Why Shari’ah investing is well suited for a post-pandemic world

The effect of the Covid-19 pandemic and the repercussions of the economic fallout continue to reverberate around the world, despite the rolling out of efficient vaccine programs in multiple countries and the slowing of infection levels.

Advocates of sustainable or environmental, social & governance (ESG) investing have been warning for years about the risks of ignoring the inter-connectivity of financial systems with society and the environment, as well as the vulnerability to biophysical shocks this relationship creates for markets. Yet it took a ruthless virus causing the world to tilt on its axis before the majority of market participants accepted the severity of the risk.

Much has been reported on the swell of interest in ESG investing as the pandemic brought responsible investing into the mainstream. The challenges facing the global economy off the back of Covid-19’s disruption have highlighted the need for resilient sustainably managed companies and the financial benefits of integrating ESG factors.

However, less has been made of the role of Shari’ah investing during the upheaval of the past year. With a high degree of overlap between Shari’ah and sustainable investing, the Islamic view underpinning Shari’ah investing advocates the sustainable development and protection of life and the environment. Key objectives of the Shari’ah are to promote the welfare of humanity and prevent harm by preserving religion, life, intellect, the interests of future generations and wealth. But Shari’ah investing widens the focus beyond financial returns to include the overall wellbeing and welfare of individuals and society at large as well as environmental preservation.

Studies have highlighted that Shari’ah-compliant funds have a lighter ESG footprint than conventional funds, with an analysis of 6,554 companies in Refinitiv’s database showing a 5.9% higher overall ESG score for Shari’ah-compliant companies vs non-shari’ah compliant. ESG metrics are incorporated into our definition of business quality as we firmly believe ESG to be a proxy measure for management quality. Companies with superior ESG metrics are less sensitive to market shifts and are better equipped to manage business-specific risk.

The long-run transition to a low-carbon, socially inclusive and resource-efficient economic growth path, otherwise known as green growth, is one of the most significant global economic shifts in the past two decades. At a fundamental level, companies that respond to this “disruption” will reap the benefits of stronger growth prospects, enhanced operating efficiencies, stronger social license to operate, better staff retention, lower cost of capital and, ultimately, a stronger and more sustainable competitive advantage.

However, as the world looks to rebuild after the pandemic’s devastation, Shari’ah investing brings additional elements that can support the economic recovery process. Through its foundational principles of risk sharing and the prohibition of speculative investments, coupled with its cautious use of debt in an environment of ever-rising debt burdens, and investment in real underlying economic activities, Shari’ah investing can present an additional avenue for policymakers and investors to explore to remediate the damage caused by the pandemic. In addition, by means of the global pool of income that Islamic investors are not allowed to partake in for religious reasons, Shari’ah investing strengthens social safety nets through high-impact grass-roots investments that are aligned with UN sustainable development goals.

This article was originally published by Business Live, a shortened version is being republished here.