Will Big Tobacco’s ESG argument go up in smoke?

Having failed to withstand the lure of cigarettes in my youth, I used to be interested in the current passage of a UK invoice that may increase the minimal authorized smoking age by one 12 months, yearly.

Is that this a harbinger of a global wave of recent restrictions that may save future youngsters from repeating my mistake? Or is Large Tobacco set to maintain raking in huge earnings for many years to return? And why do some folks suppose sustainable funding funds must be placing cash into this sector?

Learn on and tell us your ideas: you possibly can attain us at moralmoneyreply@ft.com.

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Is the ESG tent sufficiently big for Large Tobacco?

“ESG is the satan,” Tesla chief government Elon Musk wrote on X final 12 months.

He was highlighting a report on how the most important tobacco firms take pleasure in a lot greater scores from some environmental, social and governance score suppliers than Musk’s electrical automotive firm.

It’s laborious to not have some sympathy with Musk’s frustration on this level. S&P International’s newest ESG score for Philip Morris International, whose cigarettes proceed to trigger in poor health well being and demise world wide, is 85 out of 100. The score for Tesla, with its transformational contribution to the shift away from fossil gasoline in street transport, is simply 40, beneath the entire world’s 5 greatest listed tobacco firms.

Can there actually be any argument for ESG-focused buyers to carry stakes in Large Tobacco? And given the general public’s regular transfer away from cigarettes — and the specter of more and more strict coverage measures — is there an funding case even for these with a slim monetary perspective?

A brand new legislative risk

On April 16, UK lawmakers voted overwhelmingly in favour of a brand new legislation that may make it unlawful for folks born after 2009 ever to purchase cigarettes. It’s the hardest tobacco legislation ever handed in a serious financial system. If many different nations had been to comply with swimsuit, it will have dire long-term implications for the trade’s earnings.

But the share costs of London-listed tobacco giants Imperial Manufacturers and British American Tobacco have risen for the reason that day earlier than the invoice’s approval, with each modestly outperforming the FTSE 100 index. That’s as a result of this legislative method is unlikely to catch on internationally — and may not even final within the UK, argues Rae Maile, a longtime tobacco analyst at brokerage Panmure Gordon.

New Zealand launched related laws in 2022, solely to revoke it earlier this 12 months earlier than it had come into pressure, Maile notes. “The approaching demise of the trade has been a speaking level since 1952,” he instructed me.

In a analysis notice final month, Jefferies analyst Owen Bennett argued that his ESG-focused shoppers ought to take into account investing in tobacco firms which can be shifting in the direction of “diminished danger merchandise” that don’t require burning, resembling vapes and heated tobacco.

“Nearly all of people who smoke need to give up cigarettes, [but] solely 10-15 per cent of people who smoke that attempt to give up nicotine are profitable,” Bennett wrote. Due to this fact, he argued, different nicotine merchandise can profit public well being — and as consciousness of this grows, “we consider the sector turns into more and more investable once more”.

That suggestion is anathema to Bronwyn King, founder and director of the non-profit Tobacco-Free Portfolios, which has gained UN assist for its effort to influence financiers to scale back their publicity the tobacco sector.

The Tobacco-Free Finance Pledge has been signed by greater than 200 monetary establishments managing greater than $16tn, largely in Europe and Australia. Signatories are usually not required to boycott tobacco firms altogether however moderately to “encourage the adoption of tobacco-free finance insurance policies throughout lending, funding and insurance coverage”, amongst different commitments.

“There’s no good tobacco firm,” stated King, a physician who started her profession on a lung most cancers ward. “There isn’t a moral tobacco firm, there’s no accountable tobacco firm, there’s no sustainable tobacco firm.”

King identified that a lot of the expansion in different nicotine product gross sales had been pushed by younger individuals who had not beforehand smoked cigarettes.

She dismissed the concept that buyers might obtain optimistic affect by pushing tobacco firms’ administration in a greater course. “That is the large distinction for tobacco, in that engagement is futile,” she instructed me. “As a result of the one end result that’s acceptable is that the tobacco firm ceases to exist.”

A tough transition

I put this to Jennifer Motles, chief sustainability officer at Philip Morris Worldwide, which is second solely to Imperial Manufacturers among the many greatest tobacco firms by income. She argued that divesting from firms like hers means a “missed alternative for the finance group to drive change”.

“If an organization has adopted a enterprise mannequin that really responds to these actual considerations [about health], and is reporting in a really clear manner the way it’s progressing in the direction of some extent the place success doesn’t come from making or promoting cigarettes — then for me, it is unnecessary to exclude,” Motles stated.

PMI says it has invested $12.5bn in smoke-free merchandise since 2008, and that these merchandise made up 36 per cent of its gross sales final 12 months. It “goals to fully exchange cigarettes as quickly as doable”, in line with a 2023 report. Traders appear to approve of this technique judging by PMI’s share worth, which has considerably outperformed these of its main rivals over the previous 5 years.

However development of smoke-free merchandise seems to have been slower than anticipated. PMI has dropped a goal of reaching 50 per cent of income from this class by 2025, changing it with a aim of two-thirds income share by 2030.

In the meantime, PMI’s fame is bedevilling its efforts to diversify into well being merchandise. Chief government Jacek Olczak instructed the FT final 12 months that the gross sales of inhaled medication firm Vectura, which PMI acquired in 2021, had suffered from clients shunning it due to the brand new possession.

Maile factors out that Large Tobacco was pursuing diversification in response to well being considerations as early because the Sixties — usually into areas that didn’t match the large profitability of cigarettes.

And the likes of PMI nonetheless face an uphill battle to draw ESG fund managers. Miranda Beacham, UK head of accountable funding at Aegon Asset Administration, instructed me her establishment nonetheless holds tobacco firm shares in a few of its unconstrained fairness funds, since they nonetheless account for a big a part of the general inventory market, and “our greatest shoppers are usually not pushing us for a whole exclusion of tobacco”.

However like many different asset managers, Aegon shuts out tobacco firms from its ESG-focused funds — regardless of the sturdy rankings these firms take pleasure in from the likes of S&P International. Beacham is sceptical of the businesses’ claims concerning the decrease well being dangers of different nicotine merchandise, saying they’ve didn’t “construct up belief” with buyers because of their historical past of underplaying hyperlinks between smoking and most cancers.

“There isn’t a house for tobacco inside these funds,” Beacham stated.

Good learn

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