Islamic Financing and ESG Investment

When you hear of Islamic Financing and Environmental, Social, and Corporate governance Investment, many things come to mind. There is a thin line between these two approaches to raising capital. Because they share similar principles, people confuse them to be the same. These two complementary approaches to raising capital and investing emphasize the need for society and the environment to benefit from businesses. Having several meeting points and very few differences, they have become ideal for both Muslim and non-muslim investors alike.

Many have come to believe that investing in a way that makes you socially responsible and environmentally accountable is a sign of naivety. Some others believe that it is going overboard with the whole moral thing. Ethical investing has come to stay and has recently begun to gain more popularity. Most especially as investors have come to experience its benefits in the long run.

What is ESG?

Environmental, Social, and Corporate Governance is an investment approach that encourages investors to aim at reaping not only financial but social and environmental benefits from their investments. ESG holds great profit for Muslims as it allows them to invest and yet comply with the demands of their sharia law. A large part of ESG supports or upholds the principles of the sharia law. As a result, ESG has come to hold a special appeal in the eyes of Islamic financial bodies and well as their customers.

Principles of ESG

ESG principles are very valuable in helping ethical investors decide on where to put their money and predict how companies will fare financially in the future. These principles provide valuable criteria with which socially conscious investors can reach an informed decision. The criteria that should be considered before investing in a company include:

  • The nature of the relationship that exists between employees and management.
  • The management structure of the organization.
  • The company’s social and environmental responsibilities.
  • How the ethical supply chain is managed.
  • How the global community the company is situated is treated.

Relationship between ESG and Islamic Finance.

While ESG does not have its origin from Islam, yet it shares certain similarities and goals with Islamic Finance. Each champions financial responsibility and stewardship geared towards benefiting society. Efforts have been made to Islamic asset management industry key players to fully unite both investment strategies.

How ESG contradicts some Islamic law.

Though ESG shares similarities with some Islamic principles, differences exist. One of the areas of differences in the practice of usury is also known as riba. Unequal exchanges have an impact on investor’s stock investment decisions. Riba is considered to be a sin under Islamic law but is permitted by ESG. So, Muslim investors will have to learn how to check different investment criteria to know which one is riba.

Going forward

These investment strategies that are closely related will in time collaborate more. The incorporation of ESG into Islamic investing will only work out for good as it will promote the general development of the society.

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