8/8/2019 Sin or Ethical Investing: Which Pays Best?

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8/8/2019 Sin or Ethical Investing: Which Pays Best?

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the level of excise taxation on alcohol and tobacco products. Sin stocks earnsignificantly higher abnormal returns in countries where the excise taxation is high…

average sin stock returns depend on country-specific factors such as religion,litigation risk and excise taxation.” 

Incidentally, a comprehensive listing of studies related to ethical/SR and sin

investing can be found on my website.

Proponents of sin industry investing say that many ethical/SR funds often have

higher annual management fees, thereby decreasing returns. Also, that fund

managers and analysts avoid sin industries. Because of this sin industry stocks arerelatively cheap. And due to their enormous, regular cash flows they are able to

make large dividend payouts. These big dividends combined with low stock pricesfrequently provide exceptionally good dividend yields.

Thus, sin stock proponents argue that when looking at stock returns you also have to

consider not only stock price appreciation or losses, but also the ‘total return’ whichis inclusive of dividends. These are valid points that are not accounted for in many

studies which only measure stock/fund price changes.

However, the often high dividend yields of sin investments are shunned by numerousinvestors as they are concerned about the effects of sin industries on the quality of 

life for themselves, their families and for society as a whole. However, thatdiscussion is for another day.

There is a major new factor impacting our quality of life and the sin versus ethical

investing debate. This is the massive sovereign debt crises.

Countries like the United States, Britain, Japan and many others face enormousunfunded health and pension liabilities. The pressure for those countries to increase

taxation on goods such as tobacco and alcohol that contribute disproportionately to

health costs is going to be immense. Furthermore, it is likely that governmentoutlays for defence will be reduced too. The gaming industries could meet increased

taxation as well. Therefore, sin industry profits would be squeezed. So present dayinvestors in sin industries may see their returns suffer due to government austerity

programmes.

The year 2008 was a game changing event for investors. It saw the demise of 

excesses and brought about a new consciousness. This new investor consciousnessengages environmental, social, governance and ethical concerns, while governments

preach austerity and consider new taxes on our vices. Future investment returnsmay well favour ethical over sin investing.

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