Behavioral Finance in Green Investment: Strengthening Islamic Ethical Norms for Sustainable Financial Decisions

Lifti Hardini, Mira Marissa Lestari Nainggolan

Abstract


Abstract: The urgent need for sustainable economic practices has increased interest in green investment. However, understanding what drives individual decisions to invest in environmentally friendly instruments remains limited—especially in contexts influenced by religious values such as Islamic ethics. This study aims to investigate how behavioral finance factors—specifically risk perception, social norms, and environmental attitudes—alongside Islamic ethical principles, influence green investment decisions. Using a quantitative approach and structural equation modeling (SEM), data were collected from individual investors who align their financial choices with both environmental concern and Islamic values. The findings reveal that risk perception negatively affects green investment decisions, while social norms and environmental attitudes have a significant positive impact. Additionally, Islamic ethics reinforce these behavioral patterns by promoting principles such as avoiding harm (haram) and pursuing collective benefit (maslahah). The study concludes that psychological and ethical considerations jointly shape investor behavior in sustainable finance. These results not only contribute to the theoretical development of behavioral finance and Islamic economics but also provide practical implications for policymakers and financial institutions aiming to encourage ethical and sustainable investment behavior. This research highlights the need for integrated strategies that blend ethical values with behavioral insights to support green finance.


Keywords


Behavioral Finance, Green Investment, Islamic Ethics, Risk Perception, Social Norms, Environmental Attitude

Full Text:

PDF

References


Ahmed, H., & Hanifa, M. A. (2021). Green Sukuk: An innovation in Islamic capital markets towards sustainable development. Review of Islamic Economics, 25(1), 23–40. https://ie.au.edu/index.php/econrev/article/view/1234

Ajzen, I. (1991). The theory of planned behavior. Organizational Behavior and Human Decision Processes, 50(2), 179-211.

Alam, N., Hashmi, S. H., Rafiq, S., & Salain, M. S. (2021). Does green financing trigger environmental efficiency? A firm-level evidence from Malaysia. Environmental Science and Pollution Research, 28(7), 8248-8263.

Ameer, R., & Othman, R. (2012). Sustainability practices and corporate financial performance: A study based on the top global corporations. Journal of Business Ethics, 108(1), 61-79.

Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1, 1053-1128.

Barone, R., Fichera, A., & Tonello, M. (2021). Socio-demographic and psychological determinants of investors' green and sustainable attitude. Sustainability, 13(6), 3215.

Bassen, A., Busch, T., Fritsche, I., Hanisch, M., Panitz, J. C., & Rommel, J. (2019). Sustainable investing: Exploring influences of social norms among German retail investors. Journal of Sustainable Finance & Investment, 9(3), 255-283.

Braun, S., & Zawalinska, K. (2020). Green bond pricing: In search of the fundamentals for primary pricing. Journal of Environmental Economics and Policy, 9(4), 411-437.

Brundtland Commission. (1987). Our common future. Oxford University Press.

Busch, T., Bauer, R., & Krieger, K. (2015). Capturing investor preferences: A framework for estimating willingness to pay for green investment opportunities. Journal of Sustainable Finance & Investment, 5(3), 129-148.

Chin, W.W. (1998). The Partial Least Squares Approach to Structural Equation Modeling. In G. A. Marcoulides (Ed.), Modern Methods for Business Research (pp. 295-336). Lawrence Erlbaum Associates.

Cupák, A., Fandakov, A., Mikušová, J., & Xheneti, M. (2021). Examining psychological determinants of individual's intention toward green investment. Journal of Risk and Financial Management, 14(7), 321.

Demirel, A., & Yukhanaev, A. (2021). Green bonds as a sustainable investment instrument. In Emerging Issues in Economics and Finance (pp. 133-156). Springer, Singapore.

Dienes, D., & Velte, P. (2016). The impact of supervisory board composition on CSR reporting. Evidence from the German two-tier system. Sustainability, 8(1), 63.

Dillenburg, S., Greene, T., & Erekson, H. (2003). Approaching socially responsible investment with a comprehensive ratings scheme: Total social impact. Journal of Business Ethics, 43(3), 167-177.

Doran, J. & Larwood, L. (2022). Exploring the role of social norms in sustainable investing. Journal of Sustainable Finance, 8(1), 1-28.

Dorfleitner, G., & Utz, S. (2021). The pricing of green bonds: A financial ethics perspective. Journal of Business Ethics, 172(2), 341-364.

Dorfleitner, G., Utz, S., & Zhang, R. (2021). The pricing of green bonds: A literature review. Finance Research Letters, 42, 101975.

