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Tobacco stocks have traditionally performed strongly as defensive equity assets, but some big investors are now starting to divest from the industry.

The French national pension reserve fund, Fonds de Réserve pour les Retraites (FRR), announced in December 2016 that it was going to exclude investments in the equities and bonds of tobacco-producing companies.

There is growing pressure on institutional investors and others to divest from tobacco, based on strong scientific evidence of the harm caused by smoking. In particular, the efforts of Tobacco Free Portfolios, a campaigning initiative set up by Dr. Bronwyn King, an Australian cancer specialist, have raised awareness of the issue. FRR executive director Olivier Rousseau admits it struck a chord with him: “Morally, it’s a very clear-cut situation; it is indefensible. This is only a harm-producing industry, so from a moral perspective, it was easy to say that we don’t want tobacco in the portfolio.”

But whereas there is a strong rationale for excluding tobacco stocks on moral grounds, applying hard-headed investment logic to it can be sobering for investors. “The returns for tobacco have been absolutely outstanding. Between June 2004 and September 2016, the MSCI World Tobacco index grew by a whopping 632 percent,” Rousseau says. “Whereas the MSCI World index went up 122 percent.” And according to the Credit Suisse Global Investment Returns Yearbook 2015, from the Credit Suisse Research Institute, the tobacco sector was, together with beverages, the star performer since 1900 with an annualized gain of 14.6 percent [see chart below]. We’ve all heard comments from CalPERS, which said that not having had tobacco in the portfolio over the last 15 years has cost it around $3 billion. Similarly the Norwegian GPFG [Government Pension Fund Global] says its tobacco exclusion, which started ten years ago, has cost it some $2 billion. The results may vary depending on the methodology used. If one compares total returns, the difference is bigger than if one assumes, as is the case in real-life portfolios, that the dividends of high-yielding sectors, such as tobacco, are actually pooled with all dividends and reinvested in all sectors pro rata to their index weightings. Anyhow, yes, it is a bad industry, but there is no denying that it has been a very profitable investment.”

However, tobacco may not be such a good investment in the future. One reason to expect lower future returns is tougher public health legislation on smoking. “Many countries have made a commitment to act against smoking, and France is party to a 2005 international agreement on this, which basically says that public institutions should not have tobacco investments,” Rousseau says. “You can argue about its enforceability, but it is clearly a commitment taken seriously by the countries that have signed it.”

“There is a significant probability that more developed countries will take more measures against tobacco in the future. France is the second country, after the U.K., to remove branding from packaging for tobacco since January 1 this year,” Rousseau says. “Taxes are always being increased on tobacco, and regulations are increasingly restricting smoking in public spaces. Just as we can see a shift away from using carbon-emitting energy sources, so there is a similar regulatory move away from tobacco consumption.”

As part of the food and beverage sector, tobacco has performed strongly as a lowvolatility, high-dividend and stable growth sector since the start of the global financial crisis in 2007. As such, tobacco stocks have been valued at high multiples, as one of the darlings of the low-volatility trend in portfolio management, but Rousseau says this is now changing. “There has been a formidable run for the low-volatility, stable-growth types of companies, but it is coming to an end. From last July, after the first few weeks of Brexit scares,” he says, “value stocks have come back with a vengeance. Since then the stablegrowth, ‘low vol’ companies, carrying high multiples, have done poorly relative to the overall market. This tendency has started, and we believe there is more to go, and this could be the case for some time to come.”

FRR’s executive board had to present the case for excluding tobacco to the supervisory board. “There was a good debate, because it was easy to see the moral argument against tobacco stocks,” Rousseau says. “And of course concerns about returns were expressed, so that argument was also discussed. We cannot promise the supervisory board that excluding tobacco companies will pay out in future, but we simply believe that the formidable returns of the past are not going to be repeated in the same fashion. In our view, that would be a very low probability scenario.”

Although many investors engage with companies in an effort to improve their ESG rating and see divestment as a last resort, Rousseau says that this approach is not possible with tobacco producers. “It is typically the only thing that they do, so you would be asking them to stop their activities altogether,” he says. “You either invest, or you divest. The middle-of-the-road approach would be to reduce your weighting, but that is ducking the issue, really. We understand that there is an element of risk to us, but the next decade will most probably not see the same performance as in the past.”

