DELIVERING A SMOKE-FREE FUTURE

Progress toward a world
without cigarettes
INTEGRATED REPORT 2019

Philip Morris International Integrated Report 2019

PMI’s response
to COVID-19
In the last decade, thesustainable business agenda
has advanced in many ways
but one of the most remarkable
shifts has been the growing
focus on solutions — not only
understanding what issues
matter and why but also
how the private sector canaccelerate positive change andhelp communities in need.

Megatrends are significant developmentsthat shape our lives. In contrast to normal
trends, their effects are stronger, theirduration longer, and their scale larger. They
have had and continue to have important
impacts on our lives. We refer later in thisreport to the ongoing megatrends that pose
undoubtedly serious challenges to mankind
and call for the urgent need for change –the need for sustainable development.
Although COVID-19 caught the world
off-guard, global pandemics were,are, and will continue to be a looming
threat and megatrend. Sustainability will
redefine itself in the COVID-19 era, as
times of extraordinary change require
urgent adaptation. The pandemic hasforced us to adapt some of our projects,
but has also pressed us to make suresustainability is truly connected todelivering value to all our stakeholders.
PMI has been actively working against
this pandemic since its outbreak, withongoing and planned initiatives in morethan 60 countries where our employees
live and work. These initiatives involvemonetary and in-kind donations, aswell as volunteer work by teams to
support local efforts to combat the virus
and help those most affected by it.
The company’s activities include
providing protective equipment to trade
partners, support to care communities,
procurement support to purchase items
essential in the fight against COVID-19,
and financial support to institutions andnongovernmental organizations (NGOs)
working to end this crisis. As of the endof May 2020, PMI has provided morethan USD 31 million in financial and inkind donations, very often in response torequests for assistance from government
authorities. In addition, our employees inmany countries are volunteering to help
the elderly, as well as the most vulnerable.

Repurposing our value chain to better
respond to the crisis is a tangible
example of PMI’s transformation.
We are aware of significant supply
disruptions for alcohol-based handsanitizers, due to an increased demandduring the COVID-19 pandemic. We
temporarily repurposed parts of ourfactories around the world to produce large
quantities of hydroalcoholic gels (handsanitizer), distributed primarily to local
hospitals and vulnerable communities, tohelp mitigate the spread of coronavirus.
Scientists from the Genomics andTranscriptomics laboratory at PMI’s R&D
Cube in Neuchâtel helped local hospitals toanalyze inactivated nasopharyngeal swab
samples from suspected COVID-19 patientsusing the World Health Organization’s(WHO’s) recommended RT-qPCR protocol.
The work was performed respecting thesafety measures under the Biosafety Level
2 and WHO Good Clinical Laboratory
Practices. The anonymized raw data wasthen transmitted to the hospitals forinterpretation. The batches of samples
will continue to be analyzed at PMI’s R&D
Cube until hospitals are able to cope withcurrent high demand for COVID-19 testing.
PMI’s commitment to its employees
is an integral part of the company’s
broader response during the COVID-19
crisis across the world. The company
established a set of guiding principles
that outline our strong commitment toour employees’ job security, safety, andpeace of mind throughout the global
pandemic period, by guaranteeing
employment and financial stability, as wellas granting special recognition awards.

PMI will continue to contributeto the global response tothis pandemic in every way
we can. First and foremost,
we will continue to support ouremployees and their families,
and protect their safety andhealth. Nothing matters more.
André Calantzopoulos
Chief Executive Officer, PMI

Overview

Innovating for
better products

Aboutthis report
In line with our commitment totransparency and disclosure, we arepleased to share our first integrated
report, our fifth Sustainability Disclosure,which follows our last sustainability reportpublished in May 2019. Its contents areshaped by a formal materiality assessment,
refreshed in 2019, which takes into accountstakeholder perspectives as well as our
impacts on sustainable development.
Our sustainability topics are structured
around four strategic pillars of action
and two tiers, which form the basisof our reporting (see page 25).
For each tier 1 topic, this report provides
information on context, relevance, topic
connectivity, management approach,targets, and performance. Additional
detail is provided in case studies to allow
closer analysis of how we integratesustainability at country level. We
report on our tier 2 topics in an online
supplement to this report on PMI.com.

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

This report has been prepared inaccordance with the GRI Standards: Core
option. Our GRI Index can be found on our
corporate website. In addition, we sought
to align our reporting with the International
Integrated Reporting Framework andto indicate our contribution to the UN
Sustainable Development Goals. We alsoalign our reporting with the principles andstandards of the UN Global Compact andtake into account those of the Sustainability
Accounting Standards Board. Furthermore,
our reporting addresses some aspects of
the recommendations of the Task Forceon Climate-related Financial Disclosures(TCFD), while our reporting to CDP
covers some of the remainder. We willcontinue to develop our climate changereporting to reflect the TCFD’s guidance.
We make available on our corporatewebsite a highlights summary of this report.
Previous reports are available in the
Sustainability Resources area of the site.
We report on sustainability annually
and always welcome your feedback.
For comments or questions, pleasecontact Esther Bares or Marie Corger
at sustainability@pmi.com

Unless otherwise indicated, the scopeof the data in this report embraces ouroperations worldwide for the full calendar
year 2019 or reflect status at December 31,
2019. Where not specified, data come from
PMI estimates. The external verification
statement of our environmental and healthand safety data can be found on PMI.com.
This report was reviewed by PMI’s Boardof Directors and by members of PMI’s
Company Management, including our Chief
Executive Officer, Chief Financial Officer,
Chief Operating Officer, and President,
External Affairs and General Counsel.

Cover image: Employees sampling tobacco
leaves in PMI’s Plant Research facility
where the team explores avenues forselecting crops for more environmental
resilience and reduced footprint
An IQOS store in Athens, Greece

Performance
metrics1

2

Philip Morris International Integrated Report 2019

Contents

PI LL A R 1

Overview
About this report
About PMI
Integrated overview of PMI’s performance
Letter from the Chief Executive Officer
PMI’s Statement of Purpose
Our company
Our business environment
Megatrends
Creating value at PMI
Risks, opportunities, and trade-offs
Sustainability at PMI
Focusing on what matters
Our 2025 roadmap
Stakeholder engagement
Governance and management

1
3
4
6
8
11
16
20
22
24
25
26
30
32
34

Performance metrics

PILL AR 2

PILL AR 3

PILL AR 4

Closing remarks from our Chief Sustainability Officer
ESG ratings performance
Our performance
Glossary and acronyms
Forward-looking and cautionary statements

171
172
173
188
189

Innovating for better products

39

Product health impacts

40

Access to smoke-free products

54

Operating with excellence71

Responsible marketing and sales practices

72

Sustainable supply chain management

80

Respect for human rights

92

Caring for the people we work with

105

Socio-economic well-being of tobacco-farming communities

106

Health, safety, and well-being at work120

Protecting the environment

133

Climate protection

134

Littering prevention

152

Product eco-design and circularity

158

Country case studies

Portugal
Page 36

Switzerland
Page 66

South Africa
Page 100

The Philippines
Page 128

BrazilPage 166

Overview

Innovating for
better products

About PMI
Philip Morris International (PMI) is leading atransformation in the tobacco industry tocreate a smoke-free future and ultimately
replace cigarettes with smoke-free products
to the benefit of adults who would otherwise
continue to smoke, society, the company,
and its shareholders. PMI is a leadinginternational tobacco company engaged in
the manufacture and sale of cigarettes, aswell as smoke-free products and associatedelectronic devices and accessories, and othernicotine-containing products in markets
outside the United States. In addition, PMI
ships a version of its IQOS Platform 1 device
and its consumables authorized by the U.S.
Food and Drug Administration to Altria
Group, Inc. for sale in the United States
under license. PMI is building a future ona new category of smoke-free products
that, while not risk-free, are a much better
choice than continuing to smoke. Throughmultidisciplinary capabilities in productdevelopment, state-of-the-art facilities,
and scientific substantiation, PMI aims toensure that its smoke-free products meet
adult consumer preferences and rigorous
regulatory requirements. PMI’s smoke-free
IQOS product portfolio includes heatnot-burn and nicotine-containing vapor
products. As of December 31, 2019, PMI
estimates that approximately 9.7 million
adult smokers around the world havealready stopped smoking and switched
to PMI’s heat-not-burn product, available
for sale in 52 markets in key cities or
nationwide under the IQOS brand.
For more information, please visit
www.pmi.com
www.pmiscience.com

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

3

Key milestones

1847

1972

2008

Mr. Philip Morris opens a shop
on London’s Bond Street, selling
tobacco and ready-made cigarettes

Marlboro becomes the world’s
number-one-selling cigarette

PMI is spun off from Altria Group, Inc.

1902

Philip Morris & Co., Ltd. isincorporated in New York
1908

Marlboro, which will become
the company’s most famous brand,
is established and registered asa trademark

1985

Philip Morris Companies Inc. becomesa holding company and acquires General
Foods. Other acquisitions in the foodsector follow over the next decade,including Kraft Foods and Jacobs Suchard

1987

Philip Morris International Inc. (PMI) is
incorporated as an operating companyof Philip Morris Companies Inc.

1919

A new company is incorporated in
Virginia under the name Philip Morris &Co. Ltd., Inc. and starts to manufacture
cigarettes in its factory in Richmond by
the end of the next decade

2001

PMI’s Operations Center is transferredfrom New York to Lausanne, Switzerland

2009

PMI unveils its new researchand development facility in
Neuchâtel, Switzerland

2014

PMI pilots its heat-not-burnproduct, IQOS, in Italy and Japan2016

PMI announces its ambition to deliver
a smoke-free future, shifting its
resources toward the development andresponsible marketing of scientifically
substantiated smoke-free products

2003

2020

Philip Morris Companies Inc. isrenamed Altria Group, Inc., andremains the parent company ofKraft Foods Inc., Philip MorrisInternational, Philip Morris USA andPhilip Morris Capital Corporation

PMI’s Board of Directors adopts
PMI’s Statement of Purpose,
reaffirming the company’scommitment to deliver asmoke-free future

1963

The entity purchases Fabriquesde Tabac Réunies in Neuchâtel,Switzerland, a family business that
already began to manufacture Marlboro
cigarettes under license in 1957

4

Philip Morris International Integrated Report 2019

Integrated
overviewof PMI’s
performance
The ESG metrics on these pages are explainedin the relevant sections of this report. Pleasealso refer to the glossary on page 188
This report covers the 2019 calendar year,
but the aspirations, goals, and forwardlooking plans it contains may be impacted by
COVID-19 and its effects on our business,
which are currently unknown. Aspirationaltargets and goals do not constitutefinancial projections, and achievementof future results is subject to risks,
uncertainties, and inaccurate assumptions,as outlined in our forward-looking andcautionary statements on page 189

1 The information is a summary and is qualified in its entirety
by reference to the full texts of PMI’s Annual Reports forthe years ended 2015 through 2019, available on PMI.com.
2 This indicator refers to the amount paid by PMI entities,
and excludes excise tax paid in several markets where
third-party operators collected taxes on PMI products.
The total amount of excise tax paid by consumers on
PMI products amounted to USD 72.1 billion in 2019.
3 Smoke-free products: include heated tobacco units
and e-cigarettes. Total products: include smoke-free
products, cigarettes, and other combustible products.

Financials (in million USD)1
2016

2017

Revenues including excise taxes

74,95378,09879,82377,921

Excise taxes on products2

48,26849,35050,198

48,116

Net revenues

26,68528,74829,62529,805

Operating income

10,903

11,581

11,377

10,531

6 The smoke-free product shipment ratio is compiled
based on millions of units.

2019

Net earnings attributable to PMI

6,967

6,035

7,911

7,185

Total assets

36,85142,96839,80142,875

Total liabilities

47,75153,19850,54052,474

Capital expenditures

1,172

1,548

1,436

852

383

465

R&D expenditure

429

453

Business transformation3
2016

2017

2018

2019

2025 aspirations4

Net revenues (smoke-free/total)5

2.7%

12.7%

13.8%

18.7%

38–42%

R&D expenditure (smoke-free/total)

72%

74%

92%

98%

Commercial expenditure (smoke-free/total)

15%

39%

60%

71%

Smoke-free product shipment ratio (smoke-free/total)6

0.9%

4.4%

5.1%

7.6%

>30%

Smoke-free product shipment volume (in billion units)

7.7

36

42

60

>250

Combustible product shipment volume (in billion units)

845

791

767

732

<550

Total number of users of PMI smoke-free products (in millions)7

2.1

6.9

9.6

13.6

Estimated users who have stopped smoking and switched
to PMI smoke-free products – non-OECD (in millions)7

0.0

0.2

1.1

3.0

>20

Estimated users who have stopped smoking and switchedto our smoke-free products – worldwide (in millions)7

1.5

4.7

6.6

9.7

>40

2010
baseline

2017

2018

2019

Goals

914

630

584

556

Carbon neutrality by
2030

8,062

5,536

5,298

4,682

Carbon neutrality by
2050

Environment

4 Aspirations: Assuming constant PMI market share.
5 Excluding excise taxes. For future periods, at today’s
pricing and excise tax assumptions.

2018

CO2e scope 1+2 (’000 metric tons)

7 See glossary on page 188.

CO2e scope 1+2+3 (’000 metric tons)88 In 2019, we reviewed our carbon footprint model(see page 149). We have restated our 2017 and 2018
data according to the new model.

CO2e scope 1+2+3 intensity reduction versus 2010 baseline

n/a

22%

25%

32%

30% by 2020

Proportion of IQOS device sales volume covered by
CIRCLE take-back program9

n/a

n/a

66%

39%

100% by 2025

Recycling rate of IQOS devices at CIRCLE hubs (weighted average)10

n/a

n/a

45%

74%

80% by 2025

Number of PMI affiliates with anti-littering strategy11

n/a

n/a

n/a

31

9 We launched CIRCLE in 2018, and the number of markets
covered was expanded in 2019. The decrease in coverageof sales volume in 2019 versus 2018 is explained by IQOS
growth in markets not yet covered by the program.
10 Depending on device type and processing facility.
11 We introduced this indicator in 2019.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

5SocialNumber of PMI employees

14 The farm-level data related to our tobacco
supply chain reported in this report cover
22 countries from which we source.
15 Our monitoring and reporting of childlabor refer to situations of hazardous work
performed by children below 18 years old.
16 The increase can be attributed to a new
global training toolkit that has reinforced
overall awareness, leading to higher
speaking-up rates; also, there has been a
constant increase in the number of IQOS
coaches and consequently higher risk ofincidences to occur (read more on page 76).
17 Suppliers’ criticality is evaluated taking into
account spend segmentation and nature ofcomponent, as well as supply flexibility as
relevant. 2019 figure includes tier 1 suppliersof direct materials and electronics managed by
PMI central procurement team. Procurement
spend excludes tobacco leaf sourcing.
18 We started to formally onboard criticalsuppliers into our supplier due diligenceplatform (STEP) in July 2019.

2019

80,591

77,43573,542Goals

n/a

77,03971,79511.51%

14.10%

Voluntary employee turnover

3.96%

4.12%

4.53%

Proportion of management positions held by women13

34.4%

35.1%

36.1%

Proportion of women on PMI’s Company Management

10%

9%

8%

Proportion of women on PMI’s Board of Directors

15%

25%

25%

Proportion of tobacco purchased for which labor practices have beensystematically monitored14

77%

88%

92%

Proportion of farms monitored found with child labor incidents15

1.2%

1.3%

0.8%

Number of prompt actions recorded by field technicians related to child labor
incidents (proportion resolved)

4,417
(67%)

4,587
(89%)

2,712
(88%)

Total recordable incidents rate (TRIR) per 200,000 hours worked – PMI andcontracted employees

0.22

0.22

0.20

<0.30

Lost time incident (LTI) rate per 200,000 hours worked – PMI and contracted
employees

0.10

0.13

0.12

<0.10

Goals

Overall employee turnover12

13 Management positions include all employees
above a defined grade; it encompasses
managers, directors, and senior management.
We have expanded the scope of our gender
diversity data to cover approximately
95 percent of PMI’s total workforce andrestated previous years’ data accordingly.

2018

9.37%

Number of PMI full-time equivalent positions

12 Our transformation journey as we mobilized
to deliver our vision of a smoke-free future
resulted in higher turnover in 2019. This,
combined with our business strategy toclose our skills gap, a number of planned
restructures, and closure of some factories,
contributed to the increase observed.

2017

40% by 2022

Governance
2017

2018

2019

Number of training sessions completed by PMI employees and third parties on
PMI’s Marketing Code37,90323,43814,500

Number of violations of PMI’s Marketing Code and Good Conversion Practices
that resulted in substantiated cases of misconduct16

2

8

42

Cumulative number of external human rights impact assessments completed inhigh-risk countries

0

1

2

Critical suppliers, as a proportion of total procurement spend17

n/a

n/a

35%

Critical suppliers’ procurement spend assessed in PMI’s supplier due diligenceplatform (STEP)18

n/a

n/a

84%

90% by 2020

Proportion of tobacco purchased through direct contracts by PMI and PMI’s
third-party suppliers (by volume)

90%

93%

96%

>90% (ongoing)

10 by 2025

6

Philip Morris International Integrated Report 2019

Letter fromthe Chief
Executive
Officer

To all our stakeholders,
PMI manufactures nicotine containing
products that are made of, or derived from,tobacco. Altough the vast majority of oursales is still in combustible products, mainly
cigarettes, we are seeking to completely
replace these by non-combustible, smokefree products, which are a better alternative
for the health of those consumers who
would otherwise continue smoking.
Since we announced our vision to deliver
a smoke-free future in 2016, our annual
combustible product shipment volume
declined by 114 billion units. Almost halfof this decline can be attributed to ourown efforts, complementing government
measures to prevent smoking initiation andencourage cessation, as we actively andpurposefully switched many smokers who
would otherwise have continued smoking
cigarettes to our smoke-free alternatives.
The increase in our smoke-free productshipment volume by 52 billion units overthe same time period is a testament tothis massive business transformation.
The business case for our strategy is clear:
We were able to gain overall market sharein the nicotine-containing products market
and deliver strong financial results in 2019.
We generated an adjusted operating
income of USD 11.8 billion, an increase of
11.2 percent on a currency-neutral likefor-like basis versus the prior year. This was
driven by growth in smoke-free productusers and sales volume, price increasesof combustible products, coupled withthe favorable impact of our cost-saving
initiatives and increasing leverage of existingsmoke-free product infrastructure.
We also improved our performance ina number of environmental, social, andgovernance (ESG) related areas, whilestrengthening our sustainability strategy,
and setting new and ambitious targets
for our most material sustainability topics.
For example, PMI continues to demonstrateleadership in addressing climate change.
We ranked on CDP’s A Lists for climate

and water security, achieved A- for forest
disclosure, and featured on CDP’s Supplier
Engagement Leaderboard once more.
We have set the target to become carbonneutral as a company by 2030, and by 2050
including the whole value chain. We also aim
to reduce our absolute emissions consistent
with a 1.5-degree global warming scenario.
Another ambitious and new environmental
target relates to plastic and post-consumer
waste, specifically the litter caused bycigarette butts. We have developed andare implementing comprehensive plansto achieve a 50 percent reduction of theplastic litter from our products by 2025.
Regarding social impact, I would like tohighlight the importance we place on
guarding against youth initiation andyouth use of nicotine-containing products.
All of our markets have been tasked tofurther enforce and modernize youth
access prevention programs. Moreover,
it is our priority to ensure that by 2023,
at the latest, our full portfolio of electronic
smoke-free devices will be equippedwith age-verification technology.
I recognize that we still need to makemeaningful progress with regard to diversity,
equality, and inclusion. We are proud to be
the first multinational company to achieve
the Global EQUAL-SALARY certification in
March 2019. More recently, I appointed a
Chief Diversity Officer, reporting directly
to me, to push harder toward creating amore inclusive and diverse workplace.
These are all important developments,
but it is equally clear to all of us at PMI thatthe biggest positive impact our company
can have on society is to replace cigarettes
with less harmful alternatives. This is at
the very core of our corporate strategy
and sits atop our sustainability priorities.
Our aspirational target set three years ago
is that by 2025, at least 40 million adultconsumers will have stopped smoking andswitched to our smoke-free products. I am
convinced that it is possible to completely

Replacing cigarettes withless harmful alternatives is at
the very core of our corporate
strategy and sits atop oursustainability priorities.
end cigarette sales in many countries
within 10 to 15 years, but for that tohappen, manufacturers and governments
need to work in the same direction.
People all over the world believe that
CEOs manage companies for the shortterm because of a single-minded focus onshareholders. To address this, academics,
think tanks, corporate leaders, andNGOs have started talking about how
to reform the capitalist system so that it
works for everyone. In August 2019, theBusiness Roundtable issued a statement
signed by 181 CEOs who committed
to focusing on all stakeholders.
In March 2020, PMI’s Board of Directors
issued our company’s Statement of Purpose,
available in this report. It reaffirms that
we are disrupting our business from theinside, leading the industry toward a future
without cigarettes, while meeting theneeds of our stakeholders, and ensuring
the long-term viability of our company.
Clarity of purpose is essential for internalalignment; change is tough for wellestablished companies like ours, withstrong business performance over decades.
It is natural for employees to continue thebehaviors that have led to strong results.
Business success, more than failure,presents a big hurdle to a company’stransformation, and I devote a large part ofmy time to ensuring that we have the rightorganizational capabilities and mindset.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Since the launch of our smoke-free
product IQOS, we have made enormous
progress in terms of organizational
capabilities, know-how, the integrationof sustainability in the way we operate,and in our business results. To accelerate
our progress, we must further enhance
our ability to stay at the forefrontof consumer centricity, technology,
science, and innovation – to build on
PMI’s unique scientific capabilities
and outline the company’s strategy
for new products and services that
go beyond tobacco and nicotine.
We continue to deal with skepticalstakeholders: international organizations,NGOs, media, and academics, who doubtthat harm reduction through smoke-freealternatives is sound public health policyor argue that our purpose-driven strategy
is nothing more than window dressing.
Harm reduction is an accepted approachin many areas of life: from reducing salt
and sugar contents in food and drinks tolowering carbon emissions by switching
to electric cars. The alternatives are rarely
without health risk or environmental impact,
but product improvements are always
welcomed when they are scientifically
substantiated. I feel strongly that people
who smoke cigarettes, the most harmful
nicotine-containing product, should not be

To accelerate our progress,
we must further enhance
our ability to stay at
the forefront of consumer
centricity, technology,
science, and innovation.
PMI’s Operations Center in Lausanne, Switzerlanddenied the opportunity to switch to better
alternatives. We will therefore not give up
and will continue to proactively engage withsuch critics, explaining what we are trying
to achieve. Listening closely and showingthat our company takes criticism seriously
is an essential part of our transformation.
Sustainability strategy is corporate strategy,
and ESG issues are business issues. This
is what we want to emphasize with thispublication – our first integrated report.
I hope it gives you a better insight into
PMI, the challenges that we face, and theprogress we have made since announcing
our smoke-free vision in 2016.
I cordially invite you to respond, challenge,
and most of all, work with us as we
remain focused on making our businessone with a sustainable purpose.

