The newly announced Environmental, Social and Governance (ESG) Index in Budget 2014 could help investors pick Shariah-compliant companies that are also highly socially responsible.
Consultant and academician at the University Malaya, Sherin Kunhibava (picture) said the introduction of the ESG, the first in Malaysia, is an excellent move which will recognise companies that already have high socially responsible practises and encourage others to follow suit.
During the budget speech, Prime Minister Datuk Seri Mohd Najib Razak announced that Valuecap Sdn Bhd will allocate RM1 billion to invest in companies that score high on the ESG Index.
“I trust this will encourage more companies to show high commitment towards social responsibility,” Najib said. The ESG is one of the measures that will help enhance the profile of listed companies which have high socially responsible practices, the premier said.
These efforts were hailed as innovative and an excellent move in the context of Islamic finance, as the index will allow investors to pick Shariah-compliant companies, said Sherin.
However, she said Islamic financial Institutions will have to strive harder to meet the criteria of Shariah-compliance and high social responsibility. The challenge will be on how to calibrate the ESG index and rate listed companies, Sherin said in a post budgetary speech comment to The Malaysian Reserve.
In the Budget 2014 speech on Islamic finance, the government focused on the need for social responsible investment (SRI) and announced it will set up a SRI Fund to be invested in listed companies which demonstrate high accountability, transparency and sustainability, including inclusiveness in diversity encompassing gender, age and ethnicity.
Sherin said the challenge in this case will be to “identify the companies that uphold these criteria”.
Najib said the Securities Commission Malaysia will introduce the framework of SRI sukuk instrument or SRI sukuk to finance various sustainable and responsible investment initiatives.
To this, Sherin said it is an innovative, “welcomed and timely move in light of world current affairs; this move will see companies stepping up efforts to initiate sustainable and responsible business growth opportunities to be eligible as an investment initiative for the SRI sukuk,” Sherin said the idea of the SRI sukuk will also help the Malaysian Islamic finance sector gain an edge over other financial centres.