Firms’ Dynamics of ESG and Islamic Finance-Liquidity, Solvency and Macroeconomic Externalities: A Case Study of OIC Countries
Creators: name: Akande, Ayodele Emmanuel
Publisher: name: Manara - Qatar Research Repository
Year: 2024
Subjects: classificationCode: 50
subject: Philosophy and religious studies

description: ESSAY 1 Purpose
This study aims to investigate if equities that are both ESG-compliant and Shari’ah Complaint perform better than ESG-compliant only and Shari’ah compliant only equities in terms of Leverage (Liquidity &amp; Solvency), credit rating, probability of default, and sectoral performance.
Design/methodology/approach
A two-step system generalized method of moments (dynamic estimation) approach is used to investigate the effects of the explanatory variables on the dependent variables and the comparative leverage performances analysis, between the different categories of equities- 4922 companies across 31 OIC member countries of the variables of interest from 2010 to 2020
Findings
Sustainability reporting of companies does not necessarily mean good ESG performance. Top ESG performing firms are less solvent than their counterparts. Sustainability reporting, ESG performance, and Shari’ah compliance reinforce the liquidity strengths of a company. However, firms that are both ESG compliant and Shari’ah compliant have a higher initial cost of debt and total current liability. Financial performance (ROA and liquidity control) have a positive interaction with ESG performance. Shari’ah compliance blends well (positive for both current and quick ratio) with macro-economic variables which might reflect the constructive, ethical, and preservatives nature of the financial approach to the society. Both ESG performance and CSR reporting have negative interactions with macroeconomic variables, which might reflect capitalism, interest-based and profit-seeking concepts. Like the literature, financial performance (ROA and liquidity control) has a positive interaction with ESG performance, sustainability reporting, and Shari’ah compliance, but companies that are both ESG compliant and Shari’ah compliant have higher profitability and liquidity control than ESG only and Shari’ah compliant only companies (evident from the regression coefficients). Hence, equities that are both ESG-compliant and Shari’ah-compliant are more profitable, and reliable.
Originality/value
There are limited or no studies that investigate the subject matter from the standpoint of firms' dynamics, especially in OIC countries. Also, there are limited or no studies that investigate the mechanisms of macroeconomic externalities that can be geared to reinforce firms' dynamics of ESG and Islamic Finance.
ESSAY 2 Purpose
The study aims to investigate (demonstrate) whether firms can be geared to generate positive macro-economic externalities through the harmonization of ESG and Islamic finance which can help mitigate ESG risks, and therefore minimize the additional cost of adopting ESG.
Design/methodology/approach
Exploratory research using emergent and case study research methods.
Findings
While catering to the poor at present (basic needs), poor people (eligible recipients of Zakat in accordance to Shari’ah) can be actively engaged, employed, and empowered (capabilities building- human development), while the welfare of the future generation is preserved (ESG) ethically (Islamic Finance). Also, firms can be geared to exert positive macro-economic externalities to pose sustainable self-funding solutions to poverty and inequality. And in turn, the positive macro-economic externalities can be used to minimize ESG risks faced by economic agents. The Sustainable Ethical and Self-funding (SES) framework as deduced by this study aligns with the Sustainable Development Goals and directly and indirectly contributes to their achievement. In the same vein, the SES framework can be the ultimate guide and blueprint for sustainability issues of OIC member countries. This study demonstrates that sustainable debt instruments can be used to solve any prospective financing issues that may arise with the SES framework. This study supplements part 1 of the research. i.e., Essay1.
Originality/value
There are limited or no studies that investigate the subject matter from the standpoint of firms' dynamics, especially in OIC countries. Also, there are limited or no studies that investigate the mechanisms of how macroeconomic externalities can be geared to reinforce firms' dynamics of ESG and Islamic Finance, and vice versa. This study also constructs a practical and sustainable framework for combating poverty and inequality, in relation to the subject matter, which is under-discussed in the literature.