OPTrust Butts Out For Good?

Last week, OPTrust made an announcement, OPTrust to divest from public market tobacco firms:
OPTrust today announced it is divesting from the tobacco industry. By the beginning of 2018, OPTrust will be divested from all equity and fixed income investments in public companies that derive a majority of their revenue from production or manufacture of tobacco products.

"At OPTrust, we prefer to use corporate engagement – the promotion of better business practices – in our investment and ownership practices," said Hugh O'Reilly, OPTrust President and CEO. "However, there is no such thing as a safe level of consumption of tobacco products. They cause only harm. As a result, investments in tobacco do not align with our responsible investing principles."

"I'm thrilled to hear that OPTrust is implementing a tobacco-free investment policy," said Dr. Bronwyn King, Radiation Oncologist and CEO of Tobacco Free Portfolios. "This sets a new standard amongst Canadian financial institutions and will inspire others to follow suit. As an oncologist, I'm fully aware of the devastating impact of tobacco. It's heartening to see OPTrust take such a positive step, joining with the health and government sectors to address one of the greatest public health challenges of our time."

OPTrust's leadership recognizes that environmental, social and governance factors are key drivers of sustainable/long-term investment performance, and are consistent with the plan's responsible investing approach. This divestment keeps OPTrust at the forefront of responsible investing practices globally.


With net assets of $19 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 90,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.
Now, I read this last week and I must admit, I wasn't particularly impressed.

It's not that I invest in tobacco companies directly (maybe through an ETF in the past). I never invested in tobacco stocks and never will.

In fact, I agree with that radiologist, smoking is one of the biggest health challenges of our time, and big tobacco has all but given up hope to expand in developed economies and is now focused on Africa and emerging markets (China and India in particular) where laws against smoking are laxer.

I also think it's crazy to smoke, full stop. It doesn't just put you at higher risk for cancer and heart disease, it makes a lot of diseases a lot worse (like MS and other neurological diseases), promotes osteoporosis and it makes you more prone to HPV (being vaccinated gives too many young ladies a false sense of security).

The list is endless which is why any doctor will tell you if you smoke, you're just asking for trouble. But nicotine is a powerful drug and a very addictive one which is why so many who get hooked find it hard to quit.

So, from a personal and moral point of view, I'm applauding OPTrust's decision to divest from tobacco stocks and bonds.

However, from a pension's point of view, I'm against divesting in general because once you start down this path, you're opening up Pandora's box and going down a slippery slope where you can really start questioning everything.

Exactly five years, I discussed this topic in a comment going over why bcIMC was being slammed for unethical investing:
First, let me state flat out, bcIMC is one of the best, most ethical pension funds in Canada with first-rate governance which ensures alignment of interests between their managers and stakeholders.

Second, they already take responsible investing seriously and have an entire section on their website devoted to corporate governance and responsible investing.

Third, while it's true that the Norwegian Government Pension Fund has divested from tobacco and arms-producing corporations, it too is having a hard time keeping up with its own rules on responsible investing. In February, it was revealed that Norway invested over $2 billion in 15 companies that manufacture and sell surveillance technologies - and that the government has no plans to divest investments in companies that are complicit in human rights abuses abroad.

More importantly, despite its name, Norwegian Government Pension Fund isn't a pension fund. It's the world's largest sovereign wealth fund and as such, it is in an enviable position because it doesn't have to match assets with liabilities. What it is struggling with is how to manage its explosive growth, a point Richard Milne of the Financial Times discussed in his excellent article (reprinted by the Globe and Mail),  Norway’s massive nest egg spurs investment debate.

Finally, to all those tree-hugging, vegetarian environmentalists from British Columbia fighting for social justice in their Birkenstock sandals, it's time to grow up and realize that the world is a sewer and if you push responsible investing to its limits, the first companies you should divest from are big banks speculating on commodity and food prices. How come you're not hopping mad about pensions gambling on hunger? I'm way more concerned about banksters engaging in financial speculation than tobacco and arms-producing companies. 

The reality is that once you push the envelope on responsible investing, you quickly divest from many companies in all industries, including Big Pharma which some claim thrives on perpetual sickness and slavery, as well as everyone's beloved Apple whose Chinese mega-plant, Foxconn, admits having child laborers in its factories.

Another example is the coal industry, which Harvard students demanded its endowment divest from. I said this was a dumb idea and note that with China and India ravenous for energy, coal’s future seems assured (take it from someone who got scorched last year investing in environmentally friendly Chinese solars!!!).

I'd much rather see large pension funds and sovereign wealth funds invest in these companies and use their clout to bring about important change, ensuring that labor, health, environmental and governance standards are respected while they deliver on performance.
The problem with divesting is you're allowing moral principles to dictate your investment approach and are ultimately putting your plan at a disadvantage to others who haven't imposed such constraints on themselves.

More importantly, I believe in change through strength, and in order to have strength, you need to own shares and use your power to sway corporations to make sound decisions over the long run.

Now, I realize when it comes to big tobacco, there's nothing you can do, the end product is deadly, but even there, you can force these companies to be much more careful in their marketing campaigns targeting youths in emerging countries or do something to change their behavior (forcing them to explicitly state the dangers of smoking).

At the end of the day, nobody really cares if OPTrust or any big pension divests, some other investor will take their place because they like tobacco companies and the dividends they provide.

