Voting Report – June 2019

Ethical Investment Review June 2019

Climate change

Climate change continues to be one of the main areas of our ethical work. We co-filed a shareholder resolution at BP’s AGM, calling on the company to explain how it will align with the Paris Agreement. The resolution secured the BP board’s backing and was passed with 99.47% of votes. We also supported a resolution organised by the activist group ‘Follow This’ calling on BP to go further, including publishing Scope 3 emissions targets; unfortunately, this only secured the backing of 8.35% of investors.

We attended the Anglo American AGM, where we made a statement on behalf of the Climate 100+ investor coalition; we co-lead on engagement with Anglo American. This is part of an ongoing dialogue being lead by the CFB and Hermes in regard to Anglo American’s transition to a low carbon economy. This involves biannual meetings with the company to raise issues related to climate change, including climate linked remuneration, scope 3 emissions, and the reduction of coal mining. We look forward to the next meeting with Anglo American.

We continue to work on our project to evaluate the consistency fossil fuel companies’ business models with the Paris Agreement. We remain on track to draw final conclusions in 2020. With the launch of the new Global Equity Fund for Charities, we had to undertake an interim judgement on a number of global oil companies and decided that some would be highly unlikely to meet the criteria and so excluded Chevron, ConocoPhillips and ExxonMobil from investment.

We have already excluded several other fossil fuel producers under our existing policies and it is likely we will exclude further companies in future. However, we are aware that some clients want to move faster so we are consulting on the potential for launching a fund which excludes all companies with significant involvement in fossil fuel extraction.

The approach banks have been taking with their lending policies and climate change has been another area of focus. We have engaged directly with the Canadian banks to which we have exposure with respect to their lending to companies involved in tar sands projects, and found their responses to be disappointing. We are reflecting on the next steps. We have also joined other investors in writing letters to Barclays and Unicredit regarding their lending to fossil fuel projects.

Mining

The tailings dam disaster near Brumadinho in Brazil earlier this year remains very much in the minds of investors. We are part of an investor coalition organised by the Church of England which engages with mining companies on their tailing dams. This initiative has seen letters sent to 651 listed mining companies, in order to create a global register of tailings storage facilities. This is designed to raise awareness of the tailings facilities that the company owns or operates in order to see which company has responsibility for the facilities, and the scale of the risks that it faces.  As of 5 July 2019, 31% of companies contacted have responded, and we were pleased to see that included 34 of the top 50 mining companies. We continue to be active in this coalition.

The Mining and Faith Reflections Initiative (MFRI), of which we are part, organised a conference in the Vatican on Mining and the Common Good. Delegates included church, NGO, and local community representatives along with mining CEOs and other executives.

Tea & workers’ rights

We have been engaging with tea producers for some time, recognising the abuses that can take place within the sector. We wrote to Unilever to ask for greater transparency on the estates from which it sources tea and requesting this to be disclosed publically. We were pleased to receive a response from Unilever, which confirmed that the company will now publish the tea estates it sources its UK and Ireland tea from on its webpage.

Israel Palestine

We continue to monitor investment issues with respect to Israel Palestine, applying our dedicated policy. We had engaged for some time with Heidelberg Cement; however for unconnected reasons our funds no longer hold shares in this company.

Living Wage

As part of our work with ShareAction, we engaged with Reckitt Benckiser and Intercontinental Hotels Group in June to encourage both companies to become Living Wage accredited.  We look forward to hearing their responses in due course.

Plastic

We have continued to engage with companies on the issue of plastic pollution. We contacted Ted Baker about the use of plastic micro fibres used in the clothing industry. These can end up in oceans. In its response, Ted Baker highlighted its commitment to using sustainable fibres where possible and it noted that natural fibres can also have negative impacts from the use of natural resources such as water. We co-signed a letter to 50 global consumer goods companies organised by As You Sow, an American NGO, encouraging them to complete a survey on plastic packaging, to allow an assessment of their approaches.

Principles for Responsible Investment

The PRI annually undertakes an assessment of its members’ approaches and activities with respect to responsible investment. We achieved A+ ratings for our overall ESG strategy and governance, A+ for our approach with indirect holdings, A+ for our incorporation of ethics into our management of our equity holdings, and As for active equity and corporate bond ownership.

Corporate governance

Q2 was a busy quarter for voting with many companies holding their AGMs. Our voting policies resulted in voting against three quarters of remuneration reports in the UK, in many cases because of excess levels of remuneration. We oppose the election of directors where policies or outcomes on remuneration, board diversity, tax transparency, climate change or corporate governance are particularly poor. This resulted in opposing 14% of directors in the quarter. Our voting policies are applied to all of our holdings in the new Global Equity Fund as well as our UK Funds.

June 2019

Pooled Funds

Preamble

Pooled investment funds, or collective investment schemes are assets of multiple beneficial owners aggregated into single investment vehicles. They are used to provide access to specific asset classes, thematic investments or strategies that could not otherwise be accessed cost effectively or in the appropriate size without a heightened risk of liquidity becoming unbalanced.

In 2019, the Epworth position paper, Pooled Investment Funds, considered the ethical issues related to investing in collective investment schemes. These were due to potential indirect exposure to business activities and companies that would otherwise be excluded from Epworth funds on ethical grounds.

The position paper considered the biblical and theological background to investing in pooled investment funds, the approaches taken by other churches and previous actions taken by Epworth.

Biblical and Theological Background

The Bible provides little guidance on investment in pooled funds, or diversified companies, in an ethical way, although maintaining purity was a central aspect of the Mosaic Law, (e.g. Isaiah 52 vs 11) and was identified by the Church of England’s Ethical Investment Advisory Group (EIAG) as a major biblical theme that could be applied to pooled investment funds.

