Socially responsible businesses sacrifice financial returns to pursue social or environmental objectives; that much is known. Just how much of a trade-off they make has always been unclear, however, and evidence from the capital markets is inconclusive. A recent study has produced some surprising results: over the ten-year period we examined, a portfolio of investments defined as socially responsible generated returns of 8 to 14 percent. That is lower than the rate typically earned by "angel" investors—wealthy people who make direct equity investments in entrepreneurial ventures, usually at an early stage—but comparable to capital-market returns.
We studied investments made by members of Investors' Circle, a US-based network of angel investors who put their money into companies they view as socially responsible.1 Representative investments include Earth's Best, an organic baby-food manufacturer recently acquired by HJ Heinz, and Sonic Innovations, a manufacturer of low-cost hearing aids. The latter company went public in 2000.
Since Investors' Circle doesn't manage the investments centrally, its members were keen to know whether the aggregate returns from such a portfolio of companies were competitive with those from other angel-investment opportunities. In a survey, 77 percent of the group's members said that they expected returns of...