Divestment advocates say that they aim to raise awareness and put pressure on the industry
The timing could hardly have been more crucial. Last May French insurer Axa announced that it would be getting rid of its tobacco investments, arguing that they were incompatible with its position as a provider of health cover.
Axa’s intervention came just as other investors were starting to waver in their commitment to tobacco divestment. Calpers, for example, had said in April that it was reviewing its divestment policy, which had been in place since 2000.
Twelve months on, and there is renewed momentum behind the tobacco divestment movement. Other investors including Scor, AMP Capital, the Irish state’s sovereign wealth fund and Sweden’s AP4 pension fund have since said that they will get rid of their tobacco investments, or have already done so.
About $4bn of tobacco investments have been divested by financial institutions in seven countries,” says Dr Bronwyn King, chief executive of Tobacco Free Portfolios, a pressure group. She says that the past year’s moves have been “a step up” in activity around the world.
Meggin Thwing Eastman, head of screening at index provider MSCI, says: “Tobacco has been and continues to be one of our most popular data sets, not just in the socially responsible investment community but also among bigger clients who don’t want them in their portfolios.”
Calpers, which was wavering this time last year, in December re-affirmed its commitment to divestment and has extended it by including externally managed assets in the ban, which had previously only applied to assets managed internally.
Axa has pushed ahead with its plans by selling its shares and letting its fixed income investments run off. The process will take several more years though. The company has also restricted the amount of insurance that it is willing to sell to tobacco companies.
“We won’t cover their manufacturing plants and car fleets,” says Alice Steenland, the insurer’s head of corporate responsibility. “This is fairly specific to Axa — we consider it a form of financing.”
And there are efforts under way to draw more investors in. In April Axa, Scor, Calpers and AMP Capital invited peers to sign a letter publicly supporting tobacco control efforts by governments around the world. The letter is due to be published on World Tobacco Day on 31 May.
Giles Roca, director-general of the UK based Tobacco Manufacturers Association says: “Tobacco is a legitimate industry and people are free to choose to invest in tobacco stocks . . . Many commentators would point to the tobacco industry’s strong financial performance in recent years as a reason why its shares are considered an attractive buy for pension funds.”
Backers of divestment recognise that the tobacco companies are unlikely to face any immediate financial hardship because of their actions. But they say that their aim is to raise awareness and put pressure on the industry.
“Talking about it makes a huge difference as it encourages governments to take action,” says Ms Steenland.
Dr King adds that: “Every time a big investor comes out, it helps in the denormalisation of the tobacco industry. It is helpful when Axa and AMP Capital say that they don’t want anything to do with it.”
But although some big names have signed up to the cause, many more have not.
Some companies see tobacco as just one part of a wider approach to responsible investing. Allianz, for example, is implementing an environmental, social and governance policy across its portfolio which scores all investments against the same set of criteria.
Other investment managers argue that there is little demand from their clients for divestment, and that they have to be led by what their clients want. Even at Axa, the divestment is limited to the money that it manages for itself. It still invests in tobacco companies on behalf of third party clients.
And investors argue that they have a fiduciary duty to act in their clients’ best interests and that, in the past, tobacco shares have performed well. This issue is particularly important for managers with income funds as tobacco companies tend to be big dividend payers. The industry accounts for just under a tenth of the FTSE UK equity income index, for example.
Ms Thwing Eastman says that a zero tolerance approach to tobacco exclusion would mean that almost 8 per cent of the MSCI all world index would be ineligible for investment.
Last year, as it was reconsidering its stance, Calpers pointed out that divestment had cost it $3bn since it first implemented the policy in 2000. Axa says that, so far, divestment has not been too damaging. Ms Steenland says that the financial impact has been “negligible”.
Dr King refutes the idea that divestment is not a smart financial move, arguing that the industry’s prospects are bleak.
“We have to look at why they’ve done well. They are not held accountable for 6m deaths caused by their products each year. They externalise the costs of dealing with their products to governments. They privatise and internalise the profits. It is unlikely that the tobacco industry will be able to continue to operate in that way.”
She is not the only one to question whether the tobacco companies’ strong share price performances can continue. “The circumstances of the past fifteen years are unlikely to repeat,” says Chris Varco, a director at investment advisory firm Cambridge Associates. “We’ve had a unique set of circumstances.” He says that shares in tobacco companies have benefited from the growth in emerging market demand, and from investors’ search for yield in a low interest rate environment. Neither is guaranteed to continue.
Ms Steenland argues that divestment is the only way in which investors can make a difference. While engaging with companies in order to change their behaviour might work well in other industries, she says that it does not work with tobacco.
“We don’t believe engagement is an effective strategy,” she says. “Their products harm people from the first time they use it. There is no acceptable dose. We don’t believe that there is potential to change the business model.”
Resource :https://www.ft.com/content/f2325638-28fe-11e7-bc4b-5528796fe35c
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