Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Hello everyone and welcome to this MSS Sustainability Series podcast.
Speaker: Today we'll be talking about the intersection of ESG and Islamic finance.
Speaker: I will be joined by Lisa Maiden, who is currently the Chief Strategy Officer at Export-Import Bank of Malaysia.
Speaker: So Lisa has a lot of experience in the field.
Speaker: being the leading sustainability and developing implementation plans relating to low carbon transition and social impact initiative.
Speaker: And these are you are also currently ambassador of the Women in Islamic and Ethical Finance Forum base in London.
Speaker: Also, we will have Sefiane Kassem, who is an old friend.
Speaker: So Sefiane, welcome to this podcast.
Speaker: Remember days where we worked together on the trading floor where you were credit trading.
Speaker: But currently you are leading the investment specialist team within the ETF.
Speaker: and indexing business at HSBC Asset Management, where you have a lot of assets actually under the ESG and Islamic space.
Speaker: And it will be very interesting to hear your perspective from an asset manager perspective.
Speaker: To start with, we'd like to start this session with a brief introduction to Islamic investment and the intersection of Islamic and ESG.
Speaker: Clearly, ESG is a relatively new term that was coined in 2005, but kind of has ethical investing as an ancestor.
Speaker: So I guess we will find similarities between those two areas.
Speaker: Lisa, do you want to start with this question?
Speaker: Thank you, Patrick.
Speaker: It's really great to be here.
Speaker: In Islamic finance, I think the intersection that's very clearly evident is in the values that it tries to create for society.
Speaker: The Islamic finance principle is very much weighed upon ensuring that the rights of future generations are protected.
Speaker: And in that space, how we manage resources and effective wealth distribution,
Speaker: and also safeguarding assets and ensure that it continues to be sustainable for future generations is really important.
Speaker: Now looking at ESG, it tries to also propagate the same values in terms of the externality to society is also an important consideration.
Speaker: And this is both on environment, on social and on governance.
Speaker: What's important to say is also that Islamic finance looks at the E&S together as a sort of in tandem with each other, very much closely compared to ESG lands.
Speaker: So a project can be just complying in the environment element.
Speaker: But Islamic finance tries to look at both.
Speaker: what are the Islamic impact from the environment, social and governance lens.
Speaker: So all together, I would say, is the view on Islamic finance.
Speaker: Thank you, Lisa, very much.
Speaker: And Zéphane, it would be great to hear from you your perspective from an asset manager standpoint.
Speaker: Thanks very much, Patrick.
Speaker: It's a pleasure to be here, of course.
Speaker: And thank you, Lisa, for the introduction.
Speaker: I think I'd echo a lot of what you say.
Speaker: From a philosophical standpoint, the way we think about share-a-compliant investing is we acknowledge in the first instance that it's very nuanced.
Speaker: But from a top-down perspective, if you like,
Speaker: There's a lot of similarities between Sharia-compliant investing and what we would call sustainable investing.
Speaker: More specifically, Sharia-compliant investing focuses, as Lisa says, on ethical and socially responsible investment practices that align with Islamic values.
Speaker: So including promoting fairness, transparency, risk sharing, et cetera, whilst avoiding speculative practices.
Speaker: So in that respect, it looks to achieve an optimal trade-off, if you like, between potential financial returns, which may be achieved within the context of an investment, as well as the ethical considerations and societal benefits, all, of course, within the framework of Islamic finance principles.
Speaker: So how this translates into the creation, if you like, of Sharia compliant investment products often comes down to screening, screening out companies that may be heavily involved in industries or sectors that are considered to be harmful to society within the context of Sharia law.
Speaker: So that often includes alcohol, tobacco, gambling, etc.
Speaker: But also looking at
Speaker: the debt profile of companies given the prohibition on interest within the context of Islamic finance.
Speaker: So companies which have significant debt dependence in some form are often screened out.
