• April 17, 2024

Future dividend

 Future dividend

The focus on harm reduction makes tobacco companies even more attractive investments.

By Stefanie Rossel

While social responsibility is a fairly recent concept in business, awareness of responsible corporate behavior has risen rapidly. Companies have widely accepted the idea. According an EY study, sustainability reporting has become “business as usual.” More than 80 percent of Fortune 500 companies address sustainability on their websites.

Today, sustainability strategies are driven by business objectives, rather than ethical ones. Company leaders believe sustainability adds value to their organizations and helps them identify and mitigate risks.

Sustainable investing has been booming in the past few years. In its most recent report, the Forum for Sustainable and Responsible Investment valued the 2016 U.S. market for sustainable, responsible and impact investing at $8.72 trillion, or one-fifth of all investments under professional management—a 33 percent increase since 2014.

“It is very important for investors that tobacco companies have a corporate social responsibility strategy in place,” says a senior consumer analyst with a London-based investment bank. “Clients are more interested than ever in environmental, social and governance [ESG] topics. If we can point to such an effort, there’s a lot of approval and interest from customers.”

While there is no single, agreed definition of what makes an investment “sustainable,” there are funds that explicitly exclude tobacco from their portfolios, treating it as a tainted sector, similar to firearms, alcohol, fast food or gambling.

But this could be about to change. According to a Wall Street Journal report, the increasing amount and availability of data on ESG factors means that investors can judge companies individually, rather than having to eliminate whole sectors based on their members’ shared characteristics.

Erik Bloomquist

Aware of their reputation, the major international tobacco companies have long implemented responsible business strategies. “Once you have ‘got over’ the actual product, you will find that tobacco companies are very sustainable with regard to their business model and economics in general,” the analyst says. “Moreover, they have strong cash flows, are well run and feature strong brands. They are also mindful of externalities and thinking about the future. What’s more is that the tobacco industry has successfully gone through some kind of existential threat which other industries such as sugar, for example, may still experience. Hence, the image of the tobacco industry with investors is actually quite good.”

As tobacco companies seek to reduce the health impact of smoking, the tobacco “taint” may lessen. Philip Morris International (PMI) has bet the company’s future on smoke-free products that present lower risks than cigarettes. British American Tobacco (BAT) has invested more than $1 billion in its next-generation product business. In February 2013, it became the first tobacco company to publish a dedicated harm-reduction report; in 2017 it released its third report of this kind, describing the company’s reduced-risk product portfolio, the current state of harm-reduction science and its plans for the future.

“The development and adoption of reduced-risk products as key parts of PMI and BAT’s portfolios are tectonic shifts in how the firms see their business developing in the future,” says tobacco analyst Erik Bloomquist. “This change in products over time will do a great deal to enhance the image of tobacco firms and, more importantly, their actual sustainability over many years.”

Adding value

BAT has been a pioneer in publicizing its good corporate citizenship efforts. “We have been producing sustainability reports for over 15 years,” says Jennie Galbraith, head of sustainability and reputation management at BAT. “This is a clear demonstration of our commitment to transparency and maintaining an ongoing dialogue with external stakeholders.”

The company conducted its first detailed materiality assessment 10 years ago. “This assessment was instrumental in sharpening our agenda and taking us from a broad approach that included numerous socially responsible and philanthropic projects to focusing on the core issues of harm reduction, sustainable agriculture and farmer livelihoods, and corporate behavior, as well as embedding the principle of shared value across our day-to-day business practices,” says Galbraith. “There is an added reputational benefit to doing this, but for us it’s all about building a strong business for the future. Over the years we’ve seen firsthand how considering sustainability and shared value can enhance our approach.”

Jennie Galbraith

There are various frameworks to evaluate the sustainability performance of a company. The most widely cited and followed among them is the Global Reporting Initiative and the Dow Jones Sustainability Index (DJSI). The latter ranking is based on research by Swiss investment group RobecoSAM and concentrates on best-in-class companies across all industries. It provides an integrated assessment of economic, environmental and social criteria with a strong focus on long-term shareholder value. There are global, regional and country DJSI benchmarks. Following RobecoSAM’s yearly rating, best-performing companies are included in the indices, whereas those that don’t meet the thresholds are removed.

Interestingly, while companies on their websites boast about their rankings in the DJSI, the importance of such indices to investors appears to be overrated “We do not follow these indices, so it is hard for us to opine, but generally they are little followed by investors,” says the senior consumer analyst. “Or investors may look at them, but only as a first resource—i.e., a kind of minimum standard before doing further work along their own criteria. So if companies are removed, it should have little impact.”

The only tobacco company to feature in the DJSI European Index, BAT has been listed for 15 consecutive years. “This means that BAT scored in the top 20 percent of over 600 European companies assessed, maintaining the same overall score as last year (83 percent) and scoring better than the industry average in 16 out of 17 sections of the assessment,” says Galbraith. “Our associate company Reynolds American replaced us in the World Index with a 4 percent higher score than us due to the weighting of certain categories where our global footprint raised challenges for our scoring versus that of Reynolds.”

According to Galbraith, the company’s high scores across so many categories reflect the quality of management across all key areas of the business and its comprehensive and globally consistent focus on sustainability issues.

Human rights

Nevertheless, good corporate governance remains an ongoing exercise. BAT recently increased its focus on one of the biggest challenges for the tobacco industry, human rights in supply chains.

“Our global agricultural supply chain is a vital part of our business, and we’ve long been aware of the importance of protecting human rights in this area,” explains Galbraith. “As a company, we take this very seriously, and addressing human rights risks is a core element of our new sustainable agriculture and farmer livelihoods program. From an industrywide perspective, the new Sustainable Tobacco Programme builds on our long-standing Social Responsibility in Tobacco Production program and is bringing together best practice to strengthen standards for suppliers across the tobacco leaf supply chain. This is an excellent example of collaboration and shows how different parties can come together to make a difference for the common good.”

In addition to its work with leaf suppliers, BAT has also been making strides across its wider supply chain. “For example, in 2016, we rolled out our new Supplier Code of Conduct, which sets out the minimum standards we expect all our suppliers to adhere to, including specific human rights criteria,” says Galbraith. “We’ve also been working over the last year to strengthen due diligence and introduce human rights risk assessment for all 70,000-plus suppliers outside of our agricultural supply chain. We welcome the U.N. Guiding Principles on Business and Human Rights, and legislation such as the U.K. Modern Slavery Act, as they provide a much clearer road map for companies to follow.”