This reduces the Islamic financial system from over exposure to risks associated with excessive leveraging and imprudent risk taking. In Islamic financial transactions, money is not a commodity, but a medium of exchange, a store of value and a unit of measurement. Money represents purchasing power and cannot be utilised to increase the purchasing power without any productive activity. Secondly, Islamic finance encourages business transactions on a mutual risk sharing basis. The practice of risk sharing provides the impetus for the Islamic financial institutions to conduct the appropriate due diligence and maintain the explicit requirements for disclosure and transparency. These requirements thus serve to promote the adoption of sound risk management practices by the Islamic financial institutions. By embracing these essential features and the objectives of Shariah in its entirety and by exemplifying the true practice of Islamic finance as required by the principles of Shariah, the resilience of the Islamic financial system is strengthened. It is therefore paramount that Islamic financial professionals, practitioners, scholars and regulators fully understand the inherent requirements of Islamic finance, which are in fact consistent with the international best practices and standards in the conventional financial services industry. It is these very elements of Islamic finance that provides an additional in built mechanism that enhances its prospects for soundness and stability. The second key dimension relates to potential risks for Islamic finance in a crisis environment. This could arise when the economic environment and the conditions in the financial markets turn adverse.

This means channelling funds to: pivot business models for firms in economic sectors that are not so green to become greener; and invest in technologies with a lower carbon footprint or higher energy efficiency. Transition finance in turn needs credible transition plans – by both financial institutions and their customers – as well as good transition planning. Many financial institutions have made net-zero commitments and set decarbonisation targets. However, when they finance their customers' own transition to net zero through loans or investments in cleaner technologies, they may see a short-term increase in their financed emissions.This would particularly be the case in hard-to-abate sectors like steel, cement and chemical production. The increase in financed emissions will likely draw pressure and criticism from investors and stakeholders. Only with credible transition plans will financial institutions be able to explain how their transition financing is consistent with their net-zero commitments and decarbonisation targets. Financial regulators can set supervisory expectations for financial institutions on their transition plans in several ways. They can provide guidance to financial institutions on having a sound transition planning process that supports the credible transition efforts of their clients rather than divestment as the first choice. They can set expectations that financial institutions should engage their clients on climate risks and nudge them to draw up their own transition plans to mitigate these risks. They can signal to financial institutions the importance of referencing appropriate science-based sectoral pathways with meaningful intermediate targets for decarbonisation.