Making Islamic equity funds stand out in 2025 by dissociating them from sustainable investing policies — which are facing heat from political conservatives around the world — is easier said than done and not really necessary, experts shared with IFN Investor.
Leslie Yap, the managing director and country head of Nomura Asset Management (Malaysia), said this is particularly so when Shariah rules forbid investing in oil and gas companies that have high debt, while ESG strategies typically avoid such businesses for the pollution that they cause to the environment.
“We believe that we want to do both and we try to meet that,” said Leslie, referring to the ESG-Shariah duality focus chosen by Nomura, which manages the US$16.6 million Nomura Global Shariah Sustainable Equity Fund as of the 21st March 2025. “It’s a tough job, a tough challenge.”
The ethical investing space as a whole is under siege after Republican leader Donald Trump became US president again in 2025. Trump, who was in office previously between 2017 and 2020, has triggered a new wave of global opposition toward sustainable investing by signing executive orders that target pro-climate change policies and projects such as wind and solar energy. The president instead prioritizes carbon-rich fossil fuels such as oil, gas and coal.
Cutting back on companies with high ESG scores will leave Islamic equity funds with heavier concentration in technology, healthcare and industrial stocks and lower on consumer and financial business stocks, said Leslie. While the last two could be more prone to non-Halal activity and higher debt, they could also be outperformers.
Investor appetite for sustainable investing had been waning even before Trump’s return to power. According to Morningstar, US sustainable funds suffered net outflows every quarter of 2024 collectively amounting to US$19.6 billion – an increase from US$13.3 billion in outflows in 2023.
Leslie said the absence of a universally-accepted benchmark for Shariah ESG equity fundsdid not make it any easier to tout Islamic investment models over other strategies.
“So far, we have not seen an ESG-Shariah benchmark that we are comfortable with. It doesn’t mean that it’s not there. It’s just that we haven’t seen much and there’s been a lot of changes and development over the years.”
The Nomura Global Shariah Sustainable Equity Fund is benchmarked to the Dow Jones Islamic Market World Index. The index is down 3.41% year-to-date while the fund itself shows a loss of 1.5%.
There is no global standard for sustainable investing as “everyone has their own view of ESG”, said Leslie.
“For Nomura, what we have been doing is going with a normal Shariah benchmark. And we try to look for ESG sustainable companies in there that meet our six goals.” The six are mitigating climate change, natural capital depletion and obesity; eliminating communicable diseases; and enhancing basic financial services and access to clean drinking water.
Returns a priority
Elaborating on the ESG-Shariah integration, Leslie said what ultimately mattered were valuations and returns.
“We need to be comfortable that we are in a position where we can invest, deliver returns and beat the benchmark,” Leslie said.
Zaid Paruk, the chief investment officer at the US$1.2 billion Wealthvest Investment Management, is of the same opinion. “We do integrate ESG within our (Shariah) framework and effectively those companies with higher ESG risk have to deliver higher returns.
“We think that’s something unique and socially good. We wouldn’t want to just invest in high ESG risk companies without attributing a quantitative factor to that.”
Scott Klimo, who runs the US$2.7 billion Shariah compliant Amana Growth Investor Fund for Saturna Capital, concurs, saying fund managers were typically focused on making the right picks for investors while staying true to the strategies they have been entrusted with.
While Trump’s banning of offshore wind permits had a direct negative effect on that industry, there were powerful arguments for renewable energy, especially in solar, when viewed from the point of levelized cost competitiveness against fossil fuels and flexibility of application for distributed power, Scott said.
“Because of the regulatory issues, renewables will undoubtedly be subject to volatility. But investors can still be rewarded over the long term given the core economic argument and the low valuations/good growth that characterizes certain companies in the industry,” Scott explained.
Zeroing in specific industries that could deliver, Scott singled out healthcare, saying investors will likely survive any disruption there caused by Trump’s tariffs or the decision-makers in the US government now, who include billionaire Elon Musk and Health Secretary Robert F Kennedy Jr (RFK Jr).
“When we think of other Shariah/ESG investments, pharmaceuticals are the second-largest exposure in our funds, and we do not believe any of Musk’s activities or any of the tariff actions are negative for the industry. Secretary RFK Jr presents challenges, but his approach seems so scattershot I’m not sure he’ll ever get sufficiently organized to have a major impact, apart, possibly, from vaccines.”
