Is ethical investing big enough to notice?

Charl De Villiers
The University of Auckland
New Zealand

Chris Van Staden
The University of Auckland
New Zealand

Abstract:
Ethical investors often exclude firms that participate in so-called sin industries such as tobacco, alcohol, firearms, gambling, the military, and nuclear industries. We compare sin industry firms’ returns and risk with other firms’ to determine if ethical investing distorts the capital markets. We compare sin industry firms with other firms for accounting and market returns (ROA, ROE, ROE(Market)) and risk for three years for the S&P 500 firms. We use the KLD database to classify firms. We expect sin industry firms to have similar accounting returns, higher market returns and lower risk than other firms. Our results show no systematic significant difference between sin industry and other firms. We conclude that ethical investing is too small to notice. Since ethical investors are not changing capital markets or influencing sin industry firms, our results may prompt them to consider the effectiveness of their strategy.