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02 December 2023

Criteria-based funds generate interest among investors in Middle East

Tranchimand (right) and Mallah at a seminar in Dubai yesterday. (EB FILE)

By Shveta Pathak

Asset management companies are looking at the Middle East as a high potential market for sustainable and responsible investment (SRI) that has shown a significant growth across the globe in the past few years.

SRI, an investment strategy that takes environmental, social and governance criteria into consideration while making investment decisions, has been generating lots of interest among investors in this region who, due to their exposure to Shariah compliant products, quite understand the value of selecting their investments based on a certain criterion, said asset managers.

SRI funds, for instance, combine various sustainability analysis approaches in order to meet the challenges of sustainable development, which means that they invest only in firms that are among the most sustainable and responsible in their sector.

"Investors here appreciate and understand the value of screening which forms the basis of SRI. It has been only three months that we started offering SRI in this region, though it's yet not open to retail investors here. Though money is yet to start flowing in, we have got quite an encouraging response," said Firas Mallah, Head of Middle East Office, Dexia Asset Management that holds a major share in the SRI fund market in Europe.

Explaining the approach adopted for this form of investment, Henri Michel Tranchimand, Head of Global Sales and Marketing, Dexia, said SRI seeks to offer investors an attractive long-term performance generated by financial expertise alongwith a sustainable analysis. "By combining long-term sustainability challenges and sound financial performance, investors can profit from both. The environmental, social and governance factors can enhance financial performance."

Citing an example of the mining sector, he said, absence of focus on health and safety issues in this case, for instance, would impact the safety of workers thereby making a company prone to higher rates of accidents and strikes, which in turn could result in lower profits and hence, lower stock prices.

"Our aim is to maximise the return as we believe that the companies which handle interests of their stakeholders better would be able to emerge best performers. In case of SRI, by focusing on these factors, there is no need to give up on financial return," said Tranchimand.

Shariah compliant investment is similar to SRI in the sense that it screens out certain sectors based on value-criterion while SRI screens companies according to several social, environmental and sustainable criteria. Shariah compliant investment in some ways is a simplified version of SRI screening, said Mallah.

Rising awareness on issues like corporate governance, he said, reflects that stakeholders in the region are getting concerned about accountability of companies, which is a positive signal for SRI.

According to Eurosif, European SRI Study, 2008, the broad European SRI market is valued at €2 trillion (Dh9.3 trn) and has seen a significant growth in the past few years due to public awareness and increasing transparency. It is moving into the mainstream with state pension funds taking the lead and 138 fund managers in Europe offering 447 SRI products, said Lipper Feri, a fund market research and analysis company.

Over 230 institutional investors from 30 countries representing $10trn have backed the principles of responsible investment (PRI), enacted by the United Nations, added Tranchimand.

"It shows that is growing from a very small topic to a very significant part of the asset management today and it has grown from equities to varied asset classes. It shows that is growing from a very small topic to a very significant part of the asset management today and it has grown from equities to varied asset classes."

"It is impacting all asset classes be it equities, balances, bonds or money market and there is an enormous growth potential with less than one per cent of global funds under management invested in SRI funds."

The SRI management process beings with sustainability analysis for which companies adopt various approaches.

The analysis

Sustainability analysis, the first step of the SRI management process, can be based on several approaches such as:

- The best-in-class approach which selects the best (stock/bond) issuers in a given sector with regard to sustainable development

- Norms-based approach that checks issuers' compliance with major treaties, conventions

- Thematic approach which selects the companies that best comply with specific sustainability themes