Dusuki, A. W., & Bouheraoua, S. (2019). The framework of Maqasid al-Shariah for sustainable development: A holistic approach. ISRA International Journal of Islamic Finance, 11(2), 150–165. https://doi.org/10.1108/IJIF-10-2019-0161

Dyllick, T., & Muff, K. (2016). Clarifying the meaning of sustainable business: Introducing a typology from business-as-usual to true business sustainability. Organization & Environment, 29(2), 156-174.

Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate sustainability on organizational processes & performance. Management Science, 60(11), 2835-2857. Falconer, R., Viegas Curto, R. F., & Marais, M. L. (2021). Assessing the willingness of retail investors to invest in green funds. Journal of Risk and Financial Management, 14(4), 153.

Falconer, R., Yogeswaran, N., Ben-Slushie, S., & Narine, M. (2021). Green investment decision-making: An exploratory study of retail investors in a Caribbean emerging market. Journal of Sustainable Finance & Investment, 11(3), 288-309.

Ferdinand, A. (2006). Metode Penelitian Manajemen: Pedoman Penelitian untuk Penulisan Skripsi, Tesis dan Disertasi Ilmu Manajemen. Badan Penerbit Universitas Diponegoro.

Flammer, C. (2021). Corporate green bonds. Journal of Fin. Economics, 142(2), 499-516.

Gianfrate, G., & Peri, M. (2019). The green advantage: Exploring the convenience of issuing green bonds. Journal of Cleaner Production, 219, 127-135

Gunawan, J., Permatasari, P., & Tilt, C. (2019). Sustainable development: Exploring constraints within Indonesian public listed companies. Social Responsibility Journal, 16(4), 413-431.

Hair, J. F., Hollingsworth, C. L., Randolph, A. B., and Chong, A. Y. L (2017). An Updated and Expanded Assessment of PLS-SEM in Information Systems Research. Industrial Management & Data Systems, 117(3): 442-458.

Hachenberg, B., & Schiereck, D. (2018). Environmental leadership and firm performance: The role of employee relations. Corporate Social Responsibility and Environmental Management, 25(2), 110-120.

Hahn, T., Pinkse, J., Preuss, L., & Figge, F. (2018). Ambidexterity for corporate social performance. Organization Studies, 39(8), 1009-1043.

Hafenstein, A., & Hachmeister, D. (2020). Strategic determinants of green finance weight considerations. Journal of Asset Management, 21(5), 425-437.

Hamid, R. S., & Anwar, S. M. (2019). Structural Equation Modeling (SEM) Berbasis Varian. Jakarta: PT Inkubator Penulis Indonesia.

Hanif, I., & Bouchet, R. (2021). Psychological determinants of investors' intention toward socially responsible investments: An empirical study in an Asian market. Journal of Behavioral Finance, 22(3), 322-338.

Hartzmark, S. M., & Sussman, A. B. (2019). Do investors value sustainability? A natural experiment examining ranking and fund flows. The Journal of Finance, 74(6), 2789-2837.

Haryono, S. (2016). Metode SEM untuk Penelitian Manajemen dengan AMOS LISREL PLS. Jakarta: PT. Intermedia Personalia Utama.

Hebb, T. (2006). The economic inefficiency of secrecy: Pension fund investors' corporate transparency concerns. Journal of Business Ethics, 63(4), 385-405.

Jansson, J., & Biel, A. (2011). Investing to get rid of income: The elements of sustainable behavior. Journal of Socio-Economics, 40(6), 595-600.

Joshi, A., Sharma, S., & Raghav, R. (2022). Impact of behavioral biases on investment decision making: A systematic literature review. Turkish Journal of Computer and Mathematics Education, 13(3), 740-748.

Kock, N., & Lynn, G. S. (2012). Lateral Collinearity and Misleading Results in Variance- Based SEM: An Illustration and Recommendations. Journal of the Association for Information Systems, 13(7), 546–580.

Khan, M. F., & Badjie, T. (2022). The role of Islamic ethical investment in supporting sustainable finance: A Maqasid al-Shariah approach. Journal of Islamic Accounting and Business Research, 13(5), 849–868. https://doi.org/10.1108/JIABR-12-2021-0319

Khan, M. A., Ullah, M., & Usman, A. (2021). Green investment and its impact on environmental quality: The role of institutional quality. Environmental Science and Pollution Research, 28, 31803-31813.

Khan, S. A. R., Yu, Z., Golpîra, H., & Dong, H. (2021). The role of social norms and green psychological determinants in promoting green finance and behavior of stakeholders. Environmental Science and Pollution Research, 28(24), 30432- 30448.

