A quarter of Dutch pension funds, including major players such as Shell, Heineken and Retail, do not rule out investing in the tobacco industry. In doing so, they are contravening the United Nations guidelines to which they subscribe, according to research by The Investigative Desk.
By Sergio Nieto Solis | 11 February 2022
If you had invested one dollar in US tobacco stocks in 1900, you would now have accumulated over 8.2 million dollars. If you had invested that same dollar across the entire US market, you would ‘only’ have earned 58,191 dollars. This makes tobacco stocks the most lucrative investment ever, claims Swiss bank Credit Suisse in its 2020 annual review.
In recent years, shares of Big Tobacco have performed relatively less well. The biggest investors have stopped investing in them. They believe that the high returns do not outweigh the social harm of smoking. Among the smaller investment funds, tobacco stocks are still very popular. Research by The Investigative Desk shows that 25% of Dutch pension funds does not exclude investing in tobacco.
These are mainly small and medium-sized funds affiliated to the Federation of the Dutch Pension Funds. But even major players such as Shell, Heineken and the retail trade do not yet rule out tobacco shares.
Together, the pension funds without a tobacco policy invest about 130 billion euros of pension money annually. How much of that is actually invested in the tobacco industry cannot be determined. The funds do not answer questions about this or claim they do not know the exact amount.
The UN has drawn up two sustainability guidelines for the financial sector: the UN Global Compact and the United Nations Principles for Responsible Investments (UNPRI). In 2017, the organisation decided that tobacco products were ‘fundamentally inconsistent’ with the UN Global Compact. Since then, tobacco manufacturers can no longer join it. And in 2018, the UNPRI launched the Tobacco-Free Finance Pledge urging investors to stop investing in tobacco.
Following the exclusion of tobacco from the UN Global Compact, large Dutch pension funds such as ABP, PMT and PME – with assets under management of 613 billion euros, together accounting for more than one third of the total pension pool – stopped their investment activities in tobacco companies. Other large pension funds and asset managers followed shortly afterwards.
By now, at least 16 of the 20 largest institutional investors in the Netherlands no longer hold tobacco shares. The larger pension funds that still have a stake in the tobacco industry have stated that they comply with the Dutch Pensions Act, which only prohibits investments in cluster munitions.
Of the 160 funds in the Federation of the Dutch Pension Funds, 40 are still open to investing in tobacco. Three quarters of them endorse the UN guidelines, but do not implement them.
According to the pension funds concerned, this is not necessary, because the guidelines are not binding. Pension fund BPF Schoonmaak (assets under management of nearly 7 billion euros), for example, endorses the UN guidelines but thinks that this ‘has no consequences for investment funds that invest in tobacco’. They are supported by other pension funds, including the Heineken Pension Fund (over €4 billion): ‘the fact that tobacco producers are excluded from these initiatives does not mean that we should not invest in them in order to act in accordance with the principles’.
According to Russel Investments – one of the world’s largest asset managers – actively excluding tobacco stocks is unlikely to affect future returns, as they often represent only a small proportion of the investment portfolio. Researchers from Maastricht University even call it ‘very unwise’ for pension funds to continue investing in tobacco companies. As the call for ethical investments grows, tobacco shares become increasingly risky. An analysis of more than 2,000 studies commissioned by ABP reached a similar conclusion: socially responsible investing leads to slightly lower returns, but is also much safer.
Pension participants seem to have made their choice already. They are increasingly urging their pension funds to divest from the tobacco industry. Until now, the exclusion of tobacco shares has often been too expensive for small pension funds that wish to continue investing themselves: ‘You would have to get an asset manager to make tailor-made investments for you, which would be very expensive and only available to the big pension funds,’ says Hugo Nieuwenhuis, board member of the pension fund of Gorinchem-based oil company Calpam.
However, this situation is gradually changing. In recent years, many sustainable investment funds have been added. Nieuwenhuis expects that small pension funds will also make the switch: ‘I think that the regulator is going to impose more and more requirements on the ethical side of investments. It now seems riskier not to invest in socially responsible investments than to remain in tobacco shares.’
Calpam, which manages 61 million euros, came to the same conclusion: ‘Our pension fund board consists of six people, all of them work part-time, and the investment committee meets three times a year,’ says treasurer Alexander Foursoff. He is happy with his colleagues: ‘For small pension funds, it is increasingly difficult to find qualified people from their own ranks, so out of necessity we now have external board members.’ With half a working day per person, major changes are difficult to implement: ‘It is still unclear to us how the fund will need to be set up with all the new regulations, and whether we can and want to continue to exist at all.’
To safeguard their money, Calpam has recently switched to an investment fund that shuns tobacco shares: ‘But that was actually a side benefit. In view of the uncertain future, we opted for a less risky investment portfolio. Many shares were sold and exchanged for bonds. With the money that was freed up in the process, we were able to switch to a sustainable investment fund,’ explains Foursoff. Calpam accepts the expected lower return as a consequence of the passive investment strategy.