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What separates ESG bonds from also becoming Shariah-compliant?

ESG principles are largely aligned with Shariah principles. The general principles of Shariah related to fairness, transparency, equal rights and other related principles are also the guiding principles for ESG bonds. However not all ESG bonds can also be considered Shariah-compliant. For example, ESG bonds that use their proceeds to finance projects involving interest-bearing activities do not qualify as Shariah-compliant. This would also apply to the institutions involved in facilitating the bond transactions. In addition, the contract used to issue the bond must also be Shariah-compliant. Generally speaking, ESG bonds are Shariah-compliant in term of the purpose of the bonds and will be easier to be issued to comply with the Shariah requirements.

What are the current Shariah standards that are applicable to green and sustainability sukuk? Are
they sufficient?

Currently there are no specific Shariah standards applicable to green and sustainability sukuk. However, the existing Shariah standards for sukuk would still apply to ensure the Shariah compliance of a green or sustainability bond, even though general ESG principles overlap with Shariah standards. Having said that, some scholars have developed the Maqasid matrix for the purpose of ensuring that financial products are in line with the general purpose and objectives of Shariah or Maqasid al-Shariah. This matrix can be used for guiding principles in the issuance of ESG sukuk because it covers a broader range of values or principles, including ESG, SRI, VBI and other principles. Still, the challenge here is to
ensure that all the values are validated to ensure they comply with the general and specific principles of Maqasid al-Shariah.

Are there any plans to develop more specific standards for green and sustainability sukuk?

It is important to develop more specific standards for green and sustainability sukuk. At the moment, we at the International Shari’ah Research Academy for Islamic Finance (ISRA) and the International Centre for Education in Islamic Finance (INCEIF) are working on a number of initiatives with industry players related to ESG principles. We are also open to further collaborations to develop more specific standards for green and sustainability sukuk.

In addition, we are also working on a framework to integrate aspects of Maqasid al-Shariah that overlap with ESG, SRI and VBI principles into fatwa issued by Shariah scholars. This will add an ESG perspective to the fatwa, in addition to the Fiqh (Islamic legal) point of view, taking into consideration the social and environmental impacts of the sukuk or Islamic product as well.

Dr. Mohamad Akram Laldin

Executive Director
Islamic Shari’ah Research Academy (ISRA)