10.18 The investment of public funds in tobacco - the case for divestment

Last updated: November 2019     

Suggested citation: Greenhalgh, EM. 10.18 The investment of public funds in tobacco—the case for divestment. In Scollo, MM and Winstanley, MH [editors]. Tobacco in Australia: Facts and issues. Melbourne: Cancer Council Victoria; 2019. Available from http://www.tobaccoinaustralia.org.au/chapter-10-tobacco-industry/10-18-the-investment-of-public-funds-in-tobacco            

Growth of the tobacco market will inevitably lead to more deaths. 1 Pension funds (known as superannuation funds in Australia) positively and significantly affect share prices, and are therefore important investors in the stock market. 2 Australian government policies require all employed Australians to contribute to pension funds, therefore most Australians have some investment in the share market. 2  A recent analysis of Australia pension funds revealed tobacco exposure ranging from 0.108 per cent to 1.28 per cent of total assets, equating to at least AU$2.484 billion (and potentially 10 times that amount) of Australian workers’ money invested in tobacco companies. 3

Throughout the 1990s, tobacco control advocates increasingly questioned the investment of public funds and pensions in tobacco company stocks, and called for public institutions to divest such stocks. These calls occurred in the context of a growing concern regarding socially responsible investment, as well as mounting litigation against major tobacco companies, which allowed the issue to be taken seriously. 4,  5 Analyses of tobacco industry documents have highlighted the industry’s concerns that a divestment movement could hinder its social capital and lead to further stigmatisation, and revealed its efforts to obstruct such a movement; in the US, Philip Morris succeeded in stymying divestment at medically prestigious universities, 6 and in combating divestment by more financially significant government funds. 5  

Health experts have argued that investing in the tobacco industry is a clear conflict of interest, and that it is untenable for local authorities to champion public health while profiting from tobacco. 7 Ethical dilemmas and concerns about international obligations have led some states to be proactive in tobacco divestment. In Australia, the governments of Australian Capital Territory, New South Wales and South Australia, as well as the City of Melbourne, have divested their public investment in the tobacco industry. 8  In 2012, First State Super became the first mainstream Australian superannuation fund to implement a tobacco-free investment policy, and as at December 2017, there were 41 Australian superannuation funds with tobacco-free policies that cover all investment options, including the Australian Government’s Future Fund. In 2016, Medibank (Australia’s largest health insurer) also divested from tobacco. 1  

Elsewhere, the Norwegian Government Pension Fund—one of the largest in the world—ceased investing in tobacco in 2010. The country’s finance minister stressed the importance of the fund’s ethical guidelines reflecting “at all times what can be considered to be the commonly held values of the owners of the fund” (i.e., the Norwegian people). 9 The New Zealand Superannuation Fund has also excluded investment from companies directly involved in the manufacture of tobacco products, 10 and OP Trust, a large Canadian pension fund, has also announced it is divesting from the tobacco industry. Paris-based global insurance agency AXA adopted a tobacco-free investment policy in 2016, and in 2017, BNP Paribas, the world’s seventh largest bank, announced a tobacco-free policy that includes lending, investment and insurance. 11  

The issue of investment in tobacco industry stocks has typically been framed by divestment advocates in terms of social policy (i.e., the questionable logic of investing in a product that drastically increases healthcare costs and lowers productivity) and in ethical terms (i.e., the morality of investing in a highly addictive product that causes enormous harms to its users). The industry has often argued that investing in its stocks is sound fiscal policy; however advocates have flipped these arguments by highlighting the uncertainty of the industry’s finances in the face of mounting legal battles and tighter regulations. 4,  12   

Specific arguments that are commonly cited for investing in tobacco include:

