Sustainable Finance Report #2

Executive summary

Germany has an opportunity to move center stage in the area of green finance in 2017 given the German G20 Presidency summit in Hamburg in July, the PRI’s annual investors’ summit in Berlin in September and the COP23 international climate finance negotiations in Bonn in November.

With this in mind, the second issue of the Sustainable Finance Report examines how activity in sustainable investing is gathering momentum. We examine key trends such as asset owner demands, fiduciary duty, regulatory requirements and climate change.

Part of the reason for the increasing importance of ESG originates from growing academic evidence and investor experience that shows incorporating ESG into investment decision-making can improve performance and reduce risk.

To address these themes, the first article in this report examines how the regulatory environment is affecting the ESG investment landscape. Typically legislation has focused on corporate disclosure, stewardship codes and regulation aimed specifically at asset owners. The fact that the number of laws as they relate to climate change has also doubled every five years since 1997 reveals why investors are placing increased scrutiny on their holdings of carbon intensive securities.

Increased mandatory reporting and disclosure requirements are also taking place at a corporate and investor level. The Financial Stability Board’s Taskforce on Climate-related Financial Disclosure has developed proposals for assessing exposure to physical climate change risks, liability risks and how asset valuations might be affected by low-carbon government policies. Germany’s G20 Presidency in 2017 is likely to consider how the proposals from the Financial Stability Board’s Task Force on Climate-related Financial Disclosure could eventually become mandatory for companies and investors, which would extend the reach of ESG investing.

Given the importance of assessing and addressing climate risk in an investment portfolio, the second featured article in this report examines the various routes open to investors with exposure to carbon intensive assets. Here, we examine fossil fuel divestment campaigns, investor engagement as well as hedging portfolios via low carbon investments.

Asset owners are also becoming increasingly forceful in their objectives and, in many instances, are adopting low carbon commitments. For some, this is not just reducing the carbon footprint of their portfolios, but, more importantly increasing their investments in clean technology, green infrastructure and green bonds. In recent years, China and the U.S. have led the world in clean energy investment. We examined prospects for China’s renewable sector in the first issue of the Sustainable Finance Report published last year. Consequently in the third featured article of this report we examine prospects for the U.S. renewables sector in light of the U.S. Presidential election results.

In the fourth featured article we also assess developments in the global real estate market, which, in our view, is the asset class with amongst the strongest reasons for incorporating sustainability. This stems from the strong link with financial performance, developments in the areas of investor requirements, government policies, tenant demand and the growth of smart data technologies.

Our final article is an introduction to the global microfinance sector and the broader ambitions of financial inclusion. With its roots in Bangladesh in the early 1970s, the sector has grown significantly in recent years in part due to microfinance's portfolio diversification properties. In addition, universal access to financial services is viewed as part of the solution to many of the Sustainable Development Goals signed in New York in September 2015 including ending poverty, ending hunger and gender equality.

This report therefore provides a snapshot of the multiple factors driving the growth in sustainable and ESG investing, which we expect will gather momentum in 2017 through growing investor interest and heightened regulatory activity.

Click here to read the complete Sustainable Finance Report #2

Article 1

Responsible investment styles and the regulatory environment

Investors have become increasingly aware of the importance of such issues as climate change, resource scarcity, labor rights and corporate governance to financial returns. We believe this helps to explain the growth in assets under management (AuM) that are classified as Environmental, Social and Governance (ESG).

In this article, we examine trends in ESG AuM and their various classifications. We then consider how these responsible investment strategies have been influenced by the adoption of voluntary codes and principles by asset owners and managers as well as the increasing scope and pace of mandatory legislation.

The latest data from the Global Sustainable Investment Association (March 2017) shows that ESG investing grew 25% over the past two years to reach USD 22.89 bn. In the U.S., ESG assets at the beginning of 2016 had risen by 33% yearon-year to reach USD 8.72 tn. As a result, ESG AuM in the U.S. now represents over 20% of all assets under professional management, an increase from 11% since the 2012 USSIF survey.

Click here to read the complete article 1 of issue #2

Article 2

Measures to address climate risk in investment portfolios

An important factor driving the interest in sustainable investments and Environment, Social and corporate Governance (ESG) factors more broadly, is the portfolio risks associated with climate change.

In this article we provide an overview of the nature of climate risk, including developments in measuring and managing these risks such as engagement and divestment.

Climate risk has moved to the top of the agenda for policymakers and regulators, driven by the Bank of England Governor’s speech in September 2015 which identified that physical, legal and regulatory risks make climate change a threat to financial stability. As a result, it is becoming ever more important for investors to understand and, where possible, to start managing their climate risks.

