Islamic Investment versus Socially Responsible Investment: Lessons from Comparison

Abstract

Purpose

The objective of this chapter is twofold. It first explores the complementarities of Islamic investment with Socially Responsible Investment. Secondly, it examines the financial price, for investors, of being both shariah-compliant and socially responsible.

Methodology/approach

Using a value-weighted approach, we experiment the construction of a set of sharia-compliant stock portfolios with different Environmental, Social, and Governance (ESG) performance. We use the KLD ratings of 238 companies listed in U.S. stock market from 2007 to 2011. We measure and compare their performance using the model developed by Fama and French (1993) and extended by Carhart (1997).

Findings

The results indicate no adverse effect on returns due to the application of a double screening, Islamic and SRI, and show a substantially higher performance for positive governance screen during 2008–2011 periods. This outperformance cannot be explained by differences in investment style. Though, we observe significant outperformance for some ‘irresponsible’ portfolios involved in community and human rights controversies.

Research limitations/implications

The study only focuses on U.S. market. Future works should extend the experimentation to other markets.

Practical implications

This study provides a venue for Islamic funds managers to consider SRI screening as fully in line with shariah-compliance requirements, while preserving the performance of their portfolios.

Social implications

Potentially, the reconciliation of Islamic investment with positive SRI practices may foster the implementation of CSR policies by firms’ manager willing to attract Islamic investors.

Originality/value

With reference to the many studies emphasising the compatibility between CSR criteria and Islamic principles, this experimental study is the first to investigate the integration of a positive screening process designed to select companies based on their ESG performance in addition to a traditional shariah-compliant screening.

Citation

Paranque, B. and Erragragui, E. (2016), "Islamic Investment versus Socially Responsible Investment: Lessons from Comparison", Finance Reconsidered: New Perspectives for a Responsible and Sustainable Finance (Critical Studies on Corporate Responsibility, Governance and Sustainability, Vol. 10), Emerald Group Publishing Limited, Leeds, pp. 355-383. https://doi.org/10.1108/S2043-905920160000010034