The Ethics and Economics of Tobacco Investing

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Tobacco Investing

In recent news, French insurer Axa has announced they’ll no longer be investing in tobacco. In fact, they’re planning on offloading £1.3 billion worth of investments.

Axa insists that despite potential lost profits – tobacco has historically been a very stable investment – they are gaining the moral high ground. They made the decision based on principle, and the desire to “support the efforts of governments around the world”. One might wonder if they’re pulling out of tobacco ahead of potential public scandal, as has previously happened to the British Heart Foundation and the Church of England.

Axa has cut their own holdings in tobacco have been cut, but the controversial “sin stock” is staying in the many funds the company manages.

The Problem With Tobacco

Traditionally, “sin stocks” have been financially secure if morally dubious investment choices. Tobacco, in particular, is notorious for its complete absence of virtue: “there is no safe level of exposure”

That’s Dr Bronwyn King, an Australian oncologist responsible for the ‘Tobacco Free Portfolio’ campaign. She’s targeting publically-owned major investnment portfolios to combat an industry she sees as nothing short of evil. The statistics she gives us are staggering: globally, smoking is responsible for an estimated six million deaths per year; or 1 billion deaths this century

She focuses on institutional, state-run investors instead of other financial services because both the value of the investments and the levels of public accountability are dramatically high; the Australian superannuation industry is worth a massive AUD$2 trillion.

The “only acceptable outcome,” she says, “would be for tobacco companies to cease their primary business.”

Ethically, it’s hard to argue that smoking is a matter of free will, or that libertarian values of personal choice apply to it at all; it’s addictive. At a certain point, smoking is no longer a choice.

Statistics repeatedly show that uptake of the habit is related to low socio-economic backgrounds and indigenous communities. When we consider this in the context of increased smoking in Africa and Asia – where globalisation has resulted in more social stratification – the implications becomes that smoking is a tool of oligarchic corporations. There is no ethical justification.

Furthermore, 90% of smokers wish they hadn’t started; and three-quarters would like to quit.

A Good Time To Quit

It looks like a good time to cash in – shares in tobacco have remained profitable lately, but this could be its last stand. Of all the sin stocks, tobacco looks like the one closest to crumbling. Philip Morris, Altria, British American Tobacco, etc. have all seen declining returns each year. They’re still in the green, but the margin is getting smaller every time.

In fact, tobacco is only remaining stable because companies have hiked the prices to match the falling incidence of smokers. There must be a point at which this strategy is no longer adequate, and we predict it will come soon.

In the Western world, it’s estimated that only 19% of adults smoke – a decrease of 27% in the past two decades – and that number is dwindling more and more quickly. Increased awareness of the health risk coupled with government legislation on tobacco advertising and taxes is behind the decrease.

Those arguing for the continued financial viability of tobacco might point to the East: Asia and Africa have seen their numbers of smokers increase by 50% since 1990. However, the Chinese market is nearly entirely owned by state-run China Tobacco; our favourite tobacco giants will not see any growth there.

One Last Push

Ethical investment – or at least a withdrawal of investment in tobacco, like Axa’s done – could be what is needed to finally sink the industry into the red.

Legislation is not so effective at combating tobacco companies. In the U.S., the tobacco lobby is so bold in its influence that it’s been featured on Last Week Tonight; and in Uruguay, Philip Morris is suing the government over health warnings.While the industry could remain profitable short-term, falling smoker rates will be greater than pricing or lobbying can battle.

Part of the appeal of sin stocks has always been that they remain stable – or comparatively so – during economic recessions. If you’re looking for the stability of tobacco without the guilt of one billion deaths per century, we suggest diversifying your portfolio into companies that produce vapours and e-cigarettes. If you have another idea for investors fresh out of tobacco, why not share it?

For more information on ethical investments – in tobacco alternatives or otherwise – why not get in touch with our team of experts?.

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