The world’s biggest insurance company has broken ranks with the industry by withdrawing from all investment in tobacco companies.

The surprise move by Axa was welcomed by managers of ‘ethical funds’ as an encouragement to investors to believe they can make a difference.

Peter Michaelis, head of investment at Alliance Trust Investments, said:‘We think this is a bold, positive move from the world’s largest insurer and sets a strong example for other institutional investors. Tobacco kills around six million people each year and is described by the World Health Organisation as ‘one of the biggest public health threats the world has ever faced’.

Axa said governments were introducing more and more legislation aimed at curbing tobacco use globally, which essentially meant that “tobacco is a sunset industry and investing in it is becoming increasingly risky”, Mr Michaelis said.

Dundee-based Alliance Trust has charged its investment subsidiary ATI with taking environmental, social and governance factors into account when managing the £2.8billion trust, but ATI also runs dedicated ‘sustainable’ funds.

Mr Michaelis said: “‘At Alliance Trust Investments we seek out companies experiencing strong tailwinds for future growth. In our view these are high quality companies that are capitalising on structural change through new and innovative products and services, or through the way in which they make efficient use of scarce resources. Effectively, this means that our Sustainable Future (SF) funds have never been invested in the tobacco industry.”

He said all the SF funds would rank first or second quartile (top quarter or half ) in five-year performance tables for comparable mainstream (non-ethical) funds.

But investing ethically can throw up its own moral dilemmas. Patrick Connolly, certified financial planner at Chase de Vere, said ethical funds adopted different approaches.

While ‘dark green’ funds used negative screening of ‘sin stocks’, other used a positive screening approach to target companies which might make positive contributions to society or the environment.

“A third approach is to invest in ‘best of breed’ companies. As an example, some ethical funds won’t hold shares in oil companies because they do harm to the environment, while others will hold those oil companies that they consider ‘best of breed’ and think will cause less damage or look for greener solutions.

Connolly said ethical portfolios would typically have lower weightings in a sector such as oil and gas, which had been an advantage in recent times, but could make the portfolio more dependent on sector performance..

Portfolios would also tend to be skewed toward mid and small cap companies, as they were less likely to be causing any harm or damage, which again could make them more volatile.

“For those who are keen to invest ethically we like Aberdeen Ethical World Equity, Standard Life UK Ethical, Kames Ethical Equity, and the Kames Ethical Corporate Bond and Rathbone Ethical Bond funds.”

Adrian Cammidge at Kames commented: "The Ethical Equity Fund, which we have run for 27 years, is currently first quartile over one, three, five and 10 years, while our Ethical Cautious Managed Fund is ranked first quartile over one, three and five years and since its launch in 2007."

Adam Laird, passive investment manager at Hargreaves Lansdown, said: “Axa believe investing in tobacco assets is a contradiction for a major health insurer. Ethics is a personal subject and each investor will approach it differently – one person’s renewable wind energy is another’s blot on the landscape.

“There are always good and bad investments, socially responsible investing is no different. Investors shouldn’t put the ethical cart in front of the investment horse – review every aspect of a fund before making decisions.”

He said tobacco producers were just five per cent of the FTSE All Share index, but has performed strongly over the last decade, offering high returns with low volatility. “This is a defensive sector and a favourite with some top UK fund managers, like Neil Woodford.”

Mark Barnett at Invesco Perpetual, whose funds include Edinburgh Investment Trust, is another fan of big tobacco.

Hargeaves Lansdown recommends Kames Ethical Equity and Royal London Ethical Bond Fund, but says ethical investors do not need to choose an active manager.

Laird said: “There are a number of passive options for ethical investors, one of the largest is the Vanguard SRI European Stock Fund. This follows the FTSE Developed Europe Index, the index is screened for companies which do not meet “socially responsible” criteria. With ongoing charge 0.30per cent, this is a lower cost ethical option.”

CASE STUDY

Mark James, an environmental consultant from Dunbar, is a determined ethical investor, though not in the stock market.

He banks with Smile, the Cooperative Bank’s online account, and has savings accounts with the Ecology Building Society.

James has also invested modestly in Triodos Renewables, whose wind farms power over 32,000 Scottish homes, and is currently investing in a Triodos offshoot, Thrive Renewables, which has just launched an inaugural bond secured against two wind farms in Aberdeenshire.

The bond aims to raise £3m to invest in further projects, and offers investors a 5.5 per cent long-term return with a minimum investment of £250.

James says: “I was involved with an attempt by local people to get a wind turbine for a Dunbar community energy company, but we were knocked back because of visual intrusion, so it’s on the back burner.”

Simon Roberts of Thrive Renewables said: “We hope that people living close to the wind projects will participate in the offer.”