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As senior regional head for CFA Institute MENA, William Tohmé, CFA, advocates for the highest standards of practice and ethics in the investment management industry by promoting financial market integrity and transparency among regional policymakers and regulators.
Tohmé joined CFA Institute in 2018 and is based at the organisation’s office in Abu Dhabi, which opened in the same year in collaboration with Abu Dhabi Global Market (ADGM). Previously, Tohmé was director of institutional business development at Lazard, where he developed the sovereign institutional client business in the Middle East. He has also served as director for Middle Eastern institutions at Alliance Bernstein.
In this interview, Tohmé discusses the obstacles preventing a greater convergence between Islamic finance and ESG investing, what the green sukuk market ultimately needs to take off, how the investment industry can overcome the persistent problem of greenwashing, and the CFA Institute’s exemplary approach to gender diversity.
As a global association that champions ethical behaviour in investment markets, what role is the CFA Institute playing to promote the alignment of Islamic finance with Environmental, Social, and Governance (ESG) metrics?
Our mission is to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. We are present in 160 markets, so when you are present in a country where people have gone through your program and learnt the best ethical practices that they should abide by, the next step is that you start bringing people together to make sure that finance has a purpose.
What SRI, ESG and Islamic finance have in common is that they all try to give finance a purpose. When you respect the society where you are living, you shouldn’t be making money for the sake of making money. You can invest to finance a future project, such as a house acquisition, sending your kids to school, buying a home to make sure your family is living under a roof; all of these can be easily accessed thanks to finance, but to make money for the sake of making money is something that is frowned upon by all religions.
What we as an institute are trying to do is make sure that our members are always putting clients’ interest first. For them finance is a job, but to serve a cause. The cause is to make sure that people getter better retirement–because people want financial returns to get an improved financial outcome to secure better retirement–and that the intermediary as a trusted financial advisor or a professional financial planner, is making sure your interest comes first. This is something you as a member would study in level one, two, and three. You would sign every year a charter that says that you would always abide by the best practices and ethical standards set by CFA Institute. If you don’t sign this commitment, you cannot use the three letters (CFA) after your last name and you cannot renew your membership with CFA Institute.
Later on, if anything goes wrong, you cannot go in front of judges and claim ‘I did not know’. They will tell you that you studied for and passed three levels of exams where ethics was a core part of the curriculum. The only constant that doesn’t change in all three levels, is the program on ethics. The judge would tell you that you’ve pledged to apply the strict rules of CFA Institute above those of the markets.
Let’s take an example. You went to an island that doesn’t have strict rules on insider trading, but the Institute made you sign on a charter that says when there is insider trading, you will not participate in it, and you will not allow people around you to do so. So, you cannot say I was on an island where insider trading was allowed, and I was doing it because it’s a common market practice. You were supposed to apply the Institute’s code of ethics because it’s asking you to be better than the local rules.
If it’s the other way around and you moved to a super-sophisticated city where the rules are stricter than the CFA Institute’s rules, then you’ll have to apply that market’s rules. You will always go with the toughest set of rules, whether they are the local rules or CFA Institute’s rules.
In terms of initiatives, we have an Islamic finance working group that spreads across Asia Pacific, Europe, Middle East, and Africa and meets on a monthly basis. We’ve done lots of webinars and internal meetings. It’s all around promoting the values of Islamic finance within our network and seeing what common areas we have between the regions on the practical and educational side.
It is a well-known fact that Islamic finance and Sustainable, Responsible and Impact (SRI) investing have many common characteristics. But are there any major differences between the two approaches that investment practitioners should be aware of?
Geographically, the spread of Islamic finance is related to religion, because Islam is very much present in the Middle East, Asia Pacific, and big parts of Africa, whereas Judaism and Christianity are mainly present in Europe, the U.S., and the Western world and to a limited extent in the Middle East. This is where you geographically have differences in the appetite for the two different disciplines. They have in common what we call the exclusions, but even in that regard, SRI would not exclude some sectors which Islam would normally exclude.
For example, Islam doesn’t ask you to exclude tobacco, but SRI would definitely exclude it. That said, in the new Islamic finance, some funds are excluding tobacco from their investments. Conventional financial institutions are disregarded by Islamic finance, but they are not banned by SRI and ESG. So, the differences are in the exclusions and sometimes on the financial ratios.
Ten years ago, Islamic finance was bigger than ESG, and now it’s the opposite. The growth rate on ESG is huge. Sometimes it makes me ask the same question I used to ask around Islamic finance – are these products really shariah compliant - when they used to be done a few years ago in the billions of dollars? When some sukuks come into the market, we question whether they are truly sukuk or Islamic washed bonds that look like sukuk? Now that ESG is growing tremendously I ask myself, are all these products coming to the market truly ESG compliant? I doubt it.
You have two approaches – the managers who tell you ‘Of course I do the ESG screening before I start my work’ and the managers who have a different department that’s independent from them, which reports directly to the chief investment officer. They will do all the ESG screening and then give you ESG compliant investments that you can pick from and include in your portfolio. These I respect; the others are sometimes marketing gimmicks that are a result of a huge demand for the sector.
