3 Reasons Why Islamic Finance is Aligned with ESG Investing

3 Reasons Why Islamic Finance is Aligned with ESG Investing

ESG investing (also known as “sustainable investing” or “impact investing”) refers to investment activities that prioritize the optimal outcomes of environmental, social, and governance (ESG). Impact investing holds a sustainability value. Meaning, investments should consider not just the economy. It should also consider the environment and human wellbeing. Thus, the concept of ESG investing is in accordance with the principle of Islamic finance.

ESG investing is not a new concept. Since hundreds of years ago, religious and ethical belief has influenced investment decisions. For example, investments in Islam must comply with Shariah law. Islamic finance pays close attention to what kind of business one should invest in. This includes the prohibition of investing in interest-based businesses. Apart from its explicit prohibition, interest-based activities do not promote social justice and are detrimental to some parties.

There are three reasons why Islamic Finance are aligned with ESG investing:

1. Islam encourages economic activity

The Holy Qur’an mentions, “But Allah has permitted trade, and He has forbidden usury (riba)” (2:275). Riba is harmful to society. It often leads to injustice. Otherwise, Islam encourages trade where people can generate fair income. We can learn this from the story of Abdurrahman bin Auf. When he just moved to Madinah, another companion offered him to have half of his properties. Abdurrahman bin Awf politely refused. Instead, he asked about the market location where he could trade. This story illustrates how Islam encourages economic activity. Muslims are not taught to make profits at the expense of others. Instead, Islam recommends trading, which one can create financial transactions and get benefits.

2. Equality in every transaction

Islam disallows unfair transactions. Shariah laws do not let any party to have undue advantage over others. The Prophet Muhammad once reproached a dishonest dealer. He said, “whosoever deceives us is not one of us.” This follows the ESG concept in which a business transaction cannot harm anyone. Accordingly, one party can’t force the other party. Every party should have equal information. Sellers should disclose information about their goods. One can’t cheat in order to gain more profits. Meanwhile, buyers should fulfill the seller’s right. They have to pay according to the agreed price. If everyone knows their right and obligation, a fair transaction occurs.

3. Trusteeship concept in Islam

Each individual is a guardian on earth. Humans are all trustees and responsible for protecting nature with all its components. Therefore, they should ensure that the given nature and creatures should be passed well from one generation to the next generation. Islam strictly prohibits irresponsible acts. Because it will harm other creatures and environments. Again, this is aligned with ESG investing, where one’s business should be environmentally responsible.

ESG investing is about impact and sustainability. It also should bring every aspect to justice. In other words, the concept is in accordance with Islamic teaching.

God commands justice and fair dealing…

The Holy Qur’an, 16:90

To read more about Islamic Finance related topics, please click here and visit our academy.

Besides, feel free to sign up for our free stock screening services at musaffa.com.