While global tobacco groups are being recognised for their green initiatives and move away from cigarettes, critics say smoke-free is not harmless and continue to push for divestment.
Every winter, Malawi’s smallholder farmers face extreme water scarcity: between May and September, the rainfall on which the African country depends averages just 10 millimetres, pushing many producers into a state of insecurity.
For a growing minority, however, this picture is changing. In recent years, some farmers have been supplied with solar-powered drip irrigation systems to reduce their dependence on the rain, and to diversify and improve their crop yields. A key sponsor of this initiative is Philip Morris International (PMI), a tobacco giant that some might consider an unlikely candidate.
PMI’s assistance to Malawi’s farmers is not an isolated act; over the past two decades, the company has been on a mission to transform its business through an emphasis on sustainability. This includes efforts to safeguard the environment, tackle climate change and promote the fair treatment and empowerment of its workforce, across a massive global value chain.
Above all, however, PMI says it wants to “accelerate the end of smoking” and address the negative health impacts of cigarettes. To do this, it is promoting its smoke-free products, which include heated tobacco and e-vapour offerings and, to a lesser extent, nicotine pouches.
The company says the use of these smoke-free solutions is likely to present less risk of harm relative to cigarette smoking. It is aiming for more than half of net revenues to be generated by them by 2025, up from 29 per cent in 2021, in a substantial shift from its current business model. In 2021, 70 per cent of its net revenue came from “combustible products” (ie, cigarettes).
Greenwash claims
PMI is not alone in launching new initiatives and discussing the need to change its core. British American Tobacco, for instance, is pushing ahead with “new category products” to shift away from cigarettes. Imperial Brands is following a similar path by emphasising the transition to a “healthier future” through “next generation products”, while addressing its operational impacts in different areas, from packaging and waste to human rights.
But as the tobacco industry attempts to shift entrenched perceptions and frame a more sustainable future for itself, not everyone is convinced. In May 2022, global tobacco industry watchdog STOP partnered with the World Health Organisation on the publication of a briefing, ‘Talking Trash: Behind the Tobacco Industry’s Green Public Relations’. Its authors make the argument that, as the industry has tried to “rehabilitate” its image, in reality, widespread greenwashing is occurring.
Among the examples cited is the use of broader ESG data that tobacco companies frequently display to both investors and the wider community, as they often cast a positive light on their activities.
According to STOP, very few of these analyses take into account the sustainability of a company’s core product. Meanwhile, tobacco companies capitalise on the fact that there is no single, globally recognised standard for assessing their ESG credentials. As a result, they can score highly or achieve recognition.
For instance, in 2021, MSCI gave Imperial Brands a single A ESG rating, just one short of its premier category of AA and AAA-rated ESG Leaders. In April 2022, Imperial Brands and BAT were included in the Financial Times-Statista list of Europe’s Climate Leaders for their work in reducing their Scope 1 and 2 greenhouse gas emissions.
But STOP argues that the tobacco industry’s broader environmental impact is overlooked. It says 4.5 trillion cigarette butts are discarded every year, making them the most littered item on the planet. Overall, it adds, tobacco production emits about 80 million tonnes of CO₂ equivalent.
Beyond this, STOP says the push to develop new products is also fraught with environmental risks, from the extraction of minerals to create battery components to the manufacturing of plastics to develop e-cigarette casings. And all of this is before taking into account the direct health impacts of tobacco.
According to the World Health Organisation, tobacco use contributes to the death of more than 8 million people a year. On its website, the Centres for Disease Control and Prevention, a US health protection agency, warns that “[m]ore than 16 million Americans are living with a disease caused by smoking. For every person who dies because of smoking, at least 30 people live with a serious smoking-related illness.”
“There’s no other industry that basically kills its consumer in the way that tobacco does. [So ESG recognitions are] a bit like giving a sustainability award to an arms manufacturer,” says Andy Rowell, a research fellow at the University of Bath’s tobacco research and control group, which is part of STOP. “Can you ever have a sustainable weapon? It’s a contradiction in terms. This is a product that kills its consumers over the long term,” he adds.
Weapons and tobacco are explicitly mentioned as areas of concern in the technical advice provided to the EU on its planned social taxonomy that would help evaluate business activities and investment.
Growing industry trend
Few investment subjects are as emotive. PMI chief sustainability officer Jennifer Motles says: “The topic of tobacco creates a very visceral reaction, and I think that tobacco and sustainability are not really an intuitive pair. The mere connection between sustainability and tobacco will make people from the outset say either ‘what do you mean? Tell me more’, or ‘I don’t care to hear about this’.”
Tobacco companies’ shift to a more sustainable future matter in an era when the investment community is increasingly alert to the ESG dimensions of their capital allocations. With the growth in negative screening – identifying and avoiding companies that score poorly on ESG factors – and the consequent heightened reputational and regulatory risks, few companies can remain complacent.
