Shari’ah Governance Quality and Environmental, Social and Governance Performance in Islamic Banks. A Cross-Country Evidence

Purpose: The paper examines the impact of Shari'ah governance quality on environmental, social, and governance (ESG) performance in Islamic banks. Design/methodology: The study's sample consists of 66 Islamic banks from 14 countries over 2015-2019. The research uses the Heckman model, which is a two-stage estimation method to obtain unbiased estimates, as ESG scores are only observable for 17 Islamic banks in the Eikon Refinitiv database at the time of the analysis. Findings: The analysis shows that Shari'ah governance has a beneficial role to achieve ESG performance. It also shows that enhanced profiles of Shari'ah supervisory boards' attributes are more efficient than the operational procedures to promote ESG performance. In addition, the analysis shows that enhanced Shari'ah supervisory boards' attributes strengthen the bank's corporate governance framework while sound-designed procedures increase the bank's social activities by emphasizing their roles to ensure Shari'ah compliance. Finally, the analysis sheds light on the failure of Shari'ah governance to promote environmental performance. Originality: The research complements the governance-banks' ESG performance literature by examining the role of Shari'ah governance. The research also extends the literature on Islamic banks' sustainability by pointing to the Shari'ah governance failure to enhance environmental performance and thus, achieve Maqasid al-Shariah regarding the environment. Practical implications: The research provides policy insights to Islamic banks' stakeholders to promote social and governance performance in the Islamic finance industry through improving Shari'ah governance practices. However, raising environmental awareness is imminent among all actors implicated in the Shari'ah governance processes to help overcome the anthropogenic risks.