Over the past 10 years, vice was virtuous for returns if you invested in guns, sex, meat, gambling and booze, all of which outperformed the stock market on average.

That guns are smoking stocks is not surprising, given that military spending, led by the U.S., has been on the rise for the past decade, and given the tragic frequency of mass shootings, which tend to boost sales as gun owners rush to stock up in fear that their right to bear arms will be curtailed.

MindGeek, based in Montreal, has cornered a huge chunk of the pornography market, but it is privately held, so no peeking for public investors. What is left over for public investors are a few piddly stocks that make up 0.02% of the total stock market, but they are grinding out above-market returns.

Owning gambling stocks has been a good bet for the past 10 years, thanks to a booming economy and casino operators expanding in Asia, but it may not pay to “own the house” when the economy hits a downturn.

Plant protein options like Beyond Meat are bursting onto the scene but have yet to take a bite out of surging demand for meat as Asia’s middle class grows. There could be some indigestion for the meat industry as animal welfare and health concerns propel a growing wave of flexitarianism and veganism around the world (which there is now an ETF for, by the way: VEGN is now listed on the NYSE).

Vice was not so nice for returns if you got stuck holding a bag full of companies on the wrong side of the law, human rights or the low-carbon economic transition.

While he is not a tobacco investor himself anymore, Warren Buffett once famously said, “I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.” But as anti-smoking regulations continue to tighten, tobacco must now share the air with pot and vaping.

Prisons are a captive market, but for-profit prison stocks are getting booked for underperformance in the wake of a backlash from pictures of kids in cages at GEO Group that have been beamed around the world.

Crime has not paid for investors in the 100 companies with the worst records for breaking the law, which have acted as a ball and chain on their returns.

What used to be known as “black gold” is increasingly the source of red in investor portfolios, as the fossil-fuel growth story comes to an end more quickly than almost anyone predicted. While short-term geopolitical events could produce a rally for this sector, the big money is writing off those without a credible plan to transition to the low-carbon economy.

Just four companies dominate the global market for genetically modified seeds and pesticides. Bayer became the biggest company in the space when it swallowed Monsanto whole in 2018. Since then it has had some growing pains, under a heap of lawsuits related to allegations that the company’s glyphosate-based herbicides cause cancer.

Nuclear reactors create energy by splitting atoms, but they have caused many stockholders to split their hairs on account of their tendency to be delivered late and over-budget. Maybe the much-hyped next generation of nuclear reactors will have better luck.

The companies with the worst records for damaging people’s health, propriety, the environment and human rights have turned out to be wronging investors a lot, too, in terms of forgone returns.

The red-flag theme that has delivered the clearest cut to returns, as the Lorax may have predicted, is severe deforestation, where the worst-offending companies have seen their value axed by over 7% a year for the past 10 years.

How would it have worked out for an investor who went all-in on red-flag stocks?

Not so good. A total red-flag portfolio consisting of stocks across all 21 themes would have generated a 10-year annualized return of 3.6%, or less than half the 9.2% posted by the MSCI ACWI, a commonly used stock market benchmark, or the 9.1% tally of the Clean200, the 200 companies that earn the most revenue from providing environmental and social solutions.

As the next 10 years will likely be different from the last 10 years, perhaps the more important takeaway is that the “baddies” as a group make up a relatively small portion (13%) of the stock market.

So investors can decide which red flags they want to keep out of their portfolios without losing much in terms of diversification.

