By Dr. Jasmin Omercic
The importance of integrating ESG and Islamic screening methodologies for a sound Islamic economic foundation
Considering prevailing global issues such as climate change, carbonisation, conflicts, and pandemics, many of the conventional approaches to handling affairs have led to a questioning of established definitions in almost all disciplines. Such is the case with economics as well with increasing financialisation of capitalist activities to meet the expectations of shareholders being transformed into other stakeholders’ expectations as well.
While that is a step in a good direction to cater to the negative impacts of shareholder capitalism on multiple stakeholders, capitalism by itself is questioned due to flawed foundations and alternatives like Islamic finance challenge it with rootedness in sound philosophical foundations derived from sources of knowledge derived from and grounded in Islam.
Islamic finance practices are characterised by a rigorous screening of activities through a process commonly known as Shari’ah compliance. Along with the environmental, sustainability, and governance (ESG) initiatives in the financial corporate sector, there is increasing relevance of shariah-compliant investment, asset management, or financing. It has now received the attention of other non-Shari’ah investors, asset managers, or financiers. Hence, it is incumbent to question whether such faith-based screening criteria could be valuable to them whilst fulfilling the criteria of ESG, or whether the Shari’ah-compliant criteria are even greater than ESG screening criteria.
Integration of shariah-compliant and ESG screening methodologies
Perhaps the integration of ESG and shariah compliance screening methodologies could happen by taking into consideration Islamic economic foundations. Whether one should strive towards only shariah-compliant screens, ESG, or combine the two to some degree or completely is something that needs to be considered seriously.
There are companies that strive to score with the ESG screening methodology by stressing that their businesses are environmentally friendly, devoid of or reducing carbon emissions, increasingly sustainable, efficiently governed, and in line with all stipulated regulations in their respective national or international contexts.
These companies have no required criteria in terms of shariah compliance but are noticing the relevance of ESG scores in greater shariah compliance scores. Likewise, there are companies that observe ESG objectives via assurance of full-fledged shariah compliance due to elimination of all environmental tarnishing, persistent sustainable growth, and more efficient governance and regulations conforming to the maqaṣid (objectives) of shariah.
Hence, in an ecosystem where both types of companies co-exist, and even where they don’t, there is an increasing interest to employ shariah compliance processes to increase the positive impact of traditional responsible investors and engage with other shariah-compliant companies. Equally so, there is an increasing interest in shariah-compliant companies to engage ESG scoring companies via the application of their screening methodologies.
Integration of the efforts of all companies’ stakeholders and shareholders in devising a screening methodology that ensures the reduction and eventual alleviation of global issues such as climate change threats, carbon emissions, pandemics, and the like, will result in a healthier ecosystem.
Meanwhile, the recurrent challenge of integration is not only technical whereby return on assets (ROA) and return on equities (ROE) are maximised, but also the foundations upon which such integration occurs. Basing integration on the conventional flawed economic foundations allows the perpetuation of long-term outcomes driven by profit maximisation and wealth accumulation on one side, and increasing exploitation and poverty on the other. Even the adoption of the best approaches of ESG companies will not lead to genuine resolutions of pressing global issues if the foundations are not sound.
From lower shariah compliance to comprehensive or wholistic shariah compliance
Meeting the technical requirements of regulators to officially declare certain practices, services or products as shariah-compliant does not ensure compliance along with more comprehensive and wholistic objectives (maqasid) of the shariah due to:
- Apparent contradictions (tanaqud) of practice, service, or product in relation to the spirit of Islam and long-term welfare (maslaha);
- It’s apologetic (tabrir) justification of permissibility, acceptability, legality, authority, authenticity and contextual adaptability without genuine effort to remove obstacles to make a practice, service or product genuinely Islamic;
- Obvious imitation (taqlid) of conventional practice, service or product;
- Partial (tajzi) orientation of practice, service or product or;
- Deconstructive (tafkik) nature of the practice, service or product.
Analysis of contemporary shariah compliance along these comprehensive and wholistic objectives would unleash the potential of growth for companies, thoroughly filter their approaches in respective businesses and ensure genuine solutions to pressing global problems of humanity.
This practice would foster genuine integration with ESG scoring approaches and ensure rootedness in sound Islamic economic foundations. It means that companies fulfilling the screening methodologies would not only be shariah and ESG compliant but would unleash positive and impactful externalities upon stakeholders.
In return, stakeholders would support companies’ practices in meeting such comprehensive and wholistic shariah compliance objectives which would result in even greater impact and support. This represents a radical reform from the established reasoning on shariah compliance and ESG screenings by shifting the focus from adaptational to transformational proactive undertakings.
Companies would strive to be visionary and missionary in attaining the defined purpose of their existence and activity. It promises a healthy ecosystem where new players can join and meet and address emerging needs and problems. Transformational integrated screening criteria would ensure that contemporary shariah and ESG compliance methodologies would increasingly produce optimal outcomes and identify factors that produce eventual inefficiencies and hinder performance.
A more comprehensive integrated methodology of shariah compliance and ESG scoring would enable large conglomerates to scale up further and small and medium enterprises (SMEs) to creatively innovate, complement and merge among themselves or with larger conglomerates.
Attaining the reenvisioned and reinvented approach to genuine or higher shariah compliance
There are apparent gaps in contemporary shariah compliance and ESG screening methodologies that must be bridged through avoidance of imitative, apologetic, partial, contradictive, and deconstructive fallacies in reasoning, practice, production, and servicing in the global Islamic financial ecosystem.
While companies already face difficulties in meeting extant screening criteria amidst the global push towards attainment of sustainable development goals (SDGs), attention to the mentioned recurrent fallacies, which characterize contemporary human thought generally and that of economics and finance particularly, facilitates:
- Attainment of defined screening methodologies of lower Shari’ah compliance and ESG and;
- Gradual convergence towards higher Shari’ah compliance with a maqasid purpose.
Initial actionable steps of companies would be to review extant practices in light of the above fallacies in reasoning, redefine the purpose or objective, and realign practices, products, and services along with our briefly defined Islamic foundations.
This involves the revisiting and refurbishing of the purpose of a company’s operations, extraction of information and knowledge from revelational and rational sources of knowledge, adjustment of practices, products, and services along with Islamic ethical and moral norms (akhlaq), and methodological transformation so that its reformed and renewed operationalisation would align with the more comprehensive and wholistic methodological vision and mission of higher or genuine shariah compliance.
This reenvisioned and reinvented approach towards genuine or higher shariah compliance within the global economic and financial practice, products and services generally and those of Islamic economics and finance per se, would represent an opportunity to elevate global human welfare and attain greater environmental quality, unwavering sustainability and efficient governance.
Our proposed approach is adoptive in relation to current screening methodologies, adaptive to multiple contextual circumstances, and universally appealing to all economic and financial stakeholders and shareholders.