Islamic Finance and Sustainability: The Need to Reframe Notions of Shariah Compliance, Purpose, and Value

The United Nations Sustainable Development Goals (SDGs) were launched in 2015 as an ambitious vision of transformation covering numerous economic, environmental, and social targets. Funding needs for achieving the SDGs and Paris Agreement are huge, and the global shortfall of financing is substantial. In this regard, the financial sector will have to play an essential role in providing financing for sustainable development by embedding environmental, social, and governance (ESG) issues in decision-making. While the ethical and social values and principles of Islamic finance are aligned with the ESG-related issues, the evidence shows that the convergence of ESG with Islamic finance is minimal. For convergence of Islamic finance with ESG to take place, there is a need to tackle the problem at different levels. First, conceptually shariah compliance is interpreted narrowly as legal compliance with shariah rules which provides a weak religious and epistemological basis to contribute to sustainability. There is a need to interpret shariah compliance more broadly to include the Maqasid perspective and integrate the ethical, social, and environmental issues in the definition of shariah compliance. Second, to implement the broader notion of shariah compliance, there would be a need to move from a shareholder's perspective to a stakeholders’ perspective at the organizational level. This would require redefining value from a narrow economic perspective to social value that also considers the interests of the community at large.