However, Jesus appeared to be less concerned about purity regulations (e.g. Mark 7 vs 1- 23); an approach which was followed by the Apostles (e.g. Romans 14 vs 1-6; Acts 10 vs 28). God allows both evil and good to exist together until final judgement (Mathew 13 vs 24- 30; 36-43). Uprooting weeds was discouraged, as in so doing harm may be done to the wheat. It could be argued on this basis that it might not be inappropriate for a portfolio to have modest exposure to business activities and companies that would be avoided directly, providing it allowed far greater exposure to activities that were unequivocally considered to be ‘good’.

The Parables of the Kingdom also provide important teaching in terms of:

  • God’s risky generosity towards his world and willingness to sow seed in different soils (Mathew 13 vs 1-23 and Mark 4 vs 3-9).
  • Christian involvement in and engagement with the world as appropriate responses to the Gospel themes of salt, light and yeast (Matthew 5 vs 13-6 & 13 vs 33; Mark 9 vs 49-50).
  • The importance of transparency in a Christian approach to investment, in that nothing is hidden that will not be revealed (Luke 8 vs 16-17).
  • The sense that judgement can be seen as both provisional, based on what we know at the time, and final, when all things will be known, as evidenced in the parable of the wheat and tares (Matthew 13 vs 24-30).

John Wesley was much influenced by the view that God’s gracious offering of salvation in Christ is offered to all people. This contrasts with a ‘purity’ ethic. His commitment to going out to where people lived and worked rather than waiting for them to come into Church, is hardly a ‘purity’ ethic, but rather can be seen as fulfilling the witness of St Paul that ‘I have become all things to all people, that I might by all means save some.’ (1 Cor. 9.22).

John Wesley’s sermon, The Use of Money1 , provides useful background, reminding us that whilst we should gain all we can, it must not be at the expense of our life, health and mind or that of our neighbour. In particular it counsels against hurting our neighbour in his substance, through gaming, which would indicate that the avoidance of investment speculation, might be applied to a Pooled Investment Funds Policy. The Epworth Mission Statement2 provides some helpful insights. In particular it recognises that paradoxes and compromises are involved and accepts that our best efforts may be criticised as falling short of our ideals.

Christian ethics must walk a fine line touched by both grace and sin. Consequently, we cannot always know where the line between good and evil lies and the challenge is to find the boundaries between them.

There are parallels with investment in diversified companies, such as food producers or engineering companies, which engage in a range of activities. It is possible for one of those activities to be of ethical concern. In those cases, the nature of the activity is considered alongside its significance with respect to the overall company. Where the ethical concern is particularly serious, for example exposure to nuclear weapons, or where the proportion of revenue or profits arising from the activity in question is significant, an ethical bar to investment may be appropriate. However, in most cases the route taken will focus on
engagement and monitoring.

The debate over the Church of England’s indirect investment in Wonga in 2014, through a pooled investment fund demonstrated that it is difficult to sustain an argument that allows an indirect holding in a company in which a direct holding would be excluded on ethical grounds without risking significant reputational damage from wider society.

Policy

Investment in generalist pooled funds should in normal circumstances be avoided on the grounds that they allow exposure to activities Epworth would avoid on ethical grounds, when making direct investments.

However, pooled funds may be used to obtain specialist expertise, for example, geographical specialisations; sector specialisations; absolute return strategies; venture capital and other early stage enterprises; and private equity. This may be particularly useful in pursuing positive ethical strategies related to climate change and the environment.

When pooled investment funds are used, they should be:

  • Funds with similar ethical policies to those of Epworth;
  • If this option is unavailable, funds with managers pursing similar investment philosophies to that of Epworth;
  • If neither option is available, low cost tracker pooled funds may be used as the pragmatic solution to achieve a particular strategy, recognising that an appropriate ethical option is not always available
  • Funds that have investment policies and strategies that are transparent.

When pooled investment funds are used Epworth will explore the possibility (e.g. via a side letter) of ensuring that any investment complies fully or in part, with other CFB ethical investment policies.

Epworth will seek to influence the manager of any pooled investment fund in which it invests either through an investors’ committee or regular engagement where holdings Epworth finds ethically problematic can be discussed.

  • Any Pooled Investment Fund that has significant exposure to companies in which direct Epworth holdings would be avoided on ethical grounds, will also be avoided. The level of exposure to such excluded companies that would be considered acceptable in a Pooled Investment Fund, will be considered case by case, based on precedent and the advice of the Joint Advisory Committee on the Ethics of Investment (JACEI).

Epworth will consider prior to investment the extent to which a cost-effective and quick exit on ethical grounds could be made should it be required.

As Epworth offers pooled investment funds for other churches and charities it is important to consider their ethical policies and how they may be impacted by indirect investments through Epworth pooled investment funds.

Notes

  1. https://www.umcmission.org/Find-Resources/John-Wesley-Sermons/Sermon-50-The-Use-of-Money
  2. The Central Finance Board of the Methodist Church, Mission Statement http://www.cfbmethodistchurch.org.uk/downloads/cfb_mission_statement.pdf

Pooled Funds

Introduction: definition and scope of issue

Pooled investment funds, or collective investment schemes, are assets of multiple beneficial owners aggregated into single investment vehicles.

Such funds provide access to specific asset classes, thematic investments or strategies that could not otherwise be accessed cost effectively or in the appropriate size without a heightened risk of liquidity becoming unbalanced.

Examples of pooled investment funds include: investment trusts; investment companies; mutual funds; real estate investment trusts (REITs); unit trusts; open ended investment companies (OEICs); exchange traded funds (ETFs); private equity funds; venture capital funds; property funds; infrastructure funds; hedge funds; funds of funds; common investment funds (CIFs); charity authorised investment funds (CAIFs); and limited partnerships.

