Launch Partners

Thursday, July 18, 2024

Launch Partners

Islamic banks’ ESG trajectory and climate transition risk according to S&P

Malaysian Islamic banks are leading the way in ESG, according to S&P Global Ratings’s webcast on the Southeast Asian Islamic banking outlook. Malaysian players including Islamic banks and regulators are expedited to continue to focus on ESG continuing its green and SRI Sukuk issuance trajectory. The regulatory landscape is highly conducive to sustained growth in the Islamic ESG space, contributing to the growing standardization of ESG reporting in Islamic banks.
According to the rating agency, last year saw more than US$5 billion of Sukuk issued using a sustainability tag. It believes that top-tier Malaysian Islamic banks will benefit from the issuance of an international Sukuk facility with an ESG guide. Such benchmark issuances can widen the investor base, allowing the banks to broaden awareness on Islamic finance and its intrinsic ESG connection in international debt capital markets. It could also reduce issuance costs as a result of a standardization of the issuance process. Social Sukuk may potentially ease the shock in the current economic climate where unemployment is a result of the COVID-19 pandemic, especially for fiscally constrained countries.
The convergent nature of ESG and Shariah compliance was touched on by several speakers. Nancy Duan, the associate director at S&P Global Ratings Singapore, sees sustainability and Shariah compliance as naturally aligning, arguing that a lot of Islamic banks will already be falling in line with the broad agenda of ESG. Dr Mohamed Damak, the senior director and global head of Islamic finance at S&P Global Ratings, says that the link between Islamic finance and ESG should be clear to everyone by now, citing the similarities between the objectives of Shariah and ESG principles.
However, Duan thinks there is room for Islamic banks to improve in the ESG space. “What I think Islamic banks can improve on is probably moving further from negative screening that is popularly applicable while you are doing a Shariah lending finance business to a more proactive, positive screening as well as integrating the ESG sector in the credit underwriting process as well as in the investment decisions. Those will help Islamic banks’ business to be more in line with what is targeted by the sustainability agenda globally,” Duan shared.
The sore point of Islamic ESG was raised: climate and clean energy. While the trajectory for Islamic ESG is looking good, climate transition risk is a major concern for several core Islamic finance countries due to their reliance on fossil fuel. Although many of the countries have developed and are implementing energy transition strategies which include significant investment in clean energy, S&P expects energy transition to take a long time to materialize in core Islamic finance countries.

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