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European sin stocks

Abstract

This article studies sin stocks on the European market over the period 2006–2020. In addition to stocks in alcohol, tobacco, gambling, and defense sectors that are traditionally considered sin stocks, we analyze stocks in carbon-intensive sectors that have newly evolved as sin stocks, such as oil and gas, metals and mining, uranium, and coal. To investigate the return performance of sin stocks, we run time-series regressions with factor models and Fama–MacBeth cross-sectional regressions. Our results suggest that there is no robust sin premium for new sin stocks or traditional sin stocks, either in comparison with the market or their peer stocks. Our analysis on ownership characteristics shows that investors in sin stocks are mainly investment managers, corporations, and individuals. While new sin stocks are popular among institutional investors, traditional sin stocks are less held by norm-constrained investors. Finally, our subsample analyses indicate some potential changes in the market perception of the new sin stocks after the Paris Agreement.

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Notes

  1. For example, Blitz and Fabozzi (2017) mention that large institutional investors are increasingly setting carbon footprint targets, effectively divesting in stocks with high CO2 emissions. Bolton and Kacperczyk (2021) document a carbon risk premium and that institutional investors have already implemented exclusionary screening based on direct emission intensity. The report “European Sustainable Funds Landscape: 2020 in Review” by Morningstar shows that funds related to climate change were among the best sellers in 2020, while even more funds divested from the highest-carbon emitters.

  2. For “Oil and gas-related equipment and services” group, we exclude stocks in “Gasoline stations” (PermID 4294951989) as our focus is on the extractive industries. For “Metals and mining” group, we remove stocks in “Aluminium” (PermID 4294951902 to 4294951908) as our focus is on mining (extractive industry).

  3. Salaber (2007) and Hong and Kacperczyk (2009) focus on alcohol, tobacco, and gaming; Blitz and Fabozzi (2017) include alcohol, tobacco, gaming and weapons; Fabozzi et al. (2008) examine alcohol, adult services, gaming, tobacco, weapons, and biotech alterations.

  4. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement.

  5. One could potentially argue that the information about the signing of the agreement was already available to the market before December 2015 and the investors could change their behavior in anticipation of the enforcement of the agreement at the beginning of 2015. In such a case, we could consider 2015 as the starting year of the post-Paris-Agreement period. We have replicated all the subsample analyses using the alternative cut-off point, i.e., 2006–2014 for the pre-Paris-Agreement period and 2015–2020 for the post-Paris-Agreement period. The magnitude and significance of the coefficients are very similar to those using 2016 as the cut-off point. Thus, all the findings still hold. Due to the limited space, these results are not included in the paper and are available upon request.

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Acknowledgements

We would like to thank Laurens Swinkels for valuable comments and feedback.

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Correspondence to Dan Zhang.

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Appendices

Appendix

The most frequent investors

The table presents the ten most frequent investors, based on % holdings of traded shares, in the different groups of sin stocks. The table shows the investor type, if they are active/passive and the average % holdings per stock in the groups of sin stock, and the total holdings in each group in millions of euros. The table is sorted by total holdings in million Euro. Uranium is left out as it only has unique investors and no investors occurred more than once. The numbers are from February 2021.