André Calantzopoulos
Chief Executive Officer

78

Philip Morris International Integrated Report 2019

PMI’s
Statement of
PurposeWhile Philip Morris International
Inc. (PMI) is widely known asa cigarette company, in 2016it announced its new purpose:
to deliver a smoke-free future
by focusing its resourceson developing, scientifically
substantiating and responsiblycommercializing smoke-free
products that are less harmful
than smoking, with the aim ofcompletely replacing cigarettes
as soon as possible. These
innovative alternative products
do not burn tobacco, do notcreate cigarette smoke andtherefore generate significantly
lower levels of carcinogens
and other toxic substances
compared to cigarettes.

Building on the Board’s Letter toShareholders in PMI’s 2017 Proxy
Statement, we would like to reaffirm
PMI’s purpose and acknowledge that, as
the Company continues to transform its
business and organization, its core effort
to provide smoke-free alternatives thatappeal to today’s adult smokers—and towork hard to convince them to switch—
will not be enough. The Company needs
to continue earning the trust and active
cooperation of a host of stakeholders,from its supply chain partners toregulators and public health authorities.
A smoke-free future is attainable, and thebenefits it can bring to the people who
would otherwise continue to smoke, andhence to global public health, are enormous.
However, the Company cannot succeed
alone. Together with governments and civilsociety we can maximize this opportunity
through a consensus that smoke-freealternatives, when subject to proper
government oversight and regulation,
are part of a sound tobacco policy.

The Quest for Better Alternatives
for Adult Smokers
Smoking causes serious disease, and thebest way to avoid the harms of smoking
is never to start, or to quit. For decades,
tobacco control has focused on strict fiscal,marketing and other measures to deter
initiation and to encourage cessation. These
must be continued. Nevertheless, whilesmoking prevalence rates continue to slowly
decline, the World Health Organization
projects that the estimated number of 1.1
billion people who smoke tobacco products
today will remain largely unchanged by
2025, reflecting population growth.
Nicotine, while addictive and not risk
free, is not the primary cause of smokingrelated disease. The primary cause is theharmful chemicals released or generated
by the burning of tobacco and containedin the smoke. Eliminating combustion

from nicotine-containing products is theway to significantly reduce their toxicity.
Thanks to rapid advances in science andtechnology, and strong PMI commitment,these products are now a reality.
Currently, PMI’s smoke-free portfolio
comprises platforms that heat tobacco,
vaporize nicotine-containing liquids
or essentially contain only nicotine, allwithout combustion. Their development
and manufacturing follow high standardsof quality and consistency. The scientificevaluation to substantiate their harm
reduction potential compared to cigarettesmoking is based on rigorous pre-clinicaland clinical assessments and sophisticatedsystems toxicology. The results are publicly
available, are peer-reviewed and havebeen submitted to numerous regulatory
authorities including the U.S. Food andDrug Administration. The totality of thescientific evidence makes the Company
confident that switching completely tothese products is likely to present lessrisk of harm than continuing to smoke.
Post-market surveillance is necessary tocontinue building this confidence, and, overtime, quantify the reduction in morbidity
and mortality through epidemiology.
To be clear, these smoke-free alternatives
are not risk free and should not be usedby youth or non-smokers. For those who
use nicotine in any form it is best to quit
completely. The Company must market
them responsibly, so as to minimize
any unintended use, while maximizing
the switching of adult smokers who
would otherwise continue smoking.
IQOS Platform 1, a heat-not-burn tobacco
product, was commercially launched inlate 2015 and was very well received
by adult smokers, with conversion rates
exceeding 70 percent. This confirmedthat the Company had the products
and the science to fulfill its ambition tocompletely replace cigarettes. In 2016,
with the full support of the Board of

PMI believes that with the right
regulatory encouragement
and support from civil society,cigarette sales can end within
10 to 15 years in many countries.
Directors, the Company announced its
new purpose of delivering a smoke-free
future. Since then the Company has fullyaligned its employees with this purpose,and swiftly shifted its organizational
focus and resources to smoke-freealternatives. The Company is essentiallydisrupting its traditional business fromthe inside out and is leading the industry
in this unprecedented transformation.
While cigarette sales today remain thelargest part of PMI’s business in mostcountries, this is changing rapidly. In 2019,
the Company’s smoke-free products werealready commercialized in 52 markets andrepresented 18.7 percent of PMI’s global
revenue, 71 percent of its commercial
expense and 98 percent of its R&D
expenditure. As of December 31, 2019, of
the approximately 150 million people who
regularly use the Company’s products,
approximately 14 million already use
IQOS, of whom 9.7 million have stopped
smoking and switched to this product.
The Company is actively accelerating
the decline of cigarette smoking beyond
what can be achieved by traditional
tobacco control measures alone.

Overview

Innovating for
better products

Going forward, the Company is committed
to providing less harmful alternatives to thehundreds of millions of adult smokers who
would otherwise continue to smoke,
80 percent of whom PMI estimates
are looking for better alternatives. The
Company will do so through a research
agenda to innovate and substantiate a
portfolio of products that are affordable
and acceptable for these smokers in bothdeveloped and developing countries.
While PMI will continue to responsibly sellcigarettes as long as there is a significant
legitimate demand, it will continue
focusing its commercial efforts towardraising awareness of, and informing adultsmokers in appropriate ways about,smoke-free products and the benefitsof switching versus continued smoking.
The Company carefully monitors theresults of its marketing to best ensure
its smoke-free products are not reaching
non-smokers, youth and people who havealready quit nicotine use altogether.

Operatingwith excellence

Caring for thepeople we work withKey Stakeholders to
Deliver a Smoke-Free Future
PMI’s key stakeholder constituencies, which
are fundamental to both the achieving of
its purpose and to the pace of its progress,
will be affected in different ways by PMI’stransformation. The Company will seek
to engage and collaborate with relevant
stakeholders to speed the transformation
while mitigating negative consequences.

Employees
PMI’s ability to accomplish its purpose
depends on the skills, dedication andrelentless efforts of its employees. The
Company’s focus on a smoke-free future
has enhanced its ability to attract the newtalent needed to support its transformation.
The Company compensates its employees
fairly and provides important benefits.
It supports them with enriching job
experiences, training and education to
help them develop new skills and maximize
their employability in a rapidly changing
world. The Company treats employees withrespect, dignity, care and fairness. It fosters
diversity, inclusion, equal opportunityand equal salary policies to ensure PMI’s
workforce reflects modern society.

Regulators

The Company is actively
accelerating the decline ofcigarette smoking beyond what
can be achieved by traditional
tobacco control measures alone.

Regulators can decisively accelerate theindustry’s transformation toward, and the
speed at which adult smokers switch to,smoke-free products by implementing
risk-proportionate regulations and taxation
for all nicotine-containing products andby providing smokers with accurate
information. PMI is committed to engaging
transparently with regulators, sharing its
scientific research and post-market data.
The Company will be ready to support
an industry-wide gradual phase-out
of cigarettes as soon as a majority ofProtecting theenvironment

Performance
metrics

smokers in a country have switched toscientifically substantiated smoke-free
products. PMI believes that with the right
regulatory encouragement and support
from civil society, cigarette sales can end
within 10 to 15 years in many countries.

Public health community
The public health community is,unfortunately, polarized on the issue ofsmoke-free products. Without question,
their work to discourage youth and nonsmokers from starting to use any tobacco
or nicotine product and to encourage
cessation should continue. At the sametime, when better alternatives to cigarettes
exist, the discussion should not be whether
they should be made available to the morethan one billion men and women who
smoke today, but how fast, and within
what regulatory framework to maximize
their adoption while minimizing unintended
use. The Company is urging this important
stakeholder group to seize the immense
opportunity that smoke-free productspresent for advancing public health within
the present generation of smokers. PMI asks
the public health community to scrutinize
its smoke-free products, to provide
feedback for improvement and to be open
to considering that PMI’s purpose aligns
with the societal goal to change the healthtrajectories of the people who smoke.

Supply chain
People working in the Company’s supply
chain around the world, including tobacco
farmers, rely on PMI for a substantial
portion of their income. PMI deals fairly
and ethically with its suppliers, and isdedicated to acting as a good partner toother companies, large and small, that help
us meet PMI’s missions. PMI recognizes
that smoke-free products differ fromcigarettes and entail change for someof its supply chain partners, and PMI isready to help them in this transition.

Shareholders
The Company is confident of the business
opportunity that smoke-free products
bring. It is leading this new highly promisingcategory and is dedicated to ensuring its
shareholders continue to receive strong
and sustainable financial returns over time,
while recognizing the initial uncertainty
that transforming the Company’s businessmodel may bring. We are aware of thegrowing investor movement in selectgeographies to exclude tobacco from
portfolios, but we do not believe that
exclusion will convince people who
smoke to quit or to improve their lives.
On the contrary, by investing in PMI—a
tobacco company that is aiming to end
cigarette sales—and holding the Company
accountable to its purpose and targets,investors can combine positive societal
impact with long-term financial returns.
The Company welcomes suggestions,pressure and support from engagementwith both current and potential investors.

Civil society
Continued engagement and partnerships
with civil society remain essential to theCompany’s success. PMI respects the many
communities around the world where it
operates. PMI works hard to protect theenvironment through sustainable practices
across its businesses and to address both
existing social and environmental challenges,
such as child labor in tobacco growing, andemerging topics pertaining to its business
transformation, such as helping tobacco
farmers to diversify their crops. The scope,
metrics and progress of these practices
are outlined in PMI’s annual Sustainability
Report, published on PMI’s website.

910

Philip Morris International Integrated Report 2019

Achieving PMI’s Purpose
The Company understands the need tocontinue to build legitimacy and trustby being honest, respectful, fair andtransparent, and by aligning actions withwords across all areas of its business.
To make the Company’s progressin delivering its smoke-free visionverifiable, it introduced a set of business
transformation metrics, which it publishes
every year. As outlined previously, there
has already been significant progress.
To assess the impact of PMI’s current
and future value chains on society andthe environment, the Company regularly
conducts sustainability materiality
analyses and measures its performancethrough financial, environmental
and social metrics that are key to asustainable corporate strategy.
The Compensation and Leadership
Development Committee of the Board has
ensured a strong link between executive
compensation and both short- and longterm performance toward achieving theCompany’s smoke-free ambition. It ismanagement’s responsibility to ensurethat the Company’s purpose is achieved
through the appropriate structures,
systems, processes and people. The
Board oversees management’s efforts toenhance shareholder value responsibly
and sustainably over the long term in waysthat are consistent with the Company’s
purpose. Transparency and engagement
between the Board and management are
paramount, and the relationship is excellent.
In conclusion, PMI is fully committed
to its corporate purpose ofdelivering a smoke-free future.

Transparency and engagement
between the Board andmanagement are paramount.
PMI’s Board of Directors

André Calantzopoulos
Louis C. Camilleri
Werner Geissler
Lisa A. Hook
Jennifer Li
Jun Makihara
Kalpana Morparia
Lucio A. Noto
Frederik Paulsen
Robert B. PoletA Statement of Purpose is a declaration,issued by a company’s board of directors,
that clearly articulates the company’s
purpose and how to harmonize commercial
success with social accountability andresponsibility. It specifies within that
purpose those stakeholders most critical tolong-term value creation and sustainability.
On March 26, 2020, PMI published its
2020 Proxy Statement, which contained
a Letter from the Board of Directors that
corresponds to PMI’s Statement of Purpose.
The groundwork for the Statement of
Purpose was laid in the 2017 Proxy
Statement in a letter to shareholders fromthe Board of Directors announcing for the
first time our company’s smoke-free vision.
PMI employees in various locations worldwide

Overview

Innovating for
better products

Our company
Our products and brands
We have built our company on a portfolioof leading cigarette brands that are
the choice of an estimated 140 million
consumers worldwide. Our cigarettes are
sold in more than 180 markets, in manyof which they hold the number one or
number two market share position.
We have a wide range of premium,mid-price, and low-price cigarettebrands, including Marlboro, L&M,

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

11

Cigarette manufacturing

Chesterfield, Philip Morris, Parliament,
and Bond Street, which are among the 15
most popular brands in the international
cigarette market (which excludes China
and the United States). Marlboro is theworld’s best-selling international cigarette;
in 2019, it accounted for approximately
37 percent of our total cigarette shipment
volume and held a 10 percent share of
the international cigarette market.
In 2016, we set a new course for thecompany – committing to deliver a
future without cigarettes. To make ourvision a reality, we are transforming
our business and staking our future
on a line of smoke-free products.

Our smoke-free product platforms
HEATED TOBACCOPRODUCTSNICOTINE-CONTAINING
E-VAPOR PRODUCTS

Platform 1

Platform 3

Platform 2

Platform 4

Our smoke-free product development iscentered on the elimination of combustion.
We believe this is the most promising
path to providing a better choice to thoseadults who would otherwise continue
to smoke. We recognize that no single
smoke-free product will appeal to all adultsmokers. This is why we have adopted
a portfolio approach, including bothheat-not-burn products and nicotinecontaining vapor products that are
intended to appeal to a variety of distinct
adult consumer preferences. Our current
smoke-free product portfolio incorporates
four platforms in various stages ofdevelopment and commercialization.

In 2016, we set a
new course for thecompany, committing
to deliver a future
without cigarettes.

12Philip Morris International Integrated Report 2019

By the end of 2019, IQOS
was commercially available
in 52 markets, representing
44 percent of the totalinternational market,
excluding China and the U.S.

Currently, our main smoke-free product isa heat-not-burn product, commercialized
under the IQOS brand name. By theend of 2019, IQOS was commerciallyavailable in 52 markets, which represent
44 percent of the total international
market, excluding China and the U.S., byvolume. Our weighted-average geographic
coverage within these markets at thetime was approximately 60 percent.
In July 2018, we pilot-launched oure-vapor product IQOS MESH, in London.
In light of the current confusion in thee-vapor category, in February 2020, we
postponed our planned launch of an
improved version of this product, IQOS
VEEV, until the third quarter of 2020,
expecting to reach the optimal capacity
for commercialization at scale. We will
adjust our launch plans based on marketspecific factors. Due to the COVID-19
pandemic, these plans may be delayed.
With respect to our Platform 2 product,
we are finalizing our improvements to thisproduct and plan to conduct a consumer
test at the beginning of 2021. We plan
to conduct a consumer test of our
Platform 3 product by the end of 2020.

An IQOS store in Vilnius, Lithuania

IQOS
IQOS is a tobacco-heating system,
available in two versions. The first has
three main components – a heated
tobacco unit (marketed under brandnames such as HEETS and Marlboro
HeatSticks), a holder, and a charger. The
second is an integrated product thatcombines the holder and charger andallows multiple uses without recharging
the battery. Both versions work thesame way: The user inserts the heated
tobacco unit into the IQOS holder, whichcontains an electronically controlled

heater. The user pushes a button to turnon the heater and then draws on theheated tobacco unit. IQOS heats tobacco
at a temperature just high enough (toa maximum of 350 degrees Celsius)
to release a nicotine-containing vapor
without creating combustion, fire, ash,or smoke. Because the tobacco is heatedand not burned, the levels of harmful
constituents are significantly reduced
compared with cigarette smoke. Once theheated tobacco unit is finished, the user
removes it from the holder and discards it.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

IQOS VEEVIQOS VEEV is based on a new heating
technology in the e-cigarette category.
It uses a metallic mesh punctured withtiny holes to heat a prefilled, pre-sealed
e-liquid cartridge, which contains
nicotine and flavors. In each VEEV
cap, there is a new heater, eliminating
the need to manually replace it. The
consumer activates the heatingprocess by pressing a button. As theheater is in contact with the e-liquidin the cap, it heats the e-liquid togenerate a nicotine-containing vapor.

PMI’s R&D center in Neuchâtel, Switzerland

Performance
metrics

13

Philip Morris International Integrated Report 2019

rra
do
An

Operations Center
Lausanne, Switzerland

tia
oa
Cr

ds
an
Isl

ria
lga
Bu

ry
na
Ca

Our global
footprint

Cy
Cz
pr
ec
us
hR
ep
ub
lic
De
nm
ark

335K
Contracted
farmers supplying
tobacco to PMI

Ger

Fra
nce

ania
Alb

man
y

Gree

enia
A rm

E A STERNEUROPEces
Belaru9%

Hungarynd
Bosnia a a
vin
o
g
e
Herz

of our workforce

Italy

IsraelLatvia52

Markets where our heatnot-burn IQOS productis available for sale

Kazakhstan

Lithuania

Moldova

o
Monac

North
Mace
donia

ds
erlan
Neth
nd
Pola

Russ
ia
Ser

al
tug
Por

28%

of our workforce

Sw
itz
erl
an
d
Kin
gd
om

Un
ite
d

PMI-owned manufacturing
facilities, of which eight are
partially or fully dedicatedto the manufacturing of
smoke-free products

lic
ub
ep
R
k
nia
va
ve
Slo
o
l
S

Sp
ain

38

bia
Uk
rain
e

EUROPE AN
UNION

nia
ma
Ro

Sw
ed
en

14

Key: Our global footprint in 2019TobaccoTobacco sourcing
Manufacturing facilities
Combustible
products only moke-free products
S
partially or exclusively

Commercializationof smoke-free products
Markets where
IQOS is available

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

15

Ch
in
a

Headquarters
New York, U.S.

n
pa
Ja

ia
ys
ala
M

d
an
eal
Z
w
Ne
a
ore
hK
t
u
So

Arg
enti
na
Bra
zil

Cana
da

India

E A S T A SIA &AUS TR ALIA

Colombia

sia
Indone6%of our workforce

Curaçao

Pakistan
Philippines

Dominican Republic

L ATIN AMERIC A& C ANADA

Ecuador11%

ala
Guatemof our workforce(incl. the U.S.)

o
Mexic

d
ite
Un

5%

of our workforce

ela
ezu
Ven

tes
Sta

Thailand

MIDDLEE A S T & AFRIC A ,AND DUT Y FREE

Jord
an

SOUTH &
SOUTH E A S T
A SIA

Leb
ano
n

41%
of our workforce

Ma
law
i

Mo
zam
biq
Ré
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un
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a
ric
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Tu
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Un at
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i
e
Fre
Em
uty

h
ut
So

Se
ne
ga
l

16

Philip Morris International Integrated Report 2019

Our businessenvironment
Industry trends overview

Projected smoking prevalence

Projected number of smokers
Globalpopulation

6,187m
5,028m

21.5%

17.1%

Consumers
Today, an estimated 1.1 billion men andwomen around the world smoke cigarettes
or other combustible tobacco products.
The latest projections from the World
Health Organization1 (WHO) indicate
a decline in smoking prevalence (age15+), from 21.5 percent in 2010 to an
estimated 17.1 percent by 2025. At thesame time, the global population is growing
by around 70 million people per year.
The combined effect of this population
growth and declining smoking prevalence
is a forecast of 1,058 million smokers by
2025 – essentially no change versus 2010.

