We explore the growth of the sustainable and ESG investments across various Islamic finance asset classes and look at how Islamic finance investors and sustainability enthusiasts can identify new investment trajectories, opportunities and trends.
- Islamic finance and ESG investing are complementary capital-raising and investment approaches with many shared principles.
- Shariah-sensitive investors are increasingly looking at not only the Shariah compliance but also the ESG impact of their investments.
- Regulators are increasingly requiring banks in general and Islamic banks to consider and report on the ESG impact of their activities.
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Islamic finance calls for justice, empowerment of all stakeholders, ethical practices and social responsibility – notions that are at the heart of sustainability efforts and initiatives.
In recent years, the Islamic finance industry has witnessed the launch of several initiatives and the creation of innovative structures that align with sustainability and ESG efforts.
In Malaysia, the Securities Commission Malaysia introduced the Sustainable and Responsible Investment Sukuk Framework in 2014. This was followed by the issuance of the first social impact sukuk by its sovereign wealth fund, Khazanah Nasional Berhad.
In 2017, Bank Negara Malaysia issued the Value Based Intermediation (VBI) strategy Paper, and two years later, Malaysia’s Islamic fund manager, BIMB, signed the UN-supported Principles for Responsible Investment (UNPRI) to incorporate ESG into investments.
In 2018, Bahrain FinTech Bay launched the Global Islamic & Sustainable FinTech Centre and in 2020, the first set of guiding principles on Sustainable Finance were published by Abu Dhabi Global Market.
Across Islamic capital markets, stock exchanges have joined the Sustainable Stock Exchange Initiative.
What is driving Islamic finance to sustainability and ESG?
Firstly, regulators are increasingly requiring banks in general and Islamic banks in particular to consider and report on ESG impact of their activities. Secondly, Shariah-scholars are Increasingly pushing for “positive screening”, where Islamic banks need to consider that not only is an initiative Shariah compliant but that it is also socially responsible.
And last but not least, Shariah-sensitive investors are increasingly looking at both the Shariah compliance and the ESG impact of their investments.
And how are the latest figures looking?
COVID-19 has been a catalyst for the resurgence of sustainable sukuk and investment funds.
ESG sukuk issuance reached a record value of $4.6bn in 2020, boosted by large sustainable issuances during the year. Meanwhile, the Shariah-compliant funds space has been undergoing a shift towards sustainable investment, with Islamic sustainability funds amounting to $542m by the end of 2020.
Sustainability sukuk are expected to drive ESG sukuk and Islamic funds growth in 2021 as the recovery from the economic fallout from COVID-19 continues to be the prime focus for governments and corporates.
ESG sukuk issued in Q1 amounted to over $2.5bn, over half of the total ESG sukuk issuance in 2020. Islamic ESG funds also continued to build momentum, and grew to a value of $756m in the first of quarter of 2021, following the launch of several Islamic SRI funds in Malaysia and Indonesia.
How can Refinitiv help empower sustainable Islamic finance investments?
The Sustainable Islamic Finance App on Eikon and Workspace brings together everything sustainable, ESG, green and responsible across Islamic finance asset classes.
The app enables users to track and analyse the development of sustainability efforts and KPIs (performance) across various Shariah-compliant and Islamic finance asset classes.
Key features and data include:
- ESG scores of Shariah-compliant equities
- ESG scores of Islamic funds
- ESG scores for Islamic banks and windows
- ESG and green sukuk
- Real-time news feed of sustainable Islamic finance topics
- ESG and sustainability indices in key Islamic markets
- The Quarterly Sustainable Islamic Finance monitor report, prepared by the Refinitiv Islamic Finance Gateway research team
- An ESG contribution form