Impact Investing Integration

Islamic Investor
Vol. 9 Issue 27
Cover Story

Impact investing is defined as
investments made assessing not only
the financial return on investments,
but also the social and environmental
impacts of the investments in the course
of the operations of the business right
through to the consumption of the
product or service which the business
creates.

An impact investor seeks to create
social good or improve the health of the
environment in addition to achieving
financial returns. Islamic investing shares
similar characteristics to this socially
responsible investing (SRI) as both exclude
unethical businesses including gambling,
alcohol, tobacco and weapons. However
Shariah screening is more meticulous as it
excludes highly leveraged companies from
the portfolio.

Despite having less framework and
detailed rules than Islamic finance, SRI
investing has become very popular
among investors globally looking to
produce positive social and environmental
outcomes. It is reported that in the US,
these investments form an estimated
US$3.07 trillion out of US$25.2 trillion in
the US investment space.

According to En Lee, the director of Impact
Investment Exchange Asia (IIX), impact
investing is still nascent in Asia but the
industry is expected to grow significantly,
reportedly to a US$1 trillion asset class by
2020.

He believes that there is a large overlap
in terms of sectoral coverage between the
investment styles of Shariah principles
and impact investing. ““The same areas
are looked at, such as sustainable
agriculture, renewable energy, food
security, healthcare, sanitation and water
management,”” said Lee.

The slight difference, Lee believes, lies in
the negative screening approach taken by
Shariah principles in contrast to impact
investing, which is a more proactive
investment strategy to invest in companies
and sectors that produce positive social
and environmental outcomes which can be
measured in addition to financial returns.
““Through our observation, we find
that those using Shariah principles and
utilizing a negative screen from the start
may eventually pick the same impact
investment deals,”” said Lee.

IIX operates an online investment platform
known as Impact Partners, which connects
investors with opportunities to invest in
social enterprises in the Asia Pacific region.
Launched in March last year, it currently
has over 150 investors and impact
investment opportunities over US$100
million comprising a variety of sectors in
several different countries in Asia.

When asked how the connection to the
Shariah compliant investors occured,
Lee said that Impact Partners had been
approached by several family offices
looking at a more sustainable solution
to grant-based philanthropy as well as
institutional investors and even high net
worth individuals from the Middle East,
Europe and the US that have a penchant
for Shariah investing and looking to
diversify in Asia.

““The Islamic asset management industry
can widen its customer base by adopting a
socially responsible model””, said Lynette
D’’Souza, the head of investment strategies
group of Saudi-based NCB Capital. She
added that while the links between the two
models were not new, the former needs
to find similar strategies that brought SRI
into mainstream investing. Amongst the
measures that first need to be enhanced
include distribution channels, the
sophisticated investor base and incentive
schemes, according to D’’Souza.

KFH Research reports that Islamic funds
account for 4.5% of the total Islamic finance
assets globally, totaling an estimated
US$60 billion as at the end of 2011. In
2012, Islamic funds are expected to grow
10-15%. This steady pace however can
be further boosted by incorporating the
principles of SRI into Islamic investing by
applying Shariah screening over and above
the former. According to a research paper,
Islamic equity investments methodologies
must take the next step and add positive
screening and shareholder activism to the
negative screening.

With the continued uncertainty in the
global markets, this is the right time for
innovation to take place and help bring
the industry to the forefront. Investors
are always seeking for safe havens and
Islamic funds with its Shariah screening
have proven to be lower-risk than most
conventional funds.

Utilizing the current SRI platforms
available whilst maintaining the Shariah
screening may just be the formula needed
by fund managers to open the doors of
opportunities that were once perceived to
be too difficult or impossible. —— RW