Socially responsible investment has always been at the heart of the good Samaritans of any society. The phenomenon has existed from time immemorial through individual steps or small-scale cooperative style efforts, centerd around a community’s religious organs. However, it was first institutionalized in 2006 through the six ‘Principles for Responsible Investment’ released by the UN (UNPRI).

The gist of these principles is that the large investor companies and funds which become the signatories of UNPRI shall give due consideration to the ESG issues when making investment decisions. They will incorporate ESG into their own culture, demand ESG disclosure from companies they have invested in, report on their own progress toward implementation of UNPRI and work to enhance the awareness on these principles.

So, what are the ESG issues? I have already written in the last article on the environment or ‘E’ element of ESG and that how important and urgent it has become to collectively do something to save the world we live in for ourselves and for the future generations.

As for the social or ‘S’ element, the general guidelines convey that a socially responsible company would produce safe products, ie the ones which do not conflict with personal faith, or ethical values, treat the workforce well and pay them decently and support and participate in the community in a positive way.

Social investment focuses on avoiding buying the stocks of companies which produce wines or other intoxicating stuff, weapons and tobacco. Added to that are the companies in the gambling business. All of them are harmful to humankind.

A social bond is not a fixed income instrument such as a normal conventional bond. In fact, the return and redemption in a social bond is directly connected with the success of the social project where the proceeds of the bond have been applied. Hence, it is very difficult to attract the institutional or private investors to buy social bonds as part of routine investment for return. Nevertheless, recent years have seen a growing trend to invest in social causes as a way to give back to the community.

In order to fulfill the corporate social responsibility, some large organizations have also started investing in social bonds despite full knowledge that there is a risk in not getting back anything if the bond fails to achieve the investment objectives, albeit the amounts invested are miniscule compared with funds allocated for the normal fixed income instruments.

Based on my personal analysis, I find social bonds to be the closest to Shariah principles, even closer than the asset-based Sukuk the market is currently inundated with. This is because investors are not assured a fixed return (interest) nor are they guaranteed the payment of the subscription amount. Actually, this is also the spirit of Islamic investment principles which I have explained so far in this space. However, these bonds cannot be declared Shariah compliant unless they fulfill some other requirements and are endorsed by a Shariah board.

The ‘G’ part of ESG highlights the level of governance in a company. This includes how decision-making is done, internal distribution of rights and responsibilities among stakeholders viz. general assembly representing the shareholders, the board of directors and senior management. And finally the extent of compliance to the laws of the land and fulfilling obligations of reporting and paying all applicable taxes and levies.

Since it is difficult to find all ESG elements in one company, a bond issued by a company with the objective of environment protection or a social cause is categorized as an ESG bond for the purpose of simplicity. As such, all green bonds issued so far or those to be issued in future are clustered as ESG bonds.

Having explained the definition of ESG, I would now like to examine them in the Shariah prism. I have narrated the importance of protecting the environment as revealed in the scriptures and also quoted a prophetic saying. In the next article, I will write on the importance Islam gives to the ‘S’ or social element of ESG.

The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.

Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at [email protected].

Next week: Discussion on social Sukuk.