Shari’ah investing is ESG adjacent by design

For investors, the distinction that matters is structural, not philosophical. Shari’ah does not merely signal values – it hardcodes balance sheet discipline at the universe level. Before a single stock is analysed, the investable universe has already been de-levered and tilted away from business models most exposed to funding stress. This is why adding a broad, generic ESG overlay on top of a Shari’ah universe often achieves little beyond duplication. The work has already been done. In fact, Shari’ah investing often resembles the end state of well-constructed ESG portfolios – except they arrive there through rules rather than ratings.

The process of Shari’ah investing involves stripping away noise to focus on what survives cycles: durable economics, conservative financial structures, and valuation support. From that perspective, Islamic equity investing is often misunderstood. It is not a niche ethical overlay, nor is it a softer version of ESG. Correctly implemented, Shari’ah defines a universe that already internalises many of the outcomes ESG frameworks aim to engineer – without relying on scores, labels, or retrospective exclusions.

The difference in approaches is also seen when assessing risk, and risk in Shari’ah portfolios behaves differently. Shari’ah compliance operates through two mechanisms. First, business activity screens remove sectors with elevated controversy and social risk, including conventional banks. Second, financial ratio screens constrain leverage and Interest-based income, imposing a discipline that many portfolios only reach indirectly through factor optimisation. The result is not “ethical alpha.” It is left-tail risk reduction. When leverage is capped, fewer companies depend on refinancing conditions to survive. When conventional banks are excluded, exposure to a sector, tightly coupled with credit cycles and liquidity stress, is structurally reduced.

This matters now, because in a post-zero-rate world, capital structure is no longer background noise. Even after policy easing, rates remain meaningfully positive and volatile. Markets have repeatedly demonstrated that narratives – whether AI disruption, geopolitics, or policy uncertainty – can reprice entire sectors with little warning. These episodes highlight that markets are often highly volatile in the short term, making it crucial for investors to maintain a long-term view and not overreact to temporary noise. In this environment, balance sheets become a pricing signal again.

This is why it is important to stay grounded in your operating philosophy as an investor. Across wars, depressions, regime shifts, and market crises, our edge has been discipline: stewardship over speculation, balance sheet prudence over leverage, and downside control as a prerequisite for compounding. Our philosophy for Shari’ah investments – which is predominantly focused on quality, followed by value, and growth – is not designed to shine in every quarter. It is designed to protect capital in drawdowns and compound it through recoveries, systematically rather than episodically. This long-term perspective means staying the course even during periods of short-term market volatility – remaining invested and focused on fundamentals, so that disciplined strategies have time to pay off when markets recover.

Over full cycles, the Old Mutual Global Islamic Equity Fund has delivered long-term returns broadly comparable to global equity benchmarks such as the MSCI World Index, despite operating within a more constrained universe. This outcome underscores that even within a constrained stock universe, careful stock selection and global diversification across resilient industries can yield competitive long-term results.

Shari’ah portfolios still span multiple sectors and regions (excluding only prohibited industries), ensuring that investors are not “putting all their eggs in one basket” while adhering to Islamic principles. The difference is not in chasing rallies, but in how capital behaves during stress: shallower drawdowns, less exposure to financial system shocks, and a smoother path to compounding. That arithmetic matters. Smaller drawdowns require less recovery. Less recovery leaves more capital to compound. For long-term investors, these features make it easier to remain invested during market downturns, knowing that shallower losses mean a faster recovery – leaving more capital intact to fuel future gains when markets rebound. Shari’ah screening is a powerful starting filter precisely because it concentrates on operating businesses with cleaner balance sheets. In volatile regimes, those are often the companies that continue to compound, while others are forced to repair. That is the underappreciated edge. Not ethics at the cost of returns, but risk economics that allow returns to survive long enough to matter.

The bottom line is that Shari’ah investing is not ESG adjacent. It is sustainably and ethically aligned by construction. By embedding harm reduction and balance sheet discipline at the universe level, Islamic equity portfolios start from a position of financial resilience. Layered with active research and selective ESG insight, they offer something increasingly scarce in modern markets: a system designed not to blow up, and therefore able to compound through cycles. This is our investable edge. DM

Discover why Shari’ah investing starts with many of the outcomes ESG investment frameworks aim to achieve.

Author: Maahir Jakoet, Portfolio Manager of the Old Mutual Global Islamic Equity Fund, Old Mutual Investment Group