Practical analysis for investment professionals
13 January 2016

The Case against Investing in Tobacco

The Case against Investing in Tobacco

What’s the economic and ethical case against investing in tobacco?

I discussed this question with Dr. Bronwyn King, an oncologist who persuaded 34 Australian superannuation funds to divest from tobacco manufacturers. When King started working as a doctor at a cancer center in Melbourne, some of her first patients were afflicted with lung cancer. She witnessed them suffer and die — a moving and troubling experience. A turning point came when she realized some of her own pension savings were invested in tobacco through her superannuation fund. That was the origin of her campaign for Tobacco Free Portfolios.

CFA Institute: There are a number of industries considered controversial — alcohol, gambling, defense — why focus on tobacco?

Dr. Bronwyn King: I am a practicing radiation oncologist so I see the devastating effects of tobacco firsthand. That is the background to my interest in this area.

Tobacco stands alone when compared to all other industries or products. Firstly, there is no safe level of exposure. When used as intended, tobacco will have contributed to the early death of two out of three smokers. Secondly, the scale of the negative impact of tobacco is profound, causing an estimated six million deaths per year globally. Thirdly, positive influence of the industry through professional engagement is futile, as the only acceptable outcome would be for tobacco companies to cease their primary business.

Is this an issue mainly for governments and legislatures or is there a role for finance and investing?

I see tobacco as a cross-sector issue. The global health sector is doing all it can to cope with the tidal wave of patients suffering from tobacco-related disease — including researching increasingly sophisticated treatments — but cure rates remain poor (for example, the five-year survival for lung cancer is 15%). Governments all across the world have recognized the importance of addressing the tobacco epidemic by committing to ongoing implementation of tighter tobacco regulation.

In contrast, much of the global finance industry still invests in and profits from tobacco. But this is changing. Finance leaders are listening, acting, and are contributing to the comprehensive commitment from all sectors to end the global tobacco epidemic. 

Other parts of financial services, such as banking and insurance, also serve the tobacco industry. Why focus on institutional investors?

I have focussed on the superannuation sector of financial services as this is where my inquiry commenced when I found out I was invested in tobacco through the default option of my superannuation fund. With the Australian superannuation industry being the world’s fourth largest in retirement savings, with approximately $2 trillion AUD in total assets, this represents a significant part of the sector to make a difference. My work, however, is not limited to the superannuation sector or institutional investors. I am engaged with organizations across financial services broadly.

How do you respond to the libertarian argument that people are free to choose if they smoke or not?

The reality is that young people, those from a low socio-economic background, and indigenous people make up much of the smoking population. A combination of lack of education, cycles of poverty, and targeted marketing means that many are not making, nor empowered to make, informed decisions.

Surveys show that in Australia in 2013, the average age at which young people aged 14–24 smoked their first full cigarette was 15.9 years. A survey of smokers in Canada, the United States, the United Kingdom, and Australia shows that the proportion of smokers who agreed or agreed strongly with the statement, “If you had to do it over again, you would not have started smoking,” was extremely high — about 90%, and almost three quarters of current smokers have shown some interest in quitting.

Eventually, it appears that for many smokers, it is not a matter of choice, but rather addiction.

What’s the economic case against tobacco for the taxpayers?

The economic case against tobacco for the taxpayers is clear due to the fact that in Australia, the estimated total social cost of smoking in 2004/2005 was over $31 billion, and by comparison, revenue from sales of tobacco in 2008 amounted to just $5.6 billion.

What’s the economic case against tobacco for the investment professional? For instance, are there investment risks in tobacco that they have yet to appreciate?

There are many significant long term risks associated with the tobacco industry, including:

  • Regulatory Risk: There are 180 parties of the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC), the world’s first legally binding health treaty. Parties have committed to implementing a broad range of tobacco control measures to reduce the number of new smokers and to encourage current smokers to quit, in a global commitment to ending the tobacco epidemic. New regulations are being enforced all across the globe.
  • Litigation Risk: There are an increasing number of major class actions against the tobacco industry, challenging the outdated assumption that governments will automatically pay for the profound health costs resulting from tobacco.
  • Supply Chain Risk: In today’s world, it is simply unacceptable to be associated with an industry that significantly relies on child labor to produce its product.”Almost no cigarette can be guaranteed to be free from child labour.”
  • Reputation Risk: The tobacco industry is consistently ranked as the world’s least reputable industry. Consequently, individuals and organizations increasingly avoid affiliation of any sort.

