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Is it Costly to Introduce SRI into Islamic Portfolios?

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  • ELIAS, ERRAGRAGUI

Abstract

Could Environmental, Social and Governance (ESG) performance be a criterion for Islamic investment? The development of socially responsible investment (SRI) has challenged the ethical approaches associated with Islamic investment as a means to promote social achievements. Noting similarities with the positive screening approach, we investigate the integration of ESG criteria, into Islamic portfolios using KLD social ratings. This research seeks to determine the financial price of being both Sharī‘ahcompliant and socially responsible. We examine the financial performance of self-composed Islamic portfolios with varying ESG scoring. The results indicate no adverse effect on returns due to the application of Islamic and ESG screens, with a substantially higher performance for positive screening on governance during post subprime crisis’ period. Significant outperformance still arises for portfolios with bad records in community and human rights though. Performances are controlled for market sensitivity, investment style, momentum factor and sector exposure.

Suggested Citation

  • Elias, Erragragui, 2017. "Is it Costly to Introduce SRI into Islamic Portfolios?," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 25, pages 23-54.
    • Handle: RePEc:ris:isecst:0164
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    More about this item

    Keywords

    socially responsible investing (SRI); Islamic investing; ESG scorings; corporate social responsibility (CSR); portfolio management;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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