Sustainability - tobacco divested

AP4 has resolved not to invest in tobacco stocks. Mounting long-term risks, including increased regulation, is estimated to negatively affect tobacco companies' valuations in the future. AP4 estimates that tobacco

Tobacco costly for society

Awareness of health risks and of the significant social costs that can be related to tobacco
consumption is progressively increasing. This is expected to result in increased regulation for tobacco, leading to poorer performance for the tobacco companies.

Tobacco consumption, active and passive, are harmful to health and may eventually lead to increased risk of disease and premature death for affected individuals. Despite this realization, tobacco is legal in most countries.

Increase in regulations

In recent years, several countries have introduced increasingly restrictive regulations on how tobacco products may be marketed, sold and consumed. AP4 estimates that market regulations, both in terms of tobacco sales and consumption, will continue to increase. Combined with other business risks linked to the sector - like legal risks such as lawsuits and claims for damages - tobacco companies run the risk that profitability over time will decrease significantly.

AP4 supports the UN’s long-term global sustainability goals. AP4 estimates that the long-term risks associated with tobacco consumption counteracts the UN’s long-term goal of ensuring health and well-being; a viewpoint that AP4 expect more and more investors will share.

"Stranded assets"

Tobacco shares have historically generated relatively high returns. However, AP4 estimates that risks have increased and that tobacco companies long-term risk becoming so-called "stranded assets". Altogether, AP4 believes that the risks associated with tobacco companies is not properly priced, but these risks will negatively affect the valuation of the tobacco companies long term. AP4 has therefore resolved not to invest in tobacco companies. "Tobacco company" refers to
companies that manufacture tobacco products for smoking (cigarettes, cigars, etc.) and snuff in various forms.

Historically profitable shares

Historically, tobacco shares have outperformed the equity market in general. Below shows how the tobacco sector, compared with global stock indices, outperformed by a total of more than 900 percent since 2001; in other words, tobacco outperformed the index by about 12 percent in annualized terms.

Tobacco shares relative to the world index


Tobacco shares have since midyear 2016 underperformed the global equity index. In mid-2016, AP4 resolved not to invest in tobacco, and so far, the decision has positively contributed to the portfolio’s performance. However, the evaluation period, six months to date, is too short for such a long-term decision.