When Epworth invests through pooled investment funds there may be indirect exposure to business activities and companies that would otherwise be excluded on ethical grounds. This is comparable with an investment in a large diversified company, which may not merit exclusion on ethical grounds but which, nonetheless, may have some exposure to activities which would result in an exclusion if they were the sole activity of the company.

Epworth has established pooled investment funds for the use of churches and charities. Consequently, those investing through these funds may have indirect exposure to business activities and companies that they wish to avoid on ethical grounds.

Biblical and theological background

The Bible provides little guidance on investment in pooled funds or diversified companies, although maintaining purity was a central aspect of the Mosaic Law, (eg Isaiah 52 vs 11).

However, Jesus appeared to be less concerned about purity regulations (e.g. Mark 7 vs 1- 23); an approach which was followed by the Apostles (e.g. Romans 14 vs 1-6; Acts 10 vs 28). God allows both evil and good to exist together until final judgement (Mathew 13 vs 24- 30; 36-43). Uprooting weeds was discouraged, as in so doing harm may be done to the wheat. It could be argued on this basis that it might not be inappropriate for a portfolio to have modest exposure to business activities and companies that would be avoided directly, providing it allowed far greater exposure to activities that were unequivocally considered to be ‘good’.

The Parables of the Kingdom also provide important teaching in terms of:

  • God’s risky generosity towards his world and willingness to sow seed in different soils (Mathew 13 vs 1-23 and Mark 4 vs 3-9);
  • Christian involvement in and engagement with the world as appropriate responses to the Gospel themes of salt, light and yeast (Matthew 5 vs 13-6 & 13 vs 33; Mark 9 vs 49-50);
  • The importance of transparency in a Christian approach to investment, in that nothing is hidden that will not be revealed (Luke 8 vs 16-17);
  • The sense that judgement can be seen as both provisional, based on what we know at the time, and final, when all things will be known, as evidenced in the parable of the wheat and tares (Matthew 13 vs 24-30).

Methodist tradition and teaching

John Wesley was much influenced by the view that God’s gracious offering of salvation in Christ is offered to all people. This contrasts with a ‘purity’ ethic distinguishing the ‘elect’ from the ‘rest of the world.’ In his Journal for 2 April 1739 he wrote, “At four in the afternoon, I submitted to be more vile, and proclaimed in the highways the glad tidings of salvation’. His commitment to going out to where people lived and worked rather than waiting for them to come into Church, is hardly a ‘purity’ ethic (he is willing to become ‘more vile’) but rather can be seen as fulfilling the witness of St Paul that ‘I have become all things to all people, that I might by all means save some.’ (1 Cor. 9.22).

Wesley’s sermon, The Use of Money1, also provides useful background, reminding us that whilst we should gain all we can, it must not be at the expense of our life, health and mind or that of our neighbour. In particular it counsels against hurting our neighbour in his substance, through gaming, which would indicate that the avoidance of investment speculation, might be applied to a Pooled Investment Funds Policy.

Examining the Epworth Mission Statement2 provides some helpful insights.

“Epworth seeks to implement its aims:

  • By example, through the type of investments which are used and by relationships with
    both the investment community and company managements;
  • By providing the means of investment which allows our investors to use their assets not only to strive for an above average return but also to improve business practices and social justice.

Epworth is committed to wrestling with the tensions of seeking both superior returns and improving ethical standards within the portfolios we manage. However, we recognise the paradoxes and compromises which are involved and accept that our best efforts may justly be criticised as falling short of our ideals”.

Epworth and JACEI precedents

There are few relevant precedents resulting from advice issued by JACEI. However, two issues were considered at the June 2018 meeting:

  • Downing Strategic Micro Cap, an investment trust which held a 5% stake in Ramsdens, a company with 25% exposure to pawn broking. The Epworth holding in this investment trust meant that there was a 0.06% exposure to pawn broking, but over 95% of the Trust was within ethical parameters. The Committee felt that: there was a difference between investing in Downing Strategic Micro Cap and investing in Ramsdens direct; Epworth should continue to engage with Downing and review the position regularly; and agreed there was no ethical bar to investment in the investment trust.
  • Oryx International & North Atlantic Smaller Companies, investment trusts which invested in Sportech, a betting technology business. Epworth exposure to this was less than 0.1% and the Committee agreed that due to the negligible exposure, there was no ethical bar to investment in either trust.

Epworth has from time to time considered ethical issues related to pooled funds and a number of decisions have been made, which continue to guide its actions.

In the 1990s, Epworth disinvested from generalist pooled funds on the grounds that these incurred an additional cost without offering an investment expertise that the CFB could not provide, whilst allowing exposure to activities that on ethical grounds the CFB avoided through direct investments.

At the same time it was agreed that pooled funds would continue to be used to obtain specialist expertise which Epworth lacked, for example: geographical specialisations; sector specialisations; absolute return strategies; venture capital and other early stage enterprises; and private equity. This was seen as particularly useful in pursuing positive ethical strategies related to climate change and the environment.

Where pooled investment funds were chosen, it was agreed to seek:

  • Funds with similar ethical policies to those of Epworth (for example Wespath US Equity
    Fund, managed by Wespath Investment Management, a division of Wespath Benefits and Investments, a general agency of The United Methodist Church);
  • If these are not available, funds with managers pursing similar investment philosophies to that of Epworth (for example First State Investments and Stewart Investors, owned by Commonwealth Bank of Australia);
  • In the event that neither of these options is available, low cost tracker pooled funds would be used as the pragmatic alternative, recognising that an appropriate ethical option was not always available.