F1. The list of product/conduct red-flag companies was created by using various reports and databases to determine the “worst-in-class” companies for various indicators. The sources for each indicator are as follows: access-to-nutrition laggards – Access to Nutrition Initiative; blocking climate policy – InfluenceMap; civilian firearms – NZ Super Fund; controversial weapons – Norges Bank Investment Management (NBIM), NZ Super Fund; conventional weapons – Stockholm International Peace Research Institute; deforestation – Chain Reaction Research; farm-animal welfare – Business Benchmark on Farm Animal Welfare; for-profit prisons – American Friends Service Committee; gross corruption violations – NBIM; illegal activity – Corporate Knights Database; severe environmental damage – NBIM; severe human rights violations – NBIM; thermal coal – NBIM; tobacco – NBIM; adult entertainment – Motley Fool, Wespath; alcohol – S&P Capital IQ Industry Classification; energy (fossil fuels) – S&P Capital IQ Industry Classification; gambling – S&P Capital IQ Industry Classification; GMO pesticides – United States Department of Agriculture; industrial meat – Corporate Knights Database; nuclear energy – MVIS Indices.

F2. Total 10-year annualized USD returns for each red-flag category were calculated using S&P Capital IQ. Securities for each red-flag category are weighted according to market capitalization and rebalanced semi-annually. The CK Global 100 Index category was calculated separately by Solactive.

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Ethical investors are starting to turn away from the largest gun and ammo manufacturers and retailers: Sturm, Ruger & Co., Inc. (RGR); Olin Corporation (OLN), American Outdoor Brands Corporation (AOBC), and Vista Outdoor Inc. (VSTO). It’s challenging to get the full list of holdings for mutual funds (they only publish a snapshot twice per year), but ETFs are much more transparent so it’s easy to verify whether they’re firearm free.

 What is the Canada Pension Plan packing?

Unfortunately, there’s no way for Canadians to completely avoid them since the Canada Pension Plan Investment Board (CPPIB) owns $US27 million in shares in three of these companies, according its most recent public disclosures. When contacted by Corporate Knights, CPPIB emphasized these investments were caught up in its passive holdings and are not part of a specific investment strategy to own guns, although the CPPIB along with the Public Sector Pension Plan Investment Board are the only two of Canada’s ten largest pension funds that continue to own any of these gun stocks. Considering the gun stocks comprise less than 0.02% of the pension’s equity investments, they’re not exactly critical to CPP profits and could easily be dumped, if enough Canadians complain.

Pressure mounts on retailers

Weapons makers aren’t the only ones facing scrutiny. There are growing calls for big retailers like Walmart (WMT) to stop selling guns in their stores after 22 people died in the El Paso Walmart shooting in early August. Although Walmart stopped selling assault rifles in 2015 and raised the age limit to buy a gun from 18 to 21, the retailer still accounts for about 20% of ammunition sales in the U.S. with no plans to stop. Additionally, Walmart allows customers to openly carry firearms in its stores in states where it’s legal to do so. Walmart has said that it won’t be making any policy changes and continues to support Republican lawmakers who tend to be against stricter gun controls.

Sustainable Stock Showdown: Walmart vs Dick’s

Investors looking to ditch their shares in Walmart and actively encourage a chain that’s moving away from guns should take a closer look at Dick’s Sporting Goods (DKS). Before last year, Dick’s Sporting Goods had a large hunting department that sold all kinds of guns, including assault rifles. But that changed after CEO Edward Stack learned that the school shooter that killed 17 people in Parkland, Florida had purchased a shotgun at Dick’s. Even though the shotgun wasn’t used in the mass killing, Stack took decisive action and followed Walmart by removing assault rifles from stores and raising the minimum age from 18 to 21.

Going further, Dick’s removed the entire hunting department in 10 stores as a pilot project and hired three Washington lobbyists to push for stricter gun controls. Sales in these stores actually improved, leading the company to pull the hunting department out of an additional 125 locations (roughly 20% of stores) last week. If current trends persist, it’s easy to imagine that Dick’s will stop selling guns altogether.

From a purely financial perspective, Walmart is tough to beat. It is, by far, the largest bricks and mortar retailer in the world with a market cap over 100 times larger than Dick’s Sporting Goods. Walmart has outperformed Dick’s over the last five years, so investors should be cautious in dumping it altogether. But if your goal is to own companies who are more progressive on gun issues, then Dick’s Sporting Goods is a more attractive purchase.

Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. Lower beta means less risk.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet.

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing.

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