Under Germany’s G20 Presidency in 2017 one of the key initiatives will be to discuss the recommendations of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosure, which include stress-testing if business plans align with the Paris Climate Agreement.

While the low-carbon transition will move at different speeds, we believe that all governments will have to enact more stringent policies in legislation and that the cost of doing so is lower if action is taken sooner.

Despite the uncertainty of the new U.S. government’s approach to climate and energy policies, we believe it is investors’ fiduciary duty to measure and ultimately reduce climate risks. Given investors’ long-term perspective, they should focus beyond political cycles. If some regulators do not support implementation of the FSB Task Force’s recommendations, we expect investors could make greater use of proxy voting and engagement to improve corporate disclosure, as well as trying to persuade stock exchanges and accounting standards to eventually require climate risk disclosure.

Physical climate risks already exist and are only likely to grow over time. Despite scientists’ sophisticated climate models, physical climate risk data needs to become more available for investors and linked to companies’ facilities and supply chains. Improved supply chain risk analysis could be created by enhancing the FSB Task Force recommendations to require disclosure of ‘1 in 100’ year, ‘1 in 20’ year and annual disaster risk exposure. Improved disclosure of most at risk and important company facilities may also be needed, while maintaining security and confidentiality. Improved disclosures linked to climate models will become increasingly important for many types of investors.

Legal risks include attributing the increased strength of individual extreme weather events to climate change and seeking penalties from the largest carbon emitters. Investors could also become liable for insufficiently managing climate risks. The history and magnitude of asbestos related liabilities is a cautionary case study.

Regarding transition risks, while currently prevailing carbon prices appear low, many observers were surprised that governments managed to reach the Paris Climate Agreement and that it became international law so quickly. Investors should be prepared for rapid policy changes and the possibility of an abrupt re-pricing of asset valuations. Some investors may believe that economic impacts will not appear over the next few years or that they will be able to exit any at-risk holding with sufficient foresight. However, a recent study for a group of major investors shows that markets could abruptly re-price climate risks which could reduce returns over the next five years by 11% to 45%, depending on the portfolio allocation (CISL Nov. 2015).

Measuring portfolio carbon intensity has been a starting point, but, this fails to capture the entire picture. Improved disclosure, robust analysis and new indexes are needed that account for sectoral differences and all climate risks. To truly address climate risks, asset owners and managers need to incorporate climate and other ESG issues into their investment beliefs and processes. Topics for discussion include stress-testing and creating low-carbon investment targets and risk reducing benchmarks.

The fossil fuel divestment campaign has played a key role in putting climate change more firmly on the agenda of investors, governments and carbon intensive companies. More investors are divesting some or all of their fossil fuel assets but many others are more inclined to favour engagement and climate/ ESG integration.

In 2016, a number of leading investors became increasingly vocal and active in engaging carbon intensive companies and governments. This led to several European energy and mining company boards’ supporting shareholder resolutions that called for improved carbon risk management and stress testing. Investors also played an important role in the adoption of the Paris Agreement. Policy engagement is therefore becoming an increasingly important role for investors.

We are seeing a growing trend towards strong ESG and climate related proxy voting, more proactive engagement with companies and policy makers as well as the consideration of selective divestment (not just with carbon intensive companies) if corporate investees do not sufficiently improve their climate and ESG practices.

U.S. research shows that engagement on climate change, environmental and corporate governance issues can improve companies’ performance and reduce volatility (Dimson et al Aug 2015). Engagement with companies and policy-makers can lead to important changes, but there is over-reliance on a few active and vocal investors. Meeting fiduciary duties will require asset owners, asset managers and regulators to live up to their stewardship responsibilities by encouraging companies and governments to shift their strategies to reduce climate and ESG risks and seize opportunities. The EU Shareholder Rights Directive and other regulations are likely to lead to more focus on engagement.

The growing shift to passive and exchange traded funds is a challenge to engagement strategies. Asset owners, managers and regulators are likely to look for ways to expand the level and quality of investee engagement on climate and ESG issues, including in passive funds. Investors are also increasingly seeking out investment opportunities in green revenue streams. It is therefore becoming a necessity for every major asset class to consider climate risk and low-carbon technology investment options.

