The Influence of ESG Performance on Yield Spreads: A Comparative Study of Sukuk and Conventional Bonds in Emerging Dual Financial Systems

Ken Hou Low (), Abu Hanifa Md Noman and Wan Marhaini Wan Ahmad
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Ken Hou Low: Department of Finance, Faculty of Business and Economics, University of Malaya, Kuala Lumpur 50603, Malaysia
Abu Hanifa Md Noman: TIFIES Research Group and Southampton Malaysia Business School, University of Southampton Malaysia, Iskandar Puteri 79100, Johor, Malaysia
Wan Marhaini Wan Ahmad: Department of Finance, Faculty of Business and Economics, University of Malaya, Kuala Lumpur 50603, Malaysia

Sustainability, 2025, vol. 17, issue 8, 1-25

Abstract: This study comparatively examines the determinants of yield spreads for Sukuk and conventional bonds, with a particular focus on the role of firms’ environmental, social, and governance (ESG) performance. Using a dataset comprising 744 bond-year observations from issuers in countries with prominent dual financial systems—namely, Saudi Arabia, UAE, Turkey, Malaysia, and Indonesia—over the period 2008 to 2022, this analysis identifies distinct mechanisms that influence yield spreads in these asset classes. For robustness, the sample excludes financial institutions to prevent industry-weight distortion and to account for their distinct risk–return profiles, which require differentiated valuation approaches for conventional bonds and Sukuk. Drawing primarily on decoupling, information asymmetry, and legitimacy theories, our empirical results reveal that robust ESG performance is significantly associated with lower yield spreads for both Sukuk and conventional bonds. Moreover, the study explores the moderating effect of investment horizons on the ESG–yield spreads relationship, uncovering evidence of differentiated investor behavior in relation to yield curve positioning. These findings, robust across various regression specifications, underscores the pivotal role of ESG factors as firm-level drivers of financing costs, offering new insights for scholars, policymakers, and practitioners in the sustainable finance domain.

Keywords: Sukuk; conventional bond; yield spread; yield curve; ESG; sustainability; Islamic finance (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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