Sustainable, responsible and ESG finance is funding that contributes to enjoying today without destroying tomorrow, according to Aruna Narayanan, the senior advisor of sustainability and ESG at The Partnerships Advisory. The panel session on Islamic sustainable and responsible investing at the IFN Thought Leadership Dialogues 2022 in Dubai yielded many insightful comments on the development of the Islamic sustainable finance landscape. The closed-door invite-only session was moderated by Cassim Docrat, the director of DDCAP. The panelists included Aruna; Aditya Shah, the head of circular economy investments at Creek Capital; Anita Wieja-Caruba, the associate director of strategy, policy and risk at Dubai Financial Services Authority; Asal Saghari, the counsel at King & Spalding; Jessica Robinson, the senior advisor of ESG at Deloitte; Khalid Al Kayed, CEO of Bank Nizwa; Khurram Waheed, the managing director of corporate finance at Dalma Capital; Sharafudheen Razi, the ESG analyst at GSM Holdings; and Raphael Fofana, the underwriter for structured finance and sovereign investments at The Islamic Corporation for the Insurance of Investment and Export Credit.
The global climate is shifting away from shareholders’ capitalism to stakeholders’ capitalism. As the world commits to achieving development and growth solidifies in the UN SDGs, Islamic institutions must do its part and contribute to the shifting priorities.
According to Khurram, Islamic finance and sustainable finance are very well aligned. Thus, transition toward ESG investing will be very quick for Islamic financial institutions. About 80% of Islamic finance practices are already in line with ESG and the other 20% are easily adaptable. There is no fundamental dissonance, yet Islamic financial Institutions are still lagging on the ESG front. This is due to Islamic financial institutions generally being situated in regions like Asia, the Middle East and Africa which are generally lagging in ESG as such.
While Khurram suggests Islamic financial institutions are lagging in ESG at least partially incidentally, Fofana posits that risk appetite is the central problem. Sustainable financing is assumed to be long term with projects taking, at times, more than 15 years to see a return while Islamic banks, Fofana claims, do not have the risk appetite to finance longer than around five to seven years.
The ESG space is facing similar growing pains as the Islamic finance space, Asal observed. The need for accreditation and standardization of ESG definitions can be likened to the standardization efforts in the Shariah space. Likewise, governance in the form of internal and external review is also highly comparable between ESG and Shariah. Hence, we may be able to use the development of the Islamic finance landscape as a reference for where the ESG space will be moving toward.
Further adding to the comparison, Khalid suggested that an approach may be taken by banks in the event of charging a premium on a borrower due to their failure to meet sustainability key performance indicators where, like in the case of Shariah non-compliant income, the proceeds are channeled to charities. Premiums are a punitive measure on borrowers who fail to meet sustainability mandates that banks should not profit from.
While there are many challenges to the transition toward Islamic sustainable finance, Asal posits that we may see transition out of necessity. As nations face the environmental and social realities that demand an ESG transition, Wieja-Caruba stresses the importance of developing taxonomies that will allow economies to transition. Further, we must be able to address industries that are very hard to decarbonize.