Aligning ESG, SDG, SRI & VBI with Maqasid al Shari'ah

Islamic finance seeks to promote socio-economic justice and sustainable economic growth. As global financial markets increasingly emphasize ethical and sustainable investing through frameworks such as Environmental, Social, and Governance (ESG) criteria, Sustainable Development Goals (SDGs), Socially Responsible Investing (SRI), and Value-Based Intermediation (VBI), Islamic finance industry has a unique opportunity to align our offerings with these principles. By doing so, we can ensure that our financial products and services not only comply with Shariah but also contribute to societal welfare and the environment.

One of the most effective ways for us to achieve this alignment is by developing Shariah-compliant ESG products, i.e. creating financial solutions that adhere to both Islamic principles and Environmental, Social, and Governance (ESG) criteria. These products should go beyond avoiding prohibited activities such as interest (riba) and excessive uncertainty (gharar); they should actively promote ethical investments that benefit both humanity and the planet. This integration ensures that investments not only meet religious obligations but also contribute to broader ethical, social, and environmental objectives.

Islamic finance prohibits investments in industries that are harmful to society, such as alcohol, gambling, weapons manufacture, and speculative trading. Similarly, ESG principles advocate for investments that prioritize sustainability, ethical labor practices, and strong corporate governance. By combining these frameworks, financial institutions can design investment products that cater to ethically conscious investors while remaining compliant with Shariah.

One way to achieve this is through green and sustainable Sukuk, specifically issued to finance environmentally friendly projects. Green Sukuk can support initiatives such as renewable energy, sustainable agriculture, and clean water infrastructure, aligning with the Islamic objective of environmental preservation (hifdh al biah). Financial institutions can also offer Shariah-compliant ESG funds, which invest in companies that adhere to both Islamic finance principles and ESG best practices, ensuring that businesses uphold fair labor standards, minimize environmental harm, and maintain transparent governance.

Beyond investment products, Islamic banks can integrate ESG factors into their financing models. For example, Shariah-compliant home financing can be structured to support energy-efficient housing projects, while Islamic microfinance programs can prioritize funding for businesses that promote social well-being, such as enterprises led by women or those that focus on community development.

A further step toward impact-driven finance is the incorporation of SDG objectives into Islamic investment strategies.

The UN’s SDGs, which aim to eradicate poverty, improve education, and enhance global healthcare, align seamlessly with maqasid al Shariah, particularly in preserving life (hifdh al nafs) and intellect (hifdh al aql). In line with SDG 1 (No Poverty) and SDG 8 (Decent Work and Economic Growth), Islamic finance institutions (IFIs) can develop mechanisms such as Islamic microfinance to support small businesses and low-income individuals. For instance, IFIs can leverage qard al-hasan contract to provide interest-free financing, ensuring that economic opportunities are accessible to all. The use of Zakat and Waqf funds can also be instrumental in financing social enterprises and offering financial relief to marginalized communities, reinforcing the maqasid al Shariah of wealth circulation and social equity.

Education is another critical area where Islamic finance can contribute. SDG 4 (Quality Education) highlights the importance of accessible and inclusive education, which aligns with maqasid al Shariah of preserving intellect. IFIs can introduce Shariah-compliant student financing through models like Ijara (leasing), allowing students to fund their education without falling into debt traps associated with conventional interest-based loans. Additionally, Waqf-endowed universities and scholarship funds can be established to provide free or subsidized education, ensuring that knowledge remains a public good rather than a privilege.

Healthcare investments are equally vital, particularly in supporting SDG 3 (Good Health and Well-being). Islamic finance can play a transformative role by issuing Sukuk for hospitals, medical research, and public health initiatives, which aligns with maqasid al Shariah of preserving life. These instruments can help build healthcare infrastructure in underserved areas, ensuring that medical services reach those in need. The expansion of Islamic health insurance (Takaful) can further enhance healthcare accessibility, providing affordable coverage based on cooperative risk-sharing rather than conventional commercial insurance models.

Environmental sustainability is a growing priority within Islamic finance, aligning with SDG 13 (Climate Action) and SDG 7 (Affordable and Clean Energy). IFIs can champion environmental sustainability by financing renewable energy projects, eco-friendly infrastructure, and responsible agricultural practices through Green Sukuk and ESG-compliant Islamic investment funds. Such initiatives not only contribute to the preservation of the environment (hifdh al biah) but also offer long-term economic benefits by promoting sustainable resource use.

Beyond individual investment products, Islamic finance can further strengthen its ethical impact by embracing Value-Based Intermediation (VBI). VBI is a strategic approach that ensures financial institutions prioritize societal well-being alongside profitability. Unlike conventional banking models that focus primarily on profit maximization and shareholder returns, Islamic finance has the potential to commit to ethical governance, financial inclusion, and sustainable development. This can be seen in their support for affordable housing, ethical labor practices, and renewable energy projects, initiatives that promote social justice and align with the Islamic principle of economic equity.

One key application of VBI is in ethical and impact-driven financing. Instead of funding projects based solely on profitability, IFIs can prioritize sectors that contribute to societal well-being. This includes financing renewable energy projects, supporting affordable housing initiatives, and investing in businesses that uphold fair labor practices, which aligns with maqasid al Shariah of preserving life (hifdh al nafs) and protecting the environment (hifdh al-biah), ensuring that financial resources are directed toward activities that enhance the quality of life for present and future generations. IFIs can engage with stakeholders, including scholars, customers, and regulators, to understand societal needs and expectations, facilitating the development of products that address societal needs while adhering to the Shariah.

Another crucial aspect of VBI is financial inclusion and social empowerment. Islamic finance has a strong tradition of promoting economic justice and reducing wealth inequality. Through VBI, institutions can develop innovative financial products tailored to underserved populations, such as Islamic microfinance programs that provide interest-free or ethical financing to small entrepreneurs. By leveraging instruments like qard al-hasan (interest-free loans), IFIs can empower low-income communities and promote sustainable economic growth, thereby supporting the maqasid principle of wealth circulation and social equity, ensuring that economic prosperity is shared rather than concentrated in a few individuals.

Transparency, governance, and accountability also play a central role in VBI. Institutions that adhere to VBI principles operate with a high degree of ethical responsibility, ensuring that their governance structures and financial disclosures foster trust among stakeholders. This commitment to integrity aligns with the Islamic finance principles of vicegerency and amanah (trustworthiness) and strengthens the credibility of IFIs in both Muslim-majority and global markets. IFIs can achieve this by establishing comprehensive Shariah governance frameworks that assess both the legal compliance and the ethical impact of financial products, ensuring alignment with the spirit of maqasid al Shariah.

The principles of SRI further reinforce Islamic finance's ethical commitment. Both SRI and Islamic finance apply stringent investment screening criteria to avoid industries that harm society, such as gambling, alcohol, and weapons manufacturing. Integrating SRI strategies into Islamic investment funds ensures that financial activities generate positive social impact while remaining compliant with Shariah. This approach not only broadens the appeal of Islamic finance but also enhances its role in fostering ethical and sustainable economic growth.

By integrating ESG considerations, SDG priorities, VBI, and SRI principles into their operations, IFIs can redefine their role in the global financial ecosystem. They are not merely providers of Shariah-compliant financial products; they are enablers of positive change, ensuring that wealth is managed responsibly, and that financial growth serves a greater moral and social purpose. This alignment not only enhances the competitiveness of Islamic finance but also reaffirms its fundamental mission as a system that upholds justice, sustainability, and human dignity.