Tobacco Transformation Index: Different for Good Reason

Corporate leaders, investors, and nongovernmental organizations (NGOs) have demonstrated that, with the use of innovative business models, profit can be aligned with social and environmental progress. Still, little progress has been made in sectors contributing substantially to poor health and climate change, including companies that profit from tobacco, coal, palm oil, and the internal combustion engine. Unfortunately, these very sectors are frequently excluded from discussions of transformative strategies. Targeted by boycotts and divestment campaigns, companies with “dirty” legacies are often denied access to tools that could help them contribute to the public good.

Energy, food, and large agricultural companies have all funded initiatives that stymie efforts to end the massive harms their products cause. Yet, academia, governments, investors, and nonprofits continue to work with these sectors to achieve solutions, even as they call out unacceptable practices. We believe a similar approach is warranted to end the harm caused by tobacco. With seven million smoking-related deaths annually, the stakes are simply too high not to engage with parties that can expedite live-saving solutions. The Foundation for a Smoke-Free World is therefore supporting the development of the Tobacco Transformation Index, an initiative that is strategically aligned with its mission to improve global health by ending smoking in this generation.

As practices even in “dirty” legacy sectors evolve, some investors are choosing to factor non-financial information into their investment decisions. In concert with the application of fundamental investment principles, companies that deliver sustainable and healthy solutions should be advantaged over those that do not. Of course, in order to make such socially responsible choices, investors need access to the relevant data. Here, some progress is evident.

The Sustainability Accounting Standards Board (SASB) has developed 77 industry standards, which identify the minimal set of financially material sustainability topics and the associated metrics for the typical company in an industry. Tobacco is one industry for which SASB defines its standards. In addition, the EU Accounting Directive for Non-Financial Information, approved in 2017, requires over 6,000 companies to disclose information about corporate impact on social and environmental challenges.

The United States has yet to take similar action. This past July, the Congressional Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets conducted a hearing on the topic of “Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social, and Governance Disclosures.” The witnesses, including senior executives from the Global Reporting Initiative, CalPERS, and investment advisory firms, presented a diverse set of views related to sustainable investing.

Unsurprisingly, no consensus was reached. One side argued for establishing standards for Environmental, Social and Governance (ESG) disclosure. Proponents maintained that ESG standards encourage transparency, guide the disclosure of information relevant to investment decisions, and support investors focused on maximizing returns. Opponents of this view raised concerns regarding the materiality, subjectivity, cost, and efficacy of such disclosures.

How does the topic of ESG investing pertain to the tobacco industry? Like other “dirty” legacy sectors, the tobacco industry is often shunned by researchers and representatives of the health community; its shares are divested by certain investors; and its products are in some countries banned. The Foundation believes that transparent industry engagement, rather than isolation, can accelerate desired change for the benefit of public health.

The Tobacco Transformation Index will provide quantifiable evidence over time of what steps the largest tobacco companies are taking to promote a world free of combustible cigarettes and other high-risk tobacco products. The Index will evaluate and expose any actions that might impede such progress. By leveraging investor influence, stimulating corporate action, and providing objective, transparent information for all stakeholders, the Index over time aims to accelerate a reduction in the rates of disease and premature death caused by smoking.

Differentiating companies, even within a sector like tobacco, can be an effective tool. If just one actor perceives an advantage in contributing to the public good, even in its self-interest, it could play a part in influencing the hands of competitors. The benefit of an industry-specific index is the ability to dive deeply into the measurable, material drivers of change. In effect, it is possible to create a de facto performance and disclosure standard, as arguably is the case with the Access to Medicine Index and the Access to Nutrition Index in their respective industries.

The Foundation submits that by clearly articulating expectations and publicizing companies’ activities, the Tobacco Transformation Index can be a vehicle to stimulate competition among companies to finally and materially transform the tobacco industry. While understanding the distrust earned by the tobacco companies over the decades, the Foundation rejects the continued strategy of boycotts, divestments, and bans. Effective tobacco control policies, coupled with the creative destruction already underway, offers the greatest opportunity for real change.

The Tobacco Transformation Index’s key premise is that by actively encouraging and monitoring this transition, it will over time incentivize the tobacco companies to act more quickly and more responsibly than they otherwise would. Conversely, players that do not make the necessary transition rapidly enough will be exposed. As a result, all stakeholders, such as investors and public health professionals, will be better informed and able to demand necessary action.

This post has been adapted from an article by Derek Yach, originally published on Business Fights Poverty.

 

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