Should You Invest in the World’s Most Ethical Companies 2011 Edition

The Ethisphere Institute announced its fifth annual selection of the World’s Most Ethical Companies, highlighting 110 organizations that lead the way in promoting ethical business standards. Of the 110 companies honored this year, 74were on the 2010 list. (If you need help with the math, 36 are new to the list in 2011 and 26 companies dropped off from the 2010 list.)

As they did with the 2010 list, Ethisphere is emphasizing the better financial performance by the companies on this year’s list.

“The World’s Most Ethical Companies, if indexed, would have significantly outperformed the S&P 500 by delivering a nearly 27 percent return to shareholders since 2007, compared to the S&P’s negative 8.5 percent shareholder return during the same period, proving there is a strong correlation between a company’s ethics program and its performance,” said Alex Brigham, Executive Director of the Ethisphere Institute.

Personally, I think its bit misguided to judge the past performance of companies on the 2011 list by looking backwards, especially for the new companies included in the list. As we hear for all investments, past performance is no measure of future performance. A good investor would want a tool to help decide whether to invest in a company, not whether they should have invested 5 years ago.

Is inclusion on the list of Most Ethical Companies an indicator of future performance?

Last year, I looked at Ethisphere’s 2007 World’s Most Ethical Companies and tracked their performance forward to determine whether you should invest in ethical companies. The answer was “yes.” That first class, as a whole, did outperform the broader markets.

I decided to update my study and see if it still held true. The answer is still “yes.”  Those public companies on the 2007 list significantly outperformed the broader markets. If you bought one share of each, you would have realized a 3.96% return. That compares to a -12.36% loss on the S&P index and a -9.1% loss on the Dow Jones Industrials.

You can see my calculations in this spreadsheet (in Google Docs):
https://spreadsheets.google.com/ccc?key=0AuuCq02eKVqldDhydERtRmVsdVo2X0NfOUdXbkZTcmc&hl=en

They are not all winners. About half outperformed and half underperformed. But as a whole, you came out ahead. Salesforce is the bigger gainer on the list with a 126% gain. Nokia is pulling up the rear with a 70% loss.

The weak spot in my analysis is that it leaves out the effect of dividends on the returns. In looking through the Ethisphere list, they seem to be a broad mix of companies so I assumed the dividends of these companies would be similar to the dividends from the companies in that broader indexes.

My conclusion is that the companies on the 2007 list of the most ethical companies were a good investment. I may just put some money on some of those new 26 companies on the 2011 list.