SEDCO Capital, one of the largest asset managers in Saudi Arabia, has launched a new investment strategy called Prudent Ethical Investing (PEI) that integrates its Shariah-compliant investment approach with ethical investing.
PEI stresses the importance of due diligence and transparency around investment structures, processes and reporting while also integrating the analysis of environmental, social and governance criteria in the investment process. The strategy seeks to avoid high financial risk and aims to enhance long-term risk-adjusted returns.
Hasan al Jabri, CEO of SEDCO Capital, said: “We have pioneered a Prudent Ethical Investment approach that ensures we invest in companies that have strong governance, clear structures, and a prudent level of leverage. In short, while we target strong returns and performance, we ensure that our investments benefit society, comply with Shariah and ESG investment principles, while avoiding excessive leverage and non-transparent investment structures.”
Mr. Al Jabri, who has been developing the PEI approach since 2013, recently oversaw the publication of a seminal SEDCO Capital white paper, entitled ‘How can Responsible Investors Benefit from Islamic Criteria?’ which looked at the performance of responsible investments, Islamic investments and unconstrained portfolios across the US, Europe and Asian equity markets.
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The research showed that Shariah-compliant portfolios have outperformed unconstrained and responsible investment strategies over the last decade on an absolute return and risk-adjusted basis across all analysed markets.
Christian Gueckel, Chief Risk Officer at SEDCO Capital and author of the white paper, said: “Our analysis has shown that sector exclusions and balance sheet constraints cause a distinct return profile for Islamic portfolios. The lower financial leverage and better cash conversion result in a bias to quality and growth which adds a prudence element to Islamic portfolios. Our results show clearly that responsible and unrestricted investors would have performed better using Islamic criteria.”
SEDCO Capital was the first Saudi asset manager and the first fully sharia compliant asset manager to become a signatory of the United Nations Principles of Responsible Investing (UNPRI), an initiative started by former UN Secretary General Kofi Annan. This principle-based framework called for the incorporation of environmental, social and governance variables when analysing risk for any investment.
The global financial crisis in 2007 highlighted the downside of excessive leverage and the robustness of the Shariah investment universe, which proved sturdier and less volatile to market conditions and shocks. SEDCO Capital’s white paper found that over the analysed period from 2006 to 2016, the global Islamic portfolio outperformed the global conventional portfolio by an annualised three percentage points and its Sharpe ratio improved by more than 40%.
The trend towards ethical investing which focuses on ESG (environmentally friendly, socially responsible and governance driven) investing has been on the rise over the past decade. SEDCO Capital’s research paper shows how both ethical and Shariah compliant investment can embracea sustainable economic development model and how these two forces have been merged to create the new concept of PEI. SEDCO Capital has set the standard for this investment approach and in demonstration of its appeal, it is now seeing global partners follow its lead.
“We now see PEI as a pathway to propel our business forward with new partners and new projects,” said Mr al Jabri. “Our partners will benefit from a better understanding of how our investment methodology will meet both their performance requirements as well as ESG and responsible investment principles.”
SEDCO Capital has seen a sharp rise in the number of investors seeking out its PEI investment products. International investors can choose from over 14 SEDCO Capital Sharia-compliant investment strategies in Luxembourg with total AUMs of $1.8bn. Shariah-compliant asset managers are now recognised globally as providing exceptionally strong platforms.