Ethical investments: An analysis of the performance of ethical funds in Europe, the US and Scandinavia

Jonas Niels Johannesson

Student thesis: Master thesis


Based on the hypothesis that an ethically conscious investor must pay a price for opting to invest ethically correct, the thesis analyses the financial performance of ethical investments. Due to the restricted access of private investors to non‐financial information about individual companies, the analyses are conducted on ethical mutual funds. Ethical funds use screens to identify ethical companies for inclusion in the fund’s portfolio. The screening criteria applied by the funds are subjective and inconsistent among different funds. Hence a set of minimum ethical criteria which ethical fund must apply to be included in the analyses is established. European, US and Scandinavian ethical funds that comply with the screening criteria are pooled into three portfolios based on geographical location. For each fund two conventional reference funds are included in a reference portfolio for comparison of performance. Analysis of the fund performance is conducted by the use of regression analysis on monthly time‐series performance data. The models applied are the single index CAPM model and the Carhart (1997) 4‐factor model. Both models are market equilibrium model, and the multi‐factor model is consistent with a market equilibrium model with four risk factors. Using the method of ordinary least square, factor loadings of the fund performances are obtained. The market portfolios and the factor proxies are defined by the universe of regional MSCI indices and listed companies. Size and book‐to‐market proxies for use in the multi‐factor model are constructed using the regional MSCI Cap and Style indices and the OMX Nordic 40 index in one instance. The momentum proxy is created on semi‐annually performance data on individual, publicly listed stocks in the MSCI universe. Results obtained from the multi‐factor analysis provide statistically vague evidence that European ethical funds underperformed relative to conventional funds, in the period from 01.1997 ‐ 06.2008. The analyses does not allow for statistically significant conclusions on other periods or regions. When utilizing the performance attribution results of the models, a relatively large exposure towards the regional market for all ethical funds becomes evident. This finding suggest a home‐base bias of ethical funds, possibly explainable by the increased requirements of non‐financial information for ethical funds, which is easier to obtain in the local regions. Regardless of the explanation the thesis proves that ethically conscious investors carry increased exposure to the local market index.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2008
Number of pages80