More asset owners and managers joined the ranks of those divesting from tobacco and coal-related stocks in the year that ends, cementing a trend that is likely to intensify in coming years.
Pension funds including the Netherlands’ ABP and France’s Caisse des Depots et Consignations, and asset managers including CANDRIAM and Kempen Capital Management in 2018 either announced or completed the sale of tobacco producers and companies that extract or consume coal, as both activities are increasingly deemed in contravention of environmental, social and governance (ESG) principles. They follow on the heels of heavyweight investors such as Norway’s Government Pension Fund Global, who have set standards with divestments.
Tobacco and coal have in recent years emerged as a no-go zone for responsible investors, on par with another product-based exclusion, that of controversial weapons. Asset owners have looked into the risks and benefits of holding controversial assets, and increasingly their analysis shows that divesting is the right move on a risk-management, financial, reputational and social basis.
Channeling collective efforts behind the move to responsible portfolios are high-profile and ambitious initiatives including the Montreal Carbon Pledge, Climate Action 100+ and the Tobacco-Free Finance Pledge. As more of the world’s largest institutional money managers sign up to them, responsible investing principles are becoming a default practice in the industry.
Many asset owners also follow norm-based exclusions based on guidelines such as the United Nations Global Compact principles of human and labor rights, the environment, business ethics and anti-corruption.
Policies against tobacco
ABP, the pension fund for government and educational institutions in the Netherlands, said in January that it would sell out of tobacco producers within a year. Belgium’s CANDRIAM pledged in September to extend exclusionary screens as of Dec. 31 this year to more than 100 billion euros in assets to divest from thermal coal, tobacco, and chemical, biological and white phosphorus weapons. BNP Paribas Asset Management stated in March that it would end 2018 with its actively managed collective investment funds free of tobacco, while Kempen said in July it had decided to stop investing in tobacco.
Norway’s Government Pension Fund Global exited its tobacco investments as early as 2010, while PGGM, the Dutch pension fund overseeing 215 billion euros in assets, excluded tobacco in 2013. AXA and France’s Fonds de Reserve pour les Retraites (FRR) followed suit in 2016. Smoking causes an estimated 6 million deaths a year, according to the World Health Organization.
Largest source of carbon emissions
The banning of thermal-coal stocks from portfolios has been driven by a growing environmental push, which gained additional government support across the world with the 2015 United Nations Climate Change Conference. The investment exclusion covers companies that extract the mineral, as well as utilities that use it to fuel power stations. The burning of coal is the largest single source of carbon emissions.1
PME, the pension fund for over 167,000 metal and electrical engineering workers in the Netherlands, in 2018 divested its holdings in coal producers. Lloyd’s of London, the world’s oldest insurance market, announced in January it will stop investing in coal companies.2 In November, Caisse des Depots, the 202-year old manager of French public pension and savings funds, said that as of 2019 it will no longer invest in businesses that generate more than 10% of their revenues from coal. As with tobacco, they join large asset owners that already have coal exclusions in place.
The role of ESG in risk management and returns
Exclusion criteria can be considered a very basic and simple step for asset owners looking to disassociate themselves from activities that are detrimental to our societies and environment, but it is a fundamental one on the ESG transformation path of the financial and corporate landscape.
According to a biannual report from Eurosif in November,3 negative screens remain the most prominent responsible investing strategy for asset owners.
For investors, sustainability principles are also attractive as they help limit market and reputational risks that can destroy shareholder value. Moreover, a majority of surveys have shown that an ESG focus need not imply giving up on returns and financial performance. On the contrary, it can enhance them through a combination of better corporate oversight and risk management.4
A passive approach to exclusions
In November, STOXX launched the STOXX® Europe 600 ESG-X Index, a version of Europe’s popular benchmark that excludes companies based on norm- and product-based screenings.
The new index tracks the STOXX Europe 600 Index minus those constituents involved in certain activities. These include businesses that produce or distribute controversial weapons, are tobacco manufacturers, generate or consume thermal coal, as well as those in breach of any of the 10 United Nations Global Compact principles.
The STOXX Europe 600 ESG-X Index allows many asset owners to follow an ESG exclusion strategy in a passive way, adding to the amount of global ESG assets. Until recently, an active allocation was the only possible means to implement pure exclusionary screens in a portfolio of European equities.
A sustainable revolution
The tobacco and coal sectors have become the latest frontiers in the progress of sustainable investing, an area that is growing strongly and often quietly and making a big difference for the environment and the world. Other business activities are also featuring more frequently in the exclusionary landscape, most notably those related to fossil fuels beyond coal. The responsible investing revolution is gaining ground every year, one investor at a time.
1‘Trends in Global CO2 Emissions Report 2016,’ European Commission Joint Research Centre, PBL Netherlands Environmental Assessment Agency.
2 ‘Lloyd’s of London to divest from coal over climate change,” The Guardian, Jan. 21, 2018.
3 Eurosif, ‘European SRI Study 2018,’ Nov. 19, 2018.
4 DWS, ‘ESG & Corporate Financial Performance: Mapping the global landscape,’ December 2015.