Islamic Finance and Sustainability

Islamic Finance and Sustainability

Islamic Finance (IF) and sustainable or responsible investing (commonly known as Environmental, Social, and Governance (ESG)) share a core fundamental principle, which is the avoidance of harm. The question is whether this common ground means these two branches of finance could actually converge. While the two frameworks are distinct, their alignment on principles such as transparency, ethical investment, and sustainability presents opportunities for greater collaboration.  The potential for Islamic Finance products to be readily certified as ESG compliant could unlock significant growth in responsible investment markets.

Key principles

Many of the principles of Islamic Finance (IF) mirror the principles of ESG investing. There is in principle the possibility of a market convergence that would bring IF products such as Sharia-compliant sukuk bonds or ‘Waqf’ (also known as endowment) funds into the portfolios of ESG investors worldwide, and give Islamic banking institutions a growing share of what is likely to become one of the largest investment sectors of the future.

Where Islamic Finance and ESG investing differ is mainly in approach, that is ESG focuses on demonstrating a business’s positive impact, whereas Islamic Finance relies on ethical exclusions, such as alcohol, tobacco, or gambling. ESG investing also puts a stronger emphasis on engaging actively with businesses and promoting sustainability through ongoing engagement between the financier and the borrower.

Future Convergence 

Convergence of ESG investors and Islamic finance professionals will mean coming to terms with both the differences as well as similarities between the two investment approaches. This includes recognising that these remain different markets, where certification, scope of metrics and underlying mindsets are not yet in sync, and where understanding these differences is the key to grasping the opportunity.

Overcoming obstacles will require open dialogue, collaborative frameworks, and a shared commitment to values-driven finance. By fostering mutual understanding and cooperation, and developing hybrid certification models, ESG and Islamic Finance stakeholders can unlock new opportunities for responsible investment that benefit both people and the planet.