What is the cost of being good? Knowing we did the right thing, the unselfish thing, should be its own reward and we ought not to measure the downside. That is what we tell our children when they reach for the biggest slice of cake, and so it ought to be in matters of investment. Or so many believe.
But, what if you could measure the real cost in dollars and cents of forgoing a profitable opportunity; a lawful investment that would otherwise enhance the pensions of millions of working people. That's what the California Public Employees' Retirement System (Calpers), the managers of the state's public sector retirement fund did and the analysis shows that their policy of selling all their tobacco stocks in 2000 cost the fund as much as $3-billion (U.S.) up to 2014.
Calpers is now reviewing its divestment policy – the fund is also shunning investment in some firearms companies, companies in Iran and Sudan and certain emerging market countries – in the light of research conducted by Wilshire and commissioned by Calpers Investment Committee. According to Wilshire, the present value of the impact on the fund from excluding tobacco stocks over the period from 2001 to 2014 represents a loss of between $2.08-billion and $3.04-billion. Even for a fund as large as Calpers, (the total market value currently stands at $289-billion) the negative impact of excluding tobacco is significant and the fund managers will meet this month to think again about their divestment policy.
Dumping tobacco stocks was an easy call back in 2000. Ethical investment was in vogue and smoking tobacco makes people sick. It was not a hard decision for a public sector pension fund to shut out an asset class that seemed to be heading for financial as well as moral oblivion. Astoundingly, however, and in spite of the rapidly dwindling smoker population, Big Tobacco has hugely outperformed the stock market. Call it a dying industry but cigarette manufacturing is having a glorious old age, becoming more efficient every year and paying out ever bigger dividends to its shrinking club of investor devotees.
Calpers is right to review its divestment policy and it should probably be scrapped. For any fund manager that actively picks stocks, a good governance policy is essential. It is part of the fund's fiduciary duty to ensure that the firms in which it invests are lawful businesses, run well and with integrity by competent managers. Unfortunately, the current fashion is that fund managers should go much further and decide whether a business is sustainable over the very long term.
This is mistaken. Firstly, because no investor can assert with any degree of certainty that a business will still be thriving in 10-years time and the story of tobacco is a good lesson. Instead of collapsing under the weight of public vilification, tobacco companies adopted a lean survival strategy, complying with every new regulation to the letter while asserting their right to supply smokers with a lawful drug. They then set about proving that it was possible to become more profitable while selling to a shrinking market.
What is it about businesses that profit from our dependency? We love to hate the things we desperately need, especially things that leave a smell in the air after we have used them. Unlike tobacco, we genuinely do need oil and gas. Without it, our energy-rich lives would come to a full stop; billions would starve and wars of survival would ravage the planet, but our need for oil causes us genuine problems. Smart people and some governments are working on alternatives but a global transition to new forms of energy will take many decades and, predictably, as with tobacco, the unthinking want a solution today.
Supporters of immediate disinvestment in fossil fuels have garnered support in Hollywood, and in Britain, famous thespians are lending their names to campaigns vilifying BP. The oil company is a big funder of the arts in Britain but the actors, Emma Thompson and 2016 Oscar-winner Mark Rylance, want the trustees of the British Museum to reject BP's financial support on the grounds that it is dirty money. BP has already been bullied into ending its support of the Tate Gallery and this week it emerged that it was cutting links with the Edinburgh Festival.
The stars of stage and screen have not explained who should pay for the arts if the handouts from big corporations are to be spurned. Perhaps they think the government has plenty of money. It is depressingly true that many people, from actors to fund managers, don't seem to understand the vital role played by these older businesses as wealth creators and cash generators for everything from pensions to theatre festivals.
In many areas, the world is on the cusp of huge transformation but the new technology we so urgently want today requires massive investment. The money must come from somewhere; not from smashing and looting but from sustainable cash generation. We need Big Tobacco and Big Oil and even King Coal for some time yet. Their job is to pay the bills; as children we take it for granted that the food will be on the table and that the house is warm. As adults, we should recognize that knee-jerk disinvestment policies won't keep the lights on in Hollywood. Sustained investment is what is needed.
Carl Mortished