In this context, PMI has started conversations about its future and the extent to which it is aiming to leave cigarettes behind. “We’re not shying away from addressing the health impacts of our [cigarette] products,” Motles says. “Addressing this is a priority and connected to that, the best thing that we can do is to phase them out to make sure that they are not the future of our company.” However, PMI doesn’t yet have a global target date for ending cigarettes sales completely.
A former human rights lawyer who joined PMI in 2015, Motles has played an important role in shaping the company’s approach to sustainability: “It was very important to me personally, but also for the company, to ensure that when we talk about sustainability, we can do it in a way that is robust, that is rigorous, that is auditable, that is measurable and that is verifiable,” she says. “So any claims that we’re making or targets that we’re setting can actually stand the test of being verified and audited externally by any stakeholder.”
Over the last 18 months, PMI has revamped its ESG framework to emphasise both the product impact and the operational impact of its business, while addressing its sustainability priorities through eight impact-driven strategies. In 2021, the company unveiled a new sustainability index with 19 key performance indicators linked to its development goals for 2025. By introducing this framework, along with the clear set of KPIs, PMI hopes to anchor its objectives – and its claims – to verifiable outcomes.
Query over messaging
However, Rowell at the University of Bath questions the push by large tobacco firms to pursue a new generation of products: “A lot of the industry’s messaging is about being sustainable and going smoke-free. And all of that is moving into what they call ‘reduced-risk products’ – but the jury is still out on whether they actually are reduced-risk,” he says.
This issue, which is fundamental to tobacco companies’ goals for a more sustainable future, is highly complex. In BAT’s sustainability report, for instance, new category products are labelled as “less risky” choices, a designation “based on the weight of evidence and assuming a complete switch from cigarette smoking”. The company does add, however, that its products are “not risk-free and remain addictive”. BAT said it could not organise an interview with the right spokespeople within this article’s deadline.
“Big tobacco companies are saying they are committed to going smoke-free. The fundamental problem with that is they’re not committed to going tobacco-free. If they really were committed to public health, they would be committing to that,” says Rowell. New, non-combustible products still contain tobacco.
The UK National Health Service’s view is that e-cigarettes, or vapes, are “far less harmful than cigarettes”, while the Australian government’s health department observes that, even though more research is needed, scientists “do not consider them safe”. Perceptions around the risks posed by these products matter, because they are likely to affect public opinion as well as efforts to encourage divestment and prevent new capital flowing into tobacco companies over the coming years.
Financial pressure
Dr Bronwyn King, the chief executive and founder of Tobacco Free Portfolios, is leading global calls to stop financial investment in tobacco companies. King, a radiation oncologist, began her career working on the lung cancer ward of a Melbourne hospital. A meeting with the institution’s superannuation fund manager, in which she was notified that part of her superannuation fund was being invested in tobacco companies, ultimately changed the direction of her life.
“It was extremely jarring to think that I was spending all my time trying to help people recover from, or be cured of, the terrible diseases and illnesses caused by tobacco. And yet, on the other hand, my own money was being invested in the companies that make the products that were killing them,” says King.
In response, she founded Tobacco Free Portfolios, a not-for-profit organisation designed to bridge the gap between the health and finance sectors and, in doing so, exclude tobacco stocks from the business of financial services firms. Since the launch of the Tobacco Free Finance Pledge in 2018, nearly 200 signatories from 21 countries, representing more than $16tn in assets under management, have committed to the cause.
“The global catastrophe of tobacco is something that’s going to take a very long time to undo – and there’s really only a very small group of people around the world that have the time and funding to address it,” says King.
With travel restrictions easing in the wake of the Covid-19 pandemic, she plans to take the Tobacco Free Finance Pledge even further, by increasing her engagement with financial services firms around the world. “It’s the stories of my patients and the memories of my patients that gives me the energy and drive to never give up,” she says.
Unintended consequences
It is now common to see high-profile cases of institutional investors excluding tobacco stocks from their portfolios. In March 2022, British pension provider Scottish Widows announced that it would divest from any company that secures more than 10 per cent of its revenues from tobacco, while pulling £1.5bn from tobacco investments as part of the same policy. The outcome of divestment, however, is not yet clear.
In a study published in the Journal of Asset Management in 2021, Laurens Swinkels and David Blitz, both of whom work for Robecco Institutional Asset Management, found that “investors who can fly below the radar, and therefore are less constrained by social norms, are more likely to absorb the supply from tobacco divestments than other investors with public reporting obligations”.
In other words, ‘norm-constrained’ investors, such as pension funds and sovereign wealth funds, are much less likely to have positions in tobacco companies than, say, some passively managed funds that are filling the investment void.
This highlights one problem that the movement to divest from tobacco stocks faces: if investors with a conscience retreat, will they just be replaced by investors with less scruples? And how will this lead to meaningful change? Ian Woolley, head of AIM services at Hawksmoor Investment Management, says: “The counter argument against the divestment movement is that you end up with shareholders who don’t care about ESG issues and running these companies for the benefit of society; all they care about is maximising their returns and their cash flow.”
But even as market commitments to divest or negatively screen tobacco stocks pile up, tobacco companies are securing ESG-linked recognitions.
