“I see a time when LPs will be looking for an ESG hurdle rate as well as a financial one” – Laurent Benard, the CEO of Capza, a private investment platform.
Are Islamic and environmental, social and governance (ESG) investing consistent, harmonious and non-conflicting? Should Shariah compliant investors seek private equity funds that operate in accordance with the ESG principles?
The ESG principles have become new permanent features of venture capital and private equity. Adherence to the ESG is driven by limited partners, so the fund managers have to make sure that their performance fits the requirements of the investors.
The demand to invest in funds which focus on ESG accelerated in 2021, driving the assets under management (AUM) to nearly US$3.9 trillion in the third quarter of 2021. Here are some interesting statistics:
• US$3.43 trillion (88.%) of the global sustainable funds’ assets are of European origin; US$330.7 billion (8.5%) came from the US, and only US$50 billion (1.3%) from Asia (ex-Japan).
| Islamic vs ESG funds (Q3 2021) | ||
| Funds | Asset under management | Number of funds |
| Islamic | US$194.5 billion | 1,508 |
| ESG | US$3,900 billion | 7,486 |
| Source: Morningstar and General Council for Islamic Banks and Financial Institutions | ||
So, clearly, Europe leads the world in sustainable investing. And there is a definite convergence between Islamic and ESG investment as they both are concerned about their impact on society, the wellbeing of people and the environment. Many things long forbidden within Islamic finance are now excluded by ESG investment strategies too.
A study of 6,500 publicly listed companies conducted by Refinitiv established that non-financial Shariah compliant companies have on average 10% higher ESG score than their conventional counterparts.
The key common characteristics of both Islamic and ESG funds are the following:
• They ban investment in gaming, alcohol, weapons, tobacco, pornography;
• Both systems share the idea of responsible stewardship, with an underlying sense of social justice and inclusion;
• Both systems undergo compliance processes – Shariah or the ESG.
Nevertheless, ESG and Shariah compliant funds have different attitudes toward Riba. No matter how socially inclusive and environmentally cautious a conventional bank is, it still would not be acceptable to the Shariah compliant investors.
There are many sectors and industries that are made of companies that are mainly Shariah compliant such as IT, healthcare and real estate. Arbah Capital, an Islamic investment company from Saudi Arabia, just acquired US-based Constitution Health Plaza in Philadelphia for US$87 million and now has four investments valued at US$220 million in the health sector.
The Pan-Asian Gobi Partners, one of the most active investors in Islamic venture capital projects, now promotes ESG investing as a dominant strategy with limited partners and fund managers worldwide.
Greed is no longer good. Our new generations of investors – the Millennials and Gen Z-ers are bringing their societally conscious values to their investment practices. The universe of companies and projects that are in line with Shariah is infinite. Just do your regular due diligence.
Dr Vladimir Malenko is the director of FairFinance. He can be contacted at [email protected].