Ethical and Sharia-Compliant Investing Takes Off

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  • 8/8/2019 Ethical and Sharia-Compliant Investing Takes Off

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    Ethical and Sharia-compliant Investing Takes Off

    By Ron Robins, Founder & Analyst, Investing for the Soul

    Blog Enlightened Economics; twitter

    First published June 28, 2010, in his weekly economics and finance column atalrroya.com

    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 in1999 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 morethan $1.5 trillion in Sharia-compliant investments [and] there are more than 500funds 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 thecoming five years said Abdul Rahman Al Baker, executive director of financial

    institutions supervision at the Central Bank of Bahrain (CBB) at the Sixth WorldConference 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 thepace of its conventional counterpart stated Lim Hung Kiang Singapores 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 valuesand 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 ofthis 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 onlyusing positive screens to find investments that have the most beneficial impact on

    society. Ethical-SRI funds usually use both positive and negative screensthe lattermight screen out companies related to tobacco or defence etc.

    http://investingforthesoul.com/http://enlightenedeconomics.wordpress.com/http://twitter.com/#!/ron_robinshttp://english.alrroya.com/editors?auth=Ron+Robinshttp://investingforthesoul.com/http://enlightenedeconomics.wordpress.com/http://twitter.com/#!/ron_robinshttp://english.alrroya.com/editors?auth=Ron+Robins
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    Another type of ethical investing that is increasingly popular is sustainable or greeninvesting. 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 todays complex world supervisory boards in different countries can varyin their interpretations of what is Shariah-compliant. Hence, many Islamic financial

    institutions are desirous of creating a pan-Arab/Muslim Shariah supervisory board. ABloomberg 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, orfirms 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 someof the characteristics of Shariah-compliant funds. These might include stricter ethicalpractices, an external board governing ethical standards, and limiting investments in

    financial institutions with high leverage or risk.

    Even the Vaticans official newspaper, the Osservatore Romano, seems to promotesuch changes in western financial institutions and funds. Stating that (from

    Bloomberg on March 4, 2009), the ethical principles on which Islamic finance isbased 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 mightbe true when investors believe they can go further out on the risk curve.

    Globally, both ethical and Shariah-compliant funds are likely to continue growingfaster than their conventional counterparts. They share a commonality in that non-

    financial factors such as ethics and morality are instrumental in shaping investmentdecisions. 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 toraise their environmental, social, and governance (ESG) standardsto the benefit of

    ethical and Shariah-compliant funds.

    A future column will compare the performance of ethical and Shariah-compliantfunds with conventionally oriented portfolios.

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