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The ‘sustainable’ sin stock

Brendan Ryan

Alcohol. Gambling. Tobacco. Weapons. They are likely not the first industries you think of when you hear the word ‘sustainability’. However, it seems that the companies behind these products have that topic front of mind.

As ESG (environmental, social, and governance) becomes a greater – yet at times fickle – consideration for shareholders, the world’s leading companies are paving the way for sustainable practices – regardless of whether their products are philosophically or practically aligned with sustainability. 

In 2022, KPMG found that 96% of the world’s top 250 companies (by revenue) released a sustainability report, despite the fact that just 60% of organisations worldwide have a sustainability strategy in place, according to the World Economic Forum.  

Here in Australia, sustainability reporting has even been enshrined in federal policy. In March 2024, Treasury published the framework for the Commonwealth Climate Disclosure Policy. Another of the Albanese government’s impact initiatives, the Policy seeks to ensure that “all Commonwealth entities and Commonwealth companies […] complete climate disclosures.”

Impact-minded investors have long avoided the ‘sin stock’: a company that deals in the aforementioned products that may discord with one’s personal beliefs and values. ESG may seem a logical way to help an investor evaluate these stocks. However, a good ESG score may be hiding a more complicated reality. Take for example the relatively high ESG ratings for the big four companies (weapons, alcohol, gambling, tobacco) from American firm MSCI.  

Figure 1. ESG ratings for the big four sin stocks: leading companies in weapons, alcohol, gambling and tobacco. Source: MSCI.

A throughline of these companies is a stated commitment to sustainability, more often than not based in a net-zero emissions goal. Lately this is becoming somewhat of a rarity, particularly in the US. For example, Blackrock has quietly buried their sustainability practices in the wake of ESG backlash from conservatives – a practice referred to as “greenhushing” in The Washington Post

Indeed, the sin stocks are holding strong in the publication of their sustainability policies.  AB InBev – the world’s largest alcohol company by revenue – has set out to achieve net-zero emissions by 2040. World-leading gambling company (by revenue) Flutter Entertainment is similarly committed to net-zero emissions by 2035

Tobacco giant Philip Morris International (PMI) also appears to take sustainability seriously – yet its policy is starkly different to others in that at its core is a turn away from its most popular product: cigarettes.

In 2016, PMI announced a pivot from combustible tobacco to smoke-free products in an ambitious bid to achieve a “smoke-free future”. In their current sustainability policy, they explicitly state three goals: (1) “maximise the benefits of smoke-free products”; (2) “purposefully phase out cigarettes”; and (3) “seek net positive impact in wellness and healthcare”

Figure 2. Philip Morris International (PMI), net revenues by product category, 2017-2023. Sources: PMI Annual Report 2023, p. 35; PMI Annual Report 2020, p. 19; PMI Annual Report 2018, p. 16

However, the stabilisation of “combustible product” sales coupled with a rise in “reduced-risk products” (RRPs: vapes, pouches or 'Zyns,' and the like) from 2020 onwards suggests that a smoke-free future may be further away than expected. It appears PMI is attracting new customers to RRPs, while the cigarette customer base remains intact. Indeed, PMI admitted their initial goal of achieving majority revenue from RRPs by 2025 was “out of reach”

When PMI’s idea of sustainability hinges on a “world without cigarettes”, the direction of these numbers in the coming years is critical. It will signal whether the company’s vision of a sustainable future has any trace of reality. A smoke-free future is an ambitious goal – and an appealing one to the socially-conscious investor. It is also a counterintuitive one in business terms; PMI's ‘sustainable’ business model depends on the elimination of their primary product.

Clearly, even companies with questionable social impact are factoring sustainability into their business models – and this is a positive direction. Investors who take this issue seriously, however, will notice that the line between sustainable and non-sustainable companies is blurrier by the second. Further, they will notice that there is a difference between making a commitment and delivering on that commitment. 

As sin stocks turn sustainable, the responsible impact investor will dig deeper to find out exactly where their funds are going.

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