Wednesday, September 2, 2009

Are ethical investments good?

That's the provocative title of a study from researchers at the University of Western Australia, which looked at the returns associated with firms being included in, and dropped from, the FTSE KLD 400 Social Index, the world's longest-running SRI index.

"Our sample includes all firms added to, and deleted from, the [index] after its inception in May 1990 to the end of December 2007. Over this period, 370 firms were added to, and 370 firms deleted from the index."

Although the majority of deletions were due to corporate actions, such as mergers, the authors conclude that, using long-run event study methodology, that "there are positive and statistically significant long-run abnormal returns for firms being included in the [index]."

"We provide clear evidence that investing in companies which are recognized as being ethical can have long-term benefits for investors' wealth," the study states.

The authors admit that their finding "flies in the face of the consensus now emerging from academic studies in finance, which argue that funds' cost of implementing an ethical strategy are passed on to investors and thereby reduce investors' returns."

However, the study says that KLD's decision to include a firm in the index sends a clear signal that a firm is ethical and is also "unequivocally" good news for investors in those firms. "Indeed, some of the abnormal returns are large." More than 50% in some cases. "That is, $100 invested in these stocks would have earned, on average, $50.63 more that an investment in the benchmark."

The authors admit that long-run event studies are problematic and although they make efforts to avoid skewing the results, this report's conclusions will no doubt be controversial.

Download a copy of the study from this website.

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