Just Transition: the Islamic Finance Industry Beyond Greenwashing

Author : Leonard Tiopan Panjaitan
Profile :
Senior Consultant for Sustainability, Climate Risk & Green Productivity at Trisakti Sustainability Center, and
Active Member – Institute of Certified Sustainability Practitioners (ICSP)
ICSP Member ID : 10261543

The Islamic finance industry continues to experience significant global growth, with total assets projected to exceed US$6 trillion by the end of 2026. Alongside this expansion, the industry now faces a major challenge: rising public expectations regarding sustainability practices, particularly in the allocation of capital to the real economy.

Leonard Tiopan Panjaitan, a member of the Institute of Certified Sustainability Practitioners (ICSP) and Senior Consultant for Sustainability, Climate Risk & Green Productivity at Trisakti Sustainability Center, shared his views in an article highlighting the future potential of sustainability performance within the Islamic finance industry, particularly in Southeast Asia.

According to Leonard, the future of Islamic finance lies in driving micro-level resource efficiency through Green Productivity metrics and integrating measurable climate risk mitigation into every financing decision, in line with the principle of Hifz al-Bi’ah (environmental preservation).

“Policymakers and C-suite executives must now embed GP assessments and climate risk resilience scoring directly into Shariah financing contracts,” said Leonard, as quoted by Islamic Finance News (IFN) (7 April 2026) and Green Productivity Bulletin (16 April 2026).

He emphasized that the Islamic finance industry must move beyond the era of greenwashing by ceasing to view sustainability merely as a marketing tool. Numerous sustainability methodologies and standards have emerged globally and need to be adopted by the global Islamic finance ecosystem going forward.

“The convergence of the ASEAN Taxonomy’s technical criteria, IFRS S2 risk disclosure standards and proven market demand for sustainable Sukuk eliminates any excuse for inaction,” he asserted.

In this context, Green Productivity, the ASEAN Taxonomy for Sustainable Finance, and IFRS S2 can serve as complementary frameworks to help Islamic financial institutions integrate sustainability and climate risk considerations into financing processes and decision-making.

Green Productivity as a Sustainable Financing Instrument

Green Productivity was introduced by the Asian Productivity Organization (APO) as an approach and methodology for improving business performance by balancing profitability and environmental sustainability.

Through the Green Productivity Index (GPI), Islamic financial institutions, particularly Islamic banks, can support more responsible and performance-based financing practices.

“Banks should assess and incentivize financing based on demonstrated GPI improvements. Borrowers who show measurable efficiency gains could receive preferential profit margins or extended tenors,” he explained.

ASEAN Taxonomy for Sustainable Finance and the Just Transition Approach 

Leonard also believes that the Islamic finance industry should adopt the ASEAN Taxonomy for Sustainable Finance, developed by the ASEAN Taxonomy Board (ATB), as a guide for navigating a just transition, particularly Version 4, released in November 2025. The framework provides standardized technical criteria for determining whether a business activity can genuinely be classified as sustainable.

The ASEAN Taxonomy allows banks to finance businesses categorized as Amber, namely companies that are still in transition toward alignment with the Paris Agreement’s 1.5°C target.

“Islamic banks allow to finance genuine transitions – funding high-emission clients committed to decarbonization – rather than triggering abrupt, disorderly divestments that harm local economies,” he explained.

Ultimately, Islamic banking can implement a just transition approach consistent with the Islamic principle of Maslaha, which emphasizes the public interest. This is especially important as demand for sustainable financing continues to grow.

He cited Indonesia’s Bank Syariah Indonesia (BSI), whose sustainable sukuk issuance was oversubscribed. Meanwhile, Malaysia continues to maintain its position as a leader in sustainable sukuk issuance through its Sustainable and Responsible Investment (SRI) Sukuk Framework.

IFRS S2 Standards to Strengthen Climate Risk Management

The International Financial Reporting Standard (IFRS) S2, issued by the International Sustainability Standards Board (ISSB), should also be implemented to strengthen climate risk management. Climate-related risks are increasingly becoming material financial risks that can affect financing performance, collateral valuation, operational continuity, and institutional resilience.

Therefore, climate risk management can no longer be viewed merely as a voluntary sustainability initiative but must be treated as a fiduciary imperative and an integral part of enterprise risk management.

“We also need to see a dedicated climate-risk overlay applied to expected credit loss (ECL) calculations, alongside rigorous stress-testing of collateral across various warming trajectories,” Leonard stated in his article.

IFRS S2 guides Islamic financial institutions in categorizing climate risks into two primary groups: physical risks and transition risks. Physical risks include events such as floods that damage collateral assets, while transition risks arise from policy and regulatory changes that may cause carbon-intensive assets to lose value or become stranded assets.

The existence of transition risks should not serve as a reason for Islamic financial institutions, particularly banks, to neglect MSMEs or large companies with high carbon intensity. On the contrary, the standard provides Islamic banks with the ability to encourage financing for customers committed to making the transition.

By leveraging Green Productivity, the ASEAN Taxonomy, and IFRS S2 in an integrated manner, the Islamic finance industry can strengthen its role in supporting a just transition toward a low-carbon economy while delivering measurable environmental and economic outcomes.

Note: 

This article is a summary and adaptation of the original article “Beyond Greenwashing: Integrating Climate Risk Management and Green Productivity” by Leonard Tiopan Panjaitan, first published in Islamic Finance News (IFN), Volume 23 Issue 14 (8 April 2026): https://www.islamicfinancenews.com/beyond-greenwashing-integrating-climate-risk-management-and-green-productivity.html?access-key=8e07aa10a5403c30415e19d7cd694b97,

and subsequently published on the Green Productivity Blog (16 April 2026): https://greenproductivityblog.wordpress.com/2026/04/16/beyond-greenwashing-integrating-climate-risk-management-and-green-productivity/.

It is published with permission from the author and with attribution to the original publication source.

This article is available in both English and Indonesian. The English version published by ICSP is a summary and adaptation of the original article. The Indonesian version is provided to improve accessibility for Indonesian readers. As the translation was not prepared by the author, certain interpretations or linguistic nuances may differ from the original text. For a more accurate understanding of the author’s views, readers are encouraged to refer to the original article published by Islamic Finance News (IFN) and the Green Productivity Blog.

Download the Indonesian translation