Click here to read the complete article 2 of issue #2

Article 3

The search for yield and the U.S. renewables sector

In our first Sustainable Finance Report published last year, we examined the transformation of the Chinese power generation sector and the leading position China was establishing in the renewables sector. Here, we examine prospects for the U.S. renewables sector and the risks and opportunities that are unfolding from a competitive and regulatory perspective.

According to the International Renewable Energy Agency (Irena), the number of jobs in the global renewables sector reached 8.1 million in 2015 with China, Brazil and the United States accounting for almost two thirds of people employed in the renewables sector globally. By 2030, Irena estimates a threefold increase in the number of people employed in the global renewables sector.

In the U.S., of the roughly 770K people employed in the renewable sector, the solar sector accounts for just over a quarter with the wind industry employing approximately 90K. Jobs in the U.S. solar sector have increased by over 60% in the three years to 2015. As a result, more people are employed in the U.S. solar industry today than in the domestic oil and gas extraction sector (187K).

In the U.S., the deployment of renewable technology has been assisted by falling costs across the wind and solar sectors, which has made renewable power generation increasingly competitive compared to more traditional generating sources such as coal and natural gas.

The growth in the renewable sector has also been driven by a desire among utilities and independent power producers to diversify power fleets. According to the EIA, renewables, excluding hydro, accounted for just 7.3% of the U.S. power generation mix in 2015 with obvious room for growth.

The renewable sector is also being boosted by consumer demands for clean energy as well as U.S. corporates such as Walmart, Google and Apple stating their intent to source up to 100% of their energy from renewables.

In addition, 29 U.S. states have Renewable Portfolio Standards which mandate that a certain proportion of electricity generated must come from renewable sources. For example, New York and California have set targets that renewable energy must account for at least half of their energy source by 2030.

We believe renewable projects are also attractive from a yield and cash flow perspective. Renewable energy projects tend to be long-lived assets with 20-25 year financial lives and generally have consistent, long-term contracted cash flows that are independent of fossil based fuel price volatility. Such projects have garnered the attention of those seeking long-term, stable and relatively high yielding securities, particularly now during a period of low interest rates.

Within the renewable power generating sector, we believe opportunities are particularly attractive for distributed utility-scale power generation projects, that is projects of less than 25MW for non-rooftop solar photovoltaic and less than 100MW for onshore wind.

One of the benefits of distributed utility-scale projects is that they are sited close to the end-users of the power and as a result do not rely as heavily on the electricity transmission grid compared to large-scale utility projects. Consequently these facilities are able to mitigate a significant portion of the mark-up from transmission and distribution costs while still pricing close to retail power prices.

The appeal of the global renewable sector among institutional investors is also being enhanced by changing investor attitudes towards fossil fuels and the transition required towards a low carbon economy. This is a topic we explore in the climate risk article that features earlier in this report.

However, uncertainty towards the path of U.S. environmental legislation and its implications for the U.S. renewable sector has grown since the U.S. Presidential election at the end of last year.

In our view, policy change as it relates to the coal and renewables sectors are focused on the elimination of the Clean Power Plan, the repeal of energy tax credits that support the development of renewable energy and the possible withdrawal by the United States from the Paris climate agreement.

While federal legislation may become more supportive to coal and possibly less favourable to renewables, we expect state, corporate and investor level support for the U.S. renewable sector will prove resilient. This reflects improving competitivess of renewables as well as attractive investment opportunities for the sector.

Click here to read the complete article 3 of issue #2

Article 4

Developments and new horizons for sustainable real estate

In our view, real estate is the asset class with amongst the strongest reasons for incorporating sustainability into investment decision-making. This stems from the strong link with financial performance, developments in the areas of investor requirements, government policies, tenant demand and the growth of smart data technologies. An ESG real estate strategy can preserve and enhance risk-adjusted returns and strengthen the investment process. With growing investor allocations to real estate, we examine the drivers that are strengthening the case for incorporating ESG in the real estate sector.

Compared to other asset classes, Deutsche AM’s (2015) extensive review of academic evidence in this area reveals that real estate has the strongest positive link between financial performance and ESG. As investor requirements for ESG integration continues to grow, real estate investors have rapidly adopted Global Real Estate Sustainability Benchmark (GRESB) for evaluating their portfolios’ approach to incorporating ESG in the investment process. We estimate that the global commercial real estate sector will need to make at least EUR 850 bn investment to reduce the energy use of their buildings over the next 15 years in order to play a fair role in implementing the Paris Climate Agreement (Deutsche AM analysis Dec 2016, IEA Nov 2014).

