Do Sharīʿah and ESG-Compliant Firms Outperform Others? Evidence from S&P 500 Index Companies

Abstract

Background: Sharīʿah-compliance and Environmental, Social, and Governance (ESG) principles represent two major ethical paradigms shaping contemporary finance. Yet, empirical evidence on their combined impact on firm performance remains limited.
Objective: This study investigates how Sharīʿah and ESG compliance, individually and jointly, affect firm performance, focusing on both accounting-based (ROA) and market-based
(Tobin's Q) indicators.
Methods: Using a dynamic panel dataset of 504 firms from the S&P 500 index spanning 2012–2022, the research applies the System Generalized Method of Moments (GMM) to address endogeneity and unobserved heterogeneity. Two novel frameworks are employed: (1) the Sharīʿah Compliancy Score (SCOMS), which quantifies degrees of Sharīʿah financial and business compliance; and (2) a Sharīʿah–ESG Integrated Rating Model, combining SCOMS with ESG performance metrics to evaluate holistic ethical alignment.
Results: Findings reveal that Sharīʿah financial compliance significantly enhances both ROA and Tobin's Q, while Sharīʿah business compliance alone exerts limited or negative effects.
Standalone ESG compliance similarly shows weak performance links. However, firms demonstrating high compliance across both Sharīʿah and ESG dimensions achieve significantly superior financial and market outcomes, confirming the synergistic value of
integration.
Conclusion: The study validates the effectiveness of an integrated ethical framework that unites Sharīʿah and ESG principles. Such alignment strengthens stakeholder trust and corporate resilience, offering an empirically grounded model for sustainable and faith-consistent value creation.