Responsible investment should not be underestimated: it does not only have a green or liberal agenda. It could play a vital role in future proofing the economy and pension funds big and small are slowly waking up to the immediate importance of future investment.
It is not just industry giants who are flexing their ethical muscle in the market. Established in 1991, The Local Authority Pension Scheme (LAPS) Forum currently boasts 48 members and the combined assets of over £95bn. Pamela Bruce, of Lothian Pension Fund, says: "Being part of the LAPS forum involved signing up to the UN principles of responsible investment. Hermes votes for us based on our portfolio interests. Through the forum, we have a more significant voice regarding issues such as climate change."
In Head of Socially Responsible Investment (SRI) Business at Hendersons George Latham believes in the current investment market, clients are very interested in environmental, social governance. He has witnessed funds focused on responsible investment still making money. In the face of recession, this is no mean feat. He says: "The issues involved in SRI will remain involved. While the investment banking world may be in difficulty, the investment managing world is still fairly well invested."
Duncan Exley, of Fair Pensions says: "ESG issues can create risk and opportunities. Responsible investment is something you do regardless of ethics." Fair Pensions' most recent report indicates certain key pension schemes are developing means of assessing and monitoring risks. There is more engagement with fund managers and investee companies.
Companies who have signed up to the UN Principles of Responsible Investment are committed to the concept of future proofing. Gold stars are awarded to top performers: F&A, Insight, Hermes and Aviva. Fair Pensions' most recent analysis of the top 30 pension providers saw a 22% increase in engagement with the UNPRI. Their next report is due out this month and it will be interesting to see whether this is still the case. Especially when top banks such as Citibank, Deutsche Bank, JP Morgan and most recently Merrill Lynch have disbanded their SRI research teams.
Whilst some key pension funds are putting policies in place to manage long term risks and maintain accountability, Mr Exley fears there are still thousands who are not taking heed and have no apparent track record of future proofing themselves. An initial hurdle to overcome is how SRI is still widely perceived. Many are confused by what it means and perhaps rightly so. Mr Exley said: "You ask six people and you get six different answers."
A popular perception of SRI is simplistically the "screening out of bad things in favour of good things." Indeed, if this is all it boils down to, it seems not many people are interested. Rather than labeling fund managers mercenary, the problem with this definition is the subjectivity of morality. It is incredibly difficult to create blanket policy based on the criteria of what is right and wrong. People's ethics are multi-faceted and what one outwardly projects is not always what they inwardly feel.
SRI is evolving and it must employ some kind of progressive and cohesive message which appeal to the mainstream. In a Darwinian manner, SRI has already adapted to suit its context many times over. It has religious roots in the Quaker reaction to the slave trade and Wesley's Methodist sermon, 'The Use of Money'.
Much more recently, it developed a political agenda regarding human rights violations. Its philosophy encouraged divestment with South Africa during the Apartheid era and established the Sudanese Task Force in 2006 in response to the genocide in Dafur.
To have relevance now, SRI needs to strike a careful balance between some kind of contemporary angle and prosperous longevity. It needs to affect the current quarter whilst exhibiting valuable investment prospects in the long term.
Fund managers may feel SRI concentrates predominately non-financial issues. Mr Exley argues against this, claiming its focus is on areas which are not yet financial such as responsible lending, restrictions on climate change and ESG. He says: "We are concerned the fire-fighting after the financial crisis has led to a fire sale where companies have ended up selling their fire alarm at the same time."
Hendersons have tried to avoid throwing the baby out with the bath water by focusing their attention on long term thematic trends and industries of the future. Responsible investment does not need to be some kind of philanthropic indulgence. Investing in education, healthcare, social housing and cleaner energy provides sustainability. There will always be a need for these areas, however our society develops. Companies who are heavily involved in "bad" energy face increasing hikes in taxation and stifling amounts of regulation. They are therefore likely to experience huge loses in the upcoming years. For once an old adage may truly prove to be the case: slow and steady wins the race.
