Some years ago the term ‘responsible investing’ (RI) would have only been understood by a small community of professionals. Nowadays RI funds, which cover a variety of funds including microfinance funds, carbon funds, social/solidarity funds and also Islamic funds and other ethical funds, are showing a stable growth. Assets under management (AUM) have increased by 19% since 2010: growing from EUR199.9 billion (US$257.2 billion) to EUR237.9 billion (US$306.1 billion).
According to a study commissioned by the Association of the Luxembourg Fund Industry (ALFI), the proportion of RI assets compared to the total assets in European funds increased by 1.6% to 1775 funds. The most important domicile in Europe is Luxembourg, with almost one third of the European RI funds domiciled in the Grand Duchy. The survey analyzed all RI funds, and noted with respect to Islamic funds, that the number of newly-created Islamic funds in Europe rose by 22 funds, bringing the total number of regulated Islamic funds in Europe to 75 at the end of 2012.
Generally speaking, it is worth noting that whilst there has been an increase in carbon, social/solidarity funds and ethical funds including Islamic funds, there was also a rather surprising decrease in environmental, renewable energy/climate change and water funds. The AUM of environmental funds for example, decreased between 2010-12 by 10.5% to EUR28.1 billion (US$36.2 billion).
While looking at the segmentation of the funds, the study showed that two thirds of the RI funds apply either a negative or positive screening, without having a thematic focus, such as Shariah compliance. Only one third of these funds, representing 12% of AUM, had a thematic focus.
The study points out several challenges for the industry and formulates a couple of action points that are addressed to different stakeholders, such as asset managers, regulators and industry associations. Some of these challenges are similarly true for Islamic funds.
A challenge to move the RI industry from niche to mainstream is that distribution still remains mainly driven by institutional investors. In the future these investors will continue leading the way, but the global retail market will grow through clear and tailored messaging.
Asset managers should continue to increase their efforts towards transparency and measurement, both at the company and product level, whilst regulators are called to take meaningful steps towards rules on non-financial information disclosure by companies.
Islamic asset managers are to benefit from the growing RI market and it should be explored how to better include existing RI strategies and initiatives for the benefit of the Islamic industry.