Ethical Investing vs. Halal Investing: Navigating Values in Investment Decisions

Investing is not solely about financial returns; for many, it is also an expression of personal values and ethics.

Ethical investing and halal investing represent two approaches that align investment choices with moral and religious principles.

While they share some common ground, understanding their nuances is crucial for investors aiming to make informed decisions.

What is Ethical Investing?

Ethical investing, also known as socially responsible investing (SRI), involves selecting investments based on ethical, social, and environmental criteria in addition to financial considerations.

Investors often screen companies to include those that promote positive social change and exclude those involved in activities considered harmful or unethical (Renneboog et al., 2008).

What is Halal Investing?

Halal investing adheres to Islamic law (Shariah), ensuring that investment activities comply with religious teachings.

This approach prohibits investments in certain industries and practices deemed haram (forbidden) and requires adherence to specific financial principles, such as the avoidance of interest (riba) (AAOIFI, 2015).


Read more about: Halal Investment Helpful Guide

Core Values of Ethical Investing

The core values of ethical investing revolve around promoting social justice, environmental sustainability, and corporate governance. Key principles include:

• Environmental Responsibility: Supporting companies that practice environmental sustainability.
  
  
• Social Equity: Investing in firms that promote fair labor practices and human rights.
  
  
• Corporate Governance: Favoring businesses with transparent and ethical management practices (Sparkes & Cowton, 2004).

Core Values of Halal Investing

Halal investing is grounded in the principles of Shariah law, emphasizing:

• Prohibition of Interest (Riba): Avoiding investments that involve the payment or receipt of interest.
  
  
• Ethical Business Practices: Engaging in fair dealings and avoiding deceit.
  
  
• Asset-Backed Financing: Ensuring investments are backed by tangible assets.
  
  
• Risk Sharing: Promoting profit-and-loss sharing arrangements (El-Gamal, 2006).
  
  

Exclusion of Certain Industries or Practices

Ethical Investing Exclusions

Ethical investors may exclude industries such as:

• Tobacco and Alcohol
• Gambling
• Weapons Manufacturing
• Environmental Polluters

These exclusions are based on the negative social or environmental impact associated with these industries (Renneboog et al., 2008).

Halal Investing Prohibitions

Halal investing prohibits:

• Alcohol Production and Sales
• Gambling and Gaming
• Interest-Based Financial Institutions
• Pork and Non-Halal Food Production
• Pornography and Adult Entertainment
  
  

These prohibitions are derived from Islamic teachings that designate certain activities as haram (AAOIFI, 2015).

Ethical Investing Vs. Halal Investing 

Screening Criteria Differences

While both ethical and halal investing involve screening out certain industries, their criteria differ:

• Ethical Investing: Screens based on social and environmental impact, which can be subjective and vary among investors.
  
  
• Halal Investing: Follows specific religious guidelines outlined in Shariah law, which are more uniform (Hayat & Kraeussl, 2011).

Overlaps Between the Two Approaches

Both approaches exclude industries like alcohol, gambling, and weapons manufacturing. This overlap allows for certain investments to be both ethical and halal (Derigs & Marzban, 2008).

Can an investment be Ethical but Not Halal, or Vice Versa?

Yes. An investment can be ethical but not halal if it involves interest-bearing instruments like conventional bonds, which are acceptable in ethical investing but prohibited in halal investing.

Conversely, an investment can be halal but not meet an individual's ethical criteria if, for example, it involves industries with poor environmental practices but complies with Shariah law (El-Gamal, 2006).

UAE Governmental Support and Initiatives for Ethical Investors

UAE Net Zero 2050 Strategic Initiative

The UAE has committed to achieving net-zero emissions by 2050, encouraging investments in renewable energy and sustainable projects (UAE Government, 2021).

Dubai Financial Market (DFM) Sustainability Standards

DFM has introduced sustainability reporting standards to promote transparency and attract ethical investors (DFM, 2020).

Abu Dhabi Global Market (ADGM) Sustainable Finance Framework

ADGM has established guidelines to support sustainable finance, fostering an environment conducive to ethical investing (ADGM, 2019).


Read more about: The SMEs Guarantee Programs in The UAE

Regional Collaboration for Ethical Finance

The GCC countries are increasingly collaborating on sustainability and ethical investment frameworks. Initiatives include:

• GCC-Wide Cooperation: Efforts to harmonize regulations and create a cohesive market for ethical investors (Kammer et al., 2015).
  
  
• Bilateral Partnerships: Collaborations with global institutions to promote green bonds and sustainable financial instruments in the UAE and KSA (IMF, 2020).

References

• AAOIFI. (2015). Shari’ah Standards. Accounting and Auditing Organization for Islamic Financial Institutions.
• ADGM. (2019). ADGM Sustainable Finance Agenda. Abu Dhabi Global Market.
• Derigs, U., & Marzban, S. (2008). New strategies and a new paradigm for Shariah-compliant portfolio optimization. Journal of Banking & Finance, 32(9), 1723-1736.
• DFM. (2020). Dubai Financial Market Sustainability Report. Dubai Financial Market.
• El-Gamal, M. A. (2006). Islamic Finance: Law, Economics, and Practice. Cambridge University Press.
• Hayat, R., & Kraeussl, R. (2011). Risk and return characteristics of Islamic equity funds. Emerging Markets Review, 12(2), 189-203.
• IMF. (2020). Regional Economic Outlook: Middle East and Central Asia. International Monetary Fund.
• Kammer, A., et al. (2015). Islamic finance: Opportunities, challenges, and policy options. IMF Staff Discussion Note.
• PIF. (2021). The Public Investment Fund Program (2021-2025). Public Investment Fund.
• Renneboog, L., Ter Horst, J., & Zhang, C. (2008). Socially responsible investments: Institutional aspects, performance, and investor behavior. Journal of Banking & Finance, 32(9), 1723-1742.
• Saudi Vision 2030. (2016). Kingdom of Saudi Arabia Vision 2030.
• Sparkes, R., & Cowton, C. J. (2004). The maturing of socially responsible investment: A review of the developing link with corporate social responsibility. Journal of Business Ethics, 52(1), 45-57.
• Tadawul. (2020). Saudi Exchange ESG Index. Saudi Stock Exchange.
• UAE Government. (2021). UAE Net Zero by 2050 Strategic Initiative.