Recently, there was a European investment manager that was questioned by the local regulators after one of their employees left– clearly because of some sort of disagreement – and revealed to the public that when they say their funds are ESG complaint, it’s a pure marketing effort. It’s the same investment process, same stock selection, but at the end they add that label saying ESG compliant. The success of the industry is pushing some players to use this as a marketing tool without genuinely respecting the criteria of SRI/ESG. Islamic finance is not exposed to the same curse nowadays because I don’t see it growing at the same levels as ESG.
The other difference is that ESG/SRI values started much earlier with Judaism and Christianity, so SRI and ESG have evolved a lot and have been through many tests. Islamic finance is a bit younger and still evolving. On the example of tobacco – it was never banned before, now it’s banned on almost all the shariah screenings. It might even evolve in some other area. I know it will never accept the financial leverage in that evolution. But it may evolve on options trading –options and derivatives that are used to protect the portfolio and strategy; or underlying derivate strategies that are used by portfolio managers to get exposure to a market and really benefit the clients, not use them as a hedge fund.
Hedge funds will never be part of Islamic finance because by essence they’re trying to make money based on disasters or the collapse of markets. Hedge funds are here to take advantage of that. Some will argue that they have the right to do so because by doing that, hedge funds are cleaning the market and improving it. But when I put myself in the shoes of the end user who did not understand the sophistication of hedge funds, but was interested in their juicy returns, once things collapse, this person would have lost their whole retirement or life savings. I cannot give them the excuse that hedge funds are here to clean the market.
Even though shariah will not adopt hedge funds, at least some shariah scholars have started to accept the fact that you can go to derivatives to improve or protect your portfolio, or that you can have an underlying factor of derivatives, so if things go sour, your portfolio will not lose as much as an unhedged portfolio. Here we see progress. I gave the example of tobacco, but this is a more complicated and sophisticated example where shariah scholars are evolving and making Islamic finance adapt to the new needs of the market, all under the same rules of protecting clients’ investments and results.
Which financial services, products or companies come to mind that meet the criteria of both Islamic finance and SRI investing?
SEDCO for sure in Saudi Arabia [an asset management company in operation since 1976]. They are SRI compliant, shariah compliant, and United Nations signatories. The second company that comes to mind is Jadwa Investment; it’s a Sharia’a Compliant company offering fixed income and equity portfolios .
In your opinion, what are some of the key challenges preventing a greater convergence of ESG considerations with Islamic finance?
If I leave it with the players, they want to keep those two movements separate, so that they have two streams of products and offerings. I think what is preventing the bridge from being obvious to everyone is the client base. [It will change] when we see portfolios that are both SRI and shariah compliant, which offer to save a lot on the fee side and provide a bigger client base. But the market is not ready for shortcuts, they want to show you they have muscles in both sides. Of course, there are lots of common areas, but would they market it to you this way?
I would blame both ends – the supply side, it looks better on paper for you to have two big families of products, and the demand side, because we are not aware enough of the commonalities between the two streams of business, and therefore, we don’t ask for one product that fits all.
Now you see it happening with products such as green sukuk, which is about respecting the environment whilst being shariah complaint. That is a pure example of something that has been driven by demand. I’m keen on buying sukuks, but I’m no longer keen on buying sukuks that pollute the planet. I want to buy green sukuks. That’s an example that gives me lots of hope in products that will be invented that respect both the shariah law and the environment.
Why is it then that the green sukuk market remains small compared to the conventional sukuk market? Why hasn’t it exploded like green bonds?
I blame it on demography and size of the market. If I launch a green bond, I will have all the big insurance companies in the world, that are not takaful. They have billions of dollars in retirement funds and future savings, and by regulation they have to be into bonds, so they go and buy bonds. When it comes to green bonds, they feel better from a marketing point of view, and clients feel comfortable about making money while respecting the environment in the long run. Because when I retire, I want to retire with green areas around me, not in a destroyed planet, so the story there goes very well for people’s appetite.
Now with sukuk, who is buying sukuk in the region? Mainly local players here and in Malaysia. You rarely find a big western insurance company coming into a sukuk, unless they did a comparison between the yield-to-maturity on a bond that’s available for them at a certain rating, and for the same rating they have a better yield-to-maturity on the sukuk, plus the sukuk is asset backed, and the bond they have back home is not asset backed.
The only time you get conventional people coming to buy into a sukuk is when they have better warranty on the collateral, so it’s an asset backed bond all of a sudden with a better yield-to-maturity.
In the region, if you are a takaful insurance you’re not going to be able to invest in a conventional bond even if it’s green, so you’ll have to go for a sukuk. If the sukuk is green, then it’s the cherry on top of the cake. The problem is with the demand and supply. We don’t have enough supply of green sukuk, but we have a huge supply of green bonds, because we know that the pockets of the asset owners and insurance companies are very deep, and by regulation they have to buy bonds.
What could change this picture and boost the green sukuk market?