Speaker: But the ultimate objective is to ensure that investors avoid companies that may operate in industries and sectors that are considered harmful to society as a whole.
Speaker: So in that respect, there's a lot of overlap with sustainable investing.
Speaker: Thank you, Saphjan.
Speaker: And as you said, there is an intersection.
Speaker: Talk about screening, for example, which is an obvious approach in EAG.
Speaker: So then my question is, why would society appeal to those already investing with Islamic principles?
Speaker: And what value does it add basically in this case to them, where the interest comes from?
Speaker: Very good question, actually, Patrick.
Speaker: And I think the key point is that there is a slight nuance distinction between the two.
Speaker: So Lisa rightly pointed to the fact that the potential overlap is significant.
Speaker: But often you find in practice that sustainable products can often be very heavily tilted towards environmental considerations.
Speaker: So whether it's carbon emissions.
Speaker: reduction, something to do with biodiversity or others.
Speaker: And often the screening mechanism may look to address or is heavily focused on the E-pillar.
Speaker: If you look at the screening which is applied in charity compliance investment products, often it's slightly tilted on the basis of the points I made previously towards the S-pillar, the societal pillar, a little bit more so than the E-pillar.
Speaker: It's not to say that the E-pillar is less important.
Speaker: It's just the way that products have been designed.
Speaker: You have a slight tilt towards the environmental angle, a slight within sustainable products.
Speaker: You have a slight tilt towards the societal angle within Shara compliant investment products.
Speaker: So that in that respect, they're quite natural complements to each other in many regards.
Speaker: But outside of the natural screening processes, which are applied as a result of the philosophy associated with each of those product types, there are also other factors which have been driving investors to consider that together.
Speaker: So share compliant investors have started to think more and more about
Speaker: broader ESG type considerations, so sustainable considerations as a byproduct of a changing regulatory landscape, for example.
Speaker: So in Europe, there's a lot of emphasis on having environmental considerations built into investment products of various kinds.
Speaker: There's also been, of course, a lot of press coverage around the need to tackle environmental issues in a more immediate fashion, so to speak.
Speaker: And naturally, the broader public attitude tilted towards sustainable investing as a result of that.
Speaker: And that's across investor types and across countries within Europe and elsewhere to some extent.
Speaker: But Europe is really a leading light in that respect.
Speaker: So I think it's a combination of the natural screening processes which come about as a result of the philosophical starting point when building sherry compliant products versus sustainable products, but also a byproduct of the broader mood music amongst the general public and the direction of travel of regulation more generally.
Speaker: If I can add to that, Patrick, I think the interest would be from investors just mainly looking at beyond financial returns.
Speaker: And so Muslim type of investors are very much looking for products that are towards value creation in society, whether any type of financial benefit is
Speaker: brings about impact to society as well.
Speaker: And so this type of investors are already very much inclined towards looking at both sustainability and Islamic finance, I think, beyond just financial returns.
Speaker: But if there's evident impact to society, I think it's where the investors' interests will be.
Speaker: Thank you both for this.
Speaker: So that's now quite evident why it makes sense actually to combine those two approaches together.
Speaker: And the question is, where do we see the demand coming from geographically?
Speaker: I mean, the expectation will be that see that in the Middle East and Africa.
Speaker: I think these are based in Malaysia, which seems to be a leading market in this space.
Speaker: And it was a bit more colour about where the demand is coming from and why Malaysia is a leader in this space.
Speaker: I think it's very much in line with the regulation development over the years in that we had the right regulatory infrastructure to ensure that there is a very clear guidance in terms of how one can understand this type of investments and how we should perform as well as the standards in which products are designed.
Speaker: So Malaysia had a head start in terms of regulatory frameworks on how to
Speaker: Think about both Islamic finance and sustainability together.
Speaker: Just the Central Bank of Malaysia already outlined in a regulatory space the values in which sustainability crosses over Islamic finance.
Speaker: And so those type of frameworks are already in place way back since 2017.
