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Can shari’ah investing and ESG investing go hand in hand?

There has been much debate around the concept of Shari’ah investing and how this differs from Environmental, Social and Governance (ESG) investing as an investment approach. Prevailing myths are that Shari’ah funds are only for investors who follow the Islamic faith, that the investment principles are based on Islamic Law and that ESG is not incorporated into the investment decision making. However, it continues to attract a cross-section of investors looking for exposure to more ethical investments and the approach can certainly incorporate ESG investing as evidenced by our own Shari’ah fund offerings.

So, what exactly is Shari’ah investing?

Shar’iah-compliant funds are investment funds governed by the requirements of Shari’ah law and the principles of Islam and are considered to be a type of socially responsible investment. Shari’ah investing principles have historically been interpreted by scholars to determine what the minimum standards are that an investment must satisfy to meet the requirements of Islamic Law.

Can it integrate ESG?

The short answer is yes. Our investment approach incorporates the higher purposes and objectives of Islamic Law by actively incorporating ESG principles and the UN Sustainable Development Goals (UNSDGs), sharing common values with the higher objectives of Islamic Law – among others, the preservation and protection of life, resources and the environment. We go beyond the literal meaning of the law, raising the bar to incorporate the purposes and objectives behind Shari’ah, integrating both Shari’ah standards and ESG principles into our investment process. The wealth created from this investment approach is also shared with disadvantaged communities in support of UNSDGs.

What solution does Old Mutual Investment Group offer?

We offer Shari’ah Funds with a market value of about US$300 million in global and South African assets, where we invest according to Shari’ah investing principles whilst actively integrating ESG metrics. We seek to grow our clients’ wealth whilst simultaneously impacting UNSDGs through the investment returns the Funds generate. We launched the first Shari’ah fund in South Africa in 1992, and the latest Old Mutual Albaraka Income Fund, in March 2020. As a Sukuk fund which incorporates ESG, it’s a first of its kind in South Africa.

We leverage the Old Mutual proprietary ESG signal in our investment approach. For a company to be eligible for our selection it must be Shari’ah-compliant and analysed through our proprietary ESG Risk Screening Model. We also developed a one-year ESG score to capture changes in the company’s ESG profile, investor sentiment and price behaviour.

How does this approach work in practice?

To best understand this investment approach at work, a company example works well as an illustration. Our Shari’ah and ESG integrated approach is evident in Cisco Systems – a Shari’ah-compliant global technology company that designs and sells networking, data security, remote working, applications, 5G and cloud computing technologies. We applied Shari’ah principles, our stock selection model as well as our proprietary ESG Model to identify Cisco Systems as a top 10 holding in our Global Islamic portfolio. Cisco rates above average in our proprietary ESG Risk Screening Model with its profile score improving relative to its peers. Whilst it is exposed to secular growth drivers, this high-quality company has a resilient balance sheet with a default probability of 0.18%, net cash of US$12.4 billion, high profitability with a return on capital employed (ROCE) of 37%, and an attractive valuation with a forecasted dollar free cash flow yield of 8.4%. 

Cisco Systems Inc’s ESG rating trend has upgraded from A to AA rated, and it is among the leaders relative to its peers in seeking opportunities in clean technology, with its rating in clean tech being 57% greater than that of its industry peers. Cisco has a strategic focus on clean technology and aims to increase investment in clean tech while actively participating in increasing its revenue lines in the green economy. This improved ESG data is reflected in our proprietary ESG Profile and Momentum score, which places Cisco on the 74th percentile in the Global Shari’ah Fund’s benchmark.

We anticipate continued local growth for both Shari’ah and ESG funds and since our Shari’ah Funds blend ESG into our investment process, this allows us to offer a more all-encompassing proposition to support this growth. BM


To answer more of your investment related questions, contact us at [email protected] or visit http://ww2.oldmutual.co.za/old-mutual-investment-group/insights/  for more news and insights.


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