As a result of its decision to exclude tobacco stocks, FRR has joined CalPERS and CalSTRS, in addition to Norway’s GPFG, the Netherlands’ PGGM, a handful of Australian and New Zealand pension funds, AXA insurance group, and, most recently, Sweden’s AP4, in going tobacco-free. “As we understand it, there are still very few investors that have done this so far, and I think the return argument is something that has been very powerful,” Rousseau says.

At the same time as it announced its tobacco divestment, FRR said it will now also exclude companies in which thermal coal extraction, or coal-fired power generation, accounts for more than 20 percent of turnover. Rousseau added that FRR is shortly to reveal the three successful managers it has hired for a €5 billion ($5.34 billion) passive equity mandate with an ESG approach, expressed notably through a smart beta, low-carbon theme and, of course, tobacco exclusion. This mandate will make up 40 percent of FRR’s developed-market equities.

Ireland Strategic Investment Fund sells off shares in tobacco companies

The Ireland Strategic Investment Fund has sold off its stakes in tobacco companies.

The ISIF held stakes in a number of tobacco firms including Altria and Philip Morris, a legacy from the global investment portfolio held by the the National Pension Reserve Fund before it was repurposed.

The latest annual report from the National Treasury Management Agency, which oversees the ISIF, puts a value of €1m on the stake in Altria and €1.2m on the Philip Morris shares as at the end of 2015.

The total value of equities held by the ISIF in its discretionary portfolio was €5.35 billion.

That portfolio is being being sold off gradually to support the ISIF’s mandate of investing to support economic activity and create jobs in Ireland.

The Minister for Finance Michael Noonan said the divestment had been “a commercial decision” but one which was informed by Government policy on tobacco.

The ISIF also has a sustainability and responsible investment policy.

The Irish State has just sold its shares in big tobacco companies

It had been claimed that the investments made a ‘mockery’ of the State’s aim of a tobacco-free Ireland.

THE IRISH STATE’S sovereign wealth fund has just sold all of its shares in tobacco companies in a move to offload some of its ‘legacy investments’.

Finance Minister Michael Noonan announced today that the Ireland Strategic Investment Fund (Isif) “has completed the sale of its remaining investments in tobacco manufacturing”.

Isif said its decision to sell off its legacy investments in tobacco manufacturing companies “is part of a wider review of the exclusion of categories of investment from the fund as a whole, which is due to be completed in early 2017″.

Isif recently told that, as of 30 September 2016, it had equity holdings in three tobacco companies with a value of €1.5 million. A spokesman for the NTMA said that the company also held €16.7 million in tobacco-related corporate bonds.

This is relatively small relative to Isif’s total investments. The organisation, which was established with remaining funds from the National Pension Reserve Fund (NPRF), has a total fund of €7.9 billion and expects to have about €3 billion of that by the end of 2016.

The NTMA’s investments in the companies are made through fund managers, rather than the organisation actively selecting the firms or industries.

Ethical investment

Isif’s ethical investment policy for armaments is mainly influenced by its commitment to the UN Principles for Responsible Investment, but this policy does not stop its funds going into the sector altogether.

Under the UN guidelines, Isif is required to carry out investments on an ‘active-ownership basis’, which means it does not have to rule out any companies as long as it works to improve their environmental, social and governance policies.

A law that would have banned Isif from investing in tobacco companies was recently floated in the Seanad by Fianna Fáil Seanad health spokesperson Dr Keith Swanick, who said that the state’s investments in tobacco companies “makes a complete mockery of the stated objectives of a tobacco free Ireland by 2025″.

The Department of Finance said that all of Isif’s investments since its establishment in December 2014, “comply with the fund’s sustainability and responsible investment policy, which sets out key principles for responsible investment”.

Tobacco control

Minister Noonan welcomed Isif’s decision, saying: “Ireland has earned a significant reputation as a leader in tobacco control and, as we know, tobacco use is a leading cause of preventable death in Ireland and throughout the world.

The legislation that established the Ireland Strategic Investment Fund, provides that the fund’s investment strategy will be carried out in accordance with government policy. Today’s decision reinforces the government’s policy on tobacco.

He added: “Public policy is not fixed and can evolve, and the ongoing reviews by the Isif are opportunities to fine tune its investment approach in the light of relevant developments both nationally and internationally.”

This story was updated to include more information on the value of ISIF’s tobacco holding

Written by Paul O’Donoghue and posted on

CalPERS extends ban on tobacco to external asset managers

The Investment Committee for the California Public Employees’ Retirement System (CalPERS) has voted to broaden the tobacco investment restrictions to externally managed portfolios of public assets.

