This first article of a three-part series from Neter – to address Earth’s biosphere as the foundation of the global economy – traces the evolution of capital markets and the rise of nature finance, inclusive of the Shariah perspective.
The world of finance is a dynamic arena, evolving continuously in response to new markets, new investment opportunities, technology advances and economic, political, societal and environmental shifts.
From the early days of asset creation (money and gold), bartering and physical commodities trading, to today’s complex, global and increasingly digital-first capital markets ecosystem, capital markets finance – and associated investment opportunities – have been the backbone of national and global economies, and serve as a barometer of global progress.
In the UK, for example, the investment environment has evolved significantly since the 1970s, transitioning from its traditional and narrow focus on stocks and bonds to embrace much greater asset class diversity.
Investment strategies historically were driven largely by equities and fixed-income asset allocation strategies that offered a straightforward way to invest, and to a limited extent to ‘diversify’ across different asset classes to optimise returns.
As financial markets matured, and advances in financial technology supported the development of more imaginative investment products, investor appetites to explore alternative investments and asset classes have grown.
This ‘new wave’ of investment opportunity embraced commercial and residential real estate, infrastructure development, private equity and a slew of new investment opportunities backed by real world assets.
Real estate (commercial and residential) in particular has become a prominent feature of many investment portfolios, providing efficient exposure to tangible assets with the opportunity for short term income streams and long-term capital appreciation..
This is true in the world of Islamic finance – Sukuk investments are often used to fund infrastructure projects and large-scale developments.(Sukuk are typically asset-backed, meaning they are tied to the performance of tangible underlying assets).
The emergence of hedge funds in the late 1990s and early 2000s offered new and alternative investment strategies that combined long and short positions to ‘hedge’ market risk, as well as ‘uncorrelated’ asset allocation, and event-driven and quant-led strategies that promised the potential for higher returns (in a period of relatively low interest rates).
Market deregulation, loosening of restrictions on pension fund investments and the rise of new financial derivatives also fueled hedge fund growth.
Advent of sustainable investing
While economic factors and technology advances may have been the driving forces shaping capital markets transformation in the late 20th and early 21st centuries, the next major shift in the global investment landscape will be centred much more around climate and nature-based sustainability imperatives.
The 21st century brings with it a heightened consciousness around Earth’s ‘sustainability’ and the advent of environmental, social, and governance (ESG) criteria and other governmental and regulatory mandates for financial markets participants, including investors.
Encroaching 2030 Net Zero targets, 30 x 30 Biodiversity targets (a global goal to protect at least 30% of the Earth’s land and sea by 2030), ESG mandates and mandatory emissions reporting, new regulations like the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), recent publication of the final recommendations of the Taskforce on Nature-related Financial Disclosures et al, make it hard to ignore the reality and absolute imperative for action – to move beyond talking to actually doing.
Interestingly, the rapid growth in Sukuk issuance in recent years has positioned countries including Malaysia, UAE and Saudi Arabia at the forefront of ESG-based Sukuk.
Also in the context of Islamic finance, Tayyib (“everything that is wholesome, good and pure”) serves as the moral and ethical basis for sustainable investing in sectors like renewable energy, clean water and responsible consumption.
Green Sukuk funds eco-friendly projects, aligning Islamic values with global environmental goals, a concept central to the growing green finance movement in Islamic finance and creating investment opportunities that are both Shariah compliant and aligned with sustainability principles and goals.
Net Zero, sustainability rules and ESG mandates have increased overall investor demand for greater representation of investment opportunities with ‘green’ credentials in portfolios and asset allocation strategies.
While this is of course to be welcomed, it has also brought with it attendant challenges around ‘greenwashing’ and sustainability ‘box ticking’, and a lot of concerns about how ‘green’ many of these investment opportunities really are with respect to having any climate or nature-positive benefit or impact.
Making a real difference with respect to climate change, sustainability and biodiversity requires much closer alignment of capital raising, and associated investment opportunities – with impact-measurable environmental and climate related benefits such as renewable energy, reforestation and other land and sea ecosystem restoration and preservation projects.
Products such as carbon credits, investments backed by high integrity carbon projects and smarter supply chain financing that distributes value more equitably to ‘everybody down the line’ are all tools in the sustainability armoury that supports capital markets mobilisation to contribute directly to positive environmental change.
Continuing integration of sustainability with finance, and the rise and rise of “nature finance” as an asset class in its own right, will shift the future trajectory of global capital markets even further.
As regulatory pressure, mandated sustainability obligations and escalating societal concerns for the Earth’s future survival grows, it is exactly the right time to mobilise all capital markets participants – issuers, asset managers, funds and investors alike – to welcome and embrace a ‘nature-first’ approach to doing business.
Neter CEO Seth Elliott has spent over 25 years in senior executive roles building and supporting growth enterprises in different industry sectors. Seth is focused on establishing Neter as an industry thought leader in the global mobilisation of capital markets to protect Earth’s biosphere.
The next article in this three-part series from Neter will address “Earth’s biosphere as the foundation of the global economy” and will explore how “nature finance” addresses the environmental crisis, creates new avenues for investment and supports economic growth.
