FPIs prune exposure in tobacco stocks over high taxes, greater ESG focus

ESG investing, or "sustainable investing" is about responsible business conduct, and cigarette firms were globally being screened out by this class of investors

Foreign portfolio investors (FPIs) have reduced their exposure in tobacco stocks - ITC, Godfrey Phillips India and VST Industries -over the past one year.

According to the shareholding pattern filed with the exchanges for the quarter ending September, FPI holding in ITC stood at 12.96 per cent (down by 2.68 per cent year-on-year), in Godfrey Phillips, it was at 10.80 per cent (down 1.59 per cent) and in VST Industries at 3.57 per cent (down by 4.27 per cent).

Analysts believe that a focus on ESG (environmental, social and governance) investing combined with high taxation on cigarettes have led FPIs to reduce exposure. 

Abneesh Roy, executive vice president at Edelweiss Securities, explained, it’s largely ESG investing, but tax hikes have been a big concern.

ITC and Godfrey Phillips didn’t comment. However, ITC chairman, Sanjiv Puri, had said at the company’s annual general meeting that ESG investing had created headwinds for tobacco stocks globally and it was despite the fact that the company had a good rating. 

According to the company’s annual report, ITC ranked first globally amongst peers (companies with market capitalization between $38 billion and $51 billion) and overall third globally on ESG performance in the food products industry by Sustainalytics, a global ESG ratings company (according to its annual report). It has also been rated “AA” by MSCI-ESG – the highest among global tobacco companies. 

About 59 per cent of ITC revenues are now from the non-cigarettes business with the newer FMCG business’s share at 22.5 per cent. Yet, ESG investing has impacted stock performance. 

The ITC stock was hovering around Rs 168 on the Bombay Stock Exchange (BSE) while its 52-week high was Rs 266.20 and 52-week low was at Rs 134.95. In the last three years, FPI holding has come down by more than six per cent in ITC. 

ESG investing, also known as “sustainable investing” is about responsible conduct of business, and cigarette companies, globally were being screened out by this class of investors. 

However, an industry source familiar with ESG investing said, ESG funds were increasingly being questioned by even the US SEC for the potential to mislead investors. 

“The current performance of global ESG funds were heavily dependent on tech stocks, many of which have been under fire for their ‘social performance’ given privacy violations. A policy of exclusion, selective choosing of stocks as best in class even though it may not be ESG compliant in spirit is marring the original intention of rewarding companies with good ESG ranking,” the source said.

He also pointed out that there is no consensus or global standardisation on ESG measurement as social metrics haven’t evolved and therefore investors could be at risk of being misinformed.

High taxes on cigarettes were also weighing on the companies. The incidence of taxes on cigarettes has more than trebled since 2012-13; the GST regime, introduced in July 2017, increased the tax burden on cigarettes by a weighted average of 13 per cent over the pre-GST tax rates. Further, a sharp increase with the National Calamity Contingent Duty (NCCD) rates in the Union Budget 2020-2021, boosted the illicit trade further.

According to the Tobacco Institute, illegal cigarettes now constitute about a fourth of the Indian cigarette market. According to the industry, the illicit trade business got a fillip during the pandemic.