Investor name Investor type Investment orientation Total holdings Average holdings
Panel A: Military and defense     
Oil and gas     
Federal Agency for State Property Management Government Agency Passive 17,687 36.9%
BlackRock Institutional Trust Company, N.A. Investment Advisor Passive 17,685 1.0%
Italian Government Government Agency Passive 15,672 34.8%
Gazprom PAO Corporation Passive 14,331 48.2%
The Vanguard Group, Inc. Investment Advisor/Hedge Fund Passive 13,452 1.2%
Norges Bank Investment Management (NBIM) Sovereign Wealth Fund Active 8939 1.2%
State Treasury of the Republic of Poland Government Agency Passive 6913 52.5%
Capital Research Global Investors Investment Advisor Active 3509 1.4%
Romanian Government Government Agency Passive 3355 52.0%
BlackRock Advisors (UK) Limited Investment Advisor/Hedge Fund Passive 3165 0.2%
Metals and mining     
BlackRock Institutional Trust Company, N.A. Investment Advisor Passive 13,981 1.5%
Norges Bank Investment Management (NBIM) Sovereign Wealth Fund Active 8113 1.5%
The Vanguard Group, Inc. Investment Advisor/Hedge Fund Passive 7448 1.4%
Capital Research Global Investors Investment Advisor Active 5637 2.3%
BlackRock Investment Management (UK) Ltd. Investment Advisor/Hedge Fund Active 3821 1.3%
Public Investment Corporation (SOC) Limited Sovereign Wealth Fund Passive 3252 4.2%
Legal and General Investment Management Ltd. Investment Advisor/Hedge Fund Passive 2828 0.4%
BlackRock Advisors (UK) Limited Investment Advisor/Hedge Fund Passive 2792 0.3%
Schroder Investment Management Ltd. (SIM) Investment Advisor/Hedge Fund Active 2294 0.6%
M and G Investment Management Ltd. Investment Advisor Active 1910 2.0%
Coal     
BlackRock Institutional Trust Company, N.A. Investment Advisor Passive 1755 1.5%
The Vanguard Group, Inc. Investment Advisor/Hedge Fund Passive 977 1.1%
Dimensional Fund Advisors, L.P. Investment Advisor/Hedge Fund Active 101 0.4%
Grantham Mayo Van Otterloo and Co LLC Investment Advisor/Hedge Fund Active 23 0.1%
NN Investment Partners Towarzystwo Funduszy Inwestycyjnych S.A Investment Advisor Active 12 0.5%
AXA Towarzystwo Funduszy Inwestycyjnych S.A. Investment Advisor Active 9 1.2%
Aviva Investors Poland Towarzystwo Funduszy Inwestycyjnych S.A. Investment Advisor Active 0.93 0.9%
Tobacco     
Capital Research Global Investors Investment Advisor Active 4904 2.9%
The Vanguard Group, Inc. Investment Advisor/Hedge Fund Passive 3002 2.3%
BlackRock Institutional Trust Company, N.A. Investment Advisor Passive 2964 3.4%
Cedar Rock Capital Ltd. Investment Advisor/Hedge Fund Active 1688 2.4%
Fidelity International Investment Advisor Active 1603 3.7%
Fidelity Management and Research Company LLC Investment Advisor Active 936 2.87
Schroder Investment Management Ltd. (SIM) Investment Advisor/Hedge Fund Active 668 1.14
Invesco Advisers, Inc. Investment Advisor Active 279 0.47
Dimensional Fund Advisors, L.P. Investment Advisor/Hedge Fund Active 234 0.52
Nordea Funds Oy Investment Advisor Active 190 0.43
Casinos and gaming     
Capital Research Global Investors Investment Advisor Active 7388 7.61
BlackRock Institutional Trust Company, N.A. Investment Advisor Passive 2832 1.92
The Vanguard Group, Inc. Investment Advisor/Hedge Fund Passive 1628 1.58
Capital World Investors Investment Advisor Active 1430 2.00
Norges Bank Investment Management (NBIM) Sovereign Wealth Fund Active 960 1.49
Aberdeen Standard Investments (Edinburgh) Investment Advisor Active 815 2.54
Fidelity Management and Research Company LLC Investment Advisor Active 560 0.99
Avanza Bank Holding AB Corporation Passive 338 3.50
M and G Investment Management Ltd. Investment Advisor Active 312 3.52
Dimensional Fund Advisors, L.P. Investment Advisor/Hedge Fund Active 274 0.66
Military and defense     
BlackRock Institutional Trust Company, N.A. Investment Advisor Passive 2527 2.54
Capital Research Global Investors Investment Advisor Active 1496 3.72
The Vanguard Group, Inc. Investment Advisor/Hedge Fund Passive 1234 2.23
Schroder Investment Management Ltd. (SIM) Investment Advisor/Hedge Fund Active 655 2.76
Silchester International Investors, L.L.P. Investment Advisor/Hedge Fund Active 646 4.07
Legal and General Investment Management Ltd. Investment Advisor/Hedge Fund Passive 604 1.14
Baillie Gifford and Co. Investment Advisor Active 531 2.31
MFS Investment Management Investment Advisor/Hedge Fund Active 520 1.04
Norges Bank Investment Management (NBIM) Sovereign Wealth Fund Active 376 2.04
INVESCO Asset Management Limited Investment Advisor/Hedge Fund Active 355 1.87

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Sagbakken, S.T., Zhang, D. European sin stocks. J Asset Manag 23, 1–18 (2022). https://doi.org/10.1057/s41260-021-00247-9

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Keywords

  • Sin stocks
  • Sin premium
  • Norm-constrained investors
  • Carbon-intensive sectors
  • Environmental, Social, and Governance (ESG)

JEL Classification

  • G11
  • G12
  • G14