Investment, pension and insurance firm Scottish Widows announced today a revision to its ESG investment exclusion policies, adding tobacco firms to the list of exclusions, and tightening its fossil fuel rules. Based on the revised policies, the firm will divest investments worth £1.5 billion from its portfolios, bringing its total ESG risk-based divestments to £3 billion.

According to Scottish Widows revised policy, the firm will no longer hold companies that derives more than 10% of revenues from tobacco, which would cover all tobacco manufacturers and major distributors, but not companies that derive small amounts of revenue from tobacco, such as supermarkets. In a paper published by the firm explaining its policy, Scottish Widows said that tobacco holdings are incompatible with its responsible investment strategy, and pose unrewarded investment risk.

Maria Nazarova-Doyle, Head of Pension Investments and Responsible Investments at Scottish Widows, said:

“Taking the long view, industries such as tobacco are at severe risk of becoming stranded assets, as they face intense pressure from investors, regulators, and consumers, and consistently fail to properly address the social impacts of their products and within their supply chain.”

Scottish Widows also revised its fossil fuel investment threshold, and will now invest only in companies deriving less than 5% of revenue from extraction of thermal coal and tar sands, down from 10% under the prior policy. The firm said the new policy reflects the progress made by leaders in the sector to reduce their reliance on these fuels.

In order to implement the revised policies, Scottish Widows said that it worked with index, data and analytics provider FTSE Russell to construct a range of bespoke indices for its passive funds, which will be managed by BlackRock. The indices cover the new exclusions, as well as Scottish Widows’ existing ESG screens, such as manufacturers of controversial weapons and United Nations Global Compact violators.

Nazarova-Doyle added:

“With responsibility for trillions of pounds worth of investments, it is imperative that the pensions industry champions a responsible approach to investing, creating strong financial returns for savers with the help of active stewardship while divesting from practices that threaten the long-term health of people and our planet.”