Solving the SRI puzzle? A note on the mainstreaming of ethical investment

Previous research on the relationship between societal and financial performance has yielded ambiguous results. This letter seeks to put forth an explanation for this puzzle. We argue that the difference in returns between ethical and conventional indices may, in fact, be insignificant due to the ‘mainstreaming’ of ethical investment. Using a database of 24 international indices over the 2008–2014 time periods, we calculate rolling daily returns, develop a robust test for difference in Sharpe ratios, and compare alfas across EGARCH asset pricing models with endogenous volatility breakpoints. Results converge to indicate no significant difference in financial performance between conventional and ethical indices. This validates the ‘mainstreaming’ hypothesis and opens avenues for future research.