Environmental, Social, And Governance (ESG) Practices and Maqasid Al-Shari'ah in Islamic Banks: The Moderating Role of Shariʿah Compliance

Abstract

This study examines the relationship between Environmental, Social, and Governance (ESG) practices and the achievement of Maqaṣid al-Shari’ah in Islamic banks, with particular emphasis on the moderating role of Shari’ah compliance. Although ESG principles share strong ethical and normative foundations with the higher objectives of Islamic law, questions persist regarding the extent to which Islamic banks translate this alignment into substantive socio-economic outcomes beyond formal Shari’ah compliance. The growing global prominence of ESG has therefore renewed debates on whether Islamic banking institutions
genuinely fulfil their moral, social, and developmental mandate. Despite this relevance, existing literature lacks an integrated conceptual framework that systematically explains how ESG practices contribute to Maqaṣid al-Shari’ah and how Shari’ah governance mechanisms influence this relationship. Adopting a qualitative and descriptive research design, the study employs document analysis to synthesize scholarly literature on ESG practices, Maqaṣid al Shari’ah, Islamic banking, sustainable finance, and Shari’ah governance. The findings reveal a strong conceptual convergence between ESG practices and the core objectives of Maqaṣid al-Shari’ah, particularly in advancing sustainable development, social justice, ethical governance, and public welfare (maṣlaḥah). Crucially, the study demonstrates that effective Shari’ah governance through robust supervisory boards, compliance mechanisms, and accountability structures moderates and enhances the impact of ESG practices on Maqaṣid outcomes. Based on these insights, the paper proposes an integrated conceptual framework that positions Shari’ah compliance as a key moderating variable in the ESG–Maqaṣid relationship within Islamic banks. The study recommended that Islamic banks and regulators move beyond narrow product-level compliance by embedding ESG principles into institutional governance, strategic decision-making, and performance measurement systems. The proposed framework contributes theoretically to Islamic finance literature and provides a foundation for future empirical research across diverse regulatory and institutional contexts.