A proactive approach to maintaining continuous Shariah compliance through automated, real-time monitoring and portfolio management.
1. The Fiduciary Mandate of Ethical Investing
In the modern financial landscape, ethical or values-based mandates represent a significant and rapidly expanding segment of global Assets Under Management, representing a multi-trillion dollar market. These frameworks, which may be environmental, social, faith-based, or conscience-driven, form a core component of investment strategies.
They are non-negotiable obligations that seek to satisfy investors' preferences, standing alongside financial performance as measures of success. These specialized ethical frameworks generally impose dual layers of constraint on asset managers:
The "What" (Screening)
Defining the investable universe by excluding companies involved in activities deemed unethical (e.g., highly polluting industries, controversial weapons, or specific moral exclusions).
The "How" (Methodology)
Governing the permissible methods of financial transaction, such as restrictions on excessive leverage, complex derivatives, short-selling, or financing structures that rely heavily on debt and interest.
To build trust and provide auditable assurance in these specialized funds, asset managers rely heavily on external validation. They engage specialized third-party ethics auditors, compliance consultants, or screening tools to perform comprehensive reviews and issue certifications. This stamp of approval is vital, confirming that the fund's practices and holdings meet the customers' deeply held values.
2. The Challenge for Faith-Based Investments Mandates
While all ethical mandates require continuous adherence, the compliance challenge is particularly acute within faith-based investment vehicles, and even more so for those focused on Islamic values. These funds often face rules that demand an absolute, non-negotiable level of compliance with both qualitative screens and specific quantitative financial ratios.
If a company's financial activity (e.g., its ratio of interest income to total revenue) crosses a predefined threshold, the investment status changes immediately, which requires action. The industry's traditional compliance verification mechanism involves periodic audits, typically conducted on a quarterly or semi-annual basis. This reliance on lagging assessment creates an ethical risk window:
The Ethical Risk Window
A company's compliance status is constantly subject to change based on the data released in its financial or activity disclosures, which may occur at any time. For the weeks or months between formal review periods, a fund may unknowingly hold a non-compliant security. This compromises the fund's mandate and exposes the portfolio to unnecessary ethical risk and potential mandatory divestment losses.
While this risk window is generally accepted in the industry, its full implication and impact on genuine adherence are not always made clear to customers. We recognize that the integrity demanded by Islamic ethical mandates, and the trust our customers place in us, demands compliance be verified every single day.
3. Anytime Compliance Framework
To solve this exposure period challenge, we have developed an Anytime Compliance Framework. This framework transforms the reactive, periodic audit model into a proactive, continuous system powered by integration and automation, providing the highest standard of adherence required by our mandate.
We have partnered with Ratings Intelligence, a leading and technologically advanced Shariah screening specialist. This partnership grants us the independent expertise and data required to assess the compliance status for thousands of companies on a daily basis.
Figure 1: Anytime Compliance Workflow
Our Anytime Compliance Framework is built on a high-throughput, automated pipeline designed to manage risk and ensure swift corrective action:
Compliance Assessment
Our system continuously ingests the latest compliance data from our partner. It flags any security currently held in our portfolio that has had a change in compliance status.
Recourse Action & Re-optimization
If a ticker breaches compliance, the system does not wait for a quarterly audit. It triggers an automated sequence to remove that ticker and initiates a dynamic portfolio re-optimization to maintain performance parameters, all executed the very next business day.
Reporting
Detailed logs and alerts are automatically generated, documenting the status change, the immediate recourse action taken, and the subsequent portfolio adjustments for transparent reporting.
This anytime compliance model requires the ability to design sophisticated trading systems capable of reacting to such compliance events and re-optimizing the portfolio while simultaneously maintaining target risk and performance metrics.
4. Assertion of Commitment
This new framework is more than an operational upgrade; it is an assertion of ethical commitment. This technical innovation is crucial because:
It Ensures Integrity
It provides continuous, verifiable adherence to our stated ethical mandate, providing the highest standard of trust to customers.
It Mitigates Risk
By eliminating the exposure period, we significantly reduce the risk associated with potential loss-making divestment events, required to retro-adjust for compliance breach.
It Enables Scale
Automated, daily screening is the only way to manage a large, complex global universe of thousands of tickers efficiently. Technology makes strict ethical compliance viable at scale.
The Future of Ethical Investing
Through this framework, Sabr Investment Technologies is delivering the future of ethical, Islamically-aligned investing. Compliance is not a periodic checkmark, but a constant, automated certainty, ensuring customers have peace of mind that their investment meets their initial mandate at any point in time.
Disclaimer
This content is provided for educational and informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation of an offer to buy any securities or investment products. The information contained herein is not intended to be a comprehensive statement of approach and is subject to change without notice. Any investment involves risk, including the possible loss of principal. Readers should consult with their financial advisors before making any investment decisions. Nothing in this article should be construed as legal, tax, or financial advice. All information is provided on an "as-is" basis without any warranty of completeness, accuracy, or timeliness.