Investors Hope to Hurt Firearms and Fossil Fuel Companies by Shunning Them — But Research Shows Divesting Has Little Impact

“When the demand for sin stocks is large enough, their stock prices and stock returns, holding firm characteristics constant, are not different from that of non-sin stocks,” argue researchers.

Chris Ratcliffe/Bloomberg

Chris Ratcliffe/Bloomberg

Investors who exclude sin stocks from their portfolios, hoping to hurt these companies’ valuations and access to capital, may be disappointed in the actual impact.

Individuals and institutions have long believed that shunning the stocks of companies has a negative impact on their economic success, but this assumption isn’t backed by empirical data, according to a paper titled “Does ESG negative screening work?” from Robert Eccles, a visiting professor at Said Business School at Oxford University, Shiva Rajgopal, a professor at Columbia Business School, and Jing Xie, an assistant professor at Hong Kong Polytechnic University. Eccles, Rajgopal, and Xie found that negative screening for sin stocks has little effect on the firms’ valuations, stock prices, exits, and returns when compared to non-sin stocks of companies with similar fundamentals.

“In sum, we argue that claims that negative screening hurts sin stocks are somewhat overstated,” Eccles, Rajgopal, and Xie wrote. “The underlying empirical reality, at least since 2000, is more nuanced and complicated and depends on the research design used.”

Negative screening means an investor excludes a stock from their portfolio because of one, or many, of its qualities. Typically, an investor will screen out the stocks of companies that are viewed as unsustainable or unethical in the context of an environmental, social, or governance framework. For example, many institutional investors screen for “sin stocks” — stocks of companies that produce alcohol, tobacco, gaming products, and, more recently, fossil fuels, products that are harmful both to humans and the environment.

For years, institutions have avoided certain industries, holding less equity in these companies. According to the paper, negative screening has only increased in the past decade with the gap between institutional ownership of non-sin stocks and sin stocks rising from 4.3 percent in the first decade of the millennium to 7.9 percent from 2010 to 2019. Negative screening is largely concentrated in the alcohol and gun industries.

To measure the effectiveness of these tactics — whether or not excluding sin stocks from institutional portfolios actually hurt the companies that tout the unethical products — Eccles, Rajgopal, and Xie compared the effect of negative screening on sin stocks and non-sin stocks when the underlying companies had the same fundamentals. That meant both groups of companies were the same size, age, and showed signs of the same return on assets, risk levels, past performance, stock-price-based dividend yield, and book-to-market ratio.


The authors based their comparison on the hypothesis that if avoiding these companies has negative implications for the excluded industries, then sinning firms should see lower valuations than those of the non-sin stocks when their firms’ characteristics are otherwise the same. Take, for example, an alcohol company and a wind turbine company which have similar fundamentals. If institutional investors exclude the alcohol company’s stock from their portfolios because it is viewed as unethical and include the wind turbine company in their portfolios because it better aligns with the investor’s ESG goals, the alcohol company should theoretically be valued at a lower price than the wind turbine company in the broader market.

However, this doesn’t appear to be the case. The authors found that negative screening for sin stocks had no effect on the firm’s valuation.

So they tested another idea: If excluding certain industries from portfolios hurts those industries, then the stocks should run at a lower current stock price, resulting in a higher future return. Again, the authors found that sin stocks don’t earn an anomalous monthly return compared to other stocks.

Another one: If negative screening hurts sinning companies, then there should be a higher likelihood of exits for sin stocks compared to other stocks. Once more, the authors debunked this assumption. Excluded stocks have a similar likelihood of exiting the public market compared to stocks of included industries.

Negative screening for sin stocks also doesn’t result in lower offer prices compared to other stocks, according to the paper. Negative news about sin stock companies that sway investors’ perception of the company’s ESG performance does not result in negative stock returns either.

“A potential explanation for our findings is that sin stocks attract demand for their shares from a subset of investors who do not implement negative screening,” Eccles, Rajgopal, and Xie wrote. “When the demand for sin stocks is large enough, their stock prices and stock returns, holding firm characteristics constant, are not different from that of non-sin stocks.”

So why do investors negatively screen for sin stocks if it doesn’t have any empirical impacts? Eccles, Rajgopal, and Xie suggest it may be a way for investors to save face. For example, the authors found that investors vote on more ESG proposals in annual meetings for sin stocks than for other kinds of stocks, and, as a result, more ESG proposals are passed for sin stocks than for other stocks.

“[This suggests] that investors in sin stocks likely exert higher pressure on firm management to improve its ESG performance or alternatively engage in virtue signaling themselves,” they wrote.