Why Your Fund Should Be Tobacco-Free

no-smoking“Tobacco kills seven million people a year and costs society more than war and terrorism combined. Yet, the people who manage institutional assets continue to invest in the tobacco industry. That is inconsistent and has to change…”
— Thomas Buberl CEO, AXA Group

“In recognition of the profound death and disease caused by tobacco, there are 181 parties to the UN Tobacco Treaty, vowing to implement robust tobacco control regulations. In contrast, the global finance industry still invests in, and profits from tobacco. But this is changing…”
— Dr. Bronwyn King Radiation Oncologist CEO, Tobacco Free Portfolios

Confronting Death, Disease, and Tobacco

Would you invest in companies whose product kills seven million people every year, costs society $2 trillion annually in medical expenses, uses child labour in the production of its product, is blacklisted as an investment by governments who are signatories to the United Nations Tobacco Treaty, and whose future profitability faces material legislative, regulatory, and litigation risks? If the answer is ‘no’, your fund should have zero exposure to tobacco stocks.

Why have the CEO of the AXA Group (quoted above) and I come to believe this? Because radiation oncologist Dr. Bronwyn King confronted both of us with the realities of “the profound death and disease” tobacco has caused, and will continue to cause to hundreds of millions of people around the world. She tells a powerful personal story of working hard to diagnose and treat people with lung cancer and then discovering to her horror that through her Australian superannuation fund, she was an investor in tobacco companies! (i)

This led her to create the Tobacco Free Portfolios (TFP) initiative, a Not-For-Profit Organization, which has been taking its ‘zero exposure to tobacco stocks’ message to the globe’s institutional investment community, with growing impact. (ii)

The goal of this Letter is to persuade you to seriously consider the merits of the ‘zero tobacco exposure’ message. I do so by setting out the ethical and financial cases against tobacco investments in some detail, and by documenting the growing acceptance of TFP’s ‘zero tobacco exposure’ position by institutional investors around the world.

The heart of the ethical case against tobacco is reflected in Dr. Bronwyn King’s reaction to finding out that she had a direct financial interest in companies who are a major cause of the despair and suffering she witnessed in her day job as a radiation oncologist. As she correctly points out, by investing in tobacco investors are effectively endorsing a product that is the #1 cause of preventable deaths in the world (even today the 5-year lung cancer survival rate is only 15%), has no social merit (most smokers would quit if they could), causes widespread suffering, and has been blacklisted as an investment by the United Nations through the UN Tobacco Treaty. Thirteen of the UN’s 17 Sustainable Development Goals are negatively impacted by tobacco consumption (e.g., related to eradicating poverty, biodiversity losses, pollution, birth complications, food insecurity, illicit trade).

Especially insidious is the industry’s use of child labour in harvesting tobacco leaves. In March 2017, the International Labor Organization issued a report stating that “in tobacco-growing communities, child labour is rampant”. Many of these children develop ‘green tobacco sickness’ (nausea, vomiting, dizziness, headaches), and face unacceptable working conditions (long hours, too little water, poor sanitation, inadequate training, lack of legal protection). At the same time, these children are a primary customer target for the product. An estimated one in five Indonesian children under the age of 10 are smokers.

Please take a moment to imagine a front page headline announcing your fund is an investor in organizations involved in all this. In my view, it adds up to considerable reputational risk for your fund. And in this case, ‘constructive engagement’ is not an option, as the only acceptable tangible outcome is for tobacco companies to exit their primary business.

The financial case against tobacco stocks cannot be based on their historical investment performance. For example, over the 2005-2015 period, the MSCI World Tobacco Index was up 195% versus 90% for the Information Industry Index and 50% for the Total Index. Many analysts continue to recommend investment in tobacco stocks despite steadily falling sales volumes. ‘Buy’ ratings are based on such considerations as generous dividend yields in the 3-6% range, a steady diet of share buy-backs, and (so far at least) the industry’s ability to raise prices enough to offset falling sales volumes.

So what is the financial case against tobacco? There are in fact two cases: one based on litigation risk, the other on legislative/regulatory risk. The former proceeds from the legal argument that tobacco companies sell an addictive product connected to an extended list of medical consequences that lead to loading material costs on health care systems around the world. The tobacco industry should fully compensate victims and health care systems for the resulting human and financial consequences. The latter case is based on the recognition that the human and financial consequences of nicotine addiction demand international and national public policy responses to contain and reduce the demand for tobacco products.

Litigation risk: The tobacco industry has a long history of facing class action suits. Just in the USA, the current number of live product liability cases is estimated to be about 6,000. However, it is Canada that may be taking legal action against the tobacco industry to a new level. It started with a $27B class action suit involving a million Quebec smokers launched in 1999. The case finally went to court in 2012, leading to a 2015 $15B decision for the plaintiffs. Ontario took a different route, first passing legislation in 2009 allowing it to recover the cost of treating smoking-related medical expenses. With the legislation in place, it sued the tobacco industry for $50B, based on tobacco-related medical costrecovery going back to 1955. The suit asserts that the tobacco industry knows nicotine to be addictive, knows it to cause cancer, has failed to properly warn users of these risks, has suppressed evidence, has destroyed documents, and has engaged in unscrupulous marketing practices.

