Edinburgh, Scotland: The location for the Global Ethical Finance Forum (GEFF), this week. Image courtesy of Shutterstock.
"Haste Ye Back": IF and ESG in EDI
September 04, 2015 | Updated at September 27, 2017
Sporting a no-nonsense air of authority and a bristling moustache, the master of ceremonies looks like the kind of man you’d want on your side in a fight. His life journey is etched on his face and his stance and assured bearing clearly mark him out as ex-military. Under the magnificent timbers of the Great Hall he steps onto the dais, draws himself up to his full height, bangs the lectern and intones in a booming Scottish brogue, "HUMZA YUNUS, MSP". The MC’s presence is strangely compelling and appropriate for this setting, so I guess we can forgive that the surname is ever so slightly wrong. The clinking glasses of Shari’a compliant elderflower are silenced and the conference delegates turn to listen.
Edinburgh Castle is the venue for the close of the Global Ethical Finance Forum 2015. Canapés under an ancient hammerbeam roof with Mr Yousaf, Minister for Europe and International Development, is not an unpleasant way to end a very productive two days. Did I just say productive? Well, just to keep some perspective here, this is a selection of quotes I took from the last Islamic finance conference I attended and my suggested translations:
We should keep an open mind. We should have discussions. Translation: I don’t really know much about this industry but they asked me to speak so I thought I would come across as positive and helpful. It’s good to talk – I like the sound of my voice and it means I can avoid doing real work.
Let’s have standardisation. We should speak to regulators. Translation: I have in fact absolutely no idea what it means to execute an Islamic finance transaction but I have this vague hunch that standardisation will solve everything just like it does in the conventional industry. I won’t have to understand the underlying deal – I won’t need to look at real assets and real trade, I’ll just execute some docs the lawyers hand me. I’m also under the impression that regulators will solve my problems.
We should do market studies. Translation: Because that really worked for Steve Jobs, right? Also, I’ve never personally bought an Islamic financial product so I have no clue what my customer wants.
We should learn from other market participants. Translation: I like to follow the herd.
I’m not an expert on Shari’a but.... My understanding of Shari’a is..... Translation: I am an idiot. But if you have a brain tumour, I will be happy to advise and operate on you.
All of these are statements made by conference speakers at a previous event and recorded verbatim. In contrast and surprisingly, GEFF 2015 has been one of the most useful conferences I’ve attended and I did not expect to be saying that. It’s certainly the first time I’ve seen the Islamic finance crowd rub shoulders with the (much bigger) world of ESG (Environmental, Social and Governance finance). And it’s been heartening to discover the significant amount of overlapping consensus between the two.
Indeed SEDCO’s CEO Hasan Al Jabri tells us that when SEDCO added an ESG overlay to its already Shari’a-compliant portfolios, only five additional securities were filtered out. Oxford University and Arabesque’s three years worth of data tell us that Islamic and ESG filters are not a drag on performance. The UK Islamic Finance Council’s Omar Sheikh tells me the Church of Scotland has signed an agreement to work with IFC after a significant period of courtship. Much kudos to Omar and his team on doing what the Islamic finance industry should have been doing a long time ago: bridging the gap between faiths and cultures to bring ethical finance to the world.
I’m convinced. The political environment supports the reputational argument. The data supports the performance argument. I’ve even convinced my fellow panellists in the Islamic finance session to consider appointing a Shari’a scholar as a non-executive director or at the least to have an input into the nomination committees of banks. That way there is a tangible effort to inculcate moral and ethical culture into financial institutions instead of rehashing platitudinous nonsense in annual reports and PR guff.
Our panel concludes that policy makers must devise methods to incentivise banks for good behaviour rather than penalise them for bad. A culture of ethical practice can be realised if we bring scholars and governance advisers into the mainstream operations of a company rather than consult them infrequently in semi-annual Shari’a board meeting. Scholars – not just management – should be standard setters who look to positive as well as negative screens. Their focus should not just be on arcane contractual mechanisms and avoidance of prohibitions. Scholars must guide us on encouraging socioeconomic progress so that the corporation is no longer an entity merely dedicated to maximising shareholder value at the expense of all other considerations. We can overlay ESG on top of Shari’a to become “Shari’a-based” or as some are now referring to it, “Shari’a-inspired”.
Multinational corporations are a most voracious consumer, but we only have the one planet. Its preservation and stewardship is core to the Islamic faith, as it is to many others. So let’s preserve it.
There’s a major challenge, though. It is epitomised by the 65 page document written by Enron just prior to the infamous firm’s collapse. It is the Enron Code of Ethics, and it is clearly a work of fiction. What conclusion may we reach? The more you moralise, proselytise and regulate, the less the unscrupulous will care and the more cunning they become. Ethical leadership cannot just be transmitted from the top down – more often than not, corporate leaders are savvy politicians who have mastered the rules of an unpleasant game better than the rest. The rank and file see through their pronouncements on values, culture and integrity. An ethical culture comes from inspiring people, not constraining and dictating to them. It comes from society, and as Daud Vicary pointed out, it starts with education.
It’s time to go home. The crowd heads for the liveried buses leaving the Castle. As I walk towards one of them, the guide holds the door open for me and beckons me to the driver’s seat. “You the driver?” he asks me. I look at him quizzically and his face flushes. “Sorry, my apologies”, he blurts, clearly embarrassed. A salient reminder to always Know Your Customer...