This article also undertakes a comparison between Deutsche AM’s recommended global geographic real estate portfolio allocation with a ranking of countries’ green building policies. We conclude that 29% of a model portfolio allocation is to countries with the strongest green building policies and 35% is to countries with the second strongest ranking of policies (Deutsche AM analysis Dec 2016).

Low-carbon policies covering buildings continue to expand and strengthen as governments seek cost-effective ways to reduce energy consumption for reasons of energy security, job creation and reducing carbon emissions. Government policies could accelerate low-carbon technology investment in commercial real estate by reforming building energy labels to include operational performance of buildings.

Energy labels should essentially become electronic building passports. Governments may increasingly set deadlines after which inefficient buildings will not be able to be sold/leased. Investors will have to invest to improve or sell their most inefficient buildings.

Tenant requirements are amongst the most important drivers for sustainability in the real estate sector.We expect this trend will continue, particularly as research shows that better indoor air quality can improve worker productivity by between 8 to 11% (World Green Building Council 2014).

From section 5 of this article, we conclude with a discussion of ‘new horizon’ issues that are growing in importance for the sector:

1. Considering how investors can work with governments to improve urban infrastructure and reduce urban sprawl, as better urban infrastructure can enhance property asset valuation and is essential for meeting sustainability objectives.
2. Setting energy/carbon reduction targets for real estate portfolios in line with the Paris Climate Agreement. A common industry-wide methodology for setting 2°C targets would be beneficial.
3. Improving measurement of the sector’s positive societal impacts, beyond energy efficiency, renewable energy and the number of green labelled buildings

Click here to read the complete article 4 of issue #2.

Article 5

Diversification and the global microfinance sector

Microfinance describes the provision of banking services to individuals, households and small businesses at the base of the income pyramid. Microfinance also supports global efforts to increase financial inclusion, which studies show can not only spur economic activity, but, also reduce income inequality.

According to the World Bank, there are currently an estimated 2.0 bn working age adults, that is almost half of the total adult population globally, with no access to financial services. Recent research by McKinsey Global Institute (2016) finds that broadening access to financial services, particularly with digital technologies, could increase the GDP of all emerging economies by 6% by 2025 and potentially more in certain countries. This would represent additional economic growth of USD 3.7 bn equivalent to adding an economy the size of Germany and potentially creating up to 95 million new jobs in emerging economies across all sectors of the economy.

With its roots in Bangladesh in the early 1970s, the microfinance sector has grown significantly since its early days. From the narrow provision of microcredit, that is the provision of small loans to low income entrepreneurs, it now encompasses the delivery of savings instruments, mobile payment systems and micro-insurance, that is protecting lowincome people from certain risks such as illness, accidents or natural disasters.

Consultative Group to Assist the Poor (CGAP) 2015 data estimate the size of the microfinance industry at around USD 70 bn and serving over 200 million borrowers. In terms of private sector funding a large proportion of this is directed through financial intermediaries in the form of microfinance investment vehicles (MIVs), which have also grown significantly over recent years. In terms of organisational structure, MIVs invest in microfinance institutions (MFIs) as intermediaries, which are typically in the form of a commercial bank, nonbank, non-governmental organisation (NGO) or cooperative. Meanwhile small, medium-sized enterprise (SMEs) financiers are mostly in the form of a commercial bank or non-bank. Both MFIs and SMEs financing companies, which are captured in MIV portfolios, are generally regulated by their respective country’s central bank, the microfinance regulatory body or a relevant financial regulatory authority.

The type of funders, that is those entities that provide finance to the institutions who then offer financial products to the end-recipient, have also evolved from NGOs and cooperatives to foundations, bilateral and multilateral agencies and more recently by an increasing number of institutional investors.

One challenge for financial inclusion is how to service SMEs since they are often referred to as the “missing middle”. These enterprises are typically too small to be serviced by local banks, given over-proportionate transactions costs and the risk being perceived to be higher than for larger corporates, and too large to be serviced by MFIs.

According to the 2016 Symbiotics Microfinance Survey, institutional investors have remained the prime funding resource for MIVs although capital from the public sector has grown significantly. Industry figures indicate that there exists a significant under-supply of microloans in the marketplace today with 2.0 bn potential micro-borrowers. As a result, there is the prospect of strong growth for the microfinance sector. McKinsey Global Institute (2016) estimates a total credit gap of USD 2.2 tn for micro, small and medium sized enterprises in emerging economies.

