Is a Halal Fund Green by Design or Accident?

In October 2026, Darius Nass of S&P Dow Jones Indices ran a simple test. He took the 503 companies in the S&P 500 and passed them through two screens. One was S&P's Sharīʻah screen. The other was its sustainability screen, the S&P 500 Scored & Screened. Then he counted the companies that both screens rejected.

If Islamic finance really is ESG by nature, that list should be long. Was it?

His answer was 84 companies. That is almost exactly the number two screens would share if they had never heard of each other, which S&P puts at 83.4.

Many people have heard that Islamic finance is ESG by nature. But is it really? In this index, on 31 August 2026, the two screens were not opposed. They were simply unrelated.

So why do so many people believe the two fit together?

One US retail site says more than 80% of the industries that Sharīʻah screens exclude are also excluded under ESG criteria. A 2019 paper by Maybank Islamic and Schroders found a high degree of overlap between the two sets of principles. On principles, this is fair. Both screens exclude tobacco, for example. But a fund does not hold principles. It holds companies.

At the level of holdings, the picture changes. Suppose the two screens shared the same values. Then a company rejected by the Sharīʻah screen should be much more likely to fail the sustainability screen too.

In the S&P study, it was not.

So knowing that a company is not halal tells you almost nothing about whether it is sustainable, and the reverse is also true.

The two screens also cut in different places. The Sharīʻah screen took out more companies, but they were smaller on average. The sustainability screen took out fewer companies, but they were bigger on average. S&P found the same pattern in its global indices.

How can two screens that both claim to be ethical agree so rarely?

Part of the answer is how each one chooses. The Sharīʻah screen is a yes or no test. A company passes or fails, and the S&P Shariah index reviews this every month with a Sharīʻah Supervisory Board. The sustainability screen works more like a ranking. After its exclusions, it keeps the best-scoring companies in each industry group until it covers 75% of that group's market value. So a company can pass every sustainability exclusion and still be left out, simply because better-scored peers took the space. The two screens are not measuring one thing on different scales. They are doing different jobs.

What the Sharīʻah screen asks, and what it does not

Ask a Sharīʻah screen about a company's workers, its pollution or its record on bribery. What does it say? Nothing, because it never asks. It asks two questions only. What does the company sell? How does it borrow and hold its money?

The rulebooks are consistent on this. AAOIFI Sharīʻah Standard No. 21 sets tests for lawful activity, interest-bearing debt, deposits and impure income. The S&P Shariah and MSCI Islamic methodologies follow the same shape. FTSE is the most direct. Its Yasaar Shariah ground rules say the index "does not take account of ESG factors in its index design". Malaysia's Securities Commission comes closest. Its Shariah Advisory Council also looks at the public perception or image of a company's activities. Still, this concerns the activities, not labour practices, pollution or corruption.

So what happens to a company caught in a scandal? The sustainability screen removed 18 companies over conduct controversies, judged against the UN Global Compact principles and S&P's daily review of incidents. The Sharīʻah screen kept 14 of them.

The balance sheet does much of the work

If the Sharīʻah screen does not judge behaviour, what is it really judging? Very often, the balance sheet. More than four in ten of the companies it rejected from the S&P 500 sold nothing prohibited at all. They failed only because of their debt, cash or interest-bearing holdings. The sustainability screen has no test like this, so these rejections rest on a question it never asks.

Coal makes this concrete. The sustainability screen removed 17 coal companies, and every one of them was also outside the Sharīʻah index. So did they fail the Sharīʻah screen for burning coal? Not one did. Each failed on the debt ratio. S&P notes that coal power is capital-intensive and often financed with debt, but it says this describes these companies only.

Take a Muslim investor who avoids coal through the S&P 500 Shariah index. That investor has avoided it for a reason that has nothing to do with the environment. The screen did not ask about carbon. It asked about borrowing, and the coal companies borrowed too much.

The green result depends on the rulebook

What about the lower carbon that halal funds so often show? Is it real? In the S&P study, yes. The Sharīʻah index carried more than a quarter less carbon per dollar of revenue than the S&P 500. Yet S&P puts this down to sector mix, not to any carbon test. Technology made up almost half of the Sharīʻah index, well above its share of the S&P 500. I wrote about that technology tilt, and the AI risk inside it, in an earlier post.

Does every Islamic index look this green? MSCI's does not. On MSCI's own page for October 2026, the MSCI ACWI Islamic Index carries more carbon than its comparator, not less. It also holds more than twice the share of fossil fuel reserves. The comparator is a wider index that includes small companies, so this is not an exact like-for-like test. Still, the direction is the opposite of S&P's.

Sector weights explain part of it. The MSCI ACWI Islamic factsheet for 30 October 2026 puts energy and materials at about a fifth of the index. The 2019 Maybank and Schroders paper saw the same split seven years ago. Energy and materials then weighed more than twice as much in the MSCI Islamic index as in the Dow Jones Islamic World index.

Some indices add the second screen on purpose

So can a Muslim investor have both halal and green? Some indices now try. The S&P 500 ESG Shariah Index tracks the Sharīʻah-compliant members of an S&P ESG index. The MSCI World Islamic ESG Select Index starts from an Islamic index and then selects for ESG profile. In October 2026, it held 200 companies. Its carbon intensity was about half that of its comparator, and it held almost no fossil fuel reserves.

That index is green because it asked to be green. The S&P study points to a cost, though. Because the two screens are nearly independent, a combined list is much smaller than either list alone.

Some scholars want the question asked inside the Sharīʻah screen itself. Rafiqi and co-authors proposed in 2025 a maqāṣid-based ESG framework that applies after the Sharīʻah test. Rafisah Mat Radzi argued in 2024 that a narrow reading of the Sharīʻah framework limits its engagement with ESG.

Back to the 84

Every company in it passed the tests its Sharīʻah board set. Those tests were built to keep riba and prohibited trade out of a portfolio. They were not built to measure carbon or to judge how a company treats its workers.

So the 84 shows that the two screens answer different questions. I think the problem starts only when a halal fund is sold as green. In these indices, the green came from a sector weight or a debt ratio. Nobody chose either one for that reason. If the green in a halal fund was never designed, should anyone be selling it?

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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