The market uncertainty of ethically compliant equity: An integrated screening approach

This study investigates the uncertainty of market returns for ethically compliant equity using a comprehensive ethical screening methodology. The analysis also compares the effect of different ethical screening criteria on firm uncertainty. We develop a comprehensive ethical screening framework that fulfils the intrinsic value of the Islamic religion and responds to contemporary ethical challenges. Using the comprehensive framework, a global sample of non-financial companies are screened for their fulfilment of religious and ethical values. The framework is not only focused on basic screening methodologies that are currently used in the Islamic finance industry but also covers the aspect of environmental, social and governance (ESG) performance, as well as firms’ earnings qualities. The analysis reveals that ethically compliant firms display lower uncertainty than non-ethically compliant firms. The level of firm uncertainty is also different between the screening stages, where firms screened using a more comprehensive ethical approach are exposed to lower uncertainty. The results are robust to various estimations and consistent during the 2008 financial crisis.