Mr Everly believes one reason why some pension funds have been so slow in seeing the benefits of responsible investment is due to them delegating too much responsibility to fund managers who only operate in the short term. He feels there needs to be a change in the way fund managers approach contracts. He says: "Fund managers will look at a three year contract as just that but some issues within a pension scheme will build up for decades. 10 years ago, subprime lending was not a risk and climate change certainly wasn't viewed in the way it is now."
In a bid to look towards the future, Mr Latham is also quick to point out recent errors of the past: "Companies who have been well invested in corporate responsibility have been less affected by the recession. If one considers RBS two years ago, it was obvious they were weak on corporate responsibility and governance. More conservatively managed banks such as HSBC and Standard Charter haven't emerged unscathed but they are in a far better position."
He adds: "There is a strong correlation between good management and social responsibility. A focus on short term running and cutting corners can only expose a company to risks and shocks. In 2001 BP was seen from the outside as a strong competitor with good short term profits. Nevertheless, their maintenance and health and safety were not secure. They were too busy looking towards the next quarter and half term profits to see what culminated in 2004/5. In comparison, BT's strong management team has led to a sustainable profit growth."
Fair Pensions' research has found a majority of fund managers' management of ESG is limited to governance issues only. Climate change and other social concerns should irrevocably influence how investors behave. If it does not now, it will. The next 15 years will be rife with physical, regulatory and legislative changes affecting how all companies operate. Those who wait for the government to tell them what they have to do, risk missing a very important boat.
Friday 10 April 2009
Sharia Funding- friend or foe?
Originally sharia banking in the UK was disregarded as a small enterprise catering for a religious niche market. Now Britain's Islamic banking sector is bigger than Pakistan’s, according to Financial Services London. As dissatisfaction with the western banking system hits its peak, there is a growing trend of non-Muslims investing in sharia-compliant schemes.
The Islamic Bank of Britain's marketing director Steven Amos says: "Our core business will always be Muslims, but the number of non-Muslims is really picking up. We've had increased interest and it's one of a number of reasons why we're insulated from the credit crunch."
Ian Yearsley, a retired journalist and Christian lay preacher who lives in south-west London, recently opened a savings account with the IBB. It appealed to him because it pays on a profitshare rather than interest basis.
He says: "It is an ethical and sensible way to invest my money. It should be remembered that there was a prohibition against usury, or earning interest, among Christians in the Middle Ages."
The UK has been providing sharia services for 30 years but, along with the fact it was not directly affected by the subprime lending disaster, recent government support and regulations have allowed it to prosper. When he was Chancellor, Gordon Brown said he wanted The City of London to be the "gateway to Islamic finance" and, unlike some of his other aims, this seems to be the case. One recent survey found UK trade with Arab countries had risen 60% in the last six years.
The Sharia Home Purchase plan, launched in Scotland by Islamic Bank of Britain this month, is the latest example of how sharia funding is slowly and steadily starting to take the UK by storm.
Tariq Masood, chairman of the Glasgow-based Islamic Finance Council, says: "IBB's entry into Scotland is a key growth indicator for the UK's Islamic finance industry and a huge step forward for Scotland's ethical retail community."
If this seems unrealistic, a look to countries where this type of banking is more established provides definitive evidence. In Malaysia, a quarter of all Islamic banking is carried out by non-Muslims.
The growth is not restricted to the UK either. The International Monetary Fund says the number and reach of sharia-compliant financial institutions worldwide has risen from one institution in one country in 1975 to more than 300 institutions operating in more than 75 countries today. A study carried out by the Banker magazine revealed, over the past year, sharia-compliant assets across the globe have grown by almost a third to more than $639bn. If Islamic finance continues to grow at a similar rate, it will have broken through the $1trn mark by 2010.
