Islamic & Sustainable Finance: Naturally aligning for a greener future
The undeniable effects of climate change, a growing awareness of the long-term economic risks associated with climate deregulation and a desire to diversify economies beyond fossil fuels have all led the Middle East to become more and more active within the realm of sustainable finance in recent years.
Given the large amounts of both public and private capital that is needed to address these matters, the development of a unity between Islamic and sustainable finance has become an important area of securing financing that brings a positive environmental and social impact to the world, and Luxembourg has played a key role in this.
Just like sustainable finance, one of Islamic finance’s main drivers is that it should do no harm while also excluding investment in or funding of alcohol, tobacco and gambling. Both share several common values and objectives that make them naturally aligned in the pursuit of ethical and responsible financial practices, which can help reduce the learning curve that other countries and regions experience.
But how can sustainable finance and Islamic finance become even more aligned, and what has Luxembourg done to foster this?
In these regions, we’ve seen a growing commitment to global sustainability goals with the implementation of policies that support sustainable investing and responsible banking practices. Financial institutions throughout the world are also increasingly integrating ESG factors into their investment strategies, recognising the potential for long-term value creation and risk mitigation.
In addition to this foundation, both also encourage the inclusion of impact considerations in financial decision-making processes, simultaneously emphasising the importance of transparency.
The innovative financial instruments developed within Islamic finance, such as green sukuk, can inspire the expansion of sustainable finance - leveraging the synergies between these two frameworks and driving the development of a more inclusive and environmentally conscious financial system.
And in this respect, the numbers speak for themselves - it is projected that by 2025, between USD 30-50 billion will be raised through green and sustainability sukuks that aim to directly contribute to the achievement of the United Nations' Sustainable Development Goals (SDGs).
This is a massive amount of capital that needs to be raised in a relatively short period of time, whereas sustainable finance practices are still developing in the Middle East and Africa (MEA). In order to meet these commitments and cater to the broader demand for sustainable solutions in the region, governments and issuers will need support and assistance, starting with capacity building, knowledge sharing and solutions to help fostering and channelling substantial capital investment.
When it comes to helping Islamic and sustainable finance converging, let's not forget that Luxembourg is where you'll find the Luxembourg Stock Exchange - the first European exchange to list a sukuk back in 2002 and the first exchange to launch a platform completely dedicated to sustainable finance, the Luxembourg Green Exchange (LGX).
As countries across the MEA region ramp up their efforts to implement new sustainable finance practices, LGX can help regional issuers build up their reputation and access a broad, diversified and truly global investor pool, while supporting their sustainable funding ambitions.
If you are an issuer from the MEA region looking to take your first step into sustainable finance or bring your Shariah-compliant security to a broader audience, LuxSE can be your gateway to the EU and our experts are just a call or an email away!
Given the large amounts of both public and private capital that is needed to address these matters, the development of a unity between Islamic and sustainable finance has become an important area of securing financing that brings a positive environmental and social impact to the world, and Luxembourg has played a key role in this.
What is Islamic finance?
Islamic finance is the practice of raising finance in a way that is compliant with Shariah or Islamic law. With nearly 25% of the world’s population estimated to be Muslim, Islamic finance holds great potential to unlock massive amounts of capital to fund positive-impact projects throughout the world.Just like sustainable finance, one of Islamic finance’s main drivers is that it should do no harm while also excluding investment in or funding of alcohol, tobacco and gambling. Both share several common values and objectives that make them naturally aligned in the pursuit of ethical and responsible financial practices, which can help reduce the learning curve that other countries and regions experience.
But how can sustainable finance and Islamic finance become even more aligned, and what has Luxembourg done to foster this?
Working toward a greener future
Much like the rest of the world, countries with predominantly Muslims populations have taken great strides to develop sustainable finance. While the United Arab Emirates (UAE) has committed to net zero by 2050 and Saudi Arabia set its net zero goal as 2060, efforts to push the sustainable finance agenda extend well beyond the Middle East, moving into both emerging and more developed markets in Africa & Asia.In these regions, we’ve seen a growing commitment to global sustainability goals with the implementation of policies that support sustainable investing and responsible banking practices. Financial institutions throughout the world are also increasingly integrating ESG factors into their investment strategies, recognising the potential for long-term value creation and risk mitigation.
Linking sustainable products with Islamic products
With clear links in the ethics driving each practice, linking sustainable and Islamic finance is a natural step in fostering and financing greater sustainability. Both prioritise investments that align with social well-being and environmental preservation, and exclude sectors considered unethical or harmful.;In addition to this foundation, both also encourage the inclusion of impact considerations in financial decision-making processes, simultaneously emphasising the importance of transparency.
The innovative financial instruments developed within Islamic finance, such as green sukuk, can inspire the expansion of sustainable finance - leveraging the synergies between these two frameworks and driving the development of a more inclusive and environmentally conscious financial system.
And in this respect, the numbers speak for themselves - it is projected that by 2025, between USD 30-50 billion will be raised through green and sustainability sukuks that aim to directly contribute to the achievement of the United Nations' Sustainable Development Goals (SDGs).
This is a massive amount of capital that needs to be raised in a relatively short period of time, whereas sustainable finance practices are still developing in the Middle East and Africa (MEA). In order to meet these commitments and cater to the broader demand for sustainable solutions in the region, governments and issuers will need support and assistance, starting with capacity building, knowledge sharing and solutions to help fostering and channelling substantial capital investment.
Luxembourg - an advocate of Islamic finance driving the sustainability agenda
The Grand-Duchy has been long-standing supporter of Islamic finance. As the first Western country to host an Islamic finance institution in the late 1970s, Luxembourg has played a crucial role in elevating the prominence of Shariah-compliant financial products across Europe. By going on to establish a robust framework for sukuks, it also offers significant opportunities to establish, manage, and distribute cross-border investment that adhere to Shariah principles.When it comes to helping Islamic and sustainable finance converging, let's not forget that Luxembourg is where you'll find the Luxembourg Stock Exchange - the first European exchange to list a sukuk back in 2002 and the first exchange to launch a platform completely dedicated to sustainable finance, the Luxembourg Green Exchange (LGX).
As countries across the MEA region ramp up their efforts to implement new sustainable finance practices, LGX can help regional issuers build up their reputation and access a broad, diversified and truly global investor pool, while supporting their sustainable funding ambitions.
If you are an issuer from the MEA region looking to take your first step into sustainable finance or bring your Shariah-compliant security to a broader audience, LuxSE can be your gateway to the EU and our experts are just a call or an email away!
