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SustainabilityTalks: Navigating the Crossroads of Islamic Investing and ESG
28 Plays10 months ago
Join us for an enlightening episode of SustainabilityTalks, where we delve into the fascinating intersection of Islamic Investing and ESG.
Listen as Patrick Kondarjian, Global Head of Sustainability Markets & Securities Services HSBC discusses key topics with esteemed guests, Dr. Liza Mydin, Chief Strategy Officer at EXIM Bank Malaysia, and Sefian Kasem, Head of ETF Investment Specialists at HSBC Global Asset Management, explore the principles of Islamic investment and its synergies with ESG. Discover how this unique investment approach is not only attractive to all clients but also contributes significantly towards sustainable investment goals. We'll also take you on a global tour, focusing on the rapidly growing market and the opportunities that lie ahead. Tune in to learn about the challenges, innovations, and future prospects in this exciting space, by clicking on one of the buttons below.
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Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:00
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.
00:00:12
Speaker
Make sure you're subscribed to stay up to date with new episodes.
00:00:15
Speaker
Thanks for listening.
00:00:15
Speaker
And now onto today's show.
ESG and Islamic Finance
00:00:22
Speaker
Hello everyone and welcome to this MSS Sustainability Series podcast.
00:00:27
Speaker
Today we'll be talking about the intersection of ESG and Islamic finance.
00:00:32
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I will be joined by Lisa Maiden, who is currently the Chief Strategy Officer at Export-Import Bank of Malaysia.
00:00:38
Speaker
So Lisa has a lot of experience in the field.
00:00:41
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being the leading sustainability and developing implementation plans relating to low carbon transition and social impact initiative.
00:00:49
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And these are you are also currently ambassador of the Women in Islamic and Ethical Finance Forum base in London.
00:00:55
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Also, we will have Sefiane Kassem, who is an old friend.
00:00:59
Speaker
So Sefiane, welcome to this podcast.
00:01:01
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Remember days where we worked together on the trading floor where you were credit trading.
00:01:05
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But currently you are leading the investment specialist team within the ETF.
00:01:11
Speaker
and indexing business at HSBC Asset Management, where you have a lot of assets actually under the ESG and Islamic space.
00:01:18
Speaker
And it will be very interesting to hear your perspective from an asset manager perspective.
00:01:22
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.
00:01:32
Speaker
Clearly, ESG is a relatively new term that was coined in 2005, but kind of has ethical investing as an ancestor.
00:01:41
Speaker
So I guess we will find similarities between those two areas.
00:01:45
Speaker
Lisa, do you want to start with this question?
Alignment of Islamic Finance with ESG Values
00:01:47
Speaker
Thank you, Patrick.
00:01:48
Speaker
It's really great to be here.
00:01:50
Speaker
In Islamic finance, I think the intersection that's very clearly evident is in the values that it tries to create for society.
00:02:00
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The Islamic finance principle is very much weighed upon ensuring that the rights of future generations are protected.
00:02:08
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And in that space, how we manage resources and effective wealth distribution,
00:02:14
Speaker
and also safeguarding assets and ensure that it continues to be sustainable for future generations is really important.
00:02:23
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.
00:02:35
Speaker
And this is both on environment, on social and on governance.
00:02:40
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.
00:02:55
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So a project can be just complying in the environment element.
00:03:01
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But Islamic finance tries to look at both.
00:03:03
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what are the Islamic impact from the environment, social and governance lens.
00:03:10
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So all together, I would say, is the view on Islamic finance.
00:03:15
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Thank you, Lisa, very much.
00:03:16
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And Zéphane, it would be great to hear from you your perspective from an asset manager standpoint.
Ethical Nature of Sharia-Compliant Investing
00:03:22
Speaker
Thanks very much, Patrick.
00:03:23
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It's a pleasure to be here, of course.
00:03:26
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And thank you, Lisa, for the introduction.
00:03:27
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I think I'd echo a lot of what you say.
00:03:30
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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.
00:03:39
Speaker
But from a top-down perspective, if you like,
00:03:41
Speaker
There's a lot of similarities between Sharia-compliant investing and what we would call sustainable investing.
00:03:48
Speaker
More specifically, Sharia-compliant investing focuses, as Lisa says, on ethical and socially responsible investment practices that align with Islamic values.
