Table of Contents
Table of Contents

Investing in Unethical Stocks: Pros and Cons for Traders

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.

The idea of turning away investments that aren’t ethical is founded on the long-standing principle of morality. It was upheld by the Quakers in 1758 when they withdrew their investments from the extremely lucrative slave trade.

The concept of ethical investing has a long and well-documented history. However, it is only recently that it has received widespread acknowledgment, largely due to modern society’s growing sense of social responsibility. This has led to the cultivation of specialist ethical investment funds for those with an awareness of, and dislike for, unethical business behavior.

Despite this movement toward ethical investing, many companies still engage in less-than-savory practices. And these companies still attract investors. There are pros and cons to investing in unethical stocks. However, at the end of the day, whether or not to invest comes down to an individual’s own moral compass.

Key Takeaways

  • Unethical investing refers to investing in companies that engage in questionable business practices.
  • Companies that sell products that are known to be harmful, such as tobacco and alcohol, can be unethical companies.
  • Companies that allow clearly wrong business practices, such as harsh working conditions, unfair wages, and child labor, are also considered to be unethical companies.
  • Investing in companies that engage in legal activities but sell dangerous products in high demand, such as tobacco, can be profitable.
  • Companies that engage in illegal business practices, such as child labor, can suffer damage to their reputation and profits, as much of society objects to morally wrong practices.

The Argument for Unethical Investing

Unethical investing can be extremely profitable, especially when you consider industries that are perceived to thrive on addiction and human weakness.

The tobacco industry serves as an example. Although its leading players are often accused of hiding the truth about smoking and its wider health implications, they operate a highly lucrative business model.

As Warren Buffett 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 (BTI). It’s one of the largest manufacturers of cigarettes in the world and has paid growing dividends for years.

This growth points to the high consumer demand for tobacco products. Despite the harsh criticism of the tobacco industry and the fact that smoking is now widely considered a severe and potentially fatal health risk, people still want tobacco.

With this in mind, tobacco firms may be justified in questioning the criticism aimed at them. They claim that they are merely providing a popular product to consenting and knowledgeable adults. Some investors may agree with that.

Another argument in support of unethical investing is put forward by leading international trader David Neubert. Neubert chooses to exercise his ethical beliefs as a shareholder and refers to this process as socially conscious investing.

He may purchase shares in supposedly unethical companies to influence how they conduct their businesses. In this way, he may ultimately effect change. While this type of shareholder activism is only possible with a significant stake, it does give socially aware investors the potential for bringing about better business practices.

The Argument Against Unethical Investing

Part of the challenge for investors lies in the definition of unethical investing. It’s 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 claim that they are acting within the law and fulfilling large consumer demand.

However, there are other criteria by which unethical investment opportunities can be judged, such as a company’s attitude toward labor and the working process that it and its associates employ.

The issue of whether to invest becomes clearer when practices are looked at in terms of their ethical standing. 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 U.S. brand Victoria’s Secret (VSCO) 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.

Many companies now have corporate social responsibility programs in place to ensure that they are contributing positively to society, which, ultimately, makes for better business.

Primark, a budget clothing brand, suffered from similar accusations. The Ireland-based firm was accused of knowingly using child labor to maintain low retail prices and a high profit margin. It has been reported that the company worked 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. Any investment made in implicated brands could generate profit at the expense of children’s health, education, and personal freedom.

What has spurred more ethical investing?

The anti-apartheid movement of the 1970s had a role in bringing the issue of ethical investing to the forefront. The apartheid system of South Africa was a brutal form of racial segregation and oppression. Student and community demands that colleges and universities divest their endowments of the stocks of companies that did business in South Africa brought attention to the issue of unethical investing. It also placed financial pressure on the companies themselves.

How can I invest more ethically?

First, establish for yourself the moral line that you will not cross when investing. Then, as you consider investments (such as companies or mutual funds) from a standpoint of financial return, carefully study who and what are involved—the companies, industries, business practices, and investment strategies. Try to learn about the people behind the companies and the regulations guiding an industry. Who are a company’s officers, a fund’s management, and the labor force? Search online for news of issues you may suspect. Contact companies for more information and to express concern. Once you’ve done your homework, decide if the potential investments meet your ethical standards.

What’s a famous example of unethical business behavior?

One example would be the behavior of investment manager Bernie Madoff. He developed the trust of his many clients through his aura of respectability and by providing good returns. Unfortunately, those returns were part of a massive Ponzi scheme that he engineered. He knowingly defrauded investors out of billions of dollars. Madoff was sentenced to 150 years in prison in 2009 and died there in 2021.

The Bottom Line

The definition of unethical investment is subjective. The choice of whether unethical investments are for you and your capital isn’t always clear-cut. There are certainly different sets of criteria by which unethical investments are judged. For instance, there’s a stark distinction between companies that profit from the decisions of consenting adults and those who do so through the application of forced child labor.

Your task as an investor may be to balance the need for profit with your own moral standards and create a portfolio that reflects your most earnest personal beliefs.

Article Sources
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  1. Bryn Mawr College, TriCollege Libraries. “Quakers & Slavery: John Woolman.”

  2. CNBC, Warren Buffett Archive. “Morning Session — 1997 Meeting,” select “24. Won’t buy a tobacco company, but could buy tobacco stocks.”

  3. British American Tobacco. “Dividends — LSE.”

  4. The Panelist. “How I Made Chevron an Ethical Investment.”

  5. Bloomberg. “Victoria’s Secret Revealed in Child Picking Burkina Faso Cotton.”

  6. The Guardian. “The Hidden Face of Primark Fashion.”

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