Will Big Tobacco’s ESG argument go up in smoke?

Having failed to resist the lure of cigarettes in my youth, I was interested by the recent passage of a UK bill that will raise the minimum legal smoking age by one year, every year.

Is this a harbinger of an international wave of new restrictions that will save future teenagers from repeating my mistake? Or is Big Tobacco set to keep raking in vast profits for decades to come? And why do some people think sustainable investment funds ought to be putting money into this sector?

Read on and let us know your thoughts: you can reach us at moralmoneyreply@ft.com.

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Is the ESG tent big enough for Big Tobacco?

“ESG is the devil,” Tesla chief executive Elon Musk wrote on X last year.

He was highlighting a report on how the biggest tobacco companies enjoy much higher scores from some environmental, social and governance rating providers than Musk’s electric car company.

It’s hard not to have some sympathy with Musk’s frustration on this point. S&P Global’s latest ESG score for Philip Morris International, whose cigarettes continue to cause ill health and death around the world, is 85 out of 100. The score for Tesla, with its transformational contribution to the shift away from fossil fuel in road transport, is just 40, below all of the world’s five biggest listed tobacco companies.

Can there really be any argument for ESG-focused investors to hold stakes in Big Tobacco? And given the public’s steady move away from cigarettes — and the threat of increasingly strict policy measures — is there an investment case even for those with a narrow financial perspective?

A new legislative threat

On April 16, UK lawmakers voted overwhelmingly in favour of a new law that will make it illegal for people born after 2009 ever to buy cigarettes. It’s the toughest tobacco law ever passed in a major economy. If many other nations were to follow suit, it would have dire long-term implications for the industry’s profits.

Yet the share prices of London-listed tobacco giants Imperial Brands and British American Tobacco have risen since the day before the bill’s approval, with both modestly outperforming the FTSE 100 index. That’s because this legislative approach is unlikely to catch on internationally — and might not even last in the UK, argues Rae Maile, a longtime tobacco analyst at brokerage Panmure Gordon.

New Zealand introduced similar legislation in 2022, only to revoke it earlier this year before it had come into force, Maile notes. “The imminent demise of the industry has been a talking point since 1952,” he told me.

In a research note last month, Jefferies analyst Owen Bennett argued that his ESG-focused clients should consider investing in tobacco companies that are shifting towards “reduced risk products” that don’t require burning, such as vapes and heated tobacco.

“The majority of smokers want to quit cigarettes, [but] only 10-15 per cent of smokers that try to quit nicotine are successful,” Bennett wrote. Therefore, he argued, alternative nicotine products can benefit public health — and as awareness of this grows, “we believe the sector becomes increasingly investable again”.

That suggestion is anathema to Bronwyn King, founder and director of the non-profit Tobacco-Free Portfolios, which has won UN support for its effort to persuade financiers to reduce their exposure the tobacco sector.

The Tobacco-Free Finance Pledge has been signed by more than 200 financial institutions managing more than $16tn, largely in Europe and Australia. Signatories are not required to boycott tobacco companies altogether but rather to “encourage the adoption of tobacco-free finance policies across lending, investment and insurance”, among other commitments.

“There’s no good tobacco company,” said King, a doctor who began her career on a lung cancer ward. “There is no ethical tobacco company, there’s no responsible tobacco company, there’s no sustainable tobacco company.”

King pointed out that much of the growth in alternative nicotine product sales had been driven by young people who had not previously smoked cigarettes.

She dismissed the idea that investors could achieve positive impact by pushing tobacco companies’ management in a better direction. “This is the big difference for tobacco, in that engagement is futile,” she told me. “Because the only outcome that is acceptable is that the tobacco company ceases to exist.”

A tricky transition

I put this to Jennifer Motles, chief sustainability officer at Philip Morris International, which is second only to Imperial Brands among the biggest tobacco companies by revenue. She argued that divesting from companies like hers means a “missed opportunity for the finance community to drive change”.

“If a company has adopted a business model that actually responds to those exact concerns [about health], and is reporting in a very transparent way how it’s progressing towards a point where success does not come from making or selling cigarettes — then for me, it makes no sense to exclude,” Motles said.

PMI says it has invested $12.5bn in smoke-free products since 2008, and that these products made up 36 per cent of its sales last year. It “aims to completely replace cigarettes as soon as possible”, according to a 2023 report. Investors seem to approve of this strategy judging by PMI’s share price, which has substantially outperformed those of its major rivals over the past five years.

But growth of smoke-free products appears to have been slower than expected. PMI has dropped a target of achieving 50 per cent of revenue from this category by 2025, replacing it with a goal of two-thirds revenue share by 2030.

Meanwhile, PMI’s reputation is bedevilling its efforts to diversify into health products. Chief executive Jacek Olczak told the FT last year that the sales of inhaled medicine company Vectura, which PMI acquired in 2021, had suffered from customers shunning it because of the new ownership.

Maile points out that Big Tobacco was pursuing diversification in response to health concerns as early as the 1960s — typically into areas that failed to match the huge profitability of cigarettes.

And the likes of PMI still face an uphill struggle to attract ESG fund managers. Miranda Beacham, UK head of responsible investment at Aegon Asset Management, told me her institution still holds tobacco company shares in some of its unconstrained equity funds, since they still account for a significant part of the overall stock market, and “our biggest clients are not pushing us for a complete exclusion of tobacco”.

But like many other asset managers, Aegon shuts out tobacco companies from its ESG-focused funds — despite the strong ratings those companies enjoy from the likes of S&P Global. Beacham is sceptical of the companies’ claims about the lower health risks of alternative nicotine products, saying they have failed to “build up trust” with investors due to their history of underplaying links between smoking and cancer.

“There is no space for tobacco within these funds,” Beacham said.

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