By Maitane Sardon
Companies that have been on the wrong side of the social-impact movement are trying to convince investors to take another look. And for some investors, at least, it's working.
Devarsh Ruparelia, a student at the University of Illinois who considers himself an ethically focused investor, added tobacco company Altria Group Inc. to his portfolio when its stock hit recent lows in January.
That's not normally the case: Investors who incorporate environmental, social and governance (ESG) standards in their selection process often avoid tobacco stocks. But Mr. Ruparelia was won over by Altria's heavy investment in e-cigarette maker Juul Labs Inc. "Smoke-free products like Juul and IQOS are the future," he says.
More broadly, he says, "it is not a good idea to screen out opportunities just because those companies are seen as sinners, since some of these companies are not just open to change but are taking already steps to improve."
Indeed, a growing number of companies across the spectrum of industries that traditionally raise red flags with ESG investors are acting to improve their image and their business prospects by shifting toward less-harmful products and addressing corporate-governance issues.
Pressure for that kind of change is growing. In 2018, U.S. money managers reported that they applied climate-related restrictions to $3 trillion in assets, tobacco-related restrictions to $2.9 trillion, weapons-related restrictions to $1.9 trillion and alcohol-related restrictions to $1.5 trillion, according to data from the Global Sustainable Investment Alliance, a group of organizations that promote sustainable investment.
And just as investors in big numbers are turning away from certain companies because of ESG concerns, many consumers are favoring companies and products that they consider to be more socially responsible. That means a company that doesn't move toward more-responsible products and operations risks losing both investors and market share. Some companies also run the risk that tougher regulation could subject them to hefty fines and/or major expenses in bringing their business into line with the rules.
"If a company ignores the risks it is facing, this will impact quite negatively on the financial side," says Amelia Sexton, an investment manager at Holden & Partners, a financial adviser in London.
Facing those risks, some of the biggest tobacco companies are positioning themselves for a cigarette-free future.
In December, Altria invested almost $13 billion for a 35% stake in Juul, amid an accelerating decline of cigarette sales and the failure of Altria's own e-cigarette brands to gain traction in the market. Altria's chief executive, Howard Willard, described the move as the biggest in the company's history toward achieving a reduction in the harm done by tobacco.
Similarly, Philip Morris International Inc., the largest of the international tobacco companies, is going through the biggest strategic transformation in its history. Since 2008, when it was spun off by Altria, it has spent $6 billion developing next-generation products it says are less harmful than traditional cigarettes, including a device called IQOS that heats tobacco for inhalation instead of burning it.
"We want no more cigarettes on the planet in 20 years from now," says Huub Savelkouls, chief sustainability officer at Philip Morris International. Smokers and regulators will have a role to play in achieving that goal as well as tobacco companies, he says, but "we are ready for it; 92% of our R&D expenditure is dedicated to our smoke-free vision. We are ready to go as fast as possible."
Both Juul and IQOS have been criticized. Juul has been blamed by public-health officials for contributing to a surge in teen vaping in the U.S. And last month, Philip Morris International suspended all of its product-related digital influencer actions after Reuters asked the company about its use of online personalities as young as one woman who gave her age as 21 to promote IQOS. The company told Reuters that its own guidance called for influencers to be at least 25. "While no laws were broken, we fell short of the high standards we set for ourselves," says a spokesman for Philip Morris International.
Altria, Juul and Philip Morris International all say that they support raising the minimum age for buying tobacco and vaping products to 21, and that they market their products only to adult smokers.
Auto makers are also under tremendous pressure, in their case to reduce greenhouse-gas emissions, and have responded by ramping up their development of electric vehicles. Volkswagen AG, the world's largest auto maker, was a pariah of ESG investors when the scandal over the company's misreporting of diesel emissions blew up in 2015. But since then Volkswagen has focused on developing battery-powered vehicles and hybrids.
Volkswagen plans to spend more than EUR30 billion ($33.6 billion) developing electric vehicles and EUR50 billion on battery technology and production over the next five years. It expects at least two in five cars it sells to be fully electric by 2030, and many analysts say Volkswagen will soon be the largest manufacturer of electric cars. The company also says it hopes to be carbon-neutral by 2050.
Climate concerns also drive the aversion of many ESG investors to oil companies. Despite oil companies' recent investments in the development of renewable energy, spending on alternative energies by the oil and gas sector was still modest at $22 billion world-wide in 2018, according to CDP, a U.K.-based nonprofit that works with companies to help them disclose their environmental impact.
In some cases, pressure for faster change in the industry is being exerted directly -- and effectively -- by shareholders. For example, BP PLC shareholders approved a climate resolution in May that commits the British oil-and-gas company to set out a business strategy consistent with the goals of the Paris Agreement on climate change, which requires nations to strengthen their actions to limit global warming.
BP followed Royal Dutch Shell, which last year became the first major oil-and-gas company to commit to curbing emissions from its products, in response to pressure from a European group of 4,600 shareholders in the oil and gas sector.
Companies are working on revamping their operations as well as their products. Diageo, the owner of Guinness, Baileys, Johnnie Walker and other brands of alcohol, has gained a place in some portfolios with its commitment to gender diversity and inclusion in the workplace.
"The research and evidence is compelling, and the value added to business performance is clear at Diageo -- gender-balanced businesses perform better," says Mairéad Nayager, Diageo's chief human-resources officer. "We see fostering an environment where everybody is valued irrespective of their gender, background, religion, sexuality, ethnicity, experiences, thinking styles and more as crucial to our long-term success."
Women make up 40% of Diageo's executive committee and 34% of its senior leadership team. The company aims to have its senior leadership be 40% women by 2025.
"I admire Diageo," says Anne Tolmunen, lead portfolio manager of the AXA Women Empowerment fund, which invests in companies that promote gender diversity and women leadership. About 2.3% of the nearly $80 million fund is invested in Diageo.
Diageo also is investing in programs to address alcohol misuse and drunken driving, and aims to have one million people trained as what it calls responsible-drinking ambassadors by 2020. These are adults Diageo has trained to promote moderation.
Ms. Sardon is a Wall Street Journal reporter in Barcelona. She can be reached at email@example.com.