Financial Q&A: Academic studies mostly positive toward ethical investing

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Do you know of any academic studies that look at the risk-adjusted returns for ethical investing options, as compared with market indices?

R.H., via e-mail

A: A few scholars have investigated this question along with the one that looms behind it: Do investors pay a price for following their consciences in the stock market?

One upcoming study, to be published in St. John's University's The Review of Business, finds that screens used by investors to filter out companies that don't align with their values do not hinder financial performance.

"If you have a well-diversified portfolio of 'good' firms, you can perform as well as the market," writes the study's coauthor, David Myer, in an e-mail. He prepared the study, "Performance and Predictability of Social Screens," with Lehigh University colleague Anne-Marie Anderson.

Also, take a look at "International Evidence on Ethical Mutual Fund Performance and Style," which was published in the July 2005 issue of the Journal of Banking & Finance. The three Dutch authors – Rob Bauer, Kees Koedijk, and Roger Otten – sum up their findings this way: "We find no evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period."

A third study – "Investing in Socially Responsible Mutual Funds" – came as a 2004 working paper from the Rodney L. White Center for Financial Research at the Wharton School of Business at the University of Pennsylvania. Authors Christopher C. Geczy, Robert F. Stambaugh, and David Levin found that socially minded investors do sacrifice returns as a function of imposing ethical constraints on a portfolio.

But how much they give up varies according to an investor's approach. For instance, those who rely heavily on market indices and put little value on managerial skill give up relatively little – only a few basis points per month. (A basis point is 0.01 percent.)

By contrast, those who rely largely on managerial skill and bank on past fund performance to predict future returns tend to give up 30 basis points or more per month.

For a more accessible, less academic take on the same topic, you might review research from the website of fund tracker Morningstar ( or (, a website devoted to socially responsible investing.

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