Can Halal Investing and Socially Responsible Investing Be Allies?Written by Sawitri Mardyani
It was a series of doubts that brought Sameer Azam to start the investment firm Absolute Wealth Management. After a few years of working in the financial sector, he started to question what he was really doing. He was offering investment solutions, helping people grow their wealth—but how about the details? What if some companies are selling alcohol, dealing in interest, damaging the environment, or harming the health of their workers? If he encourages clients to buy shares in companies that are doing impermissible or ethically questionable things, would their and his own income be halal?
At one point, doubts like these almost made him leave the financial sector all together. Before deciding to leave his field though, he consulted scholars for advice. To his surprise, they encouraged him to stay in the field. They told him that the Muslim community needs people to help them navigate the financial sector so they can manage and grow their wealth without compromising their religious beliefs or ethics.
Sameer took on the challenge. At Absolute Wealth Management, he now helps people to invest with their values. "The goal is to build a model that is sustainable and consistent for the long term," he says. "The conventional model is about ‘How can I make money?’ It's just focused on the bottom line. It's not focused on the big picture. It does not usually care about social impact."
The Islamic model, he explains, is holistic. Muslims are encouraged to do trade and grow their economic sustenance. But Muslims are discouraged from making money in ways that compromise their religious and ethical beliefs because ultimately it compromises the community. Muslims are not allowed to invest in companies that sell tobacco, alcohol, pork, gambling, pornography, weapons, or interest-based financial services. These prohibitions are ultimately for the protection of people and society. He believes you can focus on the “big picture” without sacrificing your bottom line.
"Have you ever wondered why interest is prohibited?" he asks rhetorically, "I've seen people with debt and people without debt. When you get into debt, you become a servant to that debt instead of becoming a servant to Allah."
To ensure that they only invest in Shariah compliant stocks, Absolute Wealth Management uses the rules defined by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) as a screen. On top of this, Absolute Wealth also adds two additional screens to make sure that the companies they invest in are not only Shariah compliant, but also pass through the screens of Socially Responsible Investing (SRI) and Environmental, Social, and Corporate Governance (ESG). Additionally, for their ongoing audit they have appointed the Islamic Finance Advisory Board to ensure the portfolios and investment funds meet Islamic Investing principles.
Making an analogy with halal meat, "We don't just want to know how the chicken was slaughtered" Azam explains, "We want to know: Did the chicken get pumped with steroids? Did the chicken get abused? What were the conditions of the farm?" Using their triple screening process, Absolute Wealth enables investors to invest with their values. Sameer says they "aspire to be the Tesla’s of the investing industry". Absolute Wealth envisions an investment model that combines sustainable risk measures such as environmental, social, and corporate governance with ethical and Islamic principles without sacrificing financial growth and success.
Ultimately, Azam says that these additional screens will result in an investment portfolio that is also less risky in the long run. The SRI and ESG screens not only check what business the companies are in but how they run their business. "If you have a crisis, what will you do? Do you have a risk management policy?" By looking deeply into how companies run their businesses and their governance policies, investors can feel confident that their investment has a solid and stable foundation.
Initially, Absolute Wealth managed the finances of clients who had hundreds of thousands of dollars in assets. According to Modern Portfolio Theory (MPT), which focuses on risk and reward in investments, in order to mitigate risk it's necessary to invest in many different things. This is also known as not "putting all of your eggs in one basket". This meant that if they wanted to help clients meet their investment goals while keeping within their risk tolerance, they would need to invest in a diverse array of different companies. That's why these financial services were initially limited to such wealthy clients.
Azam wanted to change this. He wanted to make these halal and ethical financial services accessible to people who didn't have hundreds of thousands of dollars in savings. So in 2016, Absolute Wealth launched two mutual funds. Mutual funds allow investors with small amounts of capital to pool their money with other investors in a diversified portfolio.
When you invest in a mutual fund, you’re actually investing in many stocks at once. It’s up to the mutual fund manager to decide what percentage of the investment fund goes into each different company in order to maximize returns and minimize risk.
The first mutual fund they launched is the Absolute Sustainable Dividend Fund. It's comprised of Canadian and global stocks that pass the SRI, ESG and Shariah compliance screens. The fund has started the year with a return on investment of 6.59% (net of all fees) as of March 3rd, 2017.
The second mutual fund is the Absolute Sustainable Property Fund. This was a solution for investors to get consistent income with limited downside risk and complement the sustainable dividend fund. This fund invests in interest-free alternative financing vehicles on real property assets within the residential and commercial Canadian sector and gives investors the profits from the rent on these properties. Unlike conventional real estate funds this fund does not use any interest bearing loans to purchase properties. Instead, it uses popular Islamic Finance concepts such as diminishing musharaka (shared equity partnership with declining balance) and murabaha (cost plus basis) agreements to purchase and potentially profit from real properties.
For example, the fund may partner with a doctor's office to buy a commercial property together. They then have a shared equity partnership declining balance agreement with the doctor's office whereby the doctor's office will pay an agreed upon amount over time to buy off the fund's share of the property. The profits from this will be the ongoing rent to the investors of the fund. The Property Fund allows investors to have exposure in real properties even if they don't have enough to purchase a property on their own and don't want to deal with interest bearing loans. The Absolute Sustainable Property Fund is on track to make a 4.5-5.5% annualized return on investment (net of all fees) this year. Sameer gives credit to the housing co-ops in Canada for inspiring him to launch this unique strategy.
Both the Absolute Sustainable Dividend Fund and Absolute Sustainable Property Fund can be part of a Registered Retirement Savings Plan, Registered Education Savings Plan, Tax Free Savings Account, or Pension Accounts. By setting up these funds, Absolute Wealth has made halal, ethical, and sustainable investment more accessible and mainstream for Muslim and responsible investors.
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