Do ESG and Shariah Screens Influence Factor Loadings? Evidence from Bursa Malaysia

Mohnish Balaguru; Shahrin Saaid Shaharuddin; Mohamed Shikh Abubaker Albaity

doi:10.33152/jmphss-10.2.2

Authors

Mohnish Balaguru Rajiv Gandhi Institute of Petroleum Technology, Uttar Pradesh, India
Shahrin Saaid Shaharuddin Universiti Malaya, Lembah Pantai, Kuala Lumpur, Malaysia
Mohamed Shikh Abubaker Albaity University of Sharjah, Sharjah, United Arab Emirates

DOI:

https://doi.org/10.33152/jmphss-10.2.2

Keywords:

Fama-French five-factor model, ESG screening, Shariah compliance, Bursa Malaysia, Asset pricing

Abstract

To the best of our knowledge, this is the first study to simultaneously compare ESG-screened, Shariah-ESG, and conventional large-cap portfolios within an augmented seven-factor asset pricing framework in an Islamic emerging capital market. This study aims to examine whether the factor loadings of the Fama-French Five-Factor Model differ across ESG, Shariah-ESG and conventional screening regimes using the top 100 companies ranked by market capitalisation on Bursa Malaysia. The sample comprises 100 firms (22 ESG, 41 Shariah-ESG, and 37 conventional) and 14,242 firm-month observations. Using monthly stock returns from January 2013 to December 2024, stocks are categorized into three groups: ESG-screened stocks, which are constituents of the FTSE4 Good Bursa Malaysia Index; Shariah-ESG stocks, which satisfy the FTSE Russell and Securities Commission Malaysia criteria; and conventional stocks, which are unscreened. We estimate an augmented seven-factor specification using panel fixed-effects regressions and System GMM for robustness. Contrary to theoretical predictions, conventional stocks have the highest loadings on the profitability factor (RMW), while ESG stocks do not have significantly high RMW or improved model fit. The investment factor (CMA) loadings are similar for the Shariah and conventional groups. These findings challenge the standard ESG-profitability and Shariah-leverage theoretical priors in the Malaysian large-cap context and provide new evidence for the asset pricing literature on screening-conditioned equity returns in Islamic emerging capital markets. The results carry practical significance for institutional investors constructing screened portfolios and offer policy-relevant insights for regulators evaluating the design of ESG and Shariah screening criteria. Future research should extend this framework to mid- and small-cap segments and to other ASEAN Islamic capital markets to assess the generalisability of these findings.