Ethics v profit: Should pension funds divest from ‘sin stocks’?

From sugar to tobacco, it is widely accepted that some substances have a negative impact on health, but at a panel discussion at the Pension and Lifetime Savings Association’s Investment Conference, views diverged on whether pension funds should still hold stocks in companies that sell them.

Rachel Melsom, a physician and director UK and Europe of campaign group Tobacco Free Portfolios, made the moral case for divestment.

It’s not about ethics or morality but investment risks

Mark Fawcett, Nest

Tobacco, she argued, will lead to an estimated 1bn deaths by the end of the 21 century.

She highlighted that children are a key consumer group for tobacco companies; in Indonesia, 41 per cent of boys aged 13-15 smoke, while in Pakistan, 40 per cent start smoking before the age of 10, she said.

Counting the cost of tobacco investment

Reports have also uncovered widespread use of child labour in the supply chain of tobacco, according to Melsom.

She said that as there is “no safe level” of tobacco consumption, it would not make sense for investors to engage with the tobacco industry, arguing that the only acceptable outcome would be for tobacco companies to cease to operate.

She also named three key risks for investors continuing to hold tobacco stocks: the regulatory risk posed by 181 countries that are “committed to enhancing regulation”, litigation risk, and supply chain risk.

Melsom said a multi-pronged approach is needed to tackle the smoking “epidemic”, and that it is necessary to get “governments, the health sector and the finance sector working together to address this problem”.

What will divestment achieve?

However, some question whether divesting from tobacco companies would have an effect on the number of people smoking – or even if it would be ethical to potentially forgo returns for members based on moral views.

“I haven’t heard how divesting shares is going to stop a single young person to start smoking,” said Christopher Snowdon, head of lifestyle economics at free-market thinktank the Institute of Economic Affairs.

“I don’t think there is a scenario, even if there was a huge sell-off of shares, that it would make a difference” to tobacco consumption, he said.

He argued that tobacco investments – as well as guns or fossil fuels – had been among the best performing over the past 20 years, saying that if you had not invested in them “you would have put yourself out of money”, or in the case of pension funds, put members out of money.

He said divestment from sin stocks was “a very expensive way to virtue-signal”.

In the case of local authority pension funds, “I think it’s highly unethical for councillors to decide they’re going to sacrifice a bunch of money, of taxpayers’ money”, Snowdon said, adding: “If you sell them they will be snapped up.”

Concentrate on risk

But not all investors are convinced sin stocks will continue to perform well, as regulatory pressure is ramping up in areas where public health budgets might be affected – such as tobacco, sugar, salt and saturated fats.

Mark Fawcett, chief investment officer at mastertrust Nest, said: “It’s not about ethics or morality but investment risks.”

He said the problem with ethics was that not everyone has the same views. “We have over 6m members. Even if we could survey them, there is no way we would get consensus. You need some framework of how you’re going to invest responsibly,” he said.

In the case of tobacco, while tobacco companies have done extremely well, “investment is about what’s going to happen in the future”.

Fawcett underlined the regulatory crackdown on tobacco and smoking, saying there is “clearly a regulatory risk, that’s the risk we’re worried about”, he said.

Manufacturers could face healthcare bill

The performance of such investments could also be affected in the future if governments start to demand that tobacco companies – or indeed other industries – help shoulder the cost of healthcare provision associated with their products.

“The tobacco industry externalises the cost of the impact of smoking. With government budgets tight on healthcare around the world, that externalisation is potentially at risk,” he said, putting the healthcare liability into “certainly the tens, possibly hundreds of billions”.

The view that the outlook for sin stocks looks uncertain was shared by Helena Vines Fiestas, head of sustainability research at BNP Paribas Asset Management.

She said analysts believed that the tobacco industry “is at a crossroads” and its outlook much less clear financially, which is what investors should pay attention to.

“It’s not about ethics, it’s about risk management and long-term view,” she said.