Should You Invest in Ethical Companies?

Yesterday, I was excited to see that the World’s Most Ethical Companies for 2010 had outperformed the S&P 500. Ethisphere went back five years and charted the performance. They found a 53% return for the 2010 class of companies, compared to a 4% return in the S&P.

The hindsight of looking back on the performance is great. It’s telling me that I should have bought stock in those companies five years ago. We all know that hindsight is 20/20. I was curious to see if inclusion on the list is an indicator of future performance.

Should I run out and buy the companies on the 2010 list?

I decided to go back and check the performance of the companies on the first edition of Ethisphere’s list: 2007 World’s Most Ethical Companies.

Great news for ethical investing

The group of public companies on Ethisphere’s 2007 World’s Most Ethical Companies dramatically outperformed the broader market.

If you bought one share in each of the 52 companies on June 1, 2007, you would have realized a -6.34% return. In comparison, the S&P 500 had a -19.57% return and the Dow Jones Industrial Average had  a -15.80% return.

If you bought $100 worth of shares in each of the companies instead of 1 share each, your return drops to -9.83%. The difference is due almost entirely to the presence of Google and its lofty share price. (I used the Berkshire Hathaway B shares because the astronomical price of the Berkshire Hathaway A shares would have dwarfed the one share results.)

Methodology

I used SPY SPDRs, an index fund that tracks the S&P 500, and the SPDR DIAs, an index fund that tracks the Dow Jones Industrial Average.

There are 52 stocks on Ethisphere’s 2007 list that were public companies then and now. Two other companies on the list were public, but went private: Sun Microsystems and Bright Horizons. I omitted those two. There were another 38 companies that were private or whose shares were only available on foreign exchanges. I also omitted those 38 from my calculations.

I used the adjusted close price from Yahoo’s historical prices for the 52 companies, SPY and DIA shares, which adjusts the close price for dividends and splits.

Here is the spreadsheet with the underlying values: http://spreadsheets.google.com/pub?key=t5Tg37_FEqFq71zqApUq0Pw&output=html. Feel free to double-check my math or challenge my methodology.

What does it mean?

I own some of the shares on the list, so I’m well aware that almost as many companies underperformed. (After all, it is an average return.) Eighteen of the 52 companies performed worse than the SPY shares. There does not seem to be a clustering of returns or any one big or gain in the group of 52. It seems to me that these ethical companies, as a group, just outperform the broader market.

If I had more time, I might go back to the 2008 list and the 2009 list to see how those companies have done over a shorter term.