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In today’s woke world it might be hard to imagine that, until not too long ago, the concept of socially responsible investing (SRI) had not even crossed the minds of many retail investors, let alone enter the mainstream and become a universally recognized and accepted theme amongst financial industry professionals and institutions.

These days, however, “Doing well by doing good” has turned into a bona fide millennial mantra and “Social Entrepreneurship” has become the new aspirational occupation of choice for an ever increasing number of young people, who even as recently as a decade ago might have been more likely to set their sights on a career as a doctor, lawyer, financier or data scientist.

At the same time that many young entrepreneurs begin to see social impact as an integral part of their business goals, more and more investors take “Voting with your Wallet” to heart and choose not only to support companies, aligned with their personal set of core values and ideals, but also to divest from businesses, which they see as detrimental to society or the environment.

What started as Consumer Activism as early as the 60s in the US has gradually shifted to a global trend towards Investor Activism.

Here is some of what Nerdwallet has to say about it:

Once considered a fairly radical strategy, SRI has increasingly gained in popularity. According to a 2019 Morgan Stanley survey, 85% of individual investors are interested in sustainable investing, up from 75% in 2017. The options available to those investors have also grown: Investment research company Morningstar says there were 303 sustainable open-ended mutual funds and exchange-traded funds in 2019, up from 111 in 2014.

SRI tends to go by many names, including values-based investing, sustainable investing and ethical investing. The abbreviation “SRI” has also come to stand for sustainable, responsible and impact investing. Some SRI practices use a framework of environmental, social and governance factors to guide their investing. This is generally referred to as ESG investing.

Investors interested in SRI don’t just select investments by the typical metrics — performance, expenses and the like — but also by whether a company’s revenue sources and business practices align with their values. And since everyone has different values, how investors define SRI will vary from person to person.

And here is how Investopedia describes it:

Socially responsible investing is the practice of investing money in companies and funds that have positive social impacts.

Socially responsible investing has been growing in popularity in recent history.

Investors should keep in mind that socially responsible investments are still investments, and be sure to weigh the potential for return into their decisions.

Socially responsible investments tend to mimic the political and social climate of the time.

Socially responsible investments include eschewing investments in companies that produce or sell addictive substances (like alcohol, gambling, and tobacco) in favor of seeking out companies that are engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts.

In recent history, “socially conscious" investing has been growing into a widely-followed practice, as there are dozens of new funds and pooled investment vehicles available for retail investors. Mutual funds and ETFs provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment.

Socially responsible investments tend to mimic the political and social climate of the time. That is an important risk for investors to understand, because if an investment is based on a social value, then the investment may suffer if that social value falls out of favor among investors.

(This is one dimension in which Halal Investing provides a higher risk/return ratio than ESG and other SRI investments, as religious values tend to exhibit much more resiliency than political and social trends over the mid to long term.)

For example, in the 1960s, investors were mainly concerned with contributing to causes such as women's rights, civil rights, and the anti-war movement. Martin Luther King Jr. played a large role in raising awareness for the civil rights movement by targeting companies that opposed the cause as socially irresponsible.

As awareness has grown in recent years over global warming and climate change, socially responsible investing has trended toward companies that positively impact the environment by reducing emissions or investing in sustainable or clean energy sources. Consequently, these investments avoid industries such as coal mining due to the negative environmental impact of their business practices.

This brief overview of SRI investing hints at an important feature of this new paradigm, namely: its inevitable ambiguity and fragmentation. While mainstream trends are somewhat identifiable and can be reasonably well defined within a particular culture, they may still vary widely between cultures, and sometimes even unite subsets of populations across cultures.

For instance, while investors who identify with the Western sphere of influence might place more importance on traditionally western values like Human Rights, Self-reliance, Freedom of Expression, investors coming from traditionally Confucian societies might generally be more inclined to gravitate towards companies promoting societal stability, respect for one’s elders and care for one’s juniors.

At the same time, sustainability and environmental impact seem to be issues, on which investors across cultures seem to converge. Similarly, investors across religions might converge upon values like charity, modesty, etc.

Since PENTAIP was founded in Malaysia, a country with a majority Muslim population, let us take a closer look at a subset of value-based investing, known as Halal or Haram Investing.

Here is how Shazia Hussain describes it:

As the Muslim population globally continues to grow, so too does the appetite for investing, trading, working within Sharia compliant investments. Halal investing requires the investor to know all about investment products, how they work, and then it is possible to assess if the investment is in line with Islamic finance principles. For Muslims, one of the most critical aspects of Sharia law is ensuring that all income sources are halal. Islamic finance places huge importance on ensuring that income is halal (legitimate) and this is enshrined in the Quran.

Historically, the focus of halal and haram has been most prominent when it comes to food, but the concept of halal and haram must also be applied to all things beyond food including lifestyle, finances, investments, and business.

