Halalwashing is when a company makes false or misleading claims about their investment’s Shariah compliance. Far too often, we see advisors claiming to invest halal for their clients while being intentionally ambiguous.
Advisors who promise to manage a portfolio in accordance with Islamic investment guidelines, but then lack written policies or procedures designed to ensure that they do what they say they’ll do, are engaging in halalwashing. Unlike ESG investing which has no set regulations or definitions for what makes something “sustainable”, the Islamic financial industry has a renowned institution called the Accounting and Auditing Organizations for Islamic Financial Institutions (AAOIFI).
AAOIFI is regarded as the de facto gold standard for Shariah compliance in Islamic finance globally. They outline the general guidelines necessary to label an investment halal. It’s up to the advisory firm to incorporate these into their compliance program. In fact, regulators like the Securities and Exchange Commission (SEC) will audit firms to hold them accountable for any claims they make about halal investing.
How can you identify an advisor or investment firm engaged in halalwashing? The best way is to ask questions. Here are 5 questions that I recommend you ask an advisor offering “halal” products:
- Do you have written policies and procedures describing how you’ll invest Islamically for my account (request a summary of them from the compliance officer)?
- Are your Shariah investment guidelines in writing (are they incorporated into my advisory agreement)?
- What internal testing or third-party auditing is performed to ensure your policies and procedures are followed?
- Do you use a Shariah advisory board? What role do they play?
- Will you provide me with purification calculations on my portfolio (and do they conform with generally accepted standards)?
As a Muslim investor, you need the peace of mind that your investments are halal. Behind this label should be a whole set of policies and procedures an advisor is diligently following so that he is genuinely delivering on his promises. You don’t have to buy into the hype of halalwashing nor do you have to settle for a misleading label. Instead, demand transparency from your advisor.