One growing issue and opportunity for the microfinance sector is how to support their clients in adapting to the impacts of climate change. As floods, droughts and other disasters become more frequent and intense, MFI clients will be negatively impacted. MFIs thus need to be more aware of potential climate impacts in their geographies. In cooperation with governments and development finance institutions, MFIs have an important role to play in supporting training and financial solutions that help clients adapt to and reduce the risk of climate change (Fenton 2016).

While there have been setbacks to the microfinance sector over recent years, most notably excessive lending and over-indebtedness in India, drawdown events in terms of returns have tended to be relatively short-lived and these have been followed by periods of rapid recovery.

To read the complete article 5 of issue #2 click here.

Article 6:

A new perspective on tobacco engagement and divestment

This article examines the tobacco industry’s investment returns, external societal costs and how investors are engaging with or divesting from the industry.

The tobacco industry has been a very profitable investment, but some investors may be concerned with how the externalized costs of tobacco use may be undermining economic growth and investors’ wider portfolios, particularly in emerging markets. Due to these negative impacts, and the potential for governments to strengthen regulations in line with the World Health Organisation (WHO) Convention on Tobacco Control, some investors may decide to engage with the industry and governments, even if they also choose to divest.

Research from Oxford University (Smith School, Oct 2013) on divestment campaigns has found that ‘success’ requires cooperation with ‘neutral’ investors and policy-makers. Divestment alone is unlikely to change the tobacco industryand the prevalence of smoking. Those investors who have divested their tobacco holdings could look to governments to enact stronger anti-tobacco regulations along with other tobacco investors who may have concerns about the industry’s negative externalities, but who remain invested in tobacco stocks.

Since September 1989, the S&P500 Tobacco Index rose 1,510% compared to the S&P500 which rose 509%. However, six million people die each year of smoking related illnesses. Health costs and lost productivity due to premature death and disability make smoking one of the greatest economic burdens on society, rivalling armed violence: 3.0% of global GDP or USD 2.1 tn according to McKinsey Global Institute, WHO and literature review studies.

This does not include other costs such as the economic opportunity cost of cigarettes. For instance, WHO (2004a) cites evidence from several countries where the addictive nature of tobacco causes poor people in developing countries to spend 2-10x more on cigarettes than on food or education. As well, smokers’ often have lower day to day productivity; there are significant environmental and social impacts of tobacco crop production including the prevalence of child labor; cigarette-caused fire/smoke damage, injury and death, which leads to higher insurance costs. Cigarette litter also damages the environment (i.e. the chemicals and heavy metals in cigarette filters—BMJ May 2011) as well as being a costly and unsightly waste for cities to collect.

Using available evidence, we estimate that the industry creates at least 5 times more societal costs than benefits (as measured by investment returns, taxes paid, staff salaries, donations and the U.S. Food and Drug Administration’s estimate of potential ‘lost utility’ from anti-tobacco regulations). However, this does not include the controversial ‘benefit’ that premature death caused by smoking reduces pension liabilities. We were unable to find any data on this ‘benefit’.

While some listed tobacco companies may be trying to expand the sale of ‘harm reduction’ products and improving tobacco crop production practices in parts of their supply chain, only 20% of major listed companies audit their suppliers’ practices and often exclude farm level assessments (MSCI 2015).

Just as investors have become more concerned with climate change risks, investors with a global and long-term investment horizon may be concerned with how the tobacco industry’s cost externalisation affects economic growth and by extension, the financial performance of other assets.

There appears to be a strong parallel between the UN Paris Climate Agreement and the WHO Tobacco Convention: their ultimate goals are supported by the vast majority of countries and both call for a near complete elimination of carbon emissions and tobacco use. In both areas, the question is the rate of change and if companies and investors are adequately assessing risks. As companies and investors develop climate risk stress-testing methodologies, there may be lessons that can be learned from and by the tobacco industry and its investors and analysts. While some tobacco sell-side analysts in the past have stress-tested the impact of particular national tobacco regulations, it may be useful for equity analysts and investors to stress-test the impact of stronger regulations in line with the WHO Tobacco Convention and the 2013 world health ministers’ goal to reduce tobacco use to 30% by 2025 (WHO 2013).

Improved disclosure and stress-testing may be necessary as Allianz Global Investors concluded that the market appears to be discounting the impact of new anti-smoking regulations. Tobacco companies’ consensus sales growth, earnings and operating margin all show steady growth over the next several years. The industry has remained profitable in the face of declining smoking rates by increasing prices, expanding This information is intended for informational purposes only and does not constitute investment advice, a recommendation, an offer or solicitation. Past performance may not be indicative of future results. 4 cigarette sales in emerging markets and with industry consolidation. However, AGI concludes that despite tobacco’s addictive nature (inelasticity of demand) the ability to raise prices may reach limits creating profit and growth challenges. “With young populations around the world increasingly uninterested in tobacco, this may be sooner than expected” (AGI Aug 2016).

