Is it costly to be both shariah compliant and socially responsible?

Abstract

Positive ethics associated with socially responsible investments (SRI) is challenging the limits of Islamic investments' conservative approach to promote corporate social responsibility. In this study, we test the integration of social performance measures (companies the most virtuous or high-rated in terms of environmental, social, and governance (ESG) issues) in Islamic portfolios using KLD social ratings. We seek to determine the financial price of complying both to Islamic investment and SRI principles. To do so, we measure the financial performance of self-composed Islamic portfolios with varying ESG scores. The results indicate no adverse effects on returns due to the application of ESG screens on shariah-compliant stocks during the 2007-2011 periods while reporting substantially higher performance for the portfolios with good records in governance, products, diversity, and environment issues. On the opposite, a negative performance is associated with an SRI strategy of disengagement from shariah-compliant stocks with community and human rights controversies. Our performance measures are controlled for market sensitivity, investment style, momentum factor, and sector exposure.

Analysing Islamic banking ethical performance fromMaqāṣid al-Sharī‘ahperspective: evidence from Indonesia

“…This shows that to reach a high score in MSI, IBs might sacrifice some financial returns. For instance, Erragragui and Revelli (2016) indicate that there is a negative performance associated with some ethical and social strategies. This could explain why some IBs are not achieving Maqās id al-Sharī'ah as they should.…”

Evaluating the Shariah-compliance of equity portfolios: The weighting method matters

“…9 While Shariah-compliant equity investing is considered to be conceptually close to socially responsible investing (SRI), the Shariah-compliant equity universes are very different from those obtained using traditional SRI screens. For example, in contrast with the SRI universe, a Shariah-compliant equity universe typically has a large proportion of industrial and energy firms, while virtually not investing in financial firms (Erragragui & Revelli, 2016).…”

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“…On the other hand, the application of financial ratio limits is applied to Shariah companies, but this is not relevant in ESG screening. Erragragui and Revelli (2016) present an extensive discussion on the interaction between the Shariah and ESG screens from the corporate and investors' perspectives.…”

“…They also find a higher performance for the portfolios with good ESG records. Our study is different from Erragragui and Revelli (2016) in that they study ESG and portfolio returns, whereas we look at ESG and corporate performance.…”

“…Despite the strong interest in Islamic financial research, studies of ESG practices on Shariah companies are very rare. At present, Erragragui and Revelli (2016) is the only study we find examining the performance of Islamic portfolios in relation to ESG scores. The results of their four-factor model indicate no adverse effects on returns due to the application of ESG screens on Shariah-compliant stocks during the 2007-2011 period.…”