So-called ethical investing doesn't work. That's the message of this chart, which shows that the FTSE4Good index has steadily under-performed the All-share since the start of 1999.
In the last 12 months, for example, the FTSE4Good index has under-performed by 2.3 percentage points. So people who prate about "socially responsible" investing have lost out to proper investors; it's almost enough to make you believe the world is just.
There are two reasons why we should expect this:
1. "Unethical" firms like tobacco and arms companies face regulatory and litigation risk. If investors regard these dangers as non-diversifiable, they'll require a risk premium for holding them. So "unethical" stocks will deliver higher returns, if these risks don't materialize.
2. Investors equalize total risk-adjusted returns. And some of the returns to "ethical" investing are non-financial - the warm glow of sanctimoniousness. That means financial returns are lower.
Here's academic evidence corroborating the costs of ethical investing. And here's some contrary evidence.