Dutch investors snuff out tobacco

On the 05/31/19 at 7:56AM


Adrien Paredes-Vanheule

31 May marks the annual World No Tobacco Day. In the Netherlands, last year, a number of asset managers and institutional investors announced tobacco divestment plans. Asset News has looked into what led them to turn back on tobacco and the way they did it.

To date, bpfBOUW, the pension fund of the Dutch construction industry, has been the latest institutional investor based in the Netherlands to announce publicly divestment from tobacco on 15 March 2019. bpfBOUW’s board banned tobacco and nuclear weapons from portfolios in December 2018. In a statement, the pension fund of the Dutch construction industry argued high returns needed to be achieved through responsible investments. Neither tobacco nor nuclear weapons fit the idea of responsibly investing, added bpfBOUW.  

This follows a series of tobacco divesting announcements that occurred throughout 2018, starting with the largest institutional player in the country, Stichting Pensioenfonds ABP (the national civil pension fund), in January last year. Asha Khoenkhoen, spokesperson at ABP, says changes in society at international level and regulatory developments had led ABP to put the topic on its board agenda. She explains that participants, employers as well as special interest organisations were not at ease with the idea of investing in nuclear weapons and tobacco, adding that tobacco investments had been a dilemma for a long time at ABP and broader discussion was needed.

“We have developed an assessment framework for product exclusion to help reviewing our investments. We defined four criteria that could result in product exclusions: if the product is by definition harmful to people; if our influence as a shareholder cannot change anything about that fact; if it has no harmful effect if the product would no longer be there or if a worldwide treaty exists for the purpose of eliminating the product. Hence ABP decided to exclude tobacco manufacturers.”

ABP has set an exclusion list of 150 firms. Before starting selling, it defined tobacco companies, an uneasy task as it wanted to divest the whole tobacco chain. “We sold our positions at the right time. Total amount divested from tobacco reaches €4bn”, ABP’s spokesperson says.

The Dutch largest pension fund is working on “a new sustainable investment policy to set the bar higher”. Nevertheless, Khoenkhoen recalls every institutional has its own definition of sustainable investments. Therefore ethical views differ and ways to address sustainable topics too.

Tobacco less an issue in Asia

Divergences were featured in a report released by the Dutch Association of Investors for Sustainable Development (VBDO) in partnership with Hartstichting in March 2017. This study debunked myths around tobacco investing and surveyed 55 Dutch institutional investors over tobacco investment policy. The list of respondents included 30 of the 50 largest pension funds, 11 of the 30 largest insurers, eight of the 17 largest asset managers and six of the nine largest banks established in the country. At that time, 53% of the 55 Dutch institutional investors surveyed said they did not have a policy on tobacco, the rate was the highest among the 30 pension funds interviewed (73%).

At the end of March 2019, Detailhandel, the Dutch pension fund for retail sector, announced divesting 500 firms for ESG reasons but rebuffed tobacco exclusion for now as its CIO said the scheme believed in “engagement rather than exclusion”. Asset News approached Detailhandel for a more detailed comment on tobacco but it did not answer by the time of publication.

Another institutional investor, Achmea chose to fully remove tobacco from portfolios since 2013. It works with an exclusion list, containing tobacco companies, other companies and countries, to which all asset managers selected must comply. Achmea says it has analysed the MSCI World Index with and without tobacco companies since 2014. It has found out until 2017 the index including tobacco outperformed. Since then, tobacco underperformed which makes the cumulative relative performance since 2014 flat.

Although Robeco actively engages with companies it invests in, engagement with the tobacco industry will not lead to fundamental change.

Peter Ferket, Robeco

Tobacco divestment had a limited impact on the performance of Robeco’s fundamentally managed funds says Peter Ferket, the manager’s head of investments and member of the executive committee. “These funds have relatively low number of names in their portfolios, so there are more alternatives to choose from. For quantitative funds the impact differed. Most substantial impact was seen for our enhanced indexing strategies, as they have a low tracking error, and more stocks in their portfolios.

“However, although tobacco companies have shown good performance, our research also indicates that other investment opportunities can be captured to achieve the same risk-return profile as tobacco stocks,” Ferket comments.

