For Scott Levy of Bedford Row Capital, ESG jargon is the main barrier to financing sustainable projects by Islamic investors.
How to convince Islamic finance investors to invest in energy transition projects? How to convince Western investors to finance ESG projects in Sharia countries? Both problems are familiar to Bedford Row Capital, a London boutique dedicated to structuring Sharia compliant debt products. The answer is to simplify the language to improve understanding between these two worlds. The stakes are high: not only because Islamic investors are in charge of immense liquidity, but also because many SMEs owning sustainable projects cannot find financing. Explanations with Scott Levy CEO of Bedford Row Capital.
“Islamic countries are promoting cutting-edge energy transition projects”.
Many projects, especially environmental ones, could be funded in both Islamic and Western countries if investors in Islamic finance and traditional finance spoke the same language. What’s at stake?
In fact, there is a whole series of projects that require from 100 to 200 million dollars in financing and are not answered by the large investment banks. Why? Because the latter, due to regulatory constraints relating to their budget, no longer come into play below 500 million dollars. Not to mention that they only look at files that pertain to classic and “plain vanilla” projects. Few actors today offer real alternatives to commercial paper and other old school approaches to finance sustainable projects. Bedford Row Capital is one of them, because we are convinced that both Islamic finance and conventional finance have a lot of money that they want to invest in the most sustainable way possible in an inflationary environment. There are many projects awaiting investors, both from the Islamic and Western side of the economy.
What types of projects are we talking about?
The projects I can talk about because we help implement and finance them concern all sectors of sustainable finance. Environmental first of all. Islamic countries are promoting cutting-edge energy transition projects. We therefore supported a project in Jordan to ensure the extraction of copper and other essential metals for the production of batteries used in the context of the energy transition. We also helped Islamic investors finance major Mexican copper companies in this sector. In other words, it works both ways. The social field also attracts the attention of sovereign wealth funds of Islamic finance: Malaysia, the largest issuer by number and volume of green bonds, and Indonesia, generously finance infrastructure and social housing in London. Gulf countries (GCCs), which are reluctant to lend money to non-regional players, also run out of reserves when it comes to financing sustainable infrastructure in London, Paris or Zurich.
What hinders the commitment of Islamic finance to sustainable projects in the West and that of traditional finance to sustainable projects in Islamic countries today? Sharia?
Islamic finance is ethical in principle, it cannot exist without moral foundations. A dimension that ESG criteria do not include as such, but that creates points in common, in particular on governance and social aspects. Justice and simplicity are pillars of Islamic finance which is inherently transparent – in particular, detailed reporting is mandatory. The E is no exception and occupies an essential place in Islamic societies where waste is prohibited, water and trees are particularly protected. Their sensitivity to environmental issues is natural, much more than you can imagine. Finally, Islamic finance is based on sustainable values.
“The problem is not with the Sharia but with the language”.
According to the Sharia, a leverage of 30% is possible. The main limitation is in debt planning: Islamic finance prescribes that a semi-finished project be sold so that profits are shared, which temporarily puts the project to an end. Traditional finance authorizes the purchase of the project, hence its continuation. This difference is important, but it does not prevent provisions that allow projects to be carried out. The problem is not the Sharia but the language.
How to solve this language problem? Is a common language possible, which favors the conclusion of sustainable projects without clashing with ESG jargon?
Today’s challenge is essentially a jargon problem: sustainable finance uses concepts that are not meaningful to Islamic finance even if what they refer to is part of its morality. This is very similar to the concepts of CLO (collateralized loan obligation) or MBS (mortgage-backed securities) used in the financial sector to show its difference, which led to the rout we experienced in 2008. Both sides will have to make an effort. A crucial effort to keep investors from turning their heads, which is common these days. Western investors ignore projects involving solar installations because the investment vehicle is a sukuk, while Islamic investors simply ignore SFDR-compliant documents. This may not seem like much, but it creates a huge misunderstanding, albeit perfectly superfluous.
Are you optimistic, do you think the barriers will break down?
Yes, because everyone wants the same thing, whether they are Islamic finance players or traditional finance players: to find sustainable investment projects. All investors face the same reality: they have a lot of money they want to invest in future projects. Gradually, Islamic investors will adapt their approach to integrate DGS while Western investors will accept a “delabel” which will not mean downgrading. We have already entered momentum, the best proof of this is the increase in GCC countries issuing sukuk in traditional forms of green bonds.
Would this trend be good business for both parties?
The big winners of this trend will be green bond investors from emerging Islamic countries: the yield should be 100 or even 200 basis points higher than traditional green bonds. This is because the green bond market in these countries is much smaller.