Position Paper on Divestment of Tobacco Stocks from the San Francisco Employees Retirement System

The San Francisco Tobacco Free Coalition, a grass roots coalition of health, youth-serving, and environmental agencies is calling upon the San Francisco Employees Retirement System (SFERS) to divest of all tobacco company stocks as called for in the Board of Supervisor's resolution 386-96 passed in May of 1996.

The SF City and County Employees' Retirement System is a pension fund of approximately $8 billion dollars of which $21,532,000 (as of 3-27-97) , or .0028 percent, is invested in five tobacco companies (American Brands, Loew's Corp., Philip Morris, RJR Nabisco, and US Tobacco). Between August 1996 and September 1997 the system increased its combined holdings in tobacco stocks.

 

WHY DIVESTMENT IS NECESSARY

It's the right thing to do.

The City has a moral imperative to divest from tobacco given what the tobacco industry is doing both here and abroad. Shareholders of tobacco stocks reap the benefits of an industry that kills three million people world wide each year, including 450,000 in the United States and 1,425 in San Francisco. By 2025 the World Health Organization predicts that tobacco will kill 10 million people each year.

Shareholders of tobacco stocks also condone the behavior of an industry that systematically targets youth to insure their profits by replacing those smokers who quit or die every year. The tobacco industry addicts youth both here and abroad through manipulative and deceptive advertising and marketing practices. In the United States, 86 percent of youth smokers smoke the three most heavily advertised brands - Camel, Marlboro, and Newport. The market share of US cigarettes in four countries - Japan, Taiwan, South Korea, and Thailand - increased dramatically after the US tobacco companies began marketing and selling their product. A study by the National Bureau of Economic Research found per-capita cigarette consumption to be almost 10 percent higher than it would have been if the US tobacco companies had stayed away.

Shareholders implicitly consent to the aggressive worldwide expansion of the tobacco industry. Philip Morris, maker of Marlboro cigarettes, and RJ Reynolds, maker of Camel cigarettes, are two of the three leading global tobacco companies. Two thirds of their sales and nearly half of their profits come from overseas sales. For example, this year Philip Morris bought 50 percent of the Mexican cigarette company, Cigatam, which they will use to increase the export of Marlboro cigarettes from Mexico to other countries in Latin America and Asia.

Investing in tobacco stock is inconsistent with the City's anti-tobacco policy

In the last five years, the City and County of San Francisco has passed a smokefree business establishment law which included restaurants, and, in order to reduce youth access, has banned self-service displays of tobacco products and vending machines. In addition, the City has passed numerous supportive resolutions on a variety of tobacco control issues. Last year the City filed a lawsuit to re-coup smoking related health costs and intervened in a lawsuit to challenge illegal marketing practices.

Investing in tobacco while suing the tobacco industry constitutes a conflict of interest.

The City is currently suing the tobacco industry to recover the health-related costs of smoking. The City's investment of retirement funds in the tobacco industry cannot be reconciled with its current attack on the tobacco industry.

 

Opposition to Divestment: Setting the Record Straight

Argument 1: The tobacco stocks owned by the SFERS are in a S&P 500 Index Fund which replicates the holdings of the S&P 500. Divesting from tobacco would mean divesting from the entire S&P 500.

This is not the case since the SFERS manages the index fund itself as opposed to buying shares in an index fund managed by an investment company. There is no financial reason why the system cannot replicate a "S&P 497" and then either find three stocks whose returns come closest to matching that of the tobacco companies or simply leave it at 497. In addition tobacco stocks only represent less than two percent of the S&P 500. Divesting from companies who are in the process of being sued by 40 states and many municipalities is considered by many financial experts to be a sound investment strategy.

Argument 2: Selling tobacco stocks will lead to losses for the pension fund and therefore the SFERS would be breach its fiduciary responsibility.

The SFERS would in no way be abdicating its fiduciary responsibility if it chose to divest of tobacco stocks. While tobacco has historically provided good returns, over the past 5 or 6 years it has proved much more volatile than the S&P as a whole as a result of the uncertainties facing the industry due to the numerous lawsuits and potential federal legislation to regulate the industry. Furthermore it is impossible to determine whether selling any particular stock will lead result in losses to the pension fund.

Over the past five years in fact most of the major tobacco stocks have underperformed the S&P 500. Many tobacco-free portfolios, both managed and indexed, that have outperformed the S&P 500. The Domini Social Equity Fund, for instance, composed of 400 corporations that pass numerous social screens, has outperformed the S&P 500 since its creation in 1990. Furthermore, a "tobacco screen" would eliminate only 13 stocks- two percent of the S&P - out of the thousands listed on the major indexes. In addition, any divestment policy would give managers a reasonable amount of time to sell the stocks in order not to sell at a loss.

