Tuesday, June 13, 2017

Is investing in tobacco business unethical?

The Bombay high court will hear a Public Interest Litigation (PIL) filed by two Tata Trusts trustees along with five others against the union government, the Insurance Regulatory and Development Authority of India (IRDAI), LIC and other state-run insurance companies. The PIL called on the high court to direct the public sector insurance companies to divest their shareholding from the companies that are directly and indirectly engaged in the tobacco businesses. The PIL argues that investment by those companies in tobacco business is against the spirit and intent of the World Health Organization’s Framework Convention on Tobacco Control (WHO FCTC), which is the health treaty developed in 2003 in response to the globalization of the tobacco epidemic. India became a partner of the treaty in 2005.
Tobacco consumption causes estimated six million deaths per year globally, of which one million are in India.  The production-related health hazards from tobacco are also a matter of serious concern. Tobacco farmers, farm-workers, and bidi workers suffer from occupational illnesses like ‘green tobacco sickness’ (GTS).  Tobacco consumption also has severe societal costs due to reduced productivity, health cost burden and environmental damage.
The government, in conformity with WHO FCTC, has framed laws and taken steps for reducing tobacco consumption and creating awareness about health hazards. It is also working on reducing tobacco farming by developing economically beneficial alternative crops and vocations for tobacco farmers. Results are visible, although the progress is quite slow.
In spite of the disastrous health hazard from tobacco consumption, an average investor would consider including investment in a company that is in tobacco business in her/his portfolio of investment. An average investor behaves rationally. Therefore, so long as she/he estimates that the company would continue to create shareholder value, she/he would consider investing in the company. She/he uses ‘environmental, social and governance’ (ESG) criteria to assess business risks of the tobacco business (say, risks from tighter government regulations, falling sales volume and activism against tobacco consumption) and factors in the same in valuing the company’s equity.
Is there any ethical or moral issue in investing in tobacco business, which is a legal activity? Ethical considerations transgress the legal boundary. Therefore, some argue that it is immoral and unethical to invest in the production and sale of those products, the production and/or consumption of which harms the society. ‘Ethical investing’ (also called socially responsible investment, or sustainable, responsible and impact investing) is an old concept. Ethical investing requires using ESG criteria, in addition to financial criteria, in deciding investment in a particular industry or a particular company. It uses ESG criteria not to assess business risks, but to assess impact of the business on environment and society. Investors who believe in ethical investing would not invest in so-called ‘sin’ industries (e.g., tobacco, alcohol, gambling and military weapons), the products or processes of which, in their judgement, are harmful to the environment or society.
I think whether to invest in companies operating in ‘sin’ industries is a matter of personal choice based on one’s own individual ethical standards. For example, an oncologist, who experiences the trauma of her patients, may believe that investment in tobacco business is unethical. Similarly, ethical standards of individuals are often developed based on prescriptions and proscriptions in scriptures of their religion. However, in general, it is not immoral to invest in a company, which is allowed to operate by the parliament, even if it operates in a ‘sin’ industry. Parliament, in its collective wisdom, allows certain business activities and prohibits some others after taking into consideration public opinion and socio-economic impacts and weighing social costs and benefits of a particular business activity at a particular point in time. For example, in 2016 the central government issued complete ban of manufacture and sale chewable tobacco and nicotine, while it continues to allow production and sale of other tobacco products like cigarette and bidi. Parliament, by allowing a business to operate, conveys social approval to the business. Investing in a company, which is engaged in a legal business and complies with applicable laws (including soft laws) and social practices, is not unethical, because it passes the ‘social legitimacy’ test. Rather, it is unethical to invest in companies, which adopt unethical practices and flout regulatory and social norms, irrespective of the industries in which they operate.
It is inappropriate to restrain the government or PSEs from investing in companies like ITC, which provides superior return on investment. LIC, as a custodian of policyholder’s money, should act like a rational investor in building the investment portfolio.