Whilst there is clear evidence of prosperity within sharia funding, there are several concerns which are likely to grow in prevalence as it becomes more mainstream. Organisations face difficulties in judging whether their schemes truly abide with sharia law. Banks like HSBC employ a panel of expert scholars to ensure this is the case but there is little continuity between boards. With no tangible document readily accessible to all, what one person may claim is acceptable, another could vehemently object to.
At present there are only around 260 scholars who reportedly know enough about Islamic finance to be deemed experts so the market could experience a shortfall. This will probably only be temporary though as 55 educational institutions now offer courses in Islamic finance. This may also become an area which attracts non-Muslims in the future. The more people who have an intricate understanding of sharia principles, the more likely it will be for some kind of objectivity to develop.
Marshall Sana, Islamic expert at the Institute for the Study of Islam and Christianity, believes shariah funding is failing to live up to the ideals established over 30 years ago. He says: "Sharia finance is actually a distortion of Korannic teachings, and was not widely practiced by Muslims until the 1940s."
Some Muslims believe sharia funding, as it exists today, is merely western funding under a different name. Website www.islamic-finance.com fears sharia organizations are not really engaging in risk-sharing practice at all. They argue a client who defaulted in their "rent" would still eventually face the same consequences as they would in an interest-based mortgage. They believe if banks were required to share profits and losses with their clients then this would lead to the most responsible type of investment.
Sharia banking operates on a couple of principles which should make it extremely different to western banking. It prohibits any involvement with alcohol, gambling, pornography, human cloning, arms and ...pork. Although this just sounds like an extreme form of socially responsible investment, the twist is it refuses to have any involvement with interest and forbids investment where the debt to equity ratio is over 30%, ruling out significant sections of the market.
However, an ancillary clause states the banks can invest in prohibited areas as long as they take up less than 5% of the company’s activities. Amendments such as this could make one worry how far Islamic funding may experience an Orwellian "rule revision" as it continues to prosper.
Website contributors Haitham al-Haddad and Tarek el-Diwany share the concern: "Far from being part of the solution, our industry may soon become part of the problem."
There is a realistic possibility Islamic insurance may benefit from government SRI funds because of its responsible and co-operative principles. Nevertheless the Islamic funds' reliance on the oil industry could prevent them from being perceived as wholly ethical. With investors becoming increasingly aware of the importance of future proofing, this dependency could eventually become a toxic association.
Mohammed Abdul-Haq, global head of HSBC Amanah Private Banking, justifies investments in oil by sharia-compliant funds. Oil investment, he says, will remain one of the stark differences between ethical funds and Islamic funds.
Sana is also critical of some of its central ideological tenements: "It has inequality built into it, between woman and men and Muslims and non-Muslims. If you look at the literature and you look at the internal dialogue, the end is supremacy. The end is controlling institutions. It's setting up an Islamic economy and an Islamic economy is to be the world economy."
Despite these problems, no sharia-compliant financial institution has failed since the start of the current crisis and there are several reasons why Islamic funding has fared better in the wrath of the credit crunch than its western counterparts.
Humphrey Percy, chief executive of Bank of London and the Middle East, says: "Our balance sheet is still growing as a result of our increasing deposit base and more parties willing to look at Islamic finance as an alternative way to invest because they see it as competitive as well as ethical."
Although they do not produce ridiculously high returns in any one year, over the past decade they have delivered consistent results. Whilst the global markets may be down by more than a third from their peak, the Dow Jones Islamic Financials Index has lost 7% over the same period and actually rose 4.75% in the most recent September quarter.
Sultan Choudhary, commercial director of IBB, says: "We are not insulated from the credit crisis, but we are not as affected as the other banks because we do not have the exposure in terms of toxic assets. We are also not exposed to wholesale funding, as Northern Rock was. We have assets from shareholders and deposits."
These are not empty words. IBB has been operating as a retail bank for over four years, and has attracted over 40,000 customers. IBB's annual report for 2008, published last month, showed a 10% rise in customer numbers and a deposit increase of 15%. This takes their overall assets to £158m. They also managed to reduce the £6.9m loss they experienced in 2007 by 15 % to £5.9m.
