Incorporating Socially Responsible Principles in Islamic Investments – Part 2

“In this second part, Rizwan Malik compares the UN Global Compact with Islamic principles and finds many similarities. These similarities show that Islamic screening methodologies should consider investments in companies that are committed to social responsibility, and move away from mere prohibitions.”

Introduction

It is proposed that the UN Global Compact be followed by companies in order for them to qualify as SRI compliant while the underlying business remains in compliance with broader Shari’a principles. The UN Global Compact is a strategic policy initiative introduced in July 2000 by UN Secretary-General Kofi Annan for businesses that are committed to aligning their operations and strategies on a voluntary basis with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. It follows two main objectives: bring a set of universal principles of responsible business into mainstream activities of companies and to act as a catalyst for initiatives in support of wider UN goals in the area of social and environmental development. It is not a regulatory initiative and does not offer any form of measurement on participants. It relies heavily on public accountability, transparency and self-interest of those involved in the initiative of pursuing such objectives.

The UN Global Compact principles are derived from The Universal Declaration of Human Rights, The International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work, The Rio Declaration on Environment and Development and The UN Convention against Corruption. Table 1 lists the principles under UN Global Compact.

An Examination of the UN Global Compact Principles with Islamic Principles

• Human Rights

The concept of human rights draws its underlying principles from the 1948 Universal Declaration of Human Rights (UDHR) and covers a wide range of concepts relating to dignity, freedom and protection of the individual. In Islam the rights given by the kings or parliaments can be revoked while the rights given by Allah (SBWT) must be accepted and enforced. The Prophet Muhammad (PBUH) in his last sermon stated that “ An Arab has no superiority over a non-Arab nor a non-Arab has any superiority over an Arab; also a white man has no superiority over black man nor a black man has any superiority over white man except by piety and good action”. This means that the right to equal treatment is protected under Islam regardless of colour, race, nationality and religion.

Women should be treated equally, as practised at the time of Prophet (PBUH) where women were free to enter the councils of governance, speak freely to the accepted and enforced. The Prophet Muhammad (PBUH) in his last sermon stated that “ An Arab has no superiority over a non-Arab nor a non-Arab has any superiority over an Arab; also a white man has no superiority over black man nor a black man has any superiority over white man except by piety and good action”. This means that the right to equal treatment is protected under Islam regardless of colour, race, nationality and religion. Women should be treated equally, as practised at the time of Prophet (PBUH) where women were free to enter the councils of governance, speak freely to the Prophet (PBUH), and fight. Similarly at the time of Prophet (PBUH) women were trialled equally, when they were involved in wrongdoings. Allah (SBWT) mentions “Their Lord responded to them: I never fail to reward any worker among you for any work you do, be you male or female, you are equal to one another” (3:195). Islam further recognises the right to individual liberty and forbids enslaving free men. Prophet (PBUH) disliked people who enslaved free men and asked his companions to free as many slaves as possible. He (PBUH) himself freed 63 slaves and a number of companions followed this by freeing many more. Another important issue under human rights is justice; the right to justice is considered so important in Islam that Muslims are asked to choose justice over protecting their own families. Allah (SBWT) mentions “Oh you who believe! Stand out firmly for justice, as witnesses to Allāh, even though it be against yourselves, or your parents, or your kin, be he rich or poor, Allāh is a better protector to both (than you). So follow not your lusts, lest you may avoid justice, and if you distort your witnesses or refuse to give it, verily, Allāh is ever well acquainted with what you do.”(4: 135.). the Prophet Muhammad (PBUH) is reported to have said “If one of you sees something wrong, let him change it with his hand; if he cannot, then with his tongue; if he cannot, then with his heart and this is the weakest faith”. Although in Muslim societies leaders are well protected, Muslims are encouraged to disobey a superior if they are forced to go against Shari’a. Islam fully allows personal freedom and does not support being involved in each other’s personal matters (hence it protects privacy). It says in the Holy Quran “O you who have believed, avoid much [negative] assumption. Indeed, some assumption is sin. And do not spy or backbite each other. Would one of you like to eat the flesh of his brother when dead? You would detest it. And fear Allah, indeed, Allah is Accepting of Repentance and Merciful” (49:12). Further commitment to justice and brotherhood demands that the Muslim society takes care of basic needs. Islam believes in the right to decent living standards and promotes this through zakat (obligatory charity), which makes it clear that Muslims are expected to provide a safety net to others. Islam recognises the power of the ruling state should depend on consultation, consent of the people, and granting fundamental human rights.

• Labour Rights

The UN Global Compact for labour rights is based on freedom of association, elimination of forced labour, abolition of child labour and discrimination in respect of environment and occupation.

These principles are taken from the International Labour Organisation (ILO) in its Declaration on Fundamental Principles and Rights at Work issued in 1998, which set the minimum standard for organisations to follow regardless of the level of economic development.

