Women in Financial Services
Tobacco, sustainable lifestyle and ethical investing. What’s the link?
Katie.Dix / 27 Aug 2019
Invesco are kindly hosting an E2W event in September around the theme of Resposible Investing. Elena Vydrine, a member of E2W, will be publishing a series of blogs in the run up to the event on the topic of ESG. If you would like to sign up to attend this event, please register your details here. You can also read Elena Vydrine's previous blog on "What is responsible investing?"
Elena Vydrine is a Head of Portfolio Management and ESG Integration at Ryedale, a company developing portfolio management software with integrated ESG factors. Over the last 12 years, Elena has worked in the asset management industry specialising in passive equity funds that track financial indices and alternative indexation like smart beta and ESG. Previously involved in Responsible Finance project in the capacity of Research Associate at HSBC Asset Management.
Tobacco, sustainable lifestyle and ethical investing. What's the link?
Can we change our social norms and behaviours as consumers such that we all collectively do better? Can we see beyond the consumerism that erodes and exploits the natural and human capitals? It has been noted for centuries through anecdotal evidence, and more recently by academics like Dittmar (2014) and Halliwell (2013) conducting extensive meta-studies, that the relationship between materialism and personal wellbeing is far from a positive association. Gross Domestic Product (GDP), as a well-established measure of economic welfare, is not a particularly good indicator of how happy the citizens of a given country are.
Despite the continued economic growth that the countries in the developed world enjoyed over the past decades, there are important omissions of the impact that this GDP growth has had on environmental and social capitals. It is now recognised that more sustainable lifestyles could help to solve many of the pressing questions faced by our planet, like waste and pollution, climate change, income inequality, demographics, but without impacting on our ‘happiness’.
The issue is wide and complex, so let's look at a specific example: The tobacco industry, its inclusion in the investment portfolio and changing perceptions as well as realities around this investment proposition.
According to BMC Medicine (Banks, 2015) tobacco products are not safe for consumption. They are highly addictive and contribute to an early death for one out of two smokers. The World Health Organisation (WHO) estimates that the number of tobacco-related deaths could rise up to 1 billion over the next century. This figure includes second-hand smokers who also have serious and fatal health consequences.
Tobacco is the only legally available consumer product which kills people when it is used entirely as intended (The Oxford Medical Companion, 1994).
Some analysts estimate that cigarettes are the second highest contributor to poverty and almost no cigarette can be guaranteed to be free from child labour (World Bank, 99). Moreover, WHO has been vocal about industry lobbying practices and industry-funded research, which interferes with tobacco control. There have been lots of efforts worldwide to help reduce smoking. In 2005, 180 countries signed the WHO Convention on Tobacco Control.
The framework introduced broad measures in an attempt to limit the growth of the tobacco sector. In addition, many governments have rolled out taxes on tobacco and banned smoking in public. These policies have had a positive effect.
But, despite the known grim statistics, the clear medical findings, the binding WHO treaty, as well as worsening financial outlook for tobacco manufacturers, why is it that as a society we continue to tolerate investments in tobacco companies?
All over the world institutional investors such as pension funds, educational endowments and charities have portfolios with stakes in this highly questionable industry.
Although individuals do not directly invest in tobacco companies, the choice that each person makes in terms of their investment portfolio, or delegates to make (as in the case of pensions funds), can channel funding to tobacco companies. These investment decisions can influence the growth or decline of whole sectors of the economy, including the tobacco industry. Our choices as investors therefore could ultimately change the flow of funds in these investments and in the underlying industry.
The tobacco industry has long been considered an attractive investment. Indeed, the S&P Tobacco Index outperformed the S&P500 by 1,000% between 1989 and 2017. It is hard to ignore such high returns. However, if you take a holistic view of the economy and society, the picture is very different.
Deutsche Bank estimated that:
- the tobacco industry creates at least 5 times more societal cost than benefits.
Furthermore, because of the changing perceptions and increasing legislation on this product, tobacco industry underperformed broad market (S&P500) by 34.5%.
Beyond the grim statistics of six million deaths a year globally, WHO(2011) has established that:
- the health costs and labour productivity loss due to tobacco may be equal up to 3% of the global GDP.
Investors are beginning to factor this information in their analysis of portfolio risks and opportunities. A recent study by MSCI confirms that:
- excluding tobacco from, for example, MSCI All Countries World index, yields the same or slightly better risk and return profile.
This is for the period from 2012 to 2018 when compared to the underlying index which included the tobacco companies, which is attributed largely to the emerging legislation prohibiting and limiting smoking in public places, increasing litigation against tobacco companies on the grounds of recovery of their tobacco-related health-care costs, as well as changing the perception of the public through exclusion screens of tobacco companies from the investment portfolios.
Ethical investing is not always straightforward.
This is due to different cultural expectations and beliefs determining the norms of acceptable sociological behaviour. Indeed, many funds labelled as socially responsible will actually be investing in tobacco companies. Holdings in tobacco companies as a part of pension investment plans, for example, will come as a shock to many researchers, academics and medical staff who may have dedicated their lives to combating the widespread addiction to tobacco or tobacco-related diseases. In 2015 Cancer Research UK has invested 211 million pounds in British American Tobacco through their pension scheme, infuriating most of the underlying beneficiaries of the pension fund.
A charitable organisation 'Tobacco-free Portfolio' was founded by Bronwyn King, an Australian oncologist, after she discovered that her pension had exposure to the tobacco companies. This small organisation has been highly effective in influencing large institutional investors and asset managers by raising awareness and promoting exclusion of tobacco from the investment funds. A number of these signed their pledge under ‘tobacco-free portfolio’ banner. It is a great showcase of how we as individuals can impact changes in perceptions, norms and, ultimately, consumer behavior and business practices.
Transparency is the first step to achieving sustainable consumption.
A clearly defined responsible investment strategy and a commitment to the true fiduciary duty of the underlying investees is the next stage. More precisely, when measuring and quantifying the risks, returns and impact of an investment portfolio, the traditional financial metrics should be able to take account of environmental and social returns. In this way we will be able to close the loop of unsustainable business practices and pave the way to building a circular economy.
Do you know whether your investments or pension plans are tobacco-free? Are you funding an industry supplying product that cannot be consumed safely and has no social value beyond short-term and increasingly financially risky corporate profits?
If you found this interesting and would like to find out more about whether the financial industry can do well by doing good, please register here for your space at our upcoming event.
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