The €270 billion pension scheme also decided to remain divested from tobacco-related securities in internally managed public equity and debt portfolios.

Commenting on the decision, chair of the Investment Committee, Henry Jones, said: ‘There is no doubt that divestment as an investment strategy presents challenges.

However, after careful consideration of all the benefits and risks, the Committee has decided not only to maintain our current policy regarding tobacco divestment, but to extend the restrictions.’

The CalPERS tobacco restrictions date back to 2000, when concerns over ongoing litigation and regulatory risks facing the tobacco industry prompted it to take action.

Analysis performed in 2015 by Wilshire Associates, CalPERS board’s investment consultant, indicated that the pension fund’s restrictions on tobacco reduced portfolio returns by approximately $3 billion between 2001 and 2014. The committee decided in April 2016 to request a review of the current tobacco restrictions.

CalPERS chief investment officer, Ted Eliopoulos, said that he appreciated the committee’s willingness to review the sensitive topic of investment in tobacco. ‘We understand their concerns and will maintain the current tobacco exclusions while working to extend the tobacco divestment to our external portfolios.’

As part of the action, CalPERS staff will now study the appropriate timing and implementation.

Largest public pension system to sell all tobacco stocks

The nation’s largest public pension system is giving up tobacco.

The California Public Employees’ Retirement System decided Monday to sell its last $550 million worth of tobacco-related investments nearly two decades after trading away the bulk of them.

In a 9-3 vote, the CalPERS investment committee disregarded the advice from its own financial advisers who recommended reversing a sell-off of tobacco stock that was approved in 2000, which has cost the system more than $3 billion in lost earnings.

At that time, CalPERS divested tobacco holdings managed by its in-house advisers, but it allowed outside managers to retain the investments they controlled.

Public health organizations overwhelmingly opposed a reinvestment, saying it would send the message that California supports a product that causes cancer and raises health care costs.

“We’ve made a lot of progress in de-normalizing tobacco, to get people to think that tobacco is not OK,” said Jim Knox, vice president of the American Cancer Society’s advocacy arm. “To have the largest pension program in the world to suddenly get back into tobacco in a big way sends the wrong message.”

CalPERS votes to broaden ban on tobacco investments

By Robin Respaut

The California Public Employees’ Retirement System voted on Monday to broaden its restrictions on tobacco investments, opposing a recommendation by the pension fund’s staff to reinvest in the controversial asset.

CalPERS staff had recommended that the board remove its 16-year ban on tobacco investments in light of an increasing demand to improve investment returns and pay benefits.

But the board voted to remain divested and to expand the ban to externally managed portfolios and affiliated funds.

The nation’s largest public pension fund embarked on an extensive review of tobacco earlier this year, after a Wilshire Associates report estimated the exclusion of tobacco had cost the fund about $3 billion between 2001 and 2014. That was a considerably larger portfolio impact than CalPERS’ other divested assets, such as Iran, Sudan and certain firearms-related companies.

California State Controller Betty Yee, who voted in favor of the ban, said on Monday that CalPERS should be mindful of the declining tobacco sales volumes, despite the recent surge in tobacco stocks. Yee also expressed concern about the ongoing threat of tobacco litigation on the industry.

In the 10 years to November 2016, the MSCI World Tobacco Index rose 12.3 percent compared with just 3.8 percent on the MSCI World Index. The tobacco index includes Philip Morris International Inc, Altria Group Inc , British American Tobacco Plc, Japan Tobacco Inc and Imperial Brands Plc.

Board member Dana Hollinger said she was “not a fan of smoking” but did not support the tobacco ban, because “every time we divest, we are chipping away at the diversity of the portfolio.”

“I see the fiduciary here as maximizing and securing benefits to our beneficiaries,” Hollinger said.

CalPERS decision to reconsider its tobacco divestment has caught the attention of health groups, industry shareholders, institutional investors and many of CalPERS’ beneficiaries.

“It is clear that there is abundant, compelling and strong public policy arguments to stay out of tobacco,” said board member Priya Mathur. “The tobacco industry is facing a structural decline in terms of the volume of sales and their ability to gain revenues for a number of reasons.”

State Treasurer John Chiang announced in a statement late Monday that the board had “not only successfully fought back misguided efforts to lift CalPERS’s 16-year-old ban,” but also now prevented outside partners from making such investments.

