Health insurer Medibank Private has stubbed the last tobacco stocks out of its $2.4 billion portfolio after tipping $170 million of international equities into a tobacco-free global index trust developed by State Street Global Advisors.
Chief executive Craig Drummond said the process of ridding the entire portfolio of securities of companies dealing in tobacco and certain armaments had taken some years to complete and was consistent with the companies values.
Mr Drummond said Medibank took the initiative at the suggestion of former Queensland premier Anna Bligh, who is a director, and oncologist and anti-tobacco stocks campaigner Bronwyn King.
"Our stakeholders expect us to be promoting better health and - given that approximately 15,000 Australians die each year from the effects of tobacco - we don't see that it's consistent to have tobacco-related securities in our investment portfolio," he told The Australian Financial Review.
Medibank was the first investor in the trust, which also excludes controversial armaments such as cluster bombs, landmines, chemical and biological weapons and depleted uranium weapons. State Street has since signed two more clients and a total sum of $270 million.
State Street's Asia Pacific head Lochiel Crafter expects the sum to grow. Two-thirds of the firm's individually managed portfolio's exclude either tobacco or controversial armaments or both, and the trust is open to anyone with $25,000 to invest for a relatively low 0.21 per cent fee.
"We think there's a groundswell of support from investors who want to go down this path," Mr Crafter said. "We are very pleased to be able to offer this trust to a wider range of investors at such a low fee."
Mr Drummond said Medibank had no plans to widen its exclusions to industries like fossil fuels, alcohol and gambling because these could be used safely in moderation, whereas with tobacco "it's on the front of the label that it causes cancer and many other terminal illnesses."
The trust Medibank has invested in is based on the MSCI World Index of about 1600 global stocks - with the tobacco and controversial armaments stocks removed along with the Australian stocks.
Despite the intense focus on fossil fuel divestment in the past two years, Mr Crafter said State Street hasn't fielded many specific requests for fossil-fuel free indices in Australia. In the US the firm offers fossil-free, low-carbon and even a gender diversity portfolio product requested by the California State Teachers' Retirement System's (CalSTRS).
Like the vast majority of investors Medibank has seen returns on its defensively weighted portfolio plummet in the low interest rate environment. The company reported a total net return of just 2.6 per cent in fiscal 2016, down from 4.4 per cent in 2015.
But Mr Drummond said Medibank wouldn't be tempted to chase higher yielding securities by lowering the 75 per cent defensive assets weighting (fixed interest securities and cash) to buy more growth assets, or chasing higher yielding fixed interest securities.
"We have not done that and we don't intend to do that. As a result our investment returns were considerably lower over the last 12 months," he said.
"Shareholders in Medibank are not looking to buy an investment company. They are looking to buy an insurance company."
