The global Islamic finance market could expand dramatically if its goals are combined with those of Environmental, Social, and Governance (ESG) funds.
The latter funds have about $35 trillion under management globally, and that figure is projected to hit $53 trillion by 2025, accounting for one-third of all investable assets.
In contrast, Shariah funds — which are those that invest according to the ethical and religious principles specified in the Koran— have grown 300 percent over the past decade, but still only amount to about $200 billion in assets, according to the Bahrain-based General Council for Islamic Banks and Financial Institutions.
This growth could be vastly accelerated if Islamic investment funds adopted common global regulatory and legal standards. Adopting these proposed standards would also benefit ESG funds if they began practicing the investing criteria specified in Shariah law.
According to the accounting firm, Acca, those Islamic principles include:
- The idea is that wealth must be generated from legitimate trade and asset-based investment. (This means the use of money to make money is expressly forbidden.)
- Investments should produce social and ethical benefits that are beyond pure return.
- Risk should be shared among investors and businesses.
- All harmful activities, including those to the environment, should be avoided.
If ESG and funds that track Islamic law had a common foundation, they could impact the business operations of global firms, especially those operating in conservative nations in the Middle East, financial experts say.
This could also have a huge political impact on the 1.8 billion Muslims globally. This figure represents approximately a quarter of the world’s population.
“Islamic finance and ESG investing are complementary investment approaches sharing significant common ground, such as being a good steward to society and the environment,” noted a recent white paper by BNY Mellon. Both offer products that appeal to Muslim and non-Muslim investors alike, and hold strong practices and policies that each can learn from the other.”
Combining ESG and Islamic Finance Principles
A recent study found that over one-third of financial professionals who practice Islamic finance said they expect to see a large increase in the number of Islamic funds that offer ESG and Islamic Shariah compliance over the next two years, according to a study by Maybank Islamic Berhad.
That study found that 73 percent of professionals working for financial firms view the demand for ESG products as not being met because they do not meet the standards required under Shariah law.
However, if Shariah law and ESG criteria were combined in new products, the sector could see the growth rate expand significantly, the study said. This is especially true in North America, where ESG funds have exploded in popularity.
“Islamic Finance is indeed growing strongly, but we believe the growth could be further boosted if it was able to offer Shariah and ESG compliant funds globally. This study is showing that potential demand for such funds would rise from the traditional, as well as the non-Muslim investors,” Maybank Islamic CEO Dato’ Mohamed Rafique Merican said in a press release.
Originally published on www.newsweek.com