Green Insights for Islamic Finance
Senior regional head of MENA at CFA Institute, William Tohmé, talks about what prevents a greater convergence between Islamic finance and ESG investing, green sukuk and the persistent problem of greenwashing in the investment industry. Interview courtesy of Crescent Leaders and was published in In Focus issue 12.
‘If I leave it with the players, they want to keep ESG and Islamic finance separate. So that they have two streams of products and offerings,’ says senior regional head of MENA for CFA Institute, William Tohmé. ‘I think what is preventing the bridge from being obvious to everyone is the client base. [It will change] when we see portfolios that are both SRI (sustainable and responsible investment) and shariah compliant, which offer to save a lot on the fee side and provide a bigger client base.’ But the market is not ready for shortcuts, ‘they want to show you they have muscles in both sides. Of course, there are lots of common areas, but would they market it to you this way?’
William blames both ends, ‘The supply side, it looks better on paper for you to have two big families of products. And the demand side, because we’re not aware enough of the commonalities between the two streams of business. Therefore, we don’t ask for one product that fits all.’
Now you see it happening with products such as green sukuk, which is about respecting the environment while being shariah-compliant. ‘That’s a pure example of something that has been driven by demand. I’m keen on buying sukuks, but I’m no longer keen on buying sukuks that pollute the planet. I want to buy green sukuks. That’s an example that gives me lots of hope in products that will be invented that respect both the shariah law and the environment,’ says William.
Why hasn’t green sukuk exploded like green bonds?
I blame it on demography and size of the market. If I launch a green bond, I’ll have all the big insurance companies in the world, that are not takaful. They have billions of dollars in retirement funds and future savings, and by regulation they have to be into bonds, so they go and buy bonds. When it comes to green bonds, they feel better from a marketing point of view. Clients feel comfortable about making money while respecting the environment in the long run.
Mainly local players here and in Malaysia are the ones buying sukuk in the region. You rarely find a big western insurance company coming into a sukuk, unless they did a comparison between the yield-to-maturity on a bond that’s available for them at a certain rating. For the same rating, they have a better yield-to-maturity on the sukuk, plus the sukuk is asset backed and the bond they have back home is not asset backed.
The only time you get conventional people coming to buy into a sukuk is when they have better warranty on the collateral. So, it’s an asset backed bond all of a sudden with a better yield-to-maturity. In the region, if you are a takaful insurance you’re not going to be able to invest in a conventional bond even if it’s green, so you’ll have to go for a sukuk. If the sukuk is green, then it’s the cherry on top of the cake. The problem is with the demand and supply. We don’t have enough supply of green sukuk, but we have a huge supply of green bonds because we know that the pockets of the asset owners and insurance companies are very deep. Also, by regulation they have to buy bonds.
What could change this and boost green sukuk market?
What would change this is the demand. It needs a big player with deep pockets to come on the market and say, ‘this is what I need, find it for me’ and the supply would ignite itself. Then the investment bankers will make it happen and see all governments or corporates with great ratings, capable of putting an asset-backed sukuk, make sure it’s green – or green wash it, unfortunately – then they’ll accept the deal and pitch it to the asset owners.
How do investors establish that a fund truly meets ESG standards?
Everyone is busy with deciding what disclosure companies should be doing in order to be ESG compliant. We went the other way, to the investor side and said, ‘you should be able to have a stamp of quality on these products, which will assure you that an asset manager is ESG-compliant in a certain product and this is why’.
We developed the Global Investment Performance Standards (GIPS) to make sure that we’re comparing apples to apples. If you’re an asset management company in Alaska and I’m an asset management company in Shanghai, and we’re managing European equities, your numbers cannot be compared to mine. The local regulations of disclosures in Shanghai are different from those of Alaska. But if you make your numbers GIPS-compliant, and I do the same, then our numbers can both be ‘apples’ and they can be compared to one another.
We’re doing the same with ESG standards. These are self-disclosure standards, so asset managers can decide to comply with these standards. It’s a self-attestation based on a set of rules. We’ve been in consultation with the industry for a year and a half and had contributions from at least 150 practitioners. You can also hire a third party that would come and study your numbers and verify that you’re doing the right work.
CFA Institute’s Exemplary Approach to Gender Diversity
We’re not investing enough in women, their education and experience, before we expose them. I’m always wary of hypocrites, who say, ‘We’re trying to empower women and we just appointed one of them as head of this department. See, it’s not working, she’s not good.’ Did you invest in that person? Did you give them the same education that you gave to their male counterparts? Did you give them the right experience and exposure before you put them on stage?
There’s a problem in the industry. What we should be doing is say, ‘Yes, I agree with you. Give me a couple of years because I’ll be investing in their continued professional learning and their experience. I will expose them and then they’ll get there. I prefer this kind of approach.
Once you reach that level, you’ll need a matrix of all the women who have the needed skills. A matrix where the columns have the skills a company needs, and the rows have the names. Whenever you need someone that ticks at least seven of the skills you need, you can show immediately a selection of all the names that are available – CEO roles, senior management, you name it. This way you’ll be selecting based on skills and gender. You’ll have a reservoir of talents that you can choose from. What the industry is doing unfortunately is saying, ‘We need to have more women on board, let’s see who we have and let’s project them and put them on stage. We’re pushing some people just because they are women. They’ll make us look good on gender diversity.’
[The thing is], who told you they are ready to go on stage? Why didn’t you take the most experienced women available and ask them to be on stage? What about the other diversity metrics – race, ethnicity, age? Are we also putting diversity of those aspects on our boards? Beyond gender equality, I am for talent equality, experience equality and education quality. When you do those, naturally you’ll have more representation.
CFA Institute launched a programme called Mutamahin in Bahrain a few years ago. We bring university graduates who can’t find jobs and help develop their technical as well as soft skills. Never on this programme did we need to think how many women or men we have. Year after year, we ended up with 80 per cent women, 20 percent men. This is because the women want to study more and prove themselves. They don’t believe they have equal chances in finding a job. So, they put in double effort.
Look at the Saudi universities, the best GPA levels are being achieved by women because they know they have to compete with men who feel entitled to getting jobs. Women feel that they need to fight more later on to get these jobs. But at least, we’re giving them equal chances of studying and proving themselves.
If you do the metrics I recommended, you’ll definitely find more women available to work and contribute to the success of your firm. Also, at CFA, we stopped counting the years of experience and we now count hours of experience. If we keep the metric of how many years of experience you have, some women will be behind the men because they decided to have a family. [Through counting the hours], this means if you have kids and return to work, it won’t put you at a disadvantage compared to men. This is because we are conscious that women sometimes don’t have the consecutive years of experience, but they have the number of hours.