Sustainable or Just Ethical? Revisiting Islamic and ESG Indices Through the Lens of Resilience

ABSTRACT As financial systems face mounting exposure to economic, environmental, and geopolitical shocks, the definition of Corporate Sustainability (CS) is undergoing a fundamental transformation. This paper advances the field by reconceptualizing CS to include resilience—defined as the ability to withstand, adapt to, and recover from systemic disruptions—as a core dimension. This theoretical shift raises questions about the sustainability classification of ethically oriented investment frameworks—particularly Islamic and ESG indices—which have traditionally been considered sustainable due to their normative commitments to ethical governance, social responsibility, and environmental stewardship. By placing resilience at the heart of sustainability evaluation, this study provides a novel conceptual lens to distinguish between ideological alignment, structural similarity, and functional convergence in ethical finance. To empirically test this expanded framework, our paper analyzes the behavior of Islamic and ESG markets across eight major crises from 2004 to 2024, encompassing financial, macroeconomic, geopolitical, and public health crises. Using risk‐adjusted return metrics, Value at Risk (VaR), Dynamic Conditional Correlation–GARCH models, and Time‐Varying Parameter Vector Autoregression (TVP‐VAR), we assess risk, connectedness, and hedging effectiveness. Findings reveal complementary resilience profiles: the Islamic market outperforms the ESG market during financial and macroeconomic crises, while ESG exhibits greater robustness during energy‐related and geopolitical shocks. Both indices show strong spillover dynamics and mutual hedging benefits, primarily through exposure to clean energy, commodities, and general equities. In doing so, the paper offers a multidimensional, resilience‐based redefinition of sustainable finance, challenging conventional ESG classifications and advancing a more adaptive understanding of what it means to be truly sustainable in an era of global volatility.