How does Islamic finance incorporate ESG and other responsibility concerns into industry practices?
Published by RFI Foundation
Stella Cox, CBE, has been involved in Islamic finance for many years, and through it all, she has worked to bridge differences across the industry. In her primary role as Managing Director at DDCAP, Ms.Cox has led the firm’s approach to automating Sharia’a compliant transactions to meet the diverse expectations of the Islamic finance industry.
More recently, through DDCAP’s RFI membership and her personal role as an RFI Trustee, Ms. Cox actively promotes the business and ethical case for responsible finance. DDCAP’s approach originally emerged from stakeholders’ expectations around Shari’ah governance and other compliance and sanctions protocols. As its counterparties became more attuned to environmental and social impact concerns, DDCAP’s approach also evolved and these concerns influenced the commodity used and the protocols surrounding the transactions it facilitates.
For example, in relation to the commodities transactions facilitated through DDCAP’s platform, ETHOS AFPTM, some stakeholders will ask about how the commodities are sourced as well as the environmental and social impact of the mining practices of suppliers. Questions may also arise about the impact of the sourcing firm’s practices on social welfare in the labour force as well as the impact on conflict afflicted or vulnerable areas.
As a relatively small company, DDCAP has been able to incorporate environmental, social and governance concerns into its everyday activities, including those points arising from the input of Sharia’a scholars. DDCAP has its own Sharia’a Supervisory Board to oversee its business and it accommodates the rulings of its customers’ Sharia’a boards which gives DDCAP a deep perspective into how Islamic finance is incorporating ESG and other responsibility concerns into industry practices.
DDCAP encourages other institutions to become involved in responsible finance both through its membership in RFI Foundation and as a signatory to the UN Principles for Responsible Investment (PRI). Ms. Cox highlighted how DDCAP approaches the PRI principles, focusing on incorporating ESG considerations into its own commercial decisions, collaborating with other financial institutions to promote the adoption of these values more widely, and publicly disclosing its own progress in adopting these principles.
She noted one challenge DDCAP has found is with the more standardized reporting approach that PRI requires. When signatory institutions don’t fit the traditional asset manager or asset owner model, they may find the reporting process to be more complex as it doesn’t naturally lend itself to their business activities. For some emerging markets-focused institutions, and those from underrepresented sectors like Islamic finance, they may find it more difficult to report which may lead them to be less likely to engage with the organisation and the process.
As an RFI Foundation member, Ms. Cox explained that there is an opportunity to highlight these concerns and collaborate to promote the adoption of a more flexible approach to reporting and disclosure. An alternative approach recognising the heterogeneity of the responsible finance industry would naturally stem from an Islamic finance-originated organization like RFI which brings experience in bridging the divergences inherent in Islamic finance, driven by Shari’ah or business considerations, or a combination of the two.
The Islamic finance market continues to evolve to address substance and form requirements from Shari’ah but now also seeks to incorporate an additional focus on ‘impact’ as linked to the Maqasid al Sharia’a (higher objectives of Sharia’a). Ms. Cox disagrees with the prevailing view that Islamic finance is primarily an ‘exclusions-driven’ industry and she emphasised the need for Islamic finance to become more vocal in sharing its unique and positive approach to finance to foster changes to how the wider responsible finance market operates, engages and reports on its activities.
Listen to our full interview with Stella Cox in the latest episode of the Responsible Finance Podcast