Opportunities

Invest in a better future

by WIEF

Despite the best efforts of traditional corporate philanthropy, economic inequality has persisted around the world and populations have grown increasingly vulnerable to humanitarian crises stemming from economic, financial and political instability. In an effort to address these concerns, a growing number of investors today are turning to Socially Responsible Investing (SRI), which rejects the dichotomy of profits versus charity (where philanthropy and the profit motive negate each other) and which instead promotes investment in businesses that create profits precisely by addressing social needs.

 

According to an analysis by Michael Chamberlain at Forbes.com, SRI involves direct investment in social enterprises—and likewise by avoiding investment in “offending” businesses—as well as shareholder advocacy at the corporate level to ensure that a given company’s decisions impact positively on society.

“The [SRI] goals are accomplished through various means including dialogue, filing resolutions for shareholders’ vote, educating the public and attracting media attention to the issue,” said Chamberlain. He added that SRI also focused on community investing which at the time of writing, in 2013, was the “fastest-growing segment within SRI, with some USD61.4 billion in managed assets”, providing low-interest loans for capital investment as well as services including healthcare, housing and education.

“The investments are often said to have a double or triple bottom line: financial, social and environmental,”

said Sacha Pfeiffer in The Boston Globe. “They are also about aligning investments with societal values” as more investors seek ways to make income-generation consistent with their personal values.

Despite the increasing interest in SRI, however, there has been little uniformity in approach: even the terminology varies from “SRI” to “impact investing”, while goals can encompass fields as diverse as environmental protection, labour rights, consumer protection, religion and more.

While investors should be encouraged to pursue investments in areas that match their personal concerns, a key question remains largely unanswered: what investments are most needed to improve the lives of the greatest number of people around the world?

 

The UN SDGs: A unified global approach

On 25 September 2015, world leaders at the United Nations Sustainable Development Summit in New York adopted 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development. Building on the success of the UN’s Millennium Development Goals, the 17 SDGs are aligned to three overall objectives—ending poverty, protecting the planet and ensuring prosperity for all—without which the ability of future generations to meet their own needs will be compromised.

According to the UN, sustainable development can be achieved only if three core elements are harmonised: economic growth, social inclusion and environmental protection.

“There are 17 sustainable development goals with 169 targets in contrast to the eight Millennium Development Goals [MDGs] with 21 targets,”

said the UN in its online summary. “The complex challenges that exist in the world today demand that a wide range of issues is covered. It is, also, critical to address the root causes of the problems and not only the symptoms.

“The sustainable development goals are the result of a negotiation process that involved the 193 UN member states and also unprecedented participation of civil society and other stakeholders. This led to the representation of a wide range of interests and perspectives. On the other hand, the MDGs were produced by a group of experts behind closed doors.”

The SDGs thus represent the broadest global response to the need for change in approaches to development, and the UN calls on all individuals, governments and the private sector as a whole to mobilise “significant resources” (estimated to be trillions of US dollars) from domestic and international sources.

 

Aligning SRI to the SDGs
The 17 UN SDGs articulate the many key concerns that motivate SRI—but how should individuals and corporations align their SRI interests with the needs of the SDGs?

“Rather than just exclude ‘bad’ companies, some investors target companies with laudable business missions or business practices,”

wrote Pfeiffer in The Boston Globe. “That could mean industries focused on clean tech, solar power, organic foods or healthy living. It could mean investing in Uber as a way to promote the sharing economy. It could also mean financially backing companies with diverse boards, female CEOs, strong records of product safety, good labour policies and reasonable executive compensation.”

Such investments focus on environmental, social and governance (ESG) issues, and SRI applies ESG considerations across investment strategies and asset classes as well as investment techniques and solutions.

For example, the New York-based Teachers Insurance and Annuity Association (TIAA, formerly known as TIAA-CREF), which is one of the world’s top institutional investors, believes that its ESG focus is the best way to produce long-term financial returns while impacting positively on society by providing more inclusive economic development.

“This isn’t just about investing with conscience. It is an investment discipline that covers a wide range of investment analysis, due diligence and ongoing monitoring of our portfolios,” the firm said in its Responsible Investing report for 2014.

One of TIAA’s key practices is “active ownership” through which “investors can use their formal rights such as proxy voting, and informal influence by engaging through dialogue, to encourage companies held in their portfolios to improve management systems, ESG-related performance or stakeholder engagement.”

