There is an oddity rarely spoken aloud in investor boardrooms: the tobacco paradox. Tobacco may be the one industry in which the more honestly a company explains its harms to the world, the less that honesty harms its share price. 

The Tobacco Paradox: Damage & Profit

British American Tobacco (BAT) offers an almost too-perfect case study. In 2022, the company conducted its first double materiality assessment. The results placed harm reduction, climate change, and the circular economy among its Tier 1 topics. With that, BAT itself acknowledged that those issues carried serious actual and potential negative impacts on people, the environment, and the economy. Yet in the same breath, BAT’s latest annual report tells shareholders its combustible business remains lucrative, generating more than £8 billion in average annual free cash flow. Altria, in its 2025 annual report, is even blunter. It describes its traditional tobacco business as “resilient” and delivering “strong financial performance”.

Those two premises—one admitting damage, one affirming profit—are the crux of the tobacco paradox. Impact materiality, the inside-out lens at the heart of corporate social responsibility and the GRI framework, has long delivered an unappealable guilty verdict against the tobacco industry. However, financial materiality, the outside-in lens that dominates ESG and ISSB thinking, still leaves the industry considerable room to maneuver. 

The Impact Case Is Closed

The harmful impacts of tobacco are pervasive, spanning across sectors and stakeholders. The most obvious one is for people and public health. By WHO’s accounting, tobacco kills more than 8 million people each year. This includes over 7 million from direct use and approximately 1.2 million non-smokers from secondhand smoke. 

Economically, the impacts are significant, too. According to the 2016 monograph jointly published by the U.S. National Cancer Institute and WHO, smoking causes roughly $1.4 trillion in economic damage annually, about 1.8% of world GDP. These numbers  captured health care spending and productivity lost to tobacco-related illness and premature death. 

Tobacco’s impacts extend to the environment as well. Tobacco product waste, particularly cigarette butts, adds its own measurable environmental cost to cities everywhere. All in all, no other industry’s core product, used exactly as directed, systematically kills a share of the people who consume it. Tobacco’s impact materiality is so high it is nearly categorical.

But the Financial Case Is Not

Shift to the second axis, though, and the picture changes. Financial materiality asks how social and environmental issues create risk or opportunity for a company’s balance sheet. For decades, the answer was inconveniently clear: tobacco shares outperformed broader markets. This pattern is well documented in the Darden School of Business case study of CalPERS’s 2000 divestment decision.

More recently, however, that premium has been eroding. Regulatory uncertainty compounds, ESG pressure mounts, and the costly transition to reduced-risk products strains balance sheets. Thus, some portfolio managers now conclude that the industry’s profitability narrative is itself partly investor marketing. The argument is that it is designed to sustain capital inflows through high dividends rather than genuine competitive resilience. ISS ESG has observed, “It remains to be seen whether the underlying financial strength of the industry sustains going forward, given the ever-evolving ESG risks.”

When the Norm Is Not Enough

Here lies a deeper irony. 

Tobacco exclusion is in fact the most widespread form of negative screening in responsible investing. This is not a fringe practice. Rooted in faith-based investment traditions predating the term ESG by decades, it is confirmed by a 2024 study in Frontiers in Public Health as the most common responsible investment practice globally. Its modern institutional expression is the Tobacco-Free Finance Pledge. In 2018, it was launched at a United Nations side event in 2018 by Tobacco Free Portfolios, an NGO. Now, it counts more than 160 financial institutions, with combined assets exceeding $11 trillion, among its signatories.

But the right question is not whether tobacco exclusion is niche. It is not. The question is whether it has been powerful enough to restrict the industry’s access to capital. It has not. 

Take the Tobacco-Free Finance Pledge, for example. The Pledge carries no regulatory obligation, and many institutions screen out tobacco without signing it at all. More fundamentally, the signatories represent a fraction of the more than $100 trillion managed globally.

The majority of capital worldwide—particularly across Asia-Pacific and North America—has made no such commitment. Shares of BAT, Altria, and Philip Morris International still trade at combined market capitalizations in the hundreds of billions. They still sit inside major global indexes and still attract institutional investors who prize steady dividends over moral scorekeeping. More than four decades after organized tobacco exclusion began, the industry retains access to abundant, relatively cheap capital.

