In the last two decades Environmental, Social and Governance (ESG) and Shari’a-compliant investing have been the two fastest-growing areas of finance and showed resilience during the global fiscal turbulence especially when compared to the near-collapse of other investment categories. The growth of ESG and Shari’a-compliant investing is mostly demand driven. Both these approaches are generating avid interest across global financial markets, driven by institutions that are increasingly devoting more resources to them. They both aim to create real value to the economy by providing real jobs that complement real growth of businesses, leading to sustainable economic development.
ESG has become an established investment approach for global investors, stemming from a growing realisation among investors that the incorporation of such criteria into the investment process to reduce risk, drive performance, and identify investment opportunities can have a positive influence on the financial performance of companies particularly over the long-term. The purpose of Shari’a-compliant investing is to improve living conditions and well-being, establish social equity, and prevent injustice in trade relations. In its application, waste and excessive consumption are deemed unacceptable. These elements closely resemble those of SRI: keen focus on sustainable development, creation of wealth for society, and improvement in the quality of life.
Both ESG and Shari’a-compliant investment approaches demand that the businesses chosen for investment are socially useful, non-detrimental to humanity, and comply with humanist ethics. Both practice ethical exclusions as part of their investment rules, and their common list of forbidden sectors include alcohol, gambling, tobacco and weapons – businesses that are condemned or deemed harmful for man and society. SEDCO Capital states that ESG and Shari’a-compliant investing share many similar features and commonalities. In addition, these two very important investment methodologies could build on each other’s success when integrated into a single umbrella, given how they both have transparent structures.
The confluence of research, performance and demand convinced SEDCO Capital to be not only Shari’a-complaint but to also become recognized as ESG compliant by becoming a signatory to the United Nations Principles of Responsible Investing (UNPRI) in July 2014. This was a historical moment as SEDCO Capital is the first Shari’a-compliant and first Saudi Arabian signatory to the UNPRI.
To become a responsible investor, SEDCO Capital initially focused on three asset classes: public equity, private equity and real estate. Since its inception, SEDCO Capital has launched four ESG/Shari’a-compliant funds with AUM of more than US$410 million. In the private equity asset class, it has become Shari’a advisor to BTG Pactual Brazil Timberland Fund I, LP, with the fund emphasizing the sustainable development of commercially managed timberland in Brazil. In the real estate asset class, it has invested in India’s first Sustainable Green Building Research Park in Whitefield/Bangalore. Moving forward, it aspires to deploy a fully Shari’a/ESG investment platform across all asset classes and investment strategies.
SEDCO Capital’s goal in getting involved in responsible investment is to reach and realize sustainability – sustainability in economies, societies, corporations and of course, for individuals.
It is with this mindset that it approaches its investments. Investing in a timber fund such as BTG
Pactual Brazil Timberland Fund exemplifies this approach. Investing in this timber fund will have an effect on sustainability in three ways:
- Indigenous communities will not be displaced;
- That forests will be replanted in tandem with harvesting; and
- That the biodiversity of rivers will not be affected due to deforestation.
In this way sustainably will be assured. The same applies to the other SEDCO Capital funds that are ESG and Shari’a-compliant. Investing in this way encourages best practices in governance and responsible investing which it hopes sets an example for its peers in the Shari’a and non-Shari’a world.
