During a routine discussion on this year’s Union Budget with my friends and acquaintances, the framework of different taxes dominated the conservation. I could find curiosity among them when a reference was made about the sin products during the discussion.
The finance minister, Nirmala Sitharaman, in her budget for the financial years 2022-23 kept the taxation rates for sin products untouched for the second consecutive year.
Usually anxious moments hit stock markets before the budget announcements are made, as the sin products are always expected to witness high tax rates. But this time, the budget didn’t fiddle with taxation of these products and kept them unchanged for the second time in a row.
This led to a surge in the prices of the stocks of the companies manufacturing sin products.
In this backdrop, let today’s straight talk be about the sin products in which investors park their money to make money. It’s very important for you as an investor to know that investing in the stock market has its own social values.
Your basic goal as an investor may be to multiply your money by investing in the stock of different companies. But wittingly or unwittingly, you as an investor may be contributing to anti-social activities having an adverse impact on human welfare. You may be wondering how this is possible.
Let me explain. Normally investors have a habit of making money in the stock market by investing in stocks of companies which they analyze guaranteeing good returns.
Even as they look at every parameter of a company before investing in its stock, the nature of the business and its impact on human welfare misses their attention. This is basically the most important aspect which investors need to focus on before parking their money in a company.
In the local (J&K) context, the investment scenario in sin products merits a mention. Nobody wants to lend support to activities of a company that indulge in alcohol or tobacco production. But unwittingly, the investment in these stocks has made them one of the promoters of these ‘anti-social’ products.
Usually investments in companies manufacturing sin products get attention as they excite investors pleasurably. This titillating effect makes an investor overlook the legitimacy aspect of investments in these ‘sinful’ products. They only get attention because they’re titillating to talk about.
Investment experts are of the opinion that investing in ‘sin products’ simply pushes an investor into the act of sin. It punctures his moral consciousness and diminishes his social value.
What’s this most important aspect which usually misses the attention of investors?
Usually most of the investors don’t show social and moral character while parking money in the share market. They don’t bother to have a look at the end use of their money in the company in which they are investing.
In other words, ‘investments should benefit society’ strategy is missing in their investment policy. We have a series of stocks of companies in the markets that are considered immoral or unethical stocks encouraging negative trends and behaviours in a society. Most surprising part is that all this happens under the given legal framework.
What are sin stocks?
In market parlance, the stocks of companies either directly involved in or associated with activities widely considered to be unethical or immoral are called ‘sin stocks’. These kinds of stocks are ‘perceived as making money from exploiting human weaknesses and frailties’.
The Investopedia defines a sin stock as: “Stock from a company that is associated with (or is directly involved in) activities considered unethical or immoral.”
The thing with ethics and morality, however, is that there is no universally accepted definition of what is or what is not ethical or moral. However, there are some sectors of the economy that are generally considered sinful, such as gambling, alcohol, tobacco, and defense industries.
So, the most common sin stocks include companies that deal in tobacco, alcohol, gambling and other products considered inappropriate to the social well-being of a society. Even stocks of companies manufacturing weapons and other military equipment bearing capacity to eliminate humans are also put into the category of ‘sin stocks’.
However, the list of ‘sin stocks’ can be stretched depending upon the response of investors. Sin stocks can mean different things to different investors.
Why are investors generally lured to these ‘sin stocks’?
A general outlook describes these stocks as cheaper than other income-producing stocks of multinationals in the market. This gives the investors a reason to invest in these companies. Many describe these stocks as consumer staple stocks and in this backdrop hold a view that no matter what the economic outlook, investing in them is always profitable.
Notably, Journal of Financial Economics while quoting an international survey has revealed that sin stocks outperform over time. A report says that investors have gained 2 to 3 percentage points more per year investing in sin stocks, than in companies of comparable size in other sectors.
Many sin stocks also pay high dividends, increasing an investor’s overall return. That’s one reason why some funds have put a higher proportion of their assets into these sectors.
What is socially responsible investing?
Socially responsible investing is just the opposite of investment in sin stocks. It is fast becoming popular among investors. There are investors who don’t look at sin stocks for more profits, but always resort to the practice of investing money in the stocks of companies and funds that have positive social impacts. For them the nature of business of a company matters and park their money in companies and mutual funds with good social value.
As pointed out by experts, in socially responsible investing you as an investor cannot necessarily achieve social impact as well as financial gain simultaneously. Investment in socially responsible companies doesn’t mean a good return on investment. In fact, they strongly believe that the promise of a good return is far from an assurance that the nature of the company involved is socially conscious.
So, it depends upon your own investing principles. If your conscience isn’t your guide, then you will invest in ‘sin stock’ to make bigger profits. But if you are a socially and ethically responsible investor, you will definitely choose investing in the stocks of ethical and socially responsible companies – no matter profits will not be so hefty.
So, what is a sin tax?
In the above given explanations, a sin tax is a form of excise duty which is levied on the products and services that are deemed harmful to individuals or society.
Since these goods such as tobacco, alcohol, etc. generate a hefty amount of revenue, the governments tend to favour sin taxes to generate revenue. It’s also said that the high rate of sin tax is actually an attempt to discourage the activity that creates a harmful impact on society and the individual.
Let me reproduce a fact enlisting the origin of the sin tax. Adam Smith, author of “The Wealth of Nations,” is said to be the person who gave the concept of a sin tax in 1776. Smith believed that cigarettes, sugar and rum should be taxed, as these goods are not essential products for life but are widely consumed. The sin tax was first implemented on tobacco products.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK