RFI Newsletter Articles

Blake Goud 29/08/2025 Blake Goud 29/08/2025

Islamic finance could provide a way to make transition finance adaptable as economies transform

Many companies are responding to the urgency of transitioning their business but are running into challenges. One barrier they face is that it can be harder or more costly to access finance if they are penalised for using debt-based finance for transition-related investments.

Transition finance is a critical part of the global transition that will be needed to meet the requirements of the Paris Agreement and the global push towards Net Zero by 2050. Despite the big financing opportunity that the climate transition represents, debt-based financial markets are still approaching this with a short-term mindset that can impose barriers to transition finance.

Companies that diversify their revenue to other sources are likely to be far better positioned than those which do not, but financial incentives in debt markets through credit ratings counteract and could lead to companies increasing their risk through inaction in pursuit of short-term gains.

Companies need time to pivot their business strategies towards less transition-exposed sources of revenue and should not be penalised for making long-term investments that reduce their transition risk. Investors and banks, as well as other stakeholders, including workers and local communities, will pay the price if credit ratings provide the wrong financial incentives related to transition risk.

Making progress at restructuring the debt-based financing for one link in the value chain can help to address the economic, environmental and social costs from continuing the status quo towards a disorderly transition. However, the rigidities introduced by debt-based finance may not fully alleviate risks and could just shift the risk onto another part of the value chain.

Alternative approaches that link financing returns to their success in supporting the transition can help to remove the rigidity of debt and the potentially counter-productive incentives that are created for companies. Financing the transition with instruments other than debt, including through Islamic finance, can offer more flexibility to adapt to changes in the global transition, although it may introduce other challenges in today’s debt-based financial system.

Blake Goud 21/07/2025 Blake Goud 21/07/2025

Where do financial institutions fit into the Just Transition?

The UNFCCC meetings in Bonn that ended recently resulted in some modest optimism, with the release of an informal note on Just Transitions by the co-chairs to be further discussed at COP 30 in Brazil in November 2025. Progress has been relatively slow on the United Arab Emirates Just Transition Work Programme, but it fills an important gap in the global climate transition that completements efforts by financial institutions, especially at the domestic level.

The informal Just Transition draft covers several important topics. It connects the emissions reduction required by the Paris Agreement with corresponding efforts to ensure the costs and opportunities are shared equitably as countries chart out their individual pathways. It also acknowledges that making sure the process by which countries develop their own just transition pathways is effective, inclusive and participatory.

Meanwhile, the Just Transition Finance Lab highlights ways in which the country-specific nature of just transitions can allow for substantial progress through ‘closer-to-the-ground’ monitoring. This research builds on efforts underway within the G20 Sustainable Finance Working Group to highlight how emerging & developing countries are incorporating monitoring through domestic policymaking channels. This supplements the measurement of progress with metrics showing whether the process and outcomes are supporting just transition outcomes.

Domestic efforts provide a more localised approach while connecting internationally through climate finance, business ownership, and trade links. The financial sector, through its own transition planning and engagement with its customers, can complement efforts by governments and providers of climate finance by adding a Just Transition focus itself.

This is not just a problem that can be solved through a technical solution to collect the right data and make sure it is accurate and used in an effective way. A Just Transition requires a much more intentional effort to build trust with customers and other stakeholders, which is most effectively built up over time through repeated (even if small) interactions with stakeholders.

While the financial sector works with its customers and stakeholders (of both FIs and their customers) to cultivate the relationships and trust needed in the just transition, they should align with the direction of travel both domestically and globally.

Blake Goud 01/05/2025 Blake Goud 01/05/2025

Making sustainability work for OIC financial institutions & Islamic finance

Systemiq Ltd. released a “Blue Whale Inquiry” seeking to combine insights into the current challenges facing sustainability gathered from 50 leaders. The resulting report outlines a range of changes across business, governments, NGOs and the financial sector to reinvigorate sustainability for the next stage of advancement towards global goals. It also includes a frank discussion of the challenges, but also potential breakthrough areas where past efforts could bear fruit even in an environment full of headwinds.

For the financial sector, three of the key catalysts highlighted are breaking the hold of short-term financial returns on decision-making, leadership among the Global South countries through adoption and delivery on more sustainable economic models, and the use of technology including AI to avoid “being trapped in an acronym-heavy compliance regime” that has developed within ESG.

