Can sustainable investing beat the market? Evidence from Islamic countries

Purpose This study aims to investigate whether the incorporation of sustainability criteria into the traditional Shari’ah screening process has a significant impact on the performance of the Islamic investment portfolio. Design/methodology/approach This study examines the investment performance of Islamic sustainability equity indices from those Islamic countries that are member states of the Organization of Islamic Cooperation, and have partner exchanges with the UN Sustainable Stock Exchanges initiative. The data set spans from October 1, 2021 to September 17, 2024. The author addresses four key issues that are of concern to most investors: can the investment strategy of investing together in the themes of sustainability and Islamic finance outperform the global sustainability benchmark?; can this strategy outperform the global Islamic benchmark?; does the performance of this strategy vary across regions?; and is there any portfolio diversification benefit between sustainability and Islamic finance? Findings The findings reveal the heterogeneity in the investment performance of Islamic sustainability indices across countries, and suggest the potential of obtaining superior risk-adjusted returns in certain region while benefiting from portfolio diversification. Research limitations/implications The relative nascence of Islamic finance and the recent development of Islamic sustainability indices have attracted more investors than in earlier years. This increased investor attention, together with the growing integration of the Islamic capital market, makes the study all the more relevant. Practical implications From a practical point of view, the integration of sustainability filters into an Islamic portfolio, or vice versa, might provide complementary investment classes for both types of investors, and it could also offer diversification benefit for fund managers. Originality/value This paper contributes to the literature on the integration of sustainable investing and Islamic finance, and provides empirical evidence on the impact of incorporating sustainability criteria into the traditional Shari’ah screening process.