Islamic sustainable finance: how does SRI sukuk matter?

Syed Azman, Syed Marwan Mujahid and Shaharuddin, Siti Saffa and Zain, Nor Syahirah (2024) Islamic sustainable finance: how does SRI sukuk matter? In: Islamic Finance and Sustainable Development: A Global Framework for Achieving Sustainable Impact Finance. Islamic Business and Finance Series . Routledge, pp. 171-184. ISBN 978-103274307-3

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Abstract

The global financial crisis (GFC) of 2008 and subsequent economic crises have highlighted the unsustainability and irresponsibility of the financial system towards society. This led to a loss of trust in traditional financial institutions and sparked a search for alternative ways of how we do business (Benedikter, 2011). As a result, there has been a significant rise in sustainable, social, and impact finance which aims to address the negative impacts of traditional finance on society and the environment. They provide an alternative for people to invest their money in a way that would not only provide a financial return but also have a positive social or environmental impact. Sustainable finance (SF) looks at how finance (investing and lending) interacts with economic, environmental, social, and governance (ESG) issues (Gutterman, 2021; Schoenmaker & Schramade, 2019). While social finance refers to financial instruments that are used to fund social and environmental initiatives. It includes alternative sources of funding such as crowdfunding, microfinance, and impact investing. Social impact investing, also known as impact investing, is a type of investment that aims to generate both financial return and positive social or environmental impact. These approaches have become more widely recognised and utilised in recent years as a means of addressing societal and environmental issues through market-based solutions (Marwan & Engku Rabiah, 2019; Social Finance, n.d.). One of the key drivers of this shift towards social finance and impact investing was the creation of the Global Impact Investing Network (GIIN) in 2007. The GIIN is a nonprofit organisation that promotes the development of the impact investing industry and provides resources and support to impact investors (GIIN, 2016). Another important development was the creation of the Principles for Investors in Inclusive Finance (PIIF). The PIIF is a set of guidelines for impact investors, which aims to provide financial services to underserved populations (PRI, 2017). At the global level, the United Nations (UN’s) 17 Sustainable Development Goals (SDGs), essentially seek to end poverty, protect the planet, provide sustainability for the future, and ensure peace and prosperity for all. The SDGs recognise that addressing social and environmental challenges requires a holistic approach that involves the financial sector. Furthermore, various frameworks and standards have been developed to guide financial institutions to align their activities with the SDGs. This includes the Principles for Responsible Investment (PRI), which provide a framework for investors to consider environmental, social, and governance (ESG) factors in their investment decisions (PRI, 2017), and the Global Reporting Initiative (GRI), which offers a framework for companies to report on their sustainability performance (GRI, 2022). The Task Force on Climate-related Financial Disclosures (TCFD) has also developed recommendations for companies to report on the financial risks and opportunities related to climate change. Regulatory changes have also played a role in the emergence of sustainable and impact finance. For instance, the European Union (EU) has introduced initiatives such as the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation to promote sustainable finance. The SFDR requires financial institutions to disclose information on how they consider sustainability risks and opportunities in their investment decision-making processes, while the Taxonomy Regulation establishes a common framework for classifying environmentally sustainable economic activities, which helps investors to identify and compare the environmental impacts of different investments. In recent years, social finance and impact investing have grown significantly, with an increasing number of investors, asset managers, and financial institutions adopting sustainable and impact investing strategies. This growth has been driven by a variety of factors, including increasing public awareness of social and environmental issues, the rise of sustainable and responsible investing, and the development of new tools and products. Thus, unsurprisingly, the progress of these sectors has coincided with the Islamic finance industry which saw tremendous growth over the past decade. In 2020, despite the COVID-19 pandemic the Islamic finance industry still maintained a double-digit growth of 14%, to reach $3.374 trillion in size. If the trend continues, Islamic finance assets are projected to reach $4.94 trillion in 2025 (Mohamed & Ahmed, 2022). The Islamic Finance Development Report 2021 highlights that Islamic finance assets consist of primarily Islamic banking which contributes 70% of the assets. This is followed by sukuk which contributes 19% or $631 billion in value. These figures highlight the potential for Islamic finance, especially due to the demand for alternative and sustainable financing tools particularly in the global capital market. Islamic finance aims to achieve fairness, justice, and social responsibility for society through financial transactions. However, there have been concerns raised about the extent to which Islamic financial institutions have been able to uphold these principles in practice. Some critics argue that the practices of Islamic finance which are argued to fall behind in achieving its underlying social and sustainable objectives (Marwan & Haneef, 2019). In response to the perceived shortcomings, various steps such as Value-based intermediation (VBI) have been developed and undertaken (Marwan & Engku Rabiah, 2019). VBI is a concept that refers to the intermediation function of Islamic financial institutions that seeks to deliver the intended outcomes of Shariah through practices, conduct and offerings that generate positive and sustainable impact on the economy, community, and environment (Bank Negara Malaysia, 2018). Such development has encouraged the Islamic finance industry to pursue sustainable and responsible investment (SRI) strategies, which include ESG, impact, and sustainability-themed investments (EY, 2022). Given the issues mentioned, the objectives of the chapter are to: i. Explore the development of SRI and impact bonds and sukuk practices in the finance industry ii. Identify the issues and challenges of developing SRI and impact sukuk iii. Propose future directions for the development of SRI sukuk.

Item Type:	Book Chapter
Uncontrolled Keywords:	SRI Sukuk, Social Impact Bonds, Sustainability
Subjects:	BPH Islamic Economics H Social Sciences > HG Finance H Social Sciences > HG Finance > HG3368 Islamic Banking and Finance
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Institute of Islamic Banking & Finance (IIiBF)
Depositing User:	Dr. Syed Marwan Mujahid Syed Azman
Date Deposited:	17 Oct 2024 09:05
Last Modified:	17 Oct 2024 09:05
URI:	http://irep.iium.edu.my/id/eprint/115074

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