Efforts underway to adapt EU green taxonomy and TCFD for Islamic finance

The study by Bahrain-based advisor will inform an ESG advisory service set to be launched in September

The Shariyah Review Bureau (SRB), a leading Bahrain-based Islamic finance advisor, is studying the EU green taxonomy and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) to inform the development of a new ESG offering aimed at Islamic financial institutions.

The Bureau is aiming to launch the ESG service in September and expects initial demand to come from its key client markets of Bahrain and Saudi Arabia. The SRB will also consider signing up to the PRI upon conclusion of the exercise.

Currently, SRB oversees around one-third of licensed investment companies in both Saudi Arabia and Bahrain, half of all Saudi-listed Islamic insurers and 40% of Islamic banks in Bahrain.

It is likely the first initiative within Islamic finance to examine how the EU’s pioneering green taxonomy can be applied to transactions which comply with Islamic law – or ‘Shariyah’. The TCFD has made more of an impact in comparison, with the Malaysia central bank launching a risk assessment framework in 2018 which integrated Shariyah rules, TCFD disclosure standards and ESG criteria. 

The SRB will survey its clients for feedback but does not have any plans as of yet to consult with other external stakeholders.

Commenting on the project, SRB CEO Yasser Dahlawi, told RI: “There are many commonalities between sustainable investing and Shariyah principles, particularly with regards to conservation of the natural environment. We view the integration of environmental criteria into contemporary Islamic financial practices as a matter of profound importance and in line with our ethical teachings.”

 Proponents of Islamic finance are pinning their hopes on the explosion of interest in ESG  to drive the growth of Islamic finance, which they argue is inherently aligned to the principles of sustainable investing. The SRB is one of a number of Islamic finance bodies – which include the UK’s Islamic Finance Council, the RFI Foundation and the Islamic Development Bank – which have launched initiatives linking ESG and Islamic finance.

Read RI’s 2020 feature on Islamic investing and ESG here.