Environmental, social and governance (ESG) practices and financial performance of Shariah-compliant companies in Malaysia

Abstract

Purpose This study aims to examine the impact of environmental, social and governance (ESG) practices on the financial performance of Malaysian Shariah-compliant companies over the period 2010–2017. Design/methodology/approach Panel regression models are used for this study to test the effect of ESG practices on the performance and the interaction variables to examine the impact of double ESG – Shariah screening on firms’ performance. Findings This study finds a positive relationship between ESG practices and financial performance, suggesting that ESG practices can enhance firm value. Additionally, the authors also find evidence that double ESG–Shariah screening can enhance the ESG relationship with performance. These results are consistent and robust to three proxies for financial performance and different estimation techniques. Practical implications The positive relationship between ESG practices and performance implies that firms should improve their ESG commitment as this is consistent with enhancing performance. Originality/value This study presents evidence concerning the impact of ESG practices on the financial performance of Shariah companies, thereby paving the way for further studies in sustainability investments in Shariah companies.