Current state
• ESG [environmental, social and governance] and SRI [sustainable and responsible investment] are not new terms; however a great majority of SRI investments are heavily concentrated in North America and Europe, and
• Nonetheless, convergence of SRI and Islamic finance is growing, awareness among regulators is increasing and big investment funds in the Asian region are more willing to engage the board and stakeholders on sustainability especially when investors are seeking stability.
Challenges
• While there is no conflict between Shariah and ESG, devising screening processes should look beyond negative/exclusionist screening
• Performance of Shariah investments is often compared to the performance of the conventional sector — it is akin to comparing apples and oranges; it should instead be done based on comparable variables and other similar Shariah investment schemes
• Data on sustainability and social impact from investments are not sophisticated enough
• There is a financial expectation mismatch between the board and constituents — institutions need to understand accountholders, and
• Shariah boards tend to gravitate toward the opinion of the most conservative scholar which may hinder product innovation.
Recommendations
• More flexibility in terms of structure and innovation of SRI/ethical Islamic finance products and more creativity in portfolio diversification
• A more mature reporting approach on sustainability and impact investing is needed
Companies should report sustainability performance; this however requires proper guidelines and framework
There is not a one-size-fits-all solution to measure social impact; the right ESG principles for investors and companies need to be identified
• An urgent need to move from an aspiration to an implementation phase.
Mohammad Faiz Azmi is The Executive Chairman at PwC Malaysia
Dr Hurriyah El Islamy is The Executive Board Member at Badan Pengelola Keuangan Haji Indonesia
Mohd Daud Bakar is The Founder and Executive Chairman at Amanie Advisors
Oliver Warner is The Environmental and Social Consultant at International Finance Corporation
Shahril Ridza Ridzuan is The CEO at Khazanah Nasional