SEDCO Capital, CFA Institute showcase best-practice ESG integration in the EMEA region

An asset manager has teamed up with a global association of investment professionals to help investors understand how they can better integrate environmental, social and governance (ESG) factors into their equity, corporate bond and sovereign debt portfolios.

Global asset manager SEDCO Capital has partnered the CFA Institute to provide a best-practice case study on its fully Shariah-compliant prudent ethical investment (PEI) strategy for a new report on ESG integration in equity and fixed-income investments.

It is one of four reports compiled by the CFA Institute to create a best-practice guide to this nascent investment strategy.

SEDCO Capital chief risk officer Christian Gueckel (picture) said the asset manager has always believed that being a prudent investor means avoiding undue risks and seeking sustainable investments with strong governance which complies with jurisdictional regulations.

“Our PEI strategy shows that Islamic portfolio criteria, combined with ESG integration, can generate higher risk-adjusted returns than both conventional and responsible investment portfolios,” he said in a statement.

The report, entitled “ESG Integration in Europe, the Middle East, and Africa (EMEA): Markets, Practices and Data”, focuses on the current state of ESG integration in EMEA.

In the Arabian Gulf region alone, the report finds that Islamic finance and ESG investing are complimentary investment approaches with many shared principles, such as good social and environmental stewardship.

SEDCO Capital’s case study examines its PEI strategy which was described as a unique approach to integrating responsible and Shariah- compliant investment.

Both responsible and Shariah-compliant investment strategies exclude the sin stock sectors via negative screening. However, Shariah compliance also requires balance sheet ratio screening, SEDCO Capital said in a statement.

SEDCO Capital said its own research shows that the balance sheet constraints of Shariah-compliant investors can improve risk-adjusted returns of conventional and responsible investment portfolios.

PEI goes further, combining both responsible and Shariah-compliant investment strategies and integrating assessment of ESG criteria in addition.

In this way, PEI delivers distinct return/risk characteristics relative to conventional and responsible investment strategies, and has generally outperformed conventional portfolios when adjusted for risk, over the last few years.

In its case study, SEDCO Capital sets out five key building blocks to its PEI investment process. They are: Negative screening, environmental factors, social factors, governance factors and active ownership through proxy voting.

In the EMEA region, the CFA Institute finds the ESG strategy is farther advanced in the equity world than in fixed income.

It also finds that the appeal of environmental and social factors is growing and that governance is so far the most widely integrated factor into investors’ processes. However, although integration is becoming more frequent, it noted that portfolio managers and analysts are still rarely adjusting their models based on ESG data.

In July 2014, SEDCO Capital became the first fully Shariah-compliant and the first Saudi Arabia-based asset manager to be a signatory to the United Nations-supported Principles for Responsible Investment. — TMR