Pension funds have a fiduciary duty to maximise investment returns

Investments in tobacco stocks are most frequently justified on the grounds that pension funds’ fiduciary duty (i.e., legal obligations to pension fund members) requires them to maximise returns, without consideration of ethical issues. 13  In Australia, superannuation funds are governed primarily by the Superannuation Industry (Supervision) Act 1993 (SIS Act). The Act states that the funds must act ‘in the best interests of the beneficiaries’, which has conventionally been interpreted to mean their best financial interests. However, some public health experts have argued that this interpretation may be overly simplistic, and that ethical concerns could be accommodated without compromising the performance of the fund. 13    Others have pointed out that Trustees may view this covenant as an obligation to invest in tobacco stocks when they are performing well, and have suggested that it be refined to allow divestment from tobacco companies whilst being satisfied that fiduciary duties are being fulfilled. 14  The long-term best interests of members may also not align with short-term investment returns; issues with treaty obligations, conflicts of interests, ongoing litigation, and mounting regulations may all affect the future of tobacco stocks. 11      

These suggestions align with a growing movement in recent years for pension funds to consider the environmental and social behaviour of the companies in which they invest. Known as socially responsible investment (SRI), investors are increasingly excluding companies that violate human rights, for example, in favour of those that behave responsibly and ethically. However, there has been some confusion among investors regarding the extent to which fiduciary duties allow for SRI. 15  A 2007 comprehensive analysis suggested that SRI can often sit comfortably with fiduciary duties to invest prudently, provided certain conditions are met. 15  An Australian review that considered the legal position of superannuation trustees who invest ethically concluded that while SIS Act should be primarily concerned with the provision of adequate benefits for retirees, the issue of how resources are invested should also be taken into account by governments. The author argues that, taking into consideration statutory and general law on ethical investment, the SIS Act can be interpreted to allow trustees to consider non-financial concerns. 16  

Following years of predominantly indifference or even opposition, the Australian superannuation industry has become more accepting of SRI over time. 15 The Association of Superannuation Funds of Australia has advised that the main requirements for a fund desiring to invest ethically are: 17  

Unreduced expected return. An SRI policy must not lower the expected return of the plan’s assets. If the plan carried an expected return shortfall against the broad market, it would be difficult for trustees to justify this policy while at the same time proving they are acting in the best interests of the plan beneficiaries.

Effective diversification. Restrictions imposed by the SRI policy should not be so constraining that the fund is inadequately diversified.  

Implementability. Trustees need to check whether the policy can be implemented without introducing unacceptable risk exposures and burdensome administrative procedures. For example, some SRI policies lead to a portfolio biased towards medium and smaller capitalisation companies, introducing an element of risk into a portfolio and leading to periods of under-performance, even if there is no loss of long-term expected return. 

Member acceptance. Trustees must ensure that an SRI policy has wide acceptance from members, otherwise they risk assuming their social, ethical and environmental views are shared by the membership.

Documentation. Adequate and up-to-date documentation is vital and trustees should maintain proper records of their decisions and the grounds on which they are made. Independent investment advisers also have an important role to play in providing advice and independent view. 

If each if these requirements are met, the fiduciary obligations of the fund would appear to be satisfied. 17  

Further, and perhaps most importantly in regards to fiduciary duties, there does not appear to have been a financial cost for funds that have divested from tobacco. Replacing tobacco with investments that have similar characteristics (for example, funds that demonstrate inelastic demand and target emerging markets) has allowed similar returns. 18 In terms of SRI, a number of international studies have established that there are no significant differences between returns of responsible investments compared to those investments that do not account for responsibility. 19,  20  A report on Australian share funds that invest ethically found that they actually performed better, producing 4.65% average annual return in 5 years to July 31, 2010, against 4.21% for mainstream share options. 21 Similarly, a superannuation researcher reported that sustainable Australian share options offered by super funds outperformed mainstream Australian share options between 2005 and 2010. 11 A 2013 report by the Responsible Investment Association Australasia reiterated that consideration of environmental, social, and governance issues should be viewed as best practice in investment decision making. 22

