Modeling environmental, social, and governance (ESG) adoption enablers: the case of Islamic financial institutions

Abstract

Purpose Environmental, social and governance (ESG) factors influence enterprises’ performance, and financial institutions are essential to sustainable development. Islamic finance shares many similarities with impact investing and can contribute to solving ESG issues. This paper aims to identify and evaluate the enabling factors that facilitate the adoption of ESG initiatives in Islamic financial institutions (IFIs). Design/methodology/approach Eleven enabling factors are identified and assessed by experts in focus discussions to consider their materiality in adopting ESG within the IFIs. To address the study objective, a literature review, modified total interpretive structural modeling (m-TISM) and the Matrice d’impacts croisés multiplication appliquée a un classment (MICMAC) analysis were applied. Findings According to the findings, IFIs should address stakeholders’ sustainable development concerns; implement authoritative ESG legislation; provide sustainability training to their employees; ensure sufficient understanding of the Islamic Financial System among key stakeholders; and comply to sustainability frameworks to monitor and evaluate ESG performance. Originality/value This study represents a novel attempt to evaluate ESG adoption enablers as it has not been done in the past, to the best of the authors’ knowledge. Thus, it offers alternative approaches to ESG adoption and serves as a “stepping-stone” for mandatory ESG reporting compliance in the Islamic finance context. The proposed model is anticipated to pave the way for in-depth empirical research on the independent, dependent and linkage enablers discussed in this paper.