Tuesday 13 March 2018

The futility of divestment

I was in Edinburgh last week at a pensions and investment conference talking about the divestment movement. I have written about this idea before. It suggests that if you disapprove of an activity, you should sell your shares in the industry that facilitates it. In doing so you will achieve, er, absolutely nothing.

As I said at the conference, if you really dislike an industry you might not want to feel that you have to cheer it on because you have a stake in its success. Fair enough. But the divestment movement seems to think that selling off shares has some tangible effect on a company's activities. I see no mechanism by which a private investor selling a share in a fossil fuel company could have the slightest impact on the demand for fossil fuels or the amount of carbon dioxide emitted into the atmosphere. The same principle applies to tobacco, guns, alcohol, gambling, sugar or any other 'sin stock'.

If you only want to invest in 'ethical' companies and you are prepared to get potentially lower returns, that is up to you. What I object to is local authorities selling off high-yielding shares from their pensions portfolio for the sake of futile virtue-signalling. These losses ultimately have to make up by taxpayers. That is unethical.

I was on the panel with someone from Tobacco Free Portfolios. If you visit their website or watch their TED talk, you will notice that they do not offer a single reason why divesting from tobacco will have any impact on the number of cigarettes sold or the number of people who smoke. Action on Smoking and Health recently published a briefing paper encouraging local authorities to divest from tobacco. Nowhere in its eight pages is there any indication that divesting will do any good.

Given that there is no theoretical reason to assume that divesting has any effect on the supply or demand for the product in question, and given that proponents of divestment are unable to offer even a bad argument for it, you have to conclude that the whole thing is a pointless gesture.

The ASH document focuses on trying to persuade councils that tobacco stocks are not a good longterm prospect. The woman from Tobacco Free Portfolios made a similar argument. ASH are probably overestimating the efficacy of their anti-smoking policies, but it could nevertheless be true. Who knows?

Either way, that is an investment decision, not an ethical decision. If ASH knew for certain that BAT shares would be the best performing investment of the next decade, they would still encourage divestment. Claiming that tobacco shares - which have been extraordinarily lucrative in the past, despite increasing regulation - are going to head south is a way of wriggling out of giving a single tangible benefit of divestment.

In any case, why would we trust single issue pressure groups over the combined wisdom of investors? As somebody in the audience pointed out, future risks are priced into share prices. You don't have to be a strict believer in the efficient market hypothesis to see that share prices are a better guide to the value of a company than the value put on it by people who hate the company.

Let's remember that anti-smoking groups also claim that it is not in the interest of retailers to sell cigarettes and that tobacco farmers would make more money planting different crops. If either of these claims were true, you would expect retailers and farmers to have worked it out or themselves and changed their business model accordingly. It is hard to believe that organisations with an extreme prejudice against tobacco know more about the economics of the market than people who have got skin in the game.

You can watch the discussion below:

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