Responsible investment gaining traction among Islamic investors

Several mainstream asset managers and banks that are signatories to the PRI offer access to Islamic windows, sukuk or Sharia equity funds. The PRI signatory base also includes investors in OIC countries, some of which are partly or fully mandated to invest in a Sharia-compliant manner. Notably, almost half of the signatories in OIC countries joined the PRI in the last three years, signalling growing interest in responsible investment among Islamic investors.

The main drivers of signatory growth in OIC countries are the strong alignment of social objectives in responsible investment and Islamic finance, and the additional financial value of integrating environmental, social and governance (ESG) factors into investment processes – which can be combined with Sharia screening. As Islamic investors pursue sustainable risk-adjusted investment returns, integrating ESG factors into their decision-making can improve investment performance while aligning financial objectives with social and environmental goals.

The integration model

ESG integration is “the systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions”. It is one of three ways to incorporate responsible investment into investment decisions, alongside thematic investing and screening. All three ESG incorporation practices can be applied concurrently.

Read A practical guide to ESG integration for equity investing.

What is responsible investment?

The PRI defines responsible investment as an approach to investing that incorporates ESG factors into investment decisions to better manage risk and generate sustainable, long-term returns.

Some institutional investors once believed that ESG issues were irrelevant to portfolio value, and therefore not consistent with their fiduciary duties. However, this assumption is no longer supported, as set out in the PRI’s recent report, Fiduciary duty in the 21st century. ESG factors are critical to performing effective risk and return analysis. Responsible investment does not necessarily involve narrowing the available investment universe. Nor does it involve relegating the pursuit of a financial return to unrelated objectives (social or ethical). It does, however, provide investors with an expanded set of tools to evaluate the operational performance and financial prospects of investee companies.

Institutional investors can practice responsible investment in several ways, including:

  • integrating ESG information into quantitative and qualitative analysis (such as fundamental analysis of company value in equity investing or assessment of creditworthiness in fixed income investing), which could result in adjusting areas such as selection, weighting or asset allocation;
  • engaging – either individually or alongside other investors . with investee companies/entities on the ESG factors identified as relevant to them;
  • using shareholder voting rights to influence company behaviour;
  • encouraging investee companies/entities to disclose information on the ESG factors that do or could affect them;
  • monitoring overall ESG risk within the portfolio by measuring its carbon footprint, for example;
  • helping to shape investor-relevant public policy;
  • promoting wider acceptance and use of responsible investment within the investment industry.

Comparing responsible investment and Islamic finance

Exclusionary screening – including Sharia-screens or UN norms-based screens – is not a requirement of PRI membership but remains a common approach to responsible investment. According to the 2017 PRI reporting dataset, 405 signatories (32%) apply some form of norms-based or negative screening. The dataset further reveals that 235 signatories combine screening with an ESG integration approach, emphasising the complementary nature of exclusionary screens as practiced within Islamic finance and ESG integration. Indeed, there are a range of similarities and differences between Islamic finance and responsible investment.

Similarities

  • Strong emphasis on aligning finance with social good
  • Seek to increase the contribution of the finance sector to the real economy
  • Pursue a more resilient financial system void of unsustainable system risk.

Differences

  Responsible investmentIslamic finance
General investment approach Holistic approach that aims to include any ESG information that could be material to investment performance. Values-based approach that mainly focuses on exclusionary screens on specific social and economic grounds.
Active ownership Strong emphasis on being active owners and to engage with companies on ESG issues (including proxy voting). No widespread practice of engagement or active ownership.
Avoiding investments in highly leveraged companies Not widely considered. Sophisticated approach to analysing financial structures of corporate entities to understand cash flows and avoid investments in companies with excessive leverage.
Impact Not widely considered, but there is a growing focus on environmental and social impacts of investments (including contributions to the SDGs). Sharia scholars assess the compliance of financial products from a structural and legal perspective – the focus is not on actual impact or real economy outcomes.

PRI signatories in OIC countries

 HQ COUNTRYSIGNATORY CATEGORYSIGNATORY DATEAUM (US$BN)
Access Bank PLC Nigeria Investment manager 08/06/2009 0.0027
Actera Group Turkey Investment manager 30/08/2010 1.636
Borsa Istanbul Turkey Service provider 20/01/2010 -
Catalyst Investment Management Jordan Investment manager 30/01/2017 0.05
Corfina Capital Indonesia Investment manager 14/01/2015 0.04
Corston-Smith Asset Management Malaysia Investment manager 06/05/2008 0.2716
Garanti Asset Management Turkey Investment manager 23/08/2011 4.0423
Hawkamah Institute UAE Service provider 22/04/2009 -
Ithmar Capital Morocco Asset owner 14/11/2016 3.0
Kehati - The Indonesian Biodiversity Organization Indonesia Asset owner 03/02/2009 0.015
Khazanah Nasional Berhad Malaysia Asset owner 01/02/2017 35.0
PT Batavia Properindo Aset Manajemen Indonesia Investment manager 05/02/2016 1.6
Sustainable Development Strategy International Group Iran Service provider 11/05/2015 -
SEDCO Capital Saudi Arabia Investment manager 16/07/2014 4.685
Sustainability Excellence Management Consulting Ltd UAE Service provider 24/02/2015 -
The Abraaj Group UAE Investment manager 28/04/2009 9.5
TVM Capital Healthcare Partners UAE Investment manager 27/05/2015 0.05
Total 64.40

How the PRI can help

By joining the PRI, you become part of a leading, global network of more than 1,700 signatories, representing over US$68 trillion in AUM. You benefit from an internationally-recognised set of Principles and demonstrate your commitment to responsible investment via an independent link to the United Nations.

The PRI supports its signatories to create a more sustainable financial system through:

  • numerous asset class-specific guides, toolkits and case studies;
  • opportunities to attend and participate in events and workshops with other signatories, facilitating networking and knowledge-sharing;
  • access to the PRI’s Collaboration Platform, a private online resource, which allows signatories to learn, engage and collaborate with companies, policymakers and academics, as well as over 1,700 fellow investors and service providers;
  • the PRI’s Academic Network, which offers signatories access to key academic research findings and the opportunity to collaborate with academics;
  • the PRI Academy, a CFA-accredited online training system that can be tailored to staff and trustee needs;
  • the Reporting Framework, which offers guidance on how communication between corporate plans and beneficiaries can be structured;
  • dedicated network managers around the world offering local support.