Tobacco Divestment in New York State

Reining in Big Tobacco’s global practices are extremely difficult, particularly for state-based activists. However, in response to Big Tobacco’s activities around the world, activists are challenging public investments in tobacco companies.

Through the state’s pension fund investments, New Yorkers are helping to fund Big Tobacco’s deadly activities in the U.S. and overseas. New Yorkers should draw the line. The tobacco industry’s track record of lawbreaking and the terrible human toll its products take clearly make it a corporate pariah—one that should not be underwritten by the public. New York governments and public institutions must stop investing in the tobacco industry.

Many government investors are reducing or eliminating their pension fund holdings in tobacco companies and funds that include tobacco companies. In fact, New York State acted to cap the amount of retirement funds it invests in tobacco companies back in 1996, long before the most damning new evidence of Big Tobacco’s deceits was made public. It is that mountain of evidence that should lead New York State to take the next step and divest all tobacco holdings.

Tobacco Divestment Questions and Answers
Is divestment legal?

Divestment is legal as long as the fund’s decision-makers (i.e., retirement board members) have preformed their fiduciary duty to ensure the soundness of the pension funds. They must determine how divestment would impact their fund and make a decision based on that assessment.

How does divestment improve public health?
Investments in the tobacco industry promote the use of tobacco products worldwide by ensuring the financial health of the industry and making available the resources it needs to market its deadly products. Investing in a tobacco company is like investing in any other—if the investment is to be profitable, the industry must sell its product. Unfortunately, in the United States, the industry’s product kills more people than AIDS, alcohol, drug abuse, car crashes, murders and suicides combined.2 Worldwide, tobacco is expected to be the leading cause of death in the next thirty years.3 The American company Philip Morris sells most of its cigarettes overseas—including in some countries that don’t have the same stringent regulation of tobacco as the United States.4 Tobacco divestment separates investors from the tobacco industry’s bad practices.

How will tobacco divestment make a difference?
Investments help the tobacco industry finance the promotion of its products. Tobacco investments also send the wrong message to the public, especially young people. On the one hand, local governments have spent millions of dollars to reduce tobacco use and have enacted laws to protect the public from the health hazards associated with tobacco products. On the other, the government invests in the tobacco industry promoting those same products. Divestment is just another step to expose an industry that promotes a product that, when used as directed, is addictive and harmful.

Will divesting from tobacco open a Pandora’s box of political issues?
Whether or not a fund decides to divest from tobacco, other social issues (e.g., continued investments in alcohol companies or companies with poor environmental records) may be raised before the board of directors of a company (or in the case of New York State, the Comptroller). The board will have to decide on each issue it has chosen to address. Boards can adopt policies to guide their decision-making on current and future social issues.

Will divestment cost money?
Divestment transaction costs can include depressed stock prices due to a large sell-off, higher brokerage fees, and commissions. Some ways to minimize these costs are for the fund to divest over time, or have the broker cross-trade the stock with other clients’ portfolios. Institutions across the United States have proceeded with divestment knowing there would be some small additional cost, but also knowing it was the right thing to do.

Will divestment hurt performance?
Because tobacco companies make up such a small percentage of an overall portfolio, divesting from tobacco stocks has very little financial significance to state pension funds. Proponents of socially responsible investment maintain that funds that use screens to select companies with a high level of corporate responsibility actually improve their performance. Good corporate citizens are seen as having fewer liabilities. The tobacco industry certainly has not been a good corporate citizen and certainly has many liabilities.

Will selling tobacco holdings sacrifice the ability to introduce proxy votes and shareholder resolutions?
Unfortunately, the tobacco companies have been extremely resistant to change. Very few shareholder resolutions have been successful with tobacco companies. In fact, many institutions, such as Harvard University and the Massachusetts Public Retirement Investment Trust, have opted for divestment or restrictions on tobacco investment after their shareholder advocacy proved unsuccessful.

Will divestment increase investment risk?
Reducing the number of stocks in an index without replacing them increases the risk exposure in a fund. Of course, by replacing tobacco company stocks with similar large consumer goods companies, that risk can be dispersed.

What has New York State done in the past?
In 1996 New York State Comptroller McCall froze actively managed tobacco shares of the New York State Common Retirement Fund, while the New York State Teachers Retirement System under-weighted indexed tobacco by 25%.5 In 1998 New York City froze all indexed tobacco in the New York City Employees Retirement System.