Islamic teachings with regards to labour rights are very clear. It is recommended that workers should be treated fairly and justly. There should not be any discriminatory workplaces practices.  Islam allows hierarchy in management with the condition that those at the lower end are not oppressed by the ones above them. It is clearly mentioned in the Holy Quran: “He has raised you in ranks, some above others that He may try you in the gifts that He has given you” (6:165). In another place it is mentioned “It is We (God) who portion their livelihood in the life of this world: and We raise some of them in ranks so that some may command work of others. But the Mercy of your Lord is better than the (wealth) which they amass” (43:32). All forms of forced or compulsory labour are prohibited and that wages should be mutually agreed upon. It is a condition of hiring workers that it is clearly specified what is required from them in terms of work and they are informed of the wage. It is reported that the Holy Prophet had forbidden to employ any labourer or worker without first fixing his wages.

The worker must be paid immediately. The Prophet Muhammad (PBUH) commanded that the labourer should be paid his wages before the sweat on his arms had dried, i.e. immediate payment. Further holding back of wages is also disallowed, “And withhold not things justly due to men, nor do evil in the land, working mischief” (Quran 26:183). It is the duty of the employers to place a reasonable workload on the employees, good working conditions and a safe environment.

• Environment

The UN Global Compact environment standards are based on a precautionary approach to environment challenges and the promotion of environmental responsibility. Environmental challenges include damage to the ecosystem, land degradation,  impact of chemical use, waste production, etc

Islam recognises the importance of protecting the environment as man is steward (khalifah or guardian) of natural resources, as vicegerent of Allah on earth and he is responsible for looking after it.

While the resources in the world are for mankind, he is asked to be responsible of not destroying it so that successive generations can benefit in a similar manner to those in the present.

The 1994 UN Human Development Report states that the lifestyle of rich nations should change; the north has 20% of world’s population while it consumes 80% of the income and 70% of the energy, 75% of the metal and 85% of the wood. This means there has been excess consumption in some parts of the world. The Holy Quran discourages this: “Eat and drink: But waste not by excess, for Allah loveth not the wasters” (7:31).

The Islamic economist, Umar Chapra, argues that while the Islamic worldview encourages the market system, the price mechanism should be complemented with a device that minimizes the claim on natural resources. Resources should not be allowed to be diverted to the production of luxury items until necessities are provided.

The Prophet (PBUH) practiced this as he created special zones where natural resources were to be left untouched. In addition, Islam encourages moderation and discourages waste.

• Corruption

The UN Global Compact states that businesses should work against all forms of corruption. In Islam, corruption is condemned as corruption is an indicator of unequal treatment and the lack of justice. In this context the Prophet (PBUH) cursed the one who accepts a bribe, the one who offers a bribe and the one who arranges it. However there is a difference between bribe and gifts, similar to the difference between interest and profit in Islamic banking and finance. Gifts are encouraged as it increases the brotherhood while bribes lead to corruption and injustice. With regards to transparency, Islam requires clear written contracts for all business transactions and it is clearly prohibited to sell a faulty item without making it clear to the buyer. Hence Muslims are expected to be fair in their dealings with one another.

Incorporating SRI Principles

It is clear from the above that Islamic principles are fully in compliance with the UN Global Compact. However practices followed in many Islamic countries might not be in conformity with Shari’a as some of the countries do not practice equal treatment and others fall short of anti-corruption measures provided by Transparency International (Muslim countries appear to be high on the corruption scale).

The important question is how Islamic screens can be implemented by asset managers. It is proposed that education, awareness and shareholder engagement can promote these positive values and gradually investors and consumers would abide by it. However, this can only be a gradual process as the Holy Quran says “There is no compulsion in the religion” (2:256). Change can come in by asking or campaigning for it or setting examples.

As at present Islamic finance industry lacks a body promoting Islamic SRI values. Here it is proposed that Islamic asset managers should follow the UN Global Compact, so they have a set of principles and clear guidelines to follow for SRI screening.

These voluntary principles should be introduced by Shari’a screening methodologies as separate screen known as “social screen” or “SRI screen”. For a stock to be Shari’a compliant it has to pass through both the present Shari’a screening methodologies comprised of business and finance screening and the newly introduced SRI screen. The newly introduced SRI screen should be made of the four areas of the UN Global Compact. The companies will be free to include more CSR/SRI initiatives under its strategy like contributing to the local community, charity and donations as part of its overall CSR activity. In addition to the negative screening (where companies that are against the SRI principles and Shari’a are avoided), asset managers can use a norm-based screening strategy to include these SRI-related principles. As defined by EUROSIF, norm-based screening is screening of investments according to their compliance with international standards and norms. In this case it will be the UN Global Compact. Shareholder engagement is another strategy where fund managers engage with companies on ESG matters and influence their SRI practices.

It is proposed that Islamic fund managers should borrow this engagement strategy from the SRI industry and be involved in influencing not only the SRI practices but also Shari’a compliant activities of the companies. Shareholder’s advocacy or engagement is different from screening where instead of screening out the company, shareholders exercise their ownership rights to engage with the corporation and bring about positive change.

Conclusion

Islamic principles mirror UN Global Compact and promote them actively. It is proposed through that Shari’a screening methodologies should include a second screen, known as a “Social” screen, in addition to the existing Shari’a screens. This will penalize Shari’a-compliant companies that are not employing socially responsible practices i.e. human rights violations or involved in other unethical behaviour, and reward those companies that play an active role to benefit the overall society.