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

Abstract

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.