SEDCO Capital, a leading global asset manager, has partnered with the CFA Institute to provide a best-practice case study on its fully Shariah-compliant Prudent Ethical Investment (PEI) strategy for a new report on environmental, social and governance (ESG) integration in equity and fixed-income investments.
‘ESG Integration in Europe, The Middle East, And Africa: Markets, Practices, And Data’ focuses on the current state of ESG integration in EMEA. It is one of four reports compiled by the CFA Institute to create a best-practice guide to this nascent investment strategy. In addition to global insight, there are three regional reports, covering the Americas, APAC and EMEA regions. The aim of the reports is to help investors understand how they can better integrate ESG factors into their equity, corporate bond, and sovereign debt portfolios.
In the Arabian Gulf Region alone and with the collaboration of SEDCO Capital, the CFA Institute’s EMEA report finds that Islamic finance and ESG investing are complimentary investment approaches with many shared principles, such as good social and environmental stewardship.
Across all the reports, the CFA Institute published more than 30 case studies written by equity and fixed-income practitioners as the foundation of the analysis. SEDCO Capital’s case study examines its PEI strategy, a unique approach to integrating responsible and Shariah-compliant investment. Both responsible and Shariah-compliant investment strategies exclude the sin stock sectors via negative screening. However, Shariah compliance also requires balance sheet ratio screening.
SEDCO Capital’s own research shows that the balance sheet constraints of Shariah-compliant investors can improve risk-adjusted returns of conventional and responsible investment portfolios. PEI goes further, combining both responsible and Shariah-compliant investment strategies and integrating assessment of ESG criteria in addition. In this way, PEI delivers distinct return/risk characteristics relative to conventional as well as responsible investment strategies and has generally outperformed conventional portfolios, when adjusted for risk, over the last few years.
In its case study, SEDCO Capital sets out the five key building blocks to its PEI investment process. These are: negative screening, environmental factors, social factors, governance factors, and active ownership through proxy voting.
Commenting on SEDCO Capital’s partnership for the report, Christian Gueckel, Chief Risk Officer at SEDCO Capital, said: “We have always believed being a prudent investor means avoiding undue risks and seeking sustainable investments with strong governance which comply with jurisdictional regulations. Our PEI strategy shows that Islamic portfolio criteria, combined with ESG integration, can generate higher risk-adjusted returns than both conventional and responsible investment portfolios.”
Mr. Gueckel continued: “Partnering on this best-practice report points to a growing influence of responsible investments. It is an opportunity to demonstrate the value-add of SEDCO Capital’s Prudent Ethical Investment strategy for all investors – not just responsible or Shariah-compliant investors.”
In the EMEA region, the CFA Institute finds the ESG strategy is farther advanced in the equity world than in fixed income. It also finds the appeal of environmental and social factors is growing and that governance is so far the most widely integrated factor into investors’ processes. However, although integration is becoming more frequent, portfolio managers and analysts are still rarely adjusting their models based on ESG data.
When creating the report, the CFA Institute surveyed 1,100 financial professionals around the world; held 23 workshops in 17 major markets for practitioners and stakeholders; analyzed Bloomberg’s ESG company disclosure scores; and reviewed data from the largest global database of information on investors’ ESG practices – the United Nations-supported Principles for Responsible Investment (UN PRI) reporting framework. In July 2014, SEDCO Capital became the first fully Shariah-compliant as well as the first Saudi Arabia-based asset manager to be a signatory to the UN PRI.