By Mark Cobley

Of Financial News

The U.K.'s biggest pension fund is to sell out of tobacco, coal stocks and investments in controversial armaments, joining an increasingly widespread movement among the world's top investors to abandon industries judged to be unsustainable in the long term.

The Universities Superannuation Scheme, which manages 68 billion pounds ($83.9 billion) in retirement savings for 400,000 academics, announced its first-ever "exclusions"--the ruling-out of certain investments--in a statement Monday. Simon Pilcher, its chief investment officer, said: "This is a major development for us, and one that will balance both keeping the financial promises made to [our members] with investing in a responsible way."

It will begin with the sale of around GBP180 million in tobacco stocks, Mr. Pilcher said, comprising its holdings in three companies--British American Tobacco PLC, Imperial Brands PLC and Altria Group Inc. While the policy also covers bondholdings, USS doesn't presently own any debt in these companies, he added.

USS also currently holds no pure-play coal miners, nor investments in companies involved in the production of cluster munitions, landmines or white phosphorus--a chemical weapon. The pension scheme will pledge never to buy into these areas in the future, and will also commit not to buy into energy companies that derive more than 25% of their revenues from thermal coal.

USS's divestment move follows a review of its portfolio begun at the end of last year, which concluded that "changing political... attitudes and increased regulation" are likely to "damage the prospects of businesses involved in these sectors in the years to come."

Mr. Pilcher stressed the review didn't amount to an ethical judgment on the businesses concerned. He said: "We are required to make our decisions based on financial factors, but our conviction is that the longer your time horizon, the more certain it is that ethical issues will 'bite'. If a company is social dumping, for example, because it is exploiting child labour in a far-flung country, then at some point there will be an 'aha' moment and consumers will turn against them."

He concluded: "We think these companies will have lower returns in the future. That is the reason for this decision."

USS promised it would sell out of all holdings in these industries within two years, though it expects to complete most of the divestments much earlier.

The move is a departure for USS, which has resisted calls to sell out of stocks on non-financial grounds in the past, and has never publicly announced its exit from entire industries. Campaign groups welcomed the decision, but said it should have come earlier.

Catherine Howarth, chief executive of ShareAction, said: "After many years of USS closing its ears to members' views on the scheme's investments, it seems new leadership at USS is once again listening. This will greatly help to restore trust in USS at a time when it is badly damaged. There is much further to go with this process, and we hope USS will look now to follow other large U.K. schemes in establishing a robust new approach to regularly ascertain the views of members on investments held for their benefit, building members' preferences into the scheme's stewardship policy as well as taking further, bold steps to halt investment in fossil fuels."

Professor Paul Kinnersley and Dr Sue Blackwell, members of Ethics for USS, recently met with USS and said: "We believe that the overwhelming majority of USS members will support this decision as they do not want their pension contributions invested in sectors which accelerate climate change, kill people or cause harm to them."

Website: www.fnlondon.com