By Iqbal Harith Liang, Member, Bar Council Publications Committee
The 37th LAWASIA Conference 2024 took place from 13 to 15 Oct 2024 at Hilton Kuala Lumpur.
This business law session at the LAWASIA Conference 2024 discussed the concept of sustainability within the ambit of Islamic finance. The session was moderated by Abdul Rashid Ismail, Secretary of the LAWASIA Constitutional and Rule of Law Committee. The two speakers for the session were Dr Syed Adam Alhabshi, partner at Raja, Darryl & Loh, and Maya Marissa, CEO and Managing Director of Amanie Advisors.
The session began with a discussion on the relationship between environmental, social and governance (“ESG”) and Islamic finance. The speakers described ESG as a DNA strand of Syariah law, and that Islamic finance as a sector forms part of the Syariah worldview. While these two concepts are seemingly a match made in heaven, the reality was that much work needs to be done for this marriage to work.
Despite the similar principles pursued by both ESG and Syariah law, Abdul Rashid Ismail pointed out that Islamic finance products do not automatically receive ESG certification. Dr Syed Adam explained that the concept of maqasid syariah had only been discussed in the context of Islamic jurisprudence, instead of it being utilised as a tracking format akin to ESG. ESG on the other hand, is equipped with key performance indicators (“KPIs”), reporting requirements and others, which form the quantitative aspect of ESG. This is why a mere identification of a certain transaction as being compliant with Syariah principles does not automatically entail ESG certification. However, due to many common denominators between the two concepts, Dr Syed Adam was of the view that it would be easy for the Islamic finance sector to embrace the reporting culture practiced in ESG.
When asked about the additional steps that may assist Islamic finance products to align with ESG criteria, Maya Marissa opined that due to maturing markets, ESG and Syariah may merge and align, provided that the structuring of these two concepts are thought out. Maya Marissa further stated that since the reporting framework is already in place, all that was left is to import Syariah principles into the same framework, and for the expertise to be enhanced further. Given the all-encompassing nature of Syariah, it is imperative that Syariah scholars and ESG experts work collaboratively to benefit from their respective insights.
The discussion then addressed the regulatory landscape in the Islamic finance sector. Maya Marissa explained that in this field, the regulators’ ambit of purview is on a higher level. When it concerned ESG, it is the foreseeable impact that needs to be measured in order to ensure that relevant objectives are achieved. However, it should not be regulators who measure such impact, but rather private entities who could measure the impact and report back on it. Regulators should instead prioritise elevating ESG for all transactions, as well as provide incentives towards funding ESG-related projects.
When queried on how existing regulations can evolve to accommodate both Islamic finance principles and ESG considerations, Dr Syed Adam cited the example of the Value Based Intermediation (“VBI”) Financing and Investment Impact Assessment Framework issued by Bank Negara. He described VBI as a mechanism to guide Islamic finance institutions towards being responsible bankers, and one such component includes ESG. This initiative further proved ESG as being a DNA strand of Islamic finance.
Abdul Rashid Ismail then brought the discussion to the topic of greenwashing. Maya Marissa stated that at its core, greenwashing is a breach which carries repercussions. For Islamic finance products that represent itself to be green, there is an added layer of scrutiny to prevent greenwashing, which is Syariah review or Syariah audit. However, due to such high degree of scrutiny and accountability, there is currently no proliferation of green products. Therefore, greenwashing will gradually die down.
On the topic of the role of lawyers in dealing with ESG, Dr Syed Adam laid out three points: (1) lawyers must be aware of new regulations and / or legislations on ESG; (2) lawyers need to understand the non-specific and undefined ESG terms and also know how to define these terms, in order to set the parameter of advice; and (3) lawyers need to know how to collect and analyse data on ESG, particularly with the assistance of artificial intelligence (“AI”).
Maya Marissa added two further points on this matter. Firstly, lawyers need to work closely with Syariah scholars from the get-go, as they must ensure that relevant concepts are captured in the legal documents, saving time and resources. This is also important because all Islamic finance product must be Syariah compliant end-to-end, and it is Syariah scholars who hold accountability throughout the lifetime of an Islamic finance product. Secondly, due to the increasing amount of financing requirements and growing size of Islamic assets, Syariah scholars need to innovate to find solutions that go towards harmonizing Syariah law and ESG. There is also a need to ensure that Syariah and conventional finance products are on a level playing field for the benefit of everyone.
The session concluded with a question-and-answer segment. In answering the questions posed, the panel explained that although Islamic finance products that are green will be subjected to strict scrutiny from both Syariah and ESG perspectives, these Islamic finance products are still sought after as it accords with the market’s demands. It is to capture investors who wish to invest into ESG, or to comply with requirements established by relevant regulators.
In conclusion of this write up, the author wished to share Dr Syed Adam’s quote which is befitting of the session: “Islamic finance is not profit-driven, it is instead prophet-driven.”