The performance of morally questionable shares in South Africa (2004–2019)

Abstract

Orientation: Investors are increasingly weighing up the cost of investing in companies with adverse impacts on society and the natural environment.

Research purpose: In light of the shift to responsible investing, this study compared the risk-adjusted performance of a portfolio of morally questionable shares listed on the Johannesburg Stock Exchange (JSE) to a portfolio consisting of morally acceptable (responsible) ones.

Motivation for the study: Although previous research suggests that investors can perform well by investing in morally questionable shares (such as alcohol and tobacco), sentiment is rapidly moving towards a more responsible approach to selecting shares.

Research approach/design and method: The historic returns of equity portfolios were evaluated over the period July 2004 to April 2019. Two equally weighted portfolios were constructed: one for morally questionable shares and the other for morally acceptable shares. These portfolios’ risk-adjusted returns were compared to the JSE Responsible Investment Composite Index, the Financial Times Stock Exchange/JSE Shareholder Weighted Index and an equally weighted benchmark. In addition, the analysis was divided into two distinct sub-periods, covering the financial crisis and the subsequent recovery period. Morally questionable companies included those with exposure to alcohol, tobacco, gambling, oil, gas and coal.

Main findings: Morally questionable investing in South Africa does not produce risk-adjusted outperformance. No evidence was found to support the theories predicting the outperformance of morally questionable shares on the JSE.

Practical/managerial implications: Socially and environmentally conscious investors can achieve risk-adjusted returns comparable to those of investors who opt to invest in morally questionable shares and conventional benchmarks.

Contribution/value-add: The study provides insights for investors who are concerned about the opportunity costs of adopting a responsible investment approach.