While SRI is not a new notion, it has in recent years been given an extra push by a younger generation of investors that are demanding that their investments make more than just money. It is estimated that the sector has grown about 30% in the last ten years. The last couple of years have also seen government agencies such as the U.S. Agency for International Development (USAID) pledge the continuance of programmes that fund social ventures directly. Private entities are not to be left out and the likes of investment giants such as Goldman Sachs and Bank of America have themselves launched impact funds. This has been a boost to social entrepreneurs who have been waiting in the sidelines with big ideas but no capital.

 

SRI and the SME
According to Entrepreneur.com, impact investing “gives a broader group of individual investors a chance to invest in one of the best strategies for job-creation and economic inclusion in the developing world: trade financing and term loans for small and medium enterprises.”

In particular, the report was referring to the TriLinc Global Impact Fund, which has been making great strides in bringing funds to small companies that are making an impact in their communities. For example, the fund has already given loans to Peruvian diaper manufacturer Corporacion Prodesa, Chilean sustainable timber exporter Forestal Rio Calle Calle, and Indonesian retailer PT Indah Global Semesta. PT Indah Global Semesta enables low-income consumers to buy appliances by utilising payment plans.

There are many other examples of small medium enterprises, which are getting a leg up from investors looking to do good. Even Bill Gates has put money into the Unitus Seed Fund, saying “Impact investing is a powerful model with the potential to build markets and drive change for the people who need it most.”

With a focus on startups in India, Unitus is backing a number of entrepreneurs that provide services that help the poor. These include health and education chains as well as other initiatives that are looking to help people boost their livelihoods. One of these is mGaadi, an Uber-like app for rickshaws in Bangalore, which aims to enhance the rickshaw driver’s potential income while uplifting the entire face of rickshaw services.

With SRI, entrepreneurs and SMEs are being given the opportunity to turn their visions into reality not just for themselves but for the communities they work with.

 

SRI and Islamic Finance – Creating a symbiotic relationship

In this regard, Islamic financing has much to contribute. The sector which has been experiencing impressive growth—Islamic banking assets totalled USD1.35 trillion in 2014—can also help mobilise institutional as well as individual funds for global interventions to help realise many of the SDGs in some of the most challenging regions of the world today.

After all, SRI and Islamic finance are two sides of the same coin. Both are built on the notion of ethical and equitable investments; both promote sustainability and positive social impact in the communities they operate and invest in.

Institutional SRI practices such as “negative screening” (by which a fund manager decides not to invest in a company engaged in, say, the tobacco industry on an ethical basis) correspond in many ways to the halal standard in Islamic financing, and by articulating Islamic investment principles in terms of SRI, Islamic mutual fund instruments such as ijara geared towards the SDGs can do a great deal to enrich the range of ethical investment options available to conscientious investors both in the Islamic world and in the West.

Efforts to combine the two, SRI and Islamic finance, have given rise to much discussion and resulted in the funding of projects that directly push forward the UN’s SDGs. For example, the International Finance Facility for Immunisation Company (IFFIm) in 2014 launched its inaugural sukuk that raised over USD500 million that has been channeled to the Gavi Alliance. Gavi Alliance is a global entity that works to ensure that children in the world’s poorest countries have improved access to vaccines.

Last year, Khazanah Nasional Bhd launched its first ringgit-denominated SRI sukuk. Proceeds from this will fund the Trust Schools programme, which aims to improve accessibility to quality education in government schools. If successful, this will go far in promoting the aims of SDG4 to “ensure inclusive and quality education for all.”

The race to issue the first ‘green’ sukuk is also on as reports show that countries such as Indonesia, the UAE and Malaysia have shown interest and willingness for such issuances. A ‘green’ model being discussed includes a sukuk complying with the Climate Bond Standards (a framework designed by the Climate Bonds Initiative (CBI)). Sean Kidney, chief executive officer of CBI, in an interview with the Gulf News in November 2015, said that they hope to issue at least one green sukuk in 2016.

 

The future we need

It is such convergence of the principles of SRI and Islamic finance that has been hailed, not just as an opportunity for Islamic finance to grow beyond its current borders, but also as part of the global effort that will help to achieve the 17 SDGs.

By aligning SRI practices to the UN SDGs—whether from the Islamic or conventional financial perspectives—investors have a sterling opportunity to contribute directly to the global agenda for sustainable development and to improve prospects for all humanity in the near future. With the Millennials growing up and bringing with them a conscience hardwired with social interests, the popularity of SRIs looks set to rise. And as a consequence of that the world can look forward to a shift of investment from profit-focused traditional initiatives to those that promise to make the world a better place.

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This topic was explored at the 12th WIEF sessions on “Restructuring SMEs and Improving Credit Access” and “SMEs in a World of Digitised Trade”

February 3, 2017
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