Speaker: And so from that, it was very easy to identify where sustainability can be related to Islamic finance.
Speaker: And so when there are products that's designed to comply in both areas, I guess investors and I think interest started to come in.
Speaker: I think from our standpoint as a global asset manager, for us, really, when thinking about how we can serve Muslim investors globally by providing Sharia compliant investment products,
Speaker: in particular, Shara compliant investment products, which have a sustainability angle to them.
Speaker: What we noticed in practice is that the space has been developing quite rapidly as Lisa pointed to, but in different ways and at different speeds across countries and across regions.
Speaker: For us, the design challenge really was to think about how we could create products which met minimum
Speaker: global standards, if you like, and which would have widespread appeal in that respect.
Speaker: And we noticed that there were very few Shari compliant products out there that provided market exposure across asset classes, which had broad global appeal.
Speaker: As I say, many of them were designed for a local audience, but that naturally restricted their ability to build, if you like, broader, more internationally diversified portfolios.
Speaker: So
Speaker: Really for us, the idea was to try and build a product set which looked to address this by creating a range, if you like, of asset class level exposures, which constitute, if you like, a minimum number of building blocks.
Speaker: So a Sharia compliant investor that wants to invest
Speaker: in any region and build an internationally diversified portfolio which may have some ESG or some sustainable criteria built into it, can use the products to do that.
Speaker: So we were really coming at this from a global perspective, if you like.
Speaker: Thank you very much.
Speaker: And in terms of demand, clearly there are pockets of demand currently and is very localized and tending to globalize as well.
Speaker: In which markets do you see the biggest opportunities and maybe also client segments in terms of gross potential?
Speaker: So what's interesting is Malaysia, as a case study where we have both Islamic and conventional products across a diverse range of clients, both Muslim and Muslim, we're seeing a lot of take-up from non-Muslim population as well because of the fairness and outcome of society that Islamic governance products promises and evasion
Speaker: as an outcome impact.
Speaker: And so interestingly, we're seeing a lot of interest from Chinese type of investors.
Speaker: We're also seeing a lot of interest from China doing cross-border discussions on whether these type of products are available to meet cross-border interest as well between banks to banks, investors to investors.
Speaker: We're also seeing interest from Japan.
Speaker: And so
Speaker: These new markets and understanding about Islamic finance and what it offers are starting to gain traction in those type of countries.
Speaker: And we're seeing that very much in Malaysia across the non-Muslim population, as well as the traditional that we mentioned earlier, the Middle East and African Muslim population.
Speaker: I'd add to that by saying we're seeing some really interesting patterns amongst different client types in different jurisdictions from our standpoint.
Speaker: And I think one of them which really stands out to me is that in the UK, within the pension space, a lot of
Speaker: UK DC pension schemes are now required or obliged to have a Sharia default option amongst the set of options which are available to participants within the scheme.
Speaker: And we've been a beneficiary of that because we have a flagship fund, our Global Islamic Equity Index Fund, which is very popular within the UK amongst the DC pension market.
Speaker: And what we've noticed in that is that there are a lot of
Speaker: Muslim and non-Muslim investors, just to echo Lisa's point, that are invested in this particular fund and have been for a while.
Speaker: And the reason for that is because the nature of the screening resonated with a number of non-Muslim investors.
Speaker: investors, even prior to sustainable investing really becoming a material investment theme, i.e.
Speaker: there being a large number of products available out there for investors to use to build sustainable portfolios with specific objectives.
Speaker: Investors were looking at the fund, looking at the nature of the screening and felt that the ethical considerations which were built into it
Speaker: resonated well with them.
Speaker: So we've seen a lot of uptake for Sharia products within the UK DC pension market, for example.
Speaker: More broadly speaking, in different jurisdictions globally, we've seen a lot of interest across the retail investor space.
