Unleashing the potential of Islamic finance and impact investing for the SDGs

The Sustainable Development Goals (SDGs) offer new investment opportunities for the private sector, which will be vital to help address the SDG financing gap – roughly US$2.5 trillion. The need to harness innovative and untapped financing sources is paramount and is at the heart of this year’s United Nations General Assembly, which kicked off with the Secretary-General’s High-level Meeting on Financing the 2030 Agenda for Sustainable Development.

The good news is that global awareness about the SDGs is increasing, and private sector actors are taking on key roles in responding to development challenges. However, the time has come for an even broader alliance of partners to join forces to make a substantive contribution to the SDGs.  We need to mobilize new voices and perspectives for development.

Islamic finance is a unique form of funding that is fast growing with its ethical and participatory approach, prohibition of interest, as well as equity-based and risk-sharing transaction models. Its assets have grown from about US$200 billion in 2003 to $2 trillion in 2015 and are expected to reach $3.5 trillion in 2021.

In parallel, impact investing, an investment method that considers social and environmental returns alongside financial profit, offers a good opportunity to mobilize resources for development. Its assets have reached over $228 billion in 2018 and are expected to reach $1 trillion by 2020.

Matching impact investing – with its rigorous social and environmental criteria, emphasis on inclusiveness and broad understanding of business-society relations – with Islamic finance, would leverage both industries’ comparative advantage to provide innovative financing solutions for the SDGs.

Recognizing the huge potential of these untapped financing actors, UNDP and the Islamic Development Bank (IsDB) partnered in 2016 to establish the Global Islamic Finance and Impact Investing Platform (GIFIIP). The platform provides market-based solutions for sustainable development challenges. GIFIIP, working collaboratively with the private sector, aims to identify best practices and examples of innovative financing means for both Islamic finance and impact investing actors, to nurture the development of an Islamic finance-impact investing business ecosystem.

From theory to practice: applying a centuries-old financial system to new investment modalities

GIFIIP’s I for Impact report, developed in collaboration with IsDB’s Institute for Research and Training, reviews recent developments and key factors for growth, pinpoints similarities between the two sectors, and makes policy recommendations for development actors to create the conditions for the two sectors to benefit from each other.

But there’s more than reports.

One example of the convergence between Islamic finance and impact investing are sukuk (Islamic bonds), which represent the most prominent asset in Islamic capital markets (16 percent of total Islamic finance assets).  Recent launches of green sukuk – issued to finance renewable energy and environment projects – have been oversubscribed, proving their tremendous potential as a viable business opportunity to fill the SDG funding gap.

The first green sukuk was issued last year in Malaysia to finance a solar energy plant. Earlier this year, Indonesia became the first country to issue a sovereign green sukuk aimed entirely at tackling climate change and funding environmentally sustainable projects, with a nominal value of $1.25 billion.

What’s next for UNDP?

Green sukuk is establishing itself as a robust financing tool for funding the 2030 Agenda and the Paris Agreement on climate change in the coming years. But green sukuk is just one example of the opportunities that the Islamic capital market has to offer in terms of engaging the private sector and mobilizing financial resources for development. GIFIIP attempts to capture this potential by bringing together Islamic financiers and impact investing actors at several activities such as trainings, networking meetings, stakeholder consultation workshops, etc.

Building on this exciting agenda, we will meet with Islamic finance and impact investing stakeholders during the UN General Assembly high-level week to discuss opportunities for broader implementation of Islamic finance towards meeting current development financing gaps.

Deputy Director, UNDP Istanbul International Center for Private Sector Development (ICPSD)