Bridging faith and sustainability: Shariah compliant investors in climate finance
Shariah compliant finance, rooted in Islamic principles, prohibits Riba (interest), Gharar (excessive uncertainty), and investments in Haram industries. Despite these constraints, climate finance presents a burgeoning field ripe with opportunities. The inherent ethical considerations in Shariah finance align seamlessly with the goals of sustainable investing, which prioritize environmental preservation and social responsibility.
Green Sukuk and Islamic equities provide dual benefits: they offer Shariah compliant returns while directly financing renewable energy projects, reforestation efforts, and other green initiatives.
Venture capital in the Islamic finance ecosystem has the potential to become a catalyst for climate technology innovations. Islamic venture capital, guided by principles of risk-sharing and asset-backed financing, can support startups developing cutting-edge solutions to combat climate change. Islamic venture capitals can foster a robust ecosystem for climate tech by investing in companies focused on renewable energy, waste management, and sustainable agriculture.
Islamic fintech companies already became the staple of Shariah compliant venture capital industry. The IFN Fintech Landscape, the honour list of Islamic Fintech, now includes 398 companies from 42 countries! They develop and grow until they hit the exit stage, where any further development is hindered by a relative aversion of Islamic banks and other Islamic financial institutions to technology and innovation.
With climate finance the situation is likely to be radically different. Many potential end-users, including governments and world’s largest energy giants, airlines and technology companies are seeking to invest in, to buy and/or to develop climate solutions. So, exits are not going to be problematic. As usual, the industry faces problems a bit earlier — at the stage of Islamic seed capital, actually at the stage that reflects the lack of thereof.
Still, the climate tech is the darling of regulators and governments, so the solutions will be found in most Islamic economic centers — Riyadh, Abu Dhabi, Doha, Kuala Lumpur, Jakarta and London — The Green Climate Fund, Public Investment Fund, Saudi Fund for Development, the UAE Fund for Global Climate Solutions, and many other institutions already welcome Shariah climate entrepreneurs with grants and seed capital. There are rumours that the government of Abu Dhabi is working on setting up a climate-tech Waqf (watch out, Digiwaqf!) to seed Islamic climate tech companies.
Many climate tech companies revolve around carbon credits — their generation, verification, trading and retirement. But, are carbon credits Shariah compliant? The concept of carbon credits, which allows companies to offset their emissions by purchasing credits, poses an intriguing question for Shariah compliance.
While the primary goal of carbon credits — to reduce overall carbon emissions — is ethically aligned with Islamic principles, the mechanisms of their trade need careful scrutiny.
For carbon credits to be considered Shariah compliant, their trading must avoid elements of Riba and Gharar. This means ensuring that transactions are transparent, the credits are backed by tangible environmental benefits, and speculative trading is minimized. There is at least one Shariah compliant project in the VC sphere — XTCC, armed with a Fatwa from Yasaar Research (UK).