Speaker: We've seen the new world
Speaker: investment platforms, so robo-advisors, digital wealth platforms and others really starting to offer a whole range of sustainable ethical products, including sustainable and faith-based product.
Speaker: We're seeing a number of different cohorts of the retail segment across different countries and regions really start to express interest in investing in Shara compliant products, especially those within the SG angle to them.
Speaker: So I think those are two very specific
Speaker: trends, identifiable trends that we see in the market at this point in time.
Speaker: But then more from a geographical standpoint, just to complement what Lisa was saying, I think for us, we're seeing demographics and other factors impacting investment habits and patterns of certain client segments across jurisdictions.
Speaker: So
Speaker: Liza mentioned China.
Speaker: We're also seeing in India more interest in Sharia compliant investing and Sharia compliant investment products in certain parts of the Middle East and Southeast Asia.
Speaker: So countries where there typically wasn't quite as much interest in Sharia compliant products as demographics shift and you have
Speaker: a growing middle class in particular, and they have more wealth that they want to save and invest, you're seeing more and more interest come through with respect to share-a-compliant investment products, in particular those which are ESG screened.
Speaker: So we're seeing lots of different types of patents take hold, some expected products,
Speaker: on the basis of more macro developments, others unexpected but equally interesting on the basis of information which is available and out there and the fact that investors are becoming more and more educated with respect to ethical investment topics of various kinds.
Speaker: This is very interesting.
Speaker: Thank you.
Speaker: It seems like there are a lot of buckets for growth.
Speaker: You mentioned China, Japan, India, the UK pension space, retail and the demographics.
Speaker: Really interesting.
Speaker: In terms of, you know, now we looked at the potential, which seems to be quite large.
Speaker: What do you see as headwinds or challenges?
Speaker: And I would include in that potentially the regulatory side, maybe to follow up, you know, on what you just said, Sefiane, to start.
Speaker: I think there are challenges.
Speaker: From our standpoint, the main challenge was really finding a minimum set of acceptable standards which could apply or appeal, I should say, to most of the investors that we deal with across jurisdictions.
Speaker: So the challenge we faced really is that there are different standards.
Speaker: across countries and across regions.
Speaker: You have different Sharia boards which advise different client types in different geographies.
Speaker: And often some may be stricter, some may be less strict depending on their interpretation of Sharia law as applied to finance, etc.
Speaker: So finding a minimum threshold in terms of standards such that any products we created would have, for the most part, widespread appeal was really an interesting one for us.
Speaker: And from our standpoint, IUFI standards are really important in that regard because that is a common language.
Speaker: across investor types, across Sharia scholars, across jurisdictions.
Speaker: So benchmarking to IUFI standards was important for us in looking to exceed where we can.
Speaker: So from our standpoint, really the challenge, the headwind, if you like, in terms of creating products with global appeal was consistency of standards across geographies.
Speaker: Thank you, Safiyan.
Speaker: And that's probably a common topic with sustainability as well in terms of common standards and taxonomies.
Speaker: Lisa, do you want to add to this from your side?
Speaker: I think on the challenges side, what we see is the conversation of the topics around where Islamic finance intersects with sustainability that's not widely appreciated and accepted.
Speaker: And even trying to provide awareness in terms of what would the
Speaker: nuanced differences between the two look like.
Speaker: Not every element within the UN SDGs would be accepted in Islamic finance.
Speaker: There are some specifics that's quite different.
Speaker: For example, Islamic finance tries to look at full elimination of poverty rather than setting a certain threshold.
Speaker: And so having this type of awareness and understanding of what Islamic finance is,
Speaker: tries to accomplish for a society or an ideal Islamic society benefits.
Speaker: And this is not yet quite evident.
Speaker: And I think the challenge is that finding expertise and capability of someone who has both sides of the coin, understanding of Islamic finance,
Speaker: and understanding sustainability and impact.
Speaker: So I suppose we'll see a natural progression in the next two, three years when more and more expertise starts to come into the picture.
