|July 13, 2010
Sin or Ethical Investing: Which Pays Best?
By Ron Robins, Founder & Analyst -
Investing for the Soul
The stock market plunge in 2008 changed investment
returns and investor consciousness in many ways. Prior
to 2008, many investment studies found ‘sin’ stock
portfolios providing better returns than ethically or
conventionally oriented ones. Since then however, there
is preliminary evidence that ethical stock portfolios
have probably performed better. Over the next five to
ten years, and with the effects of the sovereign debt
crises upon us, I suspect that ethical stock portfolios
could outperform both the sin and conventional variety.
Sin stock portfolios generally include holdings in
tobacco, alcohol, gaming and defence companies. Ethical
or socially responsible (SR) portfolios on the other
hand typically comprise of stocks in companies related
to the financial, technology, medical/health,
alternative energy, consumer staples industries etc.
However, with the growing focus on environmental,
social, governance (ESG) and ethical issues, ethical/SR
portfolios are becoming increasingly diverse.
American supporters of sin stock investing like to quote
a February study, “Socially Responsible Investing vs.
Vice Investing,” by Hoje Jo et al. It compares the Vice
(sin) Fund (VICEX) and Domini SR funds. It stated, “our
research shows while the annualized return of SRI
[socially responsible investing] through Domini Social
Index (DS 400 Index) from 1990 to 2009 has been higher
than that of S&P 500 …[and the] Domini Social Equity
Mutual Fund (DSEFX) outperformed vice investing through
vice fund (VICEX) over the most recent one year, VICEX
has outperformed DSEFX over the long term.”
Incidentally, in the twelve months ended June 30, 2010,
the DSEFX continued to lead with a gain of 16.81 per
cent, outpacing the VICEX’s gain of 7.73 per cent. It is
also worthwhile to consider the time period of this
‘long term’ study: seven years. It begins with the
inception of the Vice Fund in 2002. Generally, long term
performance is better analyzed over ten, fifteen, or
more years’ time frame. Also, comparing two funds in a
universe of thousands, though probably representative of
the chosen criteria, does pose a question of statistical
From a European perspective, one outstanding 2009 German
study with excellent methodology is, “Vice vs. Virtue
Investing,” by Sebastion Lobe, Stefan Roithmeier and
Christian Walkshausl. It clearly indicates no difference
in returns between ethical and ‘unethical’ portfolios. I
quote, “we find no compelling evidence that ethical and
unethical screens lead to a significant difference in
their financial performance, which is in contrast with
the results of prior studies on sinful investing.”
Another 2007 French study finds fault with the idea that
sin stock portfolios perform similarly in all countries.
In “The Determinants of Sin Stock Returns: Evidence on
the European Market,” by Julie Salaber, she states that,
“ …sin stock returns vary with the level of excise
taxation on alcohol and tobacco products. Sin stocks
earn significantly 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
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 are relatively cheap. And due
to their enormous, regular cash flows they are able to
make large dividend payouts. These big dividends
combined with low stock prices frequently 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’ which is 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 numerous investors 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, that discussion is for
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 enormous unfunded 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
government outlays for defence will be reduced too. The
gaming industries could meet increased taxation as well.
Therefore, sin industry profits would be squeezed. So
present day investors 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 consciousness engages
environmental, social, governance and ethical concerns,
while governments preach austerity and consider new
taxes on our vices. Future investment returns may well
favour ethical over sin investing.