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Challenges Facing Green and Socially Responsible Investments

The growing awareness of socially responsible investments (SRI) in the energy sector by financial institutions and the majority of major contributors to the world economy is part of a number of factors increasing ethical and green projects and playing a key role in identifying the future potential role of this sector. Rima Mrad writes.

As of today, the amount of investment that can qualify as SRI in the energy sector is still relatively low; however, increased eff orts are being made to increase the amount of investment committed by corporations and multinational financial institutions to such projects. This is no doubt also bolstered by certain company requirements to report on SRI and measure the commitment of companies contributing to the improvement of their communities and society as a whole.

An interesting element to note is that SRI in energy are facing more operational and legal challenges than standard investments and their returns are usually obtained on a much longer term. This element alone can be concerning for investors. It is becoming evident now that SRI will not start to make an international impact and play a favorable role without obtaining official support and more importantly public sector support from across the globe.

Now more than ever, a new approach is needed to organize the relationship between the public and the private sectors and reinforce the development of SRI in the energy sector. We outline in the following what we believe such a new approach may include.

Research and Development

Apart from certain industries, the private sector is usually hesitant when asked to or expected to invest in research and development (R&D) and prefers to rely on government support for this purpose. By way of example, the results of the R&D investment made by the UAE government on new technologies is a clear indication how this can enhance and increase the value of investments in clean energy and agri-tech projects. This has directly led to private investors identifying the projects that can most benefi t from their involvement and has led to healthy and meaningful impact.

Smart Subsidies and Loans

The public sector and international lending banks should aim at green technologies’ subsidies, and support the engagement of companies with an SRI track record in public–private partnerships and long-term public planning developments. Governments can also optimize the structure of debt finance and facilities granted to green energy projects as part of an overall financial policy especially when these are compared with conventional projects to ensure that investors will have incentives to opt for SRI.

Promotion by Local Authorities

Local authorities have a strategic role to play in enhancing competitiveness and predicting challenges and hurdles att ached to SRI. The role of local authorities in doing so can take place at different levels:

• Sharing information and data

• Promoting R&D

• Training

• Coordinating between various stakeholders

• Predicting future data and results and providing guidance, and

• Supporting the performance of the private sector and addressing the gaps.

History has shown that investors will not react to any change or transition without the support of a strong regulatory and legislative framework. Investments in new green energy technologies will require confidence in the political and judiciary system that will guarantee protection of ownership and use of such technologies.

Promoting local authorities that are proactive and highly skilled is essential to handle the implementation of the enacted policies and simultaneously lobby for the enactment of any supporting regulations that will protect and enhance the progress achieved and secure a steady and stable promotion of the achievements made.

Continuous Management and Enforcement

The importance of handling a parallel exercise of management and enforcement was mainly identified following the analysis of the reasons for which Canada withdrew from the Kyoto Protocol. It was eventually identified that enacting a regulation or policy is not enough to ensure its success.

A similar comparison can be found when looking at implementing regulations that are usually issued after the ratification of a new legislation. The purpose of such regulations will be to address the gaps in the law upon implementation and the different authorities which are responsible for the implementation. This will remove any ambiguity as to the roles of the various stakeholders and ensure the existence of a clear framework for what to expect and the timeline for the achievement of the regulations’ goals. This is also essential in any investment as the private sector is always looking for security to ensure the future of its investments.

The number of challenges that SRI are facing to achieve profitability and attractive returns will always be a concern and this can only be mitigated if there is a clear and diligent enforcement of the different incentives and support mechanisms created to encourage and promote SRI.

In the long term, we are looking for this framework to support the promotion of SRI in the energy sector that are groundbreaking and have a wider economical impact that will also foster the future vision of this sector for years to come.

Article published by Islamic Finance
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