Kahneman, D. & Tversky, A. (1979). Prospect theory: An analysis of decision under risk.

Econometrica, 47(2), 263-291.

Krueger, P., Sautner, Z., & Starks, L. T. (2020). The importance of being an expert: Institutional investors and the disposition effect. The Review of Financial Studies, 33(12), 5554-5589.

Kücher, A., Loos, J., Ciers, J., Pooters, T., Spaninks, J., Koch, A., & Krom, A. (2020).

Green bonds: Shades of green. Robeco Institutional Asset Management B.V.

Latan, H. (2015). Konsep, Teknik, Aplikasi Menggunakan Smart PLS 3.0 Untuk Penelitian Empiris. Semarang: BP Undip.Lemeshow, S., Hosmer Jr, D. W., Klar, J., & Lwanga, S. K. (1990). Adequacy of sample size in health studies. Chichester: John Wiley & Sons.

Litvine, D. & Whelan, T. (2023). Values, beliefs, and green investment decisions. Finance & Society, 4(1), 19-42.

Meghani, K. G., Sharma, S., & Srinivasan, P. (2022). Behavioral finance and emerging financial markets: A systematic literature review. Journal of Emerging Market Finance, 21(1), 23-68.

Minaeva, O., & Solovyova, A. (2019). Green economy and sustainable development: The role of financial sector. IOP Conference Series: Earth and Environmental Science, 272(3), 032187.

Minaeva, S., & Solovyova, A. (2019). Green finance: Opportunities and risks in the business financing and investment sphere. Osetiya State University, Economics and Entrepreneurship, 13(1), 129-134.

Muñoz, F., Vargas, M., & Marco, I. (2020). Environmental mutual funds: An investor behavior survey. Sustainability, 12(5), 1-17.

Nilsson, J. (2008). Investment with a conscience: Examining the impact of pro-social attitudes and perceived financial performance on socially responsible investment behavior. Journal of Business Ethics, 83(2), 307-325.

Obaidullah, M. (2020). Behavioral norms in Islamic finance: A conceptual study of risk perception and ethical commitment. Islamic Economics Studies, 28(1), 1–20. https://www.irti.org/publications/

OECD. (2017). Investment governance and the integration of environmental, social and governance factors. OECD Publishing.

Oehmke, M., & Opp, M. M. (2020). A theory of socially responsible investment. SSRN Electronic Journal.

Paetzold, F., & Busch, T. (2014). Unleashing the powerful heart: Literature on releasing the value-centric drivers of sustainable entrepreneurial behaviour. Journal of Cleaner Production, 64, 41-51.

Rafay, A., & Farid, S. (2023). Behavioral finance from an Islamic perspective: Exploring the role of religiosity and ethical norms in investment decisions. International Journal of Islamic and Middle Eastern Finance and Management, 16(1), 132–148. https://doi.org/10.1108/IMEFM-10-2022-0467

Rahim, F., & Justice, D. D. (2015). Identifying and mitigating biases in environmental decision-making. Environment Systems and Decisions, 35(3), 363-377.

Ricciardi, V., & Simon, H. K. (2000). What is behavioral finance?. Business, Education & Technology Journal, 2(2), 1-9.

Riedl, A., & Smeets, P. (2017). Why do investors hold socially responsible mutual funds?

The Journal of Finance, 72(6), 2505-2550.

Ruf, B. M., Muralidhar, K., & Paul, K. (2001). An empirical investigation of the relationship between change in corporate social performance and financial performance: A stakeholder theory perspective. Journal of Business Ethics, 32(2), 143-156.

Schaltegger, S., & Wagner, M. (2017). Managing the business case for sustainability: The integration of social, environmental and economic performance. Routledge.

Schoenmaker, D., & Schramade, W. (2019). Principles of sustainable finance. Oxford University Press.

Scholtens, B. (2017). Why finance should go green: Embedding sustainability in financial decision making. Sustainability, 9(7), 1108.

Shefrin, H. (2000). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Harvard Business School Press.

Shefrin, H. (2007). Behavioral corporate finance: Decisions that create value. Mc-Hill.

Stern, P.C., Dietz, T., Abel, T., Guagnano, G.A., & Kalof, L. (1999). A value-belief-norm theory of support for social movements. Human Ecology Review, 6(2), 81-97.

UNEP. (2016). Definitions and concepts: Background note. United Nations Environment Programme.

Weber, M., Cologna, V., & Huang, R.D. (2022). Risk perception and green investment preferences. Journal of Banking & Finance, 134, 106326.


Refbacks

  • There are currently no refbacks.