Those who are attracted to “Green” investing may also be interested in Shariah finance. A firm operating in such spaces agrees, but has also warned that the pricing of conventional green debt means that it can struggle to meet expectations of return.
Issuers of Shariah-compliant financial Sukuk must be mindful to
avoid the potential trap of forsaking returns in “Green”
investments – as appears to have happened with some conventional
issuance, an industry figure says.
Shariah financial structures called Sukuk are certificates
representing individual ownership interests in a portfolio of
eligible existing or future assets. Sukuk are more akin to equity
than debt, given that charging interest is banned in Islamic law.
Their pricing and structure takes account of risks, including
default, in order to mimic conventional debt cashflows in certain
ways.
And with Shariah finance, areas such as gambling, pornography and
alcohol are forbidden, and there is a general dislike in Shariah
law of waste and needless consumption – which maps quite closely
with what a lot of Green investment claims to be about.
These points were made to this publication recently by Scott
Levy, chief executive of Bedford Row
Capital. The firm, based in London, describes itself as a
“non-bank originator” that exists to serve businesses unable to
access the services of banks, which want to raise finance in
the debt capital markets. It has partnered with the Sukuk
issuance platform, Al Waseelah. Potential companies are provided
a proprietary ESG assessment that poses questions about the core
of their company and operations. Al Waseelah is one of the few
Islamic finance companies to follow the United Nations Principles
for Responsible Investment, Levy said.
Levy, a figure who is unafraid to pull his punches, argues that
there is a problem with conventional Green bonds – some of them
might struggle to meet investors’ return expectations as
inflation rises to multi-decade highs. These bonds attracted a
Green premium when they were first introduced, such was the
enthusiasm for all things environmental – but the maths
have become less appealing as inflation rises. Green bonds
were cheap ways for issuers to get funding, but they did not
offer much protection against inflation – not helpful in the
current environment.
According to some estimates, more than $1 trillion of Green bonds
have been issued since they were first created. It is open to
argument how many of them will return their investors” capital in
full.
“We are riding this total wave of interest and issuers are able
to push low costs because everyone wants to go green. There are
no inflation-linked Green bonds,” he told WealthBriefing
in a call. “There is a lot of regulatory pressure for people in
the West to hold Green bonds; there are going to be performance
issues and investors’ patience could run out. This is going to be
a headache for regulators,” he said.
In a March article, Beware the green trap: Cautionary
notes, Levy wrote that issuers of Sukuk and other Shariah
finance must be aware of the problems that conventional issuers
of “Green” bonds encounter.
“The largest asset managers are having to sell off their
non-green assets (particularly in Europe with SFDR
[sustainability related disclosure] looming) which drives the
prices down to buy `greener’ assets (particularly bonds which
meet the Article 9 requirements) which further drives the yields
down as prices rise,” he wrote. “To make matters worse, green
issuers (`dark green’ if they meet the new rules) are issuing
long-term debt at very low rates. Why not? Institutional
investors need to buy benchmark size green debt to meet the new
rules; issuers are having a laugh as they can get very cheap
long-term funding.”
In his March note, Levy said: “Equity markets have slumped this
year; the NASDAQ Green Economy Index (QGREEN) is down 15 per cent
year-to-date and global green bonds (Bloomberg Global Green Bond
Index) have underperformed investment grade debt by 40 per cent.”
The S&P Green Bond Index shows that total returns, in
dollars, have struggled since the index was launched on 31 July
2014; they rose during 2020 and 2021 but fell sharply this
year. The index value at launch was 139, and as of 2 May, was
128.16. The S&P International Corporate Bond Index has
broadly followed the same pattern.
Inflation has continued to rise and central banks such as the
Federal Reserve and Bank of England have raised rates. Green
bonds, issued in the days when price pressures were weak and
rates zero, or even negative, might not fare so well in a changed
environment.
Levy argues that Shariah finance, because it can tick some of the
same boxes as those seeking Green finance, deserves more
attention. Bedford Row works with organisations such as
International Islamic Financial Market. He said that even
non-Islamic investors can benefit if they consider
Shariah-compliant areas as something to hold in portfolios.
The lack of Shariah-compliant products in the West is a
problem, he said. There are a few cases: Quilter Cheviot has a
discretionary portfolio for Shariah-compliant investors; HSBC has
some services.
A problem is that the UK’s FCA does not have expertise in this
area yet, Levy said.
