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What kind of convergence are we heading for in Responsible Financial Markets?

What kind of convergence are we heading for in Responsible Financial Markets?

By Stuart Hutton | June 13, 2019

Within the Islamic Finance sector, there has been talk of how through collaboration we could see convergence between this and more mainstream responsible investing. Many initiatives have outlined the strategies and purposes behind this move and as such, many positives have come out of it. In my travels over this time, there has been much talk about the benefit of investing in a responsibly sustainable manner for the long term whilst maintaining the distinctiveness of Islamic Finance.

However, the word convergence, in a biological sense, does trouble me somewhat. Its true definition relates to the tendency of unrelated parties evolving superficially similar characteristics under similar environmental conditions. Is this truly where we want to be heading?

If we were to see Islamic Finance highlight the similar values of that seen when screening against typical positive ESG criteria, it would not necessarily be a bad thing. However, is this the value-based investing that we really want to see from the aspect of the Maqasid Al Sharia, or are we selling ourselves short?

The moral focus in Islamic Finance is one of its incredible strengths. Its ability to meet both structural stability with a risk sharing approach, whilst concentrating on the real economy, is a great asset. If these core abilities aligned with impact investing needs of today, we could see a change ripple across the investment world forever.

So, what is not happening enough yet and why aren’t these ripples becoming a tidal wave?

There is some incredible disjointedness that still exists when we take an across the top view of both ethical and faith-based investments. It is as if the humanitarian aspect of doing good is still truly not embedded in the way forward. The difficulty of course being that it is all well and good, to do good, but if it does not reward financially, it will always create a limited offer and a narrow set of willing investors.

However, it is not those seeking to do good with their investments that drive the equity markets. It is the large institutional shareholders that have fiduciary duties to make sure they make money from their investments. So, if this can be done in an ethical and moral way, then it does offer something of an additional feel good factor. However, that aspect is simply not mainstream yet.

So, what is it that can challenge the status quo going forwards and make us change our ways?

We now know that climate change is a serious matter. The damage being done is irreversible and the need to protect life on land and below water, as well as be stewards for all living matter, including ourselves, is our moral duty. In Islamic law, all matter of land, water, food, light and other resources belong to all living things. In our central role, we need to act as the stewards and take our responsibilities seriously to protect that which has been granted plentiful to all. This is the distinctiveness that Islamic Finance can offer responsible and mainstream investors.

Our role acting as stewards is about how we channel finance into the lead role of motivating investing to impact on the sustainable development goals set by the United Nations in 2015. If Islamic finance and ethical finance are to converge, it is how they can together achieve the outcomes needed to save this planet and all that depend on it. Driving towards common goals will give cause to align and benefit from all approaches to responsible investing.

Those common goals are about the impacts we make on achieving these outcomes, on how we influence finance to not just measure financial gain, but the social and environmental return needed to be a sustainable planet, with a stable economic and humanitarian outlook. If today you could invest your savings in an investment vehicle that returned enough financial returns on doing social good, surely that would be better than many of the leading traditional companies we invest in today. So, there it is, if businesses become more like that, evidencing and committing to their social impact as well as financial profit, this is where the true convergence will happen, and it is down to us the investors to be stakeholders in achieving this.

We need to demonstrate our morals, share our ethics and make sure that the future companies we invest in look at responsible investing as something we all consider as their mainstream offer on financial socially responsible returns.

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Amir Farhan 4 months ago
Associate Partners

Great article, thank you for posting (edited)

Stuart Hutton Author Amir Farhan 3 months ago
Chief Investment Officer, Simply Ethical

My Pleasure, thank you Amir.

Daud Vicary 4 months ago
Managing Director, DVA Consulting Sdn Bhd

Captivating reading. Well done Stuart (edited)

Stuart Hutton Author Daud Vicary 3 months ago
Chief Investment Officer, Simply Ethical

Well, I have to thank you brother for all your support over the years in helping us start to achieve this... "much to do and not a moment to lose!"

Wayne Evans 4 months ago
Senior Adviser International Strategy, TheCityUK

Excellent article, we shall be touching on aspects of this at an event in London tomorrow. (edited)

Stuart Hutton Author Wayne Evans 3 months ago
Chief Investment Officer, Simply Ethical

Thank you Wayne - I thought the discussion was most definitely highlighting the underlying meaning of this article at the event (White Case?) and we have so much to do to make impact meaningful!

Abdulmalik YUSUF 4 months ago
Ph.D. Scholar, School of Management, USM, Malaysia

You're right Sir. Now in academia, that's the issue working on. i.e. aligning SRI with financial Return/Measurement/indicators. (edited)

Chief Investment Officer, Simply Ethical

Thank you brother and please keep up the good work!

Robert Hannah 4 months ago

I would make several critical comments: advocates of Islamic finance make vague statements about financial ethics, which usually revolve around whether interest is equivalent to the prohibited riba. Meanwhile, secular regulators do the "heavy lifting" in trying to enforce consumer protection, truth in lending, financial disclosure, client priority in trading (no front running), the fostering of competition in markets, and full and clear disclosure of fees - issues which really matter to consumers. Regulators might usefully appreciate some input and support from Islamic finance advocates on these issues. On ESG - the objectives may be desirable, but it is more effective to enforce regulation on the promoters of the projects themselves rather than those who finance them, who are at least one step removed from the objectives of the project. (edited)

Chief Investment Officer, Simply Ethical

Hi Robert, I think you make very valid comments here. The regulators do have a key role in all of this and although often criticised for retrospective action, I do feel over the past decade there's a move towards more proactive engagement to enhance this relationships throughout the financial services sector.
I agree that Islamic Finance advocates are no where near doing as much as they could to support the broader impact of what these improvements offer, perhaps differing themselves at this level is equally important?
On the ESG factors, whilst enforcement on promotors will help, ultimately there is still a big education piece here to change the way mainstream view it. Without this, we are still subject to ineffective influence that goes no where to have the desired impacts & is basically wash.
Thank you for the comments, much appreciated.