Sin stocks and ESG scores: Does the nature of your business really matter?
Sin stocks and ESG scores: Does the nature of your business really matter?

Summary/Abstract: The purpose of this paper is to analyse the environmental, social, and governance (ESG) performance of sin stocks held by companies that operate in sectors with ethical implications (gaming, defence, adult entertainment, etc.). For this purpose, the model of choice was a panel based on the stocks of the global S&P 1200 index for the period between 2014 and 2018, for which the accounting data was available at the time of the study. The panel model accounted for different control variables and non-sin ESG performance. Having analysed its results, we have found that the ESG performance of sin stocks is positively correlated to future ESG performance, which was a surprise given that most of the analysed companies operate in sectors that are deemed as socially and ethically controversial. One hypothesized explanation for this is the phenomenon of “social cleaning”, when a company engages in ESG activities with the sole purpose of reducing reputational risk while trying to attract a wider base of socially aware investors. Therefore, we conclude that in order to avoid the risk of “social cleaning” ESG rating companies should give more weight to environmental and social factors rather than governance ones, especially in the case of sin stocks.

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