What is socially responsible investing (SRI) all about? The idea of SRI ties in with sustainable investing, and is closely related to Islamic finance. Most recently, Malaysia’s first digital sukuk, Sukuk Prihatin Islamic bond was introduced as a part of the National Economy Recovery Plan (Penjana). Read more below to find out everything you need to know about SRI and sukuk.
The value of investments are no longer just measured in returns. Now, an increasingly large number of mainstream investors would prefer to pour their hard-earned money into investments that leave a positive impact on society and the world.
They do this through sustainable investing, also known as socially responsible investing (SRI), which is the process of incorporating environmental, social and governance (ESG) factors into investment decisions. The goal of sustainable investing is to generate measurable social and environmental impact alongside a financial return.
The rationale of SRIs ties in nicely with Islamic finance, which runs on the principles of fairness, equality and ethics, according to the Malaysia International Islamic Financial Centre. Similarly to SRI, Islamic finance, too, seeks social justice and economic prosperity of society as well as encourages sustainable economic activity. The principles of Islamic finance are derived from the fundamental requirements set by the Islamic law also known as Syariah law.
The significance of SRI is further supported by the Ministry of Finance (MoF)’s recent announcement to issue Sukuk Prihatin, Malaysia’s first digital sukuk, amounting to RM500 million under the National Economic Recovery Plan (Penjana). We’ll dive deeper into this later in the article.
Therefore, understanding the scope and benefits of SRI is pivotal to the wider investing community, particularly Islamic finance practitioners, so they are able to tap into, and access a larger and broader investor portfolio as part of the segment opportunity available in the SRI space due to its overlapping core values.
What is driving socially responsible investing?
The rise of global issues such as climate change, pollution and wasteful use of natural resources have driven consumers to call for greater demand for stronger governance and ethics from businesses.
Besides that, the high market performance of these sustainable investing products have made it more attractive to investors, who not only see value in generating returns, but also creating impact.
The demand for sustainable investments is also being driven, in part, by millennials who prefer to invest in entities that are aligned with their personal values. And they make up a crucial and emerging segment of the market because they are poised to, according to Ernst and Young, receive more than US$30 trillion (RM126 trillion) of inheritable wealth.
Since 2012, SRI instruments have reportedly grown 107.4% annually in the United States, and currently account for 18% of the assets under management (AUM) in the wealth and asset management industry there.
Since the issuance of Malaysia’s first corporate sukuk by Shell MDS, worth RM125 million in 1990, the sukuk landscape in Malaysia has continued to thrive thanks to the country’s conducive issuance environment, facilitative policies for investment activities and comprehensive Islamic financial infrastructure. (Image source: MIFC on Bix Malaysia’s website)
In Malaysia, though still a relatively niche and fledgling market, the demand for and popularity of SRI products has grown over the years since the launch of the Securities Commission’s Sustainable Responsible Investment (SRI) Framework in 2014, said Dr Noor Suhaida Kasri of ISRA Consulting at the 7th MFPC Conference on Islamic wealth management and financial planning.
The SRI Framework’s launch was quickly followed by the establishment of Malaysia’s first sustainable sukuk in 2015, and first green sukuk in 2017. A sukuk is an Islamic finance certificate that represents a portion of ownership in a portfolio of existing or future assets. Think of it as the Islamic version of conventional bonds.
As the largest issuer of sukuk globally, Malaysia is recognized as the most developed Islamic financial market in the world as measured by Thomson Reuters’ Islamic Finance Development Indicator. This measurement is due to Malaysia’s deep domestic market that supports local-currency sukuk issuances.
Currently, Malaysia accounts for 45% of the sukuk issued and is one of the countries where the private sector is a majority issuer of sukuk. Moody’s Investors Service expects Malaysia to continue to dominate global sukuk issuance volumes both in the long-term and short-term markets.
And though Islamic finance has been historically dominated by Muslim-majority countries in Saudi Arabia and Malaysia, the past three years have witnessed an increasing number of issuers from new markets including non-Muslim markets, according to S&P Dow Jones Indices. Yes, you heard that right, non-Muslims can invest in Sukuk too.