Argument 3: Members of the retirement system will sue the SFERS.

The results of the Board of Trustees vs. Baltimore affirmed the power of the municipality to divest of South Africa related stocks without violating its duties towards pension fund members. In a May 27, 1997 letter to the Executive Director of the State Board of Administration, the State Attorney General's Office in Florida stated, "The unpredictability and uncertainty of the business of selling tobacco products appear to make the continued investment in such stock highly problematic. This instability is antithetical to the best interests of the members of the Fund who are dependent on the Fund's settled predictability. In recognition of these factors, an independent decision by the State Board of Administration to divest its tobacco stock after considering all these circumstances would appear to be consistent with the fiduciary duties imposed upon the State Board of Administration in managing the Florida Retirement System Trust Fund."

Additionally, members of the retirement system are guaranteed a certain level of benefits based on years of service, not on the performance of the retirement system. Whether the money to pay for their benefits comes from the returns on retirement fund investments, current government revenues or anywhere else is immaterial to pension fund members and therefore it is unlikely they would have legal standing in such a case. If anyone might have legal standing it would be taxpayers who might be forced to bail out the system if it does not generate enough revenue to pay benefits. In any event, there is no guarantee that stocks the retirement system owns now, tobacco-related or not, will go up or down in value.

Argument 4: Once the SFERS divests from tobacco, other groups will come and call for divestment from other companies.

The SFERS has already set a precedent when they divested from companies doing business in South Africa. Other issues will be brought before them, regardless of what action they take on tobacco stocks. Other states such as Florida, Massachusetts, Vermont, and Maryland, and municipalities, such as Boston, Denver, and Philadelphia, have already divested from tobacco stocks.

Argument 5: If the SFERS divests from tobacco we will need to divest from the stocks of their suppliers as well.

The Coalition supports a more limited motion asking the Retirement Commission to divest itself of companies that manufacture consumer tobacco products.

Argument 6: The SFERS actively uses its proxy votes and if it sells the stocks it will lose its influence with these companies.

Tobacco company proxies have had no effect on the companies, despite the sometimes substantial number of shareholders voting for them. In a majority of the proxy votes in the last seven years, the retirement system has voted in favor of proxy resolutions which called for (among other things) worldwide warning labels, reduction of nicotine levels, ending the Joe Camel campaign and supporting youth access restrictions. The system however voted against proxies calling on the companies to end tobacco operations, to separate tobacco and other operations, and to end tobacco-insurance links. Other institutional investors such as Catholic Healthcare West have divested tobacco stock because their proxy votes had no impact on the operations of the tobacco companies.

Argument 7: Selling the stock will have no impact since someone else will simply purchase it.

Divestment is an opportunity to increase awareness of tobacco industry abuses both here and abroad. San Francisco investment policy must be consistent with its public policy on tobacco control.

 

Background Information

In May of 1996 the San Francisco Board of Supervisors passed resolution 386-96 urging the San Francisco Retirement Commission to "divest any and all holdings in securities of publicly traded companies that derive revenue from the sale of tobacco products because tobacco stocks can no longer be justified as a prudent investment." The resolution also called on the California State Legislature to "pass legislation barring state and municipal pension funds from holding tobacco stocks." On August 13, 1996, the Retirement Commission voted down by a 5 to 1 vote a resolution put forward by Commissioner Herb Meiberger that would have required the San Francisco Employees' Retirement System (SFERS) to divest its tobacco-related stocks held in the S&P 500 Index Fund which included American Brands, Loews Corporation, Philip Morris, and UST, Inc.

The negative vote followed a presentation by Retirement Commission staff in which they concluded that it was "prudent" to continue to hold tobacco stocks for the following reasons: "1) the stocks are widely held by many diverse prudent investors; 2) the stocks hold a prominent position in the most representative indexes of the stock market; 3) the products produced by tobacco companies are legally salable in all states and most foreign countries, and 4) the states and the federal government currently benefit from tobacco sales which produce large tax revenues (a further indication of its legality)." The staff also determined that despite the controversies surrounding the tobacco industry, company profits have not been affected. "In fact", they argued, "in spite of decades of litigation, tobacco companies continue to experience strong sales and earnings growth as a result of rapidly growing international tobacco sales." Staff argued that a) selling the stocks would have little or no effect on the price and would not even provoke a response from the companies; b) if the System sold its stock "all ability to impact tobacco companies or other public policy concerning the industry would be lost"; and c) selling the stocks would rob the system of positive stock returns.

For more information contact the San Francisco Tobacco Free Project,
30 Van Ness Avenue, #2300, San Francisco, California, 94102, USA.
Telephone: 415-581-2448 Fax: 415-581-2492
Email: Mele Lau

Email: Susana Hennessey Lavery