The principles of Sharia-compliant investing are essential for success in the emerging markets of the United Arab Emirates (UAE) and Saudi Arabia. As the Middle East continues to rise on the radars of global investors, understanding the dynamics of Sharia-compliant investing is crucial to meet the requirements of many investors institutions in these countries. ESG vs. Sharia Investing Traditional ESG (environmental, social and governance) investing focuses on the analysis of non-financial factors in assessing investment opportunities. The ESG analysis often includes evaluating a potential investment's impact on the environment, social and/or governance specific issues. Investing with Sharia compliance in mind is similar to ESG, as the analysis includes the assessment of ethical and religious aspects of investment opportunities. While ESG investing is subjective, based on a particular investor's priorities and values, Sharia investing adheres to strict rules of Sharia, which is a set of principles informed by the Islamic religion. Basic Tenets of Islamic Finance All sharia-compliant investments must abide by the principles of Islamic finance, according to Mercer's report Sharia Investing: What You Need to Know. These principles include: Interest (riba) is prohibited. Islamic law prohibits the paying of interest. Sharia law views money as a medium of exchange with no real or intrinsic value. One cannot charge or be charged interest for the use of money, as charging interest provides an advantage to one party at the expense of another. Unreasonable uncertainty or speculation (gharar) is prohibited. If a transaction is uncertain, or if a lack of information could lead to an undesirable result, it is not allowed under sharia. That means investing in futures, which involves uncertainty, would not be permitted. Impermissible activities (haram) are prohibited. Sharia-compliant investors are not allowed to invest in companies involved in impermissible activities, such as alcoholic beverages, pork meat or gambling. Profits and losses must be shared. All parties must share in the risks and rewards of any investment. Assets must be tangible. All financial transactions must be backed by tangible, identifiable underlying assets, rather than speculative assets. Opportunities for Success Clearly, the principles of Sharia restrict exposing a Sharia-compliant portfolio to conventional asset classes. While Sharia-compliant investing can present some challenges to traditional investment strategies, it also offers attractive opportunities for successful wealth building. For instance, the cash component of a conventional portfolio would often be invested in money market instruments. But in a Sharia-compliant portfolio, cash must be invested in non-interest-earning deposit accounts or Sharia-compliant contracts. Similarly, in a conventional portfolio, fixed income investments would usually include government and corporate bonds. Because of Sharia's ban on interest, those bonds are not permissible under Islamic rules. Instead, Sharia-compliant portfolios can invest in Sukuk instruments , which are Islamic financial certificates that are used to purchase assets, of which the investor has partial ownership. For example, one Islamic bank recently signed an agreement to invest in two oil tankers, which will allow investors to own a portion of a tangible asset.1 While conventional portfolios can invest in all types of sectors and industries, Sharia-compliant portfolios must avoid certain industries that are not Sharia-compliant. These include conventional financial institutions (except Islamic institutions) and any equity associated with, alcohol, tobacco, pork-related products, gambling, cloning, pornography, hotels, advertising and media (except newspapers), and weapons. In certain cases, revenues from non-compliant activities are permissible if they are below the threshold of 5% of total revenues. In addition, eligible companies' income must comply with a set of financial ratio screens, which exclude companies that are highly leveraged and/or with excessive cash/accounts receivables. Furthermore, the following instruments or any derivatives may not be held in the Sharia portfolio: Futures Forwards Preferred stock Options Swaps Short sales Any other instrument that involves the payment or receipt of interest. Although the majority of conventional investments don't fit with Sharia principles, there are other Islamic investment products that meet the evolving needs of Sharia investors. For instance, a number of endowment funds, such as the Al Rajhi Endowment, Alinma Enayah Endowment, and King Abdullah Endowment, offer a wide spectrum of Sharia-compliant investment opportunities. Many Muslims rely on Sharia to govern every aspect of their lives, including their financial wellbeing. For those investors who adhere to Sharia, investing in products or companies that violate their religious beliefs is not acceptable. However, it is important to note that there are investors who are very strict when it comes to adhering to Sharia guidelines that are commonly endorsed by Islamic scholars and other institutions such as AAOIFI (Accounting and Auditing Organization for Islamic Financial Institution). On the other hand, other investors are flexible in terms of compliance. In order to better understand the financial and investment needs of Muslim investors, investment professionals are well-advised to understand the Sharia principles and standards if they embark on marketing their investment products and services. Furthermore, conventional asset managers need to be innovative in developing new Islamic products that meet the evolving needs of Sharia-compliant investors, especially as Muslim investors are becoming more affluent and sophisticated. Sources: White, Maddy. "ADIB inks sharia-compliant deal to finance two oil tankers," Global Trade Review, 08 Jan. 2020, https://www.gtreview.com/news/mena/adib-inks-sharia-compliant-deal-to-finance-two-oil-tankers/.