The global sukuk market’s tremendous growth since 2013 is evident by the U.S. dollar-denominated sukuk market which has experienced a compound annualized growth rate of nearly 18% as measured on the Dow Jones Sukuk Total Return Index and the S&P Global High Yield Sukuk Index. This increase is driven by the heightened issuance of sukuk from sovereigns and supranationals, as well as strong investor demand for Shariah-compliant securities.
“The mutual fund assets of SRI have increased 34% since 2016 from US$1.72 trillion (RM7.2 trillion) to US$2.58 trillion (RM10.8 trillion) while the total number of SRI mutual funds have increased 50% from 475 to 636. What I am trying to say is there’s a significant move or trend shifting from traditional investment to a specific kind of investment,” said Dr. Ahcene Lahsasna, CEO of Salihin Shariah Advisory at the 7th MFPC Conference on Islamic wealth management and financial planning.
Though SRI may be associated with other terminologies like community investing, ethical investing, green investing, mission-related investing, responsible investing, and sustainable investing, industry terms such as environmental, social, and governance (ESG) and impact investing actually have distinct features and meaning despite often used interchangeably with SRI by investors and fund managers.
These differences are important to understand to help structure one’s investment portfolio in order to meet the desired goals.
What are the differences between SRI, ESG and Impact Investing?
There are many definitions floating around the world wide web, but according to Investopedia, SRI, is considered socially responsible due to the nature of the business the company conducts. Fund managers in SRI would actively eliminate and select investments according to ethical guidelines revolving around personal values, religion and even political beliefs. For investors engaged in socially responsible investing, making a profit is still important, but must be balanced against principles. The end goal is to still generate returns but without violating one’s social conscience. SRIs can be found among individual companies with good social value, or socially conscious mutual funds or exchange-traded funds (ETF).
This fund looks to environmental, social, and governance practices of an investment to see how they may have an impact on the performance of that investment. Unlike traditional investments, these funds integrate ESG factors to enhance traditional financial analysis. Fund managers identify potential risks and opportunities in ESG investments beyond just technical valuations. The main objective of ESG valuation remains financial performance.
Unlike its two counterparts, positive outcomes is the most important factor in impact investing. This means investments need to have a positive impact on society and the world in some way. Profitability of the investment may not be the main concern, but a by-product as the objective of impact investing is to help a business or organization accomplish specific goals that are beneficial to society or the environment. One example is to invest in a non-profit organization that is dedicated to eradicating poverty.
In this article, we will take a closer look at SRIs specifically, and analyze whether or not it's worth your money.
When it comes to socially responsible investing, it may come in the conventional form of bonds or the Islamic version of sukuk. But what are the differences?
Differences between bonds and sukuk
A bond is a type of investment security where an investor lends money to a company or a government for a given period of time, in exchange for regular interest payments. Upon maturity, the bond issuer returns the investor’s money, and profits are generated via fixed payments that an investor receives over the life of the bond.
Sukuk holders will receive a certificate from the issuer as evidence of ownership and are entitled to receive periodic profit payments on the principal amount invested. The sukuk holder will get back the principal amount of investment upon its maturity. (Image source: BixMalaysia)
Similar to a bond in Western finance, a sukuk is an Islamic financial certificate that complies with Islamic religious Syariah law. This is an alternative for Muslim investors who are not able to invest in the traditional Western interest-paying bond structure. How does it work? According to Investopedia, the issuer of a sukuk sells investors a certificate, and then uses the proceeds to purchase an asset, of which the investors would have partial ownership.
At this juncture, three types of sustainable bonds and sukuk are offered in Malaysia including green, social, and sustainable bonds/sukuk. But what’s the difference between the three and how do they really work?
Green bond and sukuk - Proceeds from green bonds and sukuk are used to fund environmentally friendly projects like renewable energy and climate change.
Social bond and sukuk - Proceeds are used to raise funds for projects with positive socio-economic outcomes for an identified target population. Some examples include food security and access to healthcare and education.
