The 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. This is founded on a longstanding 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.

Despite the movement toward ethical investing, there are still many companies that engage in less-than-savory practices that still attract investors. With most investments, there are pros and cons to investing in unethical stocks, though, at the end of the day, it comes down to an individual’s own moral compass.

Key Takeaways

  • Unethical investing refers to making investments in companies that are documented to engage in questionable business practices.
  • Companies that sell products that are known to be harmful, such as tobacco and alcohol, can constitute unethical companies.
  • In more extreme cases, companies that engage in practices that are clearly wrong, 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 morally ambiguous products, such as tobacco, can be profitable, due to the high demand and addictive nature of the product.
  • Companies that engage in illegal business practices, such as child labor, often see damage to their reputation and profits as most of society draws a clear line between such morally wrong practices.
  • At the end of the day, it is the investor’s own conscience that will determine if investing in an unethical company is the right decision, for themselves and society as a whole.

The Argument for Unethical Investing

Unethical investing 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. 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 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) as an example; it is one of the largest manufacturers of cigarettes in the world and has experienced largely increasing dividends from 2020 to 2022.

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 Investing

Part of the wider issue lies with defining unethical investing, 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 large 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 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 they are contributing positively to society, which, at the end of the day, is better business.

Primark, a budget clothing brand 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. 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, 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.

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