The environmental, social, and corporate governance (ESG) framework shares many similarities with the Islamic way of life.
The environmental, social, and corporate governance (ESG) framework shares many similarities with the Islamic way of life.
Both the Sunnah and Quran place importance on preserving the environment and caring for the world and all its inhabitants–whether that be nature, humans, or animals. Muslims have a moral obligation to preserve the various blessings entrusted to them by God. In a time when the state of our communities and physical environment is deteriorating, it should be every Muslim’s goal to uphold our traditions and actually live by them.
And do good as Allah has been good to you. And do not seek to cause corruption in the earth. Allah does not love the corrupters.”
[28:77]
Islamic and ESG investments are similar in that they both essentially take into account how their actions affect society, human welfare, and the environment. I will examine the role of ESG finance in today’s society and the connection this practice has with Islam.
Islamic finance is a term used to describe finance done in accordance with the Sharia. The Sharia discusses specific measures and principles which guide investors when deciding on if their investment is compliant or not. In Islam, there is a large emphasis placed on fairness in all parts of one life. It is no different that scholars apply this same principle when examining bonds and such. Namely, no one should be cheated in the transaction. In addition, Islamic finance does not allow investments that contain riba (interest), gharar (deception) or have to do with alcohol, pork, or maisir (gambling), to name a few. Sharia scholars (although they might not always agree) oversee and approve specific financial products. Sukuk is the Islamic version of a bond. Bonds are indirect interest-bearing financial obligations, whereas sukuk entails a direct ownership interest in the asset. Fortunately, green sukuk funding is on the rise for green projects in the Muslim world. The Islamic finance market has its major contenders in Saudi Arabia, Malaysia, Iran, and the Gulf and is projected to have assets worth US $5.44 trillion by 2027 according to data from Market Data Forecast.
Allah will deprive usury of all blessings but will give increase for deeds of charity.”
[2:276]
A principle shared by both Islamic and ESG finance is that beyond just financial gain, investments should also help larger societies in social and ethical ways. To start with, ESG is an acronym that stands for Environment, Social, and Governance. This discipline in finance has to do with creating a more sustainable world. According to Bloomberg News, ESG finance may hit a total asset worth of $53 trillion by 2025. A common trend that is being seen is that more and more shareholders and members of the public want to hold companies accountable for their actions. For shareholders, corporate missteps could result in a substantial amount of losses which is the ultimate driving force behind the support of this ideology. This discipline is all about corporate social responsibility and promoting the integration of environmental and social concerns into their business to contribute to the social well-being of communities. There are a few challenges when it comes to ESG, which include greenwashing, fabricated reporting, standardization, and lack of transparency.
The world is beautiful and verdant, and verily God, be He exalted, has made you His stewards in it, and He sees how you acquit yourselves.”
[Muslim]
The Breakdown of ESG
The E in the acronym stands for the Environment and is all about protecting it in the case of global warming, climate change, pollution, rising sea levels, water/energy consumption, and greenhouse gas emissions. The stewardship of the environment is a concept that is stressed in our Sunnah as well. During our Prophet Muhammad (PBUH), he designated certain areas with certain activities to decrease the exploitation of certain resources. Areas were divided into Haram and Hima. Himas were inviolable zones that represented a preserve where the vegetation and creatures were given special care with restrictions on grazing and woodcutting and such. To prevent the overpumping of groundwater, haram zones were established around wells and other water sources.
The S of ESG stands for Social and concerns a company’s support for its employees and how well it serves and stakeholders. Some examples of social issues include health and safety of employees, the impact on the community, and accident and fatality rates. The way a company operates overseas and treats its labor force is a key concern that is addressed. The Islamic model strives for social fairness and prosperity for all, as can be seen in the way the Sharia tries to decrease the concentration of wealth in a small number of hands and to help alleviate people out of poverty.
Verily, Allah is kind and he loves kindness. He rewards for kindness what is not granted for harshness and he does not reward anything else like it.”
[Muslim]
Lastly, the G in the acronym stands for Governance, which could mean many things, including the effectiveness and independence of the board structure, executive compensation, board diversity, sustainability policies, and accounting management. Vigilance is necessary to maintain the proper balance between ethical leadership and robust profitability. A successful economy depends on competent governance. A company’s potential is limited, and occasionally, it invites scandal if governance flaws are ignored. A catastrophic harm might occur to markets, investors, and labor forces. As consumers, it is important to be aware of things like diversity policies, transparency, and corruption that may exist in a company to know exactly what kind of business you are supporting.
The Significance of ESG to the Islamic Way of Life
As mentioned before, the intersection of Islamic values and ESG finance are key motivators for Muslims to not only implement ethical principles in their own companies but look for those characteristics in the companies they choose to support. Another important thing to note is the effect these policies have on struggling Muslim nations. For textile exporting countries like Bangladesh, Turkey and Pakistan, the existence of social awareness by companies to ensure worker safety and equal compensation policies is important.
In addition, you have many Muslim countries that are vulnerable to the effects of climate change yet are not the ones emitting the most greenhouse gas emissions. Understanding this imbalance and using your power as a consumer to push for companies to value the environments that they have been taking from for so long is important. The colonization of Muslim nations has left many of them deprived of the sources and means they once had. Many nations are having their resources extracted by foreign companies without repercussions. All in all, it is paramount for us Muslims to support positive change and protect the environment from evil and wrongdoing, as it is an amanah from Allah SWT.
