Emergence of Ethical Investment:

Key Note Address


M. Nejatullah Siddiqi



The increasing popularity of the idea of ethical investment, and of the closely related concepts of Socially Responsible Investment (SRI), Corporate Social Responsibility (CSR) and Social Business is indicative of a change. It is not long ago we were told by no less a person than Nobel Laureate Milton Friedman that the business of business is business, i.e. making profits. We also heard the mantra: Greed is good. So, what caused this return to sobriety?


 I think people have been shocked by environmental deterioration, increasing inequality within nations and between nation    s and rising levels of anxiety in personal lives all across the globe. These threats to peaceful living are making people everywhere, but more so in the rich countries, question their existing ways of living. Some recent business malpractices like Enron and the mortgage debacle that heaped unnecessary misfortune on many people added to these worries. Investment being the steppingstone to growth, the key to rising levels of prosperity, naturally comes in for scrutiny.


The Evil of Interest


Investment is good. It has the potentiality of bringing private gains (profits, prestige) to the investor and public benefits to society (employment, growth). There is a problem, however, when investors seek guaranteed returns. Wealth creation through investment takes place in an environment characterized by risk and uncertainty. Fairness demands some arrangement for risk sharing between suppliers of money capital and the entrepreneurs using capital for creating additional wealth. But most of the current investment arrangements are based on risk shifting. The supplier of money capital shifts the risk to the fund user, the entrepreneur. Loans must be repaid with interest irrespective of whether their use in enterprise resulted in additional wealth creation or not. This is one of the main sources of increasing inequality worldwide. The institution of interest is also responsible for environmental deterioration. It creates a constant pressure for accelerated growth so that interest on wealth borrowed and invested could be paid out of newly produced wealth. Interest is also responsible for the inverted pyramid of rising debt levels characterizing our societies, including consumer debt, especially in education and health care. Consumer indebtedness thus becomes the main source of personal anxiety.


I began my discourse on ethical investment by a litany of charges against interest to underline the immoral nature of interest. Ethical investment in the truest sense can hardly exist in a culture of debt and interest. But I will not dwell on that point any further; we have to attend to other dimensions of the subject under discussion.


The Moral Man


Ethics and morality come to man in society naturally. Morality is the quest to do the right thing, to follow the rules, and avoid doing wrong. You need something to suppress this natural inclination and that is exactly what methodological individualism has been doing for quite sometime. Neoclassical economics made us believe exclusive pursuit of self-interest by each individual ensures the realization of the largest common good. By making money your sole objective you could get what is the key to serve any other objective you wish. So no other objectives need attend upon the business of money making.


The recent surge in ethical investment and socially responsible investment (SRI) that brought us together today is an open revolt against that false logic. Instead of discussing what went wrong with neoclassical economics let us proceed further and discuss some of the issues involved.


Morality relates to man-man relationship. In the next step we extend morality to man’s relation with animals as well as inanimate beings, the entire universe. Truthfulness, honesty, justice, fairness, trust, keeping promises, sympathy and compassion are some of the moral values relevant to economic affairs. Men and women entertain these values on a variety of bases, including faith. They are welcome as moral beings, whatever the basis of their morality. But there is a strength in moral values rooted in spiritual values that is not found when morality is given a pragmatic basis.


Spiritual values relate to man-God relationship. A sense of being, i.e. consciousness of the gift of life, invokes gratitude for the Creator. Worship and devotion follow, accompanied by unqualified allegiance. Accountability provokes fear of God that invokes an appeal to the Lord’s mercy and kindles hope. The believer perceives man-man relation as an offshoot of man-God relation, all men and women being the creation of the same Creator. Human brotherhood based on faith is stronger that fraternities based on race, region or language, etc. Common interests do provide a basis for solidarity, but they fail to survive any erosion of commonness of interests. Even shared interests may lack universality. That is the dividing line between values, especially those rooted in faith in One God (tawheed) and interests, however common. Interests are vulnerable to compromises, spiritual and moral values are not.


I am not claiming that morality alone can harness individual investment decisions to serve the social good. Ethics has limitations. Recognizing these limitations Islam came with a three- pronged approach: pursuit of self-interest, moral reorientation and state regulation to ensure a basic minimum of conformity to norms. Let us focus on some of the issues involved in ethical investment within this framework.


