SEDCO Capital’s investment philosophy is based on the three principles of ethical investing, diversity and partnership.
We have pioneered a Prudent Ethical Investment (PEI) approach ensures we invest in companies that have strong governance, are well structured, have reasonable leverage and add value to the economies they work in. In short, we ensure that our investments benefit society, comply with Shariah and ESG investment principles, and refuse to create returns at the expense of others.
In 2014, we became the first Shariah compliant asset manager in the world, and the very first Saudi Arabian company, to become a signatory to the United Nations Principles for Responsible Investment (UNPRI). This principle-based framework ensures we incorporate Environmental, Social and Governance (ESG) variables when analysing risk for any investment.
SEDCO Capital’s careful due diligence and selection ensures every investment, irrespective of asset class, generates maximum value for our investors. We have created a broad and innovative spectrum of products that match the risk-return appetite for both Shariah-compliant and conventional investors.
Our diversity is our core strength. It enables an investment portfolio accessing many asset classes, spanning the entire risk spectrum, and covering all key global markets. Our investment strategy is as diversified as our asset classes, helping us match investor preferences with high-performing products time after time.
Finally, our partnership concept is instrumental in creating investor value. We are proud to emphasise lasting relationships built on mutual trust and shared success. In fact, we are committed to funding 20% of all investments - regardless of asset class – to cement our principles of collaboration, and demonstrate our confidence in our investment processes and reams. Our partnership model – where we back investments with our own resources – aligns our interests with those of our clients, and guarantees that our teams are constantly sourcing the best investment opportunities worldwide. Our global partnerships also create scale, reduce costs of doing business, increase negotiating power and help us access investment opportunities worldwide.
Signatory of UNPRI
SEDCO Capital was the first Shariah-compliant signatory of the United Nations Principles for Responsible Investment (UNPRI) - the principle-based framework designed to incorporate Environmental, Social and Governance (ESG) characteristics in the context of analysing investment risk.
SEDCO Capital’s recent annual signatory and assessment reports:
Islamic finance and responsible investing are both ethical in nature. Both principles align in their aim to improve the living conditions and well-being of society, to establish social equality and to prevent injustice in trade relations. Accordingly, SEDCO Capital sees much synergy between the two principles.
For SEDCO Capital, responsible investing and environmental, social and (corporate) governance aspects are an integral part of its activities. SEDCO Capital aims to be a prudent investor, who avoids undue risks and seeks sustainable investments with strong governance that are in compliance with relevant regulation. SEDCO Capital believes that an ESG overlay can lead to long-term rewards in terms of risk reduction and potentially higher returns. SEDCO Capital aims to use the ESG assessment to incorporate non-financial information and to identify risk factors.
SEDCO Capital invests in asset classes including Listed Equities, Private Equity, Real Estate, and Income. Part of these assets will be managed directly or managed by external investment managers. SEDCO Capital applies responsible investment criteria for selecting these managers as well.
Prudent Ethical Investment
SEDCO Capital refers to its approach of integrating responsible and Shariah-compliant investment as Prudent Ethical Investment (PEI). PEI can deliver distinct return/risk characteristics relative to conventional strategies. Shariah-compliant balance sheet screens tend to provide a prudence element and bias portfolios towards quality characteristics. Positive ESG screening can potentially improve risk-adjusted returns as well.
We regard the concept of PEI as an evolution of responsible investment strategies:
• PEI stresses the importance of due diligence and transparency of investment structures, processes and reporting. Thus, it integrates the analysis of environmental, social and governance criteria in the investment process to incorporate non-financial aspects.
• PEI avoids high financial risks and thus aims to enhance long-term risk-adjusted return. The Global Financial Crisis has clearly shown the downside of excessive leverage and financial risk. Through the entire business cycle, the avoidance of excessive financial risk leverage should deliver better risk-adjusted returns.
• PEI is an investment style, which through its prudence element biases its portfolios to better quality, thus avoiding high and undue risks.
• PEI demands the understanding for the underlying risks, structure and cash flows.
SEDCO Capital has done a comprehensive study comparing the performance and characteristics of portfolios classified as unrestricted, responsible and Shariah-compliant, to which we refer to as PEI. Our study highlights that PEI does not only represent a concept of risk reduction. In fact, we show that portfolios constructed in line with PEI have delivered better risk-adjusted returns.