The immediate future for sharia funding in the UK is the accomodation of sukuks. There has been a call for these Islamic bonds to help fund London 2012. Currently the market is estimated to be worth $24bn. Kitty Ussher, the City Minister and Economic Secretary to the Treasury, says she is "hopeful" that the UK would issue a sovereign sukuk in the wholesale sterling market in 2009. The HM Treasury has pushed ahead with the remaining enabling legislation which is published in the Finance Act 2009. This prepares the government should it decide to go to the market later in 2009 or in early 2010.
Words to know...
Riba- a dirty word in Sharia funding- it means interest
Sukuk- an asset backed bond
Mushraka- the co-operative partnership between two parties, usually the bank and the client which involves profit and loss sharing. Profits are shared as per an agreed ratio whereas the losses are shared in proportion to the capital/investment of each partner
The Islamic Bank of Britain's marketing director Steven Amos says: "Our core business will always be Muslims, but the number of non-Muslims is really picking up. We've had increased interest and it's one of a number of reasons why we're insulated from the credit crunch."
Ian Yearsley, a retired journalist and Christian lay preacher who lives in south-west London, recently opened a savings account with the IBB. It appealed to him because it pays on a profitshare rather than interest basis.
He says: "It is an ethical and sensible way to invest my money. It should be remembered that there was a prohibition against usury, or earning interest, among Christians in the Middle Ages."
The UK has been providing sharia services for 30 years but, along with the fact it was not directly affected by the subprime lending disaster, recent government support and regulations have allowed it to prosper. When he was Chancellor, Gordon Brown said he wanted The City of London to be the "gateway to Islamic finance" and, unlike some of his other aims, this seems to be the case. One recent survey found UK trade with Arab countries had risen 60% in the last six years.
The Sharia Home Purchase plan, launched in Scotland by Islamic Bank of Britain this month, is the latest example of how sharia funding is slowly and steadily starting to take the UK by storm.
Tariq Masood, chairman of the Glasgow-based Islamic Finance Council, says: "IBB's entry into Scotland is a key growth indicator for the UK's Islamic finance industry and a huge step forward for Scotland's ethical retail community."
If this seems unrealistic, a look to countries where this type of banking is more established provides definitive evidence. In Malaysia, a quarter of all Islamic banking is carried out by non-Muslims.
The growth is not restricted to the UK either. The International Monetary Fund says the number and reach of sharia-compliant financial institutions worldwide has risen from one institution in one country in 1975 to more than 300 institutions operating in more than 75 countries today. A study carried out by the Banker magazine revealed, over the past year, sharia-compliant assets across the globe have grown by almost a third to more than $639bn. If Islamic finance continues to grow at a similar rate, it will have broken through the $1trn mark by 2010.
Whilst there is clear evidence of prosperity within sharia funding, there are several concerns which are likely to grow in prevalence as it becomes more mainstream. Organisations face difficulties in judging whether their schemes truly abide with sharia law. Banks like HSBC employ a panel of expert scholars to ensure this is the case but there is little continuity between boards. With no tangible document readily accessible to all, what one person may claim is acceptable, another could vehemently object to.
At present there are only around 260 scholars who reportedly know enough about Islamic finance to be deemed experts so the market could experience a shortfall. This will probably only be temporary though as 55 educational institutions now offer courses in Islamic finance. This may also become an area which attracts non-Muslims in the future. The more people who have an intricate understanding of sharia principles, the more likely it will be for some kind of objectivity to develop.
Marshall Sana, Islamic expert at the Institute for the Study of Islam and Christianity, believes shariah funding is failing to live up to the ideals established over 30 years ago. He says: "Sharia finance is actually a distortion of Korannic teachings, and was not widely practiced by Muslims until the 1940s."
