I came across a couple interesting papers that lined out that stocks that are not considered to be ethical or within ESG frameworks could be discounted and thus offer higher expected returns:
- ESG premium: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3010234
- Asset prices affected by tastes: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=502605
- Exclusions effect: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455090
I am looking to construct a theocratical portfolio of assets that capture this discount. Looking at valuations of several of the traditional 'sin' stocks though I do not really see this discount being priced in as markets also have to price in legislative risk which is very difficult (based on simple valuation models future expected FCF/earnings yields are not absurdly high in comparison to the legislative risk posed).
Stocks I'm looking for need to have growing earnings and low legislative risks. This should filter out many where it would be difficult to distinguish an 'unethical' discount versus a legislative risk discount.
So fossil fuels, private prisons and tobbaco directly are ruled out while alcohol, pharma, weapons and gambling sector wise should follow this framework. What stocks would you include in such an index?
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