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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Ethical investing at the BBC

The BBC was in one of its fits of moral outrage yesterday, with an episode of Panorama criticising various charities for investing in "unethical" companies, notably alcohol, tobacco, arms, pharmaceuticals and energy.

Millions of pounds donated to Comic Relief have been invested in funds with shares in tobacco, alcohol and arms firms, BBC Panorama has learned.

Panorama never explained what harm was being done by Comic Relief investing in high-yield shares. It is simply a fact that companies like Diageo and BAT have been amongst the very best performers in the stock market in recent years and therefore appear in many investment portfolios. This seems to me to be sensible financial management but the BBC has previously reported on local councils investing in tobacco stock for pension funds so I guess it must be controversial (eg. here and here).

The tone of the programme strongly suggested that it was immoral per se to invest in companies like Imperial Tobacco, BAT, BP and GlaxoSmithKline. So imagine my surprise when I looked at the BBC pension fund's annual report (p. 19) and found those very companies—along with 'tax dodging' Vodafone and Amazon—in a list of their twenty biggest investments.

Panorama said that Comic Relief had nearly £3 million invested in tobacco stock. The BBC pension fund has over £111 million invested in tobacco stock.

The BBC quoted a self-styled ethical investing expert in its programme and in its report:

Ethical fund manager Helen Wildsmith looks after the cash of thousands of charities.

She said she was surprised that a charity as high profile as Comic Relief would risk its reputation and future donations.

"If people who've been giving them money, after watching the television, next year think twice and don't give that money, because they're concerned about their investment policy, then that could be argued to be a breach of fiduciary duty."

I personally couldn't care less which companies Comic Relief and the BBC invest in, but if I was a moral puritan I would take solace in the fact that I can stop giving money to Comic Relief. I would be—and am—less happy about being forced to pay for the BBC and its increasingly embarrassing Panorama 'exposés'.


UPDATE

A longer list of the Beeb's biggest pension investments can be seen here. It includes £25.3m in BAE systems, the weapons firm that Comic Relief had a £0.4m stake in, plus £22.3m in the alcohol company SABMiller, £18.9m in the tobacco company Reynolds America, £8.6m in Altria (AKA Philip Morris), £8.2m in Greene King, as well as a combined £169.6m in the pharmaceutical companies AstraZeneca, GlaxoSmithKline, Roche Holding and Novartis

So that's one arms company, all of Big Tobacco except JTI, most of Big Pharma and both of the big international alcohol companies. According to Panorama, all of these industries are "unethical".

Next week on Panorama, a team of kettles investigates the blackness of pots.

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Simple Simon squirms

The divestment movement is one of the sillier empty gestures to have caught on in recent years. The principle is fiendishly simple: institutions sell their shares in evil corporations like Big Oil and then, er, absolutely nothing happens. The share price doesn't fall and the company doesn't suffer. The only losers are the institutions which have to settle for weaker investments.

It's an idiotic idea and it's pure virtue signalling. Naturally, then, clowns like Simon Chapman are big fans of it...

Simon Chapman, 2007 (in Public Health Advocacy and Tobacco Control: Making Smoking History):

Public declarations by reputable companies and individuals that they will not invest in a tobacco company for ethical reasons can be newsworthy and may cause other groups to reflect on their position. The ethical investment movement in your country will be a useful ally in suggesting ways of promoting divestment of tobacco shares

Simon Chapman, 2009 (in Guide For a Tobacco-Free Campus):

The aim of this guide is to urge campus managers and administrators to review and improve their tobacco-free policies to include three key elements:

... An ethically and socially responsible mandatory standard or core principle that ensures that the institution, its staff and students are not financially or materially associated through the institution with the tobacco industry.

Simon Chapman, 2010:

 “A medical school taking funding from the tobacco industry is like a peace studies school taking funding from terrorists,” said Tobacco Control's editor Simon Chapman, professor of public health at the University of Sydney.

