Islamic finance and ESG: Panel analysis of sustainability in OIC countries

Mian Muhammad Ajmal Khan; Ayesha  Munir

doi:10.55942/pssj.v5i11.765

Authors

Mian Muhammad Ajmal Khan Universitas Islam Internasional Indonesia
Ayesha Munir Universitas Islam Internasional Indonesia

DOI:

https://doi.org/10.55942/pssj.v5i11.765

Keywords:

Islamic finance, Environmental Performance Index (EPI), Governance, Organisation of Islamic Cooperation (OIC), Sustainable development

Abstract

This study investigates the relationship between Islamic finance development and environmental performance in ten Organisation of Islamic Cooperation (OIC) countries from 2010 to 2023, focusing on the moderating role of governance quality. Using the Environmental Performance Index (EPI) as a composite measure of sustainability, we employ fixed-effects panel regression models to test whether a higher share of Islamic finance in national banking sectors is associated with improved environmental outcomes and whether governance quality strengthens this relationship. Contrary to prevailing theoretical expectations, the results reveal a persistent and statistically significant negative association between the Islamic finance share and environmental performance across all model specifications. Governance quality shows a modest, positive direct effect on environmental performance, but fails to moderate the Islamic finance environment nexus in a statistically significant way. GDP per capita consistently negatively influences EPI scores, indicating a growth environment trade-off, while foreign direct investment remains insignificant. These findings challenge the assumption that Islamic finance is inherently aligned with environmental goals and highlight the need for targeted policy interventions, such as explicit environmental screening in Shariah governance, development of green Islamic finance products, and integrated sustainability mandates that the sector contributes meaningfully to environmental sustainability in OIC countries.

Author Biographies

Mian Muhammad Ajmal Khan, Universitas Islam Internasional Indonesia

Mian Muhammad Ajmal Khan is affiliated with Universitas Islam Internasional Indonesia (UIII), where he is pursuing a Master’s degree in Sustainable Finance. With a strong academic and research background in green finance, ESG, and impact investment, his work focuses on exploring innovative financial solutions to address climate change and sustainability challenges. His research interests include green bonds, carbon neutrality, and sustainable development financing, with a particular emphasis on emerging economies. He is committed to advancing scholarship in sustainable finance and aims to contribute through high-impact research publications and future doctoral studies.

Ayesha Munir, Universitas Islam Internasional Indonesia

Ayesha Munir is affiliated with Universitas Islam Internasional Indonesia (UIII), where she specializes in sustainable finance and environmental economics. With a strong academic foundation in carbon markets and green financial instruments, her work centers on the role of carbon credits in mitigating climate change and promoting low-carbon development pathways. She is particularly interested in how carbon credit trading, green bonds, and impact investment can be leveraged to achieve sustainability goals in emerging economies. Her research focuses on integrating financial innovation with environmental stewardship to drive both economic growth and ecological balance.

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