With a range of green, social and sustainability investment opportunities now available within the conventional finance sector, responsible finance increasingly provides market participants with an opportunity to combine financial returns with broader societal impact in their investment activities. This emphasis within responsible finance transactions on both financial and non-financial considerations has led to suggestions that there are clear similarities between the goals of responsible finance and the ethical code that is seen by some as inherent within Islamic law (and so within Islamic finance, as financial activity guided by Islamic legal principles). In my article (the final version of which was published in the Capital Markets Law Journal) I explore the overlap between Islamic and responsible finance through a study of the comparatively small, but growing, market for responsible finance sukuk.
Sukuk are Islamic capital markets instruments that evidence the proportionate interests of holders in underlying assets, revenues or services. These instruments, which have been issued by sovereign, semi-sovereign and corporate issuers, represent one of the more high-profile elements of the Islamic finance industry. In economic effect, sukuk today share characteristics with conventional bonds, but provide an opportunity for market participants to issue, or to invest in, capital markets instruments that structurally align with financial principles of Islamic law. This connection between Islamic finance and Islamic law has been relied on by some to suggest that sukuk issuances should be used to pursue both financial and broader societal goals. Yet, the majority of sukuk certificates currently in issue have no specific societal objective and have instead been issued simply to provide capital to fund the issuer or obligor’s general corporate purposes. The reality of Islamic finance today is that the application of Islamic law to modern financial transactions has generally manifested itself in formal compliance with that law through the structural avoidance of prohibited activities, rather than in explicitly striving to achieve broader ethical objectives or societal well-being.
However, the development of responsible finance sukuk arguably represents a movement towards a more overt emphasis on social and ethical elements in Islamic finance transactions. These instruments are structured so that the proceeds from the issue of the sukuk certificates are, directly or (more typically) indirectly, invested in projects meeting pre-determined non-financial criteria. The offering documents for such issuances, therefore, generally specify how the issue proceeds will be used by the issuer or obligor to fund relevant green, social or sustainability projects. Unlike the mainstream sukuk market, responsible finance sukuk are deliberately structured to address the requirements of both the Islamic and responsible finance markets. As is the case with conventional responsible finance bonds, there is an intentionality behind responsible finance sukuk to pursue positive extra-financial objectives and to consider the broader consequences of a transaction.
While recent benchmark issuances of responsible finance sukuk (such as the 2018 and 2019 issuances of green sukuk by the Republic of Indonesia) indicate a growing market awareness of these financial instruments, the fact remains that only a tiny fraction of sukuk issuances to date could readily be classified as responsible finance. Nevertheless, with their specific focus on goals beyond financial returns, responsible finance sukuk are in line with growing interest within the financial markets of a transaction’s wider societal value. Responsible finance sukuk could also go some way towards bridging the gap between the aspirational ideals of Islamic finance and the practice of that financial market today. In this way, these instruments may represent a step towards providing those in the Islamic finance market with a mechanism through which they can participate in financial transactions that not only comply with the letter of Islamic law, but also with its substance by facilitating the active pursuit of positive societal objectives.
Edana Richardsonis a lecturer in Islamic Finance Law at Maynooth University, Ireland.