FAITH-ALIGNED GREEN TAXONOMY FOR SMES: INTEGRATING MAQAṢID AL-SHARIAH INTO CLIMATE FINANCE CLASSIFICATION SYSTEMS

Abstract

Most existing sustainability assessment frameworks are primarily tailored for larger corporations, leaving MSMEs with limited resources and guidance to effectively evaluate their sustainability performance. To address this gap, this paper proposes a simplified, faith-aligned taxonomy tailored to Islamic MSMEs by adapting the ESG-i Framework into an ex-ante classification tool. Drawing on the EU Taxonomy, ASEAN Taxonomy, and Malaysia’s CCPT, the model introduces four Environmental Objectives, a Do No Significant Harm (DNSH) screen rooted in the Islamic principle of Al-Darar (harm avoidance), and three Essential Criteria: Social Safeguards, Ethical Governance, and Shariah Compliance. Activities are categorised as Green, Amber, or Red, with built-in pathways for improvement. Designed to be accessible and values-driven, this taxonomy bridges Islamic ethical principles with sustainable finance goals, empowering Islamic financial institutions and MSMEs to participate more meaningfully in the green transition.