Much attention has been paid to sustainability, being environmentally conscious, and being a good corporate citizen. Many investment studies have examined whether being a good corporate citizen pays, or more specifically, whether it pays to be a more responsible investor, investing only in companies that are ‘good’ companies.
Surely, it should pay to be good, and cost to be bad?
A recent article by Credit Suisse deviated from focussing on ‘good’ companies, and instead investigated whether it would be profitable to invest in ‘bad’ companies, or companies that were in less environmentally friendly industries. This was examined through the monitoring of a UK vice fund, which was compared to a market tracking index, and it was found that the vice fund outperformed the FTSE social index fund over a period of 12 years.
This leads one to question whether in a South African context, the same holds? To test this from a shorter term perspective, we used the tobacco industry (J378) as a proxy for ‘bad’ companies, and compared this to the return achieved on the top 40 shares, measured using the SATRIX 40 index (STX40). The results indicate that in almost all of the periods tested, the tobacco industry has outperformed the market significantly. In particular, over the last three years, while the Satrix 40 increased by 52%, a pleasant enough return, the tobacco industry increased by a whopping 75%.
In conclusion therefore… Perhaps investing in ‘bad’ does warrant some further investigation…
Published in Standard Bank Newsletter 2015