Ethical funds have historically been priced more expensively than other funds, and are still perceived to give investors lower returns. But many fund managers argue that, according to models of share pricing, there is no reason why these investments should under-perform. In fact, several ethical funds have been achieving respectable returns.
Not surprisingly, the capital asset pricing model and arbitrage pricing theory do not mention ethics. But the question is whether they proscribe ethics; it seems either they don't at all or only negligibly. In the capital asset pricing model where the return on a share is proportional to its covariance with the market, an ethical portfolio, representing as it does a departure from the market portfolio, must produce greater risk without the accompanying reward. But how much? This has proved exceptionally hard to quantify. Studies used by the Ethical Investment Research Service find the difference amounting to less than 0.1% return a year. A senior broker has also said "this 'cost of morality' is extremely hard to quantify accurately, but it would probably be very little".