Opportunities to influence the managers of pooled funds have been taken when possible, most notably in relation to property investment. The CFB Property Fund was a founding investor in the Property Income Trust for Charities. Its fund manager, Mayfair Capital Investment Management Limited, now part of Swiss Life Asset Managers, wished to develop a socially responsible policy and exclude tenants involved in businesses that many of its potential investors would find difficult. Consequently, Epworth was invited to join the Investors’ Committee, which reviews all properties and their tenants before purchase. Epworth also assisted in drafting the Fund’s ethical policy3. On the one occasion when a property was held with a tenant which did not comply with the ethical policy, Epworth was able to point out the discrepancy and an exit from the property was subsequently achieved.

Where a pooled fund does not have an Environmental, Social or Governance policy, and the relationship is purely that of an investor, every opportunity is taken to meet the manager to discuss the portfolio in depth and highlight any holdings Epworth finds ethically problematic. Historically, such engagement has been very successful in developing a relationship of trust.

There are parallels with investment in diversified companies, such as food producers or engineering companies, which engage in a range of activities. It is possible for one of those activities to be of ethical concern. In those cases, the nature of the activity is considered alongside its significance with respect to the overall company. Where the ethical concern is particularly serious, for example exposure to nuclear weapons, or where the proportion of revenue or profits arising from the activity in question is significant, an ethical bar to
investment may be appropriate. However, in most cases the route taken will focus on engagement and monitoring.

Other church and charity position

The Church of England’s Ethical Investment Advisory Group (EIAG) published its Pooled Funds Policy in 20144. In its theological reflection, purity was identified as a major Biblical theme that can be applied to pooled investment funds. It also pointed out that the Reformed and other Free Church traditions had tended to have a stronger emphasis than the Anglican Church on the difference between the ‘elect’ and the ‘rest of the world’ with ‘purer’ boundaries and admission criteria. This highlights an element of debate between denominations as to where lines on purity should be drawn, which could be relevant in the context of pooled investment vehicles.

The EIAG policy notes that we live in the theological interim between the coming of the Holy Spirit at Pentecost and the final judgement when Jesus returns and God draws all things unto himself. “In this interim age, the life of the Christian is touched by both grace and sin, and Christian ethics must walk a fine line between a naïve trust in an innate human goodness, which will always be frustrated by sin, and a crude ‘realism’ which leaves no room for altruism, virtue and the work of the Spirit. We cannot always know where the line between good and evil lies and may often have to risk sin if we are ever to rise above it”. Therefore, “the challenge is to find the boundaries which rule out known and easily predictable unethical practices, to weigh any remaining risks with care and accept that no action can guarantee purity”.

The debate over the Church of England’s indirect investment in Wonga in 2014, through a pooled investment fund, demonstrated that it can be difficult to sustain an argument that allows an indirect holding in a company in which a direct holding would be excluded on ethical grounds without risking significant reputational damage from wider society.

The EIAG policy also suggested that solidarity is an important consideration, indicating that it has been a significant theme within post-war Roman Catholic social thought and referencing two encyclicals:

  • Populorum Progressio (On the Development of Peoples, 1967)5. . This stressed the need for solidarity between the economically strong and the economically weak as a requirement for development that is in tune with God’s purposes for the common good;
  • Sollicitudo Rei Socialis (On Social Concerns, 1987)6. This added reflections connected to a theological understanding of solidarity, based on God’s solidarity with the human race in Jesus Christ, the solidarity between human beings within the Church and the solidarity between human beings within the new creation foreshadowed by the resurrection of Jesus Christ.

The EIAG used Romans 15 vs 2-3 to remind us that: “the solidarity with the human race that Christ has demonstrated should directly influence the way in which we must build up our neighbour (not just our fellow Christians). While this ‘building up’ and solidarity is often expressed in terms of friendship and charity, it seems possible to understand a proper collaboration through co-investing as an act of solidarity, so long as all concerned are able to share in the true flourishing which results. If so, use of appropriate pooled funds should be understood as playing a part in honouring the ‘building up’ of neighbour that Christians are called to pursue”.

The EIAG recommended that: direct investment is more advisable; that investment should be avoided in pooled funds that focus on excluded activities; any underlying holdings in a pooled vehicle should be able to be monitored, and that any aggregated exposure to excluded activities should be no more than 1% of the portfolio.

In addition it was noted that continued investment in a pooled fund would be inappropriate if exposure was “particularly damaging to the credibility, effectiveness and unity of the Church’s witness”.

Considerations for a policy framework

Epworth provides pooled investment funds for churches and charities, which have their own ethical requirements, as well being a potential investor in pooled investment funds managed by others.

The Biblical and theological reflections of most relevance to pooled investment funds relate to purity, speculation, transparency and solidarity.

Investment in pooled investment funds may result in indirect exposure to business activities and companies that would be avoided on ethical grounds if direct investment was considered. There is a parallel with investing in large diversified companies.

The credibility, effectiveness, and unity of the Church’s witness could be damaged by investment in pooled funds with exposure to inappropriate business activities and companies.

There is little to indicate that a distinctive Methodist approach is necessary.

JACEI has provided advice in the past that may serve as a precedent to inform a more detailed Policy approach.