What’s the ethical case against investing in tobacco? Is it specific to certain societies or is it universal? 

Quite simply, tobacco free investment is the right thing to do. In 2015, society does not tolerate an industry that is on track to kill one billion people this century. This industry does not deserve our faintest affiliation, let alone our financial vested interest. A strong ethical case can be made due to the level of harm related to the product and the human rights issues, including the use of child labor. In addition, individuals can consider their own values, and those of their organization, and consider whether there is true alignment with that of the tobacco industry. 

How would you reconcile an investment manager’s fiduciary duty to clients and a tobacco free portfolio?

According to the the 2015 reportFiduciary duty in the 21st century by the PRI [Principles for Responsible Investment] with UNEP  FI [United Nations Environment Programme Finance Initiative], fiduciary duty is not an obstacle to action on environmental, social, and governance [ESG] factors.

Fiona Reynolds, managing director, Principles for Responsible Investment, states, “Recent studies have broadened the interpretation of fiduciary duty away from the narrow confines of past definitions, and have emphasised that there is no conflict between fiduciary duty and ESG considerations there is a growing recognition that ESG issues are in fact financially material to a portfolio. Using the status quo as a reason for not integrating ESG is no longer acceptable.”

In the case of tobacco specifically, the action of more than 30 Australian superannuation funds, comprising over 300 individual trustees/directors, to implement tobacco free investment mandates indicates fiduciary duty can be maintained.

Where do you draw the line regarding investing in tobacco? Are you talking about manufacturers, retailers, the whole supply chain, or beyond?

Tobacco Free Portfolios encourages divestment from tobacco manufacturers alone, not retailers or companies associated with packaging, machinery, or transport.

Is there a risk that if the tobacco manufacturers in the formal sector have constrained access to finance, it could result in growth of informal tobacco manufacturing?

I have yet to read any commentary or received advice on the risk of this occurrence. There is still some way to go before tobacco experiences constraints in access to finance.

Would you agree that the tobacco industry has survived social stigma and exclusions/divestment from some investors in the past? Why do you think this time is different?

I believe the finance industry is increasingly publicly exercising judgment that includes ethical considerations and a broader concept of fiduciary duty. In Australia, we now have momentum, with 34 large pension funds (with combined funds under management of more than $500 billion (AUD)) implementing tobacco free investment mandates. More than 20 others are actively considering the issue. A new baseline standard is emerging. As for the future, we are now living in a world where people demand transparency, responsibility, and sustainability. Tobacco free investment speaks to these broad themes. Consumers will ultimately demand the creation of products that meet their expectations. The time is right.

What about the intended impact? Is reduced investment in tobacco likely to lead to reduced harm to human health?

The intent is to signal disapproval of the industry by de-normalizing investment in tobacco. In turn, this can affect and build on political, legislative, health, and community initiatives to control tobacco.

What’s the eventual outcome you hope to see from Tobacco Free Portfolios?

The eventual outcome is for the finance sector to have a tobacco free investment mandate. This would align the finance sector with the good work of the health and government sectors as they endeavor to control tobacco and ensure the good health of individuals across the globe.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Usman Hayat, CFA

Usman Hayat, CFA, writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals;" the literature review, "Islamic Finance: Ethics, Concepts, Practice;" and the research report "Sustainable, Responsible, and Impact Investing and Islamic Finance: Similarities and Differences." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in development economics. He has served as a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP) and former CEO of the Audit Oversight Board (Pakistan). His personal interests include reading and hiking.

