Philip Morris International’s chief executive says that the company, which makes Marlboro cigarettes, is on a journey to become an ESG stock in order to win back investors who have avoided the stock due to tobacco exclusion policies.
PMI’s pivot from cigarettes to less harmful vapour based nicotine alternatives accounted for around a third in its revenues last fiscal year. This put the new product line of the tobacco group “on the podium” with regards to environmental, social, and governance impacts, Jacek Olczak argued.
ESG mandates have led European asset managers such as Robeco and Candriam and UK pension funds managed by Aviva and Scottish Widows to sell billions of dollars of tobacco stocks from their actively-managed funds in the past few years.
Olczak stated that there was tentative reengagement by some funds, including one-toone meetings with PMI’s investor relations team. However, he did specify which funds.
“I don’t say that they are building up a position at Philip Morris. . . “But the asset managers won’t spend time talking to you if they aren’t thinking that one day they will have to reconsider their exclusion [policy],” said he.
Olczak replied, “I believe so,” when asked if PMI could in the future be classified as a ESG stock due to its move away from cigarettes.
The leading cause of death worldwide is smoking. PMI sold more than 621 billion cigarettes in the world last year, largely due to growth in markets with less regulation, such as Indonesia and Turkey. But the tobacco company has set a goal to generate half its revenue from products that are deemed to have a reduced risk, by 2025. This is mainly driven by the success achieved by its IQOS heated stick.
Analysts expect PMI to be a few points short of 50 percent.
Olczak acknowledged that the separate goal of generating $1bn in annual revenue from healthcare and wellness product by 2025, was “questionable”, due to Vectura clients, who, after PMI purchased Vectura in 2021 shunned the inhaler manufacturer because of their new owners. PMI’s revenues in that division were just $271mn.
Olczak noted that 10% of his long-term salary was now tied to ESG goals, but he attacked the ESG conventions for freezing out PMI in recent years.
He said that PMI “was at the forefront” of reporting on methodology in relation to its products. . . He acknowledged that PMI’s rating was negatively affected by other factors, such as the child labour involved in the tobacco supply chain.
ESG investment has become the fastest growing segment in the asset management industry. The term is now used to describe a variety of investment strategies: from negative screening, which excludes sectors like tobacco, defence and fossil fuels to positive screening, which includes sectors such as clean energies.
Many banks and investors in Europe have refused to support tobacco and defense companies for years because it was against their ESG policy. But U-turns can be made: Russia’s invasion of Ukraine, which was a full-scale invasion, led to a debate about the social utility and value of armaments. Some investors, such as Sweden’s SEB re-evaluated their investment stance in defence companies.
There is also debate about whether divestiture or engagement is the best option to clean up “dirty” companies. This is especially true in the energy industry, which is undergoing a transition towards net zero emissions. “There’s a new school of thought that is gaining traction. It says that if you exclude you lose the power to influence where an asset or company goes,” said Olczak.
There is no uniform, objective and rigorous framework for defining ESG. This makes it even more difficult to define. Asset managers in Europe, where ESG is more developed, complain that the new EU rules for classifying sustainable investments are not workable. This has led the European Commission, which oversees the EUR282bn ESG market, to reconsider a major part of the flagship initiative.
Gaurav Jain is a tobacco analyst with Barclays. He said PMI has the “best sort of narrative” around ESG in the sector, thanks to its push for reduced-risk products through IQOS, and its $15,7bn acquisition last year of Swedish Match, a maker of nicotine pouches.
He added that the “bar at which ESG fund will begin looking at this sector is very high”, and that they “still have a long way to go before they can convince many people that this is net positive for global society”.