The Information Deficit


I select two issues that attend upon ethical investment: Incentive and information. Why should the decision maker avoid harming others? Why should he care about social good? And if these questions are answered to his satisfaction, does he or she have the information necessary to make a decision that would qualify?


What is meant by ethical investment? Is it investment constrained by ethics or investment guided by morality? It could be both. One could be content by deciding never to harm anyone. One could go a step further and try to do some good to others. Both are behaving morally. Examples of the former are not investing in tobacco or anything harmful like weapons of mass destruction…Examples of the latter category is investment in primary education, healthcare and low-cost housing. Both are subject to the proviso that maximizing profits is no longer the aim, that some sacrifice of profits is acceptable, even though firms must survive and satisfy the investors/shareholders.


Does the decision-maker know what is harmful? How much harm can be avoided at what cost? Does he or she have the information necessary to decide what is good for society? How much will be enough? In the neoclassical version of capitalism these questions need not bother the individual decision maker. They are left to the blind forces of the market, the famous “invisible hand”. That faith into the invisible hand having been abandoned, what can be done about the needed information?


One thing is quite clear; It is not the role of ethics, morality, spirituality or religion to supply that kind of information. In my own religious tradition there is no false promise in this regard. It is one of those areas in which man is left to fend for himself. Islam does not provide technical information. It has been reported in authentic collections of Prophet’s tradition that he demonstrated this principle in most unambiguous way.[1]


How, then, the morally-oriented decision makers, the ethical investors, are going to handle the situation and fulfill their aspiration to serve the social good while taking good care of their private interests? The answer lies in the way we handle the second issue, the issue of incentives or motivation. As we have noted above, it is the contribution of ethics and morality, spirituality and religion to motivate and provide the incentive for doing good and avoiding evil. They also motivate people to cooperate. Men and women cooperate in a variety of ways: generating and sharing information, and sharing the costs involved, etc. They cooperate as individuals in one to one contacts. They cooperate by forming NGOs. They cooperate with state agencies and through state agencies. All scenarios apply. Men and women only need to be emancipated from the bondage of self- destructive greed, sanctified by the baseless assumptions of neoclassical economics and capitalism to adopt a healthy and humane stance in what Marshall aptly called “the ordinary business of life”.


The Role of Islamic Finance


Islamic financial markets can play a role in facilitating and promoting ethical investment. But agents are incapable of achieving what principals do not want them to do. The crucial factor is the Islamic investor: Is he or she ethical enough to be willing to sacrifice some private gain for public benefit? If not, nothing is going to happen. You cannot do in the market place what families and schools failed to prepare the market players for.





Last but not the least, an important issue in ethical investment is transparency. The principal must know what the agent is doing in his or her name. It is one thing to advertise that the company will put your money to uses that fulfill your moral aspirations and observe the constraints you put to avoid harming others. Actually doing as promised is different. The crucial thing is transparency. The ethical investor must insist on transparency. The stakes are very high indeed.


Tirmidhi has narrated in his Sunan that Ibn e Masud has reported the Prophet, peace be upon him, having said:


The son of Adam would not be able to move away from his Lord’s presence till he is queried about five:


About the duration of his life, in what (activities) did he spend it;

About his youth, it turned into old age doing what?

About his wealth, how it was acquired?

And on what it was spent?

And how far he acted according to the knowledge he received?

[Tirmidhi: Sunan, Abwab Sifat al Qiyamah]


Ethical investment is not a luxury product. For the careful and God-fearing it is a necessity.




[1]      Sahih Muslim Hadith #s 2361 to 2363(Kitab al-Fadail. Bab Wujub Imtisal ma Qalahu Shar’n…..) and Sunan Ibn Majah ,Hadith #s 2470,2471(Kitab al Ruhun, Bab Talqih al Nakhl). Drawing on all the five reports, the following summary highlights the point made in the text:

       The Prophet, peace be upon him, was passing by an orchard of date trees (in Madinah).He saw some people on top of the trees. He asked, what are they doing? Told they were pollinating, taking pollens from the male trees to the female trees, he said, I do not think it will do them any good, better leave things as they are. The Prophet’s remarks made people stop doing what they used to do. That year there was no date crop. When the Prophet was informed he said, I had merely expressed an opinion. I am a human being like you. Only when I am reporting to you something from Allah, then you are obliged to abide by it as I shall never make any false report. As regards worldly matters, you know them better. Continue doing what you used to do.