When finance leaders gathered at the United Nations in New York to sign the Tobacco-Free Finance Pledge in September 2018, the move was billed as the first step to choking off finance to an industry responsible for more than seven million deaths a year.
AXA, BNP Paribas, Natixis and the Ontario Teachers' Pension Plan were among 120 signatories that pledged to halt all support for tobacco companies. Covering US$6.4trn of assets under management and US$1.8trn of corporate lending, the pledge apparently packed a considerable punch.
However, just over 16 months later, it seems to have had little effect. After a quiet year for financing in 2018, the five biggest tobacco companies substantially stepped up their fundraising last year, selling US$29bn of bonds – just short of the all-time record – and borrowing US$23bn in loans.
While a handful of firms are turning their backs on tobacco, they are dramatically outnumbered by others more than willing to support the likes of Altria, British American Tobacco, Imperial Brands, Philip Morris International and Japan Tobacco, lured in by their record profits and strong financials.
"There are still plenty of investors who look at tobacco," said Mark Wade, head of credit research at Allianz Global Investors, which excludes tobacco-related securities from its sustainable and responsible investment funds but allows such investments in its other funds.
"Is it a predictable business? Yes. Does it generate high margins? Yes. Does it generate lots of free cashflows? Yes. Does it have attractive shareholder returns? Yes. There's a lot to like about tobacco other than the fact that it makes tobacco."
US$48BN OF DEMAND
Big deals from Altria show just what is possible. JP Morgan lent the company US$14.6bn last January to fund its purchase of e-cigarette maker Juul Labs. When Altria turned to US bond markets to take down the loan a month later, it was met with US$48bn of demand, allowing it to upsize the deal.
But while the headline numbers indicate continued access to capital, bankers say that the Tobacco-Free Finance Pledge has had some impact – below the surface.
"If you look at geographic distribution of deals, it looked pretty normal a few years back," said one banker who has worked closely on several recent tobacco transactions. "But now investors from France, the Netherlands and Scandinavia are all out. The people buying are funds from the UK, the US and Asia."
He said that tobacco clients have noticed a drop-off in demand from some investors and have adapted in response – issuing more in US dollars and curtailing marketing in Europe.
For now that drop-off hasn't had a major impact on pricing, but tobacco companies are nonetheless worried about the future.
"They are facing up to it, for sure," the banker said. "I had a worried email from one of our clients just the other day. They see their investors changing and want to know what to do to minimise the impact. It is no coincidence that there haven't been many big tobacco deals in euros over the last few years.
"At this point it's a pricing discussion, it's not a 'can we/can't we?'. But if one of these clients came along with big financing needs, I would question how much of that we could get done in euros. Can you do multiple billions in the currency? Honestly, I think no. And that is a worrying comment."
At a time when other corporates are increasing euro issuance to take advantage of low borrowing costs, an enforced skew towards US dollars certainly puts tobacco outfits at a disadvantage - albeit a slight one for the moment - relative to other borrowers. And that matters because some have significant refinancing needs after a run of big acquisitions. BAT alone has £10bn of maturities in the next three years, for example.
"When it comes to tobacco, we don't believe there's any safe level of consumption and therefore exclude any tobacco companies from investment," said Paul Brain, a fund manager at Newton Investment Management, who predicts many funds will eventually come round to that view.
"Essentially, this is coming from clients, who are looking to make sure that their assets are managed in a sustainable way," he added. "We think that as capital shifts more to ESG criteria, they will find it more difficult to raise financing."
LESSONS FOR COAL
The experience of the tobacco industry will be closely watched by other industries such as coal, oil and gas, which are increasingly finding themselves blackballed by a new breed of ESG-focussed investors.
BlackRock, the largest fund manager in the world with US$7.4trn of assets under management, recently banned its active fund managers from owning the shares or bonds of any coal producers. Many other asset managers are screening their portfolios under ESG criteria.
Oil and gas companies are striving to get ahead of the game, with companies such as BP touting their renewable energy projects. Tobacco companies don't really have that option: even alternatives to traditional cigarettes are detrimental to health, so unlikely to get past ESG concerns.
As a result, many funds may take the view that tobacco is just a lost cause, according to Faryda Lindeman, a senior responsible investment specialist at NN Investment Partners, which began divesting from tobacco in mid-2018.
"We saw so many different ESG key risks related to the sector," she said. "We very quickly began to realise that this was not something we could actually start to engage on because there's no way we can improve the product or improve the companies."