The Price of Ethics: Evidence from Socially Responsible Mutual Funds

L.D.R. Renneboog, J.R. Ter Horst, C. Zhang

Research output: Working paperDiscussion paperOther research output

493 Downloads (Pure)


This paper estimates the price of ethics by studying the risk-return relation in socially responsible investment (SRI) funds. Consistent with investors paying a price for ethics, SRI funds in many European and Asia-Pacific countries strongly underperform domestic benchmark portfolios by about 5% per annum, although UK and US SRI funds do not significantly underperform their benchmarks. The underperformance of SRI funds does not seem to be driven by the loadings on an ethical risk factor. SRI funds do not suffer a cost of reduced selectivity nor do SRI funds managers time the market. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying ethical funds that will perform poorly. The screening activities of SRI funds have a significant impact on funds’ riskadjusted returns and loadings on risk factors: corporate governance and social screens generate better risk-adjusted returns whereas other screens (e.g. environmental ones) yield significantly lower returns.
Original languageEnglish
Place of PublicationTilburg
Number of pages47
Publication statusPublished - 2007

Publication series

NameCentER Discussion Paper


  • ethics
  • mutual funds
  • socially responsible investing
  • investment screens
  • smart money
  • risk loadings


Dive into the research topics of 'The Price of Ethics: Evidence from Socially Responsible Mutual Funds'. Together they form a unique fingerprint.

Cite this