Should Pensions Divest From Tobacco?

Back in June, Del Irani of ABC News Breakfast in Australia published an article, Meet the doctor hitting big tobacco where it hurts:
"Are you telling me I'm currently investing in tobacco?!"

Radiation oncologist Dr Bronwyn King made a horrifying discovery in March 2010.

At a coffee meeting with her super fund representative, she discovered — by accident — that her money was being invested in big tobacco.

"I was just so taken aback because I'd been a doctor then for 10 years and had superannuation for 10 years," she told News Breakfast.

"So for 10 years, I owned Philip Morris, British American Tobacco — I owned these companies. Because when you invest in these companies, you own these companies."

A turning point for the good doctor

Dr King's voice trembles when she reflects on the horror she felt at that moment.

Up until that point she had never really paid any attention to her super.

However, at that moment in the cafeteria, everything changed. She simply couldn't let it go unchecked.

Since then, Dr King has worked tirelessly to champion tobacco-free investment, bringing the issue to boardrooms of super funds across Australia and the world.

She is the chief executive officer and founder of Tobacco Free Portfolios and has helped redirect $6 billion of investment from the tobacco industry to other industries globally over the past five years.

It is estimated 15,000 Australians die every day because of tobacco, and according to the World Health Organisation the world is on track for one billion tobacco deaths this century.

Dr King believes that by engaging the finance sector we can change that trajectory at least a little bit, and she feels obliged to act.

"Most of my patients are either not here any more or are very sick, but I've got their stories," she said.

"I need to make sure that those stories are told and that we use those stories to change things."

'I was naive in the beginning'

When it comes to saving lives, Dr King admits her journey has been unexpected and she had a lot to learn when it came to taking on the finance industry.

"I was very green when I came to this," she said.

"I didn't understand any of the language, regulatory environment, the rules or the systems.

One of the roadblocks she faced was justifying her stance.

She was frequently asked: "If we do exclude tobacco, are you going to come back next week and make us exclude 10 other industries. How can you justify excluding just tobacco?"

In response, Dr King developed a framework that suggested investors ask three questions of any company in which they may invest:
  1. Can the product made by the company be used safely?
  2. Is the problem caused by the company so significant on a global scale that it's subject to a UN treaty?
  3. Are there are any other effective strategies to deal with the problem? For example, can you engage with a company to encourage them to behave better?
The trouble is, it's tricky to find out if your money is being invested in tobacco or not.

Crowdfunding campaign to create change

To tackle this, Tobacco Free Portfolios launched a crowdfunding campaign, seeking donations to help roll out their new initiative called "Verified Tobacco-Free".

The concept is a bit like the Heart Foundation tick.

Tobacco-free funds that agree to being audited (to confirm they are indeed tobacco-free) will be able to purchase and adopt the Verified Tobacco-Free logo.

They can then display the logo on their websites and letters to members to proudly declare their tobacco-free status.

Tobacco Free Portfolios hopes the increased awareness of the issue will encourage other funds to follow suit.

"The goal is to raise awareness of this not just in super funds but in sovereign wealth funds, insurers, banks, reinsurers, fund managers," Dr King said.

Tobacco Free Portfolios are engaged with more than 100 of those organisations globally and their goal is to make Australia the first country in the world with a completely tobacco-free superannuation system.
Dr. Bronwyn King is in Montreal today and Toronto this week where she will meet with executives from pensions and other institutional investment funds to discuss her campaign to divest from tobacco.

You'll recall back in Novermber, I explained why OPTrust is following AIMCo, CalPERS and others and butting out for good. Hugh O'Reilly, OPTrust's CEO, 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.

Clare Payne, the Chief of Global Strategy who works with Dr. King at Tobacco Free Portfolios, was kind enough to send me her thoughts on how tobacco made its way into the boardroom across the global finance sector:
The boardroom agendas of businesses across the globe are strikingly similar despite each crafting their own distinct market proposition. Like much else, agendas are subject to fads, the influence of others and external forces, sometimes unexpected and sometimes entirely predictable. Attempts to influence the agenda range from the overt (protestors with placards), to the public (a tonne of coal delivered to the front door of a bank for example) to the illegal (hacking internal email systems to deliver blunt messages to staff). Others take a less confrontational route: they write letters, speak to their local member or advocate patiently for change. On occasion, change happens. Some issues are dealt with swiftly, once and for all. Others are not so easy, they’re grappled with, Boards might choose to wait and see – or lead.

