The rising size and importance of socially responsible investments have stimulatedmuch research in this field, especially in developed countries.

Many academics demonstratedinterest in the performance of ethical mutual funds, one of the key vehicles ofethical finance, investigating whether socially responsible funds offer similarrisk-adjusted returns relative their conventional counterpart. Initially, ithad been argued that imposing ethical screens on the investment process wouldreduce portfolio performance. The rationale for this belief was that investorswould forgo the diversification benefits by reducing their investment universe,and that ranking companies according to ESG criteria was expensive. However,most studies came to the conclusion that ethical mutual funds did notoutperform, neither did they underperform conventional funds during theobserved periods.

Hence, investors could invest in ethical funds withoutharming their financial returns vis-à-vis conventional mutual funds. For instance, Bauer, Koedijk and Otten (2005) compared theperformance of ethical mutual funds to their conventional peers from 1990 to2001, using a sample of 103 mutual funds from the United States, the UnitedKingdom, and Germany. After controlling for size, book-to-market, and momentum,they did not find any significant evidence of a difference in risk-adjustedreturns between ethical and conventional funds.

However, they found that sociallyresponsible mutual funds exhibit different investment styles relative toregular funds, the former being more growth-oriented and less exposed to marketchanges. Furthermore, after using sub-periods to measure the performance ofethical funds through time relative to conventional funds, they discovered thatethical mutual funds went through a catching-up period, probably due tolearning. Curiously, they also observed that regular indices perform betterthan ethical indices in explaining the returns of socially responsible mutualfunds.  In another research, Bauer, Derwall, andOtten (2007) evaluated the risk-adjusted performance of Canadian ethical mutualfunds to their conventional counterpart. After controlling for risk andanomalies, they also found no significant differences in performance betweenethical and conventional Canadian mutual funds. However, in this research, the extentto which socially responsible mutual funds differentiate themselves fromregular funds is not clear, since no significant differences in investmentstyles were found. Also, the returns of socially responsible funds seem tocorrelate more with standard market indices than ethical indices.

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The same conclusions were drawn by Cortez,Silva and Areal (2009), who investigated the performance of ethical mutualfunds from seven European countries investing globally and/ or in the Europeanmarket. After comparing the returns of the socially responsible funds toconventional funds and benchmark portfolios, they also encountered nosignificant differences in returns. Moreover, their research also indicatesthat conventional benchmarks explain the returns of ethical mutual funds betterthan socially responsible benchmarks.