The Case against Investing in Tobacco

What's the economic and ethical case against investing in tobacco?

I discussed this question with Dr. Bronwyn King, an oncologist who persuaded 34 Australian superannuation funds to divest from tobacco manufacturers. When King started working as a doctor at a cancer center in Melbourne, some of her first patients were afflicted with lung cancer. She witnessed them suffer and die — a moving and troubling experience. A turning point came when she realized some of her own pension savings were invested in tobacco through her superannuation fund. That was the origin of her campaign for Tobacco Free Portfolios.

CFA Institute: There are a number of industries considered controversial — alcohol, gambling, defense — why focus on tobacco?

Dr. Bronwyn King: I am a practicing radiation oncologist so I see the devastating effects of tobacco firsthand. That is the background to my interest in this area.

Tobacco stands alone when compared to all other industries or products. Firstly, there is no safe level of exposure. When used as intended, tobacco will have contributed to the early death of two out of three smokers. Secondly, the scale of the negative impact of tobacco is profound, causing an estimated six million deaths per year globally. Thirdly, positive influence of the industry through professional engagement is futile, as the only acceptable outcome would be for tobacco companies to cease their primary business.

Is this an issue mainly for governments and legislatures or is there a role for finance and investing?

I see tobacco as a cross-sector issue. The global health sector is doing all it can to cope with the tidal wave of patients suffering from tobacco-related disease — including researching increasingly sophisticated treatments — but cure rates remain poor (for example, the five-year survival for lung cancer is 15%). Governments all across the world have recognized the importance of addressing the tobacco epidemic by committing to ongoing implementation of tighter tobacco regulation.

In contrast, much of the global finance industry still invests in and profits from tobacco. But this is changing. Finance leaders are listening, acting, and are contributing to the comprehensive commitment from all sectors to end the global tobacco epidemic.

Other parts of financial services, such as banking and insurance, also serve the tobacco industry. Why focus on institutional investors?

I have focussed on the superannuation sector of financial services as this is where my inquiry commenced when I found out I was invested in tobacco through the default option of my superannuation fund. With the Australian superannuation industry being the world’s fourth largest in retirement savings, with approximately $2 trillion AUD in total assets, this represents a significant part of the sector to make a difference. My work, however, is not limited to the superannuation sector or institutional investors. I am engaged with organizations across financial services broadly.

How do you respond to the libertarian argument that people are free to choose if they smoke or not?

The reality is that young people, those from a low socio-economic background, and indigenous people make up much of the smoking population. A combination of lack of education, cycles of poverty, and targeted marketing means that many are not making, nor empowered to make, informed decisions.

Surveys show that in Australia in 2013, the average age at which young people aged 14–24 smoked their first full cigarette was 15.9 years. A survey of smokers in Canada, the United States, the United Kingdom, and Australia shows that the proportion of smokers who agreed or agreed strongly with the statement, "If you had to do it over again, you would not have started smoking," was extremely high — about 90%, and almost three quarters of current smokers have shown some interest in quitting.

Eventually, it appears that for many smokers, it is not a matter of choice, but rather addiction.

What’s the economic case against tobacco for the taxpayers?

The economic case against tobacco for the taxpayers is clear due to the fact that in Australia, the estimated total social cost of smoking in 2004/2005 was over $31 billion, and by comparison, revenue from sales of tobacco in 2008 amounted to just $5.6 billion.

What’s the economic case against tobacco for the investment professional? For instance, are there investment risks in tobacco that they have yet to appreciate?

There are many significant long term risks associated with the tobacco industry, including:

• Regulatory Risk: There are 180 parties of the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC), the world’s first legally binding health treaty. Parties have committed to implementing a broad range of tobacco control measures to reduce the number of new smokers and to encourage current smokers to quit, in a global commitment to ending the tobacco epidemic. New regulations are being enforced all across the globe.
• Litigation Risk: There are an increasing number of major class actions against the tobacco industry, challenging the outdated assumption that governments will automatically pay for the profound health costs resulting from tobacco.
• Supply Chain Risk: In today’s world, it is simply unacceptable to be associated with an industry that significantly relies on child labor to produce its product."Almost no cigarette can be guaranteed to be free from child labour."
• Reputation Risk: The tobacco industry is consistently ranked as the world’s least reputable industry. Consequently, individuals and organizations increasingly avoid affiliation of any sort.

What’s the ethical case against investing in tobacco? Is it specific to certain societies or is it universal?

Quite simply, tobacco free investment is the right thing to do. In 2015, society does not tolerate an industry that is on track to kill one billion people this century. This industry does not deserve our faintest affiliation, let alone our financial vested interest. A strong ethical case can be made due to the level of harm related to the product and the human rights issues, including the use of child labor. In addition, individuals can consider their own values, and those of their organization, and consider whether there is true alignment with that of the tobacco industry.

How would you reconcile an investment manager’s fiduciary duty to clients and a tobacco free portfolio?

According to the the 2015 report, Fiduciary duty in the 21st century by the PRI [Principles for Responsible Investment] with UNEP FI [United Nations Environment Programme Finance Initiative], fiduciary duty is not an obstacle to action on environmental, social, and governance [ESG] factors.

Fiona Reynolds, managing director, Principles for Responsible Investment, states, “Recent studies have broadened the interpretation of fiduciary duty away from the narrow confines of past definitions, and have emphasised that there is no conflict between fiduciary duty and ESG considerations — there is a growing recognition that ESG issues are in fact financially material to a portfolio. Using the status quo as a reason for not integrating ESG is no longer acceptable.”

In the case of tobacco specifically, the action of more than 30 Australian superannuation funds, comprising over 300 individual trustees/directors, to implement tobacco free investment mandates indicates fiduciary duty can be maintained.

Where do you draw the line regarding investing in tobacco? Are you talking about manufacturers, retailers, the whole supply chain, or beyond?

Tobacco Free Portfolios encourages divestment from tobacco manufacturers alone, not retailers or companies associated with packaging, machinery, or transport.

Is there a risk that if the tobacco manufacturers in the formal sector have constrained access to finance, it could result in growth of informal tobacco manufacturing?

I have yet to read any commentary or received advice on the risk of this occurrence. There is still some way to go before tobacco experiences constraints in access to finance.

Would you agree that the tobacco industry has survived social stigma and exclusions/divestment from some investors in the past? Why do you think this time is different?

I believe the finance industry is increasingly publicly exercising judgment that includes ethical considerations and a broader concept of fiduciary duty. In Australia, we now have momentum, with 34 large pension funds (with combined funds under management of more than $500 billion (AUD)) implementing tobacco free investment mandates. More than 20 others are actively considering the issue. A new baseline standard is emerging. As for the future, we are now living in a world where people demand transparency, responsibility, and sustainability. Tobacco free investment speaks to these broad themes. Consumers will ultimately demand the creation of products that meet their expectations. The time is right.

What about the intended impact? Is reduced investment in tobacco likely to lead to reduced harm to human health?

The intent is to signal disapproval of the industry by de-normalizing investment in tobacco. In turn, this can affect and build on political, legislative, health, and community initiatives to control tobacco.

What’s the eventual outcome you hope to see from Tobacco Free Portfolios?

The eventual outcome is for the finance sector to have a tobacco free investment mandate. This would align the finance sector with the good work of the health and government sectors as they endeavor to control tobacco and ensure the good health of individuals across the globe.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author's employer.

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