When it comes to oil rich Saudi Arabia, environmental, social and governance (ESG) policies are probably not what most investors associate with the nation. However, SEDCO Capital, an asset manager based in the kingdom, has partnered with the CFA Institute to provide a best-practice case study on its fully Shariah-compliant Prudent Ethical Investment strategy (PEI) for a new report on ESG integration.

The paper is dubbed ESG Integration in Europe, The Middle East, And Africa: Markets, Practices, And Data’ and is aimed at helping investors integrate ESG polices into their equity, corporate bond and sovereign debt portfolios.

The CFA Institute, with the aid of SEDCO Capital, have found that Islamic finance and ESG investing are complimentary with shared principles.

SEDCO Capital’s own research shows that the balance sheet constraints of Shariah-compliant investors can improve risk-adjusted returns of conventional and responsible investment portfolios.

PEI goes one step further, combining both responsible and Shariah-compliant investment strategies and integrating assessment of ESG criteria as well. Thus PEI delivers distinct risk/return characteristics relative to conventional as well as responsible investment strategies and has generally outperformed conventional portfolios, when adjusted for risk, over the last few years.

Christian Gueckel, chief risk officer at SEDCO Capital, said: “We have always believed being a prudent investor means avoiding undue risks and seeking sustainable investments with strong governance which comply with jurisdictional regulations. Our PEI strategy shows that Islamic portfolio criteria, combined with ESG integration, can generate higher risk-adjusted returns than both conventional and responsible investment portfolios.”

When creating the report, the CFA Institute surveyed 1,100 financial professionals around the world. SEDCO Capital became the first fully Shariah-compliant as well as the first Saudi Arabia-based asset manager to be a signatory to the UN PRI.