Notes

  1. https://www.umcmission.org/Find-Resources/John-Wesley-Sermons/Sermon-50-The-Use-of-Money
  2. The Central Finance Board of the Methodist Church, Mission Statement http://www.cfbmethodistchurch.org.uk/downloads/cfb_mission_statement.pdf
  3. Mayfair Capital Investment Management Limited, Responsible Property Investment Policy and Ethical Policy https://pitch.mayfaircapital.co.uk/responsible-property-investment-policy
  4. Church of England Ethical Investment Advisory Group, Pooled Funds Policy, September 2014 https://www.churchofengland.org/sites/default/files/2017-11/Pooled%20Funds%20Policy.pdf
  5. http://w2.vatican.va/content/paul-vi/en/encyclicals/documents/hf_p-vi_enc_26031967_populorum.html
  6. http://w2.vatican.va/content/john-paul-ii/en/encyclicals/documents/hf_jp-ii_enc_30121987_sollicitudo-rei-socialis.html

Tobacco

Preamble

The prevalence of smoking in the UK has declined rapidly over time as a result of comprehensive health education, prevention initiatives and marketing regulation. In 1948, eight in 10 adult males smoked, but with the start of Government health education programmes in the 1970s, this began to reduce steeply, but more recently has tailed off and begun to plateau (Fig 1). 1

The disparity in smoking by age and gender has also narrowed over time. According to Government estimates, 15.5% of adults in England over the age of 18 and 15.1% for the entire UK (male and female) were presumed to smoke regularly in 2016 compared to 46% of men in the early 1970s (41% for women). This equates to around 7.4m active smokers. Regional differences remain stubbornly acute, with the prevalence of active smoking remaining higher in Scotland (16.1%) and Northern Ireland (16.3%) than in other parts of the UK.

The Office For National Statistics paper, ‘Adult Smoking Habits in the UK, 2017’ notes a ‘significant’ one-year fall in the prevalence of smoking across all age groups, and in total from 15.8% of the adult population in 2016, to 15.1% in 2017. It is, however, too early to determine if this represents a new longer-term downward trend, although the UK and devolved Governments have all smoking reduction prevalence targets – 12% in England by 2022.

Active smoking is more prevalent in socio-economically deprived areas, with evidence that it underpins the socio-economic variation in incidence and mortality for a number of cancer types. The prevalence of smoking is also more marked in manual or low-paid occupations (25.9%), compared to professional and managerial occupations (10.2%). Evidence of this can be seen for example, between smoking prevalence in Blackpool – registering one of the highest, and Cheltenham, among the lowest (Fig 2).

Smoking declines with age. Whereas 17.8% of UK adult males (20% adult females) smoke between the ages of 18-24, the equivalent for the over 65 age group is 8.1%. Smoking appears to peak between the ages of 24-35 (19.7%) and then declines rapidly for both sexes.

Smoking is the leading cause of preventable mortality, with 81,000 deaths per year from tobacco related illness (see below). This does not include complications arising from passive smoking, nor conditions found in babies, of whom 10% are born to a mother who smokes.

The socio-economic cost of smoking is stark. Research by Oxford University put the cost to the NHS as exceeding £5.2bn per year, with approximately 485,000 (England) hospital admissions in 2016 linked primarily to tobacco related conditions (by way of comparison, there were 617,000 admissions linked to obesity and over 16m hospital admissions in England in total in 2016-17).

Vaping

Vaping is the inhalation of nicotine vapour produced from an electronic or e-cigarette. The device comprises battery, housing, vapour cartridge and atomizer. By generating heat in the atomizer, vapour liquid is transformed into gas for inhalation. Modern vaping originated in China in 2003; exponential growth in the UK has seen the number of users increase from 700,000 in 2012 to over 6 million by 2015.

Public Health England has concluded that vaping is 95% safer than smoking. An independent commissioned report (2015) found there to be no evidence that vaping was a route into smoking for children or non-smokers, and that it is a potentially successful route to curing addiction from smoking. E-cigarettes provide users with the nicotine rush gained from smoking, without cancer causing tar and other chemicals.

The House of Commons Science & Technology Committee published its report ‘e-cigarettes’ in July 2018, in which Parliamentarians concluded that ‘e-cigarettes present an opportunity to significantly (sic.) accelerate already declining smoking rates’ and on balance advised that smokers should be ‘encouraged to give up, but if that is not possible, they should switch to e-cigarettes as a considerably less harmful alternative’. More controversially, the Committee advised a public debate on whether vaping should be allowed in spaces where smoking is now prohibited on health and safety grounds (offices, public transport etc.) stating there is no ‘public health rationale for treating use of the two products (i.e. cigarettes and e-cigarettes) the same’.

However, as the Committee itself acknowledges, uncertainties remain, and Cancer Research UK (CRUK) maintains that questions linger over the long-term safety of vaping as it has not been in circulation long enough for quantitative and qualitative longer term tests to have been carried out. CRUK states that vaping should be more closely seen as nicotine replacement therapy (NRT), which has long been seen as a safer alternative to smoking. E-cigarettes are also believed to be low risk in respect of conditions such as ‘popcorn lung’ as the liquid believed to be the cause is banned from use in e-liquids.

Given the longer-term uncertainties, a precautionary approach has been assumed so that investing in vaping and e-cigarette products are avoided until quantitative and qualitative evidence regarding their safety emerges.

Health

Smoking is the biggest preventable cause of cancer, and is responsible for 25% of all cancer deaths and three in 20 of all cancer cases. There is no statistical difference in risk between cigarette smoking and other forms such as pipe, cigar or shisha.

Chemicals in cigarette smoke enter the bloodstream and affect the entire body, being held responsible for at least 15 types of cancer as well as heart and lung disease.

Smoking is primarily linked to lung cancer where it is responsible for around 70% of diagnoses. Lung cancer currently has among the lowest survivability rates of any cancer. Smoking is also linked materially to bowel, bladder, mouth, upper throat and oesophagus cancer.

