"Today, it is increasingly clear that UN objectives peace, security, development go hand-in-hand with prosperity and growing markets. If societies fail, so will markets."
In his remarks at the ringing of the opening bell at the New York Stock Exchange, Kofi Anan, former Secretary General of the United Nations, chose to explicitly express a truth that we have implicitly accepted. The truth is that prosperity for a few is unsustainable over time, and that only balanced growth driven by inclusive rather than exclusive finance is necessary for long-term economic development and political stability.
This May, at the World Economic Forum on the Middle East, we will be meeting to discuss the issue of "Harnessing Diversity," and amongst the key issues on the agenda is the topic of Islamic finance and its role in the future development of the MENA region. These discussions are largely to be driven by the recognition of the fact that Islamic finance has truly become a sustainable and viable alternative to conventional finance and, moreover, by the acceptance of the fact that Islamic finance is a key driver of the change towards the inclusive finance of which the Secretary General spoke.
Principles for Responsible Investing
In an attempt to expand the understanding of finance and its ability to play a more productive role in achieving the objectives of peace, security and development, the United Nations unveiled the Principles for Responsible Investing (PRI) in January 2006. The PRI are a set of principles to which financial institutions agree to adhere in the execution of their business. In particular, the PRI incorporate environmental, social and corporate governance (ESG) issues into investment analysis and execution.
As signatories of the PRI, financial institutions commit to the following:
We will incorporate ESG issues into investment analysis and decision-making processes
We will be active owners and incorporate ESG issues into our ownership policies and practices
We will seek appropriate disclosure on ESG issues by the entities in which we invest
We will promote acceptance and implementation of the Principles within the investment industry
We will work together to enhance our effectiveness in implementing the Principles
We will each report on our activities and progress towards implementing the Principles
While still a relatively new phenomenon, the Principles have been effective in guiding financial institutions towards not only recognising the importance of ESG issues to investment returns, but also in helping them develop effective methods of incorporating such practices into their core business activities.
Reaching Out
When we look at the signatories and financial institutions involved in the PRI, unfortunately, we do not see many non-Western-based financial institutions at the forefront. This is especially disturbing in light of the fact that many of the issues that the Principles hope to address, as well much of the world's liquidity, are based in non-Western countries.
The PRI are a much-needed force in global finance, but the absence of their presence in much of the non-Western world, particularly the Islamic finance world, is a significant issue that needs to be addressed. While I am well aware that the United Nations Environment Programme-Finance Initiative (UNEP-FI) has definite plans to expand the Principles' exposure and adherents to include Islamic finance institutions, it would be prudent for the Islamic finance industry to reach out to the UN to help expand adherence to the Principles in the MENA region as well as to drive inclusion of ESG issues into the core of investment analysis and financial operations.
Being proactive in engaging with the PRI and UNEP-FI would be beneficial for the Islamic finance industry across several key areas. For one thing, reaching out in this area could benefit the Islamic finance industry significantly in increasing exposure of the industry to the non-Muslim world. As an Islamic finance practitioner, I am still amazed to find that very distinguished professional colleagues are still sadly unaware of the industry. And in the rare cases where people are aware of the industry, their knowledge is at an absolute minimum.
One of the key factors underlying this absence of knowledge on Islamic finance in the Western world is the glaring absence of exposure. While press coverage of Islamic finance in traditional media is certainly on the rise, exposure of the industry is yet to be mainstream. Through involvement with the UNEP-FI and the PRI, the Islamic finance industry can make significant advances in positioning itself as mainstream, as opposed to alternative, finance.
Additionally, engaging with the UNEP-FI and the Principles would be beneficial from a branding perspective. Social responsibility is increasingly becoming a differentiator between products, and the success of the Islamic finance industry is largely due to the fact that it offers both Muslim and non-Muslim investors an opportunity to conduct financial transactions in a Shariah-compliant and ethical manner. In signing up to the Principles, the industry further establishes its global branding as an innovative and leading industry in developing financial products that are not only profitable, but socially beneficial.
In discussing the issue of Islamic finance with both Muslim and non-Muslim colleagues, I still find that there is significant ignorance as to what constitutes a Shariah-compliant product and what the underlying tenets of Islamic finance are. Through avenues such as the PRI and UNEP-FI, the industry can significantly expand its reach and communication to industry outsiders and help formulate a truly global approach to building more socially valuable financial practices.
Having a Say
Beyond branding value, proactive and early engagement by Islamic finance institutions with the UNEP-FI and the PRI allows the industry to play a more important role in guiding development of the Principles and the issue of inclusive finance. As noted, many of the issues that the PRI hopes to address find their most salient representation in the non-Western world, and yet non-Western institutions are largely excluded from the global discourse on these pivotal issues.
Going to the table on this issue of our own accord and approaching the discourse from a position of strength and leadership would allow the Islamic finance industry, as the leading global representative of ethical investing, to better guide the development of the global financial architecture in ways that are beneficial to the non-Western markets.
Returning to the words of Kofi Anan, inclusive, rather than exclusive, finance is a necessary step in the continued development of the financial services industry. Islamic finance has been a leader in inclusive finance for centuries, and the emergence of the modern Islamic finance industry has been such that we are now positioned to assert more leadership in developing the global financial architecture. In engaging with the UNEP-FI, and choosing to become signatories to the Principles, the Islamic finance industry can send a very strong and effective message that we are the mainstream leaders of ethical investing, and are pivotal, central participants in guiding the future of finance.
As Principal of Nur Advisors LLC, Kavilash Chawla is responsible for helping clients develop and execute a more robust emerging markets investment strategy. This includes developing innovative yield-enhancing and risk-mitigation strategies for both private and corporate clients. Prior to founding Nur Advisors, Kavilash was an equity capital markets specialist in the investment banking industry, and worked with the United Nations on addressing emerging market financial issues. Kavilash earned his MBA from the University of Chicago, his master's in International Affairs from Columbia University, and his B.A. in Economics, History, and Political Science from Drake University.
By Kavilash Chawla
© Business Islamica 2007