2010

2025

1 Source: WHO Global Report on Trends in Prevalence of Tobacco Use
2000-2025, third edition (December 2019)2 Source: WHO Global Report on Trends in Prevalence of Tobacco Smoking 2015

WHO member states want faster change
by encouraging cessation and discouraging
initiation – targeting a 30 percent reductionin the prevalence of tobacco use by 2025
(2010 baseline).2 However, even if the
WHO prevalence target is achieved, there
will still be around 930 million smokers in
2025, according to PMI’s calculations.
As of December 31, 2019, PMI estimatesthat there were close to 14 million IQOS
users, of which over 70 percent – ornearly 10 million – had stopped smoking
and switched to IQOS, with the remaining
4 million in various stages of conversion.
For e-vapor, PMI estimates approximately
40 million users globally, of which an
estimated 25 percent – or around 10
million – were exclusive users. This equates
to an estimated 20 million total IQOS ande-vapor users globally who no longer smoke
cigarettes. To put this into perspective,
this would equate to around 2 percentof the world’s over 1 billion smokers.
Customers in an IQOS store in Ginza, Japan

1,081m

1,058m2010

2025

These projections are based on WHO data (2019) and refer to age 15+

Projected
numberof smokers

Overview

Innovating for
better products

Market dynamics
The tobacco and nicotine market globallyis characterized by a range of products,
including combustible tobacco products(e.g., cigarettes, fine-cut tobacco, pipe
tobacco, cigars, and cigarillos), smoke-free
products (e.g., heated tobacco, e-vapor,and hybrid products), and oral smokelesstobacco and nicotine products (e.g., snus,
chewing tobacco, moist snuff, tobacco
pouches, and nicotine pouches).
While the number of consumers of tobaccoand nicotine products around the world
has remained largely unchanged overrecent years, the size of the total market
by retail value has grown. This largely
reflects the impact of excise tax-driven
retail price increases for combustible
tobacco products, coupled with thegrowth of smoke-free products, partly
offset by lower volume for combustible
tobacco products, mainly reflecting
lower prevalence and lower average daily
consumption induced by price elasticity.

Operatingwith excellence

Caring for thepeople we work withIn the international tobacco and nicotine
market, excluding China and the U.S., thetotal retail value reached an estimated
USD 477 billion in 2019, with growthof around 4 percent compared withthe prior year.1 Combustible tobacco
products accounted for approximately
95 percent of the total retail value,with the balance mainly attributed toheated tobacco and e-vapor products.

Protecting theenvironment

Performance
metrics

The international market for heated
tobacco and e-vapor products in 2019reached an estimated USD 23 billion,
with growth of around 20 percent versus
2018. This growth reflects the increasing
number of adult smokers who are moving
to smoke-free products and was mainly
driven by the heated tobacco category,
which represented an estimated 70 percentof the combined retail value for heated
tobacco and e-vapor products in 2019.

17

In recent years, some governments havelegalized cannabis for medical and/or
recreational purposes, and some tobaccocompanies have invested in the category.
PMI does not sell cannabis products.

The difference between combustible cigarettes, e-vapor products (also known as e-cigarettes), and heated tobacco products
HE ATEDTOBACCOHeats
tobacco withoutburning
CIG ARE T TE S

Smoke-freeContains real
tobaccoElectronic
deviceNI COTINE

Burns
tobaccoHeats liquid
nicotine

Releases smoke
and ash1	Includes the retail value of cigarettes, fine-cut tobacco,heated tobacco and e-vapor products (including devices),snus, and nicotine pouches.

No
tobaccoE-VAPOR18

Philip Morris International Integrated Report 2019

Regulation and taxation
The risks of smoking have led legislatorsand regulators to impose rigorous
restrictions and high excise taxes
on cigarettes. Such restrictions arecomprehensive, covering packaging
and health warnings, use of ingredients,
advertising, marketing, promotions andsponsorships, and smoking spaces.
Much of the regulation that shapes
the business environment in which thetobacco industry operates is driven by
the WHO’s Framework Convention on
Tobacco Control (FCTC), which enteredinto force in 2005. The FCTC has as its
main objective the establishment of a

global agenda for tobacco regulation, withthe purpose of reducing the prevalenceof tobacco use and exposure to tobaccosmoke. As of December 31, 2019, 180
countries and the EU were parties to the
FCTC, which requires a suite of measures.
There is no global consensus among
regulators on how to regulate or tax
smoke-free products. Some aim toencourage these products, seeing themas presenting less risk to smokers andan opportunity for public health; others
severely restrict or ban not just thecommunication about such products, but
in some cases the products themselves.

Our perspective
For many decades, public healthstrategies to reduce tobacco-related
morbidity and mortality focused primarily
on preventing smoking initiation by
youth and encouraging smokers toquit. Novel, scientifically substantiatedsmoke-free products provide regulators
the opportunity to supplement andsignificantly strengthen the existing
public health approach with a third
pillar: tobacco harm reduction.
Government regulation of all nicotinecontaining products, both combustible
and non-combustible, is essential, andwe advocate for a comprehensive
regulatory framework that recognizes
that not all these products are thesame. While the most harmful products
should be subject to the most restrictive
measures, regulation and taxation
should encourage adults who would
otherwise continue to smoke toswitch to less harmful alternatives.

We don’t agree with preemptive bans andunreasonable restrictions on scientifically
substantiated smoke-free products,
because these measures deprive smokers
of using alternatives that present lessrisk of harm than smoking. Smoke-free
products contain nicotine, which is
addictive, and they are not risk-free.
Regulation should therefore provide
minimum standards for all smoke-free
product categories and specific rules
for product assessment methodologies,
ingredients, and labeling. We also support
regulation that, at a minimum, provides
for a notification process similar to what
exists in the EU, as it allows regulatory
authorities to have an overview of all
new products entering the market.
Further, regulations should ensure thatthe public continues to be informed about
the relative health risks of all combustible
and non-combustible products.
Regulation, as well as industry practices,
should reflect the fact that youth should
not consume nicotine in any form.

Illicit trade
The illicit tobacco trade provides a cheap andunregulated supply of tobacco products.
It undermines efforts to reduce smoking
prevalence, damages legitimate businesses,
stimulates organized crime, increases
corruption, and reduces government tax
revenue. It is estimated by the WHO1
that illicit trade accounts for as much as
10 percent of global cigarette consumption
and that governments are losing USD 40
billion in tax revenues each year as a result.
Many countries have introduced or are
considering actions to prevent illicit trade.
In November 2012, the FCTC adopted theProtocol to Eliminate Illicit Trade in Tobacco
Products (the “Protocol”), which includes
supply chain control measures, such as
licensing of manufacturers and distributors,
enforcement in free trade zones, controls
on duty free and internet sales, and theimplementation of tracking and tracing
technologies. As of March 31, 2020,
58 Parties, including the EU, have ratified it.
The Protocol came into force in September
2018. Parties must now start implementing
its measures via national legislation.

In October 2018, at their first meeting,the parties to the Protocol elected to
produce a comprehensive report on
good practices for tracking and tracing
systems, and to prepare a conceptual
framework for global information-sharing
to combat the illicit tobacco trade.

Our perspective
The illicit tobacco trade is large anddemands integrated action. From
our side, we focus on controlling our
supply chains to prevent the diversionof our products. For 15 years, wehave been operating a global tracking
and tracing system for our products,
covering all markets. We also work withgovernments and other partners in the
public and private sectors to combat
illicit trade. Read more about ourefforts to tackle illicit trade on tobaccoand nicotine products on PMI.com.
1 Source: https://who.int/fctc/protocol/anniv_protocol/en/Competition
The global tobacco sector includes fourlarge international manufacturers – British
American Tobacco (BAT), Japan Tobacco(JT), Imperial Brands (IMB), and PMI – alongwith two major manufacturers focused
primarily on their respective domestic
markets: the China National Tobacco
Corporation (CNTC) in China, and Altria
Group, Inc. in the U.S. Together, thesesix companies accounted for over 85
percent of global cigarette sales by volume
in 2019. Regional and local companies,
including state-owned enterprises,
accounted for the remaining 14 percent.

As in other consumer goods sectors,
manufacturers compete primarily on
product quality, brand recognition,
brand loyalty, taste, R&D, innovation,
packaging, customer service, marketing,advertising, and retail price.
Increasingly, competition also focuses on
the development and commercialization ofsmoke-free tobacco and nicotine products,
with tobacco manufacturers shifting theirresources, by varying degrees, toward thedevelopment of such products, in particularheated tobacco and e-vapor products.

Innovating for
better products

Overview

The first heated tobacco products werelaunched by various manufacturers,
including PMI, in the late 1990s, withlimited commercial traction. Following
the success of IQOS after its initial city
launch in 2014, other manufacturers haveintroduced their own heated tobacco
products in certain markets. Somemanufacturers have also launched hybrid
products, which combine aspects ofheated tobacco and e-vapor products.
To date, competition in the heated
tobacco category is primarily among
combustible tobacco manufacturers.

Operatingwith excellence

Caring for thepeople we work with

The e-cigarette was invented in 2003
in China and – after over a decade ofrelatively limited success – the broader
e-vapor category has recorded growth
in recent years, particularly in the U.S.
and certain European markets. Currently,
the market for “open” e-vapor products
remains heavily fragmented, while themarket for “closed” e-vapor products is
relatively consolidated among tobacco
manufacturers and a limited number of
e-vapor start-ups, such as JUUL and NJOY.

Our global market share 2019, including cigarettes and heated tobacco units

Other

~14%
Al
tri
aG
ro
up
, In
IMB
c

~4%

~2%
CNTC

~45%

JT

~8%
BAT

~12%
PMI

14.5%
Source: PMI financials or estimates

Protecting theenvironment

Performance
metrics

Our perspective
We have made significant progress intransforming our business. Net revenues
from smoke-free products already exceed
10 percent of total net revenues in 31
markets, and over 50 percent in four
markets. We have reallocated significant
amounts of commercial spending fromcigarettes to smoke-free products, andhave streamlined our cigarette portfolio
to focus on fewer brands and variants,
reducing the global number of SKUs
by over 600 in the last three years.
Nevertheless, cigarettes and othercombustible products remain at thisstage the largest part of our business,representing 92.4 percent of our volume
and 81.7 percent of our revenues.

One of our key transformational
challenges regards deciding how tocompete within the cigarette market,
while simultaneously disrupting it with
our smoke-free products. How should
we react to product innovation by ourcompetitors within the cigarette segment?
What to do when competitors lower
cigarette prices to gain market share?
While seeking to remain competitivein the cigarette segment in an efficientway, we give careful consideration
to the coherence of the commercial
activities needed to do so, such as whenselecting a few new product launches
in response to changing consumer
preferences or competitor actions.

Perhaps counterintuitively, our objective
to completely replace cigarettes withsmoke-free alternatives is best served
by maintaining our competitive positionin the declining cigarette market. This
has allowed us to generate the cash
flows needed to continue investing inscientific research, product development,
manufacturing, and the commercializationof smoke-free products. The extensive
commercial and distribution infrastructurefrom the traditional tobacco businessalso provides an effective platform
for launching smoke-free products at
scale. Maintaining leadership within
the cigarette segment furthermore
enables us to engage more smokers
regarding the benefits of switching,especially where we can communicate
directly with our consumers, for instancethrough cigarette pack inserts.

We strive to make these decisions
based on consumer insights, responsible
practices, and guided by a clear
principle: our decision to launch a new
product in the combustible segment
should not hinder the realizationof a smoke-free future. Where
appropriate, we will complement ourbusiness response with advocacy
for regulatory and fiscal measures toclose tax loopholes or restrict productinnovation within the combustible
segment, where such innovation raises
concerns regarding youth use.

19

20

Philip Morris International Integrated Report 2019

Megatrends
As a company operating ona global scale in a fast-paced
world, our long-term successrequires that we continuously
monitor and adapt to majorsocial, environmental, economic,
political, and technologicalchanges. We see five megatrends
as being particularly relevant
to our work within thewider context of sustainable
development, representing
an opportunity for PMI tolead change.

Drone used to map and scout tobacco fields, generating live data for decisionmaking on crop management in Bahia, Brazil

Technologicalprogress

Changing consumer
expectations

New technologies are emerging rapidly, including
in robotics, artificial intelligence, and virtual reality.
Consumer-goods companies have been at theforefront of digital innovation in marketing and sales.
Automation and digital solutions are also widely
implemented in manufacturing and supply chain,
but they bring risks related to employment patterns,
data privacy, and human rights. Taking a positive andproactive approach to shaping the future of work
will enable companies to respond to people’s desire
for income security, well-being, empowerment,
and purpose, where people’s lives are enrichedby advancing technology, and where society canprosper from equal access to new opportunities.

In today’s connected world, consumers can moreeasily compare products, tapping into a wide variety
of information sources, from product websites to
consumer reviews. Consumers are also increasinglyinterested in knowing the social and environmental
impacts related to the products they buy and arechanging their consumption patterns accordingly.
Consumers expect a seamless experience acrosschannels, where the overall experience mattersmore than the channel, and where the best brands
take service from transactional to personal.

How we are responding

How we are responding

Breakthrough developments in science and technology,
including from outside our industry, such as battery
technology, enabled us to develop the innovative
smoke-free products that we commercialize today.
We continue to actively explore and responsibly
deploy opportunities brought by new technologies forapplication in our business. For instance, we started
using drones in tobacco-growing areas to monitor crop
quality and reduce the need for pesticides. Anotherexample relates to our fleet, where we increasingly rely
on telematics to help minimize road traffic accidents,
the main cause of work-related fatalities within ourcompany. As member of WBCSD, we are part of the“Future of Work” working group, crafting a future withworkforces that are secure, motivated, skilled, andprepared for challenges posed by technological change.

We are continuing our shift toward becoming amore consumer-centric organization. Consumer
feedback constantly feeds into our productdevelopment and improvement work, for example
with IQOS DUO launched in 2019, which allows twoconsecutive uses of our main smoke-free product,
without recharging the holder. We are serving ourconsumers through a wider variety of channels
than ever before, both offline – such as our 199
IQOS stores and over 3,000 exclusive IQOS retailtouchpoints – and online, including 23 call centersworldwide. Beyond offering smokers a less harmful
alternative to cigarettes, we are also aiming to
reduce our products’ environmental footprint byintegrating circularity considerations at the design
stage and strengthening our programs for collection
and recovery of used devices and consumables.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Climate change

Purpose of business

Income inequality

The climate crisis is one of the most pressing issuesof our time. As its impacts become increasingly
visible, participating nations to the Paris Agreement
within the United Nations Framework Convention
on Climate Change committed to keeping global
temperature increases this century well below
2.0 degrees Celsius above pre-industrial levels.
Governments are considering various regulatory andmarket-based mechanisms to lower carbon emissions.
Many of those are directed at businesses, whichmust intensify their efforts to reduce greenhousegas emissions and improve energy efficiency.

Business leaders are feeling pressure to rethink therole of business in society, with social norms changing
and expectations from employees, customers, and civilsociety rising fast. In addition, investors are increasingly
pressing companies to focus on their purpose, while
demanding that their reliance on people and natural
resources to sustain and grow their businesses must
be addressed. Companies that demonstrate a lack of
empathy, that don’t stretch themselves to serve others,
that remain silent or self-serving, risk finding theirproducts, brands, and reputations permanently scarred.

Income disparity is on the rise around the globe,
with an increasingly detrimental impact on society.
Growth has disproportionally benefited higher-income
groups, while lower-income households have beenleft behind. This trend increases pressure on social
cohesion, economic growth, and political agendas.

How we are responding

How we are responding

How we are responding

Climate protection is a clear priority for PMI.
We support the Paris Agreement and are aligning
our targets with the recommendations of theIntergovernmental Panel on Climate Change (IPCC),
aimed at stabilizing global temperature rise below
the internationally agreed 1.5 degrees Celsius.
We are undertaking a broad range of activities toreduce emissions and energy consumption within
our operations and across our value chain, and wehave committed to achieving carbon neutrality in our
direct operations (scope 1+2) by 2030 and acrossour value chain (scope 1+2+3) by 2050. In 2020, we
will improve our existing approach to internal carbon
pricing, so that we better internalize external costs
and achieve our carbon targets in an efficient way.

Our Board of Directors recently released ourStatement of Purpose, reaffirming the company’scommitment to a smoke-free future and emphasizing
the need for constructive engagement andpartnership to achieve our company’s purpose. The
Statement underscores that both our Board, as well
as Company Management, considers stakeholders
an essential element of our transformation, and theenvironmental and social impacts of our businessa core part of our corporate strategy. Importantly,
we regularly conduct sustainability materiality
analyses, with extensive stakeholder input toensure that we prioritize resources where we canhave the biggest impact. We aim for transparency
in all we do, reporting on our progress yearly andsharing topic-specific disclosures on our website.

We pay our employees equally for equal work, andwe aim to provide them with equal opportunities
independent of gender, country of origin, age, andother personal characteristics. In 2019, we achieved
the global EQUAL-SALARY certification, which
verifies that PMI pays men and woman equally for
equal work everywhere we operate. Our efforts
to address income inequality go beyond our own
operations, as we aim for the farmers from whom
we source tobacco to make a living income.
In many countries, smoking is more common among
lower-income adults, exacerbating health inequalities.
Alternative products present an opportunity to
reduce such inequalities. Our vision of a smoke-free
future is inclusive: We aim for all adult smokers whootherwise would not quit cigarettes to switch to lessharmful alternatives. Ensuring access to smoke-free
products is therefore a key priority as we broaden our
product portfolio and develop new business models.

21

Philip Morris International Integrated Report 2019$11.4bn
InputsCreatingvalue
at PMI
Our value creation model
describes what we doand how we allocate ourresources to deliver long-termvalue for both our company
and our stakeholders.

Accelerate theend of smoking
What we do

Replace cigarettes
with less harmful
tobacco and nicotine
products for the
benefit of adults who
would otherwise
continue to smoke
Capitals

Manufactured
NaturalFinancialSocial
We use the Integrated Reporting Framework,
published by the IIRC (International Integrated
Reporting Council), as the basis for thepresentation of information in this visual.

73,542

Most significant non-tobacco
direct materials purchased:
printed paper board used inpackaging, acetate tow used infilter making, and fine paper

315K

Tons of packed
tobacco sourced

9.5m

Employees of over
125 nationalities,
41.7% are women

Three

Sourcing$465m

Total R&D expenditure,of which 98% related tosmoke-free products

Gigajoules of energy
consumed in PMI
factories, offices, and fleet

942

2

27

365

R&D positions (FTEs),
Main R&D
including scientists, engineers, centers
technicians, and support staff

R&D– Sustainable supply chain management– Socio-economic well-being of tobacco-farming communities– Health, safety, and well-being at work
– Climate protection– Respect for human rights

84%

Human
Intellectual

Tobacco farmers
contracted by PMI
and our suppliersin 24 countries

Suppliers worldwide

Key sustainability impacts

Our mission

Annual spend on
supply chain

335K>33,200

Outputs

22

Of our procurement
spend on criticalsuppliers assessedin our due diligenceplatform88%

Of prompt actions
related to childlabor incidents in
our tobacco supply
chain resolved

97%

Of tobacco purchased at
no risk of deforestationof old-growth forest

61%

5,800

Patents granted
worldwide related tosmoke-free products

Toxicologicalassessment studies
completed by
PMI on smokefree products

Scientificpublications
by PMI
since 2008

CO2e intensity
reduction in tobacco
curing versus 2010+16

Employee net promoter score

Innovating for
better products

Overview

A

Long-term credit ratingby Standard & Poor’s andFitch; A2 by Moody’s

38

Owned manufacturing facilities – out of
which 8 producing smoke-free products– and 28 third-party manufacturers

Operatingwith excellence

Caring for thepeople we work with

$132bnCapital expenditure

Performance
metrics

Of our commercial
expenditure relating tosmoke-free products

Cars and vansin PMI fleet

4.0m

23

Cubic meters ofwater withdrawn
in our factories

Call centers

Manufacturing and operations

199

IQOS stores and over
3,000 exclusive IQOS
retail touchpoints– Littering prevention
Health, safety, and well-being at work

Reduction in scope
1 and 2 CO2eemissions since 2010

0.12

Lost time incident
rate per 200,000
hours worked>465K

People reachedthrough our social
contributions

84%

Of waste recycled
in our factories

86.6%

5.9m

Wholesalers
and retailers

679K

Retailers that sell
PMI smoke-free
product consumables

Retail and consumers– Product health impacts

39%

23

71%

24,000Market capitalization(at Dec. 31, 2019)$0.9bnProtecting theenvironment

Of employees trained on PMI Guidebook for Success– Responsible marketingand sales practices$2.3bnIn corporate
income taxes$29.8bn

In net revenues, ofwhich 18.7% are fromsmoke-free products~140m

People consuming
our products$72.1bn
In excise taxes
on PMI products

0.87

Collision rate within
PMI’s fleet ofvehicles (per million
kilometers driven)– Access to smokefree products– Product eco-designand circularity

13.6m

IQOS users, of which
9.7m have stopped
smoking andswitched to IQOS

71%

Of IQOS users who
have stopped smoking
and switched to IQOS

52

Markets in which IQOS
is available for sale

>827K

Cigarette butts collectedby PMI employees during
World Cleanup Day

24

Philip Morris International Integrated Report 2019

Risks,
opportunities,
and trade-offs
We discuss risk factors in our 10-K and
10-Q submissions to the U.S. Securities
and Exchange Commission (SEC).1 For
each of our sustainability material topics,
we strive to present an overview of risks
and opportunities under the “Why it isimportant to us and our stakeholders”
heading in each section. Where relevant,
we also seek to address potential trade-offs
between our ambitions and sustainability
efforts. These trade-offs involve, among
other issues, the higher energy and water
consumption tied to the production of ourheated tobacco units; the need to balance
tobacco pricing with the socio-economic
conditions of tobacco-farming communities;
and pressures to purchase products
and services at the best price while
also securing appropriate sustainability
performance from our suppliers.

