Islamic finance companies looking to reduce their dependence on the real estate sector – which loaded their books with what turned out to be deadweight in the wake of the global financial meltdown – may be moving towards financing projects that have a positive impact on the community or environment.
Last week, UK Islamic bank Gatehouse and Swiss fund management company Sustainable Asset Management (SAM) announced the first ever Shariah-compliant water-focused investment strategy fund, aimed at helping to solve global water shortage crisis and meet the growing demand for water investments. Gatehouse said this may be a future direction for Shariah-compliant financing which combines high returns with sustainability trends.
“Global developments such as population growth, investments in the renewal of water resource infrastructure, the strategic need for potable water, as well as efficient water management will represent significant growth drivers in the years ahead,” it said in a statement.
According the World Health Organization, 1.1 billion people do not have access to clean drinking water.
“This new collaborative ‘Islamic finance water strategy’ affords investors the opportunity to gain a financial interest in sustainability-oriented companies that offer technologies, products and services throughout the entire value chain of the water industry, while adhering at all times to Shariah guidelines,” the company added.
Gatehouse, which is owned by Kuwaiti investment company Securities House, has set no limits on how much it intends to raise and projects “above average returns”. It told Islamic Finance news that it will offer this fund to as many investors as possible and anticipates high interest. “The market potential for this type of strategy is huge given the special appeal of the water theme in an Islamic finance framework.”
What exactly will it invest in? “We have two levels of selection. Firstly SAM identifies companies which meet the investment criteria for sustainability investing and have an exposure to water. This could include technology companies but also distribution, utilities and food.”
“Then we screen these companies for Shariah compliance. This means, among other things, monitoring the financial ratios of the companies related to leverage and interest income to ensure they fall within accepted Shariah guidelines.”
Gatehouse added that it will seek quality investments around the world, focusing on established listed companies. “The balance will be in the US, Europe and Asia, with a small focus on emerging markets.”
It intends to raise money from the Gulf Cooperation Council (GCC) countries and Southeast Asia, notably Malaysia, as well as financial institutions in Switzerland, France, Luxembourg and the UK. The initial response has been encouraging and Gatehouse and SAM are planning a joint road show in June to introduce the Islamic water strategy to GCC institutional investors: “The market tells us that there is high demand for this innovative investment strategy.”
Is this where Islamic financing is heading over the next few years? “Successful Islamic investment products will be those that not only meet the financial and activity-based screens for Shariah investments, but also whose entire approach to investing is based on adhering to wider principles of Islam, such as concern for the environment, access to basic resources and sustainability in general.”
SAM, an asset management company exclusively focused on sustainability investments, already manages a US$1.5 billion mainstream water fund. The company, which is majority-owned by Dutch financial group Robeco, will manage the new fund’s assets.
Gatehouse said it chose to work with SAM because of the latter’s expertise and commitment to the sustainability sector, backed by a world-class investment approach. “Sustainability investing means investing in sustainable earnings. This means identifying companies who profit better than their peers from sustainability trends such as water scarcity. The ability to anticipate and address fundamental needs gives them a critical advantage in their respective markets.”
Will Gatehouse be launching more “sustainable” funds with SAM? “The launch of future products will depend primarily on investors’ needs but both Gatehouse and SAM are confident that the interaction of sustainability and Shariah-compliant investing will become more important in the future.”
In a report on “The Future of Sukuk: Substance over Form” released recently, Moody’s Investors Service highlighted the need for ethical financing and social responsibility. When asked whether the SAMGatehouse fund would fit the bill, Khalid Howladar, vice president and senior credit officer of Moody’s, affirmed: “This is exactly the type of project that has social benefits.”
But he cautioned: “One needs to be careful to balance the desire for profit and the need for economic viability with the sale of ‘water’ to people who may desperately need it. Ethical means just ensuring the right financing and investments from a moral and humane perspective.”
Last week Malaysia’s central bank deputy governor Mohd Razif Abdul Kadir said Islamic finance needs to address its over-reliance on real estate. He pointed out that although Islamic finance markets had escaped the subprime crisis, it would not be spared the effects of the contagion. His remarks came in the midst of a slew of negative news reports from Islamic finance companies in the Gulf. For instance, Dubai-based Islamic mortgage company Amlak Finance posted an AED204 million (US$55.5 million) loss in the fourth quarter of last year, mainly due to a sharp fall in real estate investments.
Investment DAR, half-owner of carmaker Aston Martin, became the first company in the Gulf to default on a payment for its US$100 million Sukuk. Government-owned Nakheel, developer of some of the more grandiose projects in Dubai, admitted to receiving a bail-out from the emirate’s department of finance to help pay its invoices.
The new Shariah-compliant water fund is the second venture combining ethical and sustainable fund management with Islamic finance. Last month, UK-based F&C Asset Management teamed up with BMB Islamic to offer an investment product combining ethical and Islamic principles.
This article first appeared in Islamic Finance news (Volume 6, Issue 19).