Cancer develops as a result of DNA damage caused by the chemicals in cigarette smoke attacking the body, in particular benzene, polonium-210, benzo (a) pyrene and nitrosamines. Each cigarette is a cocktail of around 5,000 chemicals of which 70 are cancer causing e.g. cadmium, arsenic, formaldehyde and chromium.

Passive smoking increases the risk of contracting cancer by 25% and is particularly dangerous for children and young people. Second hand smoke exposure most often occurs in the home or in private transport. Smoking in a car with a person under 18 was made illegal in 2015, however, infringement is limited to a £50 fine and does not apply to drivers who are 17, or to convertible vehicles where the roof is (fully) down!

Establishing a causal link between smoking and cancer took sometime, but gathered pace during the 1950s as medical practitioners monitored and observed the prevalence of lung cancer cases. By 1956 evidence had mounted sufficiently for the British Medical Journal to publish, and this was followed by a recommendation in 1962 by the Royal College of Physicians providing incontrovertible evidence of the link between smoking and cancer.

Regulation

Tobacco is now among the most tightly regulated of products that are legitimately offered for sale. Advertising or marketing of tobacco was prohibited in the UK in 2002. The UK became a party to the WHO Framework Convention on Tobacco Control in 2005, which outlawed the practice of smoking in indoor work or public spaces and on public transport. Display of tobacco products in retail outlets was prohibited at the same time, restricting ‘display’ to behind closed non-viewable cabinets.

The final piece of highly restrictive legislation arrived in 2016 with the Tobacco and Related Products Regulations 2016, and Standardised Packaging of Tobacco Products Regulations 2015. These mandate standardised, plain packaging for all cigarettes and loose leaf tobacco, and cannot contain any text, trademark, brand or symbols other than health warnings, brand name (in standardised font), quantity and producer. These form among the most constraining sales and marketing restrictions for any legally sold product anywhere.

The law, however, remains somewhat quaint in its application: The legal age for buying tobacco was raised to 18 in 1987, but this applies only to cigarettes and not to other tobacco products. The legal age for smoking in public remains 16 in England & Wales. Vendors may be fined up to £2,500 for illegally selling cigarettes to minors, but there is no penalty for actually smoking as a minor, apart from confiscation.

Government, whilst motivated to promote health given the causal link of smoking with a range of diseases, nevertheless continues to benefit financially from the sale of tobacco products. UK excise duty and VAT is among the highest in the world on tobacco products, accounting for around 82% of the recommended retail price (RRP) of a packet of 20 cigarettes (c£9.91). Within the EU, the UK applies the most stringent duty rates followed by Ireland and France (by comparison a packet of 20 cigarettes in France will cost £5.67, and in Bulgaria – the lowest – £2.32).

The Treasury received c£8.9bn in tobacco excise duty in 2016/17 made up of a standard levy of 16.5% of the retail price plus a specific duty applied per 1,000 cigarettes sold (currently £207.99). Between 2000 and 2016, HM Government received over £146bn in tobacco related duty.

Biblical and theological background

As with so many modern ethical dilemmas, there are few direct Biblical references. Whilst tobacco has been smoked for many centuries by indigenous populations, it was only ‘discovered’ and developed as a cash crop for recreational purposes in the 16th century.

Whilst the Bible is silent on tobacco smoking, it is reasonable to draw attention to passages concerned with the body as a temple and ‘healthy or pure living’. The key text remains I Corinthians 6: 19-20; “Or do you not know that your body is a temple of the Holy Spirit within you, which you have from God, and that you are not your own? Glorify God in your body”.

These Biblical traditions support the view that practices that pollute or contaminate the body are not God- given and should be avoided.

John Wesley’s views on smoking are obscure. However, given his active interest with the outdoors, exercise, healthy bodies and views expressed in his well-known ‘Letter to an Alcoholic’, a presumption against the practice of smoking on ‘pollution’ grounds might be assumed. In his ‘Letter’ he was concerned at the harm caused by alcohol to the body and the soul that debased self-respect and worth. The intensity of his views on alcohol may not, of course, have extended to tobacco and smoking, given the effects were not so obvious, debilitating or well-known in the 18th century as were the all too obvious effects of alcohol addiction.

However, in Sermon 50, the ‘Use of Money’ he says ‘but this it is certain we ought not to do; we ought not to gain money at the expense of life, nor (which is in effect the same thing), at the expense of our health’. This would indicate that had the health effects of tobacco been known, he may have taken a not dissimilar view to smoking as he did to alcohol, and would certainly have opposed taking profit from business activities that involved tobacco.

Church investors approach

Tobacco is the most common and widely observed ethical exclusion among faith investors and other secular ethical investors. The Church of England has excluded tobacco since 1962; this was confirmed in 1964, and the position was re-affirmed in 1983 when the Church investment bodies stated; ‘the case for retaining this category [of exclusion] is clear cut’.

The Church Investors Group (CIG) regularly surveys its members on companies excluded from investment. The last survey suggested 96% of its members avoid investment in major stock-exchange listed tobacco companies. Denominations stating they avoid ‘tobacco products’ include the Baptist Union, Church of Ireland, Church in Wales, Church of Scotland, Roman Catholic Dioceses and the United Reformed Church.

Epworth/Central Finance Board of the Methodist Church (CFB) precedents

The first reference to a policy relating to investment in tobacco dates back to 1963, but there is no record of what this entailed. However, despite later comments that the CFB had always avoided investment in tobacco, there are indications that there was some exposure prior to the establishment of the Investment Unit in 1972.

