The tobacco industry is probably the best example of a morally questionable business, since smoking leads to millions of premature deaths. The Tobacco-Free Finance Pledge is a recent global initiative with a mission to inform, prioritize, and advance tobacco-free finance with the end goal being a world free from tobacco. The pledge has been signed by investors representing $11 trillion in assets under management and there are many additional investors who have not signed the pledge but have decided to refrain from investing in tobacco firms. In our recently published paper, we examine the ownership of tobacco stocks in more detail.
Norm-constrained investors and sin stocks
The existing literature reports that institutional ownership of sin stocks, including tobacco, is lower than for non-sin companies with similar characteristics. It also finds that owners who are more constrained by social norms are less likely to hold sin stocks. For example, pension funds may experience reputational risks arising from the public nature of their investments, diverse constituencies, and exposure to public scrutiny. It has also been shown that national culture may affect the tendency of investors to shun certain types of sin stocks. The divestments of sin stocks at large scale may reduce their current price, leading to higher future returns that may attract investors who do not mind investing in sin stocks. The existing literature uses decade-old data, and since sustainable investing has become much more important since then, we reexamine the ownership of tobacco stocks with more recent data.
Data and methodology
We examine the six tobacco companies that are constituents of the MSCI World Index: Philip Morris, Altria Group, British American Tobacco, Imperial Brands, Japan Tobacco, and Swedish Match. The first two are listed in the United States, the second two in the United Kingdom. The last two in Japan and Sweden, respectively. We compare the ownership characteristics of tobacco stocks with their peers in the same country and industry group. We obtain our ownership data from Refinitiv Share Ownership and Profile data as of 31 December 2019. This is a consolidation of many data sets that are largely based on regulatory disclosure requirements supplemented with voluntary reporting institutions.
We find that the number of reporting owners for tobacco stocks tends to be higher than for peer stocks. For example, in the United States, 2,362 investors hold Philip Morris stock, 2,227 investors hold Altria group stock, while on average only 1,388 investors own peer stocks. Most reporting investors for tobacco stocks hold relatively small stakes, as the total ownership reported for tobacco stocks is substantially lower than for peer stocks. For Philip Morris (PM) and Altria Group (MO), reported ownership amounts to 75.4% and 64.1% respectively, while the reported ownership of their peers is 85.1%. The figure shows that this difference is consistently present over the past decade.
Source: Blitz and Swinkels (2021) “Who owns tobacco stocks?” Journal of Asset Management.
We find that there is a strong home bias in ownership. This may be because reporting obligations are different for local and foreign investors, that foreign investors invest via local mutual funds, that foreign investors have setup local investment offices, or that local investors have a preference to invest in local stocks. Our results indicate that investors based in the United States or United Kingdom are most likely to invest in foreign tobacco stocks. Institutional investors in the Netherlands, Australia, and New Zealand largely avoid investing in the tobacco industry, as evidenced by the low holdings for tobacco stocks in combination with positive weights for peer stocks. Our data shows that over the past couple of years, differences in ownership of tobacco and peer stocks has further increased for these countries.
Ownership by pension funds and sovereign wealth funds
Pension funds and sovereign wealth funds are likely among the funds that are most constrained by societal norms. Among the large pension funds that are included in the ownership records, we observe that these five have publicly issued a tobacco exclusion policy: APG Asset Management, PGGM Asset Management (both asset managers of large pension funds in the Netherlands), AustralianSuper, California Public Employees’ Retirement System, and California State Teachers Retirement System. Our ownership data confirms their stated intentions, as we find that they do not hold any tobacco stocks, while they do have positions in peers. Also consistent with our ownership data, the AIMCo and NBIM, the asset managers of the sovereign wealth funds of the Canadian province Alberta and Norway, have explicitly excluded equity investments in tobacco companies from their portfolios. Altogether, our data shows that among norm-constrained investors, such as large pension funds and sovereign wealth funds, ownership in tobacco shares is relatively low.
Passive and active ownership
Passive asset managers are large owners of tobacco stocks. In the U.S., they own on average 27% of tobacco shares. The majority of U.S. passive ownership is managed by the “Big Three” passive managers: Vanguard, BlackRock, and State Street. Although these three are among the largest investors, they are also almost equally large investors in the peer group. Outside the U.S., passive ownership is lower. All but one of the top 10 largest active owners of U.S. tobacco stocks are from the U.S. This reinforces the strong home bias that we discussed before. Most of these investors are less invested in the tobacco peer stocks, suggesting that they expect higher returns from owning tobacco stocks.
Institutional ownership of tobacco stocks is lower than for comparable stocks, indicating that investors exempt from publishing their holdings own relatively more tobacco stocks. This anonymity substantially reduces reputational risks. Passive investors are large owners in tobacco stocks, but they own approximately the same amount of peer stocks, suggesting that index tracking of indices that exclude tobacco stocks is still a niche. We also identify a number of active asset managers that have large active positions in the tobacco industry, likely because they expect to earn higher returns on these sin stocks.
David Blitz is the Chief Researcher at Robeco in the Netherlands
Laurens Swinkels is a Senior Researcher at Robeco in the Netherlands and an Assistant Professor of Finance at Erasmus School of Economics.
This post is adapted from their paper, “Who owns tobacco stocks?”, available on SSRN.