00:03:59
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So including promoting fairness, transparency, risk sharing, et cetera, whilst avoiding speculative practices.
00:04:07
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.
00:04:24
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.
00:04:40
Speaker
So that often includes alcohol, tobacco, gambling, etc.
00:04:44
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But also looking at
00:04:46
Speaker
the debt profile of companies given the prohibition on interest within the context of Islamic finance.
00:04:52
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So companies which have significant debt dependence in some form are often screened out.
00:04:57
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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.
00:05:06
Speaker
So in that respect, there's a lot of overlap with sustainable investing.
00:05:10
Speaker
Thank you, Saphjan.
00:05:11
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And as you said, there is an intersection.
00:05:12
Speaker
Talk about screening, for example, which is an obvious approach in EAG.
00:05:17
Speaker
So then my question is, why would society appeal to those already investing with Islamic principles?
00:05:25
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And what value does it add basically in this case to them, where the interest comes from?
Complementarity of Islamic and Sustainable Investing
00:05:30
Speaker
Very good question, actually, Patrick.
00:05:31
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And I think the key point is that there is a slight nuance distinction between the two.
00:05:37
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So Lisa rightly pointed to the fact that the potential overlap is significant.
00:05:42
Speaker
But often you find in practice that sustainable products can often be very heavily tilted towards environmental considerations.
00:05:49
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So whether it's carbon emissions.
00:05:51
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reduction, something to do with biodiversity or others.
00:05:55
Speaker
And often the screening mechanism may look to address or is heavily focused on the E-pillar.
00:06:03
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.
00:06:18
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It's not to say that the E-pillar is less important.
00:06:21
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It's just the way that products have been designed.
00:06:24
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You have a slight tilt towards the environmental angle, a slight within sustainable products.
00:06:29
Speaker
You have a slight tilt towards the societal angle within Shara compliant investment products.
00:06:35
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So that in that respect, they're quite natural complements to each other in many regards.
00:06:41
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.
00:06:54
Speaker
So share compliant investors have started to think more and more about
00:06:58
Speaker
broader ESG type considerations, so sustainable considerations as a byproduct of a changing regulatory landscape, for example.
00:07:07
Speaker
So in Europe, there's a lot of emphasis on having environmental considerations built into investment products of various kinds.
00:07:14
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.
00:07:23
Speaker
And naturally, the broader public attitude tilted towards sustainable investing as a result of that.
00:07:30
Speaker
And that's across investor types and across countries within Europe and elsewhere to some extent.
00:07:36
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But Europe is really a leading light in that respect.
00:07:39
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.
00:08:00
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If I can add to that, Patrick, I think the interest would be from investors just mainly looking at beyond financial returns.
00:08:09
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
00:08:22
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brings about impact to society as well.
00:08:25
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.
00:08:35
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But if there's evident impact to society, I think it's where the investors' interests will be.
00:08:41
Speaker
Thank you both for this.
00:08:43
Speaker
So that's now quite evident why it makes sense actually to combine those two approaches together.
00:08:49
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And the question is, where do we see the demand coming from geographically?
00:08:53
Speaker
I mean, the expectation will be that see that in the Middle East and Africa.
00:08:57
Speaker
I think these are based in Malaysia, which seems to be a leading market in this space.
00:09:02
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And it was a bit more colour about where the demand is coming from and why Malaysia is a leader in this space.
Malaysia's Role in Islamic Sustainable Finance
00:09:08
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.
00:09:30
Speaker
So Malaysia had a head start in terms of regulatory frameworks on how to
00:09:36
Speaker
Think about both Islamic finance and sustainability together.
00:09:39
Speaker
Just the Central Bank of Malaysia already outlined in a regulatory space the values in which sustainability crosses over Islamic finance.
00:09:49
Speaker
And so those type of frameworks are already in place way back since 2017.
00:09:54
Speaker
And so from that, it was very easy to identify where sustainability can be related to Islamic finance.
00:10:02
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.
Global Standards for Sharia-Compliant Products
00:10:11
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,
00:10:23
Speaker
in particular, Shara compliant investment products, which have a sustainability angle to them.
00:10:27
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.