1 The Annual Report on Form 10-K is a report filed
annually with the U.S. Securities and Exchange
Commission (the “SEC”); the report presents various
matters as required by the SEC and U.S. securities laws,
including business and financial overview, risks, as wellas certain legal proceedings. Our Annual Report on
Form 10-K for the year ended December 31, 2019was filed with the SEC on February 7, 2020.
An employee in PMI’s Operations Center in Lausanne, Switzerland

Overview

Innovating for
better products

Operatingwith excellence

Sustainability
at PMI

Our sustainability material topics are
structured around four pillars of action,
which form the basis of this report. Tier
1 topics are discussed in this report,
whereas tier 2 topics are only reported
on our website. The grouping of topics
in two tiers is based on a sustainability
materiality assessment we refreshed in
2019. This analysis informs our 2025
roadmap for improvement on these
topics. Progress here will enable us tomake our contribution to the relevant UN
Sustainable Development Goals (SDGs).

Protecting theenvironment

S TR ATEG I C PILL AR S

Innovating
for better
products

To become a sustainable tobaccocompany, we must take every step
to completely replace cigarettes withsmoke-free alternatives. Innovating
for better products is therefore
at the core of our corporate strategy.
As we are transforming our company,
we need to put increased emphasis on
sustainability: Effective management ofoperational topics such as responsiblecommercialization and respect for humanrights; social topics, such as the socioeconomic well-being of tobacco-farming
communities and the health, safety, andwell-being of all at work; and environmental
topics such as climate protection, littering
prevention, and integrating eco-designand circularity into product development.

Caring for thepeople we work withTransforming
for asustainablesmoke-free
futureOperatingwithexcellence

Caring forthe people
we work withProtecting
theenvironment

Performance
metrics

TIER 1 TOPI C S

Product healthimpacts

25

TIER 2 TOPI C S

Product addictiveness

Access to smoke-free
products

Product reliability

Responsible marketingand sales practices

Responsible andtransparent R&D

Sustainable supply
chain management

Business integrity

Data privacy and protection
Illicit tobacco trade prevention

Respect for humanrightsResponsible advocacy

Socio-economic
well-being of tobaccofarming communities

Fair working conditions

Health, safety, andwell-being at work

Fair fiscal practices

Community support
Diverse and inclusive working
environment
Talent attraction, retention,and employability

Climate protection

Forest conservation

Littering prevention

Biodiversity

Product eco-designand circularity

Water stewardship
Waste reduction

26

Philip Morris International Integrated Report 2019

Focusing on
what matters
A rigorous and formalizedmateriality assessment ensuresthat our strategy, work, andreporting cover the correct
topics in the right way; thisallows us to focus resources
for the greatest impact andmake progress against oursustainability roadmap.
We refreshed our materiality assessment
at the end of 2019, owing to the rapid
pace of PMI’s transformation and theincreasing maturity of our sustainability
work. We were also keen to reach out tomore of our stakeholders in the process.
A detailed report of our materiality
assessment can be found on PMI.com.
Working with a third party to facilitate themateriality assessment is critical to ensuring
a thorough and unbiased exercise. In eachof the past two years, we partnered with
BSD Consulting, an ELEVATE company,
to help us carry out our analysis in linewith the requirements of the Global
Reporting Initiative (GRI) Standards.

Our assessment process

We followed a four-step approach:S TEP 1S TEP 2

Identifying topics

Gathering stakeholder perspectives

In 2019, we revised the list of topics we
had established in 2018, accounting
for the internal and external feedback
gathered since the last assessment, as
well as a review of internal and externalsources. These sources included analysesof public health debates, investor
requirements, media reports, andsustainability standards and frameworks,
such as the GRI and SDGs. We also took
into account benchmarks of multinational
peers and global sustainability trends.

In our 2018 assessment, we conducted
insightful and probing stakeholderinterviews, coupled with an online survey.
In 2019, we did not interview stakeholders
directly, but we expanded the survey
element, collecting over 820 responses
from 12 stakeholder groups across 60
countries. The highest participation ratecame from employees (representing twothirds of responses), followed by supplierrepresentatives, members of civil society,and the business community. To ensurethat the overrepresentation of internal
stakeholders didn’t unduly influence thesurvey results, we applied a scenario in
which equal weight was given to internaland external stakeholder feedback.
The results confirmed our initial result,with no major discrepancies noted.

We clustered some topics that were deeply
connected and disaggregated others, suchas forest conservation and biodiversity, toallow for a more granular assessment. Our
research showed two topics – productreliability plus product eco-design andcircularity – rising in relevance in line withstakeholders’ evolving expectations andthe significant increase in our sales ofelectronic devices. Finally, we refined the
topic names and descriptions to enhanceclarity and comprehension. In certain
instances, topic descriptions were further
refined during the drafting of this report.

Employees in the office of Tabaqueira, PMI’s Portuguese affiliate

The new survey incorporated two sets ofquestions: topic prioritization and open
questions. Respondents largely confirmed
the 2018 PMI prioritization, while pointing
out some topics that they believed should
be prioritized more highly: respect forhuman rights; sustainable supply chain
management; health, safety, and wellbeing at work; and littering prevention.
The responses also allowed us to assess
the newly added topics, with responses
to the open questions providing valuable
insights into stakeholders’ concernsand expectations. These questions also
allowed us to identify the topics gaining
momentum among respondents – namely,
product eco-design and circularity, climate
protection, and water stewardship.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

PMI’s impacts on society
Pillar 1

Product addictivenessS TEP 3

Product health impacts

Assessing impact
We conducted a desktop assessment
to understand the degree of impact –on a simplified three-level scale – of
our identified 26 topics on sustainable
development (outward impacts on
the environment and society, inward
impacts on our business) and where in
our value chain they occur: upstream(e.g., tobacco growers, suppliers), in
our operations, or downstream (e.g.,
consumers, retailers). We also evaluatedthe likelihood, reversibility, and severityof each impact. This work was conductedby our consultants, which complemented
their expert desktop assessment withinsights from subject matter experts
within PMI. The impact assessment
ranked each topic according to its
relevance to sustainable development.

Access to smoke-free products

Product reliability

Pillar 2

Business integrity
Data privacy and protection
Fair fiscal practices
Illicit tobacco trade prevention
Respect for human rights
Responsible advocacy
Responsible and transparent R&D
Responsible marketing and sales practices
Sustainable supply chain management

Pillar 3

Community support
Diverse and inclusive working environment
Fair working conditions
Health, safety, and well-being at work
Socio-economic well-being of tobacco-farming communities
Talent attraction, retention, and development

Pillar 4

Biodiversity
Climate protection

Key: Impact level

Forest conservation
Littering prevention

StrongMediumLight

Product eco-design and circularity
Waste reduction
Water stewardship

Performance
metrics

Upstream27

PMI operations

Downstream

Philip Morris International Integrated Report 2019

Building and validating
the sustainability
materiality matrix
Using the survey and impact assessment
inputs, we generated a sustainability
materiality matrix. We mapped the
topics across the four pillars of oursustainability strategy and highlighted
those that stakeholders believe will
increase in importance. We thenagreed on the threshold governing therelative materiality of each topic.
The matrix allowed us to update theprioritization set in 2018, grouping the
topics into two categories: tier 1 topics
and tier 2 topics. The tier 1 topics arethose on which PMI believes it can havethe greatest impact. They are core to
our 2025 sustainability strategy, with
ambitious objectives for each. Progresson these tier 1 topics is subject to senior
management oversight, and performanceagainst our objectives is published at least
annually. We continue to manage andtrack our progress on our tier 2 topics.

Product health impacts

Responsible marketingand sales practices

Climate protection
Respect forhuman rights

Access to smoke-free
products

Forest conservation

Product eco-designand circularity

Fair working conditions

Relevance for stakeholders

S TEP 4HIGH

Our assessment process

Littering
prevention

Health, safety, andwell-being at work

Responsible andtransparent R&D
Water stewardship

Socio-economic well-being of
tobacco farming communities

Product addictivenessSustainable supply
chain management

Diverse and inclusive
working environment
Waste reduction

Biodiversity

Data privacy
and protection

Business integrity

TIER 1 TOPICS

Illicit tobacco
trade prevention
Product reliability

The results of this assessment werereviewed by members of our Company
Management, including our CEO, COO,
President External Affairs and GeneralCounsel, and SVP Operations.

Community
supportTalent attraction, retention,and development

Key:

Fair ﬁscal practices

Innovating for better products

Responsible advocacy

Operating with excellence
Caring for the people we work withProtecting the environment

LOW

28

Topics gaining momentum
LOW

Signiﬁcance of PMI’s impacts on society

HIGH

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withWay forward
The core purpose of our materiality analysis
is to guide us in prioritizing sustainability
topics, help us meet stakeholders’expectations, and focus our efforts inareas where we can create the most value.
In doing so, the assessment provides thegroundwork for our sustainability journey.
Our 2019 sustainability materiality refresh
informed the development of our 2025
strategy and is shaping our reporting.
We plan to conduct a comprehensive
sustainability materiality analysis every
three years and will carry out light updates
in between. We aim to strengthen andadjust our process with each exercise.
Meanwhile, PMI affiliates are also
conducting sustainability materiality
analyses to ensure their sustainability
focus is tailored to the local context. In
most cases, they run their assessments
based on the approach and the list of
topics we adopted at a global level. Moreinformation is available in our Sustainability
Materiality Report on PMI.com.

Mechanization in tobacco farming in Jujuy, Argentina

Protecting theenvironment

Performance
metrics29

30

Philip Morris International Integrated Report 2019

Our 2025 roadmap
WE FOCUS WHERE WE C AN HAVE THE GRE ATEST IMPAC T

In our last report, we
committed to further
developing our goals
and key performanceindicators (KPIs).
Throughout 2019,
we crafted our 2025
roadmap, based on oursustainability materiality
assessment and focusing
on tier 1 topics – thoseareas in which we
believe we can makethe greatest difference.
Each priority topic falls
under the responsibilityof a member of PMI’s
Company Management
and is assigned a target
against which ourprogress will be measured
and reported on annually.
As we are stilldeveloping certain KPIs,
we will provide a morecomprehensive overview
in our next report.

Product health impact and accessto smoke-free products
Broaden access for adult smokers to smoke-free products that are
scientifically substantiated as less harmful alternatives to cigarettes

Responsible marketing and sales practices
Commercialize our products responsibly, preventing youth fromaccessing and using them

Sustainable supply chain management
Further embed sustainability in our procurement practices, leveraging
on opportunities to create long-lasting social and environmental impact

Respect for human rights
Safeguard the human rights of people impacted by our activities
across our value chain

Socio-economic well-being of tobacco-farming communities
Eliminate child labor and provide safe and fair working conditions
on tobacco farms, and promote a living income for farmers

Health, safety, and well-being at work
Promote a safe and healthy working environment which protects
the physical and mental well-being of all while at work

Climate protection
Mitigate climate change by decarbonizing our operations andvalue chain, while increasing our resilience

Littering prevention
Prevent littering of our products by promoting appropriate
behavior among adult consumers

Product eco-design and circularity
1 Note: Where targets referto a different year than 2025,
it is specifically indicated.

Integrate circularity when developing our products, improving efficiency
and recyclability, and strengthening our collection program

OUR 2025 A SPIR ATIONAL TARGETS1>40m

Number of adult smokers globally who switch
to PMI smoke-free products>20m

Number of adult smokers in non-OECD countries
who switch to PMI smoke-free products>250bn PMI’s smoke-free product shipment volume<550bn PMI’s combustible product shipment volume>90%

Youth access prevention programs in place in markets
representing over 90 percent of PMI’s total shipment
volume by 2020

100%

Percentage of PMI’s portfolio of electronic smoke-freedevices equipped with age-verification technology by 2023

100%

Percentage of critical suppliers from whom
PMI sources sustainably

10

Highest risk countries covered by external human rights
impact assessments and findings addressed

100%
Zero

Percentage of contracted farmers supplying
tobacco to PMI who make a living income<0.3

Total recordable incidents rate for employees
and contractors

Child labor in PMI’s tobacco supply chain

Achievement of carbon neutrality of PMI’s direct

Net zero operations (scope 1+2) by 2030

Achievement of carbon neutrality of PMI’s value chain

Net zero (scope 1+2+3) by 2050

-50%

Reduction of plastic litter from our products (versus 2021)

100%

Percentage of PMI smoke-free product users who haveaccess to collection and recovery for devices and consumables

100%

Percentage of PMI smoke-free devices that haveeco-design certification

Transforming
for asustainablesmoke-free
futureOverview

Innovating for
better products

Operatingwith excellenceContributing to
the Sustainable
Development Goals

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

The 2030 Agenda for Sustainable
Development is a universal call for action
to address global challenges. At PMI,
we are committed to play our part inmaking the UN Sustainable Development
Goals (SDGs) become a reality.
Building on our refreshed materiality
assessment and our sustainability roadmap,
we reviewed the SDGs to which we
believe we can contribute most. We took
the same approach we applied in 2018:• We mapped our sustainability work
to the 17 SDGs and 169 targets.
• We identified the SDGs forwhich we believe we can havethe greatest positive impact.

H u m a n R i g ht s

SECONDARYSDGs

PRIMARY
SDGs• We aligned these SDGs to oursustainability strategy.
• We developed our SDG wheel
based on the tiered structure of ourstrategy – tier 1 and tier 2 topics.
We identified no significant changes
versus our 2018 assessment, with SDG 3(health and well-being) remaining at thecore of our efforts. SDG 2 was added tothe primary SDGs on which we focus,
reflecting greater emphasis on the socioeconomic well-being of tobacco-farming
communities and sustainable supply chain
management among our tier 1 topics.
With our 2025 roadmap now in place,
we do not anticipate any major changes
to our SDG focus in the medium term.

Primary SDGs to which PMI can contribute
SDG 2

Our efforts to sustainably manage our supply chain andpromote good agricultural practices can help improve thelivelihood and food security of the farmers who supply
us with tobacco and other agricultural products.

SDG 3

Cigarette smoking causes serious disease. By replacing cigarettes
with less harmful alternatives, we can significantly reduce thenegative impact of our products on the health of our consumers.

SDG 8

We strive to provide good working conditions for all our
employees and expect our suppliers to do the same for the
benefit of over 1 million workers throughout our value chain.

SDG 12We seek to improve the lifecycle impacts of our products– from reducing the environmental impacts of tobacco
growing to efficient low-carbon manufacturing, litter
prevention, product eco-design, and recycling programs.

SDG 13

Our carbon-neutrality program in our operations and ourrenewable curing fuels program in our tobacco leaf supply
chain contribute to mitigating the risk of climate change.

SDG 14

Our Environmental Commitment governs our management
approach to waste and water, to ensure that all effluents
released are within, or better than, levels required byregulations in the countries where we operate.

SDG 15We are committed to protecting biodiversity, especiallyforested areas affected by our operations, particularly in the
supply chain of tobacco leaf and paper-based packaging.

31

32

Philip Morris International Integrated Report 2019

Stakeholder
engagement
Transformation cannot
happen without conversation.
While PMI’s commitment
to a sustainable smokefree future is unwavering,
we cannot complete thisjourney alone.

During our sustainability materiality
assessment, we collected feedback
from stakeholders on specific topics
and trends involving key issues
Business and Human Rights Forum in PMI’s Taguig office in the Philippines

From casual conversations and commercial
business meetings to formal consultations
and advocacy processes, stakeholder
engagement is part of everyday life at PMI.
Whether it be with governments, publichealth bodies, enforcement agencies, e-waste
recyclers, NGOs, investors, wholesalers,
farmers, or someone else, we engage throughdialogue, participative processes, and thedisclosure of company information. We use
Principles and Practices to guide how we doit. Our Guidebook for Success (our code of
conduct) and an Overview of our Engagement
Principles are available on PMI.com.
PMI’s Statement of Purpose (see page 8)highlights key stakeholders to achieve asmoke-free future. The table on the next
page maps relevant stakeholders based on
the degree to which they are impacted by
our activities and relationships, as wellas on their ability to influence our businessobjectives, and shows how we engage withdifferent groups. Engagement enhances
our mutual understanding of interests,
concerns, and aspirations. The nature of ourengagement changes over time to reflect
the evolution of our business – particularly
our transformation to smoke-free products.
During our sustainability materiality assessment,
we collected feedback from stakeholders
on specific topics and trends involving key
issues. Our expanded survey in 2019
included a suite of open questions that
resulted in valuable insights into stakeholder
concerns and expectations. Many participants
mentioned that PMI’s progress in its
sustainability work was encouraging andrightly targeted. Respondents also
highlighted potential for improvement.
For instance, certain employees noted
their willingness to be more involved in thecompany’s sustainability efforts. Other
stakeholders stressed the need for PMI tocommunicate on its work further and set
clear targets and performance indicators
so that progress may be tracked. We took
such comments into consideration whendeveloping our sustainability strategy.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

33

Consultations

Hotline andcall centers

Reports andpublications

Regular or
ad hoc visits

Memberships
andpartnerships

Contractual
relationships

Forumsand events

Formalgatherings

Adult consumers

Corporate
communications

Adult consumers1

Training

Stakeholder groups

Surveys andquestionnaires

Stakeholders

Ongoing
dialogue

Means of engagement

Other

PMI employees and contracted employees
PMI management
Work councils

Employees

Trade unions
Intergovernmental organizations
Regulatory agencies
Standard setters

Regulators

Government authorities (including legislators)

Submissions andconsultations

Customs2
Academia
Local communities

Public health community

NGOs
Farmers and farmworkers
Farmers’ associations
Third-party-operated manufacturers

Supply chain

Access to fieldtechnician for
tobacco farmers

Contractors
Wholesalers
Retailers
Peers and other tobacco companies
Trade associations
Chambers of commerce

Retailers and wholesalers
Business
community

Academia
Local communities

Civil society

Social contributions

NGOs
Analysts
Investors

Financial community

Sustainability ratings agencies
Written press
Social media

Media

Journalists
1 Where appropriate and as per local regulations
2 We conduct trainings for customs and law enforcement officers as part of our efforts to fight illicit tobacco trade

Studies, interviews,
business achievements,
and certifications

34

Philip Morris International Integrated Report 2019

Governance and Board of Directors
management

PMI’s annual Proxy Statement contains
detailed information on our Board andcommittee structure, the independence
and diversity of the members, andthe responsibilities and meeting
frequency of each committee.

PMI’s governance structure
grounds our daily activities
to ensure we conduct ourbusiness in compliance with highstandards and with integrity.

The primary responsibility of the Boardof Directors is to foster the long-term
success of the company, consistent with
its statutory duty to shareholders. The
Board has responsibility for establishingbroad corporate policies, setting strategic
direction, and overseeing management,
who are responsible for the day-today operations of the company.
The Board has established various standing
committees to assist with the performanceof its responsibilities. The Board has
adopted written charters for each of thesecommittees; they are available on PMI.com.

