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Article
Publication date: 9 January 2025

Nawazish Mirza, Cristiana Doina Tudor, Alexandra Horobet and Lucian Belascu

This study aims to explore the strategic integration of Sharia-compliant and environmental, social and governance (ESG)-focused investments within global equity portfolio…

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Abstract

Purpose

This study aims to explore the strategic integration of Sharia-compliant and environmental, social and governance (ESG)-focused investments within global equity portfolio optimization frameworks, with a particular emphasis on variance minimization and dynamic rebalancing techniques.

Design/methodology/approach

The research uses historical data from Sharia-compliant, ESG-focused and conventional equity exchange-traded funds (ETFs). Advanced mean-variance optimization methodologies via quadratic programming are employed, encompassing static optimization with and without a 50% cap on individual asset weights, dynamic optimization with monthly rebalancing and rolling window optimization.

Findings

Portfolios integrating Sharia-compliant investments frequently outperform those composed solely of conventional equity ETFs. Dynamic optimization with monthly rebalancing achieved the highest Sharpe ratio (1.3708) and demonstrated enhanced portfolio resilience during market turbulence, such as the COVID-19 pandemic. Sharia-compliant investments showed substantial allocations during key periods, with weights reaching up to 100% in the first half of 2020. In contrast, ESG-focused investments exhibited more limited and sporadic allocations, reflecting a more opportunistic role in the portfolio.

Practical implications

The findings reaffirm the critical role of Sharia-compliant investments in well-diversified, risk-conscious portfolios while also providing nuanced insights into the more selective integration of ESG-focused assets. The results offer practical guidance for portfolio managers seeking to integrate ethical and sustainable investment principles within advanced portfolio optimization frameworks, particularly when focusing on minimizing variance and dynamically responding to evolving market conditions.

Social implications

The study contributes to the growing body of literature on ethical and sustainable investments, demonstrating that it is possible to balance ethical considerations with robust financial performance. The research underscores the potential for Sharia-compliant investments to play a significant role in global portfolios, potentially fostering greater financial inclusion and cross-cultural understanding in the investment community.

Originality/value

This research provides novel insights by focusing on Sharia-compliant investments within non-Muslim countries, an area that has been relatively underexplored. It also compares the outcomes of static, dynamic and rolling optimizations, highlighting the dynamic interplay between ethical investment principles and financial performance.

Details

Sustainability Accounting, Management and Policy Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2040-8021

Keywords

Article
Publication date: 3 December 2024

Alexandra Horobet, Birjees Rahat, Ana-Maria Floarea and Lucian Belascu

This paper aims to examine the link between environmental policies and financial markets, with a particular focus on the banking sector. The assessment of banks is based on their…

Abstract

Purpose

This paper aims to examine the link between environmental policies and financial markets, with a particular focus on the banking sector. The assessment of banks is based on their environmental impact, social responsibility and governance practices.

Design/methodology/approach

A panel data regression model is used to examine the link between ROE and systematic risk, on the one hand, and European banking institutions’ ESG scores and its environmental, social and governance (ESG) pillar scores, as well as other financial indicators, on the other hand. The timeframe of the research is 10 years and includes 61 European banks, thus providing an extensive review of existing literature and empirical analysis to reveal the complex link between environmental policies, ESG performance and financial performance in the banking sector.

Findings

Better ESG performance is associated with lower ROE but also lower systematic risk for European banks. An improved environmental and social performance leads to higher ROE and lower beta coefficients. However, higher governance scores depress ROE.

Originality/value

The paper aims to contribute to the existing literature by showcasing a complex link between ESG practices and financial performance, focusing extensively on the banking sector. This research analyses how ESG initiatives, when implemented within banks, influence key financial metrics such as profitability, risk management and long-term sustainability. It also examines the unique challenges and opportunities that banks face in aligning ESG goals with financial objectives. Through this thorough analysis of the banking sector, the study adds depth to the current discourse on the broader impact of ESG practices on the financial performance of companies.

Details

Review of Accounting and Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1475-7702

Keywords

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