FAST FINANCE

The sound of squeaking tires echoed across the financial world as investment bankers pulled their cars to the side of the road as they heard news of the possible IPO by Saudi Aramco.  If completed, it would be the biggest public company in the world and its initial public offering size would surpass the previous record of $25 billion held by Alibaba which went public in 2014.  Coming on the back of a fall in global oil prices, the IPO would help attract fill the current account deficit that opened in 2015 by attracting foreign investors to recently-opened Tadawul. 

Faith-based values and ethical finance

Edward Mason is the Head of Responsible Investment for the Church Commissioners for England.

As Head of Responsible Investment for the Church Commissioners for England – who manage the Church of England’s £6.7 billion endowment – I get to go to my fair share of ethical investment conferences.

In September 2015 I attended the inaugural Global Ethical Finance Forum in Edinburgh, convened by Middle East Global Advisers. This Forum was excitingly different because it was organised and largely attended by exponents and practitioners of Islamic Finance.

It was not, however, an event that looked inward to the Islamic Finance world. On the contrary, I was invited to speak about the Church of England’s approach to ethical investment.  There was also a host of speakers and attendees representing secular responsible investment, which advocates the integration of environmental, social and governance factors into investment decision-making and ownership.

There was one phrase that I heard at the conference that has really stayed with me. It was a reference by Tirad Al-Mahmoud, Group Chief Executive Officer of Abu Dhabi Islamic Bank, to the importance of integrating ‘the spirit of Shariah’ into his work – for example, ensuring that the customers of his bank are treated fairly.

This expansive appreciation of the scope of faith-based ethical finance chimed with me because it is how the Church Commissioners see ethical investment. We seek to reflect the whole of the Christian faith in the way in which we invest.

We avoid certain investments on ethical grounds. When investing directly in public equities, property or corporate debt, we apply investment exclusions to companies involved in indiscriminate weaponry, conventional weaponry, pornography, tobacco, gambling, non-military firearms, high interest rate lending, human embryonic cloning, the extraction of thermal coal and the production of oil from oil sands.

We are implementing a new policy on alcohol under which companies deriving revenues from alcohol are only eligible for investment if they meet our ethical standards for responsible marketing and retailing.

We take our stewardship responsibilities seriously. We vote our shares ourselves, in a way that is consistent with our values, rather than leaving this to our investment managers.

We also engage directly on ethical issues with companies in which we invest. Earlier this year, we co-filed our first ever shareholder resolutions, about strategic disclosure on climate change, at the AGMs of BP and Shell. In an unprecedented step, the resolutions were backed by the boards of both companies and approved by over 98% of shareholders voting at the AGMs. We have filed similar resolutions in the UK’s diversified mining sector in 2016 and have amassed a mixed faith-based and secular filing coalition with over $6 trillion of assets. Our experience is that active, serious engagement by major investors with a strong faith-based remit can have a significant impact on corporate practice whether alone or in powerful co-operation with other investors.

The final strand of our approach to ethical investment is low carbon investment. We are the UK’s largest private owner of forestry and a significant investor in the UK’s largest environmental markets investment trust. In all we have £299 million of investments that qualify for inclusion in the Low Carbon Investment Registry maintained by the Global Investor Coalition on Climate Change.

The Church Commissioners’ ethical approach to investment does not hamper our ability to generate strong financial returns for our beneficiaries. We have an outstanding investment record. Over the last 30 years the fund has achieved an average return of 9.8% a year, 6.3% a year above retail price index inflation.

I left the Global Ethical Finance Forum last September thinking about the potential impact of the billions of dollars of investments represented by Islamic Finance. Like Christian ethical finance, Islamic finance is grounded in exclusions of certain financial practices.

But if investing in line with the spirit of the Christian faith can now also embrace active ownership, sustainability, and the best of secular responsible investment, could there, I wondered, be new and exciting ways in which Islamic values could be expressed in the practice of Islamic Finance –particularly with regard to climate change?

Like Christianity, Islam attaches great importance to stewardship of creation and care of the poor and vulnerable. Faith-based investors have a clear moral responsibility to take account of climate change in the way in which they invest. Following the decision by governments meeting at COP21 in Paris in December to work to keep the global temperature increase well below 2 degrees Celsius, there is now also a financial imperative to integrate the risks and opportunities posed by climate change into investment practice.

Islamic Finance integrating the best of responsible investment and embracing the transition to a low carbon economy would be an enticing prospect indeed.

A jump followed by a slow-down – Turkey’s recent insurance market developments

The Turkish insurance market saw a reversal in the fortunes of its insurance market growth after strong growth in 2013. Rising geopolitical uncertainty both from spillover from the Syrian civil war and resumed conflict with Turkey’s Kurdish separatists combined with greater political uncertainty than in recent years had a negative impact on both life and non-life premium growth for insurance companies based in Turkey.

The fall in premiums during the past two years occur even adjusting for the depreciation in the lira, but also reflect a reduction in purchasing power parity due to a general slowdown in the economy caused by continued slow growth in the Eurozone, Turkey’s main trading partner, the depreciation of the lira and an influx of refugees arriving from Syria. The macro economic figures paint a mix picture for the future prospects of the insurance industry in Turkey.

Source: World Bank

The political uncertainty has spilled into the monetary policy picture where there is pressure for rate drops as growth slowed in 2014 that overcame the preference from others—notably foreign investors—for higher rates to defend the value of the lira.   The cost of the uncertainty has been a continuation of the devaluation of the lira and a rising size of external debt measured both in exports and as a share of gross national income.  This matters to the insurance sector because about three-quarters are foreign owned or partnered with foreign insurers.

Looking at the insurance penetration, which at 2% is relatively high for the Middle East but low by emerging market standards.  Malaysia, for example, which has a similar per capita GDP level had an insurance penetration rate of almost 5% in 2013.[1]  In addition to higher insurance penetration in comparable markets, Turkey has favorable demographics, rapid urbanization and an expanding middle class can lead to the growth of insurance sector that can continue to lead the region.

Source: Insurance Association of Turkey and Finance Forward analysis

The main drivers behind the growth in 2013 was legislation, in particular legislation making some forms of insurance (like motor insurance) compulsory and incentives such as 25 percent state contribution to private pension plans.  These incentives have been welcomed by insurance companies as creating a significant growth market even as the same legislation capped the fees that insurers can charge on pensions.

The insurance market will continue to see mixed prospects going forward.  A modest recovery is expected in 2016, but the outlook of the Turkish insurance industry is uncertain given potential downside risks from continued turmoil near the Syrian border and in Kurdish areas.  However, the political uncertainty from the inconclusive election in 2015 has been resolved with the November general election which returned Erdogan and his AK Party to power resolving fears of the effect of a coalition government.

The European Union’s growth prospects, while still slow, are not seen as being at risk of another recession which should support Turkey’s export sector, provided that the fallout from the Federal Reserve’s interest rate hikes does not lead to continued heightened volatility and devaluation of the Lira.