ESG - Opportunities for broader relevance

Islamic Finance and Maqasid Al-Shari’ah:

Environmental, Social and Governance (ESG) Issues

Sayd Farook

Global Head Islamic Capital Markets

Thomson Reuters

Framing the discussion

• Engine for socio-

economic growth

• Role in addressing

unprecedented level of

global challenges

• Financial crisis impact:

Deep social crises.

• Impact on poverty

• 46 million more

people to live on <

$1.25/day,

• 53 million more on

< $2/day. (World

Bank Group)

Responsibility?

Least socially

responsible amongst

nine major global

industries.*

FINANCIAL

INSTITUTIONS… Role & Impact Performance

* 2009 BSR (Business for Social Responsibility)/ GlobeScan State of Sustainable Business Poll

Gap

Foundational Precepts:

Contemporary Business

“There is only one valid definition of business purpose: to create a customer…It

is the customer who determines what a business is...The customer is the

foundation of a business and keeps it in existence. He alone gives

employment.“

“there is one and only one social responsibility of

business—to use its resources and engage in activities

designed to increase its profits so long as it stays within

the rules of the game, which is to say, engages in open

and free competition without deception or fraud.”

“The great object of the political economy of every country is to

increase the riches and power of that country.”

Serving customers Maximizing shareholder value Enlightened self-interest

Foundational drivers & social responsibility?

Foundational Precepts:

Contemporary Business

Serving customers Maximizing shareholder value Enlightened self-interest

Foundational Precepts of Islam

(God consciousness)

Human beings as vicegerents on Earth

‘Taqwa-centricity’

Accountability

“So fear Allah. For it is God that teaches you. And Allah is well.” 2.228

“Allah takes careful account of everything” –Ali, A.Y. (1989) The Holy Qur’an: Text, Translation and

Commentary, Surat Al Nisa (Women) verse 86.

“Then anyone who has done an atom’s weight

of good shall see it and anyone who has done

an atom’s weight of evil, shall see it.” –Ibid, Surat Al Zalzala (The Earthquake) verse 7-8)

Foundational Precepts of Islam

Primary Responsibilities: Objective of Islamic Laws

Educate an Individual

in ‘Taqwa

Establish Justice

Education “seeks to make each individual a trustworthy agent just so as to strive to realize these values which benefit himself and the community” Kamali, M.H. (1989A) Sources, Nature and Objectives of Shari’ah The Islamic Quarterly, pp 215-235 at p 216.

“The Believers, men and women…enjoin what is just (accepted), and forbid what is unjust (rejected)…” Ali, Surat Tawba (The Repentance), verse 71.

Foundational Precepts of Islam

Educate an Individual

in ‘Taqwa

Establish Justice

(God consciousness)

Human beings as vicegerents on Earth

Primary Responsibilities: Objective of Islamic Laws

‘Taqwa-centricity’

Accountability

Ab

ility-B

ase

d F

ocu

s

Ind

ivid

ua

l vs. In

stitu

tio

na

l R

esp

on

sib

ility

Social Responsibility Mandate for IFIs

IFI’s Special Obligation

– Community obligation to avoid usury

– Financial intermediary with special allocation powers

– Highly visible institutions that are role models

Individual

Responsibility

IFI

Responsibility

Representative of individuals –Investors –Clients –Employees –Other stakeholders

..

‘Taqwa-centricity’ Accountability Educate Establish Justice

Overarching Accountability to Allah (SWT)

Investors

Shareholders

Investment Account

Holders

Contractual parties

Clients

(Current A/C holders, Lessees,

Partners, Vendors and Buyers)

Employees and

contractors

Other contractual

parties

Society

(Poor, youth, elders, marginalised,

discriminated against, environment)

Accountability framework of an IFI

AAOIFI Governance Standard No 7 A framework for IFI Social Responsibility?