From 1972 onwards, tolerance towards exposure to tobacco has been extremely low and has rarely been questioned. Consequently, there is little record of any debate on the subject. However, there has been an untested assumption that if tobacco accounted for 5% or more of profits or sales of any company, it would be excluded from investment on ethical grounds, whilst exposure approaching 5% would be referred to the Joint Advisory Committee on the Ethics of Investment (JACEI) for advice. An early precedent was the sale of a company that manufactured machinery for the tobacco industry.

There are precedents for decisions taken on companies with exposure to both tobacco and alcohol. The major food retailers sell alcohol and tobacco, but combined sales were not considered sufficiently material to warrant disinvestment on ethical grounds. However, in the 1980’s, KwikSave bought an off-licence chain that took its combined alcohol and tobacco sales above 20%, and as a result the holding was sold on ethical grounds.

In 1999, British Airports Authority (BAA) was considered by JACEI following its purchase of a ‘duty free’ retailer in 1998. The company’s exposure to alcohol and tobacco temporarily rose close to 20%, but had then fallen back to around 15%; JACEI considered, at the time, that this “was not a cause of major concern”.

Conclusion

The long serving investment exclusion of tobacco and tobacco related products on grounds of health is clearly accepted and well established and therefore no change to this approach is proposed. Given the longer-term uncertainties, a precautionary approach has been assumed so that investing in vaping and e-cigarette products will be avoided until quantitative and qualitative evidence regarding their safety emerges.

Epworth has published an accompanying Policy Statement on Tobacco in which its investment approach to tobacco is set out.

Notes

  1. All sources (except 2) either NHS Digital, ONS ‘Adult Smoking Habits in the UK, 2017’, National Health England, Cancer Research UK (CRUK),CIG or HM Government.
  2. House of Commons Science and Technology Committee Seventh Report of session 2017-19 ‘e-cigarettes’ https://publications.parliament.uk/pa/cm201719/cmselect/cmsctech/505/505.pdf

Tobacco

Preamble

The prevalence of smoking in the UK has declined rapidly over time as a result of comprehensive health education, prevention initiatives and marketing regulation. In 1948, eight in 10 adult males smoked, but with the start of Government health education programmes in the 1970s, this began to reduce steeply, but more recently has tailed off and begun to plateau. 1

The disparity in smoking by age and gender has also narrowed over time. According to Government estimates, 15.5% of adults in England over the age of 18 and 15.1% for the entire UK (male and female) were presumed to smoke regularly in 2016 compared to 46% of men in the early 1970s (41% for women). This equates to around 7.4m active smokers.

Smoking declines with age. Whereas 17.8% of UK adult males (20% adult females) smoke between the ages of 18-24, for the over 65s the equivalent is 8.1%. Smoking appears to peak between the ages of 24-35 (19.7%), and then declines rapidly for both sexes.

Smoking is the leading cause of preventable mortality, with 81,000 deaths per year from tobacco related illness, and the biggest cause of preventable cancer, particularly lung cancer, where smoking is responsible for c70% of diagnoses. It is also linked materially to bowel, bladder, mouth, upper throat and oesophagus cancer. There is no statistical difference in risk between cigarette smoking and other forms such as pipe, cigar or shisha.

The socio-economic cost of smoking is stark. Research by Oxford University put the cost to the NHS at exceeding £5.2bn per year, with approximately 485,000 (England) hospital admissions in 2016 primarily linked to tobacco related conditions.

Public Health England has concluded that vaping is 95% safer than smoking. An independent commissioned report (2015) found there to be no evidence that vaping was a route into smoking for children or non-smokers, and that it is a potentially successful route to curing addiction from smoking. E-cigarettes provide users with the nicotine rush gained from smoking, without cancer causing tar and other chemicals.

However, as the House of Commons Science and Technology Committee 2 itself acknowledges, uncertainties remain, and Cancer Research UK (CRUK) maintains that questions linger over the long-term safety of vaping as it has not been in circulation long enough for quantitative and qualitative longer term tests to have been carried out. Epworth has therefore determined to take a precautionary approach to vaping and e-cigarettes in respect of investment.

Regulation

Tobacco is now among the most tightly regulated of products that are legitimately offered for sale. Advertising or marketing of tobacco was prohibited in the UK in 2002, and further restrictive legislation in 2016, mandated standardised, plain packaging for all cigarettes and loose leaf tobacco; these form among the most constraining sales and marketing restrictions for any legally sold product anywhere.

Biblical and theological background

As with so many modern ethical dilemmas, there are few direct Biblical references.

Whilst the Bible is silent on tobacco smoking, it is reasonable to draw attention to passages concerned with the body as a temple and ‘healthy or pure living’. The key text remains I Corinthians 6: 19-20; “Or do you not know that your body is a temple of the Holy Spirit within you, which you have from God, and that you are not your own? Glorify God in your body”. These Biblical traditions support the view that practices that pollute or contaminate the body are not God given and should be avoided.

John Wesley’s views on smoking are obscure. However, given his active interest with the outdoors, exercise, healthy bodies and views expressed in his well-known ‘Letter to an Alcoholic’, a presumption against the practice of smoking on ‘pollution’ grounds might be assumed. In his Sermon 50, the ‘Use of Money’, he says ‘but this it is certain we ought not to do; we ought not to gain money at the expense of life, nor (which is in effect the same thing), at the expense of our health’. This would indicate that had the health effects of tobacco been known, he may have taken a not dissimilar view to smoking as he did to alcohol.

Epworth precedents

Epworth and the Central France Board of the Methodist Church has excluded tobacco and tobacco related products from investment since at least the early 1970s, when ethical investment policy was first formalised.

Tobacco is the most common and widely observed ethical exclusion among faith investors and other secular ethical investors. The Church Investors Group (CIG) survey of members suggests 96% of its members avoid investment in major stock-exchange listed tobacco companies.