Our Board is a diverse, highly engaged
group that provides strong, effective
oversight of our company. Both individuallyand collectively, our Directors have thequalifications, skills, and experience needed
to inform and oversee the company’s
long-term strategic growth. Each Director
has senior executive experience, in manycases with large, complex organizations
with significant global operations. Several
Directors have leadership experiencein the global consumer products sector,
while others bring expertise regarding
information technology, cybersecurity,
digital transformation, sustainability, and
ESG matters. Please see PMI’s 2020 Proxy
Statement on PMI.com for biographicalinformation about each Director.
The Board adopted corporate governanceguidelines, which, along with the company’s
charter, bylaws, charters of our Board
committees, as well as our code of ethics,
code of business conduct and ethics for

directors, and related person transactions
policy, provide the framework for thegovernance of the company. All of these
documents are available on PMI.com.
The Board’s oversight of the company’ssustainability work is detailed in
the sustainability governance andmanagement section on the next page.

Company Management
PMI’s Company Management encompasses
those employees who are executive
officers under the Section 16 rule of
the Securities Exchange Act of 1934.
As of December 31, 2019, our Company
Management was made up of
25 members, of whom two were
women. A biography of each memberof PMI’s Company Management
can be found on PMI.com.

Board ofDirectors

Committees

Compensationand Leadership

Finance

Nominating andCorporate Governance

Product Innovation
and Regulatory Affairs

Audit

Membership

Five Independent
Directors

10 Independent
Directors

Six Independent
Directors

Eight Independent
Directors

Six Independent
Directors

Chair

Werner Geissler

Jun Makihara

Kalpana Morparia

Frederik Paulsen

Jennifer Li

4

5

3

2

7

2019 meetings

The Board of Directors and its committees as of Dec. 31, 2019

covered in the integrated risk assessment.
In 2019, the four functions held monthly
meetings, allowing for continuous
evaluation of the risk environment, anda new common risk assessment tool was
introduced, aligning and consolidating
risks and action plans. PMI’s CRGC andthe Audit Committee of the Board of
Directors receive quarterly updates.
Our governance and technical procedures
for relevant controls align with the
Sarbanes–Oxley Act. Corporate strategy
and operations are managed in a way that
accounts for functional, market, and productrisks, and our Chief Strategy Officer reports
to our CEO directly on strategic group risks.

1 In June 2020, the Board established a new Consumer
Relationships and Regulation Committee. A full descriptionof the responsibilities of each of the Board Committees is
set forth in the Committee charters that are published on
the Company’s website.

Our risk management framework

l
na

k
ris

s

Pr
oj
e

s

Led by the CSO, PMI’s sustainability teamis responsible for defining and coordinating
our corporate sustainability strategy. The
team works closely with all functions
and across all geographies to drive theimplementation of the strategy. Certain
functions have dedicated teams addressing
sustainability in their areas of expertise,and our affiliates have dedicated local
sustainability coordinators. This helps with
the implementation of global strategy andprograms at the local level and ensures local
realities are reflected in our global work.

The CRGC coordinates an integrated
risk assessment. PMI’s integrated risk
assessment process brings together thefunctions of Corporate Audit, Internal
Controls, Ethics and Compliance, andIntegrated Information Security and Data
Privacy. Taking a holistic approach, thesegroups collaborate to understand, assess,and act on strategic, emerging, projectrelated, and operational risks. Sustainability
risks and opportunities such as safety, leaf
supply, climate change, electronic waste,and labor conditions, for instance, are

Ethics &ComplianceInternal
Controls

Information
Security & Data
Protection

Corporate
Audit

i sk

cr

g

gi

ri s

n

As part of the risk management process, thecompany has established a Corporate Risk
Governance Committee (CRGC) comprisingsenior executive officers, including the
CFO; Controller; VP, Corporate Audit;
VP, Treasury and Corporate Finance; ander

Risk management is overseen by thecommittees of the Board as well as by thefull Board. We identify and prioritize key
enterprise risks based on four dimensions:the impact of a risk on PMI if it were tooccur, its likelihood, its velocity, and its
interconnectivity with other risks.

s

Risk management

Em

Several committees of the Board of
Directors are tasked with oversight
responsibility for the topics coveredin this report. The Nominating andCorporate Governance Committee (NCGC)
oversees the company’s sustainability
strategies and performance and advises
the Board on sustainability matters. Until
June 2020, the Product Innovation andRegulatory Affairs Committee oversaw
the scientific assessment of smoke-free
products, innovation, advocacy, andconsumer affairs.1 The Audit Committee
oversees, among other matters, the

The CSO leads the integration ofsustainability across our business. He isa member of the External Engagement
Committee (EEC), composed of thecompany’s CEO, COO, and President, EA
and General Counsel, as well as seniorleaders from various functions. Supporting
the Company Management, the EEC is
responsible for developing and deploying
strategies and programs to propel better
choices for consumers. This includes theoversight of PMI’s sustainability work.

the Chief Ethics and Compliance Officer,
VP. Ownership of each of the prioritizedrisks is assigned to a member of senior
management; its oversight is assigned toa particular Board committee or to thefull Board. Management reports on theserisks to the appropriate committee andto the full Board throughout the year.

35

k
ris

Sustainability governanceand management

At least once a year, the NCGC is updated
on progress by PMI’s Chief Sustainability
Officer (CSO), who reports to the President,
External Affairs (EA) and General Counsel,
a member of the Company Management.

Performance
metrics

ct• To support our ability to attract,develop, and retain world-classleaders in a controversial industry.
• To align the interests ofexecutives and shareholders.
• To reward performance against
predefined objectives.
• To support long-term businessgrowth, superior financial results,
sustainability efforts, societalalignment, and integrity of conduct.
• To promote internal fairness and adisciplined assessment of performance.
• To align executive incentives with
our risk management objectives.
These objectives provide the framework forthe various components of compensation
and benefits and take into account the
specific nature of our business. Together,
these elements form an aggregate packagethat is intended to be appropriately
competitive. Please see PMI’s Proxy
Statement for further information on
our executive compensation program.

risk management of climate change, of
manufacturing and supply chain disruption,and the cybersecurity risk assessment.

Protecting theenvironmenttegi

Our compensation and benefits
program supports our business andfinancial objectives. Each component
is designed to achieve one or moreof the following objectives:

Caring for thepeople we work with

atio

Executive compensation

Operatingwith excellenceerInnovating for
better products

Op

Overview

ks

St

ra

36

Philip Morris International Integrated Report 2019

CASE STUDY: PORTUGAL

A modelfor integrated
sustainability
Founded in 1927, Tabaqueira
has been part of PMI since1997, when the company
became its majority shareholder.
It is the largest tobaccocompany in Portugal, and its
factory in Albarraque is oneof PMI’s biggest European
production centers.
Around 900 people work at Tabaqueira,with around 500 based at its factory,
producing cigarettes for brands such
as Marlboro, L&M, and Chesterfield, as
well as local brands SG and Português.
Several central or regional PMI business
functions are also located in the country.

Location

Portugal
Employees~900

Manufacturing
facility

Albarraque

IQOS commercialization
At the end of 2015, Portugal became
the fourth PMI market to commercialize
IQOS, with an initial introductionin the Lisbon area. The product’scommercialization required the company
to adopt a consumer-centric model.
As a first step, Tabaqueira opened an
IQOS store in Lisbon at the beginningof 2016. To ensure the product wasavailable only to the intended audience– adult smokers – and to trial a newcommercialization approach centeredon direct contact with consumers,purchases initially were limited to a selectgroup of registered users: Tabaqueira
employees and adult smokers they
recommended for membership.

Additional mobile and temporary points
of sale were subsequently established invarious locations throughout the country.
Sales were then extended to include
traditional retailers. As of the end of 2019,
the IQOS device and its heated tobacco
units could be purchased at thousandsof points of sale across Portugal.
In parallel to making IQOS available toadult smokers, Tabaqueira has prioritizedraising public awareness of the product andproviding access to accurate information
about it, while also guarding against
access to youth and nonsmokers. To thisend, the company instituted ID checks
at points of purchase and also registers
IQOS devices so each is linked to its user.

Customers at an IQOS pop-up store in Lisbon, Portugal

37

Tackling cigarette butt littering
To address the issue of cigarette butt
littering in Portugal, Tabaqueira collaborated
with multiple stakeholders, including
the European Blue Flag Association,
the Municipality of Oeiras, and rail andinfrastructure organizations. Together, they
have been implementing impactful activities
designed to change consumer behavior.
In December 2018, a campaign was
launched to raise awareness of the issue
and encourage consumers to dispose ofcigarette butts properly, in ashtrays andbins. The campaign extended nationwide
throughout 2019, spreading to events
such as the Regata de Portugal andsummer festivals. In total, 36,000 portable
ashtrays were distributed at such events.
Tabaqueira employees also took part in
activities to mark World Cleanup Day andfurther raise local awareness of the issue.

PMI employees cleaning up a beach in Portugal

Together, they have been
implementing impactfulactivities designed to change
consumer behavior.
Along with the local Sintra Municipality
and Movimento Claro (an anti-litteringorganization), they helped to clean
the beach of Praia Grande in Sintra,
collecting a total of 115 kilograms ofwaste, including 17,500 cigarette butts.
It’s expected to continue this work in
2020, with further initiatives and cleanups
planned to continue raising awarenessand help drive consumer behavior
change to protect the environment –forests and oceans, in particular.

38

Philip Morris International Integrated Report 2019

Alliance for Water
Stewardship certification
In 2019, Tabaqueira’s factory became
the first in Portugal to receive theAlliance for Water Stewardship (AWS)
certification, recognizing its good practices
in sustainable water management.
The AWS standard specifies how acompany should address its water
challenges in consultation with local
stakeholders, while also addressing its
water consumption and discharges.
PMI chose Tabaqueira’s factory as
its first European site to undergo the
AWS certification process because
it faced several risks, including:• Flooding – The factory is in an
urbanized area where flooding
is a risk during heavy rainfall.
• Water pollution – A small river runs
through the factory premises. While
factory activities do not impact theriver, pollution is a potential risk.

• Water scarcity – The factory is in a
Mediterranean location prone to drought.
• Water sanitation and hygiene –The factory water supply and its
multiple uses must undergo constantmonitoring and quality assurance.
These challenges were assessed during
the AWS certification process, leading tointerventions such as the renaturalizationof the Ribeira do Marmelo, a nearby river,to mitigate the risk of flooding. Also, thefactory cleaning processes were further
optimized. Tabaqueira has requested
permission to reuse wastewater treatedin the factory to irrigate its gardens.
Furthermore, a new automatic chlorination
process was implemented in the factory
reservoirs to improve water quality.
Thanks to its ongoing efforts tomanage water responsibly, Tabaqueira
decreased its water consumption by
48 percent between 2010 and 2019.

Employees in the manufacturing facility of Tabaqueira, PMI’s Portuguese affiliate
An employee in the manufacturing facility of Tabaqueira, PMI’s Portuguese affiliate

A focus on safety
Eliminating unsafe behaviors within
the factory facilities is a priority for
Tabaqueira. In 2018, the location recorded
12 minor incidents after employees
returned from summer vacation,highlighting an area for improvement.
To address such incidents, the affiliate
launched a “Back to Work” campaign
in 2019 to remind employees returningfrom holidays of the safety procedures
within the factory. This helped achievea substantial reduction in incidents,
with only three recorded that year.
At the same time, the affiliate reinforced
the use of behavioral observation systems(BOS) as a platform. BOS works on
the principle of preventing injuries bymonitoring, recognizing, and reinforcing

personal behavior. It provides a highawareness of safety and is a platform foreveryone’s involvement on a regular basis,in order to create an interdependent safety
culture. Tabaqueira employees have been
trained on BOS to build the capability of
preventing work-related accidents anddevelop skills to care for colleagues while atwork. The tool provides data measurementthat will help to better understand thecauses for unsafe behavior. BOS training has
already been delivered to more than 380
factory employees (representing 72 percentof the workforce). Thanks to this training,
employees have incorporated the tool into
their daily work. In December 2019 alone,
2,058 observations were catalogued. The
challenge for the future is to have all factory
employees conducting one BOS per day.
The rollout will continue throughout 2020.

39

PILL AR I

Innovating for
better products
We recognize that cigarette smoking causes
serious diseases and that the best way to
avoid the harms of smoking is never to startor to quit. Nevertheless, for adult smokers
who would otherwise continue to smoke,
we believe that product innovation has asignificant potential to benefit public health.

Product healthimpacts
Page 40

To be successful, we need to continue innovating in
two areas. First, we are developing a product portfolioof smoke-free products with a significantly reduced
health impact compared to combustible cigarettes. The
reduced risk profile of these products is scientifically
substantiated, following a step-by-step program derived
from practices of the pharmaceutical industry.
Second, to reduce harm at the individual and populationlevel, smokers must be interested in switching to smokefree products, rather than continuing to smoke cigarettes.
Here we need to innovate, transform our internalorganization, and engage with legislators and regulators
to ensure that people who would otherwise continue
to smoke have access to smoke-free alternatives.

Access tosmoke-free
products
Page 54

40

Philip Morris International Integrated Report 2019

Product
healthimpacts
Experts and many regulatory
bodies, such as the U.S. FDA,
agree that the primary causeof smoking-related diseases is
not nicotine, but the inhalationof harmful and potentiallyharmful constituents formed
as a result of burning tobacco.¹
We are therefore developing aportfolio of products that deliver
nicotine without combustion– smoke-free products.

Megatrends• Technological progress• Changing consumer expectations• Purpose of business
1 Source: https://www.fda.gov/tobacco-products/healthinformation/nicotine-addictive-chemical-tobacco-products

A scientist in PMI’s R&D center in Neuchâtel, Switzerland

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Why it is important to us and our stakeholders

Topic description
Reducing the risks to health associatedwith the use of our products.

PMI is investing in the development and rigorous
scientific assessment of a portfolio of potentiallyreduced-risk alternatives to cigarette smoking.

Cigarette smoking is the most dangerous formof tobacco use. It causes several serious diseases,
including cardiovascular disease, lung cancer,
and chronic obstructive pulmonary disease. The
best way to avoid the harms of smoking is neverto start or, for those who do smoke, to quit.

Our approach is based on the acknowledgmentthat new products will benefit public health ifthey meet three conditions: First, the totality ofevidence must demonstrate that a product has
the potential to significantly reduce risk in thelong-term, compared with continued smoking.
Second, adult smokers must consider them
acceptable alternatives to cigarettes and be
willing to switch to them exclusively. And third,
their use by unintended audiences – youth,
never smokers and former smokers – should be
minimized.

However, according to WHO forecasts, there
will still be more than 1 billion smokers by
the year 2025. For these people, alternative
products that significantly reduce the risk of
disease compared with continued smoking arefundamental. When properly regulated, they
can complement existing regulatory efforts
aimed at reducing smoking prevalence.

Relevance of the topic
Relevance for stakeholders

Overview

Connectivity with other sustainability issues at PMI

4

PMI's impacts on society

Impact in our value chain
Upstream

PMI operations

2
1

5

3

6

Downstream

7

8

Key stakeholders
Adultconsumers

Public healthcommunity

Civil society

Regulators

Media

Product
healthimpacts

9

10
13

12

11

1 Access to smoke-free products
2 Product addictiveness3 Product reliability
4R esponsible marketingand sales practices
5 Data privacy and protection
6R esponsible and transparent R&D
7 Respect for human rights
8 Illicit tobacco trade prevention
9 Responsible advocacy
10 Business integrity
11 Health, safety, and well-being at work
12 Talent attraction, retention,and employability
13 Product eco-design and circularity

41

42

Philip Morris International Integrated Report 2019

Achieving our aims
Science and technology are essential indevising solutions for bringing an end tocigarette smoking. The principal sourceof cigarette-related diseases is known: It
is the burning process that creates thevast majority of the harmful chemicals
that are the primary causes of smokingrelated diseases. In our smoke-free
tobacco products, we are able to precisely
control temperatures so that they releasenicotine and flavors but do not reach thetemperature necessary for combustion to
occur. By avoiding combustion, we reduceor eliminate the formation of harmful andpotentially harmful chemicals (HPHCs).

A scientist in PMI’s R&D center in Neuchâtel, Switzerland

The toxicological assessment of smoke-free
products is guided by two fundamental
principles. The first principle is derived
from epidemiology: Smoking-related harmand disease are directly caused by longterm exposure to the toxicants found incigarette smoke. The best way to avoid
these harms is never to start smoking. For
men and women who smoke, cessation
has been demonstrated to lead to reduced
harm and risk of tobacco-related disease
by eliminating exposure to cigarettesmoke toxicants. Complete, long-term
cessation is the maximum risk-reductionthat a smoker can achieve, and hence is
the “gold standard” for the assessment ofsmoke-free products. The second principle
is derived from toxicology: The degreeof exposure to toxicants determines thenature and degree of adverse health effects.
For exposure to take place, toxicantsneed to be present – meaning that they
are emitted by the product or process ofuse. A product with significantly reduced
toxic emissions compared with cigarettes
has the potential to significantly reduce
exposure to toxicants, which in turn willlead to a reduction in adverse healtheffects. In line with those two principles,
our toxicological assessment programaims to compare the health outcome ofswitching to smoke-free products withongoing smoking and with cessation.

Smoke-free products are not risk-free,
and they contain nicotine, which is
addictive. The way we assess the riskof using them is always in comparison
with cigarette smoking or cessation.

The precautionary principle
While regulators should exercise
precaution in matters that entail
scientific uncertainty, such measures
must be proportionate. Despite
uncertainty, action should be taken
to anticipate, prevent, or minimize
possible damage in the future. Smokefree products are not risk-free, and a
regulator may claim that some risks
have not yet been fully assessed.
Waiting for absolute scientific certainty,
however, could potentially result ingreater harm. The precautionary
principle should encourage regulators
to engage in a holistic assessmentthat balances the risks and benefits
on each side of the spectrum, and to
take a proactive approach to allow
the introduction of better alternatives
to smoking, as they are more likely
to improve individual and population
health. Consumers should have thechance to benefit from innovation thathas allowed for the creation of lessharmful alternatives to cigarettes, even
if the science around these alternatives
is still at the nascent stages. Hazardous
products should be substitutedby less harmful alternatives.

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Smoke-free products timeline
PMI has been working on innovative, noncombustible tobacco products to replace cigarettes for
decades. After years of research and two unsuccessful commercialization attempts, we launched IQOS, a heatnot-burn product and our main smoke-free product, in 2015. As of the end of 2019, the product was available in
52 markets, and we estimate that approximately 9.7 million adults had stopped smoking and switched to it.

1998‒99

2003

2004

2006

2007

Philip Morris USA andPMI launch the firstelectronically heated
tobacco product, called
Accord in the U.S. andOasis in Japan.

The World Health Assembly adopts
the WHO Framework Convention
on Tobacco Control (FCTC), which
defines tobacco control as “a rangeof supply, demand, and harm
reduction strategies that aim to
improve the health of a population
by eliminating or reducing theirconsumption of tobacco products
and exposure to tobacco smoke.”

The first e-cigarettes arecommercialized, in China.

PMI launches Heatbar in
Switzerland and Australia.
Heatbar is the second
generation of electronicallyheated tobacco products;
consumer acceptance is low
due to the bulky device andsuboptimal taste, and the
product is withdrawn.

The U.K.’s Royal College ofPhysicians publishes a reporton tobacco harm reduction.
It states that “nicotine itself
is not especially hazardous”
and that “if nicotine could
be provided in a form that is
acceptable and effective asa cigarette substitute, millionsof lives could be saved.”

2016

2015

2014

2009–10

PMI commercially launches
IQOS in key cities in Japan,
Italy, Portugal, Romania,
Russia, and Switzerland.

• PMI pilot launches
IQOS in Milan, Italy,
and Nagoya, Japan.
• PMI announces theinvestment of USD 680
million to build its first
purpose-built factoryfor heated tobacco
units, in Bologna, Italy.

PMI opens its new
research and development
facilities dedicated to thedevelopment and assessmentof smoke-free products in
Switzerland and Singapore.

• PMI announces its ambition
to lead a full-scale effort
to ensure that smoke-free
products replace cigarettes.
• PMI submits a modified-risk
tobacco product (MRTP)
2017
application for a version of
IQOS to the U.S. Food and• PMI submits a premarket
Drug Administration (FDA).
tobacco product authorization• Around 1.5 million adult(PMTA) application for a version
smokers have stopped smoking
of IQOS to the U.S. FDA.
and switched to IQOS.
• More than 4.7 million adultsmokers have stopped smoking
and switched to IQOS.

2018

2019

• Launch of IQOS 3 andIQOS 3 MULTI.
• PMI pilots IQOS MESH, ane-vapor product, in the U.K.
• More than 6.6 million adultsmokers have stopped smoking
and switched to IQOS.

