Why Azzad didn’t invest in private prisons

When the U.S. Department of Justice (DOJ) announced that it would stop contracting with for-profit prison operators, Azzad’s investment team remembered why we chose not to invest in private prisons.

At Azzad, we follow internationally accepted criteria for Islamic investing: avoiding interest, leverage, alcohol, tobacco, gambling, and pork products. We also implement selected additional social justice screens that we believe are in line with the universal faith imperative to protect people and the environment. For example, we don’t invest in weapons producers or companies practicing the devastating drilling practice known as fracking.

Sometimes we hear from clients about these additional screens. “The traditional screens are already strict,” they tell us. “Why do you add more?” The answer is two-fold: because we believe it’s the right thing to do and we believe doing the right thing pays off in the long run. Yesterday we saw a great example of this when the DOJ made its announcement, dealing a major blow to the for-profit prison industry.

Here’s the background. In May 2015, a REIT (real estate investment trust) company called Corrections Corporation of America (NYSE: CXW) passed Azzad’s financial ratio screens. CCA is one of the biggest players in the private prison management industry, and is one of two private prison operators that is also a publicly traded company. When it passed our usual screens, Azzad’s REIT portfolio management team started researching it as a possible investment.

Fundamental analysis showed that the company was profitable, but research into its line of business raised ethical concerns. A publicly traded company has a responsibility to its shareholders to be profitable. But when a company is engaged in managing the incarceration of human beings, profitability can conflict with safety protocols, humane treatment, and rehabilitation programs.

Recent investigations by the DOJ and by journalists and human rights organizations have found that private prisons are overall less safe and less effective at rehabilitating inmates and reducing recidivism.

A 2016 report by the DOJ’s Office of the Inspector General found that privately operated prisons “incurred more safety and security incidents per capita” than comparable prisons run by the government, including higher rates of assault.

Azzad’s investment team decided not to invest in CCA. In addition, we added a screen to prohibit any future investment in private prison companies because of human rights concerns.

Fast forward to August 18, 2016, when Deputy Attorney General Sally Yates announced that the federal government will end its use of private prisons, saying: “They simply do not provide the same level of correctional services, programs, and resources; they do not save substantially on costs; and … they do not maintain the same level of safety and security.”

She directed the Bureau of Prisons to begin phasing out private prison contracts as a step toward the DOJ’s goal of ensuring “consistency in safety, security and rehabilitation services by operating its own prison facilities.”

News of the announcement caused CCA’s stock price to plummet by more than 50% before trading of the company’s shares was halted for volatility. Although federal contracts account for only a portion of CCA’s business, the strong message that private prisons are not effective or advantageous may carry over to its other customers, including states, municipalities, and immigration authorities.

This is where we see investing decisions based on ethics paying off financially. If not for human rights concerns, Azzad might have held CCA in our REIT portfolio, and might even have made money with it. But after the DOJ decision, the portfolio would have suffered. Instead, our commitment to following ethical investing practices protected our clients’ integrity and as well as their financial returns.

Fatima Iqbal is a senior investment strategist with Azzad Asset Management. She has always believed there should be a way for people earn competitive returns while being conscious of how their investment decisions affect society.

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