Most of you might have heard of cornering or boycotting an individual or an idea. It is a way of punishing them for doing something malevolent. From boycotting to shunning to cancel culture it is part of the culture, even within a stock market culture.
Such black sheep stocks are called sin stocks. It is a public traded company that deals with unethical or immoral businesses that depend on or exploit the frailties of human beings. Traditionally the companies listed in this are tobacco, cigarette and weapons manufacturing. Companies blacklisted by ESG are included under the category.
Even though there are fixed items in this list, it is not a closed one. Until the end of apartheid, all South African products were shunned and brought under this category. It ended after apartheid ended. After this, another thing that entered the list is the fossil fuel industry.
ESG or Environment, Social, and Corporate Governance evaluate a firm’s adherence to ethical, environmental and social factors. Thus, it is natural for a polluting industry like fossil fuel to be added to this list as it will be disinvested to bankruptcy and then drive such companies out of business.
Recent studies even prove that ESG companies are doing good business, with many investors looking at it more favorably. But as much as such companies do better, so do companies of sin stock. In most cases, ESG companies do good business while there is a high media focus on them.
At the same time, sin stock companies seem to outperform the former in the stock market. The reasons for their success are predictable returns, high profitability and regular dividends. That gives them an upper hand above the other. They are undervalued, inelastic and have a steady stream of business.
The only problem these companies face is political ones. The government has placed heavy restrictions on these companies, especially on gambling and intoxicant businesses.
After the rise of environmental movements, even fossil fuel industries are facing increasing regulations. Even though companies in the ESG list have their revenue source from them.
Even if this could be successful in the stock market, they will never go bankrupt as banks will provide them with needed funds. Even debt investors are helping them too. But recently they are taking on green and sustainability labels which could pressurize them.
Thus, as much as there is consumption and demand for sin stock products, they will find a way for revenue generation, whether blacklisted or not. The important measure one should take is a total abandonment of their products, from fossil fuel to business that uses exploitation and other unethical practices.
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