• Launch of IQOS 3 DUO.
• The U.S. FDA authorizes a version
of IQOS for sale in the U.S.,
following its comprehensive assessmentof PMI’s PMTA application.
• Around 9.7 million adult smokers
have stopped smoking
and switched to IQOS.

43

44

Philip Morris International Integrated Report 2019

To demonstrate that switching to oursmoke-free products results in reduced
exposure to toxicants, which can or does
reduce the risk of disease compared with
continued cigarette smoking, we arefollowing a rigorous scientific assessment
program aligned with the U.S. FDA’s
draft guidance on modified risk tobacco
products (learn more about how we
conduct our R&D on PMI.com). Ourassessment program also aims to guard
against the use of our smoke-free products
by unintended audiences, such as former
smokers, never smokers, and youth.

We are following a rigorous
scientific assessment
program aligned with the
U.S. FDA’s draft guidance.

Our two main R&D centers, locatedin Switzerland and Singapore, employ
hundreds of scientists, engineers, andother experts to work on the development
and assessment of smoke-free products.
This work is headed by our Chief Product
Officer, Chief Life Science Officer, andChief Consumer Officer, who are membersof PMI’s Company Management. In 2019,98 percent of our R&D expenditure wasdedicated to smoke-free products. This
includes costs related to clinical studies,
the development of machinery andprototypes, and product acceptability
testing. The remaining 2 percent of our
total R&D expenditures largely relate
to regulatory compliance requirementsfor our combustible tobacco products.
The development and assessment ofsmoke-free products involve a networkof organizations with which we partner
worldwide, including start-ups, laboratories,
and universities (see the Swiss example
in our case study on page 66).
It is the responsibility of any manufacturer
to assess and demonstrate that switchingcompletely to a novel tobacco and nicotine
product has the potential to reduce the riskof harm compared with continued smoking.
To ensure trust, this assessment must be
independently verified. PMI has adopted
both passive and proactive approaches toverification. Passive approaches include
independently funded studies without
interaction from PMI, as well as the indepth review and inspection of PMI’s
R&D and manufacturing processes, study
documentation, data, and premises byregulatory agencies upon regulatory
submissions. Just as with our own research,
it is essential that any independent study
be conducted with the appropriate degreeof scientific rigor. The methodologies andequipment used should be fit-for-purpose
and validated, and the experimental results
should be interpreted and reported in an
accurate and non-misleading manner.
To complement these passive approaches,
we have developed a strategy to build
confidence in our scientific methods
and results by taking several proactive
steps, including the periodic inspection
and renewal of ISO 17025 for testing
and calibration laboratories and Good
Laboratory Practices (GLP) accreditations
by national authorities; publication of our
methods and results in peer-reviewed
scientific literature or on platforms such as
ClinicalTrials.gov; crowdsourced verificationof our methods and study results throughthe sbv IMPROVER platform; and proactive
sharing of data to enable analysis byindependent third parties through the
INTERVALS platform. Read more on thetransparency of our R&D on PMI.com.

It is clear that long-term epidemiological
data are needed to accurately quantify
the overall disease risk reduction effectassociated with switching from cigarettesmoking to the use of smoke-free products,
as well as to evaluate the excess diseaserisk associated with the use of theseproducts. Generating epidemiologicalevidence requires that smoke-free products
be available in the market for many years.
The products must be used exclusively
by a large portion of adult smokers who
have fully switched for at least a decade.
This renders epidemiological studies
impracticable in a premarket setting or in
the early phase of market introduction.

Scientific challenges in the assessmentof smoke-free products
Quantifying precisely the diseaserisk-reduction potential of smokefree products before, or soon after,
they are introduced into the market
comes with scientific challenges.
The first important challenge is thatmost smoking-related diseases generally
occur after decades of smoking.
Additionally, the reduction in excess
risk upon smoking cessation – andtherefore also upon switching to smokefree products – also takes years. Thisis complicated even further because
most smoking-related diseases are also
affected by other important factors
such as diet and lifestyle. Together all of
this makes the measurement of healthoutcomes after switching difficult – if
not impossible – in the short-term.
The second challenge is that smoking
affects several organ systems and many
biological mechanisms. As a result, nosingle biomarker can, on its own, cover
all of the smoking-related diseases.
Therefore, several biomarkers need tobe considered together, to strengthen
the evidentiary basis with coherent,
mutually supportive data that cover themultifaceted impact of cigarette smoking.
Scientists and regulators have not yet
reached consensus on the range ofbiomarkers that should be used to assess

the effects of smoking, smoking cessationor switching to smoke-free products.
Considering these two challenges
in particular – the complexity andmultifaceted nature of smoking-relateddiseases and the long-term natureof measuring disease – a totality ofevidence approach is fitting in the
short term to assess the disease riskreduction potential of smoke-free
products. This approach takes evidence
from different studies to cover all of
the steps in disease development fromthe emission of toxicants all the way
to overt disease. For IQOS, the totalityof evidence generated by PMI brings
together extensive aerosol chemistrydata, nonclinical studies (18 studies,including animal models of disease
covering the major smoking-relateddiseases), and clinical studies (10 studies
with thousands of participants with up to
six months of exposure). The strength of
this evidence comes from the coherence
and consistency of the results acrossthe different studies, endpoints, disease
pathways, and biological systems all
pointing in the direction of risk reduction.
It is the totality of the evidence thatallows us to conclude that IQOS reduces
the risk of smoking-related disease.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

U.S. vaping investigation
In August 2019, the U.S. Centers for
Disease Control and Prevention (CDC)
and the FDA started an investigation
into almost 3,000 reported cases of
respiratory illnesses thought to beconnected to vaping. The U.S. CDC
termed the illness “e-cigarette orvaping product use-associated lunginjury” (EVALI) and, sadly, there were
68 confirmed deaths according to theirlast and final report from February 18,
2020. CDC’s investigation concluded
that vitamin E acetate was strongly
linked to the EVALI outbreak. Thischemical appears to have been added totetrahydrocannabinol (THC)-containing
vaping products – particularly thosefrom illicit sources – which playeda major role in the outbreak.
Over the latter half of 2019, there wassignificant – often inaccurate – news
coverage of EVALI, not just in the U.S.
but also worldwide. These news reports
often incorrectly conflated EVALI withthe use of legal, regulated e-cigarette
products and were seized upon by special
interest groups opposed to tobacco harm
reduction. The unfortunate outcome
has been confusion among smokers ande-cigarette users, resulting in a rise in theincorrect perception that e-cigarettes areequally or more harmful than cigarettes.

Laboratory analysts in the manufacturing facility of Papastratos, PMI’s Greek affiliate

More worryingly, there have also
been reports that smokers who had
switched to e-cigarettes are turning
back to cigarettes, particularly thosein older age groups. Once the CDC’s
conclusions were available in February2020 – making the connection between
EVALI and illicit products – the damage
had already been done, to the detrimentof men and women who smoke.
When manufactured according to proper
safety and quality rules and responsiblycommercialized, smoke-free products
like e-cigarettes, while not safe, have thepotential to reduce the risk of tobaccorelated harm for adult smokers who
switch completely from combustible
cigarettes. Their development,
assessment, and use by adult smokers
who otherwise would continue to smoke
should be encouraged in the interestsof public health. They should also be
subject to regulation and governmental
oversight. It is particularly important that
regulation gives consumers confidence
in the quality and safety of the products
they use, and that manufacturers
develop evidence that their products
are better than cigarettes for adultusers and for the public health overall.

45

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Philip Morris International Integrated Report 2019

Our heat-not-burn IQOS productThe difference between heated tobacco products and e-cigarettes

What is it and how does it work?
Our main smoke-free product, IQOS, is abattery-powered heat-not-burn product,
which heats the tobacco to produce a
nicotine-containing aerosol that is inhaled by
the user without combustion of the tobacco.
IQOS works as a tobacco-heating system andis composed of three main components: aheated tobacco unit, a holder, and a charger.
Heats
tobaccoVaporizes
e-liquid
HE ATEDTOBACCOE- CIG ARE T TE

Uses
tobaccoNo
tobaccoversusNicotinenaturally present
in tobacco

Tobacco-derived
nicotine addedin e-liquid

No ash,no smokeNo ash,no smoke

The electronically heated tobacco unit
is a novel product containing speciallyprocessed tobacco and two filter sections.
The unit has been designed specificallyand exclusively for use with the holder (theheating device). It contains a processed
tobacco plug designed to be heated but notburned. It is made of tobacco leaves, which
are ground and reconstituted into tobacco
sheets, called “cast-leaf.” These sheets arethen crimped and made into a tobacco plug.
The user inserts the heated tobacco unit
into the holder. Once activated, the holder
heats the tobacco via an electronicallycontrolled heating blade. The holder stores
sufficient energy to permit the use of one
or two heated tobacco units, depending on
the IQOS model. Each tobacco unit provides
a maximum of 14 puffs or around six
minutes of consumption, whichever comes
first. The holder contains a small battery,which needs to be recharged by inserting
it into the charger, which in turn can berecharged using a household power socket.
The integrated version of the product,
IQOS Multi, combines the holder andcharger and allows for the use of up
to 10 heated tobacco units before it isnecessary to recharge the battery.
We continue to enhance our IQOS
product, driven by consumer insights andsupported by scientific substantiation.
In September 2019, we launched thelatest generation of the device, IQOS
DUO, with new technology that allows
for fast charging and two consecutive
uses without recharging the holder.

Overview

Innovating for
better products

How does it reduce risk?
IQOS reduces the risk to health, comparedwith cigarette smoking, by avoiding burning
tobacco. Decades of epidemiological data
have demonstrated that the developmentof smoking-related diseases is triggeredby the chronic inhalation of the harmful
and potentially harmful chemicals(HPHCs) found in cigarette smoke. Whena smoker lights a cigarette, it starts ahigh-temperature reaction, from 600 to
900 degrees Celsius, known as burningor combustion, which releases HPHCs.
When IQOS is used, the device constantly
monitors and controls the temperatureof the tobacco so that it stays below 350
degrees Celsius. As a result, the nicotinecontaining vapor the consumer inhales
contains significantly lower levels of HPHCs
than cigarettes. We have scientifically
substantiated that during the operationof IQOS, no combustion occurs, andthe aerosol generated has on average
95 percent lower levels of HPHCs thanfound in reference cigarette smoke.

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

47

The different parts of an IQOS 3 device

Heatedtobacco unit
(consumable)

COMP OSITION OF A
HE ATED TOBACCO UNIT

Mouthpiece filter
HolderCharger

PLA filter

What is an aerosol
The term aerosol is commonly usedin chemistry to describe a gaseous
suspension of ﬁne solid particles and/or liquid droplets. The IQOS device
heats a specially formulated tobacco
blend to temperatures well below thatnecessary to initiate combustion. This
heating releases nicotine and ﬂavors,
generating an aerosol that is not smoke.
Experiments performed under speciﬁc
nitrogen and air conditions conﬁrm theabsence of combustion in the IQOS
device. The absence of combustionand smoke has been confirmed bymultiple experts in countries that
include Australia, Italy, Japan, New
Zealand, Poland, the U.K., and the U.S.

Heating
blade

CasingControlelectronics

Battery

Tobaccoplug

Cellulose
acetate (CA)48

Philip Morris International Integrated Report 2019

What scientific evidence have
we gathered to date?
IQOS is the most developed and mostthoroughly assessed of our smoke-free
platforms. We have accumulated extensive
clinical and nonclinical data to support its
potential to reduce the risk of developing
smoking-related diseases comparedwith continued cigarette smoking.
As a first step, we compared the chemicalcomposition of the IQOS aerosol withthat of the smoke from a cigarette, using
standardized and validated analyticalmethods to quantify the most important
HPHCs known to be carcinogens or
respiratory or cardiovascular toxicants,
or to be involved in other toxic effects.
We found that HPHCs are reduced on
average by 95 percent compared with thereference cigarette's smoke – importantly,
the carcinogens are reduced on average
by more than 95 percent. Notably,
nitrogen oxides and carbon monoxide,
two important combustion markers, arereduced by over 96 percent. We conducted
extensive chemical characterization of
the IQOS aerosol. Our state-of-the-art
untargeted screening has allowed us tocharacterize approximately 99.8 percentof the total aerosol mass, and we have

IQOS is the most developed
and most thoroughly assessedof our smoke-free products
A laboratory analyst in the manufacturing facility of Papastratos, PMI’s Greek affiliate

Importantly, the carcinogens
are reduced by over 95
percent in the IQOS aerosol.
identified all constituents present at levels≥100 ng/stick. These analyses showedthat there were over seven times fewer
constituents in IQOS aerosol comparedwith reference cigarette smoke. As the
U.S. FDA put it when they authorized aversion of IQOS for sale in the U.S., they
are “present at very low levels” and “donot raise significant concerns from a publichealth perspective.”1 We also conductedindoor air chemistry and quality studies,demonstrating that the use of IQOS does
not negatively impact indoor air quality.
We then conducted toxicological studies
for IQOS, both in vitro and in vivo, todetermine whether the reduced formationof HPHCs in the aerosol leads to reduced
toxicity in laboratory models. Results fromthe in vitro studies showed that the IQOS
aerosol is significantly less cytotoxic andgenotoxic than the smoke from cigarettes.
The in vivo study found that, comparedwith cigarette smoke, the reduced exposure
to toxicants achieved with the IQOS
aerosol leads to a significantly reduced lunginflammation and respiratory toxicity.

1 Source: https://www.fda.gov/media/124247/download (p41)Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

A scientist in PMI’s R&D center in Neuchâtel, Switzerland

In the following stage, we conducted several
systems toxicology studies to assess thedisease-relevant biological mechanisms
affected by exposure to toxicants, using
human-derived in vitro cell cultures andorganotypic tissue cultures. These studies
showed that, compared with the reference
cigarette smoke, the IQOS aerosol has
a significantly reduced impact on key
mechanisms involved in the developmentof respiratory and cardiovascular diseases.
In a systems toxicology study conducted in
an animal model of disease, we observedthat switching to the IQOS aerosol
following two months of cigarette smoke
exposure reduces the development of bothatherosclerosis and emphysema in a manner
similar to smoking cessation. Recently, we

completed an in vivo study to assess thepotential of the IQOS aerosol to reduce
the risk of lung inflammation, emphysema,and cancer compared with cigarette smoke;
we expect to share the findings soon.
We conducted more than 10 clinical studies
on IQOS involving thousands of participants
and up to six months of exposure. For
example, we conducted four clinical studies,
each involving 160 participants, and an
exposure period lasting five days to threemonths, to assess relative exposure to
toxicants when switching to IQOS comparedwith continued cigarette smoking. The
first two studies – incorporating a five-day
exposure, in confinement – were conductedin Europe and Japan. The subsequent two
studies extended over three months – a

We conducted
more than
10 clinicalstudies on
IQOS involving
thousands ofparticipants.

A scientist in PMI’s R&D center in Neuchâtel, Switzerland

five-day exposure period followed by an
ambulatory period of 85 days – and wereconducted using IQOS with menthol
version heated tobacco units in Japan andthe U.S. The ambulatory study period wasintended to assess whether reductions in
exposure observed in a confined setting
were sustained under more “real world”
conditions, where confounding factors
such as environment, diet, passive smoking,and the use of combustible cigarettes incombination with IQOS (“dual use”) could
influence the levels of exposure to HPHCs.
All four studies showed a significant
reduction (ranging from 47 percent to96 percent relative to continuing cigarettesmoking) in the 15 biomarkers of exposurein adult smokers who switched to IQOS.
In addition, we conducted an exposure
response study to measure clinical risk
markers when adult smokers switch to
IQOS for a six-month period. The resultsof this study show that all eight co-primaryclinical risk markers display favorable
changes upon switching to IQOS andthat favorable changes in five out of eightmarkers are statistically significant.

49

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Philip Morris International Integrated Report 2019

In 2019, we launched long-term assessment
tools to find out how consumers understandthe reduced risk associated with smokefree products and how that understanding
influences their choices. The new survey
tools are intended to measure what
people think about and how they use theproducts across a set of categories, suchas perceived risk, perceived dependence,and functioning and well-being. Resultsof the assessment are available to the
public in an article on F1000Research,1
and its peer review is ongoing.

What are the external findings to date?

including through oversight of innovative
products. The agency stated: “Following
a rigorous science-based review throughthe premarket tobacco product application(PMTA) pathway, the agency determinedthat authorizing these products for the U.S.
market is appropriate for the protection of
the public health because, among several
key considerations, the products produce
fewer or lower levels of some toxins than
combustible cigarettes. (...) While today’s
action permits the tobacco products tobe sold in the U.S., it does not mean theseproducts are safe or ‘FDA approved.’” The
FDA published a detailed report describing

its assessment and conclusions, including
results on aerosol chemistry, toxicology,
and unintended use. The agency foundthat “the aerosol produced by the IQOS
Tobacco Heating System contains fewer
toxic chemicals than cigarette smoke, andmany of the toxins identified are present
at lower levels than in cigarette smoke”
and that “Available data, while limited, also
indicate that few non-tobacco users would
be likely to choose to start using IQOS,
including youth.”2 The authorization is
subject to strict marketing, reporting, andother requirements and is not a guaranteethat the product will remain authorized,

Our scientific results are supported by a
growing body of independent research.
Several government agencies are taking aninterest in validating the available evidenceor conducting research of their own. For
the period of January 2019 to February2020 alone, more than 60 third-party
peer-reviewed publications and systematic
reviews have been published on heated
tobacco products. In addition to studies
on aerosol chemistry and toxicology,
the first independent clinical and postmarket studies have started to emerge.
In general, these studies confirm PMI’s
results, although some have contradictoryinterpretations of similar results to ours (e.g.,using fresh air as the comparator instead ofcigarette smoke), methodological differences(e.g., studies that do not follow OECD
guidelines), or overstated conclusions.
The list of independent studies publishedaround PMI’s smoke-free products and/or
our methods and results as of December
19, 2019 is available on PMIscience.com.
In 2019, a version of the IQOS systembecame the first electronic heat-not-burnproduct to be authorized for sale in the U.S.,
pursuant to the 2009 law that empowers
the FDA to regulate tobacco products,
1 Reference: https://f1000research.com/articles/8-214
2 Source: https://www.fda.gov/news-events/pressannouncements/fda-permits-sale-iqos-tobacco-heating-systemthrough-premarket-tobacco-product-application-pathway

Laboratory analysts in the manufacturing facility of Papastratos, PMI’s Greek affiliate

particularly if there is a significant
uptake in youth initiation. The FDA will
monitor the marketing of the product.
The FDA is continuing its scientific review
of PMI’s MRTP applications, which were
submitted for the same products on
December 5, 2016. An MRTP order fromthe FDA would allow a tobacco productto be marketed to adult smokers in the
U.S. with messages stating that switchingcompletely from cigarettes to IQOS (1)reduces exposure to certain chemicals,
and/or (2) that the product is less harmful
than another tobacco product or would
reduce the risk of tobacco-related disease.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Our e-vapor product
What is it and how does it work?
Our second smoke-free product, IQOS
MESH, is an e-vapor product (or e-cigarette),
which is a battery-powered device
producing inhalable vapor from a liquid
solution containing nicotine and flavors.
We plan to launch the next generation of
IQOS MESH, which will be launched underthe brand name IQOS VEEV. This product isdesigned to maximize acceptance of adultsmokers who would otherwise continue tosmoke and facilitate complete switching in amanner similar to our heat-not-burnproduct.
IQOS VEEV is composed of a device and adisposable cartridge. The device holds thebattery and the puff sensor, while thecartridge holds the heating element and thee-liquid. IQOS VEEV is based on a newheating technology in the e-vapor productcategory. When the device is switched on,
puffing draws air through the bottom of the
cartridge, activating the heater. To generate
the vapor, the product uses a metallic meshpunctured with tiny holes, which heats
e-liquid contained in the cartridge(commercialized under the VEEV brand).
The liquid contains flavors and nicotine, thelatter being extracted from tobacco leaves.
IQOS VEEV uses closed-system e-liquid
cartridges to protect against tampering andliquid leakage. Unlike typical e-vapor
product cartridges, VEEV cartridges are
manufactured, assembled, prefilled, and presealed in a fully automated process, toensure product consistency. This occurs
within our European production facilities.
Each cartridge contains a heater, which
eliminates the need to manually replace it,
and the liquid in the cartridge is sufficientfor the device to be used several times for agiven cartridge. IQOS VEEV also features
puff-activated heating and a low-liquid level
detection system that ensures theconsistency and quality of the vapor
generated and inhaled.
Scientists in PMI’s R&D center in Neuchâtel, Switzerland

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Philip Morris International Integrated Report 2019

How does it reduce risk?
In e-vapor products, the liquid is heated
to form an aerosol, which is inhaledthrough the mouthpiece. In contrast
with cigarettes, e-vapor products deliver
nicotine without the smoke constituentsthat arise from the combustion of tobacco.
Until recently most e-vapor products used a“coil and wick” system to heat the nicotinecontaining solution. The wick draws theliquid onto a coil-heating element to heat
the liquid and create an aerosol. In thesesystems, the temperature of the heatercan vary significantly depending on how
strongly the user puffs on the e-cigarette.
Several studies have shown that puffing on
an e-cigarette when the liquid level is low
results in “dry puffs,” which can significantly

increase exposure to certain toxicants –especially formaldehyde. In IQOS MESH
and IQOS VEEV, the wick is eliminated, andthe coil is replaced by a metal mesh. Whenthe liquid is introduced to the heater, theincreased surface area provided by themesh material helps heat the liquid in amore consistent way than it occurs withcurrent-generation coil and wick systems.
The software ensures that the temperatureof the heater is stable and does not vary
based on the puff strength or puff-to-puff.
The low-liquid detection system cuts off
the power supplied to the mesh heater
once the level of the liquid has dropped
below a certain level, eliminating dry puffs.

