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Thursday, May 30, 2024

Launch Partners

US turbulent ESG investing landscape unlikely to impact Islamic funds, says investment manager

On the 1st March 2023, the Republican-controlled US Senate voted to overturn an investment rule, known as the ESG rule, by the Department of Labor (DOL) which allowed retirement plan managers to consider ESG factors when making investment decisions.

While Joe Biden, the president of the US, has promised that he would veto any bill that nullifies the ESG rule, the US House vote demonstrates how politicized the ESG investing landscape is in the country. The final ESG rule was announced on the 22nd November 2022 and came into effect on the 30th January this year.

“Even though the [Republican bill to overturn the ESG rule] is unlikely to pass, it does show the extent to which ESG investing has been demonized by right-wing elements in the US. Islamic investing, however, is in many ways a distinct strategy,” Joshua Brockwell, the investment communications director at US-based Islamic financial advisory Azzad Asset Management, told ISFI.

The ESG rule follows President Joe’s ‘Executive Order on Climate-Related Financial Risk’ issued by the White House on the 20th May 2021 to advance “consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk…,” the executive order read.

The debate regarding the ESG rule is driven by a fundamental dissonance regarding how those on either side of the debate expect ESG investing to impact investor returns, with those against the rule arguing that it may financially hurt retirement plan holders.

The stance on ESG investing potentially hurting investor returns is in line with the previous DOL final investment rule proposed by the Donald Trump-led Republican administration on the 13th November 2020 which came into effect on the 12th January 2021.

The ESG-agnostic rule required retirement plan managers to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.

According to Max Schanzenbach and Robert Sitkoff, professors of law at the Northwestern University School of Law and Harvard Law School respectively, the current theory and evidence on ESG investing could satisfy the investor principles to consider only financial risk-and-return considerations.

The degree to which an ESG strategy is prudent, according to the professors of law, will depend on the facts and circumstances and the risk–return relationship.

According to Joshua, responsible investing of all stripes is on the rise. It is considered by many to be an important part of the risk management and due diligence process, so it is unlikely to suffer irreparable damage from political attacks. “Ultimately, it’s the free market at work, which is what America does best.”

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