Integrating ESG and Shariah Frameworks for Enhanced Equity Market Returns

Most of the existing studies primarily focus on the impact of ESG and Shariah-compliant on the financial performance instead of the share price performance. The objective of this study is to investigate the share performance of ESG (Environmental, Social, and Governance) and Shariah-compliant stocks in the Malaysian equity market, that is benchmarked against the FBMKLCI from the period of 2019 to 2023. It evaluates the ability of the stocks to surpass the benchmark and outperform the FBMKLCI by 5% and 10% respectively. This study examines the share price performance which leverage on the Stata software to identify p-values (<0.1) as indicators of marginal statistical significance. The results demonstrated a mixed performance for ESG-rated stocks, with social and governance variables emerging as a more consistent driver of outperformance compared to environmental dimensions. Even though the ESG and Shariah-compliant combination demonstrated a mixed set of results in the outperformance of the stocks, it has provided some evidence that the integration of ESG and Shariah-compliant stocks may enhance the equity market returns. It promotes the alignment of ESG and Shariah-compliant stocks to institutional investors, policymakers, and retailers who strive to achieve better equity market performance. This research underscores the pivotal role of integrating ESG and Shariah-compliant frameworks in driving share price performance while ensuring that ethical standards are taken into consideration.