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Sunday, February 25, 2024

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PODCAST: Separate rules for Islamic ESG? Legal expert thinks may be better to wait and see

There have been calls for separate rules for Islamic ESG finance as the world pursues ESG finance standardization, but an Islamic finance legal expert opined that such specific rules may not work in the Islamic finance industry’s favor. VINEETA TAN writes.

The push for greater clarity and standardization in rules governing ESG finance activities comes on the back of concerns of social washing and greenwashing which are seemingly rampant within the multitrillion dollar ESG finance sector as demand for value-driven products rises.

In response, regulators such as the UK’s Financial Conduct Authority and the Securities Exchange Commission in the US have released or proposed new ESG disclosures to better regulate the fast-growing sector.

“The requirement for standardization, which has always been the challenge made to Islamic finance, I think will be the challenges made to the ESG market,” Farmida Bi, the global chair and EMEA chair at Norton Rose Fulbright, shares with IFN.

Within the Islamic finance space, more practitioners are demanding for a single set of regulations on green and social finance products, some for Islamic ESG specifically.

“I think we should probably wait before we move into an alternative set of requirements for Islamic green products to see where the conventional market is. Because it may not be helpful for us to come up with yet another set of requirements which could potentially make Islamic green products or Islamic ESG a tiny subset of what will hopefully be a very large conventional ESG market.”

Major Islamic finance jurisdictions are shaping their ESG finance policies. Notably, Malaysia, which has been actively pursuing this agenda, is also infusing Islamic finance into its ESG narrative. The Malaysian securities regulator issued an SRI Sukuk framework in 2014, which paved the way for the issuance of the world’s first corporate green Sukuk. In 2017, it released guidelines on SRI funds, which also took into consideration Islamic funds.

ESG traction within the Islamic finance industry has picked up significantly in recent years, and the industry sees ESG as the next driver of growth for Muslim-friendly finance. In the first half of 2022, approximately US$4.3 billion in ESG-linked Sukuk were issued, according to Fitch Ratings. Outstanding ESG-linked Sukuk rose 11.2% quarter-on-quarter in the April–June 2022 period.

This is an excerpt of an interview with Farmida Bi, Norton Rose Fulbright’s global chair. To listen to the full discussion, log on to IFN Podcast.

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