Tobacco is a low risk, high profit investment

Traditionally, tobacco has been viewed as a sound investment; one that is low risk and high profit. However, some analysts have argued that such investments may be risky in the medium– to long–term, and that current stocks may be overvalued. 13 Ongoing falls in prevalence rates have seen sales across the developed world steadily decline, with one analyst arguing that tobacco could virtually disappear in 30 to 50 years, 23 and a public health body describing it as a “sunset industry”. 11 Tobacco companies have made attempts to manage these risks by investing in developing world markets that are currently profitable; however, these markets may be unreliable in the long-term to counter declining markets elsewhere, due to increasing regulations. Together, increasingly strict regulatory requirements, increases in taxes, plain packaging, and widespread litigation, all threaten the future profitability of tobacco. 13  An Australian superannuation fund, UniSuper, stated that its decision to not invest in tobacco was due to the stocks delivering minimal outperformance and the industry facing “an uncertain regulatory future and…potential long-tail liabilities associated with it”. 24 The author of a 2015 detailed analysis of tobacco investments expressed scepticism about such investments going forward, and advised potential investors to consider that the industry faces declining volumes, legislative actions, and other roadblocks. 25    

Further arguments against investing in tobacco include:

Investing in tobacco undermines the FCTC and the National Tobacco Strategy

Australia became a Party to the WHO Framework Convention on Tobacco Control (FCTC) on February 27, 2005. Article 5.3 states, “Government institutions and their bodies should not have any financial interest in the tobacco industry, unless they are responsible for managing a Party’s ownership interest in a State-owned tobacco industry” (4.7). Thus, each of the more than 170 Parties to the FCTC has legal obligations to protect public health policies regarding tobacco control from vested interests of the tobacco industry. The guidelines recognise the “fundamental and irreconcilable conflict between the tobacco industry’s interests and public health policy interests” and provide recommendations to protect tobacco control policies from tobacco industry interference to the greatest extent possible, which include:

  • Raise awareness about the addictive and harmful nature of tobacco products and about tobacco industry interference with Parties’ tobacco control policies. 
  • Establish measures to limit interactions with the tobacco industry and ensure the transparency of those interactions that occur. 
  • Reject partnerships and non-binding or non-enforceable agreements with the tobacco industry. 
  • Avoid conflicts of interest for government officials and employees. 
  • Require that information provided by the tobacco industry be transparent and accurate. 
  • Denormalise and, to the extent possible, regulate activities described as ‘socially responsible’ by the tobacco industry, including but not limited to activities described as ‘corporate social responsibility’. 
  • Do not give preferential treatment to the tobacco industry. 26

Recommendation 7.2 states that “Parties that do not have a State-owned tobacco industry should not invest in the tobacco industry and related ventures”,  26 which Parties should consider in relation to pension funds. These considerations could form part of a broader policy on contact with the tobacco industry, or it may be preferable to treat the issue of pensions separately, given the complexity of fiduciary duties. 27 Norway, for example, has addressed the Article 5.3 recommendation to avoid conflicts of interest by announcing in 2010 that it would be divesting government pension funds from the tobacco industry. 9  

The Australian National Tobacco Strategy 2012–18, agreed to by all nine Australian Federal, State and Territory governments, commits them to developing policies and regulatory options to implement Article 5.3, and to prevent tobacco industry interference in public health policies. 28 Thus, investing in tobacco undermines both international and local obligations. 

Investing in tobacco is socially irresponsible and against the public interest

An argument that is sometimes raised in favour of tobacco investment is that tobacco is a legal product, and therefore a legal investment. 11 However, tobacco is a unique product in that it kills as many as two-thirds of its long-term users when used as intended. 29 Tobacco, along with other legal products, has been excluded from some investment portfolios due to treaty conflicts, its history of unethical conduct, and social irresponsibility. 11 The WHO has highlighted the irreconcilable conflict of interest between the tobacco industry and public health. 28 Tobacco is an enormously harmful, addictive product; Australian smokers lose an average of 12 years of life. 30 The tobacco industry has used its enormous resources for decades to aggressively undermine tobacco control strategies, 31 including targeting its products at children. 32  As high-income countries have implemented restrictions on marketing to children, these efforts have simply been moved to developing countries. 32,   33  Its significant contribution to poverty and disease worldwide has led to suggestions that there is a moral imperative not to benefit financially from tobacco holdings, 33  and that investment in tobacco is inconsistent with public values. 34 It may also be unsound social policy to derive public income from tobacco, 4 when its use leads to lost productivity and high healthcare costs, as well as higher levels of financial stress for individuals and families (see  chapter 17, section 2).

