Prevalence of ESG Strategies Among Shari’a‑Compliant Funds and Attendant Issues

Environmental, social and governance (ESG) factors continue to merit attention in the private funds space and more generally in investment-making decisions. ESG investing is not without its opponents, however, as some U.S. institutional investors are pushing back on certain aspects of ESG investing. Further, the SEC is focusing on enforcement and rulemaking activity around ESG investing, with an emphasis on greenwashing. Nonetheless, one byproduct of any cautiousness as to ESG investing could be an increased interest in Shari’a-compliant funds or other products that may embody many features of ESG investing without simultaneously running afoul of any regulations or rules. This guest article by Morgan Lewis attorneys Amanjit K. Fagura and Alishia K. Sullivan explores recent ESG trends; the interplay of ESG investing and Shari’a compliance; risks and considerations associated with forming ESG Shari’a-compliant funds; and how those risks have affected fund launches to date. For more on Shari’a compliant funds, see “The “New-Age” Sukuk Market: How Investors Can Profit While Safeguarding Against Legal Risk” (Sep. 22, 2011).

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