Tobacco: Acting against society but thriving?

We believe that companies doing good for society make better long-term investments. The response I often get is: ‘Well, if that’s true, why have tobacco companies done so well?’

This piece of research is our detailed answer. We cannot refute the fact that tobacco shares have performed well over the past decade, but we do have real concerns about their ability to carry on doing so.

What has changed? Principally the Framework Convention on Tobacco Control; a treaty which covers 90 per cent of the world population, and whose aim is to accelerate the decline in tobacco consumption. Throw in e-cigarrettes, greater awareness of health impacts and some really aggressive actions by governments globally; and there are definite signs that declines in smoking rates will be much more rapid than the industry would have us believe.

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Smoking is proven to be bad for your health. Here we look at why owning tobacco shares may also be bad for your wealth.

Our Approach

Our Sustainable Future (SF) approach is based on the belief that companies which improve our prosperity and welfare will be more profitable and more resilient.

Yet how come tobacco companies, whose product reduces overall prosperity and welfare, have done so well in the last decade? And will this continue?

The possible answers are:

1. We are wrong, and companies acting against society can do well indefinitely

2. We are right, but these things can take time

3. Addictive products like tobacco are exceptions to the rule, which is generally right.

4. Society benefits from smoking and so it will continue indefinitely

We would never invest in tobacco companies for the SF funds, but it has often been cited as a challenge to our SF proposition, so it is important that we can answer the challenge. Also British American Tobacco (BAT) and Imperial Tobacco Group (IMP) make up approximately 5 per cent of the UK index(1) so the question does also have a bearing on relative performance.

Here we examine the tobacco industry and explore three possible trends for tobacco consumption, modelling their implications on the value of tobacco companies.

Tobacco and Smoking: So how bad is it for you?

Tobacco use is the leading cause of preventable death. It kills 6m people prematurely every year and causes hundreds of billions of dollars of economic damage worldwide annually. If current trends continue, then 8m will die early each year by 2030 (WHO Report on the Global Tobacco Epidemic 2011). For context, World War 1 killed 8.5m servicemen.

As a smoker, the question is not whether smoking will kill you, but how. Most common is cardiovascular disease (heart disease or stroke) at 43 per cent, rather than lung cancer at 28 per cent. Female smokers are more at risk, especially if taking the contraceptive pill, and the worst impact is on babies from mothers who smoke.

So pretty bad.

Are governments Acting?

Yes, since the 50s taxation, regulation, and education have been put in place to reduce the prevalence of smoking in developed countries. Now this has gone global with the Framework Convention on Tobacco Control (2005). The stated intention of the signatories to the FCTC is ‘to protect present and future generations from the devastating health, social, environmental and economic consequences of tobacco consumption and exposure to tobacco smoke’.