“Generations of Californians will reap the health, economic and ethical benefits of today’s bold decision,” Chiang said.

(Reporting by Robin Respaut in San Francisco; Editing by Lisa Shumaker)

Tobacco is — still — a bad investment for pension fund

The California Public Employees’ Retirement System’s board of administration took a stand in 2000 when it voted to divest from tobacco companies, which profit from a product so toxic that it kills or disables millions of the people who use it. It was the right decision at the time, and remains so 16 years later.

It was also a fairly easy decision back then for the nation’s largest public pension fund. Not only was tobacco killing people, it was costing the state dearly in healthcare expenses and lost productivity. The final nail in the coffin, so to speak, was that tobacco didn’t appear to be a great investment in 2000. The value of tobacco investments had plunged in the previous two years, smoking rates were continuing on a long downward trend and potentially pricey litigation against the industry was pending.

In other words, divestment looked like a classic win-win. CalPERS could take a moral position and not jeopardize its primary duty to make money for the 1.8 million people who rely on it for their retirement. And though there’s no evidence CalPERS divestment affected smoking rates (which were already dropping) or blocked tobacco companies’ access to capital, it was part of successful effort, along with strict regulation, high taxes and ubiquitous anti-smoking campaigns, to “denormalize” tobacco use.

Divestment is a difficult call for governmental pension funds. They have a clear fiduciary duty to maximize the returns on their members’ investments.
Turns out, though, that tobacco investments didn’t tank as expected, in part of because of expanded marketing in Third World countries. Investors who retained their tobacco holdings realized significant revenue. Analysts estimate that CalPERS lost out on as much $3.68 billion in earnings over the years — about a quarter of what CalPERS’ investments have earned annually over the last decade.

That’s not great news for a severely underfunded pension fund whose poorer-than-expected performance may lead the board this week to lower its expected earnings from investments — again. If the board votes to do so, it would force the state and local governments and school boards in CalPERS to increase their annual pension contributions by millions of dollars, leading them to cut services or raise taxes.

On Monday, the CalPERS Investment Committee is also considering a proposal by staff to allow the $300 billion fund to reinvest in tobacco companies. It must be tempting to chase the revenue that may have been lost from not investing in Camels or Kools, but if there is a return to be made on tobacco (and that’s not even a sure bet), it wouldn’t be worth the moral cost. The board should reject this proposal.

Divestment is a difficult call for governmental pension funds. They have a clear fiduciary duty to maximize the returns on their members’ investments. But in our view, these public agencies also have a responsibility not to support evil, corrupt or destructive forces whose ill effects far outweigh any good they may do. That can take the form of products, like tobacco and firearms, or regimes. The decision by pension funds and U.S. companies to divest from South Africa in the late 1970s and 1980s, for example, is credited by many with helping to raise awareness about apartheid, which led to its ultimate demise.

Yet such moves also increase pressure to divest from more businesses, products and countries for purposes that aren’t necessarily as morally imperative but are politically popular. For example, a bill introduced this month in the state Legislature would restrict CalPERS’ investments in the construction of the Dakota Access Pipeline. It’s not a stretch to imagine a push to divest from soda companies or industries that use genetically altered organisms for food or farming.

That’s a slope CalPERS can’t afford to slide too far down. (The board’s own policies state that it will not divest unless required by valid state or federal law, which seems disingenuous in light of its history on tobacco.) The more constrained the fund becomes, the harder it will be to generate the big returns it’s relying on. And every dollar it falls short will have to be made up by the state and participating local governments, leaving them less money for public safety, anti-poverty programs, educating children and other priorities.

Admittedly, there’s a solid, if heartless, case to be made for reinvesting in tobacco. It’s a legal product, and users can’t credibly claim they didn’t know about the dangers listed right on the pack. And while ever-dwindling smoking rates may eliminate that habit within the next two decades, tobacco companies have found a new source of profits in the growing market for electronic cigarettes.

But doing the right thing often costs more than the doing what’s easy. That’s true for individuals, for groups and for organizations. It’s true too when it comes to socially responsible investments. Yes, there may be big money to be made investing in this poison product. If individual investors can live with that, fine. But public institutions such as CalPERS shouldn’t.

French pension reserve fund turns its back on tobacco, coal

Fonds de reserve pour les retraites (FRR), France’s €37.2bn pension reserve fund, will no longer invest in the tobacco industry or certain coal companies.