Simon Chapman, 2014:

Very proud to belong to @Sydney_Uni where ethical investment governance open & responsive to #globalwarming concerns http://t.co/sOUt2YV3Qz

— Simon Chapman AO (@SimonChapman6) August 26, 2014

Simon Chapman, April 1st 2015 (after falling for an obvious April fool joke):

Petrol head Clarkson signs up for @guardian fossil fuel divestment!! http://t.co/nGdN3j5ztb

— Simon Chapman AO (@SimonChapman6) April 1, 2015

Given his typically blowhard views on this issue, it was an #awks moment for Simple Simon this week when it became known that his own university (Sydney) had just invested $2 million in British American Tobacco. This left him squirming when he wrote his regular column for The Conversation. First, he argued that $2 million isn't very much money, then he resorted to the most tenuous sophistry to claim that everybody gets money from the tobacco industry if you look at things through a kaleidoscope...

With $2m of $1.4b invested in BAT, the homeopathically small proportion that might arguably be linked to my salary would be pressed to buy a sachet of sugar for a coffee. But that’s what passes for excitement among pro-smokers these days.

Indeed, by extending the same logic, there is no citizen in Australia who is free from taking the Big Tobacco dollar. Some $9.763b is collected annually from customs and excise duty on tobacco and GST. This money goes into consolidated revenue where, along with every other form of government revenue, it is pooled to provide expenditure on things we all use and benefit from: roads, government schools, health care, prisons, defence etc.

Every doctor in Australia by this argument, “benefits” from big tobacco each time they receive a Medicare payment from Canberra.

Some strong arguments there, I'm sure you'll agree.

Aside from the hilarity of watching the fool fight his corner, it is interesting, though unsurprising, to note that the university's financial advisers are more realistic about plain packaging's ability to deliver a blow to the tobacco industry than Chapman is.

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The useful and the true

Propaganda requires inconvenient truths to be replaced by useful lies. For the purposes of public relations, a bald assertion made often enough is as good as a fact. For the issues covered in this blog, I've characterised this as 'we're public health, we say what we want'. So long as people believe it, that's all that matters.

There was a small example of this on the BBC website yesterday when it was reported that 'Surrey County Council has been accused of hypocrisy after running stop smoking campaigns while investing in tobacco companies.'

Although it was on the front page of the Beeb's news site, this wasn't much of a story. All that had happened was a Green party councillor had complained about the local council investing in tobacco stock, presumably for its pensions.

Mr Essex said it was hypocritical for the council to invest in the tobacco industry.

He called for it to "show some leadership and take our money out of an industry that does so much harm and costs the NHS so much".

This fellow clearly has a moral objection to certain industries and doesn't want the council associated with them. This kind of virtue signalling is central to the divestment crusade.

Fair enough, he has his view, but moral ickiness is not enough to persuade people to sacrifice money for self-righteousness (which is the trade-off required by divestment). His moral indignation is the true motivation, but it is not sufficiently useful to win the argument.

Since people invest in shares to make a profit, it would be more useful if it could be shown that tobacco stock was not very profitable. To that end, the BBC (or the press release it was working from) quoted somebody from the UK Sustainable Investment and Finance Association. I've never heard of her or her organisation but this is what she said...

"Over the long term, tobacco companies do not provide significantly higher returns than other companies."

This is the very opposite of the truth, as any serious investor will tell you. This graph from Credit Suisse shows how wrong she is...

As Credit Suisse say, every decade since the 1960s (when the health effects of smoking became well known) has seen 'tobacco companies outperforming comparable firms by over +3 percent per year.'

This - obviously - is the reason councils, universities and pension funds invest in tobacco. They pay good dividends and the share price outperforms that of nearly every other industry. Between 2000 and 2012, for example, British American Tobacco yielded a return of +669%, making it the fifth most profitable FTSE 100 company. BAT, like Imperial and the other big tobacco firms, produce 'above-average yields, and good records and prospects of dividend growth.' They have been 'some of the most reliable income generators for many years'. They are 'cash machines'.

If the BBC had approached almost any other financial analyst, this is what they would have said. It is, after all, a simple, verifiable fact that tobacco shares have been amongst the best in the world over virtually any time frame you choose to look at it. Instead, they managed to find somebody to say something that was useful but totally untrue.

Job done.

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