Similar legal actions by other Canadian provinces are also winding their way through the courts. New Brunswick has a November 2019 court date. There is no court date yet for the Ontario case, but it is expected soon. Findings for the plaintiffs would open the door to similar successes for the other provinces, and indeed, for other governments around the world. It would not take a lot of $50B legal victories to wipe out the profits of the entire tobacco industry for years to come. Finally, interesting new legal channels are opening up. Just this past May the Dutch launched a criminal action against the tobacco industry, charging it with fraud and aggravated assault. Also, in assessing legal liability for damages and costs, Brazil’s Superior Court of Justice recently noted that in addition to those directly responsible, liability may also extend to those “who benefit from what others do”. (iii)

Legislative/Regulatory risk: with the signatures of 181 countries with 90% of the globe’s population, the UN Tobacco Treaty has more support than any other UN agreement. The Tobacco Treaty, and the parallel WHO Framework Convention on Tobacco Control, represent an unprecedented degree of international cooperation to reduce the use of tobacco products in both the developed and the developing worlds. A noteworthy clause requires government agencies (including pension and sovereign wealth funds) not to invest in the tobacco industry. Meanwhile similar control efforts (e.g., excise taxes, packaging restrictions) continue to build at the national level. A recent initiative by the Federal Drug Administration in the USA is especially noteworthy. In a July 28 press release the FDA announced “a new comprehensive plan for tobacco and nicotine regulation…placing addiction at the centre…by lowering nicotine content to non-addictive levels through achievable product standards”. Financial markets reacted immediately to this new threat to the tobacco industry’s long-term viability. Tobacco stock prices declined 5-10% on the news, for a collective loss of $26 billion. They have yet to recover these losses.

So what does all this mean for institutional investing in general, and for the investment policies of pension organizations in particular?

Investment Policy Implications

People managing other people’s money have a fiduciary obligation to ensure the investment decisions they make (or are made on their behalf) pass (1) reasonable ‘ethics’ tests, and (2) reasonable ‘no undue risk’ tests. I have come to the view that tobacco investments fail both tests.

Tobacco investments are not ethical in the sense investing in them signals giving ‘safe harbour’ to a product (a) known to be the #1 cause of preventable deaths in the world, (b) known to negatively impact 13 of the UN’s 17 Sustainable Development Goals, and (c) known to make significant use of child labour in the harvesting of sickness-producing tobacco leaves.

Tobacco investments carry undue reputational risk if these ethical issues are left unaddressed.

Tobacco investments carry undue financial risk in exposing investors to a continuously increasing volume of legislative/regulatory and litigation actions. The former actions negatively impact the industry’s revenues, the latter its costs of doing business. Taken together, they lead to a plausible continuous squeeze on the tobacco industry’s future profitability. All this leads to material ‘stranded asset’ risk down the road.

I am not alone in this view. A recent Investor Statement on Tobacco in support of tobacco control measures has already garnered 53 signatories with a collective $4 trillion under management. As an example, asked about its tobacco divestment decision, here is how New Zealand Super explained its 2007 decision from a ‘responsible investor’ perspective:

As a product, tobacco fails product safety and ethics tests.

The tobacco industry is a poor prospect for effective investor engagement.

Tobacco investment has no material impact on the Fund’s reward/risk characteristics.

Investment would be inconsistent with the UN Tobacco Treaty and the WHO Framework Convention on Tobacco Control. Thus investing in tobacco would damage New Zealand’s reputation in the world community as a responsible investor. New Zealand Super notes that over time, its 2007 divestment decision has garnered broad support from its stakeholders.

Your Organization’s Next Step

If, like New Zealand Super and many others, your organization is already tobacco-free, take a moment to celebrate the progressive decision already taken. Also ask if the tobacco-free fact and its rationale have been clearly communicated to your organization’s stakeholders.

If, on the other hand, your organization is not yet tobacco-free, take a moment to ask ‘why not?’ Possibly, it is because no-one to date has placed the ‘tobacco-free’ action item on the organizational decision agenda. After all, the manufacture and sale of cigarettes is not illegal, and investment returns have been good. Further, making investment decisions with ethical connotations can be awkward.

It is my hope that this Letter will trigger the appearance of tobacco investing on your organization’s decision agenda soon. The case for divestment is growing stronger year by year.


This letter was written by Keith Ambachtsheer and has been posted with his permission. The information herein has been obtained from sources which we believe to be reliable, but do not guarantee its accuracy or completeness. All rights reserved. 


i. Dr. King made the ‘tobacco-free’ case in person in a powerful TED Talk to 4300 people in Sydney in June 2017. I encourage you to hear her in person. https://tedxsydney.com/talk/eliminating-tobacco-companies-frominvestment-portfolios-bronwyn-king/

ii. Tobacco Free Portfolios is the only not-for-profit organization to promote tobacco-free investing across the world. It does so by engaging key leaders and influencers across the global financial sector. Its strategy is to educate and advocate rather than to ‘name and shame’. I am a member of TFP’s Global Advisory Council. For more information about TFP, visit http://www.tobaccofreeportfolios.org/

iii. See the UNEP Inquiry into the Design of a Sustainable Financial System: “Lenders and Investors Environmental Liability”, April 2016, page 12.