How Can Responsible Investors Benefit from Islamic Criteria?
As a signatory of the UNPRI, SEDCO Capital aims to incorporate ESG considerations into its investment process subject to its overriding duties to its clients.
SC regards ESG integration as an investment decision making process that considers the environmental, social and corporate governance risks associated with the companies in which it invests and employs strategies to evaluate their impact within the context of financial analysis. This process is a sound complement to the traditional investment analysis focused on financial data. Furthermore, SC intends for its investments to contribute to sustainable development - meeting the needs of the present without compromising the ability of future generations to meet their own needs.
SC’s ESG approach is an integral part of the investment process in all asset classes and strategies. ESG analysis complements traditional financial analysis and investment due diligence. The result of the ESG assessment is part of the overall assessment of an investment opportunity and is subject to the overriding duty of SC to protect the interests of its clients.
SC incorporates responsible investment approaches in all its investment activities. There are no exceptions in SC's responsible investment approach relative to its overall investment policy.
Islamic finance and responsible investment are well aligned. SC considers Shariah-compliant investing as a sub-set of responsible investing. Therefore, SC applies the same investment guidelines and aims to restrict non-permissible activities which include the following:
• The manufacture and/or sale/distribution of alcohol, tobacco and pornographic productions.
• Restaurant or hotel/motel businesses, except those not selling alcohol.
• Operators of gambling casinos or manufacturers of gambling machines.
• The manufacture of military defense equipment or weaponry.
The manager selection criteria apply for liquid assets, private equity and real estate.
SC includes ESG assessment both in the initial due diligence as well as the ongoing monitoring of its external investment managers. External investment managers are expected to:
SC may assess the following aspects:
SC aims to analyze the investment process of external managers
from an ESG perspective in the initial due diligence. SC promotes responsible investment to existing managers that do not yet adhere to responsible investment principles. SC annually reviews the manager's responsible investment process.
This analysis is documented in the investment research and due diligence memos. Investment decisions should consider this documentation. Regular updates on ESG should be documented in Manager Discussion Summaries.
SC's focus is to engage with private equity general partners (GPs) to promote the incorporation of ESG into investment decisions as part of its ongoing dialogue with the GPs and, where applicable, through its participation in Advisory Committees. SC may agree certain ESG considerations and exclusions through side letters with the GPs.
For co- and direct-investments, SC aims to use an active ownership approach to promote ESG considerations with general partners leading the transaction. In particular, SC aims to engage with portfolio companies to directly and/or indirectly to promote ESG compliance and reporting. However, SC's ability to require any ESG due diligence or reporting may often be very limited as a minority co-investor.
ESG is analysed on a stock level. Negative outcomes are discussed to determine potential engagement.
We exclude the following sectors/activities (among other investment restrictions):
The negative screening criteria typically do not change. Stocks are regularly reviewed if they still pass the negative screening criteria.
Management assessment and board related developments are monitored on daily basis to identify any weaknesses that can cause strategic dislocation for the investee company.
SC's criteria for negative screening generally are not expected to change.
Responsible Investment criteria are integrated in all phases of the investment process from sourcing to selection, management, monitoring and ownership activities.
In the sourcing and selection criteria ESG and in particular Building Energy rating is a major part of the criteria and helps filter opportunities during the sourcing phase. That said, for our value add strategy we target properties that we could add value also through re-positioning of assets to become more environmental friendly and efficient.
ESG issues are assessed in the initial due diligence of potential property acquisitions. The potential risks and benefits are evaluated in the due diligence documentation. SEDCO Capital (SC) also scores new investment opportunities on ESG criteria. Furthermore, SC evaluates and updates ESG aspects for existing properties on a regular basis. SC follows a Shariah-compliant investment approach since Islamic finance and responsible investment are well aligned.
SEDCO Capital (SC) applies a set of screens and exclusions that are in-line with its Shariah-compliant investment philosophy.
SC analyzes sukuk, murabaha and other income assets from an ESG perspective. The ESG review is part of the issuer review for financial and qualitative risks and considerations. SC's ESG assessment is an integral part of the investment analysis of issuers and other specific instruments.