Policy

Epworth will not invest in any company that wholly or mainly manufactures tobacco or tobacco related products.

For the purposes of this Policy, this includes finished tobacco products such as cigars, cigarettes, pipes and loose tobacco, filters, tips and bands. Epworth will also seek to avoid investment in any agricultural or commodity related company where tobacco is the main crop.

Retailers will not normally be excluded from investment unless the contribution tobacco sales make to overall company revenues are significant, or where wholesale tobacco is a material component of sales.

Although NHS England views e-cigarettes and vaping as carrying a fraction of the risk of conventional tobacco products, and recognises that they can be effective in controlling and alleviating addiction, Epworth will take a precautionary approach by avoiding investment in such products until long-term quantitative and qualitative evidence emerges.

Where necessary or appropriate, Epworth will engage with retailers on tobacco sales, although it is recognised that UK law applies very strong restrictions on marketing, advertising and branded sales, as well as restricting their sale to minors.

Notes

  1. All sources (except 2) either ONS, National Health England, Cancer Research UK (CRUK), CIG or HM Government.
  2. House of Commons Science and Technology Committee Seventh Report of session 2017-19 ‘e-cigarettes’ https://publications.parliament.uk/pa/cm201719/cmselect/cmsctech/505/505.pdf

Voting Report – March 2019

Ethical Investment Review March 2019

Climate change

Our work evaluating fossil fuel companies’ alignment with the Paris Agreement has made considerable progress. We are assessing the extent to which the business plans of these companies are aligned with ‘well below 2C’. Our project looks at companies’ current asset mix, capital expenditure plans, climate strategy & governance, transition plan and direct emissions. We have developed methodologies for all five assessment areas and have begun to apply them to companies. Overall, we are examining 29 metrics on each company. Our next steps are to refine our approach and engage with the companies we are assessing.

We continue to be active in investor coalitions such as Climate 100+. This includes co-filing a shareholder resolution at the BP AGM later this year, calling on the company to outline how it will align with the Paris Agreement.

Mining

In January a tailings dam near Brumadinho, Minas Gerais, in Brazil, collapsed, almost certainly killing over 300 people. The mining company responsible for the dam was Vale, which had operated the Samarco dam which collapsed in November 2015. Our portfolios did not hold Vale but the disaster highlighted the risks associated with such tailings dams.

We are part of an investor coalition organised by the Church of England to put pressure on mining companies to reveal more information about their use of tailings dams and to adopt independent standards. We participated in an investor roundtable in March with investors and mining companies. We have been encouraged by the acknowledgement of some leading mining companies of the need for change and have been engaging on this issue with companies held in our portfolios. We are working to encourage disclosure from mining companies on their exposure to tailings dams as there is very little information available and the risks to life are considerable. We will be working as part of the coalition on engagement around the tailings issues.

We continue our work helping church and mining leaders discuss what mining for the common good means in practice, especially for communities directly affected. The Methodist Church, Church of England, and the Vatican continue to explore ways we can share perspectives and engage with mining companies.

Pooled investment funds

Investment in pooled investment funds, also known as collective investment schemes, raises some challenges for ethical investors. Pooled funds are used to provide access to specific asset classes, thematic investments or strategies that could not otherwise be accessed cost effectively or in the appropriate size without a heightened risk of liquidity becoming unbalanced. However, there can be a risk that owning stakes in such funds can indirectly expose portfolios to business activities and companies that would otherwise be excluded on ethical grounds. This is similar to owning shares in a large company with a small division involved in activities which would disqualify it from investment were it the main business.

On JACEI recommendation, we have published a policy on investment in pooled funds. The policy acknowledges the advantages of pooled funds when specialist expertise or geographical exposure is required. We will seek pooled funds with a similar ethical investment approach to our own where possible and we will engage with the fund managers. We will avoid pooled funds with significant exposure to companies in which we would avoid direct investment. The policy is available on our website.

Israel Palestine

Continuing the long running engagement that we have had with Heidelberg Cement regarding a quarry in the West Bank, the company has told us that the quarry is to be sold to a private party, and that production at the site has ceased.

Living Wage

We engaged with BT Group last year to encourage it to become Living Wage Accredited. We continued engagement through to February 2019, when it became clear that the company would not become accredited, which was disappointing. We will continue to monitor this situation, and will engage again in the future. The engagement was part of a larger effort, where we encouraged seven companies to become Living Wage accredited. We continue to work with ShareAction on this issue.

Worker rights

Our letter to the Chairman of Ted Baker, a clothing retailer, following allegations of inappropriate behaviour in the workplace, received some publicity. The CEO later voluntarily suspended himself from duties and in March the company announced that he had resigned.

Farm animal welfare

In collaboration with FAIRR, we joined other investors engaging with Whitbread regarding antibiotic use in its supply chain. Although Whitbread has now sold its Costa Coffee division, it still owns other restaurants and food outlets. Questions were asked around the development of targets and a timeline for implementation to encourage suppliers to report the quantity and type of antibiotics used in different species of animal. There was also a detailed discussion around the audits that take place with regard to animal welfare. Whitbread was forthcoming on the subject and we look for progress during the year.

Stewardship Code

Our 2019 Stewardship Code Statement is now available. Our Statement continues to be rated Tier 1. In future the Code is expected to place more emphasis on environmental, social, and governance considerations.

Corporate governance

In association with other Church Investors Group members we revised our voting template in time for the 2019 voting season. The standards we expect on remuneration and boardroom gender diversity remain high and we made some small adjustments this year. We extended the boardroom diversity requirement beyond the UK where possible and we added an element on tax transparency.

There were relatively few company meetings this quarter. Full voting reports are available and a summary is published online.

Voting Report – December 2018