NEXUS OF SHARIAH AND ESG COMPLIANCE: A MAQASID AL-SHARIAH SCREENING FRAMEWORK AND ITS IMPACT ON FIRM’S PERFORMANCE

Abstract

This thesis investigates the nexus between current Shariah negative screening practices and contemporary ESG positive screening strategies, introducing an enhanced framework based on Maqāṣid al-Shariah and evaluating its effects on firm performance through empirical analysis. It begins with a critical review of prevailing Shariah screening methods in global indices, revealing methodological inconsistencies, limited quantification, and insufficient integration of broader ethical aspects. Concurrently, it analyses the evolution of ESG screening, uncovering shared ethical foundations with Shariah but differing operational mechanisms. The thesis highlights how Maqāṣid al-Shariah principles safeguarding faith, life, intellect, lineage and wealth align with ESG principles both theoretically and practically. This alignment illustrates how religious compliance can merge with sustainable investment goals to form an integrated ethical framework. To operationalise this, a novel three-phase conceptual model, "Shariah Screening 2.0", is introduced, comprising: (1) the Shariah Compliancy Score (SCOMS), a quantitative refinement of binary screening; (2) a Shariah-ESG Integrated Rating Model; and (3) an Enhanced Maqāṣid al-Shariah Screening Framework using a Corporate Maqāṣid al-Shariah Assessment (CMSA). Successful implementation requires corporate participation, improved disclosures, deeper research into Maqāṣid indicators, and institutional support. Empirically, the study investigates the impact of Shariah and ESG compliance on firm performance using ROA and Tobin's Q ratios, applying System GMM dynamic panel analysis to 504 S&P 500 firms from 2012 to 2022. Results show that Shariah financial compliance enhances performance, while business compliance alone has limited or negative effects. Standalone ESG compliance also shows limited impact. However, firms with high levels of both Shariah and ESG compliance exhibit significantly improved financial and market outcomes. These findings underscore the inadequacy of isolated strategies and support the case for an integrated ethical framework, offering novel empirical evidence that combined Shariah and ESG standards enhance trust, resilience and performance.

Date of Award	2025
Original language	American English
Awarding Institution	HBKU College of Islamic Studies