Positioning Islamic Funds as Socially Responsible Funds is a key strategy for fund managers

in KPMG Luxembourg, 21.08.2014

According to the 2014 Global Islamic Asset Management Report issued by Thomson Reuters, scalability is the key challenge facing the Islamic asset management industry.

The Islamic fund universe is dominated by a few large players: the largest 10 Islamic funds represent 44% of the total AUM. In order to survive, smaller asset managers must establish a 3 year track record and deliver competitive fund performance. At the end of the day, investors are looking for performance.

The report highlights 3 solutions to reach the required scale, one of them being to position Islamic funds as Socially Responsible Investments (SRI).

Key figures: mind the SRI

According to KPMG’s 2013 European Responsible Investing Fund Survey, the estimated size of the global sustainable investment market is at least USD13.6 trillion  at the end of 2012, with Europe representing 2/3rds of the total assets.

The report from Thomson Reuters indicates that:

  • SRI assets have grown on average by 22% since 2010 worldwide;
  • The SRI market in the EU represents USD15 trillion.

SRI is a fast growing subsector of the conventional funds industry with the potential for alignment to Islamic funds complementing Shariah principles. In addition, this positioning could also enhance the image of Islamic finance or Shariah compliant funds in Western countries.

KPMG’s report interestingly refers to “ESG integration”: more and more asset managers have started integrating ESG considerations into the investment process as they have become a natural concern of the mainstream investment industry. This may be the driver that will put ESG concerns high on corporate agendas.

How can Shariah compliant strategies fit into SRI?

The ALFI Responsible Investing technical committee established 5 sub-categories of responsible investing. Shariah compliant funds were classified as part of Ethical funds.

Common grounds and divergence between Shariah compliant funds and SRI:

  • There are social aspects to Islamic finance as dealing in sinful and socially irresponsible activities is forbidden in Islamic finance; although what is meant by sinful and socially irresponsible would differ between the SRI interpretation and the Shariah interpretation.
  • Shariah compliant business is structured considering the common interests of business partners and the sharing of risk and rewards between the business partners. In the SRI business there are different dimensions such as considerations of compliance with international conventions on weapons, human rights, labor, and environment.
  • Currently, negative screening is used to exclude non-Shariah compliant investments. In the SRI business, positive screening is more appropriate in order to select certain socially responsible activities.
  • In addition, the prospectuses of Shariah compliant investment funds often include a list of non-eligible investments, rather than a list of authorized investments. SRI or ESG aspects, even if they form part of the strategy, are not visible to the public. In order to converge SRI and Shariah compliance, it is necessary to add SRI filters into the existing strategy and the prospectus and market the funds as such.

Shariah compliant funds and SRI funds: benefits and challenges of the combination

  • From a marketing perspective, positioning Shariah compliant funds as SRI funds would enable asset managers to reach a broader range of investors and enhance the brand of Shariah compliant funds.
  • The combination of Shariah compliant screening and SRI principles would reduce the risk profile of the funds.

However, the SRI business has its own challenges:

  • The SRI market is largely driven by institutional investors so this positioning would not open the door to a large retail market;
  • There are divergences in the interpretation of certain Shariah compliant concepts as we know; the SRI business has the same challenges as there is no commonly understood definition of SRI which is a challenge from a marketing perspective.
  • Additional costs have to be considered such as the cost of ESG research or the cost of obtaining certain SRI labels. The future belongs to those who are able to discern the next sustainable trend, spot its business and social potential and move fast in the right direction.
    Positioning Shariah compliant funds as Socially Responsible Investments may be a win-win combination for Islamic funds promoters and their existing and potential institutional investors.

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