Investment in the tobacco industry is risky

Research at Maastricht University (UM) shows that investing in tobacco stocks can carry substantial financial risks. Professor Rob Bauer worked with a team of six students from the Honours Programme at the Maastricht University School of Business and Economics to contribute a scenario analysis to the report Tobacco: Reviewing the Growing Financial Risks. The study was commissioned by Tobacco Free Portfolios (TFP), a global organisation that works with the finance sector – advocating that investment in, insurance of and offering credit to tobacco companies cease. The UM report provides strong arguments in support of their case.

Future scenarios
Tobacco companies have been constantly in the public eye in recent years. Reports on new lawsuits against the sector appear almost daily in the world press, ethical dilemmas – especially concerning health effects and child labour – are hotly discussed in the global media, and now institutional investors are increasingly withdrawing from the tobacco sector for both ethical and financial reasons. Yet for many years, tobacco stocks have been seen as a solid investment with a high yield and stable, high dividends. In 2018, however, tobacco share prices fell sharply. According to the Maastricht researchers’ report, The Future of Tobacco Stocks: A Scenario Analysis, the results are ‘A clear signal regarding the financial outlook for tobacco manufacturers.’ There is also a warning to investors: ‘For long-term investors focussed on maximising returns, it is a signal that cannot be ignored.’ The UM report explores three future scenarios. The first is based principally on a continuation of the status quo, the second assumes a lower level of growth in the tobacco sector than previously, and the last assumes a persistent steep fall in demand as a result of political, economic, social and technological factors.

Social responsibility
UM takes social responsibility very seriously, not only in its research, but also in its education. Students are involved at an early stage in socially relevant projects in fields such as sustainability. The School of Business and Economics (SBE) and the incorporated European Center for Sustainable Finance (ECCE) occupies a leading position with regard to research on sustainable investment. For the study on the financial risk of investment in the tobacco industry, students were carefully selected for their talent and commitment.

Professor Rob Bauer supervised the research: ‘I’m more than proud of my team of students for their objective scrutiny of the tobacco industry. Together we’ve produced a report that clearly shows – looking ahead – that investing in the tobacco industry is associated with substantial financial risks. Falling demand for tobacco, an increasing number of lawsuits against the tobacco industry, and worldwide disinvestment by large institutional investors make investment in these companies not only ethically irresponsible but also financially risky. In particular, long-term investors such as pension funds should take good heed of this if they are considering whether to exclude tobacco companies from their investment universe.’

Creating impact
Fabian Grohmann, honours bachelor student at SBE, sees the research as a valuable experience: ‘For us students, doing this research was more than just a great opportunity to work in a professional research team and develop our skills. We young people want to do go beyond just doing a good job - we want what we do to have an impact. The tobacco project focused on a subject closely related to issues that allow for just that, such as sustainability and public health. For me, this was one of the key reasons to join the team, because it provides that additional incentive to put in the extra hours.’​​

Tobacco Free Portfolios
The study was made at the request of Tobacco Free Portfolios, a global non-profit organisation that cooperates with the financial sector all over the world to stimulate and prioritise tobacco free finance. Dr Rachel Melsom of Tobacco Free Portfolios coordinated the research: ‘I have very much enjoyed working with the research team. Tobacco is a stock that has delivered profit to investors at a profound cost to human life, and great expense to society. Based on the very realistic scenarios detailed here, not even the most hardened financial analysts can say this financial gain can be expected to continue.’

Photo by Marcus Bleasdale for Human Rights Watch

The research has been conducted by Professor Rob Bauer, Professor of Finance (Institutional Investors Chair) and Director of the European Center for Sustainable Finance (ECCE) at Maastricht University, and Executive Director of the International Centre for Pension Management (ICPM) in Toronto, Canada. His team of research assistants is made up of students from the Maastricht University Honours Programme in the second or third year of their bachelor’s degree: Fabian Grohmann, Fabian Süßmann, Filip Dobrzynski, Jeroen Schmitz, Julian Alves, and Moritz Dillmann.


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