29 thoughts on “The Case against Investing in Tobacco”

  1. Chijere Chipeta says:


    Though there has been much debate against the tobacco industry; I see that there’s still bias in terms of discussion against the industry.When we look at the production side of tobacco, mostly for countries in the sub saharan Africa.Mostly small scale farmers a larger percentage of the population depend on tobacco farming as a source of livelihood,if we force them out of production how would they survive. We want to save people’s life’s by destroying some people’s life, where thero no much sense.there’s little they can do without tobacco farming. We shouldn’t only think of the big investors in the supply chain but the characteristics of the primary producer as well. If we say yes to tobacco disinvestment, cancer cases will decline as argued but will happen to the primary producers who are poor and are in large numbers. Force them out of the industry you possibly forcing them into a slow death out of poverty

    1. Tara says:

      Don’t waste your breath Chijere , these guys don’t know the difference between business risk and investment risk….. as outlined in the interview .

  2. Chijere Chipeta

    Thanks for visiting the blog and sharing your comment.

    It seems you are making a utilitarian argument in favor of tobacco. That is, the cost of potential slow death from poverty of some tobacco farmers in Africa, as you put it, somehow outweighs the cost of slow death of smokers. I am not sure how this utilitarian calculus can be justified.

    Poverty is not just the problem of some tobacco farmers in Africa but of many other people across the world and smoking, a health hazard, is not a measure for poverty alleviation.



  3. Rob D. says:

    I hope you realize that the points made in this article could be made about almost anything. Change the word tobacco to, say, alcoholic beverages. How about cars? Both of which have some controversial aspects of their production if you really look for it. And they both will kill you. And both do kill on much higher levels than tobacco. How about we just let people decide how to live their own lives?

    1. Rob D

      Thanks for sharing your comment.

      Yes, tobacco and alcohol face some similar issues, and that’s why the very first question in this interview pertains to that. Dr King has shared her views on tobacco vs alcohol etc.

      Regarding driving cars, that’s ofcourse different from smoking cigarettes in many ways.



  4. Ahmad says:

    It should be noted that Islamic funds do not invest in tobacco.

    Thanks, good interview.

    1. Ahmad,

      Thanks for visiting the blog and sharing your comment.

      Yes, Islamic banking, takaful/insurance, and investment management, all segments of Islamic finance screen out tobacco.



  5. Hansi Mehrotra says:

    Good to see Australian super funds taking the lead on this.

    We need to make RI mainstream by showing that the only reason they are not is because society hasn’t priced or made public the costs of public goods.

  6. Hansi Mehrotra

    Thanks for visiting Enterprising Investor and sharing your view.

    Yes, a significant part of the discussion on ESG and RI focuses on internalizing negative externalities, and there clearly are externalities in tobacco. At the same time, it is also an issue of moral values. It is up to the investors whether they take the economic value or moral values perspective.



  7. Mary Davey says:

    Many things cause cancer for example chemicals used in agriculture, hormonal contraceptives do too does this mean that you should not invest in healthcare or monsanto. In my opinion as an investment expert your responsibility is to obtain the maximum returns on your portfolio with appreciation as to the risk criteria not making haphazard “ethical” considerations as to whether or not tobacco causes cancer, investment analysts are not cancer experts. If you had invested in Philip Morris in 2010 and maintained your position for the long term you would have a 300% return on your port olio in a low risk consumer staple equity there is a similar case for British American Tobacco
    Thank you very much

  8. Mary Davey says:

    Just one further point on this article:
    Considering that Tobacco is a consumer staple, one would have to exclude many ETF and possibly S&P 500 in order to obtain a tobacco free investment portfolio which for an investment professional would not alone be irrational it would also be unethical and from the stand point that in the CFA institute ethical guidelines you are supposed to :
    Place the integrity of the investment profession and the interests of clients above their own personal interests.

    Tobacco free investment seems to be a personal crusade for the writer here as they say that after their work in hospitals they decided to pioneer tobacco free investing.

    1. Mary Davey

      Thanks for reading the interview and sharing your views. Its good to get all sides to a story. I can’t speak for Dr. King, but here is how I think one could argue against your view.

      1. Yes, ofcourse, cancer or harm to one’s health can be caused by more than one factor, but it is an established fact that smoking is harmful to one’s health and it is a cause that can be avoided.

      2. The case against tobacco is both economic and ethical, and both types of considerations are relevant for investors depending upon their mandates.