In contrast with conventional
cigarettes, e-vapor products
deliver nicotine without thesmoke constituents that arise
from the combustion of tobacco.

An employee in PMI’s manufacturing facility in Crespellano, Italy

In IQOS MESH and IQOS VEEV,
the wick is eliminated, and thecoil is replaced by a metal meshOverview

Innovating for
better products

Next steps
We will continue to invest in scientificresearch to develop a portfolio of
ever-better, affordable, and acceptablesmoke-free products for existing adultsmokers – in both developed anddeveloping countries. In addition tocontinuously improving the two smokefree product platforms we are currently
commercializing, we are continuing R&D
work on our other two product platforms.
Our R&D work, and its associatedinnovations, has resulted in 5,800 patents
granted for smoke-free technologies
as of the end of 2019. As of this year,
we are introducing a new metric thattracks the number of patents and patentapplications published and granted byOperatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

53

the IP5 Offices. IP5 is the name given
to a forum of the five largest intellectual
property offices in the world; the IP5
Offices together handle about 80 percentof the world’s patent applications.
The revision to the reported metrics
reflects PMI’s refined international
patent filing strategy, by which it isensuring that it is focusing its resourceson enhancing patent protection for its
innovations in key jurisdictions. The
refined strategic geographic footprint of
its patent portfolio optimizes IP value formoney, reducing the average unit cost forprotecting its innovations internationally,and freeing up resources to enhance thepatent portfolio in key jurisdictions.

Performance
Business transformation metrics:
Product health impacts

2016

2017

2018

2019

R&D expenditure (smoke-free/total)1

72%

74%

92%

98%

R&D expenditure (in millions USD)

429

453

383

465

Number of R&D positions (FTEs)2

n/a

n/a

764

942

Patents granted relating to smokefree products (cumulative)

1,800

2,900

4,600

5,800

170

300

480

740

36
11

57
12

82
19

109
19

7

7

9

9

Patents granted in IP5 jurisdictions relating
to smoke-free products (cumulative)3
Number of studies completed by PMI on smoke-free
products (cumulative, since 2015)• Toxicological assessment• Clinical assessment(short-term, focused on biomarkers)• Perception and behavior

1 Smoke-free products include heated tobacco units, devices, and e-cigarettes. Total products include smoke-free products, cigarettes, and othercombustible products.
2 R&D positions include scientists, engineers, technicians, and support staff. Comparable data for years prior to 2018 are not available,
as the scope of R&D positions changed following company organizational changes.

LINKS

PMIscience.com
PMI Scientific Updates

3 Includes published international (PCT) patent applications. IP5 jurisdictions include Europe (patent applications published and patents
granted by the European Patent Office), China, South Korea, Japan, and the U.S.

Employees sampling tobacco leaves in PMI’s Plant Research facility in Switzerland

54

Philip Morris International Integrated Report 2019

Access tosmoke-free
products
The public health benefit ofsmoke-free products depends
not only on their potential toreduce the risk of smokingrelated disease, but also on theiractual use as alternatives tocigarettes by adult smokers. For
consumers to use them, thesealternatives must be accessible.
With access we refer to four
aspects: improving consumerawareness, acceptability,
availability, and affordabilityof our smoke-free products.

Megatrends• Technological progress• Changing consumer expectations• Purpose of business• Income inequality
A customer and a sales representative in an IQOS store in Ginza, Japan

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics55

Why it is important to us and our stakeholders

Topic description
To provide adult smokers withmeaningful access to smokefree products, we need to raiseawareness about their existence
and make the products acceptable,
available, and affordable so thatsmokers switch to them.

Relevance of the topic
Relevance for stakeholders

Overview

For PMI, developing scientifically
substantiated smoke-free products isonly the first step. The next is to makethem accessible to all men and womencurrently smoking cigarettes or othercombustible products. Our ability to
do so successfully depends on various
factors beyond our control, in particulargovernment tobacco control policy andregulations. The commercialization ofsmoke-free products is at the core of
our long-term value creation model.

Innovative tobacco and nicotine
products that have been scientifically
substantiated as less harmful thansmoking will realize their maximum
potential for population harm reduction
only when they are used in lieu ofmore hazardous tobacco products
such as cigarettes. To achieve this aim,
they should be globally accessible forsmokers who want to continue using
tobacco or nicotine products, while
minimizing the use by unintended
audience like youth and nonusers.

Connectivity with other sustainability issues at PMI
2

PMI's impacts on society

4

5
6

3

1

7

Impact in our value chain
Upstream

PMI operations

Downstream

8

Access tosmoke-free
products

9

Key stakeholders

10

Adult
consumers

Public healthcommunity

Civil society

Regulators

Employees

Retailers andwholesalers

Media

12

14

16
18
17

15

11

13

1 Product health impacts
2 Product addictiveness3 Product reliability
4R esponsible marketingand sales practices
5S ustainable supply
chain management
6 Data privacy and protection
7R esponsible andtransparent R&D
8 Respect for human rights
9 Illicit tobacco trade prevention
10 Responsible advocacy
11 Business integrity
12 Health, safety, andwell-being at work
13 Diverse and inclusive
working environment
14 Talent attraction, retention,and employability
15 Climate protection
16 Littering prevention
17 Product eco-designand circularity
18 Water stewardship

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Philip Morris International Integrated Report 2019

Our aims>40m

Number of adult smokers globally who
switch to PMI smoke-free products by 2025

>20m

Number of adult smokers in nonOECD countries who switch to PMI
smoke-free products by 2025

>250bnPMI’s smoke-free product shipment
volume by 2025

<550bnPMI’s combustible product shipment
voume by 2025

Achieving our aims
It is our long-standing ambition that by2025 at least 40 million smokers switch to
PMI’s smoke-free products and completely
stop smoking. This number can be muchhigher if more regulators make productharm reduction a third pillar of their
tobacco public health strategy, in addition
to preventing initiation and encouraging
cessation. Our vision of a smoke-free future
is an inclusive one. Within our global targetof 40 million, we are aiming for at least 20
million smokers in non-OECD countries
to switch to our smoke-free products. We
have made good progress toward theseobjectives. We estimate that, by the endof 2019, a total of 9.7 million smokers
had switched to IQOS and completely
stopped smoking cigarettes, among them
3 million smokers in non-OECD countries.
In the three years following theannouncement of our smoke-free visionin 2016, PMI's smoke-free productshipment volume increased from 7.7 to60 billion units. We actively accelerated
the decline in shipment volume ofour combustible tobacco products,
which contracted from 845 billion to732 billion over that time period.

To assess the strength of our ambition,
we put it in the context of the latest WHObase case projections.1 Based on theseprojections, which assume a world without
smoke-free products, there would be 138
million smokers buying PMI cigarettes in
2025, at the current company market share.
The WHO aims to further reduce smoking
prevalence by strengthening measures toprevent smoking initiation and encourage
cessation. Its 2025 target in this respect,translated to our consumer base, implies a
16 million reduction, equating to a total of
122 million smokers of PMI combustible
products by 2025. Our smoke-free strategy
supplements WHO efforts. If we succeed
in our ambition to switch at least 40 million
smokers to smoke-free products, there will be
82 million people smoking PMI's combustible
products by 2025, compared to 138 million in
the base case and 122 million as per WHO's

1 Projections are based on the WHO Global Reporton Trends in Prevalence of Tobacco Use 2000-2025,
third edition (December 2019)

To achieve our objective, we are leveraging
our resources to enhance awareness,
acceptability, availability, and affordabilityof smoke-free products. Our commercial
expenditure ratio is a good overall indicatorof our efforts in this regard, showing
how much of our total global spend on
marketing, consumer engagement, andtrade activities is dedicated to smoke-free
products. In 2019, 71 percent of PMI’scommercial expenditures related to smokefree products, far exceeding their share of
total net revenues of 18.7 percent. While
PMI is doing everything under its control
by shifting resources, government policy
and regulations play a key role in enabling
and facilitating access, as will be describedfurther in this section of the report.

Consumers of PMI products – projection 2025

(Illustration based on WHO projections, assuming constant PMI market share)

16m

In order to succeed in making the world
smoke-free, we need to provide all adultsmokers with access to PMI’s smoke-free
products. By access we mean that:• smokers are aware of the existence
and benefits of smoke-free products;• the products are acceptable
to the smoker as a viable
alternative to cigarettes;• the products are conveniently
available for sale to the smoker; and• smoke-free products areaffordable to the smoker.
This section of the report elaborates
on these four aspects of access.

target. This means that our aspiration isto reduce smoking more than three times
faster than the target set by WHO.

16m
40m

138m

122m

82m

2025 estimatebased on
WHO projection

2025 estimatebased on
WHO target

2025 estimate with PMI
aspiration complementing
WHO target

People who switch
to PMI smoke-free
products, as per PMI’s
aspiration
People who quit orless people starting,in line with reduction
aimed for by
WHO with additional
tobacco control
measuresSmokers of PMI
combustible products

Overview

Innovating for
better products

Providing adult smokers access to oursmoke-free products is top priority at PMI.
In addition to the substantial resources,
as explained above, we dedicate the vast
majority of management time to the topic,
from our entire Company Management
team to the management teams in every
market where we are commercializing, orplan to commercialize IQOS. Our Chief
Operating Officer heads our efforts toroll out smoke-free products across ourmarkets globally. The team led by PMI’s
Chief Consumer Officer brings together
all consumer-facing experiences acrossthe consumer journey, from trends andinsights on acquisition and retention
communications, to physical and digitalchannel strategy. In conjunction, ourCommercial team, headed by PMI’s SeniorVice President, Commercial, develops,
tests, and deploys the routes to market
for smoke-free products. Meanwhile, theteam led by our Chief Product Officer
continuously enhances and develops
PMI smoke-free products, accounting
for consumer feedback. Importantly, ourOperations team, led by our Senior Vice
President, Operations, works to ensure
our manufacturing capabilities meetthe demand for smoke-free products.
Also, our External Affairs team, headedby PMI’s President, External Affairs andGeneral Counsel, is at the forefront of
our efforts to advocate for regulationand policies that will ultimately help adult

Our aspiration is to reducesmoking more than threetimes faster than thetarget set by WHO.

Operatingwith excellence

Caring for thepeople we work withsmokers who would otherwise continue tosmoke to change to better alternatives.
This cross-functional work is guided by
PMI’s Guidebook for Success (our code of
conduct) and overseen by specific internal
policies such as those on responsible
marketing and sales practices, market
research, product development, andexternal communications and engagement.

Product awareness
The first component of our access strategy
is raising awareness of smoke-free products
among adult smokers. We want adultsmokers to understand the difference andbenefits of our smoke-free products incomparison with combustible cigarettes,
but also make sure they understand thatsmoke-free products are addictive andProtecting theenvironment

Performance
metrics

not risk-free. In our awareness-raisingefforts we remain cautious to guard
against the use by unintended audiencessuch as never smokers, former smokers,
and youth (read more on page 72).
Throughout the world, tobacco productmarketing is subject to extensive
restrictions, including outright bans.
The regulatory environment varies
substantially across markets, making it moredifficult – or almost impossible – in somecountries than others to make people who
smoke aware of alternatives to cigarettes
and how and why they should use them.
Another significant hurdle is consumer
confusion and misinformation that exists
about the smoke-free category. People needaccurate and non-misleading information
to be able to make an informed decision.

57

To illustrate the degree of misinformationthat may exist, a recent study found thatup to 73 percent of U.S. citizens mistakenly
believe that nicotine causes cancer.1
To date, based on our post-market studies,
we estimate that only 36 percent of
adult smokers in the markets where PMI
commercializes IQOS are aware of the
product’s features and benefits comparedwith smoking cigarettes. This lack of
information arguably presents the biggest
hurdle to achieving our smoke-free vision.
It is also potentially the easiest and fastest
to overcome if and when public healthorganizations decide to inform, or allow
the adult smokers to be informed, about
the benefits of smoke-free products.
1 O’Brien, EK, et al. U.S. adults’ addiction and harm beliefs about
nicotine and low nicotine cigarettes. Preventative Medicine.
2017; 96:94–100. https://www.sciencedirect.com/science/
article/abs/pii/S0091743516304510

AccessAwareness

Acceptability

Availability

Affordability

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Philip Morris International Integrated Report 2019

Product information
At PMI, we want to ensure that we
provide our consumers with accurate
and non-misleading information about
our smoke-free products, so that adultsmokers who would otherwise continue
to smoke can make an informed choice.
To this end, we have internal processes inplace designed to ensure our consumer
messages meet this standard. We also
have developed a program of perception
and behavior assessment studies tounderstand how our smoke-free products
are perceived and how users will
actually behave with those products.
Consumer messages about our productfeatures and benefits are verified bya cross-functional team comprisingscientists, market researchers, lawyers,
communications experts, and marketers.
In order to establish whether a statement
is accurate (substantiated), the teamverifies available information on productdesign and characteristics, or scientificevidence available either from theliterature or directly from our scientificstudies or consumer research. To confirm
a message is clear and non-misleading, inparticular for health messages, we organize
comprehension research in various markets
and carefully analyze the results before
deciding to release the message at hand.

Such premarket research is complemented
by post-market surveillance studies
that help us adjust our messaging (seepage 61 for post-market surveillance).

They also informed the development of ourGood Conversion Practices, which serveas the bedrock for our engagement withadult smokers (read more on page 74).

We do not conduct studies on youth;
however, studies we have conducted on
our heat-not-burn IQOS product among
young adult never smokers between legalage (min. 18) and 25 years old suggest that
our smoke-free products are not attractive
to them, as evidenced by the very low levels
of intention to try and intention to use,reported when they are exposed to various
forms of IQOS-branded communications.

The opinions expressed by public healthorganizations, regulatory bodies and NGOs
about smoke-free products have a big
impact on decisions made by individual
smokers, so confusion must be avoided.
It is essential to have an open, meaningful
dialogue about the role smoke-free
products can play in the improvementof public health and the effect current
legislation in many countries has inpreventing adult smokers from accessing
accurate information. We appreciatethat tobacco is an emotionally charged
topic, but it is important for the hundreds

Our premarket and post-market studies
guide all our consumer-facing activities
and communications, including the internal
assessment of the consumer messages.

The team also works directly withmarkets to ensure proper deploymentof consumer communication developed
centrally, or that locally developed
marketing materials meet our standard.
Perception and behavior assessment studies
help us to evaluate risk perceptions ofsmoke-free products among various adultconsumer groups. The results of thesestudies show that adult consumer groups
tested have a good understanding that
IQOS presents less risk than cigarettes
but is not risk-free, that it is not intended
for nonsmokers, and that quitting the useof all tobacco is the best way to reduce
the risk of tobacco-related disease.

Good Conversion Practices signage at an IQOS store in Lisbon, Portugalof millions of smokers that science andfacts prevail. We therefore are callingon leaders, policymakers, scientists,
health professionals, and society as awhole to join this conversation – withthe goal of achieving a future without
cigarettes as soon as possible.

Our premarket and post-market
studies guide all our consumer-facing
activities and communications

Innovating for
better products

Overview

Operatingwith excellence

Consumer engagement at retail

In addition to the IQOS stores, there
are premium resellers; these are selectstores in which we provide information
about our smoke-free products to adultsmokers, offering them an opportunity
to have a session with trained staff about
the product, its benefits, and explanations
on how to use it, in the environment they
regularly visit to purchase tobacco products.
Additionally, IQOS users in these locations
can access IQOS-related services such as
cleaning of their devices by the premium
reseller staff, replacing devices in case of
defects, and experiencing and accessing
new device ranges and accessories withwhich to personalize their IQOS products.

Purchasing and trying a smoke-free productis only one step along the conversion
journey of an adult smoker who switches
to a less harmful alternative. It is essentialthat we set in place the right infrastructure
to support smokers along this journey.
We currently have 23 consumer callcenters where users can contact us if
they have a question about the productitself or its use. Insights we receive are
fed back into our product development.

Digital capabilities help to become more
efficient in serving consumers. In countries
where this is permitted, adult smokers who
express an interest in IQOS are offered thepossibility to go through an online session
with a remote IQOS coach. Consumers
can also benefit from additional services
via other digital touchpoints. To do this,and with the consumer’s consent, we use
our customer relationship management(CRM), which allows us to proactively offer
tailored communications and promotions
to consumers, according to their specificinterests and the stage of their consumer
journey. It also allows us to process,analyze, and respond swiftly to consumer
feedback collected across all touchpoints.

At the end of 2019, PMI had a footprintof 199 stores dedicated to IQOS andover 3,000 exclusive IQOS retailtouchpoints around the world. They
offer personalized support to consumers,
starting with explaining how the productshould be used and how to clean it. In
our boutiques, interested adult smokers
can not only buy the product, but also
receive education on the heated tobacco
From

To

Single productMultiple products with multiple components(devices, consumables, accessories)

Consumer journey Simple: from one
cigarette brandto anotherComplex: changing behavior1 byadopting a smoke-free product andcompletely quitting smoking

Touchpoints

Multiple types: own retail, independent
retail, e-commerce, call centers, coaches

One type: retailer

1 For the smokers who would otherwise continue to smoke.

Protecting theenvironment

technology and its benefits, communicate
with our staff, and try the product. Our
IQOS coaches are trained on our Good
Conversion Practices and required tointeract only with adult smokers.

To succeed in helping smokers to transition
to smoke-free products, we are shiftingfrom a business-to-business to a consumercentric model. This is a highly complex
and resource-intensive exercise. In thetable below, we illustrate some of thedimensions of this change in our businessmodel, illustrating the complexity and scaleof the change we are undertaking. Thistransformation requires significant changes
in our organization’s internal processes,
skill set, and mindset. It requires substantial
and long-term investment in infrastructure,systems, and capability building. Therefore,
it has to be carefully paced by thecompany before scaling things up.

Product

Caring for thepeople we work withAn IQOS store in Bogotá, Colombia

Performance
metrics

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Philip Morris International Integrated Report 2019

Product acceptability

Product design

Smokers will only stop smoking and switch
to better alternatives if these products are
acceptable and meet their preferences.

Our smoke-free products are designed
to reduce disease risk compared withsmoking, while replicating as much as
possible the taste, nicotine delivery,
and ritual characteristics of cigarettes
so that adults who smoke are willing toswitch to these alternative products.

An important indicator in this regard is theso-called full-switching rate: the percentage
of IQOS users that stopped smoking versus
total IQOS users. In 2019, the average fullswitching rate for IQOS was 71 percent. The
perfect full-switching rate is 100 percent,and this is our ultimate goal as we continue
to develop and improve our products.

In 2019, the estimatedpercentage of IQOS users who
stopped smoking and switched
to IQOS was 71 percent.

The likelihood that a smoke-free productwill be considered a viable alternative tocigarettes by adult smokers relies on theoverall sensory experience and nicotinedelivery. With regard to nicotine, the FDA
stated: “IQOS delivers nicotine in levels
close to combustible cigarettes suggestinga likelihood that IQOS users may be able
to completely transition away fromcombustible cigarettes and use IQOS
exclusively.” We discuss in more detailthe role of nicotine in our smoke-free
products on PMI.com.
The responsible use of flavors in smokefree products also plays an important rolein product acceptance. Some flavors areimportant to encourage adult smokers toswitch and should be preserved, whileothers could be particularly appealing toyouth and should not be used, such as thosewith candy or dessert-like descriptions. In all
circumstances, we agree there is a need forgovernment oversight on products and theirmarketing, so they do not appeal to youth.
To continuously enhance the productexperience, we are guided by consumer
insights throughout the journey ofdeveloping and improving smoke-free
products, from the concept design stage totheir commercialization at scale. This allows
us to incorporate product updates and newfeatures designed to address consumer
pain points and help adult smokers switchfrom cigarettes more seamlessly.
For example, IQOS 3 DUO, launched in
2019, allows for faster charging and twoconsecutive uses without recharging
the holder.

