13
november-december. 2019 | @Halal
Finance
Revolutionary
financing
T
The alignment of Shariah and sustainable investing
There is consistency
between Shariah and
sustainable principles
Shariah portfolios are more sustainable than
traditional equity portfolios, even though this
is partly by chance rather than by design.
Just recently, Maybank Islamic Berhad
collaborated with global investment manager,
Schroders for a joint research report on the
alignment of Shariah and Sustainable Invest-
ing. The findings of the report advocate that
investors who embrace Shariah principles
when investing, should also be open to the
ideas of sustainable investing.
The research shows that the incorpora-
tion of sustainability considerations is both
complementary in philosophy to Shariah
investing, and has the potential to improve
investment outcomes.
Consistency in principles
There are many variants of sustainable
investing but the common underlying
principle is to incorporate how a company
interacts with society and its environment in
the investment decision-making process. It
can involve excluding companies involved in
certain sectors or it can more generally take
account of Economic, Social and Governance
(ESG) factors when assessing the potential
risks and rewards of an investment.
Figure 1: The Shariah universe is small and growing slowly, the popularity of sustainable investing has soared
3.5
3.0
2.5
140
+4.3% a year
120
100
2.0 80
1.5 60
1.0 40
0.5 20
0.0 0
+10.2 a year
Global
equities-
responsible
investments
sector,
assets under
management,
USD billions
Global
Shariah
equities,
USD billion
assets
under
management
2016
2017
here are about 1.8 billion Mus-
lims globally or a quarter of the
world population. Despite this
number, Muslims have been
underserved by the asset man-
agement industry with limited
innovation in product offerings and low
growth in assets. As of June 2019, only US$3
billion was invested globally in Shariah global
equity funds. Furthermore, most funds have
struggled to achieve scale in 2017 and 69 per
cent of funds had assets under management
of less than US$25 million.
This can be contrasted with the rapid
growth of assets invested along sustain-
ability lines. There is now over US$133 billion
invested in this sector’s funds. This is qua-
druple the amount invested in 2011.
Incorporation of sustainability consider-
ations is both complementary in philosophy
to Shariah investing and has the potential to
improve investment outcomes. Two impor-
tant points merit deeper consideration:
Source: Broadridge, as at July 2019
Shariah investing has traditionally
focussed on excluding companies which do
not comply with Shariah principles, such as
earning revenues from prohibited activities
(e.g. alcohol, gambling, adult entertainment
and non-Shariah compliance finance). The
prohibition of interest, or Riba, under Shariah
law also means that companies which exceed
prescribed limits on the portfolio of debt
or cash are not permitted. Environmental
impact is not normally a consideration.
However, the teachings of Islam have a
much broader reach. The Islamic view holds
that all natural and depletable resources are
blessings from Allah (swt) and they are to be
managed in trust in order to ensure the rights
of this and future generations are preserved.
Therefore, Shariah investing widens the
focus beyond financial returns to include the
overall well-being and welfare of individuals
and society at large as well as environmental
preservation.
The two main areas of difference between
Shariah and sustainable approaches to invest-
ing concern the prohibition of (receiving or
paying) interest and the exclusion of the
traditional finance sector. The first of these
can be considered consistent with conven-
tional (non-Shariah) views on sustainability,
although the latter has no equivalent. Where
Shariah compliance is essential, Shariah prin-
ciples must take precedence. Shariah-specific
products are required.
Current offerings
force a compromise
Muslim investors are currently faced with a
choice between two competing options:
• Invest in a Shariah-compliant fund that
pays no formal heed to environmental
considerations.
• Invest in a traditional sustainable fund
which is not Shariah-compliant.
Neither is satisfactory. Furthermore, 66
percent of Asian respondents to the Schroders
2019 Global Investor Study said they would
always consider sustainability factors when
selecting an investment product, higher than
the 57 percent globally who agreed with this
statement. In other words, there is strong
demand for investment products which take
account of.
A call to action
The traditional exclusionary focus of the
Shariah investment industry is ripe for
disruption. It resulted from the industry
attempting to replicate what already existed
in the traditional investment industry, in a
Shariah-compliant way. Moreover, Muslims
should not be forced to compromise between
their religious beliefs and their desire to invest
in a sustainable manner, especially given
that the underlying principles are so closely
aligned. The Shariah industry has languished
but there is no reason why, if it bridges this
divide, it cannot grow substantially and better
serve the Muslim community.
This is a summary version of a longer
paper on the alignment of Shariah and
sustainable investing. The full paper can be
accessed at http://schroderstalkingpoint.com