By Ron Robins

A research study released this past summer suggests that for optimal returns ethical investors need to include ‘best in class′ stocks in companies that they might usually shun. As we know, ethical investors usually ignore companies because they are involved in activities, products, or services they deem unethical or harmful—even if they have ‘high′ ethical or ESG ratings.

Published in the July/August 2009 edition of the Financial Analysts Journal, the study authors Meir Statman and Denys Glushkov made the following comment about their research, “[That] analyzing 1992–2007 returns of stocks rated on social responsibility… found that this tilt gave such investors an advantage over conventional investors. The advantage from tilting toward stocks of companies with high social responsibility scores is largely offset by the disadvantage from the exclusion of stocks of shunned companies.

[And, therefore,] socially responsible investors can thus do both well and good by adopting the best-in-class method in constructing their portfolios: tilting toward stocks of companies with high scores on social responsibility characteristics but refraining from shunning stocks of any company.” [Underlining added].

Now it is my belief that as a higher ethics and consciousness permeates society there will gradually be relatively fewer companies engaged in obviously destructive behaviours. Thus, there will eventually be a reduced need for negative screening and fewer companies to shun.

Yes, I know this sounds rather utopian to some readers. But especially in the spirit of a dawning new year, I remain an unflagging optimist about the direction of humanity. Hence, over the very long term I predict it will be possible for ethical investors to enjoy superior returns by only investing in the companies that sit well with their values.

December 22, 2009

© Ron Robins 2009