The Moderating Effect of Sharia Stock Index Inclusion on the Relationship Between Sustainability Performance and Profitability

Abstract

This study examines the relationship between sustainability performance
and profitability, with a specific focus on the moderating role of inclusion in
the Sharia Stock Index. The index's screening criteria are hypothesized to
align with sustainability objectives, potentially enhancing firm profitability.
The analysis is based on a sample of 75 firms from Indonesia and Malaysia
over the period 2018–2022. Using panel data regression, the findings reveal
a positive relationship between overall ESG (Environmental, Social, and
Governance) scores and profitability. However, no significant relationship is
identified between individual ESG pillar scores and profitability.
Additionally, the moderating effect of Sharia Stock Index inclusion on the
sustainability performance–profitability relationship is not supported by the
results. This study contributes to the literature by exploring the interplay
between sustainability performance and profitability within the context of
Muslim-majority ASEAN countries. It also challenges assumptions
regarding the role of Sharia Stock Index inclusion, offering fresh insights for
investors and policymakers aiming to balance sustainability objectives with
financial performance.