Halal investing is sometimes called Shariah investing or Shariah-compliant investing, while ethical investing is also called socially responsible investing. The growth of halal and ethical investments is mainly due to the fact that the corporate world becomes more sensitive to the growing social awareness of shareholders and contribution to real economic activities.
Halal investing is based on religious belief, which means that all investments must adhere to Sharia principles. Halal investment must therefore follow the principles of Sharia, which must be free from prohibited elements, including riba (interest), maysir (game) and gharar (uncertainty). Riba or interests are expressly forbidden in the Quran. Basically, riba is the excess money paid by the borrower to the lender in addition to the principal for the use of the lender’s money over a certain period of time. Therefore, financial products bearing the riba element such as interest-bearing deposits, bonds, private debt securities and money market instruments are considered prohibited (haram).
Maysir, which literally means a way to easily get something and get undeserved profit from it, are driven by pure chance. As a game of chance, gambling often leads people to take high risks and behave irrationally in order to win big. In Islam it is forbidden to take extreme risks unknowingly and to add value in view of the outcome with the possibility of losing money. Gharar essentially refers to the uncertainty of contractual terms that could lead to exploitation and deception of people, which could lead to litigation and contract manipulation. In addition to the three prohibited elements, halal investment is also based on the principle that Islam prohibits any activity with illegal activities (haram) such as wine, alcohol, adultery, gambling, tobacco, banks and conventional insurance, and meat. Pig. Therefore, the actions of companies contaminated by one of the prohibited elements are considered non-compliant with sharia.
On the other hand, ethical investing means incorporating corporate values and personal concerns into investment decisions. Ethical investing considers both the financial needs of investors and the impact of the investment on society. Ethical investing applies ethical and social criteria in the selection and management of investment portfolios. Investors are concerned not only with the financial returns of their portfolios and the associated risks, but also with the characteristics of the companies in which their funds are invested. This includes the nature of the company’s goods or services, the location of the company and the way in which it conducts its business and business operations.
The ethical investment strategy can be positive or negative. The positive approach is favourable to companies that enjoy a high reputation in terms of products, activities or business methods, while the negative approach aims to avoid investing in companies involved in products or countries. unacceptable or whose business methods are considered unethical. the ethical investment decision is mainly influenced by ethical issues such as environmental improvement, climate change, genetically modified foods, gambling, human rights violations, nuclear energy and military, animal testing, health and safety violations, etc. The concept of ethical investing is consistent as it evolves to provide appropriate policies according to the changing environment. In its most recent adaptation, ethical investing moves from negative to positive selection to promote innovation and positive contributions to society, not simply to reduce the negative impact of business and industry practices and environment.
Despite the differences, halal and ethical investing generally share an ethical investing philosophy which is a value-based approach to aligning an investor’s portfolio with religious beliefs. Both focus on real economic activities such as improving people’s living conditions and well-being, creating social equity, and preventing injustices in trade and commerce.
Halal and ethical investments also focus on the protection of natural and environmental resources with the exception of institutional financial sectors and invest in the same economic sectors, namely industry, health, consumer goods, services utilities, consumer services and basic materials such as technology. In addition, both apply measures that eliminate a group of companies or entire sectors based on social or religious beliefs. For example, industries such as tobacco, alcohol, and pornography are excluded due to the nature of the products and services that are harmful to society.
While halal and ethical investments use a screening process in managing their portfolios, the application of the screening process should be distinct. companies from which the portfolio manager can select investments.
Ethical investing applies the screening process to ensure that the companies they invest in adhere to their ethics policy. The screening process weeds out companies deemed negative and will encourage investment in positive companies. Negative screening avoids certain types of investments, for example gaming companies or arms manufacturers. Positive filtering, on the other hand, favours activities or characteristics deemed desirable such as the renewable energy industry or health. Some managers also use the “best-in-the-industry” rule, which selects leading companies in each business sector based on their social and environmental commitment, and the “overlapping social responsibility” rule, whereby the actions of a portfolio are selected according to the usual procedure, but a process is added to address social responsibility issues.
While the ethical investment screening process limits the inclusion of companies that are unaware of human rights and environmental concerns, halal investing appears to apply a different approach based on business compatibility with human rights. Sharia principles. On this point, halal investment is subject to the Shariah screening methodology determined by the Shariah Supervisory Board or the Shariah advisors of fund management companies. In some jurisdictions, e.g., Malaysia, the Shariah screening methodology is determined by a centralized Shariah advisory body established by the regulator, i.e. the Malaysian Securities Commission, as a more high authority in determining Shariah issues in relation to Islamic capital market activities which include Shariah compliance. investments.
The Sharia screening process generally includes two categories of screening, namely qualitative screening and financial screening. Quality screening excludes companies involved in prohibited activities such as alcohol, tobacco, gambling, pork products, and conventional banking and insurance. Sharia screening is usually made available by index companies such as FTSE, S&P Dow Jones and MSCI, which offer a wider range of Islamic indices for fund managers to compare against. Financial screening is applied using financial ratios to ensure securities are Sharia compliant, which involves calculating ratios, such as the ratio of interest-bearing debt to assets or the ratio of the total debt to the average market capitalization of a company. The wisdom behind financial screening is to avoid investing in debt-embedded securities.
Halal investing is further characterized by strict limitations such as the purification process and the exclusion of investments in interest-bearing securities to which ethical investing is not subject. On this point, halal investment provides for a purification of investment income tainted by impure income by purification. it is required when the companies are joint ventures that have passed the tolerable test of Sharia screening process resulting in tainted income generated from the investment. Purification involves giving a certain percentage of that income to charity as a form of repentance for being involved in a certain level of non-Sharia compliant investments.
In a nutshell, halal and ethical investments are closely related but not similar. It is argued that Sharia principles often go beyond the requirements of ethical investing and have the benefit of providing clearer ethical coding and standards as well as an enforcement mechanism overseen by the supervisory board. of Sharia or Sharia advisors.
The convergence of values between the concepts of halal investment and ethical investment highlights the ethical and social protection agreement. The Halal Investment Screening Criteria applies a more standardized negative screening approach for industries and companies that do not meet the basic Halal investment criteria. Although there are differences in the interpretation of the appropriate filters in the Islamic investment screening process, the differences are minor and in fact harmonize as the market develops and progresses.
Above all, the decision to invest in halal or ethical investments will always depend on the values of the investor, as well as their overall portfolio and financial planning objectives. Investors interested in halal and ethical investing often look for fund managers who offer a high level of disclosure and transparency in terms of investment process, portfolio listings and detailed reports before making an investment decision.