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November 07, 2006



Interesting post, although moral decisions (assuming SRI is a more moral decision) are no less moral because they are more costly. Think how fiery your sanctimonious glow would be if you knew it was coming at a price (and how cooled it might become if you start figuring out your maximum SRI price). Kind of like, I'd pay £40 not to fly on a low-cost airline, but no more.

Also, I've just glanced at the article that you cite in support of the SRI-costs line. By the looks of things, the authors seem to be testing expectations of SRI investors regarding the behaviour of fund managers and the variation in costs (from negligible to substantial) that follow. Not quite what you're claiming here.


Sorry for the double post - a question. I've been trying to replicate your graph on the FTSE4Good site but can't. What ought I to do?

Also, the graph on the site seems to suggest that FTSE4Good outperformed the FTSE, which would seem to be a better comparator than an all-shares index, since it might well be that companies outside the FTSE outperform those inside.


Ciaran - I've no idea how to get the data from FTSE - I used Datastream. It is the case that the FTSE 100 has under-performed the All-share over this period, so a 4Good-FTSE 100 comparison looks better. But that's not relevant for my story. The opportunity cost of any equity investment is a tracker fund, as measured by the All-share.
You're right - the paper I linked to comes from a completely different perspective. But that's all the better, for establishing that ethical investing doesn't pay.


Points taken thanks - I must explore Datastream.

I would have thought that the general under-performance of the FTSE is somewhat relevant. Some part of the explanation for FTSE4Good's underperformance must be that it's drawn from the FTSE. An ethical package that includes investments outside the FTSE might pay better than FTSE4Good. A third reason you might expect the results you describe, if you like, so a bit relevant.

james higham

...The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, i.e., investors who rely heavily on individual funds' track records to predict future performance...

...we show that this performance differential cannot be explained by differences in market sensitivity, investment style, or industry-specific components...

From this, you conclude, Chris, that ‘So-called ethical investing doesn't work’ and that people who prate about "socially responsible" investing have lost out to proper investors?

It seems to a mere layman that of course the SRI, by its initial constraints will cost big but that in the longterm, say, over ten years, it has other things going for it in the area of goodwill and market confidence. Maybe I’m wrong.


Just a thought, but perhaps people who invest ethically aren't necessarily looking for the biggest and bestest returns, just somer returns that are ethically produced.

Tom H

This isn't very surprising, though, is it - and I wouldn't have thought it would surprise people who make their investment decisions for "ethical" reasons. Presumably if "ethical" investment did pay better than "unethical" investment (in purely financial terms), then it wouldn't need to promote itself as "ethical". I mean, nobody's got a moral objection to *not* investing in tobacco companies and arms manufacturers, so if that were the best strategy, independent of moral considerations, then everyone would already be doing it.

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