Some Muslims believe sharia funding, as it exists today, is merely western funding under a different name. Website www.islamic-finance.com fears sharia organizations are not really engaging in risk-sharing practice at all. They argue a client who defaulted in their "rent" would still eventually face the same consequences as they would in an interest-based mortgage. They believe if banks were required to share profits and losses with their clients then this would lead to the most responsible type of investment.
Sharia banking operates on a couple of principles which should make it extremely different to western banking. It prohibits any involvement with alcohol, gambling, pornography, human cloning, arms and ...pork. Although this just sounds like an extreme form of socially responsible investment, the twist is it refuses to have any involvement with interest and forbids investment where the debt to equity ratio is over 30%, ruling out significant sections of the market.
However, an ancillary clause states the banks can invest in prohibited areas as long as they take up less than 5% of the company’s activities. Amendments such as this could make one worry how far Islamic funding may experience an Orwellian "rule revision" as it continues to prosper.
Website contributors Haitham al-Haddad and Tarek el-Diwany share the concern: "Far from being part of the solution, our industry may soon become part of the problem."
There is a realistic possibility Islamic insurance may benefit from government SRI funds because of its responsible and co-operative principles. Nevertheless the Islamic funds' reliance on the oil industry could prevent them from being perceived as wholly ethical. With investors becoming increasingly aware of the importance of future proofing, this dependency could eventually become a toxic association.
Mohammed Abdul-Haq, global head of HSBC Amanah Private Banking, justifies investments in oil by sharia-compliant funds. Oil investment, he says, will remain one of the stark differences between ethical funds and Islamic funds.
Sana is also critical of some of its central ideological tenements: "It has inequality built into it, between woman and men and Muslims and non-Muslims. If you look at the literature and you look at the internal dialogue, the end is supremacy. The end is controlling institutions. It's setting up an Islamic economy and an Islamic economy is to be the world economy."
Despite these problems, no sharia-compliant financial institution has failed since the start of the current crisis and there are several reasons why Islamic funding has fared better in the wrath of the credit crunch than its western counterparts.
Humphrey Percy, chief executive of Bank of London and the Middle East, says: "Our balance sheet is still growing as a result of our increasing deposit base and more parties willing to look at Islamic finance as an alternative way to invest because they see it as competitive as well as ethical."
Although they do not produce ridiculously high returns in any one year, over the past decade they have delivered consistent results. Whilst the global markets may be down by more than a third from their peak, the Dow Jones Islamic Financials Index has lost 7% over the same period and actually rose 4.75% in the most recent September quarter.
Sultan Choudhary, commercial director of IBB, says: "We are not insulated from the credit crisis, but we are not as affected as the other banks because we do not have the exposure in terms of toxic assets. We are also not exposed to wholesale funding, as Northern Rock was. We have assets from shareholders and deposits."
These are not empty words. IBB has been operating as a retail bank for over four years, and has attracted over 40,000 customers. IBB's annual report for 2008, published last month, showed a 10% rise in customer numbers and a deposit increase of 15%. This takes their overall assets to £158m. They also managed to reduce the £6.9m loss they experienced in 2007 by 15 % to £5.9m.
The immediate future for sharia funding in the UK is the accomodation of sukuks. There has been a call for these Islamic bonds to help fund London 2012. Currently the market is estimated to be worth $24bn. Kitty Ussher, the City Minister and Economic Secretary to the Treasury, says she is "hopeful" that the UK would issue a sovereign sukuk in the wholesale sterling market in 2009. The HM Treasury has pushed ahead with the remaining enabling legislation which is published in the Finance Act 2009. This prepares the government should it decide to go to the market later in 2009 or in early 2010.
Words to know...
Riba- a dirty word in Sharia funding- it means interest
Sukuk- an asset backed bond
Mushraka- the co-operative partnership between two parties, usually the bank and the client which involves profit and loss sharing. Profits are shared as per an agreed ratio whereas the losses are shared in proportion to the capital/investment of each partner
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