Convergence of ESG imperatives and Islamic finance

Our growing understanding of ESG (environmental, social, and governance) has transformed how global markets perceive business value. In tandem, though not necessarily in lockstep, the Islamic economy, too, has flourished into a multi-trillion dollar ecosystem that extends far beyond traditional Muslim regions. 

While these two behemoths have historically been viewed as separate, they are beginning to converge, and this has helped ESG gain momentum as investors and regulators tackle urgent issues such as climate change, social inequality and governance failures.

The intersection of these frameworks is attracting a global audience eager for a brand of finance that is focused on long-term well-being rather than short-term gains.

Islamic ethics and sustainability
Shariah law prohibits exploitative interest and practices that can harm individuals or society. It promotes principles like risk-sharing, fairness, transparency and genuine economic activity. 

As highlighted in financial economist Kabir Hassan’s research on Islamic finance and sustainable development, these principles foster an economic vision focused on justice and community welfare. 

Just like ESG’s environmental criteria strive to protect our planet, Islamic principles actively discourage waste, pollution and anything that threatens long-term ecological balance. Furthermore, ESG’s social criteria focus on inclusion, fair treatment and community benefits aligns perfectly with Islamic values of fairness and mutual responsibility. When it comes to governance, the emphasis is on accountability, transparency, and ethical leadership; these too are principles that are central to Islamic decision-making.

The CFA Institute has even referred to Islamic finance as an 'ethical bridge' that connects traditional responsible investing with Shariah-oriented expectations. 

Markets showing rapid convergence
Recent Islamic Finance Development reports highlight a significant increase in sustainability-linked Islamic instruments, especially green and social sukuk, enabling governments and corporations to raise funds for renewable energy projects, social housing, sustainable transport and other initiatives, whilst adhering to Shariah compliance. 

Countries like Malaysia, Indonesia and the UAE are leading the way in this area. The World Bank’s research on Islamic green finance highlights how these markets have built the necessary ecosystem, regulations and investor confidence to issue substantial amounts of ESG sukuk. Their experiences demonstrate that Islamic finance can serve as a powerful catalyst for climate action and social development. 

Guidance from the Islamic Development Bank, the London Stock Exchange Group and the International Capital Market Association has paved the way for structuring green, social and sustainability sukuk. The Islamic Development Bank has also introduced its own Sustainable Finance Framework, demonstrating how Islamic institutions can integrate ESG thinking into Shariah-based mandates while ensuring tangible impact. 

Beyond sukuk, the integration of ESG is also making significant strides in Islamic asset management and Takaful as well. Recent studies on Islamic investment screening reveal a growing trend among asset managers to blend ESG metrics alongside traditional Shariah screening. 

Challenges to overcome
One major concern to consider, however, is that of greenwashing and superficial implementation. Some Islamic financial products have faced criticism for mimicking conventional instruments without genuinely fulfilling Shariah objectives. 

Another challenge we face is standardization. ESG frameworks vary across regions and merging them with Shariah requirements can lead to confusion. Additionally, reporting frameworks and impact measurement tools differ in their maturity. 

The World Bank and Islamic Development Bank’s climate finance analysis indicates that many Islamic markets still lack the institutional capacity to properly assess environmental performance or track emissions. Without reliable and consistent data, investors find it tough to evaluate the true impact of their investments. 

A landscape of opportunity 
Despite these challenges, however, the opportunities outweigh the obstacles. The Islamic economy’s focus on ethical trade, social justice and environmental stewardship lays a solid groundwork for a future driven by sustainability. Data from a joint report produced by the Islamic Corporation for the Development of the Private Sector and the London Stock Exchange Group indicates that investors are increasingly interested in products that align values with performance. 

In emerging markets, Islamic ESG instruments are seen as a way to draw in new capital for national development. Fintech innovations are bridging gaps in transparency, access and compliance. Plus, the philosophical connection between ESG and Maqasid al Shariah hints at long-term synergy rather than just a passing trend. 

As global stakeholders look for financial models that safeguard both people and the planet, the Islamic economy stands out as a valuable contributor. This isn’t just a strategic opportunity; it is also a true reflection of Shariah’s goals, echoing the Qur’anic call for justice and moral responsibility. 

A relationship with long-term promise 
The relationship between ESG and the Islamic finance is still evolving, but the outlook is promising. It reflects a wider shift in global finance towards purpose and accountability.

By embracing this connection, the Islamic economy can pave the way for a financial future grounded in shared prosperity and sustainability. 

Youshey Zakiuddin is a sustainability and ESG communications professional with experience in the Middle East, Canada and Pakistan. He has contributed to climate education initiatives and authored children’s books on environmental awareness