00:10:40
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For us, the design challenge really was to think about how we could create products which met minimum
00:10:47
Speaker
global standards, if you like, and which would have widespread appeal in that respect.
00:10:53
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.
00:11:02
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.
00:11:12
Speaker
So
00:11:13
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.
00:11:27
Speaker
So a Sharia compliant investor that wants to invest
00:11:30
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.
00:11:40
Speaker
So we were really coming at this from a global perspective, if you like.
00:11:44
Speaker
Thank you very much.
00:11:45
Speaker
And in terms of demand, clearly there are pockets of demand currently and is very localized and tending to globalize as well.
00:11:55
Speaker
In which markets do you see the biggest opportunities and maybe also client segments in terms of gross potential?
00:12:01
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
00:12:24
Speaker
as an outcome impact.
00:12:27
Speaker
And so interestingly, we're seeing a lot of interest from Chinese type of investors.
00:12:33
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.
00:12:48
Speaker
We're also seeing interest from Japan.
00:12:51
Speaker
And so
00:12:52
Speaker
These new markets and understanding about Islamic finance and what it offers are starting to gain traction in those type of countries.
00:12:59
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.
00:13:10
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.
00:13:18
Speaker
And I think
Demographic Interest in Sharia-Compliant Investment
00:13:19
Speaker
one of them which really stands out to me is that in the UK, within the pension space, a lot of
00:13:25
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.
00:13:38
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.
00:13:51
Speaker
And what we've noticed in that is that there are a lot of
00:13:54
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.
00:14:03
Speaker
And the reason for that is because the nature of the screening resonated with a number of non-Muslim investors.
00:14:10
Speaker
investors, even prior to sustainable investing really becoming a material investment theme, i.e.
00:14:18
Speaker
there being a large number of products available out there for investors to use to build sustainable portfolios with specific objectives.
00:14:26
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
00:14:34
Speaker
resonated well with them.
00:14:36
Speaker
So we've seen a lot of uptake for Sharia products within the UK DC pension market, for example.
00:14:42
Speaker
More broadly speaking, in different jurisdictions globally, we've seen a lot of interest across the retail investor space.
00:14:49
Speaker
We've seen the new world
00:14:52
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.
00:15:05
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.
00:15:18
Speaker
So I think those are two very specific
00:15:21
Speaker
trends, identifiable trends that we see in the market at this point in time.
00:15:25
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.
00:15:40
Speaker
So
00:15:40
Speaker
Liza mentioned China.
00:15:42
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.
00:15:52
Speaker
So countries where there typically wasn't quite as much interest in Sharia compliant products as demographics shift and you have
00:16:00
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
Challenges and Differences with Sustainability
00:16:13
Speaker
ESG screened.
00:16:13
Speaker
So we're seeing lots of different types of patents take hold, some expected products,
00:16:20
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.
00:16:37
Speaker
This is very interesting.
00:16:38
Speaker
Thank you.
00:16:39
Speaker
It seems like there are a lot of buckets for growth.
00:16:41
Speaker
You mentioned China, Japan, India, the UK pension space, retail and the demographics.
00:16:49
Speaker
Really interesting.
00:16:50
Speaker
In terms of, you know, now we looked at the potential, which seems to be quite large.
00:16:55
Speaker
What do you see as headwinds or challenges?
00:16:58
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.
00:17:05
Speaker
I think there are challenges.
00:17:07
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.
00:17:21
Speaker
So the challenge we faced really is that there are different standards.
00:17:26
Speaker
across countries and across regions.
00:17:29
Speaker
You have different Sharia boards which advise different client types in different geographies.
00:17:36
Speaker
And often some may be stricter, some may be less strict depending on their interpretation of Sharia law as applied to finance, etc.
00:17:46
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.
00:17:59
Speaker
And from our standpoint, IUFI standards are really important in that regard because that is a common language.
00:18:06
Speaker
across investor types, across Sharia scholars, across jurisdictions.
00:18:12
Speaker
So benchmarking to IUFI standards was important for us in looking to exceed where we can.
00:18:20
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.
00:18:30
Speaker
Thank you, Safiyan.
00:18:31
Speaker
And that's probably a common topic with sustainability as well in terms of common standards and taxonomies.
00:18:36
Speaker
Lisa, do you want to add to this from your side?