Improved, more comparable and more widespread tobacco regulation scenario stress-testing would match the recommendations of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosure, which is recommending companies and investors improve their carbon risk management and transparency, including with climate related stress-tests.

While global smoking prevalence fell from 23% to 21% between 2007 and 2013, according to WHO (2015) only ~10% of the world’s population is covered by a tobacco tax that is judged by the WHO to be sufficiently high (more than 75% of cigarettes’ retail price). The proportion of tax in cigarette prices is also much lower in emerging markets, where 80% of the world’s 1.1 bn smokers live. Without stronger polices, an additional 700 million people could be smokers by 2030. This is based on WHO estimates, which assumes prevalence rates remaining relatively unchanged and current projected population growth rates.

The world’s health ministers have agreed a target to reduce tobacco use 30% by 2025. From 2008-14, more than 53m people in 88 countries stopped smoking due to tobacco control regulations, including in countries with high smoking rates, indicating that regulations are expanding (Levy et al Dec 2016). Cigarette sales appear to be declining, even in China, the world’s largest market (AGI Aug 2016). Reducing the rate of smoking will also help meet the UN Sustainable Development Goals.

An increasing number of investors are divesting their tobacco stocks and/or bonds, though this is still small compared to the industry’s market capitalisation. Notably, CalPERS decided to expand its tobacco divestment policy to its external managers despite their financial advisors recommending tobacco re-investment.

The UK Law Commission concluded that investors may divest from companies if underlying beneficiaries share the concern and if a reasonable test of potential financial detriment is used. Trustees may also account for an industry’s wider negative economic impacts (such as those described in this article) in their decision.

One French pension fund which recently announced their tobacco divestment decision stated “Progress will not be achieved by dialogue with these companies, because the whole purpose of engagement would be to demand that they should stop their activities altogether” (FRR Dec 2016). 

While a similar argument is being made by some commentators regarding fossil fuel companies today, investor engagement is helping lead European oil and gas companies to increase investment in low-carbon technologies and to climate stress-test their portfolios (CDP 2016). As well, one major U.S. oil and gas company appointed a climate scientist to their board after investor pressure. In May 2017, investors voted in favor of climate risk stress-testing at two major US oil and gas companies. Divestment and engagement strategies both have complementary roles to play in helping to reduce climate risks, the negative impacts of tobacco use and other sustainability challenges.

The high negative externalities of the industry suggest that investors who are not able to or willing to currently divest, could attempt a multi-year engagement initiative, encouraging listed companies to improve performance on Environmental, Social and Governance (ESG) issues, aiming to reduce the negative impacts of tobacco use as far as possible.

Caution is however necessary given the industry’s history, such as the 2006 U.S. court finding that the industry engaged in a 50-year violation of the U.S. racketeering act. WHO has also warned that the tobacco industry just uses engagement to improve their image.

Electronic cigarettes and other ‘harm reducing products’ could be creating a different future for the industry. One industry chief executive declared a desire to phase out conventional cigarettes. Whether this is genuine remains to be seen but investors could call for firm business timelines and targets towards such a goal. ‘Harm reducing’ products could be monitored and further developed to reduce remaining negative impacts, particularly concerns that they could introduce children to other tobacco products and thus to life-time addiction.

Just as investors played a key role in encouraging the finalization of the Paris Climate Agreement, investors are starting to become more active in encouraging governments to implement the WHO Convention on Tobacco Control. On “World No Tobacco Day” (31 May 2017) 53 investors with USD 3.8 trn in assets called on governments to support stronger regulation on tobacco control (PRI May 2017). This could accelerate regulations that reduce tobacco’s negative impacts.

A new agenda for investors regarding tobacco could include: creating and using tobacco regulation stress-testing methodologies, stronger disclosure requirements (regarding marketing practices; ‘harm-reducing’ product business strategy, R&D levels and product volumes; fines, legal costs and lobbying policies/practices), expanding and improving tobacco crop production sustainability standards, supporting the use of such standards as a condition for bank loans to the sector, supporting the creation of an Economics of Tobacco report modelled on the climate change Stern Review and considering how investors could support governments in enacting new and strengthening existing tobacco laws.

Click here to read the complete article (A new perspective on tobacco engagement and divestment).