Are Islamic Banks More ESG Compliant than Their Conventional Counterparts?

Sustainability is a well-established concept in Islam, as such. Islamic banks that are modelled on the principles of shariah must conform to the practices of sustainability; one such practice is that of ESG. This paper tests whether the ESG performance of Islamic banks is higher than that of conventional banks. While ESG is important to a modern investor, it would not have much of an effect if the bank was not performing well financially. As such, this paper also tests the impact of ESG compliance on financial performance of Islamic banks in the GCC region. The data is collected from Thomson Reuters Refinitiv; the dataset comprises of Islamic banks and conventional banks from the GCC region with data of these banks collected from 2011-2019. This research applies a pooled data based OLS regression analysis to compare the level of ESG compliance between the two types of financial intermediaries and the same pooled data regression model to test the impact of the ESG combined score on financial performance. The results suggest Islamic banks have an inferior ESG performance to their conventional counterparts, while ESG also negatively impacts service sector institutions such as banks.