Performance of ethical equity investing in the UK: active, passive and criteria

Ethical equity investing account for roughly 22% of all assets under management in the UK – this puts it in a position where it can no longer be neglected. This thesis evaluates the performance of ethical equity investing in the UK. We look at three key issues: performance of ethical funds versus conventional funds; performance of ethical indices versus conventional indices; and finally, performance of certain ethical criterion versus other such criterion. Previous studies have looked at these issues but they have used a Mean-Variance (MV) and/or asset pricing model based methodologies; both these approaches suffer from serious drawbacks and hence we choose to employ a more robust Marginal Conditional Stochastic Dominance (MCSD) methodology. This is the first study in the area of ethical investing to use an MCSD approach to evaluate performance. In line with previous studies, we find that neither ethical nor conventional funds dominate each other. However, we find in contrast with previous studies that on average both ethical & conventional funds dominate the market; the said outperformance is resilient to the effect of fees. We also find in contrast with previous studies that the US & Global ethical indices are dominated by conventional ones. Thus in the US & Global context a passive ethical index investor has to pay a price for being ethical. In the UK & EU context, they pay no such price. We believe that the contrast in our findings with those of previous studies arises out of our use of a superior MCSD methodology as compared to the MV and/or model based methods used by them. And finally, we find that UK ethical funds which employ a comprehensive ethical strategy (i.e. subscribe to all ethical criteria) and/or invest locally (i.e. only in UK listed firms) outperform the market. Since the US & Global ethical indices also fare poorly, it appears that UK ethical investors would be better off investing in funds & indices with a local focus.