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This study aims to explore the strategic integration of Sharia-compliant and environmental, social and governance (ESG)-focused investments within global equity portfolio optimization frameworks, with a particular emphasis on variance minimization and dynamic rebalancing techniques.

The research uses historical data from Sharia-compliant, ESG-focused and conventional equity exchange-traded funds (ETFs). Advanced mean-variance optimization methodologies via quadratic programming are employed, encompassing static optimization with and without a 50% cap on individual asset weights, dynamic optimization with monthly rebalancing and rolling window optimization.

Portfolios integrating Sharia-compliant investments frequently outperform those composed solely of conventional equity ETFs. Dynamic optimization with monthly rebalancing achieved the highest Sharpe ratio (1.3708) and demonstrated enhanced portfolio resilience during market turbulence, such as the COVID-19 pandemic. Sharia-compliant investments showed substantial allocations during key periods, with weights reaching up to 100% in the first half of 2020. In contrast, ESG-focused investments exhibited more limited and sporadic allocations, reflecting a more opportunistic role in the portfolio.

The findings reaffirm the critical role of Sharia-compliant investments in well-diversified, risk-conscious portfolios while also providing nuanced insights into the more selective integration of ESG-focused assets. The results offer practical guidance for portfolio managers seeking to integrate ethical and sustainable investment principles within advanced portfolio optimization frameworks, particularly when focusing on minimizing variance and dynamically responding to evolving market conditions.

The study contributes to the growing body of literature on ethical and sustainable investments, demonstrating that it is possible to balance ethical considerations with robust financial performance. The research underscores the potential for Sharia-compliant investments to play a significant role in global portfolios, potentially fostering greater financial inclusion and cross-cultural understanding in the investment community.

This research provides novel insights by focusing on Sharia-compliant investments within non-Muslim countries, an area that has been relatively underexplored. It also compares the outcomes of static, dynamic and rolling optimizations, highlighting the dynamic interplay between ethical investment principles and financial performance.