Tobacco consumption causes an estimated six million deaths per year globally, of which one million are in India. The production-related health hazards from tobacco are also a matter of serious concern. Tobacco farmers, farm-workers, and bidi workers suffer from occupational illnesses like “green tobacco sickness”. Tobacco consumption also has severe societal costs due to reduced productivity, health cost burden and environmental damage.
The government, in conformity with WHO FCTC, has framed laws and taken steps to reduce tobacco consumption and create awareness about health hazards. It is also working on reducing tobacco farming by developing economically beneficial alternative crops and vocations for tobacco farmers. The results are visible, although the progress is quite slow.
In spite of the disastrous health hazard from tobacco consumption, an average investor would consider including investment in a company that is in the tobacco business in her/his portfolio of investments. An average investor behaves rationally. Therefore, so long as she/he estimates that the company would continue to create shareholder value, she/he would consider investing in the company. She/he uses “environmental, social and governance” (ESG) criteria to assess business risks of the tobacco business (say, risks from tighter government regulations, falling sales volume and activism against tobacco consumption) and factors in the same in valuing the company’s equity.
Is there any ethical or moral issue in investing in the tobacco business, which is a legal activity? Ethical considerations transgress the legal boundary. Therefore, some argue that it is immoral and unethical to invest in the production and sale of those products, the production and/or consumption of which harms the society. “Ethical investing” (also called socially responsible investment, or sustainable, responsible and impact investing) is an old concept. Ethical investing requires using ESG criteria, in addition to financial criteria, in deciding investment in a particular industry or a particular company. It uses ESG criteria not to assess business risks, but to assess the impact of the business on environment and society. Investors who believe in ethical investing would not invest in so-called “sin” industries (e.g., tobacco, alcohol, gambling and military weapons), the products or processes of which, in their judgement, are harmful to the environment or society.
I think whether to invest in companies operating in “sin” industries is a matter of personal choice based on one’s own individual ethical standards. For example, an oncologist, who experiences the trauma of her patients, may believe that investment in the tobacco business is unethical. Similarly, ethical standards of individuals are often developed based on prescriptions and proscriptions in scriptures of their religion. However, in general, it is not immoral to invest in a company, which is allowed to operate by Parliament, even if it operates in a “sin” industry. Parliament, in its collective wisdom, allows certain business activities and prohibits some others after taking into consideration public opinion and socio-economic impacts and weighing social costs and benefits of a particular business activity at a particular point in time. For example, in 2016 the central government issued a complete ban on the manufacture and sale of chewable tobacco and nicotine, while it continues to allow production and sale of other tobacco products such as cigarettes and bidis. Parliament, by allowing a business to operate, conveys social approval to the business. Investing in a company, which is engaged in a legal business and complies with applicable laws (including soft laws) and social practices, is not unethical, because it passes the “social legitimacy” test. Rather, it is unethical to invest in companies, which adopt unethical practices and flout regulatory and social norms, irrespective of the industries in which they operate.
It is inappropriate to restrain the government or public sector enterprises (PSEs) from investing in companies such as ITC, which provides superior returns on investment. LIC, as a custodian of policyholders’ money, should act like a rational investor in building the investment portfolio.
The writer is adjunct professor in the Institute of Management Technology (IMT) Ghaziabad; and Chairman of Riverside Management Academy;
e-mail: asish.bhattacharyya@gmail.com
