If institutional investors are looking to divest completely from an industry, tobacco would be ripe to pluck out of their portfolio, according to a new report by Genus Capital Management Inc.

The report found that divesting entirely from tobacco wouldn’t have had a significant negative impact on returns over the past 20 years.

“Though individual investors may not realize they’re funding the proliferation of harmful tobacco products, it’s common practice in the asset management industry to use tobacco stocks to diversify,” said Mike Thiessen, vice-president of sustainable research at Genus, in a press release. “Our tests show that divesting from tobacco as far back as 1999 would not have negatively affected financial returns for investors. As such, we’re proud to be among the first firms in Canada to go tobacco-free.”

Read: Letter to pension plans: Why your fund should be free of tobacco investments

Indeed, Genus has removed all tobacco-related assets from all portfolios it manages and has become a signatory of the United Nations-supported Tobacco Free Finance Pledge. 

In testing the viability of divestment, Genus compared index portfolios with and without tobacco companies, finding that, since 1999, a tobacco-free index underperformed by 0.06 per cent. In testing a tobacco-optimized portfolio, one where tobacco stocks were actively replaced by highly correlated alternatives, active returns were slightly positive. For the portfolios, Genus used a basket with a 35 per cent allocation to Canadian stocks and 65 per cent allocation stocks within the MSCI World index.

Read: Ontario Teachers’ signs tobacco-free investment pledge

As well, in a six-year study by the investment firm, portfolios with lower tobacco inclusion have outperformed. “When an investor decides to remove companies involved in a controversial product, the investor needs to determine the criteria for exclusion,” the report noted. “One common method to exclude companies involved with a certain product is to determine the portion of the company’s revenue that comes from the product and then exclude companies with revenue from the product over a certain threshold.”

For example, while a grocery store might sell tobacco products, it’s not the primary business of the company. Investors can screen for companies that make 10 per cent or more from tobacco, which would eliminate actual tobacco producers, but not grocery chains that do make some profit from tobacco products.

Within the six-year backtest, Genus found that regardless of the level of exclusion, portfolios that did exclude tobacco, at any level, outperformed the MSCI World index. The most additional return was seen by portfolios that excluded tobacco completely.

The report also noted the substantial future headwinds the industry faces as cigarette smoking is on the decline, as well as ongoing global taxes and government policies looking to deter tobacco use.

Read: Divesting from fossil fuels doesn’t mean sacrificing returns: report

“Smoking has been declining in the U.S. and other developed markets for decades and smoking among teenagers has hit record lows,” the report said. “By 2025, the [World Health Organization] predicts that Canadian smoking rates will fall under 10 per cent down from 14.3 per cent in 2015 and 27.5 per cent in 2000. Predicted declines are similar for many other developed countries, including the U.S.”