Dimtcheva, Morrison, and Marsland (2002b)

Dimtcheva, Ludmila, Gordon Morrison, and John Marsland. "Green with Envy." Commerzbank Securities, March 18, 2002b.

Uses proprietary risk assessment tools to analyze the FTSE4Good Index. This estimates tracking error of the screened index vs. the FTSE Europe at 2.58%. "In our view the magnitude of this expected tracking error is quite surprising" and is "higher than many institutions would be comfortable with." Most of this is driven by "styles and themes" (such as higher valuaion ratios) as opposed to industries. Only about 1/3 of the effect was attributable to stock-specific risk. The authors argue that investors should be compensated for this tracking error via higher expected return for the FTSE4Good index.

Link:  http://www.institutionalshareowner.com/pdf/Green-with-Envy.pdf