Does the islamic label indicate good environmental, social, and governance (ESG) performance? Evidence from sharia-compliant firms in Indonesia and Malaysia

Abstract

This study empirically investigates the effect of an Islamic label on environmental, social, and governance (ESG) performance. Islamic firms in Indonesia and Malaysia that are characterized by lower debt and lower non-sharia compliant income and have a higher ethical standard are expected to make a better contribution to the environment and society. Testing firms in Indonesia and Malaysia, two emerging countries in ASEAN (Association of Southeast Asian Nations), reveals a significant difference in overall environmental and social performance, but not in governance quality. Also, the study documents the significant effect on performance of using Islamic criteria for leverage, accounts receivable, and cash. Overall, after controlling for some variables and splitting the sample into different time horizons and firm sizes, the study consistently reveals that firms labeled as Islamic have better environmental and social performance, but not governance performance. The relevant policies should be adjusted.

Jel classifications

G21, G29.