CPP urged to dump tobacco stocks

(August 5, 2005) The Canadian Medical Association is taking a different approach in its latest attempt to convince the CPP to divest its tobacco stocks, putting aside the usual health and social arguments and focusing on pure economics.

“Expert evidence suggests that investments in tobacco are not a wise endeavour,” the CMA says in a report published earlier this summer.

The CMA concedes that tobacco stocks have been rallying of late, due to cost-cutting efforts and mergers in the industry as well as the dismissal of a $280 billion legal claim in the ongoing battle between the U.S. Justice Department and big tobacco.

Still, the legal issues surrounding tobacco could easily rise to the surface again, some analysts believe, supporting the CMA’s contention that the “long-term financial returns of tobacco stocks are expected to be lacklustre.”

The prospect of lower tobacco returns has already convinced some major U.S. pension funds to eliminate tobacco stocks for fiduciary or legal reasons, the report says.

In addition, tobacco divestment will have little effect on the overall performance of the CPP, the CMA argues, because tobacco represents such a small proportion of total holdings. The CPP currently has about $100 million worth of tobacco investments in an $81 billion plan.

To date, the CPP has steadfastly refused to take a stand on social and environmental issues. “While social investing is easily applied by individuals and small groups of like-minded people, it is extremely difficult, if not impossible, to implement for an institutional investor representing over 16-million contributors and beneficiaries with a wide cross-section of personal beliefs,” the CPP Investment Board says on its website.

The CPP argues that its main responsibility is to invest pension contributions in the best interest of Canadians and “with a view to achieving a maximum rate of return, with undue risk of loss.”

But the CMA maintains that tobacco divestment would not be risky at all for the CPP, pointing to a study conducted for the California Teachers Retirement System, which concluded that “the incremental increase in both absolute and relative levels of risk is so small that from a statistical standpoint they are insignificant.”

Although the study is somewhat dated, covering the years 1987-1999, the CMA contends that the argument for divestment remain “compelling and current.”

In addition, federal and provincial governments spent at least $131 million in 2004 on efforts to convince Canadians to stop smoking. This is counter-productive, the CMA says, when the CPP provides $100 million in capital to tobacco firms such as Altria, British American Tobacco and Rothmans.

The CMA suggests that given the CPP’s reluctance to change its policy on tobacco, the best approach may be through legislation — an amendment to the CPPIB Act prohibiting investments in the tobacco industry and requiring the CPP to divest itself of existing tobacco holdings.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com