Case Study: Indonesia’s tobacco paradox, where the two materialities sit furthest apart

Indonesia is the only country in Asia that has neither ratified nor signed the WHO Framework Convention on Tobacco Control. It is quite a staggering reality, when the instrument is adopted by nearly 180 countries covering 90% of the world’s population. 

Research from the University of Indonesia estimates some 61.4 million active and passive smokers nationwide. It also estimates 17.9 trillion to 27.7 trillion IDR of tobacco-related health costs in a year, which far exceeds the excise revenue earmarked for health. Indonesia’s Ministry of Health projects even bigger numbers. The treatment costs for tobacco-related disease run roughly three times higher than the excise revenue the state collects, with macroeconomic losses approaching 600 trillion IDR annually.

On the financial side, Indonesian regulation functions as a shield, not a threat. Indonesia’s lowest excise tariff runs to about 483 IDR per cigarette—less than 70% of the retail price WHO recommends. And each time the government has raised excise taxes aggressively, the market has shifted toward downtrading into cheaper or illicit brands. So, higher prices have repeatedly failed to reduce consumption as intended.

Tobacco’s Reputational Detour

If internalizing externalities is the only path that truly narrows the gap, tobacco companies have spent considerable energy on a cheaper substitute. Rather than closing it, they choose to manage how the gap looks. 

The industry is a prolific practitioner of greenwashing and socialwashing. Companies crowd their sustainability reports with harm-reduction pledges, biodiversity partnerships, farmer-livelihood programs, and circular-economy pilots even as combustible cigarettes remain the overwhelming source of revenue.

“The tobacco industry is increasingly using actions related to environmental and sustainability claims to mask the damage it causes,” FCTC COP10 (2023) formally noted.

The hope behind these efforts is transparent: a reputational facelift. More specifically, it is one aimed at investors and rating agencies that translates into easier capital access and friendlier ESG index treatment—all feeding back into financial materiality itself. And so the tobacco paradox remains.

A Matter of Assurance 

That strategy persists partly because assurance remains a soft constraint. Much of what tobacco companies disclose is assured voluntarily. On that note, where assurance exists, it is often about merely stating they may be unaware of misstatements, rather than affirmatively vouching for the data. Investors cannot price risks they cannot fully verify.

This is where the International Standard on Sustainability Assurance 5000 comes in. It was issued by the IAASB as the first comprehensive, profession-agnostic global baseline for sustainability assurance, taking effect for reporting periods beginning December 15, 2026. The ISSA 5000 must be applied with genuine rigor—not phased in gently through limited-assurance exemptions—if corporate disclosures are ever to be stripped of the greenwashing and socialwashing that currently let a devastated impact story coexist so comfortably with an intact financial one.

No Exception Is the Real Condition

A financial-materiality signal strong enough to push mainstream investors genuinely out of tobacco will appear only when the industry’s externalities are fully internalized into its own cost structure. That requires a collective settlement far broader than investor commitments alone. 

It would mean regulators raising excise taxes toward WHO’s benchmark and enforcing them without tolerance for illicit trade. It would also require health and insurance systems that stop subsidizing tobacco’s disease burden through public budgets. No less importantly, it needs domestic financial sectors that begin genuinely pricing those externalities into credit and portfolio decisions. It would also, fundamentally, require governments that ratify the FCTC and implement Article 19. These provisions, reinforced at both COP10 (2023) and COP11 (2024), call on governments to make the tobacco industry financially responsible for the costs of harm it causes through levies, surcharges, and cost-recovery mechanisms beyond excise taxes.

The deeper issue is not profit. Corporations are legally required to pursue returns—that is neither scandalous nor surprising. The scandal is in complicity. It is in governments that keep excise taxes low for fiscal convenience; banks and pension funds that hold tobacco debt and equity while their clients pay the consequences in hospital bills; and assurance bodies that accept limited-scope sustainability reports as adequate. 

Ultimately, the tobacco paradox relies on a system that, year after year, prices the cigarette without pricing the death. Tobacco companies continue to kill under the carefully maintained cover of harm-reduction rhetoric and sustainability cosmetics. Until every link in that chain refuses to absorb a cost that rightfully belongs to the industry, the answer to the question this essay began with will remain embarrassingly simple: the deadliest industry stays the most profitable because, collectively, we keep letting it be.

The author wishes to express deepest gratitude for the invaluable and insightful feedback provided by Deborah K. Sy of the Good Governance in Tobacco Control (GGTC) on the initial draft of this article.

Editor: Nazalea Kusuma