A New Look at Tobacco

Smoking may be shunned in health-conscious California, the first state to ban lighting up in public, especially by teachers who implore students to quit. But the $170 billion California State Teachers’ Retirement System is considering restoring investments in tobacco stocks that it snuffed out in 2000.

Trustees of the country’s second-largest pension fund, who fear they will get burned for lackluster returns for the fiscal year ended June 30, say the ban has cost it more than $1 billion in lost investment gains. “If we’re excluding a part of the economy that has been making money for shareholders, it leaves us open to tremendous criticism,” says trustee Carolyn Widener. The trustees are worried less about socially responsible investing than about their fiduciary obligations. When CalSTRS established new criteria for screening stocks in 2000, tobacco was the only industry to meet all four risk factors: litigation, bankruptcy, regulation and the chance that widespread institutional divestment could push down share prices. If an industry satisfies three of the criteria, CalSTRS removes it from its passive and active benchmarks. But tobacco no longer meets any of the criteria, CalSTRS staff reported in June. Cigarette companies have beaten three quarters of the lawsuits against them, and earnings are rising, reducing the risk of bankruptcy. Regulatory risks are not significant, and most investment boycotts fizzled when lawsuits were settled. But some trustees want further investigation. “Can we fulfill our legal duty to teachers without investing in products that kill?” California State Treasurer Bill Lockyer, who previously sued tobacco companies as attorney general, asked the CalSTRS board on June 4.