Category Archives: IFG Reports

The Opportunity for Ethical Sukuk

Author: Michael Bennett[i], The World Bank.

Source: Thomson Reuters Sukuk Perception & Forecast 2015

Islamic finance shares a strong similarity with ethical investing. Like ethical investors, Shariah-compliant investors demand that their investments not only be attractive in economic terms, but that they meet certain non-financial criteria as well. In the case of Shariah-compliant investors, these non-financial criteria involve compliance with Islamic law and principles.

Growth of ethical investing

The concept of ethical investing – investors using their money to promote ethical activities and social good – has deep roots in the doctrine of many religions. Islam, Christianity and Judaism, for example, all share a focus on the individual’s moral responsibility to use money in a way that betters one’s community and is consistent with one’s faith. These religious prescriptions have impacted individual investment decisions for centuries.

Over the past few decades, ethical investing has grown from being just a matter of individuals exercising their faith to become a comprehensive investment strategy. A large and growing number of individual and institutional investors, including asset managers, pension funds and university endowments, now include achieving certain social, environmental or corporate governance objectives as a part of their money management process. In making investment decisions, these investors overlay a qualitative analysis of a company’s policies or practices in the specific area or areas of concern to the investor onto their quantitative analysis of the company’s financial condition and prospects.

Ethical bond market

The conventional bond market has been used to channel investment to worthy causes for decades. The World Bank pioneered this use of the bond market when it issued its first bond in 1947.  The World Bank, and other supra-national institutions, issue bonds and use the proceeds of those issues to fund sustainable development projects in developing countries. Only recently, however, with the growth of the ethical investing movement, have investors sought to invest in bonds in which the proceeds will be used to promote specific ethical activities. Driven by this investor demand, the ethical segment of the conventional bond market has begun to expand rapidly, with supra-national “theme bonds” (linked to specific development themes such as women’s empowerment or access to water) and “green bonds” (bonds for which the proceeds support specified environmental projects or activities) leading the way.  Table 1 illustrates the growth trajectory of the green bond segment of the ethical bond market.

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[i] Michael Bennett is the Head of Derivatives and Structured Finance in the Treasury Department of the World Bank. The findings, interpretations and conclusions expressed herein are those of the author and do not necessarily reflect the views of the World Bank or its affiliated organizations.