Issues in Endogenizing Relevant Systematic Risk in Islamic Sustainable Finance

Abstract

Environment and climate change are generally considered a systemic risk, not as part of the systematic risk. The view of Islamic finance industry and institutions is no different. However, with greater awareness about the existential threat of climate crisis, there is call for treating it as part of the systematic risk. The Islamic finance industry, as a purpose-driven than merely profit-driven, has to be cognizant too about the evolving risk. Once it is recognized that industries and institutions also contribute to systematic risk and they can and must find ways to reduce that risk, it is only prudent and appropriate that there must be concerted efforts in that direction. This paper provides a brief survey of the emerging ideas and makes the case that, wherever possible in both conventional and Islamic context, endogenizing systematic risk needs to be a priority and toward that end the paper identifies some pertinent issues.

Keywords: Islamic finance, Sustainable development, Systematic risk, Climate change

JEL Classification: Q56