Ethical investment can be classified as using negative criteria to avoid investing in companies that are involved in specific areas. This screening is largely subjective, often depending on individual consciousness, but a general consensus of those screenings shows an unerring similarity to the screens used by the Islamic world when selecting suitable investments – with riba (interest) probably being the major difference between the two sets. The same types of prohibition of firms are excluded by ethical screening in the conventional banking world as are screened by the Islamic world – such as those that are involved in gambling, alcohol, arms manufacture, tobacco, pornography and the like.

It is notable that the roots of socially responsible investing in the conventional world also seem to have stemmed from a religious connection – they have been traced back to the 1920s when the Methodist Church wished to invest in the UK stock market while avoiding companies involved in alcohol and gambling. Since that time, the industry has flourished with banks, such as the Netherlands-based Triodos Group and the UK-based Co-operative Bank, taking prominent positions in the conventional banking world supported by hundreds of mutual investment funds, each specialising in some aspect of ethical or socially responsible investment.

So how interchangeable are these technical terms – ethical investing, socially responsible investing and Islamic investing? Ethical investing, as we have seen, uses negative screening to weed out companies that engage in undesirable lines of business. The Ethical Partnership goes on to classify socially responsible investment in the conventional world as not only adhering to agreed negative criteria, but actively seeking out firms which make a positive contribution to society. This is very much along the lines of classical Islamic economic theory which holds that the Earth’s resources are to be used for the benefit of the community as a whole. Another fundamental tenet of Islamic economic theory is that it is the duty of mankind to care for the world’s resources and to hold them in stewardship, or trust, for future generations. It is interesting then, that the UK’s first purely ethical trust, which was launched in 1984 by Friends Provident, was called The Stewardship Fund. Conceptually, the two forms of banking would appear to be operating on parallel paths.

What is ethical investment and socially responsible investment?

Ethical investment has been defined as putting your money where your morals are, or investing according to your beliefs.

Ethical investments tend to use negative criteria to avoid investing in companies involved in areas such as:

Environmentally damaging practices;
 Trading with oppressive regimes and countries with poor human rights records;
 Pornography and offensive advertising;
 Gambling;
 Tobacco and alcohol production;
 Unnecessary exploitation of animals;
 Unsafe products and services;
 Genetic engineering, abortion and embryonic research;
 Armaments.

Socially responsible investments, as well as adhering to agreed negative criteria, actively seek out firms which make a positive contribution to society, for example:

Products and services which are of long term benefit to the community;
Conservation of energy and natural resources;
Environmental improvements and pollution control;
Good relations with customers and suppliers;
High employee welfare standards;
Organic farming and foods;
Strong community involvement;
A good equal opportunities record;
Respect for the sanctity and dignity of human life;
Openness about their activities.

The list is not exhaustive. Each fund tends to differ in negative and positive criteria and also in investment risk. It is, therefore, very important to select the right funds to match your views.

Other differences may be more readily understood by conventional banking’s ethical investment community. These differences include the avoidance of short-selling and the more conservative use of derivatives, which would typically be used only as hedging tools if they are used at all. Many in the West may well now sympathise with this position, particularly in light of the current turmoil in the conventional financial markets and the abuses that have reportedly taken place.

Possibly there is a third alternative, that of stressing what the Islamic model has in common with the socially responsible investment community of the conventional world and pointing out that the industry is already pre-screened, so that it inherently meets the needs of the ethically conscious conventional market. There may already be some traction in this message – Imran Pasha, head of branch network at the Islamic Bank of Britain has noted that, in the UK, his bank has experienced a five to ten per cent increase in inquiries from non-Muslims who were interested in the ethical aspects of Islamic finance.

What ethical screening means:

Shari’ah-based Islamic index screening

Shari’ah indexes are mechanisms that track the performance of selected, leading Shari’ah-compliant companies. The indexes may be global or limited to a particular geographic region. Two of the major providers of Islamic indexes are Dow Jones and the FTSE.

Boards, made up of leading Shari’ah scholars, advise suppliers on the make-up of the indexes and advise on Shari’ah principles. The Dow Jones uses its own in-house appointed Shari’ah scholars; the FTSE uses the services of Yassar Research Inc.

Excluded from the Islamic indexes are companies that are involved in activities that are not in keeping with the fundamentals of the Islamic faith (haram activities). Companies that are involved in the following activities are automatically excluded:
• Alcohol manufacture, distribution, or related activities;
• Conventional banking services or other interest-based service companies;
• Entertainment and gaming services (casinos/gambling, cinema, hotels, music, pornography, etc);
• Life insurance;
• Pork-related products.
Although not specifically prohibited by the Shari’ah, companies engaging in the following activities are considered to be against the interests of the community, so are generally excluded:
• Arms manufacture or sales;
• Tobacco-related production and products
To be considered Shari’ah-compliant, companies must also adhere to strict financial ratio screening (see below) as determined by the index’s Shari’ah advisory board.

Other ethical based screening

Many ‘ethical’ and ‘socially responsible’ investments will screen out most, if not all, of the above categories. Additionally, other screens, such as human rights violations or use of child labour, may be included in the ethical screenings of conventional financial investments depending on the consciousness of the particular screen.

These activities are not strictly considered as ‘haram’, so are not automatically excluded from the Shari’ah screenings.

Financial ratio screening

Islamic scholars recognise that business activities must be carried out with non-Islamic organisations so they tolerate a limited amount of otherwise ‘haram’ activities to take place within those conventional companies. Those activities must be within acceptable limits. This type of screening has protected the Islamic community from investment losses in the past. A commonly quoted example is when Enron, prior to its collapse, exceeded the Shari’ah guidelines of acceptable levels of debt and was taken out of the Islamic indexes at the insistence of the Shari’ah scholars, and so protected Islamic investors from its dramatic fall in the markets.
• Some of the common financial screens include:
• Debt to total assets should not equal or exceed 33 per cent;
• Illiquid to total assets should be at least 51 per cent (this figure can vary according to region);
• Total investment in non-compliant activities should not equal or exceed 33 per cent;
• Income from non-compliant investment should not equal or exceed five per cent of gross revenue;
• What is referred to as ‘net liquid assets’, calculated as [(tangible fixed assets + inventory) – liabilities], per share should be at less than the market price of the share.

A key point, though, is that the fund, although being totally Islamic in practice and intention, is also being actively promoted to the socially responsible investment community in the conventional world as well as to Islamic investors.

The hope is that these primary investment ideas will appeal to both the ethical investors in the conventional world and the ethical investors in the Islamic world. To hold these basic humanitarian beliefs you need not be Muslim – they are values that the majority of people throughout the world will uphold.