The Islamic Finance Council UK (UKIFC), in partnership with PwC, brought together key industry leaders, Islamic finance experts, and sustainability professionals on Tuesday 25th June in London for an exclusive Unlocking Islamic Sustainable Finance round table. The event, which explored the burgeoning intersection of Islamic finance and sustainability, formed part of the London Climate Action Week (LCAW) programme.

LCAW is an annual event that began in 2019, organised by E3G. It gathers global leaders, organisations, and communities to address climate change challenges. LCAW features diverse activities such as forums, workshops, and showcases, playing a crucial role in advancing climate solutions and fostering collaboration among policymakers, businesses, and the public. The week highlights London’s commitment to sustainability and climate action, reinforcing its role as a global leader in addressing environmental issues.

The Unlocking Islamic Sustainable Finance round table was the first Islamic finance event to feature on the LCAW programme, thereby marking a significant milestone in the industry’s engagement with global climate action efforts.

Key areas of discussion are summarised below:

Market Opportunity and Growth for Islamic Sustainable Finance

According to new data from the Al Huda Center of Islamic Banking and Economics, global Islamic banking assets could hit $5 trillion by 2025, while S&P projects that the Islamic finance sector could experience an annual growth rate of 10 per cent in 2024. The round table discussions highlighted the substantial role Islamic sustainable finance can play in achieving the transition to net zero and achieving the UN Sustainable Development Goals (SDGs).

During the round table, it was also highlighted that adherence to Shariah-compliant finance reinforces consumer trust in the institutions that uphold these principles, particularly in Organization of Islamic Cooperation member states, many of whom are impacted by climate change and in need of finance and investment. Islamic finance also plays a pivotal role in enhancing financial inclusion by offering alternative mechanisms that cater to underserved populations.

With an increasing recognition that Islamic finance can help deploy capital to where it is most needed, according to the Financing a Sustainable Future report, green and sustainability sukuk has emerged as an innovative instrument which is attracting strong market demand.

Green Sukuk Guidance

The discussion moved on to what might be the most significant recent development in relation to Islamic finance in recent years. The publication of Guidance on Green, Social, and Sustainability Sukuk was a key output of the High-Level Working Group on Green and Sustainable Sukuk (HLWG) that was developed by the London Stock Exchange Group, Islamic Development Bank and International Capital Market Association. The guidance aims to promote sustainable finance instruments within the global sukuk market, providing clarity on issuing sukuk aligned with principles of sustainability, facilitating investments in projects that benefit the environment and society.

Sukuk has grown to become a significant asset class in the global bond markets with around US$220 billion issuances last year. In the sukuk market, there are roughly US$1 trillion worth of outstanding shares. This year, US$5 trillion worth of bonds have been issued, indicating a 50–60% increase in the market. Meanwhile, Green and sustainable sukuk issuances accounted for less than US$500 million in 2017 and increased to US$10.8 billion last year. In comparison, the market for green social sustainability bonds was valued at US$50 billion in 2014, when the Green Bond Principles were established and Global ESG bond issuance reached $621.8 billion in the first nine months of 2023. As a result, the guidance would also benefit issuers and individuals who are new to the sukuk market, especially green investors. It also takes a practical view especially in terms of developing economies particularly in the Middle East where a substantial portion is driven by sectors which need to transition. Chief financial officers of companies, sovereign teams, asset managers, and Shariah boards are anticipated stakeholders of the guidance.

Regulatory Developments

A key focus of the discussion was the evolving regulatory landscape, particularly in the Gulf region. The UAE Central Bank’s recent mandate requiring Islamic financial institutions to develop climate action plans through its Guiding Principles Regarding Islamic Sustainable Finance signals a significant shift in regulatory approaches to sustainability. This development aligns with UKIFC’s advocacy for greater integration of sustainability principles within Islamic finance regulatory frameworks.

It was highlighted that Islamic banks, while making efforts to align with the guidance, should measure changes to track progress. There was a consensus that they should also be given some flexibility during the transition process.

Tayyib Inspired – Islamic Sustainable Investing Platform (ISIP)

The round table also provided an opportunity for UKIFC to introduce its Islamic Sustainable Investing Platform (ISIP) to the UK audience having been showcased recently in Dubai, Kuala Lumpur and Istanbul. The ISIP is inspired and framed by the Islamic concept of “Tayyib” (pure, wholesome, and impactful). It complements the existing “halal” paradigm successfully built by the early Islamic finance pioneers and supports the development of the Islamic asset management sector. It reflects an aspiration for excellence which has been applied to Islamic investment sector.

ISIP serves as a showcase for independently assessed Islamic investment products that align with sustainability goals. The launch of the platform is a significant step forward in making Islamic sustainable finance more accessible and visible to a global audience. It presents an opportunity for Islamic finance to contribute unique perspectives to global sustainability efforts.

Challenges, Opportunities and Updates

Participants engaged in discussions about the challenges facing the Islamic sustainable finance sector. A key issue that emerged was the need to broaden the investor base, particularly among pension funds and institutional investors. Overcoming this challenge highlighted the importance of education and awareness-raising.

The Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI) Standard 62 on Sukuk was mentioned as a challenge facing the industry. It was noted that the standard now gives a narrower definition of Sukuk and a higher entry level into the market. This will impact green and non-green sukuk issuances, thereby becoming a key consideration for all market players.

On a more positive note, some UKIFC-led research was shared during the round table which, encouragingly, showed that 80% of Islamic finance customers want products aligned with SDGs. This consumer demand presents a clear opportunity for the industry to develop products that meet both religious and sustainability criteria.

Looking Ahead

The round table concluded with a sense of optimism about the future of Islamic sustainable finance. Key areas for future focus include:

  1. Continued collaboration between Islamic finance institutions, regulators, and mainstream sustainable finance players
  2. Further development of standards and guidelines to facilitate market growth
  3. Enhanced efforts to educate investors and consumers about Islamic sustainable finance products
  4. Exploration of how Islamic finance principles can contribute to addressing global sustainability challenges
  5. Exploration whether there was appetite for shariah compliant pensions from Islamic banking customers

As a pioneer in this field, UKIFC remains committed to driving forward the Islamic sustainable finance agenda. By combining the ethical principles of Islamic finance with contemporary sustainability frameworks, a new suite of financial solutions can be made available that benefit both people and planet.