Investing In Unethical Stocks: The Pros And Cons For Traders

By Lewis Humphries | November 01, 2012 AAA

When people discuss making an unethical investment, they are referring to the process of purchasing shares in a firm that engages in questionable operational or recruitment activities. This is founded on a long-standing principle and was first practiced by the Quakers in 1758, when they withdrew their investments from the extremely lucrative slave trade.

While the concept of ethical investing has a long and well-documented history, it is only recently that it has assumed widespread acknowledgment. This is largely due to the growing sense of social responsibility that exists in modern society, and has led to the cultivation of specialist ethical investment funds for those with a wider level of global awareness.

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Unethical Investment: The Case for the Defense
Despite this, however, it is unwise to assume that unethical investment is a thing of the past. In fact it is often an extremely profitable practice, especially when you consider industries that are perceived to thrive on addiction and human weakness. The tobacco industry serves as a relevant example, (as although its leading players are often accused of hiding the truth about smoking and its wider health implications, they operate an extremely profitable and highly lucrative business model). As Warren Buffet suggested, the sale of tobacco not only generates extremely high profit margins but also provides firms with access to a vast and captive target market.

Take British American Tobacco (AMEX:BTI) as an example; it is the second largest manufacturer of cigarettes in the world and has experienced a dividend increase of 91% over the last five years. This growth hints at the high consumer demand that exists in modern society, despite the constant criticism that blights the tobacco industry and the fact that smoking is now widely accepted as a severe and potentially fatal health risk. With this in mind, tobacco firms have some justification in questioning the criticism aimed at them and other so-called unethical investment opportunities, as they claim they are merely providing a popular product to consenting and knowledgeable adults.

Another argument in support of unethical investing is put forward by leading international trader, David Neubert, who chooses to exercise his ethical beliefs in his role as a shareholder. He refers to this process as socially-conscious investing, whereby he may purchase shares in supposedly unethical companies in order to influence the way in which they conduct their businesses and ultimately effect change. While this type of shareholder activism is only possible with a significant stake, it does, however, allow socially-aware investors to have a direct impact on encouraging better business practices.

The Argument Against Unethical Investment
Part of the wider issue lies with defining unethical investment, as it is a highly subjective and personal consideration. While firms that sell products such as tobacco, alcohol and oil are often described as operating fundamentally unethical business models, they will claim that they are acting within the law and fulfilling a huge consumer demand. There are other criteria by which unethical investment opportunities are judged, however, such as an individual company's attitude to labor and the working process that it and its associates employ.

These issues are more clearly-defined in terms of their ethical standing, as the use of forced or underage labor is reprehensible by almost every moral code. With this in mind, it is worth noting that a number of popular retail outlets have found themselves accused of supporting and even facilitating child labor in economically-poor regions. The much-loved U.S. brand Victoria Secret, the flagship of Limited Brands (NYSE:LTD), found itself embroiled in a dispute over the use of fair trade cotton, as suppliers claimed that they were unable to meet demand without employing child labor.

Budget clothing brand has also suffered from similar accusations, as the Ireland-based firm was accused of knowingly utilizing child labor in order to maintain low retail prices and a high profit margin. Although parts of the original BBC footage used to expose the brand were subsequently discredited, recent reports suggest that the company still works alongside leading Indian textile firms that are known to use forced child labor. This recurring association between questionable recruitment procedures and leading players within the fashion industry is worrying, and any investment made in implicated brands could generate profit at the expense of children's education and personal freedom.

The Bottom Line
The definition of unethical investment is subjective, as is the choice of whether unethical investments are for you and your capital. There are certainly different sets of criteria by which unethical investments are judged, with a stark distinction existing between companies that profit from the decisions of consenting adults to those who do so through the application of forced child labor. Your task as an investor is to balance the need for profit with your own moral standards and create a portfolio that reflects your most earnest personal beliefs.

At the time of writing, Lewis did not own any shares in any company mentioned in this article.

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