Speaker: But where Malaysia is at, we see a very clear differentiation where one understands Islamic finance.
Speaker: They may not have a full appreciation of a whole sustainability requirements as well as impact investing as yet.
Speaker: Thank you both.
Speaker: I'll go into the next and last question, which is about forward-looking and where the market could be going in terms of innovation and what the next frontier could be for this space.
Speaker: Maybe, Disa, if you want to start.
Speaker: Yeah, I think what is very exciting is the idea of participation finance and resharing type of instruments.
Speaker: We see some developments happening in Turkey where they have mentioned after the earthquake that there needs to be a retail type of investing, public and private participation.
Speaker: And so moving forward,
Speaker: away from interest-based instruments, but looking at blended or quasi-equity type of instrument where there is a target impact towards better wealth distribution.
Speaker: That's one.
Speaker: Second is Islamic social finance.
Speaker: In this area, the instruments within the Islamic finance realm
Speaker: where contribution to society or other aspects such as Islamic endowment type of instruments and coupling that with where high net worth Muslim investor may look for this type of products.
Speaker: This is not yet on shelf and I think echoing what Sufjan mentioned,
Speaker: Having that coupled with robo-advisors and coupling that with maybe retail space for the investor would be quite exciting to see.
Speaker: I think there's a lot of interesting potential future developments within the share-compliant and sustainable investment space, thinking about
Speaker: where the two come together.
Speaker: So within the context of the equity space, if we think of things from an asset class perspective, we've already seen the creation of a number of products which have or bring together, if you like, Shara compliant investment principles with sustainable investment principles.
Speaker: Having said that, there's a lot of work to be done in that respect.
Speaker: There's still comparatively speaking, a very small number of Shara compliant investment products which have ESG screening or sustainable
Speaker: investment screens built into them that actually exist within the markets.
Speaker: So I think there's still some work to be done there.
Speaker: But looking across asset classes, I think we've seen the Sukuk market growing very rapidly over the past few years.
Speaker: It's starting to mirror broader conventional fixed income markets in terms of
Speaker: The development and growth of the green Sukuk market and sustainable Sukuk bond market, sustainably linked Sukuk bonds, transition Sukuk bonds, etc.
Speaker: have started to appear on the scenes.
Speaker: We're seeing it mirror conventional fixed income markets in that respect in terms of growth and development.
Speaker: But I think an asset class which has been, relatively speaking, untouched so far is really what we would call the alternative space, in particular, the real estate space, infrastructure space, etc., which I think will become of increasing importance in future years, given the evolution of the fiscal backdrop across many countries.
Speaker: So I think there's a lot of scope to create products, share a compliant investment products, which have a sustainable angle to them within that space.
Speaker: And I'll just finish by saying as an asset manager, it would be nice to think about stewardship and engagement from companies.
Speaker: a Sharia compliance perspective as well.
Speaker: So many asset managers have very well developed stewardship and engagement programs which they use as an interface.
Speaker: They use them as a means of engaging companies with respect to select topics of importance.
Speaker: But I think there's a lot to be said for the potential for Sharia investment principles to be incorporated into stewardship and engagement
Speaker: programmes, especially with respect to Sharia compliant investment products, to ensure the right type of discussions are being had by stewardship and engagement teams with companies, target companies with respect to whether they're meeting Sharia compliant investment criteria and sustainable investment criteria of various kinds.
Speaker: Thank you very much.
Speaker: We come to an end of this podcast.
Speaker: A lot of great insights I have learned a lot.
Speaker: There is an evident intersection and more importantly, complementarity between Islamic finance and sustainability.
Speaker: Already a significant market and demand, which is growing across new markets and client segments.
Speaker: You mentioned several exciting areas of innovation, such as in the private-public partnership, in the equity indexing space, sustainability in Sukuks.
Speaker: the alternative space.
Speaker: So we'll be watching out for these.
Speaker: Thanks for listening.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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