The convergence between the broader ESG community and Islamic finance is a fundamental trend with strong momentum. The trend stems from the in-built ESG components of Islamic finance (for example, the exclusion of socially harmful sectors) and from the ongoing development of the broader ESG sector worldwide. Considering the conceptual affinity between ESG and Islamic finance, it is not surprising to see the convergence grow.
ESG has continued to thrive in 2022 despite overall challenges in the global economy and financial markets. This holds true for both the overall ESG sector and Islamic ESG initiatives. 2022 was marked not only by growth, but also by increased enablement and recognition from a wide range of stakeholders.
Review of 2022
Expansion and enablement
It is estimated that total global ESG assets may surpass US$41 trillion in 2022, representing one-third of all assets under management. Bloomberg Intelligence forecasts that the ESG sector may continue to grow at a rate of 15% per year, reaching US$50 trillion by 2025.
Record volumes are similarly reported for Islamic ESG. After reaching US$6.1 billion in 2021, ESG Sukuk issuances were on track to exceed US$8 billion in 2022, with US$4.4 billion of issuances in the first half of 2022 alone. Green Sukuk represented US$2.4 billion of this figure, corresponding to 54% of the total.
In 2022, the High-Level Working Group on Green and Sustainable Sukuk, formed at COP26 [2021 United Nations Climate Change Conference], released a detailed report on the potential contribution of such Sukuk. The composition of the group — including the UKIFC, GEFI, London Stock Exchange, HM Treasury (UK), Indonesia’s Ministry of Finance and IsDB — reflects the strength and diversity of stakeholders who have taken a deep interest in Islamic ESG finance. The report estimates a potential contribution of US$30–50 billion in green and sustainable Sukuk through 2025.
In addition to governments issuing ESG Sukuk, regulators like Securities Commission Malaysia have called on the private sector to launch more ESG funds. Multilateral organizations have increasingly published reports and resources on Islamic finance and the SDGs. In May 2022, UNDP launched an online course titled ‘Islamic Finance for the Sustainable Development Goals’, developed in partnership with the IsDB, the IsDB Transform Fund and Durham University Business School.
These developments, as well as a plethora of other events and publications released by global companies, underscore the broad recognition of the convergence between ESG and Islamic finance.
Preview of 2023
Likely themes
As we enter 2023, five themes may likely emerge:
1. ESG as a bridge
ESG-aligned offerings increasingly serve as a bridge between Islamic finance and the broader ESG community. As Sukuk issuers and asset managers seek to attract investors from Europe, the Americas and beyond, ESG is important.
2. Increased nuance
A July 2022 cover story of the Economist magazine questioned whether ESG is broken, suggesting a narrow focus on carbon emissions. ESG offerings may likely become more nuanced over time, pursuing more specifically stated goals.
3. ‘Sukuk plus’
In addition to Sukuk, funds in other asset classes (public equities, real estate, private equity, etc) will likely adopt ESG screens – reflecting investor demand and global trends.
4. Fintech as an enabler
Fintech is a key enabler of ESG propositions. Fintech offers more comprehensive screening data and makes it possible to efficiently reach customers who seek ESG offerings.
5. Ongoing stakeholder support
As the 2030 Agenda and other sustainable finance targets approach, we can expect a heightened sense of urgency for ESG. Governments, regulators, companies and investors may all likely continue to push for expanded ESG.
Conclusion
ESG is maturing, both globally and in the Islamic finance industry.
If fears of a global recession materialize, stakeholders’ commitment to ESG may be tested. Sustained growth in ESG through the pandemic — including the uncertain times of 2020 and 2021 — suggests that jolts to the system may, in fact, lead stakeholders to increase their attention to ESG considerations.
In addition to benefiting from the global rise of ESG, Islamic finance has important elements to offer the broader ESG community. These include independent ethical supervisory boards (a protection against greenwashing), established international standards and clear mandates from shareholders to pursue more than only profit.
As ESG and Islamic finance converge, both have much to offer.
Dr Aamir A Rehman is a senior fellow at Columbia University’s Richman Center for Business, Law, and Public Policy. He can be contacted at [email protected].