“The window is closing! The world is not on track to reach the Paris Agreement goals, and global temperatures can reach 2.8°C by the end of the century. As per the Emissions Gap Report 2022, the world must cut emissions by 45 percent to avoid global catastrophe. Solutions to transform societies exist, but the time for collective, multilateral action is now.”
My stay in Dubai afforded me the opportunity to meet several dignitaries on the sidelines of the COP28 conference and enabled a stronger insight into the dire need for Environment, Social, and Governance (ESG) factors. The world is grappling with crises on two fronts. One is immediately quantifiable - the climate crisis, where we are facing a potential rise in temperatures of at least 2.6 percent (that is, if the Paris Goals are met; otherwise, it could be worse). The other is the growing stress and restlessness in humanity, leading to a stagnation in terms of real progress and creativity. Everyone seeks more, ready to delve deeper into the digital realm for additional connections, striving for ‘more,’ or at least ‘more likes’ - thus turning false validation into a substantial gain.
The corporate world is actively engaged in ESG initiatives, seeking to balance the needs of multiple stakeholders whose priorities may not align. Profit, which defines corporate objectives, now takes a slightly obscured seat as the ‘good’ for society assumes precedence and is being thrust into the driver’s seat.
My pursuit has centered on Foreign Direct Investment (FDI) and promising investment opportunities. The increasing focus on ESG in financial and corporate institutions has not gone unnoticed, prompting me to explore this further and pen my thoughts in what might become another piece on Islamic finance or banking.
Upon reviewing the approaches of both conventional corporate and Islamic banks towards ESG, a surprising observation surfaced. Contrary to expectations, conventional banks appeared to have a more robust market presence. Before I share my answer, it is crucial to grasp the why’s and how’s of the need for ESG identity within corporate entities.
Over two decades ago, in my quest for understanding, I encountered a significant statement from a professor from Phillips Academy in Andover. He noted, “If you wish to understand history better, use the economics filter. You will get a clear insight into the truth of things.” Today, ESG demands a similar filter for me to connect the inherent goodness with the pressing commercial needs of our times.
The world has progressed remarkably in the last two decades. The millennium crises of double zero seem trivial from our current standpoint. Satellites traverse the star-studded sky like New York cabs, astronauts converse with their families in space stations over cups of tea, data cables connect continents, and Wi-Fi has become the new oxygen. The corporate world is hungry for data interpretation skills, intrinsically linked to creativity. Independent thinkers capable of changing perspectives, seeking the new, and revolutionizing the game are the need of the hour. However, they come on their terms, and addressing their values has transformed HR.
Simultaneously, climate crises, war economies, and the surge of human values through social media have threatened the proverbial ‘Profit’ in more ways than one. For economics to triumph, ESG must lead the way. When I say ESG, I am referring to the holistic impact of sheer goodness integrated into a company’s values, avoiding what my friend Senator Sherry Rehman aptly terms ‘green washing.’
This leads me to Islamic finance and its underlying philosophy. In previous articles, I referred to theological masters like Ibn-Khaldun and Imam Ghazali, influential Islamic scholars from different historical periods, and their contributions to the understanding of various aspects of Islamic finance from a holistic perspective. Although they approached the subject differently, their views collectively offer insights into the ethical, social, and economic dimensions of Islamic commerce.
Khaldun, a 14th-century North African scholar and historian renowned for ‘Muqaddimah,’ employs an interdisciplinary approach, combining history, sociology, and economics to analyze the rise and fall of civilizations. He emphasizes the importance of social cohesion and solidarity in economic systems, arguing that the economic activities should contribute to the wellbeing of the society. He introduces the concept of ‘Asabiyyah,’ highlighting the need for social solidarity in guiding economic activities with a sense of community and shared responsibility.
Ghazali, an 11th-century Islamic theologian and philosopher preceding Khaldun, emphasizes moral responsibility and consciousness of God in the financial and societal framework. Advocating for a balanced distribution of wealth, he stresses the importance of Zakat to address economic inequalities and promote social justice. His discourse delves into the repercussions of Gharar (speculation) and Riba (usury).
Bringing up both scholars aims at underscoring the essential ESG principles naturally intertwined with the Islamic ethos. Islamic finance is built on the objective of synergizing communities, expanding on the basic values of trade and industry, such as honesty, transparency, profit, and loss sharing, reliability, and interpersonal relationships. The impact of financial decisions is meant for the broader community. If I could coin the term ‘social profit,’ it would excellently explain the outcome of Islamic instruments.
While I have been predominantly writing about Islamic banking, today I take the liberty to envision the potential use of Islamic financial structures for the broader corporate community, aligning with the Shariah compliance not for religiosity but for the immediate need of equity and wellbeing across the board. Islamic financial structure focuses on the interconnectedness of economic, social, and ethical dimensions.
The reason Islamic banks do not need to keep an ESG score is that their ESG is automatically part of the process, beginning with onboarding a new employee to assisting the customer in escaping the well of compound interest through schemes that consolidate partnerships and trust. The entire philosophy backing the Islamic way of doing finance is not merely a set of financial principles but an integral part of a just and balanced societal framework.
– The writer is a former minister of state and chairman Board of Investment