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War – a minefield for ethical investors

War! What is it good for?

Absolutely nothing … except, some say, profit opportunities.

Investing in "sin" companies – weapons makers, Big Oil, polluters, tobacco, gambling firms and the like – is likely a vexing issue for most DIYers. Can investors live with themselves if they put money into companies that are known for questionable or harmful practices?

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It's an ethical minefield, no pun intended.

Consider these moral quagmires:

– Investing in weapons companies may be unpalatable to many DIY investors, but lots of companies make other beneficial products. "Think of United Technologies [aerospace and building as well as defence] and Boeing," says Kurt Rosentreter, a financial adviser at Manulife Securities who counsels DIYers. "Some of the top stock investments in the world have long been involved in defence and other industries."

– The law of unintended consequences can apply. For example, if one invested in defence during the U.S.-led Iraq War in 2003, bear in mind that many of the weapons left behind are now in the hands of the terror-bent Islamic State in Iraq and Syria.

– The U.S. tobacco industry agreed to pay $246-billion (U.S.) in 1998 for the drain on health care and other resources caused by smoking. Yet there are still profits to be had. While big tobacco had paid out about $100-billion of this settlement by late last year, tobacco companies are pushing new products such as e-cigarettes.

– Many DIY investors don't like the idea of investing in casinos, yet the Canadian Gaming Association says the industry is responsible for more than 250,000 direct and indirect jobs nationwide, and governments across the country are clearly hooked on the revenues.

Like it or not, the sin stocks have tended to be safe stocks for investors who see profit as an amoral benefit, Mr. Rosentreter says.

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"Stocks like Altria [the parent company of Philip Morris International Inc. ] have been some of the best wealth builders for investors for decades. It's the same with booze and defence. Even if you don't have a job you may still drink and smoke, so these stocks can even be defensive in rough market times."

For most people, known illegal activity is a red line, Mr. Rosentreter says. "I find that if a business is found to be acting in ways that are illegal in parts of the world, investors start to steer away. Think of things like bribery in foreign countries, child labour, known polluting and so on."

There are clear cases of share prices plunging in relationship to a company's behaviour or its record. For example, BP PLC shares took a hit in early September after a U.S. federal judge ruled it primarily responsible for the 2010 oil spill in the Gulf of Mexico. But is the selloff based on morality or the simple fact that investors realize that the ruling could put BP on the hook for billions of dollars more for the cleanup?

It's both, Mr. Rosentreter says. Investors are aware that for sin stocks, "regulation and other variables eventually slow or shut down the businesses, hurting the stock prices."

The world is changing, says Ron Robins, a Niagara Falls, Ont.-based analyst who founded an ethical investing advice website called Investing for the Soul. "Investors in sin industries may see their returns suffer due to government austerity programs," he says.

Governments facing deficits, unfunded pension liabilities and rising health-care costs find it irresistible to boost taxes on the sin industries, particularly tobacco, alcohol and gaming, he says, eventually driving away consumers. Meanwhile, more socially responsible portfolios typically include sectors that are on the rise in the 21st century, he adds – finance, technology, medical equipment, clean energy, consumer gadgets and so on.

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Mr. Robins points to studies from Europe that compared "socially responsible" with "sin" investing and found that the gap is narrowing. Mr. Rosentreter agrees that, "with a greater emphasis on social issues, it [the morality of an investment] is another variable that can sidetrack results and hurt share price."

What about buying one share of a company that is perceived as evil so that an individual can show up at its annual meeting and make a statement?

"Yes, you could, but you really need to be a big player. It's hard for retail investors to have an impact, easier for pension funds and wealthy people," Mr. Rosentreter says.

Both experts agree, though, that in the social-media age, the ground is shifting.

"Above all, I am of the opinion that we are evolving into a society that is caring," Mr. Robins says.

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