This is not the first time Axa has turned its back on a sector citing ethical reasons. Last year it decided to cut its exposure to companies with a high involvement in coal-related activities including coal mining and electricity production.
But Axa’s divestment from tobacco isn’t just a bigger deal — €1.8bn versus its €500m exposure to coal. It is also unthinkable that the decision is because Axa believes the industry to be in decline.
The MSCI World Tobacco Index — of which BAT and Philip Morris are both constituents — is one of the best performers of recent years. The index was less than 100 back in 2002, but has risen steadily to surpass 400 in 2016.
So Axa is either serious about making the ethical argument case, or the firm is seeing something financially rotten about tobacco that has completely eluded the wider market. The firm will also need to find somewhere remarkably profitable to put its money instead if it intends to stand behind its ethics from a purely profitable point of view.
This is a bold play, as it’s easy to be cynical whenever a big manager talks about taking an ethical approach to their investments. A growing amount of lip-service is given to environmental, social and governance issues, but these rarely translate into rejection of a profitable business opportunity.
Recent bond deals in Europe illustrate the point. At the start of May, Philip Morris International printed a €500m 20 year trade with tight pricing. The order book was almost double that amount, suggesting that investors have few reservations about the durability of the sector. GlobalCapital didn’t hear much about anyone’s ethical reservations over buying the deal.
In November, British American Tobacco got a £350m 40 year sterling bond away with a £1.4bn book. That might say more about the UK’s appetite for long-dated paper than its dedication to ciggies, but it doesn’t suggest an industry short of friends.
When the next big tobacco deal comes around it may be too early to see if Axa has made a difference. (Those still hankering after tobacco might even welcome the move if it means they get a slightly better return on their investment.)
Tobacco might not be as abhorrent to others of course. Axa said that investing tobacco no longer made sense for it as a responsible insurer.
But people do start to take notice when a market operator as big as Axa takes a stance. The influence of Norges Bank on the ethical investment market provides an example — with other firms now using its observation and exclusion list as a template. Pensions and insurance fund manager Aegon said this week that it is also striking coal mining from its investments and will conduct an in-depth sustainability review of its investments later this year.
Where Axa goes next with its divestment and redeployment remains to be seen. Aside from coal and tobacco, the firm has already applied ESG guidelines to making divestments from controversial weapons (2007), palm oil and forestry (2013) and food ('soft') commodities derivatives (2013).
What is certain is that the rest of the capital markets will be taking notice.