The government's auto-enrolment provider NEST is going tobacco-free across all of its investment portfolios after concluding the asset is a "poor investment" for its eight million members.
The £6bn master trust said the decision was due to key factors including stricter worldwide regulation, increasingly aggressive legal action by governments, and falling global smoking rates.
NEST estimated it will take up to two years to divest from tobacco companies, where it currently has around £40m exposure. It noted that, if it did not make this change, it would likely have around £130m invested in tobacco by 2022, based on having £20bn in assets under management by that time.
Speaking to PP, head of responsible investment Diandra Soobiah said NEST is a long-term investor, so it had to make an assessment over a long-term timeframe.
"That's why we've been watching the sector closely for a number of years, and seeing these long-term trends gradually translating into performance," she said. "We also think more emerging market countries are catching up with this position.
"Furthermore, we've started to see big schemes in Australia, the US, Canada and Holland, for example, that have acted upon this [divesting from tobacco].
"I think the position will catch up in the UK, and the financial position will become clearer over time. But we will make this move right now because we believe the financial evidence that we've seen is particularly compelling."
She also noted that she would be "completely lying" if she said NEST completely ignored moral reasons to divest from tobacco - i.e. the number of deaths caused by the substance globally.
"That is why government regulators are acting to try and counteract that. I think you can't hide away from the damaging effects of tobacco; we recognise that."
NEST already has a tobacco-free policy applied to its ESG emerging markets and commodities funds, but will now start to screen out tobacco across all of its retirement date funds and other portfolio choices.
In a separate statement, chief investment officer Mark Fawcett said the move would not come as a surprise to some.
"We've been highlighting our specific concerns around tobacco in investments and its performance for a couple of years now," he said, adding that the tobacco industry is "struggling" and "being regulated out of existence".
He concluded: "We have not taken this decision lightly but we don't think it makes sense to continue investing in an industry whose business model looks increasingly unsustainable."
The decision to divest from tobacco was supported my NEST's fund managers who have agreed to make the changes across its portfolio.
Amundi co-head of emerging markets fixed income Sergei Strigo said: "We do not see attractive risk reward of the tobacco sector in the emerging market bond universe and the market share is fairly modest in the emerging market debt space.
"NEST's decision to go tobacco-free is consistent with Amundi's ESG view to cap tobacco companies in our lowest two ratings before exclusion."
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