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As someone who reports on sin stocks, I sometimes catch some static from people about morality and whether or not ethics should come into play in our portfolios.

I firmly believe: Ethics should be important to us as individuals (to quote George Costanza: “We’re trying to have a society here!”) and our personal ethic should inform all of our decisions, including investing.

But investing in an ethical portfolio doesn’t suddenly make you an ethical investor. Here are a number of problems with ethical investing (but first: A meme!)

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PROBLEM #1 – THE DEFINITION OF AN “ETHICAL PORTFOLIO” OR “ETHICAL FUND”

Some ethical portfolios are defined not by the list of stocks they can invest in but rather by the list of sin stocks they refuse to invest in… and all other due diligence remains the same. So rather than being “ethical”, these funds should really just be called a non-sin-stock portfolios. Truly ethical portfolio would go one step further and look at other factors of a company such as: What percentage of their profit is spent on doing good in the world, how are they encouraging employees to participate in charitable causes, are they supporting families and ensuring that they have a healthy and environmentally-friendly workplace that pays a fair wage. (And there should be far more questions, too; those are just some examples). But I don’t see this. I see ethical portfolios and ethical funds as more typically being driven only by what they exclude.

PROBLEM #2 – WHO DECIDES THE ETHICS OF ETHICAL PORTFOLIOS?

Often (at least in my observation), ethical funds might sometimes be replaced with the title “Upper-Middle-Class Evangelical Christian” portfolios because that group is the group that defines the values of many ethical funds. It makes sense: They have money and are politically and socially influential, so from a business perspective I can see why ethical funds cater to this group. But there are other groups that have their own ethics (and certainly some of these ethics will cross over but not all of them). My point here is that your own ethic needs to determine your investing not the ethic of a group of people who you may or may not be part of.

PROBLEM #3 – ETHICS AND SIN CREATES A FALSE DICHOTOMY

By using terms like “ethical investing” and “sin stocks” one creates a false dichotomy of superiority and inferiority. I might liken it, in a humorous way, to Apple and Blackberry. An owner of an Apple product has no problem feeling great about their purchase while the owner of a Blackberry product needs to constantly defend their decision among others. I feel this all the time as the owner of this site. But as I’ve shown in this blog post and in my blog post Sin stocks are relative, we can’t easily say that ethical investing is superior while sin stocks are amoral. It’s difficult, and it’s a sliding scale. Are you okay with beer stocks? What about wine stocks? I know some investors who feel that beer or spirits stocks are sin stocks but wine stocks are not. It’s complicated and using blanket terms fool us into thinking that the issue is simpler than it really is.

PROBLEM #4 – ETHICAL PORTFOLIOS ARE FEEL-GOOD PORTFOLIOS

We all know people who are fiercely proud of how good they are to the environment but are quite content driving two cars and buying stuff with lots of packaging. We all know people who will indignantly refuse to eat anything but locally-grown produce in support of farmers but are fine wearing shoes that were stitched by sweatshops. We all know people who feel superior because they give money to charity yet won’t lend a helping hand to a friend who needs their tire changed. Truth be told, we’re all kind of like that a little bit: Some of our decisions are done to make us feel like we’re making a difference when really we’re making a difference in one area and reversing that difference in another area. It’s the same with ethical portfolios: They make us feel like we’re superior value-based investors when that might not always be the case.

PROBLEM #5 – ETHICS NEED TO BE CLEARLY DEFINED AND OFTEN AREN’T

So ethical investors hate alcohol sin stocks and tobacco sin stocks and gambling sin stocks. Those are the easy ones. What about crime sin stocks? Or conflict sin stocks? What about perfectly acceptable stocks that use sweatshop labor? What about All-American stocks like General Motors or Ford who employ thousands and pump a lot of money into the economy but whose vehicles produce harmful emissions? Ethical investors need to decide what ethics they are investing around and what makes this even more difficult is…

PROBLEM #6 – ETHICS NEED TO BE MEASURED IN DEGREES

Ethical investors need to decide to what degree do their ethics hold up: What if, for example, a perfectly harmless food company that seems entirely ethical owns shares in a tobacco company. Is 1% acceptable? Is 2% acceptable? What if that ethical grocery store chain also sells booze? I’m not trying to say that you shouldn’t invest ethically, I’m just trying to highlight some problems with ethical investing.

PROBLEM #7 – BUSINESSES CHANGE

Many uninformed investors are shocked to discover that tobacco company Altria (MO) used to also own other non-tobacco, family friendly products like Kraft and Maxwell House and Jell-O. Over time, businesses invest and divest in other companies, perhaps acquiring the entire company or shares in the company. Stakeholders and decision-makers come and go and ethical investors need to actively manage their ethical investment to make sure that the company you invested in yesterday is the same company you are investing in today.

PARTING THOUGHTS

I’m not saying you shouldn’t invest ethically. Our ethics drive all of our decisions and we should be intentional about what we invest in. Rather, I want to warn readers about falling into the trap of ethical investing versus sin stock investing based on terms that require much more thought than we tend to give them.

DISCLAIMER

Nothing on this site is a recommendation because, hey, I can't read your mind and I don't know what you have in your portfolio, and I'm not a licensed financial advisor. So never EVER trade without doing your due diligence. If you want more information about this fascinating topic, please check out the Sin Stocks Disclaimer page which basically says the same thing but more emphatically.