Divesting in tobacco has public support

In line with largely negative community perceptions about the tobacco industry, survey research in NSW found that the majority of people perceive investments in tobacco stocks by pension funds as unethical. Even when the tobacco investments were profitable, about two-thirds of the fund members were opposed to their money being invested in the tobacco industry. 35 Another survey reported that 63% of the Australian public want pension funds to encourage better environmental and social practices. 36 Results of a large survey of future beneficiaries of the Swedish pension system showed that on average, beneficiaries preferred their pension funds to go beyond financial concerns and to consider social, ethical and environmental issues; both financial motives (beliefs about financial risk and returns) and values-based motives (self-transcendent value priorities) were underlying these preferences. 37 Experts suggest that together, the negative attitudes of the general public and fund members toward investment in tobacco, and positive attitudes toward environmental, social, and ethical considerations, provide a lever for health promotion advocacy on this issue. 35

10.18.1 Tobacco Free Portfolios 

Tobacco free portfolios was launched in 2010 by Australian oncologist Dr Bronwyn King, when she learned that her industry superannuation fund was investing in tobacco. Its initial aim was to encourage Australian superannuation funds to divest from tobacco, and it has since expanded its work to engage with the finance sector internationally. Since 2015, Tobacco Free Portfolios has been active in more than a dozen leading economies, which in 2017 had led to AU$12 billion of tobacco industry assets being divested by financial institutions in ten countries. 3

In 2018, Tobacco Free Portfolios launched an initiative ‘Verified Tobacco-Free’. Pension funds and other investment bodies can apply to use the Verified Tobacco-Free certification stamp, subject to audit, to publicly declare their tobacco-free position. This will act as a guarantee to members and consumers that money is not being invested in the tobacco industry. There are three variations of the Verified Tobacco-Free certification stamp representing different categories: Verified Tobacco-Free, Verified Tobacco-Free Product (for Fund Managers only), and Verified Tobacco-Free Commitment (considered to be ‘in transition’ to Tobacco-Free). 38

Also in 2018, and developed by Tobacco Free Portfolios, the Tobacco Free Finance Pledge was launched at the United Nations. It highlights financial institutions that have implemented tobacco-free policies and encourages similar companies to do the same. The pledge also encourages the financial sector to address priorities outlined in the UN's Sustainable Development Goals and World Health Organization Framework Convention on Tobacco Control, raise awareness, and encourage financial institutions to reconsider their business relationships with tobacco companies. The pledge currently has 151 signatories and supporters, representing USD$7.5 trillion in assets under management; USD$2.0 trillion in corporate loan book, and USD$186 billion in gross premiums. 39

Relevant news and research

For recent news items and research on this topic, click  here. ( Last updated October  2021)



1. Cancer Research UK, Preventing lung cancer: Isolating the Tobacco Industry.  London: Cancer Research UK; 2002. Available from:  http://archive.tobacco.org/news/168800.html .

