Philip Morris International Charts Path to ESG Stock
At Philip Morris International, there is a conscious effort to become a stock that prioritizes environmental, social, and governance (ESG) principles. The cigarette maker is making this move as part of an effort to regain investors who have shunned tobacco exclusion policies. Jacek Olczak, Philip Morris International’s CEO, argued that the shift towards less harmful nicotine alternatives is positioning the company among ESG stocks.
Olczak hinted that there have been positive movements made towards engaging with the investor relations team, although there is no clear indication yet of which funds may be reconsidering their exclusion policies. He also emphasized that part of his long-term pay is now tied to ESG targets.
ESG investing is growing in popularity, with the segment becoming the fastest-growing in the asset management industry. While there is no set guideline for ESG criteria, there is a general belief that the practice can align investment values with broader environmental, social and governance concerns.
Philip Morris International is a leading cigarette manufacturer, selling about 621 billion cigarettes globally each year, and accounts for about a third of revenue from vapor-based nicotine alternatives. It is aiming for half its revenue to come from lower-risk products by 2025, propelled primarily by its heated tobacco product, IQOS. Nevertheless, analysts predict that PMI may fall below the 50% mark by a small margin.
Impact of ESG Criteria on Tobacco Companies
Despite Philip Morris International’s shift towards ESG principles, the tobacco industry faces significant challenges arising from the general perception of tobacco as a sector that disregards environmental, social, and governance principles. ESG policies have caused asset managers such as Robeco, Candriam, Aviva, and Scottish Widows to sell billions of dollars worth of tobacco stock in their actively managed funds.
In response to PMI’s move into less harmful nicotine alternatives, according to Gaurav Jain, a tobacco analyst at Barclays, it has the best ESG transition narrative in the industry. However, Jain adds that ESG funds’ criteria have a high bar for entry, and there is still a long way to go before the sector can convince investors that tobacco companies can achieve a net positive for global society.
Traditional Exclusion vs. Pledge Divestiture
With regards to ESG criteria, investors may select between traditional exclusion screening or pledge divestiture. The traditional exclusion approach involves divesting from “dirty companies” like tobacco and defense firms, whereas pledge divestiture entails investing in these companies and influencing their transformational process. According to Olczak, the latter approach’s school of thought is gaining traction. It allows the investors to impact where the asset goes.
Challenges with ESG Criteria
There are several challenges involved in setting ESG criteria, including a lack of a universal, objective, and rigorous framework. In Europe, asset managers contend that the new EU rules for sustainable investment classification are unworkable. The EU is worth Euros 282 billion, prompting the European Commission to factor in discarding a significant part of its flagship initiative for the market.
Exploring ESG Investment in the Energy Sector
The energy sector is one of the most critical sectors to undergo significant transformation for achieving net-zero emissions, but there are significant challenges related to ESG criteria in the sector. At present, the ESG-related criterion for the energy sector is only about an energy company’s carbon footprint and the extent to which it contributes to climate change. The lack of broader ESG criteria makes it challenging to change the entire business process and tackle aspects such as environmental degradation and labor laws.
Philip Morris International’s 2025 Vision
Philip Morris International’s 2025 vision aims to derive half its revenue from lower-risk products, primarily that of its heated tobacco product, IQOS. The company acquisitioned Vectura in 2021 with the aim of achieving $1 billion in annual revenue from health and wellness products by 2025. However, Olczak stated that the target seems unlikely, thanks to the avoidance of Vectura by its customers due to PMI’s acquisition of the firm.
ESG Investment as a Growing Trend
ESG investment is becoming an increasingly popular trend in the asset management industry. The ESG segment continues to advance, with various methods that range from the negative screening approach of removing specific sectors to the positive screening approach, where sectors like clean energy are chosen. These strategies cater to positive social goals and environmental change, and any investor integrating these practices could change their preference either to a “negative” or “positive” cleaner investment.
Conclusion
Philip Morris International’s shift towards environmental, social, and governance (ESG) principles is positioning the company among ESG stocks in an effort to attract investors who have shunned tobacco exclusion policies. The lack of a widely accepted ESG framework could pose challenges.
