Positive Impact Portfolios: July roundup

Over the last two years, investing in a global index of tobacco producers would have generated a negative return of over 20%.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Damien Lardoux, 16th August 2019

A report published by the World Health Organisation (WHO) caught my eye last month. Contrary to what tobacco producers are claiming, e-cigarettes are “undoubtedly harmful and should therefore be subject to regulation”. While vaping exposes users to lower levels of toxins than smoking, the WHO said the devices still pose “health risks” to users.

Over the last two years, investing in a global index of tobacco producers would have generated a negative return of over 20% while in the meantime global equities have generated a positive return of 25%. For those believing that e-cigarettes will help tobacco companies alleviate their falling revenue challenge, the WHO report warns them that regulators are unlikely to let misinformation by the tobacco industry drive a growth in the number of nicotine consumers.

Could the tobacco industry experience the same decline as the coal industry? In the US, 40% of the electricity was generated from coal in 2014. This dropped to 27% in 2018. What happened in 4 years? At the Paris climate conference in December 2015, 195 countries adopted the first-ever universal, legally binding global climate deal. The agreement sets out a global action plan to put the world on track to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.

Reducing CO2 emissions, the main contributor to global warming, has been the primary focus since then. As a result, switching off coal plants has usually been one of the first steps, helped by the fast declining cost of renewable energy. It is no surprise then that a wave of coal mining companies went into bankruptcy in the last 3 years.

Regulatory risk shouldn’t be underestimated for the tobacco industry, there is no such things as a safe cigarette. Initial hopes that e-cigarettes might compensate for the structural decline in cigarettes sale could be short-lived as evidence builds around the health risks posed by vaping.

As per the example of coal, investors need to decide whether they are comfortable with supporting sectors with significant regulatory risks or would instead prefer investing in sectors that help countries tackle the many social and environmental challenges they face.

Like many of you, I have already made up my mind. A recent report estimating that another $27 trillion of investments in low-carbon technologies will be required by 2050 to enable the energy transition is only reinforcing that conviction.

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Have a question about the EQ Positive Impact Portfolios? Please email enquiries@eqinvestors.co.uk, we’re always happy to hear from you.

About the author: Damien Lardoux

Damien has an MSc in Management from Reims Management School and an MSc in Wealth and Asset Management from ESCP-EAP Paris Business School. He is also a CFA charter holder, being a regular member of the CFA Institute and CFA UK society.

Before joining EQ Investors, Damien worked for Bank of America Merrill Lynch being responsible for asset allocation, security selection and portfolio construction. Damien now acts as the portfolio manager for the EQ Investors Balanced, Positive Impact and Multi Index portfolios. He also co-chairs our Fund Selection Committee.

Damien is a devoted sportsman, playing judo and squash on a regular basis. He also enjoys hiking, to very far places such as the Himalayas and Kilimanjaro.

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