Islamic finance and ESG: Beyond branding towards economic substance

The global financial system is entering a period of deep structural transformation. Traditional economic assumptions centred on excessive leverage, debt expansion and short-term profitability are increasingly being questioned amid climate pressures, geopolitical uncertainty, inflationary risks and growing concerns over social inequality. Across global markets, investors and policymakers are no longer focused solely on financial returns; they are also demanding sustainability, ethical governance and long-term economic resilience.
In response, ESG (Environmental, Social and Governance) has become one of the most influential frameworks shaping modern finance. Yet despite the rapid growth of ESG-linked investments, an important question remains unresolved: can financial systems genuinely achieve sustainability while remaining heavily dependent on speculative activity and disconnected from the real economy?
This question deserves serious attention, particularly within emerging economies seeking more balanced and resilient development models.
Within this context, Islamic finance represents far more than a religious banking alternative. It offers an economic philosophy that may become increasingly relevant in the future global financial order.
Unlike conventional finance, which often separates financial activity from productive economic value, Islamic finance is fundamentally linked to real assets, risk sharing and ethical accountability. Its principles discourage excessive speculation, prohibit exploitative financial practices and encourage investment connected to genuine economic activity. These foundations are increasingly aligned with the core objectives of sustainable finance and ESG frameworks.
The growing international interest in ethical investment demonstrates that markets are beginning to recognise the limitations of purely profit-driven financial systems. Investors today are increasingly concerned with governance quality, environmental responsibility and social impact. In many respects, these principles have long existed within Islamic economic thought.
However, despite this natural alignment, Islamic finance still faces a major challenge. Much of the industry continues to operate within a replication model that imitates conventional banking structures while simply adapting contractual forms to satisfy Sharia compliance requirements. This has limited the intellectual and developmental potential of the sector.
The future success of Islamic finance will not depend solely on expanding Islamic banking assets or increasing the number of Islamic financial products. Its true value will depend on whether it can offer practical solutions to structural economic challenges more effectively than conventional models.
SIGNIFICANT ISSUE FOR OMAN
Under Oman Vision 2040, the Sultanate of Oman seeks to diversify its economy, strengthen fiscal sustainability, support innovation, increase private sector participation and position itself competitively within emerging industries such as renewable energy, logistics and digital transformation. Achieving these ambitions requires financial systems that support long-term productive investment rather than short-cycle speculative financing.
Islamic finance can contribute meaningfully to this transformation if strategically positioned within national development priorities. For example, green sukuk could become an important financing mechanism for renewable energy projects, sustainable infrastructure, water security initiatives and environmentally responsible urban development. As Oman continues to invest in green hydrogen and energy diversification, Sharia-compliant sustainable financing instruments can attract both regional and international investors seeking ESG-aligned opportunities.
At the same time, Islamic finance offers important possibilities for supporting small and medium enterprises (SMEs), which remain essential for economic diversification and employment generation. Conventional lending structures often create barriers for startups and early-stage businesses due to collateral requirements and rigid debt obligations. Partnership-based Islamic financing models may offer more flexible, development-oriented alternatives that encourage entrepreneurship and innovation.
Equally important is Oman’s strategic position within the broader regional Islamic economy. The Sultanate of Oman possesses political stability, geographic connectivity and growing regulatory maturity that could enable it to become a regional hub for sustainable Islamic finance linking the Gulf region with Asia and emerging international markets.
YET FINANCIAL OPPORTUNITY ALONE IS INSUFFICIENT
The broader discussion of Islamic finance must move beyond branding and symbolic compliance towards substantive economic contribution. The central issue should not be how many Islamic products exist in the market, but whether these instruments genuinely contribute to productivity, sustainability, social inclusion and economic resilience.
Without such a shift, Islamic finance risks becoming merely a parallel version of conventional banking rather than a meaningful alternative to it. This transformation also requires stronger institutional and professional frameworks. Regulators, universities and financial institutions must work collectively to strengthen governance standards, research capabilities and sustainability reporting practices. Transparent disclosure, credible ESG measurement and accountability mechanisms will become increasingly important for investor confidence and market integrity.
In this evolving environment, the accounting and auditing profession assumes a particularly critical role. As ESG reporting standards expand globally, accountants and auditors will increasingly be responsible for evaluating non-financial disclosures, verifying sustainability performance and ensuring transparency within both conventional and Islamic financial institutions.
Ultimately, the future global economy will reward financial systems capable of balancing profitability with ethical responsibility and long-term societal value. Financial legitimacy will become just as important as financial performance. Islamic finance possesses many of the intellectual foundations necessary for this transition. The challenge now is whether the industry is prepared to move beyond formal compliance towards genuine economic transformation.
For Oman, this moment represents more than a financial opportunity. It represents an opportunity to contribute to a more sustainable, responsible and inclusive model of economic development for the future.

Dr Suaad Jassem The writer is Associate Professor of Accounting and Auditing, CBFS