Fund manager seeks new rules to require retailers to disclose tobacco revenues

By John Filar Atwood

Australian fund manager and sustainable investor Pella Funds Management has asked the SEC to develop new rules to require retail companies that sell tobacco products to disclose the revenue from their sale of those products. In its rulemaking petition, Pella explained that many of the largest sellers of tobacco products limit their disclosure about tobacco because of the risks they face from increased regulation and declining sales due to the health concerns surrounding tobacco use.

Pella noted that increased regulation of tobacco products has contributed to declining tobacco sales in the U.S. It cited data from the Centers for Disease Control indicating that cigarette smoking rates for adults declined from 42.4 percent in 1965 to 13.7 percent in 2018. Pella claimed that declining revenue combined with well-established health risks have led retailers that rely on tobacco-related revenue to limit disclosure about their exposure to tobacco products.

Pella argued that investors need to understand whether an investment candidate aligns with their values, and that profiting from tobacco may not match those values. Pella believes that new rules requiring retailers to report revenue from tobacco sales would allow investors to assess whether an investment is suitable for their portfolio.

Current reporting. Pella provided an example of a reputable mutual fund manager that excludes from its portfolio companies that generate more than 10 percent of their revenue from tobacco. Yet, as of June 2023 that fund manager invested in Dollar General, whose revenue includes an undisclosed percentage from cigarette sales. Under the current reporting regime, it is impossible for that fund manager to substantiate Dollar General’s exposure to tobacco-related revenue, Pella said. The same problem is faced by hundreds of other similarly situated fund managers, it added.

Pella made the following observations from information it compiled about the current reporting practices of tobacco retailers with a market capitalization of at least $100 million:

• Most companies that sell tobacco products make some mention of selling those products in their Forms 10-K, suggesting that they recognize that selling tobacco products is a reportable activity.
• Some companies (Albertsons, BJ’s Wholesale Club, Kroger Co., PriceSmart, Village Super Market, Weiss Markets) that are reported to sell tobacco products by online sources do not make any mention of selling tobacco products in their 10-Ks.
• Only one company (Murphy USA) provided guidance on the amount of revenue generated from tobacco-related products.

Creating uncertainty. Pella acknowledged that any analysis of the retail group is hampered by the absence of a requirement to report whether a company generates revenue from the sale of tobacco-related products. It creates uncertainty about whether the missing tobacco revenue disclosure is due to the company not selling those products or to the company choosing not to disclose those sales, Pella stated.

Pella’s final argument in favor of new disclosure rules was that without the requirement to report tobacco-related revenues, few companies will do so for competitive reasons. Specifically, companies are worried that they might be providing more information to competitors than they receive in return, Pella noted. Mandatory reporting will overcome this issue, Pella said as it urged the SEC to initiate a rulemaking project to develop tobacco disclosure rules.