05/06/2023 09:57 Philip Morris on path to becoming an ESG stock, says chief executive | Financial Times

Philip Morris International Inc

Philip Morris on path to becoming an ESG stock, says chief executive
Jacek Olczak argues that shift away from cigarettes should prompt a rethink after wave of exclusionary
policies

Jacek Olczak: ‘The asset managers will not spend the time on talking with you, if they don’t have in mind that one day is coming
that they should reconsider the exclusion [policy]’ © Darrin Vanselow/FT

Oliver Barnes and Harriet Agnew in London MAY 30 2023

The chief executive of Philip Morris International says the maker of Marlboro
cigarettes is charting a path to becoming an ESG stock as part of a push to win
back investors that have shunned the stock because of tobacco exclusion policies.

PMI’s pivot away from cigarettes towards less harmful vapour-based nicotine
alternatives, which accounted for about a third of its revenues last year, placed the
tobacco group’s new product line “on the podium” when it came to environmental,
social and governance impact, argued Jacek Olczak.

ESG mandates have prompted European asset managers including Robeco and
Candriam, and UK pension funds run by Aviva and Scottish Widows, to sell off
billions of dollars worth of tobacco stocks in their actively managed funds in recent
years.

Speaking to the Financial Times, Olczak said there had been tentative re-
engagement from some funds including one-to-one meetings with PMI’s investor
relations team, although he did not specify which ones.

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05/06/2023 09:57 Philip Morris on path to becoming an ESG stock, says chief executive | Financial Times

“I’m not saying that they are building a position in Philip Morris . . . but the asset
managers will not spend the time on talking with you if they don’t have in mind
that one day is coming that they should reconsider the exclusion [policy],” he said.

When asked if he believed that PMI in the future could be classified as an ESG
stock because of its push away from cigarettes, Olczak responded: “I think so.”

Cigarettes are the leading cause of preventable death globally. PMI sold 621bn
cigarettes worldwide last year — benefiting from growth in less regulated markets
such as Indonesia, Turkey and Egypt — but the tobacco group has a target to derive
half of its revenues from products judged to be of reduced risk by 2025, driven
largely by the success of its IQOS heated tobacco stick.

However, analysts expect PMI to fall short of the 50 per cent figure by a few
percentage points.

Olczak admitted that a separate target to derive $1bn of annual revenues from
healthcare and wellness products by 2025 was “questionable” due to clients of
Vectura, which PMI bought in 2021, shunning the inhaler company because of its
new owners. PMI revenues from that division stood at just $271mn last year.

Olczak pointed out that 10 per cent of his long-term pay was now linked to ESG
targets, but he railed against the ESG conventions which had frozen PMI out in
recent years.

In relation to its products, he said PMI was “on the forefront of the reporting on
the methodology . . . on the transparency and on the materiality assessment”, but
he acknowledged that other areas such as child labour in tobacco supply chains
harmed PMI’s ESG rating.

ESG investing is now the fastest-growing segment of the asset management

industry. The term has come to represent a range of approaches to investment:
everything from negative screening (removing sectors such as tobacco, defence or
fossil fuels) to positive screening (picking sectors such as clean energy), to less
defined strategies that push for positive social or environmental change.

For years, many banks and investors across Europe refused to back tobacco and
defence companies, arguing that it went against their ESG policies. However, U-
turns are possible: Russia’s full-scale invasion of Ukraine, for example, prompted a
debate on the social utility of armaments and some investors, including Sweden’s
SEB, overhauled their stance on investing in defence companies.

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05/06/2023 09:57 Philip Morris on path to becoming an ESG stock, says chief executive | Financial Times

A debate is also raging on whether engagement or divestiture is the best way to

clean up “dirty” companies, notably in the energy sector as it undergoes a
transition to net zero emissions. “There is a different school of thought which is
also gaining more and more traction, which is if you exclude, you abdicate from the
ability to impact where the asset, where the company will go,” said Olczak.

The challenges around defining ESG are compounded by the fact that there is no
universal, objective, rigorous framework. In Europe, where the ESG movement is
more advanced, asset managers are complaining that new EU rules to classify
sustainable investments are unworkable, prompting the European Commission to
consider junking a key part of its flagship initiative for the €282bn market.

Gaurav Jain, a tobacco analyst at Barclays, said PMI “has the best sort of narrative
around ESG transition in the sector” thanks to its push into reduced risk products
with IQOS and its $15.7bn acquisition of nicotine pouch maker Swedish Match last
year.

But he added that “the bar at which ESG funds will start looking at the sector is
very high”, arguing that “they still have a long journey to travel before they can
convince a lot of people that this is a net positive to global society”.

Copyright The Financial Times Limited 2023. All rights reserved.

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