Ethical Funds and Risk: Evidence from the United Kingdom

this study, Islamic funds and ethical funds are treated as distinct types of funds due to their underlying unique asset screening criteria. The research objectives are to compare the risk exposures of ethical funds and conventional funds; to examine the risk exposures across different ethical fund styles; to explore the risk exposures of Islamic funds in comparison to ethical and conventional funds, and to examine the RAR across different fund types. Thirteen distinctive risk measures and six unique RAR measures are used to quantify the riskiness and performance of funds. Modern portfolio theory (Markowitz, 1952) and stakeholder theory (Freeman, 1984) are set as the theoretical basis for this research as these theories provide competing propositions about the risk and RAR exposure of different types of funds. Two sampling approaches, both top sample and matched sample methods, are applied to identify the sample of funds that operate in the capital market of the United Kingdom. In the top sample, 50 ethical, 50 conventional and 15 Islamic funds that have the top asset sizes in each fund type are selected. In the matched sample, 50 conventional funds are matched for 50 top ethical funds and 11 ethical and 11 conventional funds are matched for the 11 top Islamic funds based on fund size, age, domicile, and investment area to create a sample of funds with similar characteristics. Data are collected for the sample period of July 2011 to June 2018. The risk and RAR measures are empirically compared using both univariate and multivariate data analysis techniques. In the univariate data analysis, both parametric and nonparametric tests are performed. In the multivariate analysis, the fund-specific characteristics are used as control variables to eliminate the effects of heterogeneous fund characteristics and fund style dimensions while comparing the risk and RAR measures across different fund types. Therefore, two types of samples and several data analysis techniques are employed in this study to produce robust analysis. The findings demonstrate that the risk exposure of ethical funds is neither entirely higher nor entirely lower than conventional funds; however, ethical funds are exposed to overall higher RAR than conventional funds. These findings suggest that ethical screening criteria do not always negatively impact on risk, but there is evidence of a positive impact on RAR. Furthermore, mixed results are identified regarding risk and RAR exposure across different ethical fund styles. In particular, there is evidence of both equal and different risk and RAR exposures across ethical fund styles. Furthermore, overall, the negative ethical fund (NEFs) style is exposed to lower or equal risk compared to other ethical fund styles, but the RAR of NEFs is higher or equal than other ethical fund styles. . Finally, the empirical evidence shows that in general Islamic funds are exposed to higher risk than both ethical and conventional funds; however, the RAR of Islamic funds in general does not significantly differ from the ethical and conventional funds. These findings indicate that stricter ethical screening criteria and Islamic faith-based screening do not affect the RAR of ethical funds styles and Islamic funds adversely.