Islamic Investor: Islamic Investor: - Islamic Finance News

CHAPTER
Benefitting from Responsible Investment
Interfacing Shariah Investing with Socially Responsible
Investments (SRI) and Environmental, Social & Governance (ESG)
In June 2006, legendary investor Warren Buffet, announced he
was giving most of his wealth to the foundation set up by Bill
Gates and his wife. The total assets of the Bill & Melinda Gates
Foundation are expected to reach US$100 billion before the
end of the decade.
As societies become more affl uent, they experience a migration
of values. There appears to be a shift away from “materialist”
values, which emphasize economic and physical security
and towards “post-materialist” values, which emphasize selfexpression
and quality-of-life.
Data shows that the top 2% of the world’s population owns
more than half the world’s wealth, and the top 10% owns
85% (Source: World Institution of Development Economics
Research, 2000). The future of the social-issues movement
hinges on the desire of the wealthiest individuals of the planet
to use their investments to improve the world. The good news
is that this desire exists.
Even the smaller “Average Joe” investors believe that the small
gestures they make to avoid harming the environment makes
them feel better. They are able to see concretely what their
savings are used for: which companies get their money and
what they do with it.
This new breed of investors consist of people who care deeply
about ecology and saving the planet; about relationships;
about peace and social justice; and about self-actualization,
spirituality and self-expression.
The concept of assimilating ethical components into
investment portfolios has always been the core of Shariah
investing. Shariah investing can be considered a form of
socially responsible investing (SRI) because it also excludes
investment in businesses that are deemed unethical, such as
those involved in gambling, alcohol, tobacco and weapons.
Interestingly, Shariah investing then goes beyond the traditional
ethical investment screening approach to further integrate an
Source: MSCI, August 2011
additional layer of risk management with SRI ethical screening.
The Shariah–compliant investment process exercises prudence
by excluding investments in highly leveraged companies from
the portfolio. The screening process reinforces the principle
that acceptable Shariah-compliant stocks should not be
involved in excessive risk taking, high borrowing, or exploitation
of contracts. This investment approach is arguably more
fi scally ethical as it screens out fi nancially-risky stocks for a
more stable and prudent alternative investment style.
Overall, a Shariah-compliant portfolio will be less exposed to
the following:
1) De-leveraging;
2) Insolvency;
A Comparison of MSCI Islamic, ESG and SRI Indices
and methodologies
Islamic; environmental, social, and corporate governance
(ESG); and SRI funds were some of the investment innovations
that have been adopted since the 1980s, according to the
recent fi ndings of a global survey conducted by CREATE-
Research. Fundamentally designed to deliver psychological
benefi ts, these “themed” funds appeal to investors who are
seeking investment solutions that are not only harmonious with
their beliefs, but also have shown comparable performance to
conventional investing. For these investors, free markets often
meant the organized exploitation of the weak by the strong.
The MSCI World indices provide Islamic and values-based
indices to cater to this market. Its Islamic Index Series
Methodology applies stringent screens to exclude securities
based on business activities, as well as fi nancial ratios derived
from total assets. Meanwhile, the MSCI Socially Responsible
indices exclude companies that are inconsistent with specifi c
values-based criteria. Additionally, these indices target
companies with high ESG ratings relative to their sector peers,
to ensure the inclusion of the best of class companies from an
ESG perspective.
Let us examine how these index methodologies have performed
against one another as well as against the mainstream indexing
approach (represented by the MSCI World Index). In the price
comparison chart below, the returns for the MSCI World SRI,
MSCI World ESG, and MSCI World Islamic Index all outperform
the conventional MSCI World Index. Interestingly, during the
2008/2009 global fi nancial crisis, the MSCI World Islamic Index
outperformed the other three indices.
Relative to the MSCI World SRI and MSCI World ESG indices,
the Shariah index has fewer constituents because of the nature
of the rigorous screening and analysis adopted, the most
obvious being the exclusion of the fi nancial sector. The MSCI
22 September 2011