2. Huynh W, Mallik G, and Hettihewa S. The impact of macroeconomic variables, demographic structure and compulsory superannuation on share prices: The case of Australia. Journal of International Business Studies, 2006; 37(5):687–98. Available from:  http://dx.doi.org/10.1057/palgrave.jibs.8400220

3. King B, Payne C, and Stone E. Tobacco-free investment: Harnessing the power of the finance Industry in comprehensive Tobacco Control. QUT Law Review, 2018; 17(2):161–74. Available from:  http://lr.law.qut.edu.au/article/view/699

4. Wander N and Malone RE. Keeping public institutions invested in tobacco. Journal of Business Ethics, 2007; 73(2):161–76. Available from:  http://link.springer.com/article/10.1007/s10551-006-9188-0

5. Wander N and Malone RE. Fiscal versus social responsibility: How Philip Morris shaped the public funds divestment debate. Tobacco Control, 2006; 15(3):231–41. Available from:  http://tc.bmjjournals.com/cgi/content/abstract/15/3/231  

6. Wander N and Malone RE. Selling off or selling out? Medical schools and ethical leadership in tobacco stock divestment. Academic Medicine, 2004; 79(11):1017–26. Available from:  http://journals.lww.com/academicmedicine/Abstract/2004/11000/Selling_Off_or_Selling_Out__Medical_Schools_and.2.aspx

7. Luxmore-Brown J and Middleton J. Sell up or cough up: Pension funds and tobacco. Better Health for All, 2013. Available from:  http://betterhealthforall.org/2013/05/24/sell-up-or-cough-up-pension-funds-and-tobacco/

8. ACOSH. Tobacco free investments. Available from:  https://www.acosh.org/what-we-do/investment-in-tobacco/

9. Ward A. Norway fund shuns tobacco companies. Financial Times, 2010. Available from:  http://www.ft.com/intl/cms/s/0/9ef17b66-052a-11df-a85e-00144feabdc0.html#axzz3bs04ZCpo

10. New Zealand Superannuation Fund. Exclusions. 2007. Available from:  https://www.nzsuperfund.co.nz/how-we-invest-responsible-investment/exclusions

11. Action on Smoking and Health Australia. Ending investment in Tobacco. 2015. Available from:  http://www.ashaust.org.au/lv4/lv4action_investment-htm/

12. Schueth S. Tobacco: No more excuses for pension funds. Pensions & Investments, 1997. Available from:  https://www.industrydocumentslibrary.ucsf.edu/tobacco/docs/fyjl0067

13. Action on Smoking and Health. Local authority pension funds and investments in the tobacco industry.  2012. Last update: Viewed Available from:  http://shareaction.org/resources/local-authority-pension-funds-and-investments-in-the-tobacco-industry/ .

14. King B. Submission regarding the Australian government’s discussion paper, 28 November 2013: ‘Better regulation and governance, enhanced transparency and improved competition in superannuation’. 2014. Available from:  http://static.treasury.gov.au/uploads/sites/1/2017/06/King_Bronwyn_Dr.pdf

15. Richardson BJ. Do the fiduciary duties of pension funds hinder socially responsible investment? Banking and Finance Law Review, Forthcoming, 2007. Available from:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=970236

16. Leigh A. " Caveat investor": The ethical investment of superannuation in Australia. Australian Business Law Review, 1997; 25:341–50. 

17. Association of Superannuation Funds of Australia (ASFA). Development of asfa policy on ‘ethical investment’, Sydney: ASFA; 2000.  Available from:  http://citeseerx.ist.psu.edu/viewdoc/download?doi= .

18. Noble G. Turning their backs on tobacco. Superfunds, October 2013. Available from:  http://search.informit.com.au/documentSummary;dn=651932954396777;res=IELBUS

19. Bauer R, Koedijk K, and Otten R. International evidence on ethical mutual fund performance and investment style. Journal of Banking & Finance, 2005; 29(7):1751–67. Available from:  http://www.sciencedirect.com/science/article/pii/S0378426604001372

20. Galema R, Plantinga A, and Scholtens B. The stocks at stake: Return and risk in socially responsible investment. Journal of Banking & Finance, 2008; 32(12):2646–54. Available from:  http://www.sciencedirect.com/science/article/pii/S0378426608001325

21. St Anne C. Does being ethical give you good returns? Morningstar, October 2012. Available from:  http://www.morningstar.com.au/Video/funds/ethical/2243

22. Responsible Investment Association Australasia. Responsible investment benchmark report.  2013. Available from:  http://www.responsibleinvestment.org/wp-content/uploads/2014/08/2013-Benchmark-Report.pdf .

