According to Invetopedia.com, the definition of Ethical Investing is the use of one’s ethical principles as the main filter for investment selection. The idea can be applied by either eliminating certain industries altogether, for example gambling, alcohol and tobacco, or by over-allocating into industries that meet one’s ethical guidelines.

There are many funds that use this principle when it comes to choosing the investments (mainly equities) that they allocate their clients’ funds to. But at the end of the day, should one really care where the money is invested, as long as it is profitable? This question will be answered different for every investor since every investor will have his/her own criteria as to what is or is not appropriate. I am just simply trying to ask – where do you draw the line?

 

One may argue that investing in a company that manufactures tobacco or alcohol for example is not a really big issue. People who consume such products know of the negative effect that these products have and they choose to consume them anyway. On the other hand the products are addictive and hence they also have an immoral control over the consumers, especially addicts. Furthermore, it may be highlighted that such firms invest a lot of money into lobbying and propaganda and so they are not really playing fair and thus tricking people into consuming their products. So should I eliminate these companies from my portfolio?

To be honest, shouldn’t we really think the same of fast food producers? They are the cause of a lot of health issues, yet we do not restrict the intake of fast food consumption for people under a certain age as we do for alcohol and tobacco consumption. So should I not invest in the shares of McDonalds or The Coca Cola Company based on my ethical thinking?

With the legalisation of the personal consumption of Marijuana in certain US states one can now invest in companies that produce this product. The same arguments brought up for the tobacco and alcohol industries can be used here. By investing into such a company am I indirectly causing people to consume more of the product?

Reasons to invest in these industries.

Such industries that invest in addictive product such as alcohol, gambling and tobacco tend to be less affected by economic trends. The reasoning is that even in an economic downturn, people will still gamble, they will still smoke and they will still drink. Thus, having equities of companies that offer these products in one’s portfolio will add to diversification and theoretically lead to less of a downturn when the majority of shares are going down.

But this is not the full story of course. Yes these shares can lead to a less risky portfolio and potentially better returns, however they do not come without certain other negative features. If you take the tobacco and alcohol industries these are frequently subject to lawsuits and new regulations that limit their ability to market their products. When we have a new research paper come out that this product or that product causes more harm than we previously thought, these shares will suffer.

On the gambling side, if we take for example casinos, all the large casino shares have interests in Macau which is the “Las Vegas of China” (although it is much larger than Las Vegas to be fair). This means that these stocks are affected by the news coming out of China which is still a volatile market. A quick look at the shares of companies like Wynn Resorts Ltd and Las Vegas Sands Corp will easily allow one to appreciate the volatility of such shares.

What about the fire-arms, ammunition and military supplies industry?

Now let us take it a step further. For argument’s sake, let us assume that with the industries that produce addictive products that have detrimental health issues an investor argues that one cannot save someone from their own foolishness and hence they should not eliminate these companies from their portfolio. In other words, these companies pass the ethical criteria for this investor. What if we now consider arms and ammunition companies? What if we consider companies that develop jet fighters, missiles and other military supplies?

With the current tensions around the world following many terrorist attack incidents, the most recent being the Paris Attacks which have led to France declaring war on ISIS some investor are backing companies like Boeing, Lockheed Martin and BAE Systems to do well. These companies sell the supplies that would be used by military and hence the current scenario is looking very profitable for them. So this begs the question – Should I invest in this industry to profit from the conflict in Syria? How much is too much?

The shares of these three companies are up an average of 10% over the past 3 months alone. With tension very high and more countries signalling their intentions to join France the potential for these shares to keep doing well is easy to see. This is not to say that the risk is low with these sort of companies. These is still no clear plans regarding the continued war on terror that the US had initiated back in 2001 following the twin towers events. There is nothing to say that these shares are not already overvalued in the sense that people have already pushed up the prices of these shares in the knowledge of the potential for future profits.

The Bottom Line

The aim of this post was not to argue in favour or against the concept of ethical investing. The aim was to create awareness and make investors question how much they are willing to accept from an ethical point of view when it comes to choosing the products they invest into.