For financial institutions in OIC markets seeing recalibration of externally imposed sustainability disclosure standards, there may be value in concentrating efforts on practices that provide a better balance between investor expectations and other stakeholder needs. For Islamic Finance, the greatest opportunity may lie in leaning into the discussion of ethics that other financial sector stakeholders are wary of tackling. It may be more advantageous to be able to talk authentically about ‘just’ outcomes as the economy-wide climate transition accelerates, as our planetary debts come due.

Blake Goud 05/03/2025 Blake Goud 05/03/2025

What banks are (and are not) disclosing in their transition plans

The Sustainable Finance Observatory (formerly 2°Investing Initiative) released a report evaluating some of what can be expected to be in the forthcoming reports, and what may be missing. Their analysis is based on the disclosures to date made under transition plan guidance for signatories to the Net Zero Asset Management and Banking Alliances.

For investors and financial institutions in OIC markets with less robust non-financial transition plans and sustainability reporting, the gaps are surely wider, even as a successful climate transition carries a significant opportunity (and risk mitigation) outcome for the economy and financial sector. These will be compounded by an increased focus not only on the ‘credibility’ of transition plans, but also on the alignment of transition plans with Just Transition principles.

Blake Goud 18/02/2025 Blake Goud 18/02/2025

For resource-intensive economies, physical and transition risks could drive a ‘climate change risk trap’

On a global level, and in guidance for financial sector regulators, climate change actions are often presented as a sliding scale between climate mitigation – efforts to reduce emissions – and climate adaptation – efforts to make countries more resilient to the impacts of climate change. The dichotomy arises within the financial sector through a similar sliding scale between different scenarios.

Many OIC countries face a different outlook, however, where higher transition and physical risks coexist, especially at the sub-national level. A new paper terms this outcome a ‘climate change risk trap’, and evaluates it by considering the impacts of climate change physical and transition risks on Kuwait following the release of the country’s first flash flood hazard map.

Governments, regulators and financial institutions will all have to chart their own path to respond to the elevated risks of climate change where this 'risk trap' is most likely to be present. The impact on a response to climate change goes beyond mitigation and increases the benefits of domestic financial sector development and efforts to produce a Just Transition.

Blake Goud 23/09/2024 Blake Goud 23/09/2024

Financial institutions need to identify what impact they want to have on climate, nature & Just Transition

Financial institutions looking to make progress on their climate, nature and ESG priorities have seen expectations rise from investors, regulators, customers, and other stakeholders. No longer can they just release a sustainability report with glossy photos that highlight their community involvement. Financial institutions are now expected to lay out a clear strategy and show progress on implementing it, with a Just Transition plan to mitigate any adverse social impacts that could result.

It will be important to set out a set of adaptable principles to support decision-making. It will not be enough to have decisions guided only by data; they will also have to be guided by a positive objective that takes into consideration a much wider range of impacts besides just financial impacts on companies, investors and financial institutions.

During a recent MIFC Leadership Council event in London, Sultan of Perak Nazrin Muizzuddin Shah highlighted that improving transparency through disclosure can be a catalyst for change, but Islamic finance should go beyond this. He specifically called out “the fulfilment of the higher social and humane objectives captured by the concept of Maqasid al-Shariah” and the need “to avert harm and to promote benefit”.

As financial institutions apply the new data sources, they will need to balance two key constraints inherent in the data. On the one hand, they will face mandatory requirements that stipulate specific methods for calculating the data they disclose. Banks will have to invest in technology to help collect, manage, analyze and report on mandated climate disclosures, which will result in single-point estimates of data such as Scope 1, 2 and 3 emissions for customer activities or similar metrics for nature loss.

The over-reliance on data (only) can lead financial flows astray, especially if these quantitative requirements are hard-coded into regulation. Financial institutions will always have some regulations they must follow, regardless of the outcomes they produce. In most cases, however, the regulation will not be as black-and-white and will allow for business judgment by financial institutions.

The Institutional Investor Group on Climate Change (IIGCC) released guidance for investors to use asset-level Scope 3 emissions data that includes the recommendation that “without qualitative context, in the current data landscape, taking a blanket approach to Scope 3 across an investment portfolio could risk incentivising decision-making that is not necessarily aligned with mitigation of climate change and its associated financial risks.”

Climate change mitigation is not just about reducing emissions, it is about doing so in a way that syncs with commitments to reverse nature loss and produce a Just Transition. The decision-making process of banks and investors needs to address all three objectives (climate mitigation, reversing nature loss, and a Just Transition) using information about the qualitative context behind the climate data they use, and more importantly within a decision-making process that places value on the outcomes.