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courtesy of Freepik, for illustration purposes only
Introduction: Beyond Profits —
Rethinking What Really Matters in Finance
Let’s face it — the world of business and
finance isn’t what it used to be. For decades, the default yardstick for
success was profitability. But today, a growing number of investors,
regulators, and even consumers are asking bigger questions: What kind of
impact is this company making? How does it treat people? Is it helping or
hurting the planet?
This is where ESG — short for
Environmental, Social, and Governance — enters the conversation. It’s more than
a buzzword or reporting requirement. ESG is quickly becoming a central lens
through which financial decisions are made. Banks, asset managers, and insurers
are embedding ESG thinking into the very DNA of their strategies — not just
because it’s trendy, but because it’s good risk management and good business.
Interestingly, many of the principles at
the heart of ESG aren’t exactly new. In fact, Islamic finance has been
championing ethical, responsible, and inclusive financial practices for
centuries. Its values-based framework — grounded in fairness, transparency, and
community wellbeing — aligns surprisingly well with the modern ESG agenda.
So, how do these two frameworks complement
each other? And what happens when you bring them together in practice? Let’s
dig in.
ESG and Islamic Banking: Different
Origins, Shared Principles
While ESG might have gotten its official
start in a 2004 UN Global Compact report, its essence has been influencing
investment behavior for decades. The basic idea is simple: businesses shouldn’t
just be financially successful — they should also do right by people and the
planet.
- Environmental (E): How a company
impacts natural ecosystems — think emissions, resource use, pollution,
climate resilience.
- Social (S): How a company treats
its employees, customers, and communities.
- Governance (G): How it’s managed —
including leadership, accountability, transparency, and ethical practices.
Now, compare this with the core goals of
Islamic finance. It operates under the principles of Maqasid al-Shari’ah,
which are essentially the higher objectives of Islamic law. These include the
protection of life, intellect, faith, family, and wealth — all geared toward a
just and harmonious society. Islamic finance prohibits speculation, interest (riba),
and investments in industries considered harmful (like gambling or alcohol).
Instead, it promotes real economic activity and shared prosperity.
In short, both ESG and Islamic banking
frameworks are rooted in accountability, stewardship, and long-term thinking.
They're both about balancing profit with purpose.
Malaysia Leading the Way: Regulation
Meets Innovation
Malaysia is a great example of how this
ESG-Islamic finance crossover is playing out in real time. The country isn’t
just talking the talk — it’s backing it with solid regulatory moves and
financial innovation:
- Bursa Malaysia launched a
Sustainability Framework as far back as 2015, nudging listed companies to
improve ESG disclosures.
- The Securities Commission rolled
out an SRI (Sustainable and Responsible Investment) Roadmap to guide the
market.
- Bank Negara Malaysia now expects
that by 2026, at least 50% of bank financing should be aligned with
climate-friendly or transitional initiatives.
This kind of policy push has created a
fertile ground for Islamic financial institutions to lead the way in
ESG-aligned products — from sustainable sukuk to green Islamic funds.
Sukuk & ESG: Financing with a
Conscience
Here’s where theory meets the real world.
One of the most exciting meeting points between ESG and Islamic finance is the sukuk
market. Sukuk, sometimes called Islamic bonds (though they’re a bit more
complex than that), are Shari’ah-compliant financial instruments based on asset
ownership and profit-sharing.
Because sukuk are grounded in real assets
and ethical use of proceeds, they naturally lend themselves to sustainability-linked
financing. In fact, Malaysia issued the world’s first green SRI sukuk back
in 2017 — aimed at financing solar photovoltaic plants. Since then, we’ve seen
a wave of ESG-themed sukuk from both corporate and sovereign issuers in
Malaysia, Indonesia, and beyond.
These instruments are giving investors
something powerful: the opportunity to generate returns while supporting clean
energy, infrastructure, and community development — all within the ethical
guardrails of Shari’ah.
Impact Investing: ESG and Islamic
Finance Playing on the Same Team
Another space where ESG and Islamic banking
make a great team? Impact investing — where financial returns go
hand-in-hand with measurable social or environmental outcomes.
The Global Impact Investing Network (GIIN)
defines impact investing with four characteristics: intentional impact,
evidence-based design, performance management, and transparency. Sound
familiar? That’s because Islamic finance is already doing a version of this,
guided by principles of justice, tangible asset-backing, and social good.
Islamic finance avoids harmful industries,
focuses on long-term partnerships, and insists on transparency — all of which
align beautifully with ESG’s focus on responsible investing. Investors are
increasingly applying ESG filters to understand the real-world outcomes
of their investments — carbon emissions avoided, jobs created, communities
served — and Islamic finance can add another layer of ethical rigor to that
process.
Making It Work: Reporting, Trust, and
Innovation
To make this synergy truly impactful, we
need more than good intentions. Transparency, standardisation, and trust are
key. That means:
- Clear disclosures on
Shari’ah-compliant assets and ESG criteria.
- Robust ESG reporting standards,
like those from the ISSB or the SC’s SRI Taxonomy.
- Third-party audits and consistent
impact measurement to give investors confidence.
And of course, innovation plays a big role
too. Fintech, blockchain, and digital platforms can help Islamic finance
leapfrog into the ESG era — offering better traceability, smarter contracts,
and more inclusive access to capital.
Conclusion: A Shared Future for Ethical
Finance
At a time when the world is craving more
responsible and inclusive financial models, the convergence of ESG and Islamic
finance feels both natural and necessary.
Both frameworks remind us that finance
isn’t just about numbers — it’s about values, communities, and the future of
our planet. They push back against short-termism and encourage us to think
long-term, act ethically, and invest in things that matter.
The rise of Shari’ah-compliant ESG products
— from green sukuk to impact funds — isn’t just a passing trend. It’s part of a
larger shift toward a more grounded, principled form of finance. And as more
investors, regulators, and institutions embrace this intersection, we have a
real shot at building a financial system that is not only profitable — but also
just, sustainable, and truly meaningful.
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