00:18:39
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.
00:18:53
Speaker
And even trying to provide awareness in terms of what would the
00:18:58
Speaker
nuanced differences between the two look like.
00:19:02
Speaker
Not every element within the UN SDGs would be accepted in Islamic finance.
00:19:09
Speaker
There are some specifics that's quite different.
00:19:12
Speaker
For example, Islamic finance tries to look at full elimination of poverty rather than setting a certain threshold.
00:19:20
Speaker
And so having this type of awareness and understanding of what Islamic finance is,
00:19:25
Speaker
tries to accomplish for a society or an ideal Islamic society benefits.
00:19:32
Speaker
And this is not yet quite evident.
00:19:34
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,
00:19:45
Speaker
and understanding sustainability and impact.
00:19:48
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.
00:19:56
Speaker
But where Malaysia is at, we see a very clear differentiation where one understands Islamic finance.
00:20:04
Speaker
They may not have a full appreciation of a whole sustainability requirements as well as impact investing as yet.
00:20:12
Speaker
Thank you both.
00:20:13
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
Innovations in Islamic Finance
00:20:25
Speaker
space.
00:20:25
Speaker
Maybe, Disa, if you want to start.
00:20:27
Speaker
Yeah, I think what is very exciting is the idea of participation finance and resharing type of instruments.
00:20:36
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.
00:20:49
Speaker
And so moving forward,
00:20:51
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.
00:21:05
Speaker
That's one.
00:21:06
Speaker
Second is Islamic social finance.
00:21:09
Speaker
In this area, the instruments within the Islamic finance realm
00:21:13
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.
00:21:29
Speaker
This is not yet on shelf and I think echoing what Sufjan mentioned,
00:21:34
Speaker
Having that coupled with robo-advisors and coupling that with maybe retail space for the investor would be quite exciting to see.
00:21:43
Speaker
I think there's a lot of interesting potential future developments within the share-compliant and sustainable investment space, thinking about
00:21:52
Speaker
where the two come together.
00:21:54
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.
00:22:09
Speaker
Having said that, there's a lot of work to be done in that respect.
00:22:13
Speaker
There's still comparatively speaking, a very small number of Shara compliant investment products which have ESG screening or sustainable
00:22:21
Speaker
investment screens built into them that actually exist within the markets.
00:22:26
Speaker
So I think there's still some work to be done there.
Growth of Sukuk Market
00:22:28
Speaker
But looking across asset classes, I think we've seen the Sukuk market growing very rapidly over the past few years.
00:22:34
Speaker
It's starting to mirror broader conventional fixed income markets in terms of
00:22:39
Speaker
The development and growth of the green Sukuk market and sustainable Sukuk bond market, sustainably linked Sukuk bonds, transition Sukuk bonds, etc.
00:22:49
Speaker
have started to appear on the scenes.
00:22:51
Speaker
We're seeing it mirror conventional fixed income markets in that respect in terms of growth and development.
00:22:56
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.
00:23:15
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.
00:23:24
Speaker
And I'll just finish by saying as an asset manager, it would be nice to think about stewardship and engagement from companies.
00:23:31
Speaker
a Sharia compliance perspective as well.
00:23:34
Speaker
So many asset managers have very well developed stewardship and engagement programs which they use as an interface.
00:23:40
Speaker
They use them as a means of engaging companies with respect to select topics of importance.
00:23:47
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
00:23:57
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.
00:24:16
Speaker
Thank you
Conclusion: Complementarity and Innovation
00:24:17
Speaker
very much.
00:24:17
Speaker
We come to an end of this podcast.
00:24:20
Speaker
A lot of great insights I have learned a lot.
00:24:23
Speaker
There is an evident intersection and more importantly, complementarity between Islamic finance and sustainability.
00:24:30
Speaker
Already a significant market and demand, which is growing across new markets and client segments.
00:24:35
Speaker
You mentioned several exciting areas of innovation, such as in the private-public partnership, in the equity indexing space, sustainability in Sukuks.
00:24:45
Speaker
the alternative space.
00:24:46
Speaker
So we'll be watching out for these.
00:24:48
Speaker
Thanks for listening.
00:24:50
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:24:53
Speaker
We hope you enjoyed the discussion.
00:24:55
Speaker
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