While ESG investing is becoming increasingly popular in the asset management industry, the tobacco industry remains challenged by the sector’s perception of being disregardful of ESG concerns. Philip Morris International’s 2025 vision aims to derive half its revenue from lower-risk products, primarily from IQOS. It also previously set a goal of achieving $1 billion in annual revenue from health and wellness products by 2025 through the acquisition of Vectura, which may appear questionable due to customers’ avoidance of the inhaler product from the new owners.
Overall, this growing trend offers opportunities for both cleaner investment prospects and challenges to vulnerable companies. Managers must weigh and navigate plausible options for inclusion or exclusion, and pledge or divestment while navigating various ethical and financial considerations to enhance investor satisfaction.
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The Philip Morris International chief executive says the Marlboro cigarette maker is charting a path to becoming an ESG stock as part of a push to win back investors who have shunned the stock due to tobacco exclusion policies.
PMIthe move away from cigarettes towards less harmful vapor-based alternatives to nicotine, which accounted for about a third of its revenues last year, has placed the tobacco group’s new product line “on the podium” in terms of environmental, social and and governance, argued Jacek Olczak.
ESG mandates have prompted European asset managers, including Robeco and Candriam, and UK pension funds managed by Aviva and Scottish Widows, to sell billions of dollars worth of tobacco stock in their actively managed funds in recent years.
Speaking to the Financial Times, Olczak said there had been an attempt at re-engagement by some funds, including one-on-one meetings with PMI’s investor relations team, though he didn’t specify which ones.
“I’m not saying they are building a position in Philip Morris. . . but wealth managers won’t spend the time talking to you if they don’t have in mind that a day is coming they should reconsider exclusion [policy],” he said.
When asked if he believed PMI could be classified as an ESG stock in the future due to its move away from cigarettes, Olczak replied, “I think so.”
Cigarettes are the leading cause of preventable death globally. PMI sold 621 billion cigarettes globally last year, benefiting from growth in less regulated markets such as Indonesia, Turkey and Egypt, but the tobacco group aims to derive half of its revenues from products judged to be lower-risk by 2025, driven largely by the success of its IQOS heated tobacco stick.
However, analysts expect the PMI to fall below the 50% figure by a few percentage points.
Olczak admitted that a separate goal of making $1 billion in annual revenue from health and wellness products by 2025 was “questionable” due to customers of Vectura, which PMI bought in 2021, avoiding the inhaler company a because of its new owners. That division’s PMI revenues stood at just $271 million last year.
Olczak stressed that 10% of his long-term pay was now tied to ESG targets, but railed against ESG conventions that had frozen the PMI in recent years.
In relation to its products, it said PMI has been “at the forefront of methodology reporting. . . on transparency and materiality assessment,” but acknowledged that other areas such as child labor in tobacco supply chains hurt PMI’s ESG rating.
ESG investments it is now the fastest growing segment of the asset management industry. The term has come to represent a range of approaches to investing: from negative screening (removing sectors such as tobacco, defense or fossil fuels) to positive screening (choosing sectors such as clean energy), to less defined strategies that push for positive social goals or environmental change.
For years, many banks and investors across Europe have refused to back tobacco and defense companies, claiming it went against their ESG policies. However, U-turns are possible: Russia’s full-scale invasion of Ukraine, for example, has sparked a debate about the social utility of armaments, and some investors, including Sweden’s SEB, have revised their position on investments in defense companies.
There is also an ongoing debate as to whether pledging or divestiture is the best way to clean up “dirty” companies, particularly in the energy sector transitioning to net-zero emissions. “There’s a different school of thought that’s also gaining traction, which is that if you exclude, you abdicate the ability to impact where the asset goes, where the company goes,” Olczak said.
The challenges of setting ESG criteria are compounded by the fact that there is no universal, objective and rigorous framework. In Europe, where the ESG movement is more advanced, asset managers complain that new EU rules for classifying sustainable investments are unworkable, prompting the European Commission to consider junking a key part of its flagship initiative for the market worth 282 billion euros.
Gaurav Jain, tobacco analyst at Barclays, said PMI “has the best kind of ESG transition narrative in the industry” thanks to its drive towards reduced-risk products with IQOS and its $15.7 billion acquisition by 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 way to go before they can convince many people that this is a net positive for global society” .
https://www.ft.com/content/99901b48-8c58-407d-af90-5fab9a883ae0
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