This article was originally published by Mallowstreet
Long-term investors increasingly recognise they need to factor sustainability into their investment decisions – and that their clients expect it. Demand for services and insights into sustainable investing is increasing, reflected in an ever-growing number of funds and other financial products that invest explicitly based on Environmental, Social and Governance (ESG) criteria. For many people, ESG is not only about how a company manages risk, but how it serves all its stakeholders – workers, communities, customers, shareholders and the environment. These are the ultimate indicators of a company’s strength and sustainability.
At Tobacco Free Portfolios, we work collaboratively with the financial sector to encourage investors to exclude tobacco from their portfolios, and to support them in this journey. Why do we do this? Tobacco is, after all, a legal product.
It is well-known that tobacco causes considerable harms to human health. It is responsible for 8 million deaths each year and is the single largest cause of preventable death worldwide. When used as intended, tobacco will have contributed to the early death of two out of every three smokers. In many poorer countries, tobacco use is on the rise – in large part due to aggressive marketing and promotion by large tobacco companies. 80% of the world’s smokers are now found in low and middle-income countries – places where there are far fewer resources to deal with the terrible public health consequences.
Less well-known perhaps are the significant environmental and climate-related damages also associated with tobacco production and consumption. As the UK hosts the UN Climate Change Conference, COP26, in Glasgow in November, many financial institutions have been keen to bolster their climate and environmental credentials, and have made concrete commitments to progressively reduce the carbon footprint of their investments to zero.
Tobacco’s annual contribution to climate change, in terms of greenhouse gas emissions, is equivalent to Peru or Israel. Few people are aware that tobacco production is responsible for 5% of deforestation worldwide. I saw this firsthand in my previous work with the United Nations in Zambia to develop a tobacco control social impact bond – an initiative to develop positive reinvestment opportunities for the financial sector. There, low-income smallholder tobacco farmers are forced to cut down trees from local forests to burn the fires they need to cure tobacco leaves. Not only is valuable agricultural land being used for a crop which has no nutritional value in a food insecure country, additional forest must be cleared to cure the leaves. There are also other environmental scourges. Cigarette filters are the world’s number one littered item (4.5 trillion are discarded every year). Cigarette butts are also the world’s single largest source of ocean plastic waste – an issue which is (rightly) increasingly on the international agenda.
These are all reason enough to be concerned about investing in tobacco companies. But there are also multiple risks associated with investing in tobacco. These include regulatory risk stemming from the fact that 180+ countries worldwide have ratified the UN’s Tobacco Control Treaty, signalling a commitment to implement progressively tighter tobacco control policies over time to drive down tobacco consumption. Take for example the current UK Government consultation on tobacco litter which would make tobacco companies financially responsible for the £40 million per year costs to local councils to clean up littered cigarette butts in the UK. There is also litigation risk. In 2019, a finding in favour of the Government of Quebec was upheld which determined that the health costs of tobacco were the responsibility of tobacco companies. British American Tobacco alone is facing more than 3000 legal challenges in more than 10 countries. Add to this supply chain risk. The US Department of Labor lists 17 countries that use child labour on tobacco farms, often in the developing world. In Zambia, I saw how tobacco cultivation in no way represents a route out of poverty for the families that farm it. Many reputable investors are therefore rightly concerned about the reputational risk associated with a product that negatively impacts so many of the UN’s Sustainable Development Goals (SDGs).
Despite these concerns, do investments in tobacco make sense from a purely financial perspective? We see that tobacco share prices peaked in 2016/17 and have rapidly declined since then. Today, the share price is down around 50% on less than 4 years ago. The MSCI World Tobacco Index has underperformed the broader MSCI World Index since the start of last year. A 2020 study of the 100 most common US retirement funds noted tobacco-free funds outperformed funds without a tobacco exclusion, 15.5% vs. 12.1% over 10 years. The various risks which are contributing to the recent fall in share prices are only intensifying over time.
Why not engage with tobacco companies to improve corporate behaviour? A United Nations’ directive states that there the fundamental conflict of interest between the human right to health and tobacco manufacture, and that that engagement with tobacco companies is contrary to the UN’s fundamental values and principles. The UN Tobacco Control Treaty also states that “government institutions and their bodies should not have financial interests in the tobacco industry” – something that is not widely known by many local authority and public pension schemes.
Tobacco companies’ moves to manufacture a broader range of supposedly less harmful products (such as e-cigarettes), reduce single-use plastic, or source wood for curing from sustainable sources does not detract from their fundamental core business, which is the production and marketing of highly toxic and addictive products that are deeply harmful to human health, damage the environment and result in the premature death of two out of every three users.
Investing sustainably is something investors can no longer afford to ignore. And while in the UK, our hosting of COP26 is helping to shine a light on how finance can support – and accelerate – the journey to net zero, we’re also increasingly seeing investors consider social factors in their investment approach and the impact that businesses have on local communities, in part due to the COVID-19 crisis but also down to movements like Black Lives Matter.
COVID-19 has underscored the need to “build back better”. This will require a strong focus on both the “E” and “S” in ESG. The financial sector can play its part by driving investment away from tobacco to more sustainable ends. Never has this been more urgent.
By Gail Hurley for Mallowstreet
NOTE: The information in this article is for general information only. It should not be taken as constituting professional advice from Tobacco Free Portfolios (TFP). TFP is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this article relates to your unique circumstances. TFP is not liable for any loss caused arising from the use of, or reliance on, the information provided in this article. The article also contains hyperlinks to web sites operated by third parties. TFP has no control over and is not affiliated with or responsible for those sites and, unless expressly stated by TFP, should not be taken to adopt or endorse any content, advertising or products available through those sites.