A Comparison of Socially Responsible and Islamic Equity Investments

Abstract

Defining social investing and its boundaries is a challenging task, since no general consensus exists about the ‘ideal’ characteristics that socially responsible investments (SRIs) should possess. Some faith-based investments, for instance, Islamic funds, are often associated with SRIs, even if there are some inconsistencies in the investment decisions. This paper explores whether Islamic investments can be included into the category of SRIs or whether they exhibit characteristics that would more fittingly classify them in a separate investment family. To answer this research question, we focus on equity investments from both a qualitative and a quantitative point of view. The first part of the study discusses and compares the screens generally used to build socially responsible (SR) and Islamic portfolios, while the quantitative section of our study analyses portfolios’ characteristics using relevant European indices as a proxy for SRI and Islamic funds. Covering the period from 2001 to 2011, we use style analysis to investigate the sector and country composition of SR and Islamic portfolios. In addition, through a cointegration analysis on FTSE indices, we show that the econometric profile of the FTSE Islamic series exhibits peculiar portfolio characteristics compared to conventional and SRI indices. Although the academic literature has extensively analysed SRIs and some authors have focused on Islamic investments, to the best of our knowledge, this is the first paper to investigate the qualitative and econometric differences between SRIs and Islamic investments.

Keywords: Style analysis, socially responsible investments, cointegration analysis, Islamic investments, Islamic mutual funds

JEL Classification: G12, G23, P43