June 28, 2010Ethical &
Sharia-Compliant Investing Takes Off
By Ron Robins, Founder & Analyst - Investing for the
Soul
Sustainability issues and financial crises have spurred
ethical and Shariah-compliant investing globally.
U.K. green & ethical funds increased to £9.5 Billion in
2009 from just £2.4 billion in 1999 reports EIRIS. In
the U.S., ethical and socially responsible investing in
all its varied forms grew significantly to $2.71
trillion in 2007 (the latest data available) from $1.2
trillion in 1997, says the Social Investment Forum.
Presently, about one in every nine U.S. investment
dollars has gone through some type of non-financial
screen.
Sharia-compliant investments have taken off as well.
“…investors globally hold more than $1.5 trillion in
Sharia-compliant investments… [and] there are more than
500 funds globally that comply with Islamic principles,
of which one-third of these funds were launched during
the past four years, and the figure is projected to
double in the coming five years… ” said Abdul Rahman Al
Baker, executive director of financial institutions
supervision at the Central Bank of Bahrain (CBB) at the
Sixth World Conference of Islamic capital markets and
investment funds on May 24.
“Due to its widening acceptance and its appeal as a
means for ethical investment, the [Shariah-compliant
finance] industry is expected to continue growing at
twice the pace of its conventional counterpart… ” stated
Lim Hung Kiang Singapore’s Trade and Industry Minister
speaking on June 14 at the World Islamic Banking
Conference Asia Summit in Singapore. Shariah-compliant
funds are now found in North America, Europe, Africa,
the Middle East and Asia.
Many believe that Western ethical investing also has its
roots in religious traditions. For instance, the Bible
proffers ethical business conduct and the Quakers and
Methodists of the 1700s offered strict rules concerning
investments as well.
Most investors intuitively understand ethical investing:
one applies personal values and ethics to investing.
However, ethical investing has spawned, and shares, a
close kinship to numerous other investment styles.
The ‘sister’ to ethical investing is socially
responsible investing (SRI). In fact the terms ethical
investing and SRI are frequently used interchangeably.
SRI however, has been associated with left wing
political views for a long time. Largely because of this
association many in the industry have dropped the word
‘socially’ so that the term ‘responsible’ investing is
now commonplace.
One new variant of ethical investing is ‘impact’
investing. This term relates to only using positive
screens to find investments that have the most
beneficial impact on society. Ethical-SRI funds usually
use both positive and negative screens—the latter might
screen out companies related to tobacco or defence etc.
Another type of ethical investing that is increasingly
popular is sustainable or green investing. And for
religious communities there are ‘faith-based’ funds,
guided by the precepts of the associated group.
Shariah-compliant investing is also faith-based, rooted
in the strictures of the Koran. Shariah-compliant
investments must be approved by an independent Shariah
supervisory board in accordance with religious Muslim
principles.
However, in today’s complex world supervisory boards in
different countries can vary in their interpretations of
what is Shariah-compliant. Hence, many Islamic financial
institutions are desirous of creating a pan-Arab/Muslim
Shariah supervisory board. A Bloomberg report published
on alrroya.com June 10 indicated that a supreme Shariah
board could exist among Gulf Arab states by 2013.
Shariah-compliant investments prohibit investing in
institutions that pay interest, or firms involved in
gambling, speculation, pornography, tobacco, alcohol or
pork products. They also generally shun financial
institutions that have high leverage.
Both ethical and Shariah investing appear to have a
bright long term future. However, it would not surprise
me to see various western ethical funds take on some of
the characteristics of Shariah-compliant funds. These
might include stricter ethical practices, an external
board governing ethical standards, and limiting
investments in financial institutions with high leverage
or risk.
Even the Vatican’s official newspaper, the Osservatore
Romano, seems to promote such changes in western
financial institutions and funds. Stating that (from
Bloomberg on March 4, 2009), “the ethical principles on
which Islamic finance is based may bring banks closer to
their clients and to the true spirit which should mark
every financial service.”
Because of their comparatively lower risk profile,
Shariah-compliant funds may do better than ethical funds
when there is an aversion to risk, and the converse
might be true when investors believe they can go further
out on the risk curve.
Globally, both ethical and Shariah-compliant funds are
likely to continue growing faster than their
‘conventional’ counterparts. They share a commonality in
that non-financial factors such as ethics and morality
are instrumental in shaping investment decisions. Also,
both arise from principally religious traditions.
Now, and most importantly, the awareness of climate
change and continuing financial disorder are compelling
regulatory authorities and investors everywhere to raise
their environmental, social, and governance (ESG)
standards—to the benefit of ethical and
Shariah-compliant funds.
A future column will compare the performance of ethical
and Shariah-compliant funds with conventionally oriented
portfolios.
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alrroya.com |