Halal investment refers to the investment of money in accordance with Islamic finance principles. Sharia finance law is centered on the concepts of social justice, ethics, and using finances to help build communities. For any Muslim considering halal investment strategies, the focus should be partnerships that are mutually financially beneficial.

Sharia law lays down principles and regulations Muslim investors must comply with if they want to invest in halal products. According to Sharia rules, compliance with Islamic finance principles leads to a more ethical and just society.

Halal investments encourage Muslims to invest responsibly and always ethically.

Islamic finance needs to comply strictly with Sharia law, and the following Islamic finance principles are expressly prohibited:

PAYING AND CHARGING INTEREST (RIBA)

Interest payments, or investments that include an interest element, are strictly prohibited in Islam. Charging interest is not considered to be Sharia compliant as it is deemed to be an exploitative practice.

RISK AND UNCERTAINTY (GHARAR)

Sharia rules do not allow participating in contracts where there is excessive uncertainty or risks. Investing or partaking in any short-selling or uncertain contracts are forbidden in accordance with Islamic finance principles.

INVESTING IN PROHIBITED ACTIVITIES

For Muslim investors, investment in any business that is involved in prohibited activities such as gambling, and selling alcohol is prohibited.

SPECULATION (MAISIR)

Sharia law prohibits speculation or gambling. So, if any form of investing includes contracts where the ownership is dependent on events in the future that are uncertain, this is deemed to be precarious.

PROS

Some of the main benefits of halal investments for Muslims (and no-Muslims) include the following:

Social Responsibility - taking a socially responsible approach to finances and investment not only means the investment is Sharia-compliant, but it can also lead to human rights protections, just distribution of wealth, and ethical investments that minimise environmental degradation.

Less Risk - Islamic finance principles mean that halal investment products are less susceptible to huge market changes and fluctuations. Global crises do not impact Islamic finance as they do more traditional banking. As short term speculation is discouraged in Islam, the exposure is much lower overall.

Growing wealth in a halal way - this is the most critical benefit for Muslim investors. Not only does halal investment mean that Muslims can engage and involve themselves with global markets, it also means that Muslims partake in disciplined investment that requires ethical due diligence.

CONS

Whilst Islamic finance does not prohibit risk taking, it does discourage speculative investments. Some of the risks associated with halal investment include:

Limited opportunities - halal investment products are fairly new to the finance niche so finding the right opportunity can sometimes be challenging.

Due diligence - the level of information gathering required for halal investments is far greater than traditional investment. The due diligence takes time and requires attention to detail that not all investors are willing to do.

Diversification - investing in a halal way requires time and consideration. This often means that the portfolio is not as diverse, or quick to grow, as traditional investments.

STOCKS, BONDS AND SHARES

Muslim investors who purchase stocks will want to know the modus operandi of the company so that they can be sure that any income derived from their stocks is Sharia compliant.

On the whole, bonds are not considered to be a Sharia compliant investment as they are rooted in interest payments. Sukuks are a more acceptable form of Islamic finance bond (see below).

GOLD

Gold is considered a safe and traditional means of investment that is Sharia compliant. Gold is not deemed to be in breach of any Islamic finance laws.

SUKUK

Sukuks are an alternative to traditional bonds as they do not bear any interest. They are often referred to as Islamic bonds, and are normally asset based. They are able to generate income for halal investors without breaching the Sharia rules.

PROPERTY

Investing in property can be a great way for Muslims to invest. The only caveat is that if a mortgage is obtained it is deemed to be a halal mortgage without any element of riba.

PROHIBITED INDUSTRIES

Any halal investment must be in accordance with the Sharia principles mentioned above, and must be done with consideration of ethics and social justice. Companies whose main business goes against the central tenets of Islam are considered universally unacceptable as investment opportunities.

There are certain industries that are deemed to be unethical or at risk of causing harm to society, and Muslims should therefore avoid opportunities in these sectors:

Industries manufacturing, promoting, advertising, or selling alcohol

Industries manufacturing, promoting, advertising, or selling cigarettes or drugs

Banking products or financial transactions that include interest (riba)

Any industries related to gambling

Industries related to prostitution or pornography

Industries relating to pork

Sharia law prohibits investing in industries and businesses where at least 5% of their income comes from unethical sources (this is known as the 5% rule). Before investing in any business, Muslims should check out the financial statements and positioning of the company and do some research on their sources of income and profits and where they are derived from.

Halal compliance is an option you could choose when defining the mandate of your PENTAIP robo-advisor. Whether Islam happens to be your religion or not, so long as your own values align with those listed above, selecting the Halal investment option might be worth looking into.

As just one instance of ethics-based investing, Halal investment is a great example of how you could use your capital to affect positive change not only in your bank account, but in the world at large.

Halal investment refers to the investment of money in accordance with Islamic finance principles. Islamic finance law is centered on the concepts of social justice, ethics, and using finances to help build communities, focusing on partnerships that are mutually beneficial.