Does Ethical Investing Help Investment Performance?

Posted by Simon Moore on April 24
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Ethical investing, sometimes called socially responsible investing, is a choice that was recently added to the Moola service, but what does investing ethically mean for your potential returns? Here we delve into the issues associated with that.

Summary

  • Returns for ethical and standard portfolios appear similar over time
  • Invest ethically makes sense if you believe in it, not for higher returns

Academic Studies

Researchers have looked into how socially responsible investments have performed historically. Researchers Kempf and Osthoff publishing in 2007 found that social responsible screens can improve returns by up to 8.7% a year before any transaction costs.

However, a similar study in the same year by Ronald Hill and colleagues found that the results to socially responsible investing were less clear, specifically socially responsible European firms may have seen better performance, but that didn't hold true for firms in the U.S. and Asia.

Finally, two different studies by Rob Bauer and colleagues on the impact of socially responsible investing found no impact on performance from investing in a socially responsible way, one looking at U.S., British and Germany funds and the other looking at Australian stocks.

It therefore seems fair to say that the research on the performance benefit of socially responsible investing is inconclusive. Some studies see benefits, but other similar studies don't.

What It All Means

So, it seems the main reason to invest in a socially responsible way is that you believe in the positive impact of the strategy. If you're doing it for the prospect of superior returns, then you may be disappointed, though returns are also unlikely to be worse.

One final point we would note is that although Moola fees are identical for standard and ethical portfolios, the expense ratios of ethical funds are currently slightly higher than non-ethical portfolios. We estimate that this could be a drag on ethical performance by around 0.10% a year (1 pound for every 1,000 pounds invested), we also observe that the bid/ask spreads on ethical funds can be higher, these are small effects, but worth pointing out.

It's also likely that performance for ethical portfolios will be randomly different than a standard portfolio over time, there will be periods where ethical performance appears better and other times when it's worse. That's just the nature of the markets.

 

Written by Simon Moore

He was previously CIO of FutureAdvisor, a US digital advisor. His most recent book Digital Wealth, explains automated investing. He studied economics at Oxford, and completed his MBA at the Kellogg School of Management.

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