The Cost of Socially Responsible Investing

TLDR

The article estimates the cost of socially responsible investing. The authors use Monte Carlo simulations to compare a skillful investor’s performance in unrestricted versus restricted investment universes across various skill levels. The study finds that socially responsible investing imposes substantial costs even on moderately skilled investors, suggesting that restricting the investment universe may not be the most cost‑efficient way to promote the social ideal. Topics include ESG investing, accounting and ratio analysis, and markets.

Abstract

In this article, the authors estimate the cost of practicing socially responsible investing. Using these results, investors may determine whether imposing restrictions on the available investment universe is the most cost-efficient method for promoting the particular social ideal. The authors design and execute a Monte Carlo simulation to compare the performance of a skillful investor in an unrestricted investment universe with the performance of the same investor in a restricted investment universe. They repeat this for a variety of skill levels and investment universes and find that the cost of socially responsible investing is substantial for even moderately skilled investors. <bold>TOPICS:</bold> <ext-link>ESG investing</ext-link>, <ext-link>accounting and ratio analysis</ext-link>, <ext-link>in markets</ext-link>