Can Muslims invest in ESG funds if they include companies with minor interest-based income?

by

Question:
Can Muslims invest in ESG funds if they include companies with minor interest-based income?

Answer:

1. Definition and Nature of ESG Funds

What are ESG Funds?

ESG funds are investment funds prioritizing companies that meet specific criteria related to:

  • Environmental impact (pollution control, renewable energy)
  • Social responsibility (employee rights, fair practices)
  • Governance ethics (transparency, anti-corruption practices)

However, these ESG funds may include companies that, although primarily ethical in business practices, generate a small portion of their income through interest-based (riba-related) sources.

2. Scholarly Consensus (Ijma‘) on Minor Interest-based Income

Islamic scholars from authoritative bodies, including AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and the International Islamic Fiqh Academy, established clear guidelines:

  • Investing in companies with primary halal activities but minor incidental haram income (less than 5% of total income) is permissible under specific conditions.
  • Investors must purify their earnings by identifying and donating the proportional haram portion.

This ruling enjoys broad contemporary scholarly acceptance, including AAOIFI Shariah Standard No. 21, which explicitly permits investments subject to rigorous screening and purification.

3. Conditions for Permissibility (Shar‘i Screening Criteria)

ESG funds are permissible for Muslims only if the following conditions are satisfied clearly:

  • Primary Business: Must be halal-compliant (no alcohol, gambling, unethical sectors).
  • Interest Income Threshold: Incidental interest-based income must not exceed 5% of total income.
  • Debt & Financial Ratios: Debt levels and other interest-related financial metrics must meet commonly accepted Islamic finance ratios (typically debt below 30% of assets).
  • Purification (Taṭhīr): Investors must purify the portion of profits attributed to interest-based income annually by donating it entirely to charity.

This approach aligns explicitly with established Islamic finance scholarship, standards from AAOIFI, and international Islamic finance bodies.

Leave a Comment