The convergence of ethical investment business models and their reliance on the conventional US investment market

ABSTRACT

This study investigates the extent of convergence of the two key types of ethical investment business models: Islamic Finance (IF) investment and Socially Responsible Investment (SRI) and the level to which these ethical business models are disconnected from the conventional investment market. We undertake an empirical assessment using three key US stock indexes: the Dow Jones Industrial Average, the Dow Jones Islamic Market, and the Dow Jones Sustainable Index. We find that IF and SRI indexes show significant similarities, suggesting that the ethical investment models share common moral and societal values and react similarly to market forces indicating convergence. We also find that the ethical investment models appear to be closely dependent on the conventional US stock market, suggesting inefficiency in the ethical investment model and, therefore, a dominant effect of conventional finance market on ethical investments. These findings are relevant as they allow us to better clarify the perceived convergence/divergence of values in IF and SRIs and to measure the degree of efficiency and credibility of ethical investment models to determine whether they are capable of successfully managing investments, in consideration of social, environmental, and economic factors, with fair, sustainable, and responsible outcomes.

KEYWORDS:

• Ethical investment
• Islamic stock market
• time series modelling
• socially responsible investment

JEL CLASSIFICATION:

• C22
• G15

Disclosure statement

The authors declare that they have no conflict of interest.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.

Notes

¹ See Ghorbel, Abdelhedi, and Boujelbene (2014) for more details.

² See Daugaard (2019) for a concise review on the emergence of environmental, social and governance investing forms.

³ See Sairally (2007) for further details on the origins and perspectives of ethical finance.

⁴ The results of stationarity tests are not reported to save space, but available upon request.