IFI’s Operational Manifestation

Disclo

sure &

Go

vernan

ce as a Mean

s of A

ccou

ntab

ility

Mandatory

• Screening of investments

• Earnings prohibited by Shari’a

• Responsible dealings with clients

• Employees

• Zakah

Operations (employees, vendors, etc)

Financial

mobilization Religious (Form & Substance in all

operations)

Recommended

• Qard Hasan

• Environmental considerations

• Screening clients and contractors (add. criteria)

• Industry-wise investment quotas

• Social impact based investment quotas

• Par excellence customer service

• Micro/ small sized biz social savings and investments

• Employee welfare (extension)

• Charitable activities

Social Responsibilities

IFI Practices

2009 Social Responsibility Survey of Islamic Financial Institutions:

Yet to move from the negative screening framework which is primarily based

on avoidance (first generation) to the positive action framework which is based

on both avoidance and engagement in socially responsible activities (second

generation.)

Conflicting Ideologues within Islamic

Finance

• Some say - IF responsibility is only structural

compliance – literalists have taken over the

conversation

• Possible reasons:

– historical and political influence

– the old guard of professionals

– differing Shari’a opinions

• But, there are other Point of views

Current Global Practices

• Sophistication of the existing CSR processes, benchmarking tools, and operations

• Wal-Mart - Sustainable Product Index: measure sustainability

of products for first time. Survey 100,000+ suppliers around four areas: energy and climate, material efficiency, natural resources, and people and community. Ability-based initiative.

• Socially Responsible Investing: In the U.S., more than 3 trillion in

total assets under management based on three core socially responsible investing strategies—screening, shareholder advocacy, and community investing

• Social Entrepreneurship: Kiva and Grameen. more than 30,000 such

social enterprises, together representing some $40 billion in revenue

•Social Investment Forum’s 2007 Report on Socially Responsible Investing Trends •B Lab, a nonprofit organization that certifies these purpose-driven companies

0

10,000

20,000

30,000

40,000

2007 2008 2009 2010 2011 2012 2013

Growth In Ethical Awareness

Responsible finance has witnessed an exponential growth trend that has accelerated since the financial crisis and is poised to continue as people demand finance in line with their values

UN Principles of Responsible

Investing

Organizing around basic principles

needed to make ESG a part of the

investment process and expand

disclosure of progress towards the

sustainability goals with stakeholders

The value of simplicity

Sustainability-Screened Assets

OECD countries account for over 95%

of the reported sustainability-focused

assets & continue to experience rapid

growth while accounting for a large

share of global wealth

OECD leads today’s growth

Islamic Finance Assets

The rise in prominence of Islamic

finance overwhelmingly from emerging

markets show the potential for broader

ethical finance & investment growth in

these newer markets.

EM the key to future growth

Source: UNPRI, USSIF, EUROSIF, Thomson Reuters, UKIFS, RFI estimates

+170%

+240%

+158%

US$ bn

5

78%

23%

7%

Global wealth Estimated in 2013 at

US$148tn,

78% of which not managed

using well-defined ethical

criteria

ESG screened More than $10tn of

assets (7% of global

total) subject to ESG

screening, dominated by

assets in OECD

countries

1.1%

Represents 1.1% of global

assets and a major source of

future growth for responsible

finance

Islamic Finance

Incorporating process

and disclosure on ESG

criteria for 23% of

global assets

UNPRI

The growth of socially responsible finance to date has been

led by investors in OECD countries. The growth of Islamic

finance is driven by its expansive presence across emerging

markets which will contribute heavily to future growth of

responsible finance more broadly.

Expanding the Universe

Responsible Finance Universe

Multiple approaches to Responsible Finance

THE OPPORTUNITY There is a growing recognition that the link between risk and reward was severed in the years leading up to

the financial crisis and needed to be rebuilt with ethics and morals at its heart. The work being done in

Islamic finance and other areas of ‘responsible finance’ are far more in harmony than they are in

disagreement. Bridging the gap in understanding and communication between conventional ESG asset

managers and Islamic asset owners and financial institutions can provide benefits to both sectors.

