Chapter 3: Ethical Investment in Islamic Finance: The Role of ESG Toward Sustainable Growth

The concept of sustainable growth has gained lots of traction in recent years especially due to the aftershock of the Covid-19, which has left individuals and businesses reeling from the adverse consequences such as loss of livelihood, poverty, and bankruptcy. Hence, sustainable growth has become a necessary long-term goal for individuals and businesses alike to be able to attain financial success combined with the ability to meet environmental, social, and governance (ESG) needs. In this context, Islamic finance, which centers on the principles of Shari’ah law, is expected to help individuals and businesses from the financial and nonfinancial perspectives (i.e., ESG), to attain sustainable growth through ethical investments. The interaction between ESG and ethical investment in Islamic finance is expected to build a sustainable future for potential investors, shareholders, and other stakeholders, such as the public, customers, and employees, in alignment with the United Nation’s (UN) Agenda 2030 and the sustainable development goals (SDGs). This chapter, first, provides an overview of Islamic finance followed by discussion on the foundations of Islamic finance and ethical investment. Next, this chapter explains the origin, definition, and role of ESG in modern investment practices. This chapter also reviews the synergy between ESG and ethical investment in Islamic finance and sustainable growth. Finally, the integration of ESG in Islamic investment is examined in this chapter.