Both the tobacco and oil and gas industries face a similar quandary right now - they are generating lots of cash from activities which many perceive as being unethical and damaging, but their transitions into other areas are currently not offering anywhere near the same levels of return. 

This matters to anyone who has meaningful exposure to the UK market in their portfolio, say through a FTSE 100 tracker, as well as those who invest directly in these sectors. Combined they have a weighting of around 15% in the UK’s flagship index.  

For BP (BP.) and Shell (SHEL), both under relatively new leadership in the form of their respective CEOs Murray Auchincloss and Wael Sawan, there has been a clear move to water down commitments to a transition.

Their underperformance compared with their US peers, who have openly dismissed a move into renewables in favour of a continuing focus on oil and gas and complimentary areas like carbon capture, speaks far louder than regulatory and political pressure to accelerate their move out of oil and gas.

BP looks more in need of a plan, with reports suggesting Auchincloss is set to ditch a pledge to reduce oil and gas output by 25% by 2030 (this target had already been reduced from an initial 40% when it was outlined in 2020).

Fine, you can stop doing what the market doesn’t like, but that’s not a strategy in itself.

Shell at least has had a long-term focus on gas which some believe can play an important role as the world weans itself off more polluting fuels like crude oil and coal, and this is reflected in the outperformance of its shares.

In tobacco, Imperial Brands (IMB) posted an encouraging year-end trading update on 8 October which showed strong growth in so-called NGPs (next generation products) like e-cigarettes and vapes.

However, like BP and Shell it is the company’s bread and butter of selling cigarettes which generates all the cash to finance the big dividends and buybacks which are a key attraction for so many investors.

NGPs still account for a relatively modest, albeit growing share of revenue and remain a loss-making activity.

It’s easy to lose sight of the fact, amid the recent doom and gloom around the UK economy and London market, that it has a large number of excellent smaller businesses which often don’t get the attention from the market which they deserve. We’re doing a bit to redress the balance in our main feature this week, drawing on our knowledge and experience to highlight three names and hearing from fund managers about the companies which are getting them excited.

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