How true are ratings?
For tobacco companies, receiving a high ESG rating underscores the progress they are making across a spectrum of sustainability-related issues. But, for their critics, it illustrates what they consider to be the often-murky universe of ESG ratings. As a result of these ratings, passive funds can deploy investments into tobacco stocks on an automated basis.
“Simple passive investment strategies might focus, for example, purely on ESG risk scores, or ESG management scores, agnostic of what a company produces, its impact, or other norms and principles,” says Thijs Huurdeman, a tobacco industry analyst at Morningstar Sustainalytics, an ESG and corporate governance research and ratings firm. “Active investors might have a more holistic approach, and take into consideration a combination of approaches in building a portfolio. In the end, it’s all about what ESG approach you favour in your investment strategy,” he adds.
Nevertheless, there is evidence that ESG considerations have hit tobacco companies’ valuations. George Salmon, a senior investment analyst at Hawksmoor Investment Management, points to the example of BAT.
“Recently, BATS [the London Stock Exchange symbol for the company] has come back into vogue to some degree as investors seek a safe haven in the face of economic uncertainty. But it is still pretty cheap,” he says. “A major reason BATS remains unloved is the fact ESG considerations are playing an increasing role in stock selection.” Salmon refers to investors’ specific views over the social impact of tobacco, rather than ESG evaluations such as those expressed in ratings.
Until now, however, these considerations seem to have had little effect over a long time horizon. In August 2022, research was published by Robert Eccles, who has advised PMI on sustainability issues and is a visiting professor at the University of Oxford’s Said Business School, along with Shiva Rajgopal from Columbia University and Jing Xie from Hong Kong Polytechnic University, that analysed pricing information over the decade starting from 2010. The research found that so-called ‘sin’ stocks in the consumer sector didn’t differ from matched peers in a control group in terms of the cost of raising new equity, though the cost of issuing new debt was higher. Sin stocks are shares in companies often considered unethical, such as tobacco, alcohol and gambling.
Meanwhile, data supplied to Sustainable Views by Refinitiv show no shortage of debt market activity on the part of big tobacco companies. Bond issuance by the big four tobacco companies, including PMI, BAT, Japan Tobacco International (JTI) and Imperial Brands, were healthy between 2016 and 2022, with a total of 43 deals.
Indeed, JTI’s dual tranche €1bn debut hybrid bond issue was more than six times oversubscribed in 2020. Over the same period, these four companies also benefited from over $116bn in loan market activity, according to Refinitiv. In September 2021, for instance, PMI secured a $2.5bn revolving credit facility involving a number of global banks.
In any case, there are signs today that investors’ desire to pursue ESG principles will only stretch so far in the face of deteriorating market conditions. “Tobacco stocks have come back in favour this year because they’re very much at the defensive end of the market. As market volatility has increased, investors have voted with their feet, signalling that for many, the stable profits these companies can offer are still attractive,” says Salmon at Hawksmoor.
Wrong framework?
If market volatility, even to a marginal degree, can alter core investment principles, including ESG preferences, it could underscore criticisms of existing frameworks around sustainable investment. This applies, in particular, to the way that companies are rated according to different ESG criteria. “The most dangerous assumption of all is that ESG is an objective set of performance metrics that we can use to score whether something is good or bad,” says Alison Taylor, executive director of Ethical Systems, a research platform that is part of NYU Stern School of Business.
For Taylor, contemporary discussions around investing in tobacco are too simplistic. “We’ve ended up somehow in this very binary situation, where people are making these maximalist arguments when it comes to responsible business and tobacco,” she says. “A lot of these anti-tobacco arguments are basically saying the tobacco industry shouldn’t exist, or that regulators should regulate the tobacco industry out of existence. But what are they really suggesting here? That consumers shouldn’t be given the choice to smoke?”
From this perspective, the nuances of a complex situation are being ignored. As Taylor points out, the push to sort good and bad companies from one another, and move money from the latter to the former, is unlikely to be a panacea for the world’s problems. Moreover, tobacco groups are arguably doing more to address their key sustainability challenges than most other industries, she says, adding: “I do find it interesting that tobacco is the only industry I can think of that is actually trying to address its existential issues. Maybe [the development] of electric vehicles [by automakers] is another, but I’m struggling otherwise.”
The thorny relationship between tobacco companies and sustainable investment will not be resolved quickly. On the horizon, the tobacco industry is facing a growing wave of regulatory risks, including New Zealand’s decision to enact legislation to criminalise the sale of tobacco to people born after 2009, among other measures. Similarly, proposed regulatory changes in the US could see nicotine levels in cigarettes and other finished tobacco products reduced to make them less addictive. It is unclear if a snowballing divestment movement would help over the long term, either.
But as the industry looks to prioritise sustainability, new avenues for growth and, some hope, cooperation are opening. PMI’s Motles says: “[In this situation], there is an element of being a watchdog and calling out things that are happening that is very relevant, but then there’s an element of action: action that is impactful, that is sustained over time and that is only achieved by different stakeholders working together.”