Is ethical money financially smart?

Little is known about how investors select socially responsible investment (SRI) funds. Investors in SRI funds may care more about social or ethical issues in their investment decisions than about fundperformance. This paper studies the money-flows into and out of the SRI funds around the world.We find that ethical money chases past returns. In contrast to conventional funds’ investors, SRI investors care less about the funds’ riskiness and fees. Funds characterized by shareholder activismand by in-house SRI research attract more stable investors. Membership of a large SRI fund family creates higher flow volatility due to the lower fees to reallocate money within the fund family. SRIfunds receiving most of the money-inflows perform worse in the future, which is consistent with theories of decreasing returns to scale in the mutual fund industry. Finally, funds employing a highernumber of SRI screens to model their investment universe receive larger money-inflows and perform better in the future than focused funds.