David Palmer: Sin stocks – is the universe expanding?

29 Sep 2020 Expert insight

David Palmer, chief executive of Epworth Investment Management, discusses issues relating to 'sin stocks'.

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One of the key tools of ethical investing is the exclusion of companies that do not meet the investor’s ethical policy. Many of these exclusions are the so called “sin” stocks, companies that make money from exploiting human weaknesses and vices. There is a surprising unanimity amongst ESG investors that these include companies involved in activities such as adult entertainment, gambling, tobacco and arms manufacturing. 

A new sector has leapt into this discussion about sin stocks in the last 24 months –oil & gas companies. Much of the ESG work around companies such as BP & Shell has looked at their alignment with the 2015 Paris Accord, asking whether their activities are compatible with a world where temperature increases are kept to well below 2 degrees. The answer requires modelling of the next 30 years of the activities to be undertaken by these companies – how will they spend their capital? What emissions targets are they setting themselves? How clean are their existing resources? This requires a forensic examination of their operational and economic activities. 

At Epworth we have a matrix of 21 different tests that give us an assessment of each oil and gas major’s contribution to the climate emergency. Not surprisingly the American oil companies universally fail on most of our tests - as do most of the state-owned oil companies. European oil companies give a more mixed outcome with some showing sufficient commitment to alternative energy sources and setting clear emissions targets for a case to be made that they may align with the commitments of the Paris Accord. At Epworth, following advice from our ethical committee, we have sold BP and Total but, for the time being, retain Shell in some of our equity portfolios.

However, this forensic examination of the greenhouse gas performance of oil and gas companies for some investors misses the point.  

I recently attended a passionate debate about the merits of including oil and gas companies in the investment funds belonging to a leading Church in the UK. The ravages that the climate emergency is placing on our planet are widely agreed in the in this country (unfortunately this isn’t the case everywhere in the world) and  speakers focused on how the products of oil and gas companies are contributing to this. The issue for them was not whether the oil and gas companies align with the Paris Accord but rather that they do not want to profit from activities that cause such harm. This view reflects a journey that many faiths groups in the UK have been on. The Quakers were the first to fully disinvest from the oil and gas sector in 2015 and many have fully or partially followed.

The universe of “sin” stocks has a new member.

Some investors may wish to go further than focusing on oil companies, for example excluding industries with a high carbon footprint, such as cement manufacturers. They may also want to invest in companies that actually contribute to a slow-down in in the increase of global temperatures.

Investing in a way that protects our planet does have consequences – the smaller investment universe increases portfolio risk and index tracking errors. In avoiding oil and gas companies investors give up the liquidity, yield and defensive qualities that these stocks offer. But, in the view of some investors, you also avoid being sinful and can help tackle the climate emergency.

David Palmer is chief executive of Epworth Investment Management, which launched a Climate Stewardship Fund in the summer that excludes oil and gas companies, as well others with a high carbon footprint .

Epworth Investment Management Limited (“Epworth”) is authorised and regulated by the Financial Conduct Authority (FCA Registered Number 175451). Epworth-managed funds are designed for long term investors. The value of units in funds can fall as well as rise and past performance is not a guide to future returns. 

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