Socially Responsible Investing (SRI) vs. Sin Stocks

Is it better to be bad than to be good? It is a question that has plagued humanity since the beginning of time, and the world of investing is not immune to the controversy. In one corner are fans of socially responsible investing (SRI), and in the other corner are fans of sin stocks.

The Case for Socially Responsible Investing (SRI) and for Sin Stocks

SRI fans prefer an investment strategy that views successful investment returns and responsible corporate behavior as going hand in hand. They believe that by combining certain social criteria with rigorous investment standards, they can identify securities that will earn competitive returns and help build a better world.

Proponents of sin stocks have traditionally favored companies in the gambling, alcohol, tobacco, and firearms industries. Any companies that make a profit have a place in their portfolios, regardless of whether the firm builds nuclear power plants, sells components for land mines, or has questionable labor practices. This camp points out that somebody is going to profit from these industries and argues that there’s no reason to miss out on the opportunity.

Buy into Sin, or Put Your Money Behind Your Convictions?

SRI fans argue that it’s possible to do some good while making money. Their argument rests on the idea that socially responsible companies are likely to be well-managed because their underpinnings are based on solid values.

Sin stock fans argue that SRI mandates pass up good opportunities in companies that have strong fundamentals, trading profits for a feel-good factor. The sin stock crowd feels good when their investments deliver solid returns. They would rather put money in the bank by backing industries that meet consumer demand than starve for their convictions.

Modern portfolio theory (MPT) seems to back the argument of sin stock proponents, as constructing the optimal portfolio should be more challenging if some stocks are removed from the universe of possible investments.

A Look at the Numbers

The Impax Sustainable Allocation Fund, launched on Aug. 10, 1971, as the Pax Balanced Fund and renamed on Dec. 31, 2022, is the oldest operating SRI fund in the business. The Vice Fund, launched on Aug. 30, 2002, is considered one of the industry’s oldest sin funds. A look at the two funds’ annualized returns (as of early 2022) tells an interesting story. For 10 years running, the socially responsible fund has done better.

**Impax Sustainable Fund as of Aug. 31, 2022 (then the Pax Sustainable Allocation Fund); Vice Fund as of June 30, 2022

Comparing the funds to their respective indexes provides another perspective. Impax delivered index-like performance across the board, while Vice fell short of its benchmark in every metric.

Complications

Interestingly, SRI funds tend to invest heavily in technology, healthcare, and financial services. It is also important to consider the cyclical nature of the markets. When sectors, such as technology and healthcare, are topping the charts, sin stocks may be out of favor or at least underperforming the market leaders. Similarly, when stocks that SRI funds won’t buy are leading the pack, sin stocks will outperform.

It is also worth noting that the universe of SRI funds vastly outnumbers the universe of sin funds. There are dozens of SRI funds, including big names, such as Dow Jones and Calvert, and a number of exchange-traded funds (ETFs).

On the sin stock side, there are fewer than a half-dozen offerings, even with ETFs included, although there are plenty of individual securities that fit the mold, so constructing a portfolio based on stocks that SRI funds won’t hold is easy to do.

The Bottom Line

Where should you put your money? If your moral convictions won’t permit investments in sin stocks, then your choice has already been made. Just be sure to learn about the screening criteria for the funds that you are considering, or you could end up with companies that don’t represent your values in your portfolio.

If you’re just looking to make a solid investment, moral convictions aside, then a diversified portfolio including both saints and sinners may be the better choice.