Socially Responsible and Ethical Finance is becoming the focus for obligors and sponsors worldwide which provides Islamic Finance Institutions (IFIs) with an opportunity to harness the potential that comes from the clear synergy between Islamic finance and ESG.
The key tenets of any Sharia compliant business/investment are to prevent harm to the environment, benefit all organic forms of life and to ensure sustainable wealth creation. These tenets are shared with the principles of ESG which are environmental, social and governance, underpinned by principles of being a good steward to society and the environment.
There is also an obvious correlation between Islamic finance and the UN sustainable development goals (SDGs) in particular, in relation to mitigating climate change, promoting biodiversity, eradicating poverty and achieving environmental sustainability.
Opportunity
Islamic finance and responsible business can be complementary if they are structured correctly.
Due to the increasing awareness of the impact investments have on our planet, global and regional investors are increasingly interested in businesses and investments which can demonstrate measurable ESG performance. A strong ESG proposition will help you access new markets and expand into existing ones.
The IFIs have an opportunity to capitalise on the rapid rise of ESG through integrating responsible business and the complementary elements of ESG within their systems and processes. The complimentary aspects of ESG can be used to attract and enrich a new pool of investors through impact investing.
Where to start?
The first step is to evaluate your investment and/or funding metrics against the ESG criteria, its requirements and the applicable reporting framework.
Breaking the strategy down into the different ESG headings is a starting point when considering the principles to embed into your practices, operations and systems.
We adopt a multidisciplinary and integrated approach to navigating our clients' ESG needs across the ESG spectrum including the role of diversity and inclusion on boards and broader corporate governance and compliance issues.
We provide practical advice on evolving regulations and policies, and helping clients prepare for the legal, financial and reputational risks arising in this rapidly changing multi-jurisdictional compliance landscape.
The responsibilities/priorities can be broken down into three areas:
- Legal Responsibility
- Reputational
- Ethical.
We would work with you to identify where the priorities lie and then perform an audit of the relevant documentation to identify any gaps and omissions. We would work alongside your other advisors to ensure that their recommendations are followed through into the documentation and governance arrangements where possible.
What is involved
Our experts can work with you to build a strategy from the ground up that is right for the nature of your business. We offer a meeting at one of our offices or online to discuss your goals, practices and drivers around responsible business and our bespoke recommendations to shape your strategy and key metrics.
What you can do now
As the focus on ESG increases, IFIs and businesses can harness the potential arising from this confluence by appealing to new pools of investors and differentiating products so that they are in line with Islamic ethics and spirit. One way to achieve this is to have a 'bolt on' approach which compliments existing screening criteria.
The stage is now set for Islamic finance to take the next step in its development and go beyond Sharia compliance to demonstrate to the world that Islamic finance has a positive social impact. As Islamic finance continues to grow in line with the global economy and there is an increasing emphasis on ESG and responsible business, it is now prudent for Islamic finance to take the lead across its asset classes by accommodating ESG as an integrated layer of governance.
Some examples of our responsible business related support
- Support and recommendations on introducing ESG driven decision-making
- Support and recommendations on an appropriate framework and monitoring matrix
- Undertaking gap analysis against the framework to identify areas for improvement
- Reviewing or providing appropriate organisational policies
- Providing training to board and senior management to underpin those policies
- Support with setting and implementing a stakeholder engagement strategy