Robeco announced on 7 March 2018 that it would exclude investments in the tobacco industry from its mutual funds after it excluded tobacco companies from its sustainable fund range. Full tobacco divestment, including in sub-advised funds, was completed before the end of Q3 2018. Ferket remarks that if Robeco engages as active shareholders with companies it invests, “engagement with the tobacco industry will not lead to fundamental change”.

“Given the significant international concerns about the risks posed by tobacco and in view of recent developments, such as the UN Global Compact’s decision, we were convinced that the time was ripe for excluding tobacco”, Ferket points out.

Robeco’s investment head says client reaction was positive, although there were regional differences regarding “what was deemed acceptable (minimum threshold) to invest in tobacco from a product perspective.” If tobacco exclusion was a logical step for clients in the Netherlands, Belgium or the UK, these in other regions like Asia “needed sometimes a bit more explanation.”

Similar pattern was found by NN Investment Partners which announced tobacco divestment for its whole fund range in May 2018 after it had already banned tobacco of its sustainable funds and mandates.

“Generally speaking, we have had positive client feedback. Though the only issue we faced was in Japan because tobacco there is not as controversial as it is in Europe and a few tobacco manufacturers are based in the country. If a client refuses to divest from tobacco for his mandate, we cannot impose our views. It happened for one mandate only”, tells Faryda Lindeman, senior corporate governance specialist at NN IP.

Research conducted NN IP to exclude tobacco in addition to the fact it was ever less accepted as an investment by the public and stakeholders. It took more time to divest from tobacco for one of NN IP’s equity funds which is focusing on consumer trends.  “Tobacco weighed more than 10% and we needed clients to agree divesting from tobacco in this specific case. Exposures to defensive sectors like consumer staples and utilities replaced the tobacco one as they also perform well on the long run”, says Lindeman for whom divesting does not mean financial losses.

She says NN IP divested at a time the tobacco sector was under pressure. With share prices of tobacco firms down in 2018, no peculiar financial impact was found on the firm’s funds.

Measures underway against Dutch tobacco retailers

July 2018 saw a couple of other tobacco divesting announcements within the Dutch asset management space. First Aegon has exited from tobacco stocks held for its general account globally, and for customer accounts in the Netherlands. The fixed income investments for its general account are being run off, Aegon says. The exclusion does not apply to customer accounts outside the Netherlands for fiduciary and contractual reasons.

“We expect the impact will be limited due to very small equity holdings in general account and run off approach to FI holdings”, it emphasises.

Kempen Capital Management also ceased tobacco investments in its own funds but not in mandates, bespoke investment portfolios and multi-management funds. Danny Dekker, senior responsible investment advisor at Kempen, says framework used to assess tobacco and led to its exclusion was based on several criteria (e.g. harm of the product, international standards) and facts (e.g. sources from WHO). He stresses that ever more Dutch investors are divesting from tobacco, “this seems to indicate a shift from tobacco investments.”  

“The tobacco exposure of the Kempen portfolio was c. 1%. We expect no future (negative) performance effect”, says Dekker.

At a state level, major developments happened too. The Netherlands withdraws from a cigarette international committee part of the international organisation for standardisation (ISO) that is advising the tobacco industry on nicotine, tar and carbon monoxide in their products. The reason? The tobacco industry weighed too much on the committee’s action.

The Dutch government also introduced anti-tobacco measures in the National Prevention Agreement released on 23 November 2018. This plan aims among others at reducing to less than 5% the number of adult smokers in 2040 and at making young population and pregnant women smoke-free.

Most notable measures to crack down on smoking comprise:

  • a 20% tax rise on cigarette packs next year (+€1) with a target of a €10 priced pack in 2023;
  • a ban of smoking products from supermarkets as from 2020 and from retailers as from 2021;
  • no more tobacco advertising in and on the front of shops as from 2021 at the exception of tobaccofocused shops;
  • neutral packaging for cigarettes and handrolling tobacco as from 2020 as well as for electronic cigarettes and cigars as from 2022.

NN IP’s Lindeman underlines public campaign against tobacco supported the Dutch tobacco divesting momentum last year. “It becomes harder to market cigarettes and to buy tobacco in the Netherlands. You cannot see the product anymore on the packages and state tax is 57% per pack.”

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