Halal vs ESG Investing: How Similar Are They?

What comes to mind when you hear the word 'young investors'? Nowadays, the investor demographic is dominated by the younger generations, namely Millennials and Gen Z.  

Much like the generations that came before them, Millennials and Gen Z dream of securing a financially stable future. However, to them, their way of securing the dream is what matters. We've come to know the younger generation, especially Gen Z, as a generation that demands authenticity and accountability in almost every aspect of their lives, including finance.  

This social consciousness drives Gen Z to seek more than just quality when it comes to products. On top of good quality, the products they consume have to have genuine value as well. This behaviour resulted in a significant shift, including the investment industry and putting ESG investing in the spotlight. 

What is ESG investing? 

ESG refers to Environmental, Social and Governance, a set of standards used to measure a company’s environmental and social impact. The term ESG was first coined by the United Nations Global Compact in 2004, while the movement itself started in the 1970s. It has also been said that ESG investing originated from the Socially Responsible Investing (SRI) movement, a common practice for investors who want to align their investment portfolio with their social values at that time. Sometimes, ESG investing is called sustainable investing. 

Due to its popularity, ESG investing is becoming a highly lucrative market. Many conventional investing companies have reported being outperformed by ESG funds, including the American publicly traded corporation S&P Global. In 2021, the company reported that 19 of 26 ESG exchange-traded funds (ETFs) and mutual funds performed better than their S&P 500. Australia also reported increasing trends in ESG investing, predicting that Australia's ESG investing market revenue is expected to reach $2,370.7 million by 2030. 

Is ESG investing the same as halal investing? 

On a surface level, ESG and halal investing share many similarities: both prioritise and stand on principles of morality, justice, and fairness without compromising profits. Both actively avoid investments in businesses that are harmful to the environment and society. In conclusion, ESG and Shariah-compliant investing focus on generating profits without harming the environment.  

Due to the similarities between the two, many have been comparing ESG and halal investing, even going as far as saying the two are the same. At their core, however, the two have different values and objectives: ESG investment is valued on whether an investment creates a positive environmental and societal impact, but it doesn’t concern Shariah compliance.  

For example, a renewable energy company with good social and environmental practices qualifies as an ESG and halal investment due to its responsible cause. However, if the company is involved in businesses that are prohibited by Islamic laws, such as riba (interest), it can no longer be considered a Shariah-compliant investment. Meanwhile, for an investment to be considered as halal, it needs to fulfill its Shariah compliance on top of avoiding businesses that are prohibited by Islamic laws. 

Can Muslims invest in ESG investments? 

With its positive track record and commitment to sustainability, many people find ESG a very interesting investment choice. Many Muslims have also expressed their interest in ESG investing, because it focuses on sustainability and society wellbeing. So, can Muslims invest in ESG investments? 

While ESG investing has great credibility, it’s important to remember that not all of its funds qualify as halal. Some ESG investments may still involve interests, which is not permissible in Islamic finance. For Muslims, as it is mandatory to keep your investments aligned with your faith, Shariah-compliant investments are the better option. Caring for the environment and societal wellbeing is a part of the Islamic principles, therefore Shariah-compliant investments are inherently environmentally friendly.  

Halal ETFs by Halal Money, for example, avoid investments in potentially harmful businesses like weapons. Instead, Halal ETFs invest in property, shares, and Islamic bonds (sukuk). Additionally, Halal Money’s ETFs are Shariah-compliant certified. As a part to uphold its Shariah compliance standards, the ETFs are subject to a 3-tier governance process, which includes maintenance and periodical audits by the Global Islamic Financial Services (GIFS). 

Why choose halal investing over ESG? 

While ESG investing promotes sustainable practices and supports environmental wellbeing, halal investing is a more comprehensive option for Muslims in terms of moral standards and religious compliance.  

One of the risks ESG investing commonly poses is the lack of universal standards. Different companies may implement different reporting standards, interpretations, and metrics, which can affect investing decisions and opportunities in the long run. This can also lead to the risk of greenwashing, a practice where companies overestimate or misinterpret their environmental efforts. 

Halal investing platforms, on the other hand, will employ trusted Shariah boards to regularly audit their investment products to ensure they meet the compliance standards. In the event of the profit generated from halal investing turned out to be haram, halal investing will allow you to perform wealth purification. Wealth purification is an act of "cleaning" the portion of income generated from non-halal means. Wealth purification is usually done through donation and selling impacted shares. 

In conclusion, halal investing is the most suitable and safest option for those who wish to align their investment portfolio with their values and their faith. Download the Halal Money app (available on App Store and Play Store) to start investing in Halal ETFs! 

Frequently Asked Questions 

Is ESG investing the same as halal investing? 

While ESG and halal investing share similar principles, they’re two different investing practices. ESG investing only concerns environmental and social wellbeing and does not necessarily avoid elements that are impermissible in Islam. 

What makes an investment halal? 

An investment is considered halal if: 

1. it avoids riba
2. does not profit off businesses that are prohibited in Islam like weapons, gambling, pork products, and alcohol

Can Muslims invest in ESG ETFs? 

Muslims may invest in ETFs with strong ESG characteristics, but it's important to further investigate whether the ETFs are also halal. Because not all ESG investments are halal, it is recommended that Muslims invest in halal ETFs instead. Click below to download the app start now!