PMI, the company behind Marlboro, is hoping to attract investors by upgrading their Environmental, Social and Governance (ESG) rating through targeted shifts in their products and strategies.
Many tobacco exclusion policies have cost Philip Morris a number of investors. Ranging from the Scottish Widows Pension Fund to Carmignac, Allianz, and Robeco, tobacco exclusion policies are making tobacco companies bleed money. PMI is determined to do anything it can to overcome it.
Straying away from cigarettes towards nicotine vapour-based products put Philip Morris on the ESG “podium”, according to the CEO. Despite selling over 621 billion cigarettes in the past year, profiting from sales in less regulated markets where demand is high – including Indonesia, Turkey and Egypt – one-third of PMI’s revenue was constituted by vapour-based nicotine alternatives. Indeed, its IQOS stick had almost 25 million users in 2022.
IQOS, standing for “I Quit Ordinary Smoking”, is a type of heated tobacco system. IQOS is designed as an alternative to traditional cigarettes and uses a heating element to heat tobacco instead of burning it.
Pushing and promoting the sale of products other than cigarettes could classify Philip Morris as an ESG stock, at least according to Olczak, who shared his thought with FT.
Indeed, he insisted that certain funds have held several meetings with PMI’s investor relations team, meetings that would not take place if these funds did not anticipate an upcoming changing tide with regard to Philip Morris’ stature as an ESG stock:
“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].”
Are alternative products going to cut it?
Although cigarettes are the primary cause of preventable death and diseases worldwide, multi-coloured, flavoured nicotine sticks are not much better for our health according to medical experts, and governments think so too.
Although vaping and smoking cigarette alternatives are somewhat safer, they are still causing significant health damage. Indeed, the Centers for Disease Control and Prevention (CDC) confirmed in February 2020 that there had been 2,807 cases of “e-cigarette or vaping use-associated lung injury (EVALI) and 68 deaths attributed to that condition”.
Additionally, the relatively new product has not been around long enough to measure its long-term effects, which could be as catastrophic as those of regular cigarettes.
Countless health warnings have been made to prevent the new wave of nicotine addiction, fuelled by flavours and colours.
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To combat the plague, the UK government is considering implementing new regulations around the distribution of e-cigarettes. Although it is illegal to sell e-cigarettes to minors, the Royal College of Paediatricians and Child Health suggest that 15% of 11 to 15-year-olds already use vapes.
Prime Minister Rishi Sunak and other ministers are calling for bans on single-use vapes that contain an array of harmful chemicals, announcing that there will also be restrictions on children-targeted marketing and the distribution of nicotine-free samples to under-18s (which contain the same colourful range of chemicals and toxins).
In Australia, earlier this month, a ban was enacted on all vapes except for prescription ones to deter their usage among children. Importation and sale of vapes, regardless of whether or not they contain nicotine, will be banned unless sold with a prescription by a licensed pharmacist.
Flavours and pretty colours will also be abandoned to deglorify the practice of smoking, a move that should serve as an example to many other countries.
“Just like they did with smoking […] ‘Big Tobacco’ has taken another addictive product, wrapped it in shiny packaging and added sweet flavours to create a new generation of nicotine addicts,” says Australia’s Health Minister Mark Butler
Philip Morris: What about the “S” in ESG?
The unanswered question remains, will a shift to different addictive and dangerous products bring Philip Morris across the invisible line to be considered an ESG stock and welcome back all of its previous investors to further fuel the nicotine plague?
As mentioned in the FT interview, “The challenges around defining ESG are compounded by the fact that there is no universal, objective, rigorous framework.” This appears to leave the door open for a tobacco company like Philip Morris to somehow attempt to fit within an unexisting framework.
It would have to remove harmful investments such as in fossil fuels or defence (but that is not its sector), or increase investments in clean energy (but that is not what it says it’s doing), or push for positive social change (that is what it says: that vaping is better than tobacco, indeed, that it is somehow “good”).
However, the door is not open to play around with the ESG concept. It has had plenty of time to develop to maturity and gain universal acceptance, having been around for the better part of fifty years, evolving from the earlier concept of socially responsible investing (SRI) that had emerged in the 1960s and 1970s in response to the Vietnam War, the civil rights movement, and the apartheid in South Africa.
It was first explicitly mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI) report, with ESG criteria required to be incorporated in the financial evaluations of companies and used as a basis for sustainable investment.
By now, ESG has gone fully mainstream and some of the best, most authoritative and comprehensive definitions of ESG come from sources such as The Harvard Law School Forum on Corporate Governance, McKinsey & Company, Corporate Finance Institute, Deloitte US and Market Business News.
There is little doubt that investors and shareholders have a fairly clear definition of ESG in mind. As a result, tobacco companies like Philip Morris are facing very real obstacles to convince their investors that they are ESG-compliant.
Gaurav Jain, a tobacco analyst at Barclays, argues that PMI has the best “narrative around ESG transition in the sector” through its sales and acquisition strategy, but they still have a long road ahead before it “can convince a lot of people that this is a net positive to global society.”
Whether or not Philip Morris will obtain the necessary qualifications to join the club cannot be predicted. Nonetheless, smoking, regardless of what shape, packaging or flavour it comes in, is harmful and dangerous.
To allow a company producing and promoting any tobacco and nicotine devices to be considered ESG would be a surprise, to say the least – if not downright immoral. As long as smoking and vaping are a proven threat to public health, there is not way that a tobacco company can be compliant with the “S” in ESG.
Editor’s Note: The opinions expressed here by the authors are their own, not those of Impakter.com — In the Featured Photo: Cigarette buds. Featured Photo Credit: Pawel Czerwinski