A version of this article first appeared in New Private Markets
It has been reported that some asset managers in the Gulf Cooperation Council (GCC) expect stronger inflows amid growing demand for environmental, social, and governance (ESG) and Islamic-compliant investments. The rise in the global popularity of ESG investing presents a unique opportunity to investors, asset managers, and banks in the GCC to offer more “green” Islamic investment products to attract and obtain investment from a broader pool of potential investors that seek to invest in an ESG-compliant manner. Additionally, while “green” investments that tick the boxes of ESG and Shari’a compliance may currently be limited, the rise in innovative structured solutions that allow for exposure to certain ESG investments that would otherwise not be Shari’a compliant are increasingly being used by family offices, regional banks, and institutional investors and could bridge the gap further.
With the GCC’s significant pool of liquidity and the global popularity of ESG investing, the coming years could see an increase in ESG- and Shari’a-compliant products as envisaged by asset managers in the region. However, it should be noted that there is currently no standard that needs to be met before an investment can be labeled or described as ESG-compliant, hence investors will likely conduct their own due diligence on any Shari’a-compliant opportunities claiming to be ESG investments to ensure that such investments do in fact comply with their investment aims and they are not misled by “greenwashing.” Nonetheless, given that the market for Shari’a-compliant ESG investment is still relatively nascent, there is significant potential for growth.
Further, with the appetite for ESG investments increasing in the GCC and with investors and managers becoming more mindful of the opportunity for growth associated with ESG investing, there may be a rise in Shari’a-compliant offerings that align with ESG principles. In this article, we explore both themes and the potential synergies between the two.
BACK TO BASICS: WHAT IS ESG?
ESG investing as per the CFA Institute[i] is an approach to managing assets involving investors explicitly acknowledging such factors in their investment decisions.
There are several ways for investors to engage in ESG investing, including active investing, which involves active engagement through using their voting powers to persuade the entities they have control over to invest solely in ESG-friendly activities and to operate in a manner consistent with ESG policies and trends; and screening, which involves refraining from investing in companies or with asset managers that invest in non-ESG–friendly activities (for example, those engaged with tobacco, gambling, alcohol, or arms sales).
As widely publicized, investor demand for ESG investments has increased significantly in recent years,[ii] resulting in …….