      3. It is no argument to say that “With the benefit of hindsight, I can tell you that you could have made a lot of money had you bought that tobacco stock back then.” For instance, with the benefit of hindsight, you probably could have made more much more money by selling your tobacco stock and putting that money in a leveraged short position in oil futures. The research paper “The Price of Sin Aversion” says that “the alcohol, tobacco and sin portfolios do not exhibit any significant outperformance, and the gambling portfolio underperforms.”

      4. Yes, one has to draw the line on exclusions somewhere, that is, who should exclude and how far to go in pursuit of that exclusion. The interview makes it clear that Dr. King is talking about pension funds and excluding tobacco manufacturers.

      5. Whether or not excluding tobacco is consistent with fiduciary responsibility is an ongoing debate. CFA Institute does not have a position on this specific issue. That a number of Australian pension funds have already excluded tobacco implies that they have found why and how excluding tobacco is consistent with their fiduciary responsibility.

      Thank you again for reading the interview and sharing a different perspective.



  9. Mary Davey says:

    Dear Usman,
    Thank you for your response, I have something to add:

    1. A leveraged position short position in crude futures is an altogether different risk profile than a long equity position in consumer staples, you are comparing apples and oranges. Futures trading carries much more risk and pension portfolios are not in the business of trading futures as a business mainstay i.e. they may have a proportion of their investments in futures funds but it is not their usual business. Pension portfolios are usually in the buy and hold business and their investment horizon is for the long term and not a 6 month turnover trade that may or may not have materialised.

    2. If the Australian pension portfolios are excluding tobacco stocks entirely from their business, they would have to be excluding all consumer staples ETF and S&P 500 which has 3 tobacco stocks in the portfolio clients should be made aware that this is the case as it is the biggest are for normal pension portfolios. How is this ethical from the standpoint of an investment professional it is experimental in nature for a pension portfolio to exclude consumer staples and the largest stock index on the basis that tobacco is bad for people health, they may as well exclude all of the military and defence stocks too.

    3. In relation to your first point about tobacco being bad for ones health; there are many things that are considered bad for ones health and as an investment professional it is not the area of expertise to judge this; people have been smoking since the stone ages it is only in recent years with the advent of tobacco cessation products that smoking has become an anti social problem.

    I look forward to your informed response,
    Thank you,

  10. Mary Davy, thanks for the discussion. Quick clarification:

    1. My point was about arguing in favor of a stock with the benefit of hindsight, and the point stands whether it is about oil futures or a stock. I did quote a research study which addresses the issue of performance.

    2. I am afraid I am not the best person to explain how the Australian funds are implementing tobacco exclusion.

    3. The argument here is that tobacco stands out, it is not just one of the many things that are not good for one’s health. There is both an economic case and an ethical case against tobacco, as explained in the interview.

    Thanks again for your interest in the interview.



  11. Mary Davey says:

    Dear Usman,

    I had a quick look at the research paper; and I must add that where I come from neither tobacco, alcohol or gambling is a sin. In fact the gaming stock Paddy Power has been the best performing stock in the ISEQ this year and everybody is scrambling trying to get in on the action.

    Research papers are largely open to subjective reasoning and from my quick review of the paper that you refer to there is a lack of charts which are more exact in their interpretation.

    The point that I am trying to make is that it is arbitrary to consider Tobacco stocks unethical and the reasoning for the investment strategy quoted in the above article is very subjective opinion and personal opinion of Dr King who is a medical person and does not have expertise in investing or trading I understand. For a pension portfolio it is a very risky strategy if as a result of tobacco free investing you are excluding consumer staples which are low risk, cyclical and price inelastic in nature.

    Personally I have been to Australia in recent years and their anti tobacco and alcohol policies are ridiculous, for example if there is a roof on an out door building but no walls you can’t smoke underneath you must go out in the sun (which could cause skin cancer) or you can’t smoke within 500 meters of a public building. However there is terrible violence in Australia and violent crime is a serious social problem.

    Ethics can be argued in many different ways and are largely subjective in nature. Stock price charts do not lie and tobacco stock are good investments for pension funds and they have been for many many years excluding tobacco funds on the basis that tobacco is unhealthy is unethical from the standpoint of an investment professional for the simple reason that they are not experts in health and it is not their mandate to be experts in health either.