What would change the picture is the demand, and the demand would come from the big pockets in the region that are asset owners, for example, a big sovereign wealth fund in Malaysia, Singapore, Saudi Arabia, Abu Dhabi, Kuwait, or Qatar, deciding that “I’m going into green sukuks, and I need big supply of products”. Then the investment bankers will make it happen in a few weeks. They would go around and see all the governments or corporates with great ratings, capable of putting an asset-backed sukuk, make sure it’s green–or green wash it unfortunately–then they will accept the deal and pitch it to the asset owners. It needs a big player with deep pockets to come on the market and say, “this is what I need, find it for me” and the supply would ignite itself.
In the absence of a common industry standard, what is the best way for investors to establish that an ethical/responsible fund truly meets ESG standards and that is not, for example, simply repackaged to highlight ESG credentials?
Everyone is busy with deciding what disclosure companies should be doing in order to be ESG compliant. We went the other way, to the investor side, and said “you should be able to have a stamp of quality on these products, which will assure you that an asset manager is ESG compliant in a certain product and this is why”.
We developed the Global Investment Performance Standards (GIPS) to make sure that we’re comparing apples to apples. If you’re an asset management company in Alaska, and I’m an asset management company in Shanghai, and we’re managing European equities, your numbers cannot be compared to mine. The local regulations of disclosures in Shanghai are different from those of Alaska. But if you make your numbers GIPS-compliant, and I do the same, under a set of rules of disclosure, transparency, and fairness in producing the numbers, then our numbers can both be ‘apples’ and they can be compared to one another.
We’re doing the same with ESG standards and we’re revealing them in November. These are self-disclosure standards, so you will decide if you want to comply with these standards. You [as an asset manager] will go and pick the set of rules and make sure your product is ticking all the boxes in disclosure, so that your prospects or clients will be able to say, “yes I’m convinced this is ESG compliant and I will buy it”. It’s a self-attestation based on a set of rules that we will share with the industry, coming from the industry. Because we’ve been in consultation with the industry for one year and a half; we had contributions from at least 150 practitioners, we collected their thoughts and we’re now drafting those standards. You could also hire a third party that would come and study your numbers and verify that you are doing the right work.
You have been a longtime supporter of women’s leadership and gender parity in the workplace. From your observations, what is the current status of women in the investment industry?
I’ve seen big initiatives around the Club 30 percent, in the UAE, listed companies must have at least one woman on their board of directors, and some companies are looking to introduce quotas. I did not believe in quotas until I heard from Christiane Lagarde. She also did not believe in quotas in the beginning, but then she found that we’re not really getting there. She came up with a list of at least 250 names of very talented women, and whenever someone said, “we’re not finding the right talents”, she would say “open the list please and pick and choose”. I’m not saying that we have to impose quotas. But we’re not investing enough in women, their education and experience, before we expose them.
I’m always wary of hypocrites, who say “We’re trying to empower women and we just appointed one of them as head of this department. See, it’s not working, she’s not good”. Did you invest in that person? Did you give them the same education that you gave to their male counterparts? Did you give them the right experience and exposure before you put them on stage? We have a problem in our industry. What we should be doing is saying “Yes I agree with you. Give me a couple of years because I’ll be investing in their continued professional learning and their experience, I will expose them, and then they will get there.” I prefer this kind of approach.
Once you reach that level, you’ll need a matrix of all the women who have the needed skills. A matrix where the columns have the skills a company needs, and the rows have the names. Whenever you need someone that ticks at least seven of the skills you need, you can show immediately a selection of all the names that are available – CEO roles, senior management, you name it. This way you’ll be selecting based on skills and gender. You’ll have a reservoir of talents that you can choose from. What the industry is doing unfortunately is saying, “We need to have more women on board, let’s see who we have and let’s project them and put them on stage. We’re pushing some people just because they are women; they’ll make us look good on gender diversity”.
But who told you they are ready to go on stage? Why didn’t you take the most experienced women available and ask them to be on stage? What about the other diversity metrics – race, ethnicity, age? Are we also putting diversity of those aspects on our boards? Beyond gender equality, I am for talent equality, experience equality, and education quality. When you do those, naturally you’ll have more representation.
We at the CFA Institute launched a program called Mutamahin in Bahrain a few years ago. We bring university graduates who can’t find a job, and we help develop their technical and soft skills. Never on this program did we need to think how many women or men we have. Year after year, we ended up with 80 percent women, 20 percent men. This is because the women want to study more and prove themselves; they don’t believe they have equal chances in finding a job, so they put in double efforts. Look at the Saudi universities, the best GPA levels are being achieved by women, because they know they have to compete with men, who feel entitled to getting jobs. Women feel that they need to fight more later on to get these jobs. But at least we’re giving them equal chances of studying proving themselves. Then if you do the metrics that I recommended, you’ll definitely find more women available to work and contribute to the success of your firm.
Also, in our organization, we stopped counting the years of experience and we now count hours of experience. If we keep the metric of how many years of experience you have, some women will be behind the men because they decided to have a family. So, we started to count the hours; this means if you have kids and return to work, it won’t put you at a disadvantage compared to men. Because we are conscious that women sometimes do not have the consecutive years of experience, but they have the number of hours.