Asset Owners Reevaluate Tobacco

Just as America’s largest pension fund weighs getting back into tobacco investment, the world’s largest insurance fund announces a break up with the sector.

The world’s largest insurance fund announced its intent to divest from tobacco on Monday morning.

French insurer AXA said it would pull €1.8 billion ($2 billion) from tobacco stocks and industry corporate bonds, citing the conflict of interest it faces as a health insurance provider.

“This decision has a cost for us, but the case for divestment is clear.”“It makes no sense for us to continue our investments within the tobacco industry,” said Deputy CEO Thomas Buberl in a statement. “The human cost of tobacco is tragic; its economic cost is huge.”

Cary Adams, CEO of the Union For International Cancer Control, called AXA’s decision a “milestone step in the right direction.” But even as AXA turns its back on the tobacco industry, another major institutional investor is deciding whether to jump back in.

The California Public Employees’ Retirement System (CalPERS) announced in April that it would conduct a review of its 15-year ban on tobacco stocks. The review, set to be completed over the next six to nine months, will weigh the costs and benefits of a potential reinvestment in the industry.

“Divestment as an investment strategy presents a challenging conflict for CalPERS, as it often pits social responsibility against our fiduciary duty,” said Henry Jones, CalPERS board vice president and investment committee chair, in a statement. “We are sensitive to the policy issues surrounding divestment causes. But we’re also obligated to ensure that we maximize our investment returns on behalf of our members.”

“Limiting the opportunity set for investments has a deleterious impact on performance over long periods of time.”So far, CalPERS’ divestment from tobacco in 2000 has not proven a financial boon for the fund. An October report by Wilshire found that the fund missed out on as much as $3 billion in potential returns from tobacco holdings as of December 31, 2014. Continued exclusion could cost the fund $170 million annually over the next 20 years.

“Limiting the opportunity set for investments has a deleterious impact on performance over long periods of time,” wrote Andrew Junkin, Wilshire president, in the report.

However, defenders of the initial divestment have argued that supporting the tobacco industry is financially harmful to CalPERS as an organization responsible for providing health care benefits. State Treasurer John Chiang has called for CalPERS to reverse its decision to reevaluate tobacco, and representatives from organizations including the California Faculty Association and American Cancer Society have similarly spoken out against possible reinvestment.

“Investing in tobacco companies is harmful to public health and to our fiscal bottom line,” said Chiang in a statement. “Smoking causes addiction, disease, and death. No public pension fund should associate itself with an industry that is a magnet for costly litigation, reputational disdain, and government regulators around the globe.”

The CalPERS board of administration was itself split over the issue, with the April motion to move forward with the reevaluation of tobacco only narrowly passing. But the controversial decision was reaffirmed at the May investment committee meeting, with the board voting to accelerate the process from the original 12 to 24 month timeframe set for the review.

“Divestment is a difficult issue for us,” said CalPERS CIO Ted Eliopoulos in a statement. “We are happy to have a clear direction, and look forward to a thorough discussion of the issues and engagement with our stakeholders.”

CalPERS said it expects to come to a final decision on whether or not to include tobacco in its portfolio early next year, after a thorough review of data, studies, and stakeholder feedback.

For AXA, however, the decision is obvious.

“This decision has a cost for us, but the case for divestment is clear,” Buberl said. “As a major investor and leading health insurer, the AXA Group wants to be part of the solution, and our hope is that others in our industry will do the same.”

Related: La Caisse and CalPERS Undertake Strategy Reviews & Divestment Doesn’t Work, Says NZ Super