Islamic finance offers Middle East investors a valuable gateway to ESG investments

Soumaya Hissoussi, Senior Vice President, Lombard Odier Abu Dhabi Branch

As the shockwaves of the pandemic reverberated through the global capital markets, 2020 marked a year of prolonged uncertainty, volatility and, at times, unprecedented change. However, amidst the turbulence, two key trends have stood out showing signs of resilience and major growth – these were Islamic finance and ESG investing, respectively. As we look ahead to the Middle East’s economic roadmap post pandemic, Islamic finance assets will not only play a key role in supporting future economic stability but will also offer investors a crucial entry point into ESG investment strategies, unlocking significant opportunities for sustainable, long term value creation.

Considering first, the key catalysts emerging which are accelerating the rise of Islamic finance, and second, its role in facilitating more sustainable, ethical investment opportunities more broadly, as we rear our heads from the lockdown and look to the future, there exists an exciting opportunity for the Middle East – an opportunity which our future generations of young investors will play a key part in delivering.

Despite challenging macroeconomic conditions, Islamic finance is on the ascent

Whilst the equity markets fluctuated throughout 2020, and traditional fixed income suffered sharp selloffs at the onset of the pandemic, as many countries struggled to contend with the economic impact of COVID-19, Islamic banking assets offered a far more positive picture for investors, buoyed by increasing demand and supportive relief and state aid policies from governments.

Nasdaq Dubai saw a significant number of sukuk listings in 2020, culminating in a $1 billion sukuk by Dubai Islamic Bank, listed in November. Data from a recent Moody’s report revealed Sukuk issuances grew by 15% in 2020 to a record annual high of $205 billion, marking a fifth consecutive year of growth. Whilst these highs are estimated to stabilise in 2021, Moody’s estimates continue strong growth in global Islamic funds under management, rising at an annual rate of 4-5% in 2021-2022.

At a time when many asset classes have underperformed and buckled under the strain of pandemic-induced economic pressures, investors have sought safety in Islamic banking, which has provided much needed stability and risk mitigation. However beyond just wealth preservation, looking forwards, Shari’ah compliant strategies offer the potential for investors to tap into more diverse, and at the same time

Among the reverberations of the global pandemic came the growth of Islamic Finance and heightened appreciation of the importance of ESG investing. Soumaya Hissoussi, Senior Vice President, Lombard Odier explains to MEA Finance why both are on the assent and are naturally well suited, with the social “S” component set to gain increasing prominence

more responsible investment opportunities – and as the global markets become increasingly challenging to navigate, it is the duty of active wealth managers to provide investors with solutions that are tailored to their specific needs and objectives, creating the opportunity for sustainable value generation.

At Lombard Odier, our solutions are fully customisable to each client’s individual demands. There is no such thing as an “off-the-shelf” or “one size fits all” product. In today’s climate of constant change, for investors to realise value from their investments we need remain nimble and agile, constantly developing our proposition in line with evolving investor demands. Our solutions are multi-asset class, offering clients everything from global investments, sukuks, equities from the Dow Jones Islamic index, as well as thematic funds, right through to ETFs and commodities. Responsible investing requires a balanced portfolio, underpinned by risk management, security and diversification, and Islamic finance provides investors with a compelling vehicle to achieve this.

Even greater than the demand for Islamic strategies, the pandemic has accelerated markedly the rise in ESG investing. Environmentally conscious and socially responsible investments have grown exponentially since COVID-19, and the trend will only continue to gather pace in the years to come. Bloomberg data suggests ESG assets may top as much as $53 trillion by 2025. Whilst some may have initially perceived the ESG wave as a temporary product of a bull-market, the reality is that ESG and sustainability will be the cornerstone of future investing – not only for the strategies adopted by retail and institutional investors, but also operationally for the investment management industry more broadly.

Whereas the “E” and the “G” have been occupying more of the headlines – spanning green assets, net zero commitments and greater scrutiny on governance protocols – the social (or “S”) component of ESG gain increasing

THE SOCIETAL ELEMENT OF ESG WILL ONLY CONTINUE TO BECOME INCREASINGLY IMPORTANT

prominence as a critical priority for investors looking for more sustainable wealth creation. This is where there Shari’ah compliant assets offer Middle East investors with a very attractive opportunity, as an effective, reliable vehicle to more socially responsible investing. As a trusted advisor to our clients, sustainability sits right at the top of our agenda, and Islamic banking will be integral in offering investors ESGcompliant investment strategies.

Islamic finance goes hand-in-hand with ESG investing

Shari’ah compliant assets inherently must adhere to certain rules and values, in line with social and religious codes of conduct. As a results in many areas Shari’ah investing shares common practices with requirements of traditional ethical investing models, making Islamic finance a valuable conduit to more socially responsible investing – in turn, an integral component of ESG.

Our Shari’ah discretionary mandate represents the bank’s long tradition of social responsibility and commitment to develop sustainable and responsible investment solutions. An ethos which ESG investing is also built on, working in the same direction.

As industry standards for equality and transparency continue to increase, and the pandemic reveals the need for greater diversity and inclusion, both investment managers and investors will need to assess the impact their investment decisions are making on societies and communities around the world. To be able to do so effectively, sustainability and social responsibility will be two core pillars in this process, both of which speak to many of the same principles as Shari’ah compliant investing.

What does this mean? Whilst not mutually exclusive, Shari’ah finance offers a framework which embodies the social and ethical values of ESG investing, providing Middle East investors with an attractive opportunity to adopt more sustainable, responsible investment strategies – and, ultimately, the ability to tap into the significant value potential from ESG and the global shift towards sustainability. We are embedding sustainability into every facet of our investment processes, and we feel strongly industry must continue do the same, to allow Middle East investors to capitalise on the significant opportunity ahead.

Looking to the future, forecasts project global Islamic finance assets to reach $3.69 trillion by 20241. Simultaneously, the societal element of ESG will only continue to become increasingly important. With both sharing the common goal of social responsibility, there exists a compelling opportunity for the Middle East’s economy and investments markets post pandemic and in the long term.

Lombard Odier has been offering investment solutions in line with the principles of Islamic finance since 2012. Recognised by industry as a leading provider of first class, best-in-market Islamic finance services, Lombard Odier was awarded Best Shari’ah-Compliant Wealth Management Offering at the WealthBriefing MENA Awards for Excellence 2020, the ninth consecutive year the bank has won top honours in these awards.