One issue that has made a surprising entry as a priority on boardroom agendas is that of tobacco. Even public health officials, with a lifetime of tobacco control experience, have marvelled at the attention the issue of tobacco, and more specifically financial investment in tobacco, is receiving across the finance sector globally.

Tobacco has long been considered a health problem. We’ve been well aware for some time of the health issues related to tobacco, it’s now over 50 years since the US Surgeon General announced the unequivocal link between poor health outcomes and tobacco use - and even then it was considered late. We know that tobacco use results in devastating health impacts from lung cancer, to heart disease, the lose of limbs, eye sight, even respiratory problems in our children. Despite this knowledge the facts might still startle: 2 out of 3 smokers will die early as a result of their tobacco use. 7 million people will die this year and 1 billion people this century – because of tobacco. One hundred thousand children start smoking tobacco each and every day. This, despite the persistent and gallant efforts of doctors, public health experts and governments across the globe. The fight against tobacco companies has been relentless, the wins both big and small – but mostly just costly.

An ally that has long been missing in global tobacco control is that of the business community, namely finance. Tobacco after all is a business and the health implications an outcome of a business model that has allowed tobacco companies to privatise their profits whilst outsourcing the costs of their products to governments and communities. These companies have thrived through continued financial investment allowing expansion and influence.

Unwittingly, for many, they’ve found themselves as ‘owners’ of tobacco companies through having tobacco company stocks in their pension fund portfolio or other financial products. A ‘best of sector’ methodology has meant that even ‘sustainable’ and ‘responsible’ investment options routinely include tobacco companies. We’ve certainly created complex financial systems and untangling not just the average worker but also the biggest financial institutions from tobacco takes consideration and time, but it can be done.

Momentum around tobacco-free investment has grown steadily. The announcement in January this year by ABP, the world’s 5th largest pension fund, of a new policy excluding investment in tobacco could be considered a signal of the year to come, and indicates what will almost certainly be on the agenda for others in the global finance sector.

Tobacco now stands as the most commonly requested exclusion at BlackRock, and to date global finance leaders such as AXA, BNP Paribas, CalPERS, CalSTRS, PFZW, AMP Capital, Bank of New Zealand, Aviva, Natixis, OP Trust and PME have implemented completely tobacco-free investment mandates. Government run financial funds and pension funds including the Norwegian Oil Fund, the New Zealand Superannuation Fund, the Australian Future Fund, T Corp, the Irish Sovereign Investment Fund, Fonds De Reserve Pour Les Retraites, AP4 and the Alberta Investment Management Corporation are also tobacco-free. Currently, approximately 60% of the Australian pension sector (excluding self-managed funds), with total assets approaching AU$1 Trillion, is tobacco-free. In turn, tobacco-free products are coming to market to meet the demand.

Tobacco Free Portfolios has worked closely with many of the finance leaders on the tobacco-free list. Taking a strong position on tobacco can be justified for the following reasons:
  1. There is no safe level of consumption of tobacco: When used as intended, tobacco will have contributed to the early death of two out of three smokers.
  2. There is a UN Treaty: In recognition of the global ‘tobacco epidemic’ the United Nations’ Tobacco Treaty was established in 2005, called the World Health Organisation Framework Convention on Tobacco Control. It is the world’s first global legally binding public health treaty and is signed by 181 countries, representing 89.6% of the world’s population, making it one of the most widely embraced treaties in the United Nations’ history.
  3. Engagement cannot be effective: According to Dr Vera Costa, Head of the Secretariat of the World Health Organisation Framework Convention on Tobacco Control, “Engagement (with tobacco companies) is contrary to UN systems, objectives, fundamental principles and values”, 2017. Dr Margaret Chan, the former Director General of the World Health Organisation has declared, “The tobacco industry is not and cannot be a partner in effective tobacco control.” Positive influence of the industry through professional engagement is considered futile, as the only acceptable outcome is for tobacco companies to cease their primary business.
As environmental, social and governance practices become a criterion for which investment might be received or withheld, leaders across the finance sector are using their power to do what they can to address some of the most pressing issues of our time – and tobacco is undoubtedly one of them. The words of educator and writer, Anna Lappe, remind us that, “Every time you spend money, you’re casting a vote for the world you want.”

In finance, tobacco control has a new ally and its force is set to grow - that, it would seem, you can bank on.
Now, I had a chat with a friend of mine yesterday who told me he's all for giving pensioners a choice to divest from tobacco, big oil, guns, or whatever but when it comes to defined-benefit plans, he has real issues divesting from anything which is legal.

