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Sustainability and Islamic Finance

Sustainability

 

Sustainability is one of the most significant trends in financial markets where it is related or integrated with the following areas:

  1. Sustainable Responsible Investment (SRI) - concept of investment desire by investors.
  2. Corporate Social Responsibility (CSR) - concept of commercial operations desire by management of a corporation.

 

Sustainable Finance incorporates climate, green and social finance while also adding wider considerations concerning the longer-term economic sustainability of the organisations that are being funded, as well as the role and stability of the overall financial system in which they operate (International Capital Market Association (ICMA), Zurich, 2020). The following shows the inherent link between sustainability and Islamic finance:

 

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Environmental, Social & Governance (ESG)

Environmental, social and governance (ESG) criteria are a set of standards to guide an operation of a company or use to screen potential investments by a socially conscious investor. This concept of investing is also known as sustainable investing, responsible investing, impact investing, or socially responsible investing. It assists investors to avoid investing in companies which may expose them to greater financial risk due to the wrong or ineffective decision that the company may employ with regard to the environment, social and governance aspects of their business operations (Investopedia, 2020).

 

Environmental

Environment consists of everything that is around us. It can be living or non-living things.

  • Carbon Emission
  • Energy Usage
  • Waste and Recycling
  • Climate Change Risks
  • Supply Chain Management
  • Water Management
Social

Men are considered sociable when they live collectively in interacting populations, whether they are aware or not, and whether the interaction is voluntary or involuntary. 

  • Community Relations
  • Customer Relations
  • Employee Relations
  • Human Capital Management
  • Human Rights
  • Health & Safety
Governance

Governance covers all of the processes of governing. It is the way that the rules, norms and actions are structured, sustained, regulated and held accountable.

  • Accountabilty
  • Bribery & Corruption
  • Compensation Scheme
  • Structure & Size of Board
  • Transperancy
  • Ownership Structure

 

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Five Ps Model for Sustainable Development

  1. Planet: Protect the planet from degradation, through sustainable consumption and production, managing its natural resources and taking action on climate change to support the needs of the present and future generations.
  2. People: End poverty and hunger, in all forms and dimensions, and to ensure that all human beings can fulfill their potential in dignity, equality and healthy environment.
  3. Peace: Foster peaceful, just and inclusive societies; free from fear and violence.
  4. Prosperity: Ensure all human beings can enjoy prosperous and fulfilling lives as well as economic, social and technological progress in harmony with nature.
  5. Partnership: Mobilize the means required through a revitalised Global Partnership with the participation of all countries, stakeholders and people.

 

Value Based Intermediation (VBI)

An intermediation function that aims to deliver the intended outcomes of Shariah through practices, conducts and offerings that generate positive and sustainable impacts to the economy, community and environment, without compromising the financial returns to shareholders.

Financial Industry Customer/ Community Government Regulator
  • Greater innovation
  • Enhanced efficiency
  • Effective ecosystem
  • Improve standard of living
  • Fair & transparent treatment
  • Realignment of business focus with business agenda
  • Strengthened financial stability

 

Major Parts of VBI

  • PART I: Unlocking full potential of Islamic finance
  • PART II: Realigning focus towards creating greater socio-economic impact
  • PART III: Defining common underpinning thrusts of value-based intermediation
  • PART IV: Creating enabling environment for adoption of value-based intermediation

 

VBI & Maqasid al-Shariah

Justice Wealth Circulation Wealth Preservation
  • Minimise unjust elements (uncertainty, exploitation)
  • Equitable wealth distribution
  • Prohibit wealth hoarding
  • Encourage income generation
  • Channel wealth to productive sectors
  • Recognise private ownership
  • Prohibit transgression of rights of others
  • Ensure valid transfer of ownership

 

Maqasid al-Shariah

  1. Necessities/ Essentials (Daruriyyat)
  • Protection of Religion (al-Din)
  • Protection of Life (al-Nafs)
  • Protection of Intellect/ Mind (al-Aql)
  • Protection of Human Being (al-Nasl) / Family (al-'Ird)
  • Protection of Property (al-Mal)
  1. Needs (Hajiyyat)
  2. Complementary/ Embellishments (Tahsiniyyat)

 

