BYD Exits E-cigarette Business With Investors Worry About ESG Appeal

Key points:

1. The Asian Corporate Governance Association (ACGA) has reported that the Chinese electric car manufacturer BYD has exited the electronic cigarette business.

2. Investors were concerned about how the electronic cigarette business will affect BYD's ESG (environmental, social, and governance) attractiveness. The new regulations from the European Securities and Markets Authority (ESMA) prohibited ESG funds from investing in the tobacco industry, which could result in BYD being excluded.

BYD did not issue a formal response, citing that the business segment had a relatively minor impact.

Nana Li, responsible for sustainable development and governance in the Asia-Pacific region of the Asian Corporate Governance Association, announced on LinkedIn that the BYD has ceased operations in the electronic cigarette business, Responsible Investor reported.

She said the dialogue began in 2023, with BYD engaging with 20 institutional investors from the ACGA, a group co-led by Li and Karine Hirn, chief sustainability officer at East Capital.

Li said that BYD's electronic cigarette business has always been one of the key topics of discussion, and this business is operated by its subsidiary BYD Electronics, of which she owns 66% of the shares. 

Investors' concern regarding this business lies in the fact that it could decrease BYD's attractiveness among investors interested in ESG issues. 

This problem is particularly important after the implementation of new regulations by the European Securities and Markets Authority (ESMA), in which funds that contain in their name terms related to ESG or other sustainability keywords are prohibited from investing in companies in the tobacco or arms industries.

According to the report in June from investment research firm Morningstar, BYD is one of the top ten stocks in ESG funds with high exposure to financial risks, these stocks must be divested to comply with ESMA regulations. 

Data indicates that there are 94 ESG funds that hold BYD stocks, with a cumulative risk exposure of $835 million. Morningstar points out that BYD's tobacco business is one of the possible reasons that could lead to its exclusion according to admission rules.

In July, ACGA sent a letter to BYD explaining how ESMA rules would affect the investment capacity of European ESG funds in the company. 

Li announced that in October, ACGA learned that BYD had decided to withdraw from the electronic cigarette business, and BYD did not respond to the request for comments.

Li said: "Subsequently, we sought formal confirmation from BYD regarding this development. 

“However, the company has been hesitant to acknowledge it, citing the relatively minor impact of this business segment despite its significance to certain investors, who may need to divest their BYD shares under the new ESMA regulations if this change did not occur by the end of last year."