"DB pensions aren't there to make moral choices on behalf of their members, they are there to maximize returns without taking undue risks to fulfill their pension promise. If tobacco was illegal, fine, divest from it, but it isn't and I can see many pensioners worried about the state of their pension plan having real issues divesting from tobacco if it helps them bolster their plan over the long run."

He added: "Dr. King is right to feel the way she does but it was easy for her to check off a box in her Australian DC plan, much harder to do when you're part of a large DB plan which has a clear mission and return objective."

He ended on a sobering note: "Governments should make tobacco illegal but they refuse to because it's an easy way to collect revenues from the masses. If it was illegal, we wouldn’t have these debates on whether or not to divest from tobacco. People shouldn't blame their pension for doing its job, they should be campaigning governments to make certain things illegal if they feel so strongly against an industry."

I actually agree with him because even if all pensions divested from tobacco, there will be other funds like hedge funds, private equity funds or mutual funds that refuse to divest, stating they have a fiduciary duty first and foremost to their investors, not to some social or health cause no matter how worthy it is.

But if you listen to Dr. King's TED talk below, you can't help but wonder why pensions and other institutional investors still invest in big tobacco, it's like investing in death and despair.

Lastly, as someone who was diagnosed with MS over 20 years ago, I can't understand why anyone would smoke. My neurologist asked me a long time ago if I smoke and I said "no". He told me: "Good, smoking makes MS a lot worse."

Smoking makes everything a lot worse but it's so addictive that people can't seem to stop even when they want to. There is a moral problem investing in addiction and disastrous health outcomes, no matter how good it is for your pension.

Update: I managed to attend Dr. King’s lecture at the Centre Mont-Royal late this afternoon and also got to meet her. The presentation was meant for a broad audience and it was excellent. She showed us why cigarettes are so addictive and how the global tobacco crisis is here. In terms of her organization’s work, I was impressed with one slide where she showed all the Australian pensions, banks, insurance companies and sovereign wealth funds that collectively manage close to $1 trillion and divested from tobacco investments. Her organization has managed to convince many other major global financial institutions to divest from tobacco.

Interestingly, I told her governments are the problem because they collect major revenues from the sale of cigarettes. She told me the costs to the healthcare systems across the world due to tobacco-related illnesses dwarfs the revenues they get. She agreed with me the problem is governments spend the bulk of that revenue on other projects, not on healthcare costs due to tobacco-related illnesses.

She ended her serious lecture with a funny scene from the movie The King's Speech (see below).

Update #2: Jordy Gold, Director at Shift, sent me an email asking me this:
Your colleague said that DB pensions "are there to maximize returns without taking undue risks to fulfill their pension promise." I was speaking with a lawyer last month who works with some large Canadian pension funds. I said exactly what your colleague said about maximizing returns and asked how any fund could justify full divestment from tobacco or any other type of company for that matter. The lawyer corrected me. While there are some pension funds that have the explicit mandate to maximize profits, not all of them do. In general, he said that some/many funds have a mandate to simply meet their short and long-term obligations. As such, so long as they meet those obligations, funds with this type of mandate can justify divestment from tobacco. Do you agree or disagree with this interpretation?

It sounds like you enjoyed Dr. King's talk. After hearing her speak and your colleague's thoughts on DB fund responsibilities, would you say that OPTrust is breaching its fiduciary duty by divesting from tobacco?

I'm curious to hear your thoughts.
To which I replied:
I wouldn’t say OPTrust isn’t fulfilling its fiduciary duty, it most certainly is since it’s fully funded, but what if it wasn’t and divested from tobacco? Some members don’t take too kindly to their pension divesting from any investment when the plan is underfunded because it makes the plan more expensive which means they need to raise the contribution rate or cut benefits when it's underfunded. You’re right, I should elaborate, maximize returns without taking undue risks AND meet the plan’s actuarial target rate of return.

Also, CalPERS, CalSTRS and other big pensions that divested from tobacco did so despite being underfunded, which they did for ESG reasons but it still pissed off some of their members because it meant they need to pay more into their plan.
I thank Jordy for asking me his questions and hope this clarifies a few things on divestments. Importantly, pensions that divest aren't breaching their fiduciary duty, especially if they consulted their members beforehand, but there are costs associated with such decisions, especially if the plan is underfunded.