This paper addresses some interrelated questions regarding ethical investments: does ethical screening provide any incentives for improved social responsibility within firms? Are ethical screened portfolios competitive compared with conventional funds with respect to risk‐adjusted return? Does the risk‐adjusted return of a screened portfolio depend on the screening strategy applied? Considering ethical screening as a kind of segmentation of the equity market, it is shown that screening might create incentives for changes in firms' behaviour. The strength of this incentive depends on the relative share of screened portfolios, which in turn partially depends on the financial performance of the screened portfolios. While some theoretical arguments suggest that screening imposes a handicap compared with conventional portfolios, the empirical evidence does not suggest that screened portfolios systematically under‐perform conventional portfolios.
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Aslaksen et al. (2003) studied this question.