Incorporating Socially Responsible Principles in Islamic Investments: An Empirical Analysis

The paper examines the compatibility of United Nations (UN) Global Compact’s principles with Islam and proposes a new “social screen” to be added in addition to existing Shari’a complaint equity screening methodologies. The paper then empirically analyzes the performance of SRI portfolios with portfolios that are both socially responsible and Shari’a compliant using risk adjusted return tools and Carhart 4 factor model. The paper further investigates the performance of seven Islamic indices with equivalent socially responsible indices. It was found that the Islamic principles not only endorse the principles of UN Global Compact but also enforce them and make an individual accountable. The empirical results show that SRI and Shari’a compliant combined portfolio performs better than the SRI portfolio, and hence Sharia compliant investments bring value to the SRI portfolio. The paper also found that Shari’a compliant portfolio generates better returns than the SRI portfolio in a bearish market while the latter performs better in a bullish market. It is concluded that during market downturn Shari’a compliant portfolios can be used to limit risk.