23. Spielman A. Cigarettes bad for wealth, but there’s life in tobacco yet,. Financial Times, 14 January 2011. Available from:  http://www.ft.com/cms/s/0/a2f73314-2017-11e0-a6fb-00144feab49a.html

24. UniSuper. FAQs: Does UniSuper invest in tobacco? Available from:  http://www.unisuper.com.au/investments/investments-faqs

25. No authors listed. Are Tobacco stocks still a good investment? Smarter Analyst, 2015. Available from:  http://www.smarteranalyst.com/2015/04/13/are-tobacco-stocks-still-a-good-investment/

26. World Health Organization. Guidelines for implementation of article 5.3 of the WHO Framework Convention on Tobacco Control Available from:  http://www.who.int/fctc/guidelines/article_5_3.pdf

27. Action on Smoking and Health, Developing policy on contact with the Tobacco Industry.   2015. Available from:  http://ash.org.uk/files/documents/ASH_944.pdf

28. Intergovernmental Committee on Drugs, National Tobacco Strategy 2012-2018. Commonwealth of Australia; 2012. Available from:  http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/publishing.nsf/Content/national_ts_2012_2018 .

29. Banks E, Joshy G, Weber MF, Liu B, Grenfell R, et al. Tobacco smoking and all-cause mortality in a large Australian cohort study: Findings from a mature epidemic with current low smoking prevalence. BMC Medicine, 2015; 13:38. Available from:  http://www.ncbi.nlm.nih.gov/pubmed/25857449

30. Peto R, Lopez AD, Pan H, Boreham J, and Thun M. Mortality from smoking in developed countries 1950 - 2020. 2015. Available from:  http://gas.ctsu.ox.ac.uk/tobacco/contents.htm

31. World Health Organization. Tobacco industry interference with tobacco control. World Health Organisation, Geneva: WHO, 2009. Available from:  http://apps.who.int/iris/handle/10665/70894 .

32. World Health Organization. 3 out of every 4 children are exposed to tobacco advertising. 28 May 2013. Available from:  http://www.searo.who.int/mediacentre/releases/2013/pr1558/en/index.html

33. Ad hoc Committee on Tobacco Investment, Proposal to adopt a policy excluding investments in tobacco companies. University of Pennsylvania; 2013. Available from:  http://www.phil.upenn.edu/~weisberg/Tobacco-Final.pdf .

34. No authors listed. Australia pension fund reviewing tobacco stake. Medical Xpress, 2012. Available from:  http://medicalxpress.com/news/2012-10-australia-pension-fund-tobacco-stake.html

35. Walsh RA, Tzelepis F, and Stojanovski E. Australian pension funds and tobacco investments: Promoting ill health and out-of-step with their members. Health Promotion International, 2008; 23(1):35–41. Available from:  http://heapro.oxfordjournals.org/content/23/1/35.short

36. CPA Australia. Super funds should be 'super' investors say Australian public: CPA Australia survey. 2006. 

37. Jansson M, Sandberg J, Biel A, and Gärling T. Should pension funds’ fiduciary duty be extended to include social, ethical and environmental concerns? A study of beneficiaries’ preferences. Journal of Sustainable Finance & Investment, 2014; 4(3):213–29. Available from:  http://www.tandfonline.com/doi/abs/10.1080/20430795.2014.928997#.VW94RdKqrnU

38. Tobacco Free Portfolios. Verified tobacco-free program.  Available from: https://tobaccofreeportfolios.org/verified-tobacco-free-program/.

39. United Nations Environment Programme Finance Initiative. Tobacco-free finance.  2018. Available from: https://www.unepfi.org/psi/tobacco-free-finance/.