And it's not just tobacco. Tom Steyer, the founder of Farallon Capital Management, one of the top multi-strategy hedge funds, once spoke in front of CalSTRS's board telling them to divest from fossil fuel stocks.

Mr. Steyer, a billionaire who is now retired, forced his own hedge fund to divest from fossil fuel stocks and bonds before he retired. He's now a powerful Democrat who you see on television with political ads calling for the impeachment of Donald Trump (love the part where he calls himself an "ordinary citizen").

Steyer is using his clout to promote his environmental and political agenda but again, pensions have to be extremely careful divesting from any sector no matter what Tom Steyer or anyone else thinks.

I mean honestly, think about it, cow farts are more damaging to our planet than CO2 from cars, so should pensions divest from McDonald's and other fast food burger companies? And besides, if you take a super long view of things, the Earth is screwed, at least according to Stephen Hawking.

From guns to bombs, to booze, to soft drinks and fast food, to pharmaceuticals, gambling, finance, cars if you really put every investment under a microscope, pensions would be divesting from a lot of things but would it be in their members’ best interests or that of society at large? I don't think so.

There is also the thorny issue of how do pensions divest from tobacco when it's part of an ETF? It leaves them exposed to tracking error. This too may explain why most pensions don't divest from any sector.

Morality and investments aren't always a good mix and when I read "this divestment keeps OPTrust at the forefront of responsible investing practices globally," I would say it's far more complex than you can possibly imagine. Using "responsible investing" to justify divesting is a slippery slope.

Please note, I did reach out to Hugh O'Reilly, President and CEO of OPTrust to get his take and also let him know my views. I was told he is traveling but will get back to me later this week. If he does, I will update this comment.

Also worth noting, OPTrust posted this on Twitter earlier today (click on image):

You can read more on this event, The Evolution of Canadian Pensions, by clicking here. It will take place in Toronto on Wednesday, November 22.

Below, on November 2, the Retirement Security Project at Brookings hosted an event with senior Canadian officials and American experts to discuss the Canadian retirement income and pension system and its relevance to American policy debates. OPTrust's Hugh O'Reilly and HOOPP's Jim Keohane shared their views so take the time to watch this clip.

Seond, Bronwyn King is a Radiation Oncologist and Founder and CEO of Tobacco Free Portfolios, discusses how her collaborative work with finance industry executives has contributed to >40% of Australian pension funds implementing tobacco free investment mandates, with ~$2.5 billion tobacco stocks divested.  

Also, Duncan Bannatyne takes on British American Tobacco and asks them why they're targeting African children, in the face of falling smoker numbers in the west. Of course, as the third BBC clip shows, British American Tobacco employees routinely bribe politicians and public officials in Africa to undermine life-saving health policies.

Lastly, the Wall Street Journal reports that revenues for US tobacco companies hit $117 billion in 2016, up from $78 billion in 2001. This clip discusses how the industry succeeded despite lawsuits, rising taxes and declining smoking rates.

As my mentor and friend from McGill University, Tom Naylor, used to tell us: "the world is a sewer".  Unfortunately, you can't divest from it.

Update: On Friday, I had a chance to discuss this decision to divest from big tobacco with Hugh O'Reilly, President and CEO of OPTrust, and here are the main points he relayed back to me:
  • Hugh began by telling me he too is very skeptical of divestment in general and "strongly believes in corporate engagement." 
  • He told me OPTrust believes in environmental, social and corporate governance (ESG), that he is a member that it is a member of the Canadian Coalition of Good Governance (CCGG), and that OPTrust is committed to delivering disclosure on climate change.
  • He told me that following Canadian law, OPTrust had divested from landmines and cluster bombs.
  • Importantly, on the issue of tobacco, Hugh doesn't buy the slippery slope argument. Unlike alcohol and gambling, there is compelling evidence that tobacco is highly addictive and leads to sickness and death. "No amount of corporate engagement will change the end product and its destructive effects."
  • On the issue of fiduciary responsibility, Hugh was equally adamant: "Our focus isn't just on maximizing returns, it's mainly on funded status. If we were only looking at returns, we would put a higher allocation in equities or other riskier assets." Moreover, he told that following ESG investing principles doesn't negate fiduciary responsibility, it enhances it and there are studies (ICPM) which demonstrate investing in companies with good governance is better over the long run. He cited the example of Unilever which has adopted strong ESG principles.
  • Interestingly, he told me that OPTrust isn't the first pension to divest from tobacco, AIMCo and CalPERS also divested from it (CalPERS also voted to broaden its restrictions on tobacco investments to external managers). 
  • In terms of performance, he said these investments are negligible and can be easily replaced with consumer staple companies that offer equally attractive dividends. He also said that major lawsuits against big tobacco will impact that sector's long-term profitability.
  • Lastly, Hugh called Dr. Bronwyn King, Radiation Oncologist and CEO of Tobacco Free Portfolios, a "real hero" for the work she is doing all over the world. He said he had lively discussions with her but in the end, he too was convinced divesting from tobacco was the right course of action.
I thank Hugh for taking the time to talk to me about this decision and after speaking with him, and listening to Dr. King's TED talk below, I'm starting to wonder why pensions and other institutional investors still invest in big tobacco. The world may be a sewer but we can all do our part to make it a little better one step at a time.