S&P: Islamic Finance is missing the ‘S’ in ESG

The Islamic finance industry could contribute to a sustainable financial system by further developing existing parallels between Sharia principles and environmental, social, and governance factors, says S&P Global Ratings in a report .

“The ‘E’ and ‘G’ factors seem to us to be more visible in Islamic finance than the ‘S’, owing to the presence of green sukuk and an additional layer of governance in Islamic finance,” said S&P Global Ratings Global head of Islamic Finance Mohamed Damak.

“The ‘S’ factor has historically been less visible. That is because Islamic banks, as issuers themselves, do not appear to focus on their own social performance. It is not because of a lack of instruments or products.”

Socially responsible products do exist in Islamic finance and their size is reportedly substantial, the report says. These include Waqf, consisting of a donation of an asset or cash for religious or charitable purposes with no intention of reclaim.

These products could make a difference when it comes to socially responsible financing. At the same time, we think it will require a proper governance framework for their use in order to reach this objective.

“Therefore, in our opinion, the Islamic finance industry is slowly realising that it could contribute to a sustainable financial system. We think that the contribution will remain limited, though, at least in the short term,” said Mr. Damak

We estimate the size of the global Islamic finance industry at around $2.1tr at year-end 2018. While there are no estimates on the total size of the Waqf assets and Zakat flows, it is reportedly substantial.