Investment preference by shariah-compliant mutual funds: does sustainability engagement matter?

The concept of sustainability has been embedded in the philosophy of modern businesses. Through this concept, firms are required not only to fulfill its responsibility towards the shareholders, but also to engage themselves in sustainability activities, thus fulfilling the needs of the stakeholders as well. Firms that adhere to sustainability engagement may enjoy long-term benefit such as strengthened brand and corporate reputation, improved market position and reduced cost, thus attracting investments. The purpose of this study is to examine if such engagement by business firms may attract investments from Shariah-compliant mutual funds. Previous studies found that mutual funds have disinterest towards firms with good sustainability engagement. However, this study believes that the influence of Islam through the principles of tawhid (faith), khalifah (vicegerency) and ukhuwwah (brotherhood) may lead Shariah-compliant mutual funds to act differently, where they might consider firms with good sustainability commitment in their investment decision making. A total of 236 firms listed on Bursa Malaysia in the years 2014 and 2015 have been selected as sample. A one-year lagged data for sustainability engagement and Shariah-compliant mutual funds have been utilized. Sustainability engagement is measured by the quality of sustainability disclosure, while the ownership of Shariah-compliant mutual funds is measured by their percentage of shares held in the ownership structure of the sampled firms. The results reveal that Shariah-compliant mutual funds do have positive preference towards firms with good sustainability engagement. The results thus confirm the Islamic influence in shaping the behavior of Shariah-compliant mutual funds in their investment decision making process