Sustainability bond and sukuk - Proceeds are used to raise funds for projects that bring clear environmental and social-economic benefits. At the same time, their financial and/or structural characteristics vary depending on the issuer's ability to achieve predefined sustainability/ESG objectives.
The Sukuk Prihatin programme 2020 - the first digital sukuk
Touted as the first ever digital sukuk in Malaysia, the programme was launched on August 18 as part of the government’s National Economic Recovery Plan (Penjana).
Based on the Syariah principle of Tawarruq via the Commodity Murabahah arrangement, it is open to all Malaysians aged 18 and above. The sukuk has a total target issuance of RM500 million with a maturity period of two years.
Details of the sukuk:
- Subscribe to the programme through JomPay or DuitNow
- Accessible through the mobile banking platforms of 27 participating banks in Malaysia, but Maybank is the main distribution bank.
- The sukuk will be distributed on a first-come first-served basis, and is available from August 18, 2020 to September 17.
- Interested applicants may take part in the programme with a minimum RM500 investment.
- Offers a profit rate of 2% per annum, which will be paid on a quarterly basis and will be exempted from tax.
“The Syariah-compliant sukuk issuance is established in response to requests by various parties to contribute towards the country's recovery efforts. To that end, the government decided that the sukuk issuance is a transparent and appropriate instrument in response to those requests,” according to a media statement by the MoF.
“Sukuk holders have the option of donating the principal amount upon its two-year maturity. Proceeds from the Sukuk Prihatin will be channelled to the Kumpulan Wang Covid-19 for the implementation of economic recovery measures that include, among others, enhancing connectivity to rural schools, supporting research grants for infectious diseases, and financing micro SMEs, particularly women entrepreneurs,” it added.
Besides the sukuk prihatin, Malaysians also get to choose from a diverse pool of socially responsible funds including 10 green sukuk, two green bonds, two social sukuk, one sustainable sukuk and two sustainable bonds, as of June 2020, according to data compiled by Dr Noor Suhaida. All together, they make up a total volume of almost US$2.1 billion (US$8.8 billion).
These Shariah-compliant SRI products position Malaysia as a leader in Islamic finance, as well as strengthen its value proposition as a leading Islamic finance marketplace and centre for sustainable finance.
List of socially responsible funds in Malaysia
Below is a list of green, social and sustainable bonds and sukuk available in Malaysia:
|Issuer (year)||Amount (in million)||Standard||Use of proceeds|
|Tadau Energy Sdn Bhd||RM250||SRI, GBP||Solar|
|Quantum Solar Park||RM1,000||SRI||Solar|
|PNB Merdeka Ventures Sdn||RM690||SRI, ASEAN, GBS||Building|
|Sinar Kamiri Sdn Bhd||RM245||SRI, GBP||Solar|
|Segi Astana Sdn Bhd||RM415||ASEAN, GBS||Building|
|UiTM Solar Power Sdn||RM222.3||SRI, ASEAN, GBS||Solar|
|Pasukhas Green Assets Sdn Bhd||RM17||SRI, ASEAN, GBS||Hydropower|
|PNB Merdeka Ventures Sdn||RM445||SRI, ASEAN, GBS||Building|
|Telekosang Hydro One Sdn Bhd||RM470||SRI, ASEAN, GBS||Hydropower|
|Telekosang Hydro One Bhd Sdn||RM120||ASEAN, GBS||Hydropower|
|Cypark Ref Sdn Bhd||RM550||SRI||Solar|
|PNB Merdeka Ventures Sdn||RM435||SRI, ASEAN, GBS||Building|
|Total Green Bonds
|Khazanah Nasional Berhad - Sukuk Ihsan (April 2015)||RM100||SRI||Education|
|Khazanah Nasional Berhad - Sukuk Ihsan (June 2017)||RM100||SRI||Education|
|Total social bonds
|HSBC Amanah Malaysia||RM500||SBG||UN SDGs|
|CIMB Bank Berhad||RM680||ASEAN, SUS||UN SDGs|
|Edra Solar Sdn Bhd||RM245||SRI, ASEAN, SUS||Renewable energy, socio-agriculture|
|Total sustainability bonds
|Total volume of sustainable bonds
Types of socially-responsible bonds and sukuk in Malaysia. (Info source: Dr Noor Suhaida Kasri of ISRA Consulting)
The development of socially responsible investing products in Malaysia can also be seen on the FTSE4Good Bursa Malaysia Index, which comprises Malaysian stocks selected from the top 200 companies in the FTSE Bursa Malaysia EMAS Index based on their ESG performance. This index excludes companies involved in tobacco production, nuclear weapons, conventional weapon systems, or coal power industry.
