Integrating Environmental, Social, and Governance (ESG) principles in developing economies requires understanding the regulatory frameworks. Although there is increasing recognition of the role of regulations in ESG adoption, the impact of 'hard' (mandatory) and 'soft' (voluntary) ESG regulations on Islamic Financial Institutions (IFIs) and their financial and sustainability outcomes remains underexplored. This study investigated how hard and soft ESG regulations affect sustainability and financial performance in various regulatory environments. Utilizing a panel dataset (2021-2024) of 31 Islamic banks across 16 jurisdictions, this study employs fixed-effects and random-effects regressions with Driscoll-Kraay standard errors to address heterogeneity, cross-sectional dependence, and serial correlation. ESG regulatory intensity is quantified through sentiment analysis (a machine learning technique) of regulatory disclosures. The empirical findings reveal that both soft and hard ESG regulations significantly influence Islamic banks’ sustainability and financial performance, albeit through different channels. Hard ESG regulations are more effective in enhancing sustainability performance by reinforcing accountability and regulatory discipline. In contrast, soft ESG regulations support financial performance by fostering strategic flexibility and internal capability development. This study contributes to the literature by providing the first comprehensive cross-country evidence that systematically distinguishes the performance implications of soft and hard ESG regulations in Islamic banking, thereby advancing our understanding of how regulatory designs influence sustainable finance outcomes.