Maqasid al-Shariah in Islamic Finance

Objectives of Maqasid al-Shariah in Islamic Finance

  • To circulate wealth
  • To ensure the continuity of wealth investment
  • To achieve financial transperancy
  • To achieve comprehensive communal prosperity
  • To prevent harm & hardship in wealth & finance
  • To ensure justice in circulation of wealth in business transactions

Benefits of Implementation of Maqasid al-Shariah in Islamic Finance

  • The well-being of the family, society, and nation are prioritized over the well-being of the individual.
  • The well-being of the market conditions is important over the well-being of the individual's business operations.
  • Public interest is at the forefront.
  • Preventing evil and harm while promoting good and well-being.
  • Preventing evil and harm are crucial over promoting good and well-being.

 

Categories of Sustainable Financing

Climate Financing Climate financing refers to local, national or transnational financing; drawn from public, private and alternative sources of financing that support mitigation and adaptation actions that will address climate change.
Green Financing

Green financing enables investors to finance green projects with a lower interest rate or tax incentives and rebates for environmentally friendly investments, funds or bonds.

 

CIMB Bank

  1. EcoSave Savings Account-i CIMB Islamic contributes 0.2% to green activities. As the allocation grows, more green projects would be funded.
  2. CIMB SME Renewable Energy Financing
Microfinancing

Microfinancing provides small amount of loans with favorable terms that aims to aid in the revitalization of urban and rural communities.

  • AgroBank: Modal Usahawan 1 Malaysia-i (MUS1M-i)
  • Alliance Bank: Cash Vantage Personal Financing-i
  • Bank Rakyat: Skim Pembiayaan Mikro-i (MUsK)
  • CIMB Islamic: Xpress Cash Financing-i
Ethical Banking Banks that operate their activities following from the outset the criteria of transparency, democracy and sustainability, together with the financial criteria of traditional banking.
Social Business Businesses whose profits are reinvested in order to protect environment or promote development and solidarity.
Social Financing

Sustainable finance that involves social finance activities that enhance local communities and social development. These channels include, but are not limited to, community investing, social enterprise lending, sustainable business, philanthropic grant making, and program-related investments.


For example, First-Time Home Buyers Schemes: PR1MA & MYHOME Scheme
Socially Responsible Investment (SRI)

Investments that include ESG criteria other than economic criteria (risk, profitability and liquidity) including impact investments, whose purpose is to generate social and environmental impact as well as financial return.

 

Khazanah Nasional: USD 225 million Ihsan Sukuk to fund the improvement of education in Malaysia Government schools under the SRI Sukuk Framework.

 

Criteria for Sustainable Financing & Investment

Suggestion for Green Financing Checklist Suggestion for Shariah Compliance Investment Green Category
  1. Normal screening checklist for financing
  2. Shariah compliance screening checklist for financing
  3. Green SDG & Screening for financing
  1. Methodology for conventional stock screening
  2. Methodology for responsible / ethical stock screening
  3. Methodology for Shariah compliance stock screening e.g. SC's Shariah Screening Methodology
  4. Green SDG, Shariah & Compliance stock category

Examples:

  • CSR Policies, Procedures, Departments
  • Financial Inclusion, Micro and SME Finance
  • Non-Profit Financing
  • Philanthropic and Social Programmes
  • Impact on the Environment and Social Activities
  • Assessing and Screening of Environment and Social Risks
  • Other Elements of ESG, SDG & VBI

 

Examples of Initiatives in Sustainable Financing & Investment

alt text Finterra embarked on a program with timber-related agencies, where for every $100 donated by a person to charitable causes listed on their platform, Finterra will match the donation amount with tree plantation. The initiative is well received as it helps to support the causes for the needy and also the environment.
alt text SEDCO Capital Global Funds launched the first Shariah-compliant funds based on ESG principles.
alt text Green Sukuk and Working Party (GSWP) to develop Islamic financial products for investment in climate change solutions.
alt text Based in Singapore, ASFI is a multistakeholder platform bringing together industry academic, and science-based
knowledge partners to support financial institutions in implementing ESG best practices.
alt text Islamic finance sector in Malaysia contributed almost 20% (USD80.78 million) of financing for projects under Malaysia’s Green Technology Financing Scheme.

 

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