Sin Stocks: Understanding The Debate

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Sin stocks

The philosopher Immanuel Kant famously decried the use of people as a “means to an end”. Now that some countries legally recognise corporations as people, it might be time to apply that same approach: corporations must not be judged on their product, but on how they got to it.

Judging these companies is a burden easier left to others. Because ethics is such a diverse, complicated field, many socially responsible financial advisors turn straight to “sin stocks” as an easy way to avoid doing more research than most people would care for.

However, it’s time that both investors and their advisors recognise an inconvenient truth: that even the infamous “sin stocks” aren’t cut-and-dry guidelines.

So the concept of the “sin stock” may no longer be a reliable shortcut to ethical investing – but what can we learn from them?


What Are Sin Stocks?

These are traditionally sinful stocks in industries such as weapons and tobacco; and they’re the bulk of most ethical stock indices’ blacklists.

A stock index loaded with sin stocks is often referred to as a vice fund; the biggest in the US has recently renamed itself the Barrier Fund. The reasoning behind being part of such a fund can include the belief that sin stocks are counter-recessionary and stable investments.

They’re called “sin stocks” because the majority of ethical investors tend to come from middle-class, Western backgrounds – a demographic often typecast as having traditional Christian values. By blacklisting companies that contribute to traditional “sin” – such as pornography and alcohol – many funds can claim to be ethical.

Unfortunately, it doesn’t quite work that way.


What’s Wrong With Sin Stocks?

Time and time again, we have proved that ethical investments providing lower returns is a myth. In this sense, there is still no big financial argument against the existence of sin stocks. As an investor, you aren’t missing out on huge returns by avoiding them.

However, we must also recognise another myth: that high-performing “sin stocks” are less ethical than the average company.

Stocks, just like human sins, aren’t always black and white; they come in shades of grey. Operating in a world of “sin stocks” divides the world into good and bad; this is already contentious and subjective. This line of reasoning often leads to the conclusion that everything not a “sin” is, by exclusion, “good”.

Nothing could be further from the truth.

It goes without saying that the promotion and support of damaging industries such as weapons and tobacco should not be encouraged. However, ethical issues with these companies are often much smaller than those of “good” stocks, such as the famously happy, family-oriented Coca-Cola.

The problem is that it’s not enough to decide some stocks are evil and the rest can be green-lighted. Every action can be good or bad, and therefore every company can, too; we can’t pretend that “not a sin stock” means the same as “the ethical choice”. We must choose the good guys, not the bad ones.


How Do I Know Who Is Unethical Without Sin Stocks?

The very word “sin” conjures up an image of Biblical ethics: but is it appropriate to apply the Ten Commandments to the behaviour of modern, secular corporate entities?

The traditional sins of the alcohol industry are nothing compared to the huge environmental sins by oil and gas or pharmaceutical corporations, which are not generally listed as sin stocks but would be top of the list for most ethical investors.

Ultimately, you will have to create your own definition of ‘unethical’ – and you might well draw on traditionally sinful products. However, investment ethics should focus on a company’s behaviour, not its product; this is what socially responsible investing is all about.


Create Your Own Savvy Stock Index

So the concept of a “sin stock” is outdated and exclusive; how can we build it into something positive? We propose creating the opposite: a portfolio full of ethical, high-performing stocks that are included on the basis of good company behaviour, not excluded because of controversial products.

Look at how companies treat their workers, control the damage to their environment, or fund their communities – truly ethical corporate behaviours – and you’ll come up with a portfolio that’s not as much about family as it is about technology.

In a world where “sin” is subjective and every stock is an ethical choice, the truly sinful thing to do is fail to research the companies you’re including in your portfolio, no matter how “good” they seem. A lengthy, frustrating task, but one we can help you with.

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