Islamic forestry fund aims to tap crossover appeal

Wed Jul 18, 2012 12:03pm IST

* Aims to raise $100 mln, sees viability at $30 mln

* Targets 15 pct rate of return, net of fees

* Combines Islamic and green investment themes

By Bernardo Vizcaino

SYDNEY, July 18 (Reuters) - Luxembourg-based Sustainable Capital has announced the launch of a sharia-compliant forestry fund, part of a trend toward crossover products that appeal to Islamic investors as well as those interested in green investment.

The firm aims to raise $100 million in the open-ended fund, which starts its offering period next Monday and will invest in the agricultural, biomass and forestry sectors.

Islamic finance adheres to religious principles but the industry has only recently begun to stress the theme of wider social responsibility.

"Sustainability has been a challenging conversation in the Gulf, as it was regarded as a competing asset class. But energy security cannot be built on one source alone," Michael Young, the fund's investment advisor, told Reuters. "Countries are now embracing diversification."

Forestry has had to contend with a preference among many Islamic investors for more familiar real estate and hedge fund products.

In a bid to differentiate itself, Sustainable Capital has highlighted the inflation protection and steady-return qualities of its new fund, which will aim for a 15 percent rate of return net of fees.

It would be reasonable for most long-term investors to allocate 5 percent of their portfolios to green investments, though some preferences may go as high as 10 percent, Young said.

DISTRIBUTION

A fund size of $30 million would make the product viable, but reaching its $100 million optimal size could take from "three months to three years", Young added. The ultimate aim is to raise $250 million.

Capital-raising and achieving scale have been a problem for sharia-compliant fund managers, with 64 percent of the estimated 800 Islamic funds globally having less than $75 million in assets, according to consultants Ernst & Young.

This has prompted boutique firms, which often lack developed sales channels or established ties with Islamic financial institutions, to rethink their marketing strategies.

Sustainable Capital plans to use strategic partnerships to tap Gulf, Asian and European markets, in order to extend the firm's distribution capabilities and keep operating costs low.

It will seek at least two distributors in the Gulf, one focusing on Saudi Arabia. The firm sees the bulk of its investor base eventually coming from the Gulf and Asia, Young said.

CROSSOVER

One reason for the lack of close ties between the Islamic and ethical investor communities is geographical: Islamic investors have strong roots in the Middle East and southeast Asia, while the ethical investment industry has its strongholds in North America and Europe.

Also, green investments have generally been built using a "positive screening" approach, in which funds identify specific sub-sectors and economic processes which they like. Islamic finance has emphasised "negative screens" which forbid investing in areas such as gambling, tobacco and alcohol.

However, with its use of asset-backed deals, Islamic finance also has an ideological emphasis on promoting real economic activity instead of pure monetary speculation. So firms such as Sustainable Capital see commonalities with ethical investment.

In April, London-based Siyam Capital said it planned to launch sharia-compliant philanthropy, social housing and timberland investment products by the end of this year.

In March, a "green sukuk" working group was launched by the Climate Bonds Initiative, the Clean Energy Business Council of the Middle East and North Africa, and The Gulf Bond & Sukuk Association. Its aim is to promote issuance of sukuk to finance climate change investments and renewable energy projects.

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