Just imagine you have some extra cash available at your disposal. What would you like to do with it? Perhaps, invest somewhere to make some money out of it? But, what kind of business(es) should you invest in? Some of us may decide to invest our savings based on the expected profit margin we are going to get.
But, do you think getting hefty profit margins on your investment should be the only factor you should consider again while investing?
Being Muslims, we should live a purposeful life. Money should not be everything in the equation. We must have some higher purpose in life no matter what we do.
The Halal Times had published an article on a similar topic. Today, we would like to share with you a practical example of how we could align our investment strategy based on the value which we think is close to our heart.
In March 2020, we launched the Old Mutual Albaraka Income Fund, the fourth in our Shari’ah suite of funds. This fund has delivered above-inflation returns since its inception.
Growth of Sukuk
Sukuk is an Arabic word that means ‘certificates’. In finance, it stands for bonds that are structured in a Shari’ah-compliant manner.
Unlike bonds that indicate a debt obligation, a Sukuk offers the holder ownership of a physical asset. Another way to look at a Sukuk is to think of it as a share certificate in an unlisted joint venture, for example, wind or solar farm.
Because skunks are Shari’ah compliant, they are not linked to the interest rate. Sukuks are priced according to the value of the physical assets as well as the credit rating. The Sukuk will increase in value when the assets increase in value, whereas profits from bonds correspond to a fixed interest rate or credit rating.
According to Refinitiv (one of the world’s largest financial market providers and infrastructure), Sukuk was introduced to the market over 30 years ago and has seen continued growth within Islamic finance.
During the Covid-19 crisis, Shari’ah funds have shown the same resilience as Environmental, Social, and Governance (ESG) investments. Their growth and popularity held up to the volatility, both in inflows and performance. Refinitiv highlights the fact that Sukuk was launched in several non-Muslim countries in 2020 including Hong Kong, Luxembourg, South Africa (this refers to the Old Mutual Albaraka Income Fund), Senegal, and the United Kingdom.
They conclude that the growth has been aided by the continued innovation in Sukuk, keeping up with digital innovations that have introduced green, blockchain, and inflation-linked Sukuk.
The important link between ethical and ESG investing
The ESG and Shari’ah funds we manage at Old Mutual Investment Group have also followed the global trend in growth. The fact that we have seen the growth of Shari’ah investing across clients with diverse backgrounds, comes as no surprise.
We believe that clients have values that are about ethics, morals, and principles. Increasingly, investors are using ethical principles and moral codes as the primary filter for the selection of investments.
Globally, the growing threat of climate change, resource depletion, rising pollution, and unethical practices in the private and public sector, has led to an escalation in demand for more ethical practices and products from companies and governments alike.
Shari’ah investing principles have historically been interpreted by scholars to determine the minimum standards that an investment must satisfy to meet the requirements of Islamic Law. Our investment approach incorporates the higher purposes and objectives of Islamic Law by actively incorporating ESG principles and United Nations Sustainable Development Goals(UNSDG), sharing common values with the higher objectives of Islamic Law – which, amongst others, seeks the preservation and protection of life, resources, and the environment.
We go beyond the literal meaning of the law, raising the bar to incorporate the purposes and objectives behind Shari’ah, integrating both Shari’ah standards and ESG principles into our investment process. The wealth created from this investment approach is also shared with disadvantaged communities in support of UNSDGs.
Al baraka partnership and proprietary ESG algorithm
To manage funds in line with ESG and Shari’ah, we must ensure our process is legitimate and transparent. We manage our Shari’ah funds in partnership with Al Baraka Bank, offering clients the best of both – investment opportunities that are as principled as they are rewarding.
In addition, over the last decade, we tested ESG data from various data providers and developed an algorithm that standardizes and combines data from different sources to produce our proprietary ESG Risk Screening Model.
Uniquely, for a company to be eligible for our selection it must be Shari’ah compliant and analyzed through our proprietary ESG Risk Screening Model. We also developed a one-year ESG score to capture changes in the company’s ESG profile, investor sentiment, and price behavior.
Addressing social issues
Old Mutual and Al Baraka partnered with The South African Muslim Charitable Trust (SAMCT) in 2008 to act as a conduit for the provision of funding assets, services, and other resources to approved public benefit organizations. Since its creation, the Trust has made significant donations towards poverty alleviation, empowerment, community upliftment, and sustainability programs. Funds are distributed to improve the health and development of people, irrespective of race or religion.
The Trust contributes towards four primary sectors – Education, Health, Social Development, and Poverty Alleviation.
According to Refinitiv, “Covid-19 has exposed the shortcomings of our economies and societal systems and this will hopefully lead to change.” This leads us to believe that we’re on the right track with both our ESG and Shari’ah funds because the largest generational wealth transfer, from baby boomers to millennials is coming up.
Millennials are known to value responsible living, from what they eat and wear, to how they treat the environment and increasingly, where they put their money. Refinitiv highlights that transparency and ESG integration will become even more pronounced.
As Old Mutual Investment Group, we’re well placed for these developments, through our investment process, partnership with Al Baraka, and our ESG and Shari’ah investment solutions.