Towards Becoming an ESG Stock
Philip Morris International (PMI), the renowned manufacturer of Marlboro cigarettes, stands at a crossroads. The company is embarking on an audacious journey to transform its image from a traditional tobacco giant to a progressive entity worthy of ESG (Environmental, Social, Governance) stock classification. This ambitious shift is driven by a strategic pivot away from cigarettes towards less harmful, vapor-based nicotine alternatives, a bold move that accounted for approximately one-third of its revenue in the previous year. The goal? To put PMI on the environmental, social, and governance podium, thereby changing the narrative around the company’s societal impact and winning back investors who stringent tobacco exclusion policies have driven away.
Re-engaging Investors: One Conversation at a Time
PMI’s vision is not merely a pipe dream. The company’s investor relations team has been involved in focused engagements with various funds. Although specifics on the funds involved are not public, the fact that these conversations are taking place indicates that the financial community is open to a tobacco company potentially evolving into an ESG stock.
Transitioning Away from Cigarettes: A Strategic Decision
Given the grave health consequences associated with smoking, PMI’s pursuit of reduced-risk products is timely and strategic. The company sold a staggering 621 billion cigarettes globally last year, fueled mainly by growth in less regulated markets like Indonesia, Turkey, and Egypt. Despite this, PMI has set a target to derive 50% of its revenues from reduced-risk products by 2025, a goal-driven mainly by the success of its IQOS heated tobacco stick.
However, the path toward transformation is not without challenges. PMI’s separate target to achieve $1bn in annual revenues from healthcare and wellness products by 2025 appears doubtful. This is due to the resistance from clients of Vectura, an inhaler company PMI purchased in 2021, whose revenues stood at a mere $271 million last year.
Tackling ESG Challenges Head-On
Despite these hurdles, PMI’s commitment to ESG principles is unwavering. Evidently, 10% of CEO Jacek Olczak’s long-term pay is linked to ESG targets, underscoring the company’s determination to integrate ESG principles into its business operations. The company is also making strides in improving transparency and methodology in product reporting while acknowledging areas of improvement, such as addressing child labor in tobacco supply chains, which currently affect PMI’s ESG rating.
The ESG Investment Landscape: A Paradigm Shift
ESG investing has emerged as the fastest-growing segment of the asset management industry, encompassing a spectrum of investment strategies. These range from the negative screening of sectors like tobacco and fossil fuels to positive screening of sectors like clean energy and initiatives promoting social or environmental change.
Over the years, many European banks and investors have eschewed tobacco and defense companies, arguing they contravene ESG policies. However, recent global events have sparked debates around the social utility of specific sectors, leading to shifts in investment stances. This dynamic nature of ESG investing presents opportunities and challenges for companies like PMI.
The Road Ahead: A Long but Necessary Journey
PMI’s journey toward becoming an ESG stock is not a sprint but a marathon. The company’s push into reduced-risk products like IQOS and its substantial $15.7bn acquisition of nicotine pouch maker Swedish Match last year has positioned it favorably in the sector. However, it’s essential to acknowledge that the bar for ESG funds to reconsider the tobacco sector is exceedingly high. PMI still has a considerable distance to travel before convincing stakeholders of its positive societal impact.
The Changing Face of ‘Dirty’ Companies: Engagement or Divestiture?
The evolution of PMI also brings to light a critical debate in the investment world: engagement or divestiture. Is engaging with ‘dirty’ companies more effective and influencing them towards cleaner practices, or should investors divest from these companies? This debate is particularly relevant in the energy sector’s transition to net-zero emissions, where the exclusionary approach can strip investors of the ability to influence the company’s direction.
Navigating the ESG Landscape: A Lack of Universal Framework
The journey toward ESG classification is even more challenging due to lacking a universal, objective, and rigorous ESG framework. In Europe, where the ESG movement is more advanced, asset managers grapple with new EU rules for classifying sustainable investments, deemed unworkable by some, leading the European Commission to consider significant changes to its flagship initiative for the €282bn market.
PMI’s ESG Transformation, A Marathon Worth Running
In conclusion, as Philip Morris International continues to blaze the trail toward becoming an ESG stock, it is clear that the journey will be demanding. The company must balance its strategic goals with the evolving landscape of ESG investing, the high expectations of ESG funds, and the varying definitions and standards of ESG metrics. However, if successful, PMI’s transformation could redefine the narrative around the tobacco industry and perhaps even serve as a blueprint for other companies embarking on a similar path.