Public Lecture: Investing in sin firms: is vice really nice?

26 February 2016

Public Lecture: Investing in sin firms: is vice really nice?

The latest in Henley Business School’s Engaging Business public lecture series saw Dr Andreas Hoepner tackle the contentious issue of investing in so-called ‘sin firms’ – those involved in cigarette and alcohol manufacture and distribution, as well as in gambling activities.

The latest in Henley Business School’s Engaging Business public lecture series saw Dr Andreas Hoepner tackle the contentious issue of investing in so-called ‘sin firms’ – those involved in cigarette and alcohol manufacture and distribution, as well as in gambling activities.

Introduced by Professor John Board, Dean of Henley Business School, Andreas is Associate Professor of Finance and Director of Enterprise at Henley’s International Capital Market Association (ICMA) Centre. In his research Andreas has been tracking the performance of sin firms for some time. In 2015, he and a fellow ICMA colleague produced a paper challenging the sin stock premium theory. The notion that investment in such firms outperformed others seemed to have been supported by a 2009 report (Hong & Kacperczyk), and, perhaps unsurprisingly, the media had seized upon and sensationalised the ‘findings’ with predictably salacious headlines.

Context and environment is key to robust research

But according to Andreas, the research methods used might have been skewed by selective data. ‘Data is the new oil,’ he said, ‘and it’s important to take into account all the contextual data, such as company size and other environmental metrics, not just the KPIs.’

Through a process of replicating and then refining the Hong and Kacperczyk research, Andreas, along with co-author Hampus Adamsson, demonstrated that the apparently superior performance of sin stocks could not be substantiated.

Andreas summarised the complex algorithms thus: ‘When using a financial data science approach rather than classic financial economics analysis, the moment we controlled in-sector size and value controls the outperformance of the sin stocks disappeared in almost every case.’

Henley Business School at the University of Reading is, Andreas says, one of the few establishments that can deliver such robust analysis of this kind of data, being geographically located at the epicentre of the UK’s leading technology cluster and having, within the ICMA Centre, more Bloomberg and Reuters terminals than Chicago, Harvard and Oxford combined.

While acknowledging that most pension funds would prohibit investments in porn or drugs, Andreas recalled a real example of how such investments can inadvertently find themselves putting capital into ethically unsound organisations. He cited a Californian teachers’ pension fund that unknowingly proved to be the largest investor in a company that had, as one of its subsidiaries, a gun manufacturer. That manufacturer – ironically and tragically – produced the weapon that was used in a massacre that left 26 dead in the Sandy Hook elementary school in Newtown, Connecticut in 2012.


The growing move towards more responsible investment

For Andreas, the pressure on funds to act more ethically has resulted in a significant increase in the number of enquiries regarding responsible investment policies. There has also been a significant rise in the number of organisations committing themselves to the UN’s Principles for Responsible Investment.

The kind of modelling Andreas used in his analysis is now being employed at a number of research centres for a variety of applications. At Bristol University, for example, they are developing Twitter-based real-time forecasting (‘nowcasting’) to predict weather changes and the spread of illnesses. And the same process can be applied to emotional trends, as demonstrated by the analytics of tweets collected during the England v Germany football match of the 2010 FIFA World Cup last 16, measuring how supporters’ emotions towards each team varied during the game.

Following his presentation, Andreas took questions from the audience, covering topics as diverse as the impact on analysis of Big Data, and how online and social media analytics are being used to predict the outcome of the US presidential election and the Eurovision Song Contest!

Commenting on his findings’ positive reception in the Financial Times among others, Andreas noted that: ‘Investment committee members always have a view on environmental, social and governance [ESG] metrics and some might be sceptical about it. In the past, they might have referred to the (earlier) sin stock studies, but now they have this study. We are certainly the first voice to say that, statistically, sin stocks do not outperform other stocks.’

And when asked what impact the paper could have on investors, he said that he hoped it would ‘increase investors’ confidence that integrating ESG metrics is not harmful.’

As well as his professorship at the Business School, Andreas is also currently serving as Senior Academic Fellow to the UN-supported Principles for Responsible Investment initiative, and as Senior Associate to the University of Cambridge’s Programme for Sustainability Leadership.

Further details of Andreas’ award-winning research is covered in the paper ‘The Price of Sin Aversion’ (2015), which he co-authored with Hampus Adamsson.

The lecture was held at Henley Business School’s ICMA Centre, which specialises in undergraduate and postgraduate degrees in finance at the University of Reading, and is home to an extensive trading simulation supported by Bloomberg and Thomson Reuters.