The Least Sinful Sin Stock?

Last week, my colleague Sunniva Kolostyak asked if it was time to ditch booze stocks. The question comes as some took the ‘Dry January’ challenge – so why not take it to your portfolio?

Alcohol is a ‘Sin Stock’, in the company of the other (supposedly) ‘seedier’ industries of gambling, tobacco, defence (gun manufacturers, for example), cannabis, and adult entertainment, among others. For various reasons – cultural, religious, personal convictions – some investors decide to avoid some or all of these industries and stocks altogether.

From an environmental, social and governance (ESG) lens as well, these sin stocks have come under scrutiny. In a 2021 study on the ESG performance of sin stocks, researchers Gabriel Paradis and Eduardo Schiehll found 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 concerning governance and some key social and environmental issues for which sin stocks could have compensated risk exposure with responsible management practices. Their results demonstrate that sin stocks are exposed to more severe ESG issues and consistently lack the necessary practices to mitigate these issues.

Is Booze ESG-Friendly?

Morningstar company Sustainalytics says alcoholic beverages are considered controversial because excessive drinking can lead to social problems like addiction and public health issues. Certain religions also outlaw intoxicants, making them unsuitable investments for people of faith. Plus, it uses a lot of water.

“As Morningstar analyst Kate Matrosova recently discussed, there are no alternatives to freshwater, unlike fossil fuels; as a result, our reliance on water poses not only critical challenges to the health of ecosystems but also to the operations of businesses, communities, and society,” Kolostyak says, pointing out that in 2011, the drinks giant Diageo (DGE) used on average 6.9 litres of water per litre of finished product.

Still, Kolostyak acknowledges that alcohol remains the sin stock category people seem least worried about. A Robeco study of pension funds in the Nordics — the region that’s arguably the toughest on imposing exclusions — found that only tobacco stocks are shunned on a large scale, while alcohol and gambling are not. This doesn’t seem to make much sense.

Why Alcohol is a Sin Stock

Put simply, alcohol kills. In Canada, StatCan found that in 2020, the number and rate of alcohol-induced deaths increased among those under the age of 65. Among those aged 0 to 44, the number of alcohol-induced deaths rose from 325 (1.6 deaths per 100,000 people) in 2019 to 480 (2.3 deaths per 100,000 people) in 2020. There was also an increase in the number of alcohol-induced deaths in those aged 45 to 64 in 2020 (1,790 or 17.7 deaths per 100,000 people) compared with 2019 (1,525 or 15.0 deaths per 100,000 people) (These numbers exclude accidental deaths, like drunk driving).

Plus, there is evidence that alcohol causes cancer. In 2018, a Lancet report funded by the Bill and Melinda Gates foundation stated bluntly, “Alcohol use is a leading risk factor for global disease burden and causes substantial health loss. We found that the risk of all-cause mortality, and of cancers specifically, rises with increasing levels of consumption, and the level of consumption that minimizes health loss is zero.“ Essentially, the safest amount of alcohol to consume is none.

This isn’t news to Tim Stockwell at the Canadian Institute for Substance Use Research, who points out that the World Health Organization (WHO) declared alcohol a Class 1 carcinogen 30 years ago. He was a part of a 2018 experiment in Yukon, that put cancer warning labels on alcohol, to examine changes in the intervention versus comparison site for three outcomes: unprompted and prompted recall of the cancer warning, and knowledge that alcohol can cause cancer. It found that in a real-world setting, cancer warning labels get noticed and increase knowledge that alcohol can cause cancer – however, four weeks after the experiment began, it was shut down by industry lobbyists.

Some of the main industry arguments questioned the content and validity of the cancer label message itself, claiming the cancer warning was inaccurate, unproven, and based on false or unsound evidence. Arguments also frequently highlighted risk factors for cancer aside from alcohol, and that the link between alcohol and cancer is too complex for a single label. The industry also argued that there are also health benefits to alcohol. The industry also insisted that alcohol is not the same as tobacco – which makes sense because many of these tactics were used by the tobacco industry in the past.

It's not all bad news though. Despite the pulling of cancer labels, some of the messaging about drinking seems to stick. All large alcohol companies proactively emphasize the importance of responsible drinking, and labels do exist to tell consumers to not drink to excess, and curb consumption when pregnant.

But the Stocks Pay Dividends

“It is widely accepted that it is excessive and irresponsible consumption of alcohol that is problematic, not consumption in moderation — and it is the latter practised by the overwhelming majority of drinkers worldwide," says Swetha Ramachandran, investment manager at GAM Investments. Speaking to Kolostyak, she added a blanket policy of no investment in alcohol companies can be a blunt instrument when it comes to achieving ESG objectives. she says.

Also, don't forget the income. Diageo, for example, has increased its dividend every year for more than 20 years. “Diageo is the best collection of alcoholic beverage brands in one company that exists anywhere in the world. We're lucky that it's a UK company,” Nick Train, who holds Diageo in Silver-rated Finsbury Growth & Income Trust told Morningstar.co.uk in 2020.

Kolostyak finds that among Morningstar’s rated booze stocks, 10 even have a wide economic moat rating. Pernod Richard and Diageo are the companies with the lowest ESG risk rating. Chinese Kweichow Moutai (600519) has the highest ESG risk, and the second-best three-year annualized return of the stocks, with 42.57%, behind Wuliangye Yibin (000858), which has grown 60.60% year-on-year for three years.

Funds Already Fermenting

Do you hold alcohol stocks in your funds? For Canadian investors, alcohol might be held in global equity, European equity, emerging market equity, or international equity funds. We pulled a list of open-ended mutual funds from Morningstar Direct, that had over 4.5% of their holdings in either wineries & distilleries, or breweries. Many of these funds earn a forward-looking Morningstar Quantitative Rating, or MQR. The scale for the Quantitative Rating is the same as for Analyst Ratings: Gold, Silver, Bronze, Neutral and Negative, which provide a forward-looking assessment of a fund's ability to outperform its peer group or a relevant benchmark on a risk-adjusted basis over a full market cycle. Here is the list:

Source: Morningstar Direct