Smoking out ethical value

Smoking out ethical value

The investment industry has seized upon the rise in demand for environmental, social and governance-aligned products and yet we continue to lack a universal definition for what ESG actually means.

As an industry we have created a range of solutions, from negative screening to ESG integration to impact investing, but I sometimes wonder if we have lost sight of what our clients are trying to achieve.

It is only by understanding the ‘why’ of ESG – the motivations of the end beneficiary – that we as investors can find the correct solutions.

For some, of course, ESG is associated with ‘doing good’ and making a positive difference on the world, often with the belief that it comes at the expense of financial outcomes.

For others, ESG is synonymous with ‘ethical’, and their ESG solutions should seek to avoid those investments that breach their own moral code. Since there is no universal definition of right and wrong, these solutions need to be closely tailored to the client’s beliefs.

And yet ESG investing need not be about making the world a better place or about morality. ESG investing is simply about considering the full-range of risks and opportunities of an investment – something the investment world should be doing as standard.

Consider, for example, tobacco stocks, beloved for decades by defensive-minded, dividend-seeking investors.


Western society’s opinion towards smoking shifted as far back as the mid-1960s and momentum against smoking in public places began in California in 1995, becoming more widespread throughout the 2000s.

While there is no universal set of morals, society’s stance against cigarettes seems as close to an ethical consensus as you can get.

Despite this seemingly universal belief, tobacco shares performed incredibly for a long period.

This performance can be attributed to the low rate environment in which stocks with a steady yield became highly sought after by income-oriented investors.

Since mid-2017, however, tobacco shares have, on a relative basis, collapsed, giving up eight years of outperformance.

On July 28 2017, the US Food and Drug Administration announced a comprehensive plan to “shift trajectory of tobacco-related disease [and] death”, which included potential restrictions around the levels of nicotine in combustible cigarettes.

Tobacco companies, particularly those with large US exposure, saw their share prices plunge. The FDA has followed this up with restrictions on menthol and tighter guidelines around marketing.

The FDA may only cover the US market, but it sets the tone for the global war on tobacco, which, since 2017, is a significant headwind to these companies.

Nielsen data highlights that in late 2017 the reduction in volume of tobacco sales in the US began to outstrip price rises, leading to an overall fall in US tobacco revenues.

For us, tobacco investments are avoided, not because of the ethics of the product or the behaviour of the companies, but because we see the business as unsustainable and believe that the current valuations will be further challenged as regulators increasingly clamp down on these addictive and harmful products.