What is ethical (ESG) investing?
Ethical investing — often called ESG investing (Environmental, Social, and Governance) — is a broad approach that aims to avoid investments in companies that cause harm to people, society, or the environment. ESG investors typically screen out companies involved in fossil fuels, weapons manufacturing, tobacco, child labour, and similar concerns. They may also actively invest in companies with positive environmental or social impact.
ESG screening is based on the values of the investor (or the fund manager) and evolves over time. There is no fixed standard — what one ESG fund excludes, another may include.
What is halal investing?
Halal investing is defined by Islamic principles rather than personal or societal values. It screens investments based on Sharia law, which prohibits:
- Riba (interest) — no conventional banks, financial services companies, bonds, or any business that earns primarily from interest
- Haram industries — alcohol, tobacco, weapons, pornography, gambling, pork
- Gharar (excessive uncertainty) — no speculative derivatives, excessive leverage
- Maysir (gambling) — no casinos, betting, lotteries
Halal screening is based on fixed religious principles rather than individual values. A product is either Sharia-compliant or it isn't — and this is determined by qualified Islamic scholars, not by the investor.
Key differences
| Feature | Halal investing | ESG / Ethical investing |
|---|---|---|
| Based on | Islamic Sharia law — fixed principles | Personal/societal values — variable |
| Who decides? | Qualified Islamic scholars (SSB) | Fund manager, rating agencies, investor |
| Interest/banks | Excluded | Often included |
| Alcohol | Always excluded | Sometimes excluded |
| Weapons | Always excluded | Often excluded |
| Fossil fuels | Not automatically excluded | Often excluded |
| Debt ratio | Screened (max ~33% debt) | Generally not screened |
| Certification | Independent Sharia Board | No fixed standard |
Where they overlap
Halal and ESG investing agree on excluding several major industries: weapons, tobacco, gambling, alcohol, and pornography all appear on both types of exclusion lists. As a result, many halal funds and ESG funds end up with similar holdings, particularly when it comes to avoiding "sin stocks."
A halal investor may find that ESG-labelled funds avoid some of the same companies they want to avoid. However, this is coincidental alignment, not the same thing.
Where they differ significantly
Banks and financial services: Most ESG funds include conventional banks and financial companies, which are screened out in halal investing because they earn primarily from interest. This is one of the biggest practical differences — conventional banks are a large component of most equity indices.
Fossil fuels: Many ESG funds exclude oil and gas companies for environmental reasons. Halal investing does not automatically exclude fossil fuel companies (provided they are otherwise operating in a permissible industry). A Muslim investor may hold oil company shares while a green ESG fund would not.
Debt ratios: Halal screening includes financial ratio tests — companies with total debt exceeding approximately 33% of their market cap may be excluded, regardless of their industry. ESG funds do not apply this kind of financial ratio screening.
Which is right for British Muslims?
For British Muslims, halal investing is the correct framework — not ESG. An ESG-labelled fund is not necessarily halal, and a non-ESG fund can be halal if its holdings pass Sharia screening. The label that matters is the Sharia certification from a recognised Sharia Supervisory Board, not an ESG rating.
Practical tip: To check whether a specific fund or company is halal, use Zoya — a Sharia stock screener reviewed by Islamic scholars. Never assume an ESG fund is halal without checking.
To invest in certified halal portfolios, see our halal investment platforms guide.
Frequently asked questions
Not automatically — ESG and halal are not the same thing. An ESG fund may include conventional banks, which earn primarily from interest and are excluded under Sharia screening. Always check that a fund has been certified by a Sharia Supervisory Board before using it in a halal investment account. See our halal investment platforms guide for certified options.
No — ISUS is a Sharia-screened fund, not an ESG fund. It excludes companies based on Islamic finance principles (conventional finance, alcohol, tobacco, weapons, gambling, pornography) and applies financial ratio screens. It is certified by a Sharia Supervisory Board. Some excluded companies might pass ESG screens; some ESG-excluded companies might pass Sharia screens. They are different frameworks.
Historically, halal equity portfolios have performed comparably to conventional equivalents over long periods. Excluding conventional financial companies (a large sector) can hurt performance when banks are doing well and help it when they are struggling. The MSCI Islamic indices have tracked closely to their conventional counterparts over most multi-year periods. Past performance is not a guide to future returns.