Ethical Investing in Australia: Is there a Financial Penalty?

This study provides new evidence on the performance and investment style of retail ethical funds in Australia. By applying a conditional multi-factor model and after controlling for investment style, time-variation in betas and home bias, we observe no evidence of significant differences in risk-adjusted returns between ethical and conventional funds during 1992-2003. This result however is sensitive to the chosen time period. During 1992-1996 domestic ethical funds underperformed their conventional counterparts significantly, whereas during 1996-2003 ethical funds matched the performance of conventional funds more closely. This suggests that ethical mutual funds underwent a catching up phase, before delivering returns similar to those of conventional mutual funds.