Abstract
Certain economic actors are considered by many as involved in or associated with an activity that is considered unethical or immoral, such as the producers of tobacco, alcohol and firearms (often referred to as sin stocks). In an environment in which stakeholders are increasingly interested in sustainable development and corporate social responsibility, it is important to understand how firms respond to these issues which divide public opinion. Our study compares the environmental, social and governance (ESG) performance for a targeted sample of 79 sin stocks and a control group of comparable firms. We observe that sin stocks have a lower overall ESG performance as well as for each of the three ESG pillars, and that this difference is more significant in relation to governance and some key social and environmental issues for which sin stocks could have compensated risk exposure with responsible management practices. In other words, our results demonstrate that sin stocks are exposed to more severe ESG issues and consistently lack the necessary practices to mitigate these issues. Our study provides relevant insights into the informativeness of ESG scores to distinguish firms (and sectors) investing in management practices that offset ESG risk exposure.
Highlights
In 2018, based on sales, Phillip Morris International was the most important producer of tobacco
Ref. [17] findings show that the environmentally and socially responsible practices of sin stocks are value-relevant only when these firms are performing below their peers, which suggests that sin stocks pursue ESG investments because of competitive advantage, rather than moral rebalancing
Our study aims to bring a new perspective to this question: Are sin stocks incentivized by the market to adopt more responsible practices than firms in more traditional sectors? we seek to shed light on the differences and similarities between the ESG performance of sin stocks and more conventional firms
Summary
In 2018, based on sales, Phillip Morris International was the most important producer of tobacco. This approach appears quite ironic considering that Phillip Morris could stop producing cigarettes This raises the question of whether such socially responsible initiatives are an alternative way of promoting its products, or is this the result of pressure from stakeholders to gyrate towards a more socially acceptable business model?. Sustainability 2021, 13, 9556 values (i.e., Socially Responsible Investment (SRI)) and the new products might prove less profitable This duality raises uncertainty about the way firms (businesses) respond to investors’ pressures. Sin stocks’ practices aimed at mitigating their ESG issues would be expected to be superior to those of firms operating in more traditional sectors, in order to compensate for the important exposure to ESG issues (risks) Considering these two perspectives, firms flagged as sin stocks face an ambiguous response to ESG issues. They score better for toxic emissions and waste management
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