Kuala Lumpur / EMIRATES BUSINESS
Islamic finance is complementary to and a major enabler of making responsible investing more ubiquitous across emerging markets – and Asia is leading the way – but integrated reporting and governance remains gap for many investors. To attract long-term capital, many companies in Asia are becoming more aware of how investors integrate Environmental, Social & Governance (ESG). In the process, they are becoming more open to engagement with responsible investors and in the process, are finding easier access to cheaper capital.
Asian firms now comprise more than half of the Dow Jones Sustainability Emerging Markets Index, a benchmark for ESG performance. In 2015, seven of the 13 added companies to the index were based in Asia. Among the Bursa Malaysia FTSE 4 Good Index constituents of 34 companies that score highest on ESG criteria are also Shariah compliant, only 9 are Shariah non-compliant and 4 of those are banks with Islamic subsidiaries.
Islamic finance is strongly connected to the real economy and places emphasis on how shareholders’ funds are used and whether they are in accordance with the values of investors. Expanding reporting requirements to include data relevant to ESG investors can help Islamic investors also better understand the permissibility of individual investments as well as allow integration of ESG to increase investment performance.
As the importance of ESG spreads beyond equities and into fixed income and other asset classes, there is a recognition—in line with the longstanding perspective from Islamic finance — that a hands-off lender-borrower relationship is problematic. It is increasingly clear that all types of investors who are financing a business (including by financing them with debt) that non-financial factors can have significant financial impacts on their investment.
This growing consensus supports wider convergence where Islamic investors adopts ESG principles to push for the transparency required to implement it. Research by Arabesque Asset Management and Oxford University demonstrate that between 80-90 percent of studies show implementing sustainability standards actually lower companies’ costs, improve performance and boost share prices.
The Responsible Finance Summit (RFS) to be hosted by Bank Negara Malaysia, organised by the RFI Foundation, and co-organised by Middle East Global Advisors — aims to highlight how Islamic finance can support integrated reporting in emerging economies to expand responsible investment flows. Specifically, the summit supports meaningful alliances between Islamic finance and traditional responsible investing.
The synergies that exist between these two ecosystems – Islamic finance and responsible finance –are many and integrated reporting for Shariah-sensitive investors presents a new avenue for growth for