The Kingdom, and Germany. After controlling for size,

The rising size and importance of socially responsible investments have stimulated
much research in this field, especially in developed countries. Many academics demonstrated
interest in the performance of ethical mutual funds, one of the key vehicles of
ethical finance, investigating whether socially responsible funds offer similar
risk-adjusted returns relative their conventional counterpart. Initially, it
had been argued that imposing ethical screens on the investment process would
reduce portfolio performance. The rationale for this belief was that investors
would 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 not
outperform, neither did they underperform conventional funds during the
observed periods. Hence, investors could invest in ethical funds without
harming their financial returns vis-à-vis conventional mutual funds.

For instance, Bauer, Koedijk and Otten (2005) compared the
performance of ethical mutual funds to their conventional peers from 1990 to
2001, using a sample of 103 mutual funds from the United States, the United
Kingdom, and Germany. After controlling for size, book-to-market, and momentum,
they did not find any significant evidence of a difference in risk-adjusted
returns between ethical and conventional funds. However, they found that socially
responsible mutual funds exhibit different investment styles relative to
regular funds, the former being more growth-oriented and less exposed to market
changes. Furthermore, after using sub-periods to measure the performance of
ethical funds through time relative to conventional funds, they discovered that
ethical mutual funds went through a catching-up period, probably due to
learning. Curiously, they also observed that regular indices perform better
than ethical indices in explaining the returns of socially responsible mutual

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In another research, Bauer, Derwall, and
Otten (2007) evaluated the risk-adjusted performance of Canadian ethical mutual
funds to their conventional counterpart. After controlling for risk and
anomalies, they also found no significant differences in performance between
ethical and conventional Canadian mutual funds. However, in this research, the extent
to which socially responsible mutual funds differentiate themselves from
regular funds is not clear, since no significant differences in investment
styles were found. Also, the returns of socially responsible funds seem to
correlate more with standard market indices than ethical indices.

The same conclusions were drawn by Cortez,
Silva and Areal (2009), who investigated the performance of ethical mutual
funds from seven European countries investing globally and/ or in the European
market. After comparing the returns of the socially responsible funds to
conventional funds and benchmark portfolios, they also encountered no
significant differences in returns. Moreover, their research also indicates
that conventional benchmarks explain the returns of ethical mutual funds better
than socially responsible benchmarks.