1

DIVERSE STRENGTHS Unlike most of responsible finance which primarily operates within investment management, Islamic finance

(a form of financial intermediation in which funds are raised and applied using asset-based methods or

partnerships in accordance with Islamic law) takes a more expansive view of its place within the financial

sector. Both have unique strengths and both can benefit from the other’s strengths.

2 NO COMMON LANGUAGE Despite growth across the different areas within responsible finance, there does not necessarily exist a

common language for how to communicate the common values or to institute common standards, develop

policies for investments and cooperate in finding investment opportunities, which could give the responsible

finance industry more leverage to influence policy and decision-making.

3

NEED FOR POLICY PERSPECTIVE TO SHAPE GLOBAL AGENDA The responsible finance sectors collectively have insights that could be meaningful and beneficial to the

overall development of the financial services industry and can contribute to inclusive and holistic

development of the financial sector by contributing towards shaping Basel III to IOSCO Principles to IFRS

Standards

4

The financial services industry, which has a disproportionate influence on the development of

economies, needs a unified voice to represent the perspectives of responsible finance to influence the

broader financial system for the betterment of mankind.

CONNECT

CONVERGE

CHAMPION ENGAGE

EXPAND

1

2

3 4

5

Way Forward

1

3

2

4

5

CONNECT the various forms of socially responsible

finance and Islamic finance through dialogue, sharing

best practices and common action plans and resolutions

CONVERGE Consensus-building is based on valuing

the diversity of approaches to achieving responsibly-

driven finance and investment strategies and committing

to moving from dialogue to action. This will entail

developing a minimum set of measurable standards and

facilitating cooperation between those involved with SRI

bonds, Sukūk and other capital market innovations.

CHAMPION the socially responsible finance and

Islamic finance industries together with a unified voice

and become the leading and most authoritative voice for

proposing the inclusion of Islamic finance and

responsible investment into global regulatory issues.

ENGAGE asset owners and their institutional

representatives together with individuals who can provide

additional resources to appropriately assess all types of

responsible financial instruments and institutions

(including Islamic instruments and institutions) as

legitimate and viable options for their financial activities.

EXPAND the RFI’s capability and reach through the

sharing of skills and provision of training services within

individual responsible finance sectors so that people

working in each sector can understand the other

responsible finance sectors and identify opportunities to

expand its footprint across the globe.

RFI’s strategic objectives are designed to connect responsible and Islamic finance and expand their

reach & impact globally towards integration and vocal participation within the global economy

Vision To integrate principles and solutions of the responsible

financial sectors, including the ethical and socially

responsible principles of Islamic finance, into the global

economic system to support broad based economic

development

Mission To connect the socially responsible and Islamic financial

sectors, to promote their convergence towards common

standards and representation and to enable their

activities to serve as a catalyst for greater economic

development for the benefit of all.

Strategic Objectives

•To facilitate connectivity and understanding between Islamic finance and other socially responsible finance sectors.

•To facilitate the convergence of (non-Islamic) socially responsible finance and Islamic finance supported by data and with

specific policy recommendations for implementation of common standards and facilitating connectivity between key

stakeholders

•To be a powerful voice representing the perspectives and solutions of its members within the responsible financial

services industry to senior government bodies, policy makers, and institutional investors. RFI acts as an advocate for

regulatory and financial policies that will remove barriers that inhibit the development of responsible finance.

•To enhance engagement with institutional investors such as pension funds and sovereign wealth funds in order for them

to appropriately assess all types of responsible financial instruments and institutions (including Islamic instruments and

institutions) as a legitimate investable universe

•To expand adoption of the various forms of responsible finance by enhancing the human capital capacity that

understands the different approaches to responsible finance and is committed to expanding its footprint across the globe.

Responsible Finance Institute - rf-institute.org

9

Launch of the Responsible Finance Institute

The Responsible Finance Institute will be

launched on the 31st of August 2015,

Alongside the inaugural Global Ethical

Finance Forum (GEFF), Edinburgh, Scotland,

UK on the 1-2 September 2015,

Hosted by the Government of Scotland