Further, next year, it will launch €5bn of ESG-based passive equity mandates as part of the implementation of the new strategies.

The exclusion strategy will be applied to the fund’s existing bond mandates, so that, by the end of 2017, it will have been applied to almost 95% of the “overall scope” of FRR’s assets, according to the fund.

It yesterday announced that it decided to exclude, from its equity and bond portfolio, investments in tobacco-producing companies and companies for which more than 20% of turnover is derived from thermal coal extraction or coal-fired power generation.

The strategy was proposed by the executive board and approved by the supervisory board on 1 December.

In a statement, FRR said efforts by the World Health Organisation, governments and civil society to deal with the “scourge” of tobacco consumption could eventually weigh on the performance of tobacco companies.

It also believes engaging with companies will not lead to progress “because the whole purpose of engagement would be to demand that they should stop their activities altogether”.

“For this reason, FRR has decided to exclude the tobacco industry from its portfolio,” it said.

On its decision on coal companies, the reserve fund said it had already reduced its exposure to high-carbon sectors, especially those exposed to coal, which is accountable for more greenhouse gas emissions than any other fossil energy source.

FRR said that, after the international agreement on climate change reached at the UN Conference of Parties (COP21) in Paris last December, “governments, and also investors, are increasingly calling coal into question as being incompatible with the objective of limiting global warming to 2°”.

FRR will still invest in companies that generate more than 20% of their turnover – or their electricity, steam or heat production – from coal if they employ carbon capture and storage processes or “have formally announced their commitment and have begun to take action in this direction”.

The fund said the two exclusion strategies would be rolled out in 2017.

The coal exclusion decision contributes to portfolio decarbonisation efforts that have been underway at FRR over at least the past two years.

Individual and institutional investors representing more than $5trn (€4.7trn) of assets under management have committed to divesting from fossil fuels, according to a recent report.

FRR’s announcement comes a day after the local authority pension fund for the borough of Southwark in London pledged to sell its investments in fossil fuels.

National Cancer Institute – The Economics of Tobacco and Tobacco Control

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Ireland’s investment body could be stopped investing in tobacco – but doesn’t invest very much in tobacco

The NTMA’s investments in the companies are made through fund managers.

A LAW HAS been proposed that would see Ireland’s Strategic Investment Fund (ISIF) banned from investing in tobacco companies.

The proposal was floated by Fianna Fáil Seanad Spokesperson on Health and Mental Health, Dr Keith Swanick.

Under questioning by the Seanad in October, Minister of State Eoghan Murphy confirmed that the taxpayer, through the National Treasury Management Agency (NTMA) and ISIF has equity holdings in three separate tobacco companies.

Swanick says that situation cannot be allowed to continue.

His Public Health (Prohibition of Tobacco Investments) Bill 2016 would make it illegal for the continuation of investments such as these and would ensure that no further investment in tobacco companies can take place with taxpayer’s money.

“This is a shocking situation and it is not tenable for the Government to turn a blind eye to these investments in tobacco companies. It is incredible to believe that the state holds investment in tobacco companies and it makes a complete mockery of the stated objectives of a tobacco free Ireland by 2025, the cornerstone of ‘Tobacco Free Ireland’.”

However, just 0.02% of ISIF’s total assets are invested in tobacco firms and, a spokesperson told, they may not continue investing in them anyway.

“Historically, exclusion has not been part of ISIF’s Responsible Investment strategy – with the only exclusions from the Fund being mandated by legislation. To date, the Cluster Munitions and Anti-Personnel Mines Act (2008) is the only relevant legislation and the ISIF operates a prohibited securities list of 19 companies on this basis.

ISIF management and the NTMA Board’s Investment Committee are currently reviewing the Sustainability and Responsible Investment Policy to examine the potential of adding to the list of excluded investment categories. This process is expected to be completed by the end of the first quarter of 2017.

In relation to investment in tobacco companies, on the basis of preliminary and unaudited figures for end Quarter 3 2016 i.e. as at 30 September 2016 ISIF had equity holdings in three tobacco companies with a value of €1.5 million or 0.02% of its total assets.

The state also has small equity investments in international companies involved in the development of armaments, such as Canadian group Bombardier, French firms Thales and Boeing, and the US’s Airbus Group and United Technologies.

The NTMA’s investments in the companies are made through fund managers, rather than the organisation actively selecting the firms or industries.