Opposition to personal profit from tobacco is as old as Virginia’s founding plantations. Many leading endowments and pensions took a stand to divest from this addictive leaf several decades ago but the movement failed to catch on a small and mid-sized institutional asset managers. However, a growing interest in impact investing suggests that more and more investors may be expected to kick the tobacco habit in the years to come.
This resolve to divest picked up speed in 1990 in response to new research on tobacco’s devastating health effects. Harvard University and the City University of New York (CUNY) were the first University endowments to divest, and John Hopkins University followed closely behind them.
In 1996, the American Medical Association’s House of Delegates made the claim that “all physicians, health professionals, medical schools, hospitals, public health advocates and citizens…divest of any tobacco holdings” and even called on all life and health insurance companies and HMOs to divest, as well. This clarion call took the divestment campaign beyond academic institutions and into the centers of commerce and public life. Since smoking affects societal health costs and worker productivity, insurers and public pensions could no longer ignore the divestment issue.
Since that early flurry of activity a few decades ago, the drive to divest from tobacco has moved forward at much slower pace. With this backdrop, all eyes were recently focused on America’s largest state pension, the California Public Employees Retirement System (CalPERS). After making the decision to divest from tobacco investments in 2000, some of the CalPERS trustees and staff were still feeling what we can call the “pangs of withdrawal.” The question emerged: Was it still prudent to blacklist this historically profitable industry? To help answer this question, the trustees ordered an historical analysis to better understand the true costs of divestment.
The divestment report, completed by Wilshire Associates, revealed that the decision to divest from tobacco had cost CalPERS 1.94% of its total global equity portfolio over 14 years from 2000-2014. On an annual basis, the cost was 0.14% of growth per year. Despite this relatively small impact, these losses still reduced the portfolio by over $3 billion dollars due to the immense size of CalPERS equity portfolio—a number that cannot be ignored.
After hearing arguments from both sides, CalPERS recently voted in December 2016 to not only maintain their current tobacco stock blacklist, but also order complete divestment from all funds with tobacco holdings. Selling individual stocks in a portfolio is a relatively easy task. Eliminating these same positions from every fund balance requires much more intentionality as more rigid fund managers need to be fired and replaced. Could this moment be the fuel that reignites the tobacco divestment movement?
Whether new investors pick up the tobacco divestment mantle remains to be seen. However, what is absolutely certain is that today’s investors are becoming much more focused on aligning their portfolios with their mission and values. The US Forum for Sustainable and Responsible Investment (US SIF) reports that allocation to strategies that either use exclusionary screens to avoid unpalatable business practices or best-in-class screens to reward corporate citizenship have increased 33% in the last two years. Many investors are deciding that the well-being of their community and beyond is not worth sacrificing for mere tenths of a percent.