A recent discussion on our Linked group inquired on the potential convergence between Islamic finance and SRI. Socially responsible investing has evolved over the years - just the same as Islamic finance - and mostrecently much attention has been given to the concept of sustainable development. For the SRI industry this has meant a departure from its negative-screens comfort zone towards a more dynamic and positive-screened methodology. Such approach is also gaining momentum across Islamic finance (for instance Dow Jones having launched their Islamic Sustainability Index).Here we include a paper from KAU's Islamic Economics Research Centre that provides an analysis of Sustainable Development as it relates to Islamic finance. This provides a broad overview that would be useful before taking on the specifics of SRI.
Sustainable Development from an Islamic Perspective: Meaning, Implications, and Policy Concerns
Zubair Hasan
Professor of Islamic Economics and Finance
International Islamic University of Malaysia, Malaysia
"This paper examines the debate on the meaning of sustainable development and
the policy implications of different approaches from an Islamic perspective.
It integrates mainstream and Islamic positions on the subject and argues that to
whatever definition of sustainable development one might subscribe, eventually,
each ends in an environmental concern."
"It argues that the Islamic approach is more agreeable to environmental protection and concludes that issues surrounding sustainable development have moral, ethical, social, and political complexities and that economics or economists alone cannot resolve the problem."
Also here is a short article on the subject from Ittihad Capital done on the subject as it appeared in Business Islamic magazine last year: http://www.ittihadcapital.com/articles/Ahmad_SRI_IF_Solving_the_Puzzle_JulAug08.pdf
ReplyDeleteI like the article's reference of SRI and Islamic Finance as "long-lost twins". They certainly share a higher purpose, there are many parallels between these two “philosophies” but the same cannot be said of the two “industries”. I have researched SRI funds across the board, about 900 of them, and I would say that some SRI players can properly contribute to Islamic finance, but not all of them and certainly not the majority.
ReplyDeleteSuhail's article posits that SRI and IF are each incomplete but that they can learn from each other. Definitely! In my view there are some key differences:
ReplyDeletea) The SRI industry traditionally has been focused on negative screens - in fact Eurosif and similar US research (a bit outdated though) indicates that 80% of the SRI screening criteria is purely focused on tobacco and alcohol exclusion. This figure is even higher in private mandates, with a predominant focus on tobacco exclusion. Regrettably these are not comprehensive skills for running a Shariah mandate.
b) The typical SRI fund has had roughly a 25% allocation to financial stocks. It falls prey to elaborate public relations exercises by corporates (similar to the box-ticking that Lindsey has mentioned). For instance, Shell spends about 5% of its R&D budget on alternative fuels, but they don’t stop reminding us of this with a massive PR campaign (maybe more is spent on the advertising!). Islamic finance is more robust in terms of its quantitative screens (but the financial ratios could still be gamed by corporates).
c) SRI is driven by institutional funds. Assets from public pensions compose 81% of all US originated SRI managed accounts, whereas in Europe 94% of all assets in SRI mutual funds originate from institutional investors. There is no such thing in Islamic finance, Takaful institutions represent a possible “pension equivalent” but they still have some way to go in terms of asset size to make an impact, thus no institutional driver yet.
There are similarities, but that doesn’t mean they are “good” similarities:
ReplyDeletea) Both have completely left microfinance on the sidelines, it is the “dandruff” of ethical investing (scratch it off, minor nuisance). The most ethical financial structure in history is not even mentioned in any of the “mainstream” SRI databases (I challenge you to check on this). I have made it a point to incorporate microfinance products into my SRI research. The reason it is left aside is probably because microfinance (as a money-market equivalent) doesn’t command fat fees…
b) They both command ethical premiums. SRI investors pay an SRI tax: fee structures have historically been higher for them, whereas corporations need to spend on mindless green initiatives. Is there a Shariah tax? Both pass on the additional costs to consumers. It’s a tax, the question to be raised is: are the benefits validating the extra costs?
c) On the positive side, SRI has recently evolved from mere tobacco-exclusionism towards more elaborate strategies: climate change, ESG and CSR criteria are some examples. These are skills that can be transferred to Islamic Finance, but then I must ask why can’t Islamic finance transfer its success back to SRI? SRI “teaching” Islamic finance is a very anglo-saxon way of seeing things!
d) Finally, the least noticed trend for both – generational change. The head of one of Europe’s largest SRI fund houses will tell you his unit used to be seen as the corporate gulag - where you retired, a repository of reject staff. Today, it is a magnet for top recruits, where they see making an impact on the issues they value. Islamic finance is no different, it is booming because of fresh talent, new ideas, young blood (regardless of age). Islamic finance is not being fueled by oil revenues, sovereign wealth funds or 9-11. It's a generational change.