Degree

Master of Science in Finance

Department

Department of Finance

School

School of Business Studies (SBS)

Date of Submission

Spring 2026

Supervisor

Dr. Sana Tauseef, Associate Professor and Director QEC, Institute of Business Administration (IBA), Karachi

Project Type

Thesis

Document Type

Restricted Access

Pages

xi, 88

Keywords

ESG premium, environmental, social, governance, Shariah-compliant stocks, Fama French five-factor model, portfolio mispricing, U.S. equity market

Abstract

Purpose: This purpose of this paper is to investigate whether ESG and its individual pillar (environmental, social and governance) stock premia (low minus high) exist in Shariah-compliant and conventional U.S. equity market, how the magnitude and direction of these premia differ across the two universes, and how ESG pricing has evolved in both universes, particularly after 2018 when ESG integration accelerated in global markets.

Methodology: This paper develops value-weighted one- and two-dimensional portfolios for both Shariah-compliant and conventional universes based on ESG scores and firm characteristics (size, book-to- market, beta, and illiquidity) using U.S stocks over the period 2011-2024. Portfolio excess returns are regressed on the Fama-French (2015) 5-factor (FF5) model, and ESG premiums are measured as low-minus-high ESG quartile spreads. The sub-sample analysis for the same portfolios is also conducted for 2011-2017 and 2018-2024 periods to assess temporal shifts and robustness of the results.

Findings/Results: Both Shariah-compliant and conventional portfolios exhibit significant ESG premiums over the entire period, with low-ESG portfolios outperforming high-ESG portfolios. Governance is the most consistent driver of returns within Shariah-compliant portfolios, while environmental and social factors dominate in conventional firms. ESG effects are concentrated in specific firm characteristics, notably in low-beta and growth- or value-oriented firms across both universes, with particularly strong premiums among big Shariah-compliant firms. In contrast, illiquiditysorted portfolios consistently show weak or insignificant results. Sub-sample results show that ESG pricing strengthens 2018 onwards, with higher explanatory power of the FF5 model and more frequent significant alphas.

Originality/Value Addition: This study adds value by providing the first comparative analysis of ESG-related mispricing between Shariah-compliant and conventional U.S. stocks, examining not only the existence and direction of ESG premiums in each universe but also how these premiums have evolved over time.

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