Companies on the FTSE4Good Bursa Malaysia Index are rated based on environmental sustainability, relationships with stakeholders, attitudes to human rights, supply chain labour standards and the countering of bribery.
However, there are some questions over the uncertainty of the index. For instance, it’s not clear whether inclusion in or exclusion from the index effectively incentivise companies to change their behaviour in regards to social responsibility.
The growth of the SRI market in Malaysia is further bolstered and supported by the significant number of institutional investors who have embraced the Malaysian Code for Institutional Investors (MCII) from as early as 2014, according to Dr Noor Suhaida. The code advocates and guides institutional investors to invest in a responsible manner by having regard to corporate governance and sustainability. As of September 2019, there are 22 signatories to the MCII.
All in all, Malaysia has progressively demonstrated leadership in the SRI sector with the introduction of policies, frameworks, and roadmaps that enable the SRI market to grow further.
Investors’ heightened interest in the benefits of SRIs have pushed financial institutions to offer more sustainability-related products.
Pros and cons of socially responsible investing
Some people would rather pour their money into companies that care about the same issues as them.
Unlike traditional investing, ethical investing isn’t as straightforward. We breakdown the pros and cons so you can get a clearer picture of what it has to offer.
1. Investing in an entity that is close to your heart or more aligned with your personal beliefs
If you're a big advocate for the environment, it’s likely that you would only want to invest in companies that dedicate their money to green issues, or at least avoid companies that are doing more harm than good to the environment. This sort of investment would be good for you as it ties in really closely with your personal beliefs.
2. You could be part of a real movement to create a better world
Though ethical investing is relatively new, it has gained traction across the globe and is starting to gain enough attention to grow even further. As more and more investors start putting their money into this movement, it could help result in higher valuation, and may even pressure more companies into transforming into more ethical and green entities.
1. Choosing your issue or cause may be tricky
Bottom line is there’s no perfect company. For example, though it may align or promote certain social issues like diversity and equality, they may not be environmentally-friendly and are polluting the earth in some way or another. Not knowing which issue or cause to prioritize and put more emphasis on as an investor is another potential dilemma.
2. Performance isn’t always guaranteed
Though there is a clear morale and conscious benefit from investing in ESG funds or ethical investments, these funds are not always performing as well or better than index funds. At this point, there is no evidence that a portfolio that is more ethical would perform significantly better on the long-term compared to their unrestricted equivalent. However, there is some evidence showing that SRIs have performed as good if not above that of traditional investments, according to a 2015 study by the Journal of Sustainable Finance & Investment.
Is SRI for you and should you go for it?
Some investors are drawn to SRIs for a number of reasons like religious tenets, personal values, political beliefs and specific events. For others, it may not be particularly important or necessary to invest in businesses that align with your personal values, because there’s a clear separation between financial goals and personal beliefs.
On top of that, SRIs come with their own set of challenges compared to traditional investments. But SRI could be a good way to keep you attached to your investments to achieve the investment goal you wanted because the business runs on values that are close to your heart. By pouring your money into these causes, you would be truly embodying the phrase ‘putting your money where your mouth is.’
At the end of the day, people invest for two reasons - achieve short-term gains or for a long-term financial goal, if you feel that SRI products could help you grow your investments and provide similar returns to help you retire comfortably, then the answer would be: why not?
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