    Finally in the article the comment about:
    The intent is to signal disapproval of the industry by de-normalizing investment in tobacco.

    The role of an investment manager or pension fund manager is never to “signal disapproval” it is a completely ridiculous statement, the role of an investment manger is to get return on investment and that is it.

    I look forward to your informed response,
    Thank you

    1. Mary Davey

      Thanks for engaging in the discussion on investing in tobacco. I think by and large both of us have expressed our views. There is bound to be a diversity of views on both the ethics and economics of investing in tobacco.



      1. Mary Davey says:

        Dear Usman,

        Thank you for your comment, but upon reading the full interview and the comments, I really don’t think that you get it. You put yourself forward as a FRM and CFA but in terms of the article, there does not seem to be a good grasp of either. For Example

        1 You say that Islamic Funds will not invest in Tobacco stocks, I can only assume that this is as per the article that this is because “smoking causes cancer” but most islamic funds are top heavy in Military and munitions, for example KSA invests 10% of its GDP in Arms military and munitions:
        How do you justify this discrepancy?

        2 The interview is with Dr King who is a medical person, how do you justify her taking a personal crusade against tobacco companies in terms of portfolio management when her area of expertise is neither finance trading or portfolio management?

        3. In your comment to me you state that I should sell my tobacco stocks and take “a leveraged short position in crude oil futures” I would like to know how you justify this statement as a FRM and CFA why do you think that I should do this?

        I await your response,
        kind regards,

  12. Afshan Rajabpour says:

    Thank you for sharing the information with us. I believe on top of that lack of accountability to future generation should be considered as well .e.g human contribution to global warming,…

    1. Afshan Rajabpour,

      Thanks for reading the interview.
      There are a number of posts pertaining to climate change on Enterprising Investor, which may interest you.



  13. Michella says:

    The tobacco lobby wants investors to believe that even though tobacoo faces stiffer regulation and social disapproval and that it causes cancer and uses child labor, this all is mere a subjective ethical issue of archaic religions, it will never cause a loss on investments.

    1. Michella,

      Thanks for sharing your view. If I understand you correctly, you are suggesting that the case against investing in tobacco is not confined to ethics, there is a economic as well as an ESG angle to it that all investors, regardless of their ethical stance, need to consider. I think the content of the interview is consistent with this view.



  14. Emily says:

    I have no moral concern about investing in tobacco. If it causes cancer to smokers, so be it.

    1. Emily,

      Thanks for stating your view with such clarity and brevity.

      Different people are going to have different views about the ethics of investing in tobacco. Also, ethics is one but not the only part of the case against investing in tobacco, as the interview above clarifies.



  15. john says:

    As a non smoker, I am really tired of seeing cigarette buts. They are everywhere where I live. Tax payer money wasted on cleaning this mess. Tobacco manufacturers should make the buts chewable, let their happy customers recycle the buts for us.

  16. Government has banned smoking in many cities. Many shopkeepers are not selling smoking products. Smoking is responsible for your bad health. So please do not smoke in your entire life.

  17. Vlad says:

    Dr. King appears to be brain-washed beyond redemption insofar smoking is concerned. Millions of deaths per year, 2 in 3 smokers dying prematurely – she bought the anti-smoking fanatical propaganda hook line and sinker.

    She quotes a survey where 90% of smokers said they wish they hadn’t started – let’s do a little exercise: let’s replace smoking with drinking coffee, shall we ? let’s scare the s**t out of people with how bad smoking supposedly is for you (2 out of 3 will die prematurely, that kind of stuff), let’s raise the current price of coffee 10 times, let’s ban drinking it practically everywhere except your home and in the middle of nowhere and then see if 90% wouldn’t say the same: God, I wish I never touched the stuff.

    So Dr. King doesn’t want to engage with tobacco manufactures, she wants them ‘to cease their primary business’. May I remind her to brush up on her history and see what happened in the 1920s in the USA when alcohol manufactures ‘ceased their primary business’.

    I find it quite baffling that investment managers who are supposed to be critical thinkers got taken by this fanatical propaganda masquerading in ethics.

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