Engagement vs. Divestment in
the Tobacco Sector

Divestment has tended to be the dominant approach of those wishing to take a ‘responsible’ investing approach to tobacco. Many sustainable, ethical and ESG-labelled funds exclude the sector entirely, reflecting concerns about health impacts, addiction, and the historic role of tobacco companies in public-health controversies.

Divestment can send a strong ethical signal — but on its own it has severe limitations in influencing real-world smoking behaviour or corporate strategy. We believe that, as reduced-harm tobacco nicotine products become more widely available, active engagement can play a constructive role in accelerating the transition away from combustibles.

The Limitations of Divestment

Divestment is intended to express values-based objections to selling harmful products, pressure companies by lowering share prices and raising their cost of capital, and distance investors from reputational or ethical concerns. In the tobacco sector this view is strongly championed by initiatives such as Tobacco Free Portfolios, which advocates for full exclusion of tobacco equity and debt on ethical, public-health and fiduciary grounds.

However, the divestment model faces several structural challenges when applied to tobacco:

1. Persistent Demand Means Others Will Supply

  • Publicly listed companies represent only 40–45% of global cigarette production.

    If they disappeared, others would take their place — potentially with reduced transparency and weaker governance compared to listed companies

  • Demand for psychoactive substances doesn’t vanish through prohibition.

    Historical and modern examples (e.g., illicit drugs) show that attempts to restrict supply do not eliminate demand.

2. Ownership Shifts Toward Less Responsible Shareholders

If responsible investors exclude tobacco, ownership becomes concentrated among shareholders less driven by public-health concerns.

Before the emergence of reduced-harm nicotine products, this mattered less: companies had no viable alternative to combustibles. But today, companies face a strategic choice:

  • Invest in reduced-harm products, or

  • Maximise short-term profit from cigarettes

Shareholder voice influences which path they take.

3. Cost-of-Capital Effects Are Limited

One theory behind divestment is that it raises the cost of capital for ‘unethical’ companies. But tobacco companies:

  • are strong cash generators,
  • self-fund operations,
  • have long experience managing volume decline in combustible cigarettes through price increases.

If they do need capital, it is usually for reduced-risk product investment, not cigarettes. Depressed equity valuations may even push firms to double down on their legacy business — combustibles — rather than invest in trying to transform their business.

How Engagement Creates Real-World Impact

The rise of reduced-harm nicotine products — including vaping, nicotine pouches, and heated tobacco — has created new opportunities for investors to influence corporate behaviour. We believe companies must make a clear commitment to integrate harm reduction into their strategies.

Engagement can accelerate this shift in several ways:

1. Encourage Capital Allocation to Reduced-Harm Products

Active engagement can encourage companies to increase investment in reduced-risk product development and shift marketing and R&D budgets away from combustibles.

2. Improve Transparency and Reporting

Constructive dialogue can promote better disclosure on product sales volumes by category, consumer behaviour and migration from combustibles, youth access controls and responsible marketing, and other performance indicators relevant to health impact. These data points are essential to assessing whether companies are genuinely transitioning.

3. Support Responsible Practices Across the Value Chain

Although health impacts dominate societal concerns, tobacco companies also face scrutiny over agricultural labour conditions, the environmental footprint of the tobacco cultivation and manufacturing supply chain and, increasingly, the environmental impact of reduced-harm products. Engagement provides a channel for investors to press for improvements across these areas, consistent with broader ESG expectations.

Investor Influence Matters: engagement as the path to real-world harm reduction

Divestment communicates ethical discomfort but does little to change real-world smoking behaviour. Engagement, by contrast, leverages investor influence to shift companies toward reduced-harm strategies, better transparency, and higher standards across the value chain.

Next article: Investment Process

An investor should consider the investment objectives, risks, and charges and expenses of the fund carefully before investing. A prospectus which contains this and other information about the fund may be obtained by calling 1-800-617-0004, or by clicking here. The prospectus should be read carefully before investing.

Investing involves risk. Principal loss is possible. The Fund is a recently organized entity, giving prospective investors a limited track record on which to base their investment decision. The Fund’s investments will be concentrated in the securities of issuers in the tobacco, or nicotine - related group of industries. The tobacco industry is subject to significant risks and uncertainties that could materially and adversely affect the financial condition and cash flows, of companies operating in it. Investing in foreign securities typically involves more risks than investing in U.S. securities, and includes risks associated with: (i) internal and external political and economic developments – e.g., the political, economic and social policies and structures of some foreign countries may be less stable and more volatile than those in the U.S. or some foreign countries may be subject to trading restrictions or economic sanctions; (ii) trading practices – e.g., government supervision and regulation of foreign securities and currency markets, trading systems and brokers may be less than in the U.S.; (iii) availability of information – e.g., foreign issuers may not be subject to the same disclosure, accounting and financial reporting standards and practices as U.S. issuers; (iv) limited markets – e.g., the securities of certain foreign issuers may be less liquid (harder to sell) and more volatile; and (v) currency exchange rate fluctuations and policies. Investment in emerging market securities involves greater risk than that associated with investment in securities of issuers in developed foreign countries.

Derivatives may pose risks in addition to and greater than those associated with investing directly in securities, currencies or other investments, including risks relating to leverage, imperfect correlations with underlying investments or the Fund’s other portfolio holdings, high price volatility, lack of availability, counterparty credit, liquidity, valuation and legal restrictions. A total return swap is a contract in which one party agrees to make periodic payments to another party based on the change in market value of the assets underlying the contract, which may include a specified security, basket of securities, or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. The Fund is a non-diversified, investment company under the 1940 Act. Because the Fund is non-diversified, it will invest a greater percentage of its assets in the securities of a limited number of issuers. Investing in medium and small capitalization companies may involve special risks because those companies may have narrower product lines, more limited financial resources, fewer experienced managers, dependence on a few key employees, and a more limited trading market for their stocks, as compared with larger companies. The securities of micro-cap companies may be more volatile in price, have wider spreads between their bid and ask prices, and have significantly lower trading volumes than the securities of larger capitalization companies.

ETFs are subject to risks that the market price of an ETF's shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact an ETF's ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. Brokerage commissions will reduce returns

The Hexis Active Nicotine Engagement ETF is distributed by Quasar Distributors, LLC

Definitions used on these pages:

R&D: Research and development spend – investment in developing new products, technologies, or capabilities.

M&A: Mergers and acquisitions spend – spending on acquiring or merging with other companies to expand scale, capabilities, or market access.

Capex: Capital expenditure – investment in long-term physical or intangible assets such as facilities, equipment, or infrastructure.

Discounted Cash Flow (DCF) model – a valuation method that estimates a company’s value by discounting its expected future cash flows back to today.

Terminal value – the estimated value of a business beyond the explicit forecast period in a DCF model.

Terminal growth rate – the assumed long-term, steady growth rate used to calculate terminal value.

EV: Enterprise Value – a measure of a company’s total value, calculated as market capitalisation plus net debt

EBITDA: Earnings before interest, taxes, depreciation and amortisation