Post-market studies and surveillance
We conduct post-market studies tounderstand how the product is used andby whom. These studies are necessary
to confirm the results of the premarket
perception and behavior assessments andto measure that current adult smokers
switch to the product, while never andformer smokers are not using it.

An IQOS coach and customers in an IQOS store in Athens, GreeceOverview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Employees in PMI’s office in Tokyo, Japan

We have established IQOS adult owner
panels in 21 countries. These dynamic
longitudinal studies, which involvein total about 110,500 participants,
allow us to measure the usage patternsof IQOS adult owners over time.

from an independent study commissionedby the Japanese Ministry of Healthamong middle- and high-school students
found that the use of heated tobacco
products among this group is extremely
low and lower than smoking cigarettes.1

In Japan, we are conducting repeatedcross-sectional surveys to measure trends
of prevalence and patterns of IQOS use
over time and to assess the impact ofthe product on public health. The results
highlighted a very low rate of tobacco use
initiation with IQOS (2 percent of adult IQOS
users in 2017 and 1.3 percent in 2018) anda very low use in former smokers (only 0.1
percent of adult former smokers reinitiatedtobacco use with IQOS). Additionally, results

Overall, the data from our own studies,
as well as independent studies, confirm
that IQOS is reaching the intended
audience, adult smokers, and is of very
limited interest to adults who have neverused nicotine products before or who
had already stopped using tobacco.

110,500
We have established IQOS
adult owner panels in 21
countries, involving about
110,500 participants

Product availability
Whether we can make our smoke-free
products available to consumers depends
on a number of essentially external factors.
We need to understand a country’s
regulatory conditions to decide whether it
is legally possible and commercially viable
to launch the product there. We thenbuild sufficient production capacity, also
depending on trade zones and tariff barriers.
Lastly, we need to establish the rightmarket organization to commercialize theproduct, ranging from how we will actuallydistribute the product up to establishing afull-fledged commercial organization that
can implement the extensive consumer
interaction described earlier in this section.
As of December 2019, our main smoke-free
product, IQOS, was available in 52 markets,
either in key cities or nationwide, and weestimate that in total over 120 million adultsmokers worldwide could buy IQOS devices
and consumables near where they live.

1K umamaru H & Osaki Y (2019) Update ofCurrent Status in Japan on Tobacco Harm
Reduction. Global Nicotine Forum (GNF)2019 presentation. Available at: https://gfn.
net.co/downloads/2019/presentations/
Hiroya_Kumamaru.pdf

A sales representative with a customer in an IQOS store in Cape Town, South Africa

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Philip Morris International Integrated Report 2019

Production capacity
Expanding the sale of smoke-free products
requires significant investment in our
production capacity. In particular, themanufacturing of smoke-free productconsumables requires that we build newfactories or convert existing cigarette
factories and increase our capital
expenditure – for example, to purchase newmachinery. As we are replacing cigarettesales with smoke-free products, we arealso consolidating our cigarette factory
footprint. In 2019, the discontinuation ofcigarette manufacturing in select factories inPakistan, Colombia, Argentina, and Germany
resulted in significant restructuring. We
aim to manage such transitions fairly andopenly, promoting constructive engagementwith employees and placing the emphasison their continued employability (readmore about our efforts to conduct
effective labor relations on PMI.com).

Market launch
In 2019, we launched IQOS in eight
additional markets, including Hungary,
Mexico, Sweden, the UAE, and – via alicensing agreement with Altria Group,
Inc. – the U.S. This brought to 52 the total
number of markets where the productwas commercialized as of year-end. Of
these markets, 27 are OECD countries.
A number of countries, including Australia,
India, Norway, and Singapore, do not permit
the sale of heated tobacco and e-vapor
products. We engage with stakeholders to
advocate for allowing the sale of IQOS andother scientifically substantiated smokefree products in these countries. We do
not believe that banning such products is arational policy, especially considering thatthese countries do permit the sale of themost harmful tobacco product: cigarettes.
In the U.S., the sale of heat-not-burntobacco products is subject to an ex-ante
regulatory authorization by the FDA. On
April 30, 2019, the FDA authorized the sale
A cigarette manufacturing line (on the right) and heated
tobacco unit manufacturing line (on the left) in our
manufacturing facility in Neuchâtel, Switzerlandof a version of IQOS, following a rigorous
scientific assessment of PMI’s premarket
tobacco product application, filed in 2017.
Under an exclusive licensing agreement with
PMI, Altria, Inc. started commercializing
IQOS in the U.S. in the third quarter of 2019.
In addition to external factors, internal
constraints also play a role in the rate
at which we can roll out smoke-free
products globally. PMI is present in over
180 markets, but the size and capacity of
our local organizations vary. Not every
market has the resources and capacity tolaunch smoke-free products immediately.
We also evaluate the commercial viabilityof launching smoke-free products in a
specific market to decide how to prioritizeinternal resources internationally.

Distribution channels
There are now 20 markets where
our heat-not-burn product IQOS is
supported commercially nationwide.
In the other markets in which we havelaunched IQOS, the product initially ispresent in key cities, allowing PMI to gain
experience and build capacity before we
proceed with a nationwide rollout. We
estimate at 60 percent the weightedaverage geographic coverage in the 52
markets where IQOS was present as ofthe end of 2019, excluding the U.S.
Expanding the geographic availability of
our smoke-free products requires that
we leverage a variety of retail channels.
In 2015, we started opening and runningour own retail stores in markets where
IQOS was present. These consumer
touchpoints allow us to communicate andengage directly with adult smokers. They
enable adult smokers to see, touch, andtest the product where allowed. We rely
on both stationary and temporary sales
areas, with established flagship storesand pop-ups. As of the end of 2019, we
had 199 permanent boutiques and storesworldwide, mainly in key cities and areasof high consumer traffic. Where legallypermitted (i.e., in 30 countries), we also run
e-commerce websites for IQOS allowing
adult consumers to purchase the productonline and have it delivered at home.1
The indirect retail environment consistsof our traditional trade partners such as
tobacco retailers, as well as key accountchains such as convenience stores andpetrol stations. Based on the productportfolio handled and the services provided
to consumers, we classify the general
trade and key accounts universe into threegroups: consumable sellers, service points,
and premium resellers. At consumablesellers, the main focus is to provide IQOS
users with a convenient option to purchasethe heated tobacco units on a regular basis.
In service points, consumers can also accessvarious services related to IQOS, such as
replacement of the device in case of defect.
Premium resellers offer consumers the full
spectrum of services, including cleaningof devices and explanatory sessions,along with a full brand experience.
At the end of 2019, there were over 3,000
exclusive IQOS retail touchpoints2 aroundthe world and around 679,000 points of sale
where IQOS heated tobacco units are sold.
We illustrate our distribution channels
in our country-specific case studies
on pages 36, 66, and 100.

1 As of year-end 2019, our smoke-free devices and heated
tobacco units could be purchased through e-commerce
websites in 19 markets. Additionally, e-commerce websites
run in 11 markets allowed the online purchase of smoke-freedevices only.
2 Touchpoints relate to all permanent and temporary retailtouchpoints, where IQOS is sold exclusively (boutiques,
flagship stores, pop-ups, shop-in-shop, and corners).

Overview

Innovating for
better products

Product affordability
We will only achieve a smoke-free
future if all adult smokers who would
not quit but like to switch to smokefree products can afford to do so.
Unlike with cigarettes, adult smokers whowant to switch to IQOS must first buy an
IQOS device. Their retail price ranges fromaround USD 40 to 115, depending on themodel and country, with a geographicalaverage price of the lowest cost IQOS
device of USD 44. These high-quality
devices have significant production costs
to ensure they consistently function within
the well-defined specifications that are partof the scientific substantiation package.

Operatingwith excellence

Caring for thepeople we work with

To address the potential cost barrier for
adult smokers who would like to switch,
we have implemented various solutions,
including initial lending of the device or
payment over time, and we have lowered
the price of the existing IQOS device
versions following the launch of newer
versions. We also improved battery
performance, thus improving the longevityof the devices. This not only helps to lower
the average annual costs for the user, italso improves IQOS' ecological footprint.
A second aspect of affordability relates
to the price of the consumable. At the
moment, the production costs of IQOS
heated tobacco units are somewhat
higher than those of cigarettes, onProtecting theenvironment

Performance
metrics

average. Heated tobacco units undergoa special manufacturing process that isvastly different from the manufacturingof cigarettes, and the products require
an increased level of quality assurance infactories. We also incur other costs thatare not applicable to cigarettes, such as
the costs of scientifically substantiating
the reduced-risk profile of these products.
Importantly, IQOS has much higher
commercialization costs compared tocigarettes that result from the need toproperly introduce consumers to this new
product and explain its functioning, suchas the costs related to our customer carecall centers and follow-up with them during
their conversion journey so that they

do not fall back into smoking. Generally
speaking, the more restrictive the regulatoryenvironment, the more difficult it is toeffectively commercialize our smoke-free
products and therefore the higher thecosts related to commercialization.
Beyond costs, a key factor driving tobacco
product retail prices is excise tax. Excise
taxes on cigarettes are generally higher
than those on smoke-free products, andwithin the smoke-free category, electronic
cigarettes tend to be lower taxed comparedwith heat-not-burn tobacco products.
As a result of the combined effect of
cost and tax differences, the price to theconsumer of IQOS heated tobacco units
is typically below the price of premium
cigarettes and sometimes, as in New
Zealand and the U.K., at the low end of
the combustible tobacco products pricing.
We estimate that heated tobacco units are
priced the same or lower than a smoker’s
current cigarette brand for 47.8 percent
of smokers in the geographies where wecurrently commercialize IQOS. In Japan,
we started to launch IQOS heated tobacco
units at different price points in order toextend the reach among adult smokers.
Clearly, to achieve our vision of a smokefree future, our smoke-free products must
be affordable to all adult smokers withineach market.
The same reasoning applies across countries.
We aim for our smoke-free products to becommercialized in all countries and have a
dedicated team focused on lower- andmiddle-income countries.

Our smoke-free
products must beaffordable to all
adult smokers.
A retailer in Lisbon, Portugal

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Philip Morris International Integrated Report 2019

To date, our smoke free-products areavailable in 15 upper-middle-income
countries: Albania, Armenia, Belarus,
Bosnia and Herzegovina, Bulgaria,
Colombia, Dominican Republic, Guatemala,
Kazakhstan, Malaysia, Mexico, Romania,
Russian Federation, Serbia, andSouth Africa.
They are also available in two low- andlower-middle-income countries: Moldova
and Ukraine.
We are only at the beginning ofcommercializing a full-fledged portfolioof smoke-free products and realize that
additional efforts are necessary. We
continue to work on developing a variety
of product platforms, including devices andconsumables with different price points.
Furthermore, we are exploring alternative
business models and routes to market. A
recent example is the global collaborationagreement announced in early 2020 with
the South Korean tobacco company KT&G,
which offers the opportunity to broaden
our portfolio and to offer consumers awider range of taste, price, and technology
choices. The KT&G portfolio includes lil
Hybrid, lil Mini, and lil Vapor products.
A challenge to attaining greater
product affordability is the fact that thecommercialization of our smoke-free
products requires significant upfront
investments in R&D, production, andcommercial infrastructure. We expect
those costs to lower over time, as
we gain experience and scale.

We are exploringalternative business models
and routes to market
An IQOS coach and a customer in an IQOS store in Vilnius, Lithuania

Next steps
Our long-standing aspiration is that by 2025
at least 40 million people will have stopped
smoking and switched to our smoke-free
products. To achieve this ambitious goal, we
will need to work on all four access drivers:
awareness, acceptability, availability, andaffordability. This in turn requires that we
continue to massively shift resources across
our company toward smoke-free products.
We have expanded our business transformation
metrics introduced three years ago to provide
further transparency about the scale andspeed at which we are moving. We now also
report on the number of stock keeping units(SKUs) that we produce within the cigarette
category as well as heated tobacco products.
Since announcing our smoke-free vision in2016, we delisted over 600 cigarette SKUs
globally, while significantly broadening ourportfolio of heated tobacco units, to over
400 SKUs.
With the planned launch of IQOS VEEV, PMI
will enter the e-vapor product category inmore countries, providing additional smokefree options to completely replacecigarettes.
We will continue to do everything within
our ability to give all smokers who want tocontinue using tobacco or nicotine products
full access to our smoke-free products. There
are many factors outside of our own control.
Governments in particular can accelerate
the end of smoking. They can play a key rolein providing accurate information to smokers
about smoke-free products and introducing
product standards to ensure that only
scientifically substantiated smoke-free
products are commercialized. Governments
can also provide the right incentives tosmokers and producers, through regulationand taxation.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics65

Performance
Business transformation metrics: Access to smoke-free products1

2016

2017

2018

2019

Number of factories producing smoke-free products out of total number of factories3

3 out
of 48

4 out
of 46

8 out
of 44

8 out
of 38

Total SKU4 count – combustible cigarettes

4,421

4,201

3,968

3,799

Total SKU count – heated tobacco units

62

145

253

414

Number of markets where PMI smoke-free products are available for purchase

20

38

44

52

32%

43%

47%

47%

26

63

81

199

Proportion of markets where PMI smoke-free products are available, which are outside the OECD5
Number of IQOS stores

90

292

488

679

Commercial expenditure (smoke-free/total)

15%

39%

60%

71%

Net revenues (smoke-free/total)6

2.7%

12.7%

13.8%

18.7%

1

5

19

31

Number of retailers that sell PMI smoke-free product consumables (in thousands)

Number of markets where net revenues from smoke-free products exceed 10% of total net revenues
Number of markets where net revenues from smoke-free products exceed 50% of total net revenues

0

1

3

4

Smoke-free product shipment volume (billion units)

7.7

36

42

60

2025 aspirations238‒42%>250

Combustible product shipment volume (billion units)

845

791

767

732

<550

Smoke-free product shipment ratio (smoke-free/total)7

0.9%

4.4%

5.1%

7.6%

>30%

Total users of PMI smoke-free products (in millions)8

2.1

6.9

9.6

13.6

Estimated users who have stopped smoking and switched to PMI smoke-free products – non-OECD (in millions)8

0.0

0.2

1.1

3.0

>20

Estimated users who have stopped smoking and switched to PMI smoke-free products – worldwide (in millions)8

1.5

4.7

6.6

9.7

>40

1 Smoke-free products: include heated tobacco units and e-cigarettes. Total products: include smoke-free products, cigarettes, and other combustible products.
2 Aspirations: assuming constant PMI market share. Note: Aspirational targets do not constitute financial projections.
3 Previous years' data were restated to account for our second manufacturing facility in Italy, Bologna, that started producing heated tobacco units in 2016.
4 “SKU” stands for stock keeping unit.
5 Excluding PMI Duty Free.
6 Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions.
7 The smoke-free product shipment ratio is compiled based on millions of units.
8 See glossary on page 188.

LINKS

PMIscience.com

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Philip Morris International Integrated Report 2019

CASE STUDY: SWITZERLAND

Promotingsustainability
throughinnovation
Philip Morris International has asignificant presence in Switzerland.
The city of Lausanne is home
to its global Operations Center(OC), and PMI maintains its
biggest research facility,“the Cube,” in Neuchâtel.

Location

Switzerland
Employees~3,600
Manufacturing facility

Neuchâtel

The company’s Swiss history dates back to
1957, when PMI entered into an agreementwith Neuchâtel-based Fabriques de Tabac
Réunies to produce the first Marlboro
cigarettes manufactured outside the U.S.
In 1963, PMI acquired Fabriques de Tabac
Réunies and established its Swiss affiliate,
Philip Morris S.A., one year later. Since thattime, the factory in Neuchâtel has been
one of PMI’s most important manufacturing
facilities, producing cigarettes for thedomestic market and for export to morethan 40 countries around the world.

PMI’s R&D center in Neuchâtel, Switzerland

67

In 2015, it was converted into PMI’s
first dual-production facility, producing
consumables for the heated tobacco system
IQOS alongside cigarettes. Today, almost
3,600 people work for PMI in Switzerland
as part of the company’s worldwide
operations or for Philip Morris S.A.
In 2015, Switzerland became the third
market to launch IQOS, after Japan and
Italy, and the product is now available
nationwide. The device and the heated
tobacco units, marketed under the brandname HEETS, can be purchased in seven
IQOS boutiques, and in almost 3,000
independent points of sale throughout thecountry. A further 3,000 points of sale only
sell the consumables. Since early 2018,
Philip Morris S.A. has ceased all marketing
activities for combustible cigarettes innewspapers and magazines, on billboards,
at festivals, and in cinemas; it uses suchchannels exclusively for the marketingof IQOS. In addition, the company has
stopped selling cigarettes on its online
commercial platforms in Switzerland.

In 2015, Switzerland became
the third market to launch
IQOS, and the product isnow available nationwide.

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Philip Morris International Integrated Report 2019

An employee controlling the heat pump in PMI’s Operations Center in Lausanne, Switzerland

Becoming carbon-neutral
In October 2019, PMI announced plans
to make all its factories carbon-neutral
by 2030 and to only purchase certified
renewable electricity for its manufacturing
facilities by 2025. For the factory in
Neuchâtel, the aim is to already reachcarbon neutrality by the end of 2020.
To this end, several measures have been
put in place in recent years, including
the installation of a wind turbine, solar
panels, and parking spaces with charging
stations for electric cars. The biggest
contribution comes from taking advantageof the factory’s lakeside location: The
production facilities began using waterfrom the lake at 6 degrees Celsius to coolmachinery and buildings as early as 1964.
Currently, the water is released back into
the lake at 11 degrees Celsius, following
the cooling process. Going forward, thesame water will also be used for heating
via two newly installed 600-kilowatt heatpumps. After use, the water temperature
will be lowered again to 6 degrees Celsius
before being released back into the lake.

For the factory in Neuchâtel,the aim is to already reach carbon
neutrality by the end of 2020

In Neuchâtel, the aim is toalready reach carbon neutrality
by the end of 2020.

This will represent a reduction of
approximately 1,000 tons of CO2
per year. The heat pumps will be inoperation in the second half of 2020.
In collaboration with Swiss nonprofit
certifier myclimate, PMI managed to makeits global Operations Center in Lausannecarbon-neutral for the second year in
2019. The team responsible for PMI’s Swissbuildings calculates the carbon footprintof the OC and assesses ways to reduce
CO2 emissions as much as possible. Any
unavoidable emission is offset throughmyclimate. The biggest impact so far has
been achieved through the installation ofa heat pump and using water from Lake
Geneva to fully heat and cool the building.
Compared with the previously used boilers,
the heat pump saves 10,000 liters of waterand 40,000 cubic meters of gas annually.

69

Investing in novel technologies
With our main research facility in Neuchâtel,PMI is contributing significantly to theinnovation landscape in Switzerland. In
2019, the European Patent Office (EPO)
announced that PMI was their thirdlargest Swiss applicant with 424 patentapplications, ranking 45th out of allpatent applicants worldwide. The heating
technology and other components for IQOS
were developed and assessed in Neuchâtel,with the contribution of around 60 startups and SMEs from across Switzerland.
PMI actively invests in technologies andbusinesses that support its vision of asmoke-free future through Lausanne-based
PM Equity Partner (PMEP), the corporate
venture capital fund of PMI. In 2019, PMEP
partnered with MassChallenge Switzerland,a nonprofit accelerator that helps startups in Switzerland and elsewhere inEurope grow their businesses, to create
the second edition of the PMEP start-up
challenge. During this event, 10 start-ups
were invited to PMI’s Operations Centerto pitch their business ideas on innovative
solutions in the fields of digital, life sciences,and operations to a jury composed ofmembers of PMI’s Company Management.

$

PMI actively invests intechnologies and businesses
that support its vision ofa smoke-free future

In addition to increasing PMI’s presence
within the Swiss innovation ecosystem
and introducing a crowd of promising
entrepreneurs to the company’s vision ofa smoke-free future, the competition led
to several R&D collaborations with theparticipating start-ups.
Beyond hosting challenges and competitions,
PMEP is financially supporting several other
innovative start-ups. It invested, for example,
in TreaTech, a start-up emanating from the
École Polytechnique Fédérale de Lausanne.
TreaTech has developed a novel wastewater
treatment that combines freshwaterproduction with the opportunity totransform organic matter into biogas,
valorize important minerals, and eradicate
micropollutants. This investment
contributes to PMI’s commitment to cleanand sustainable technologies.

PMI employees taking part in a cleanup activity in Lausanne, Switzerland

70

Philip Morris International Integrated Report 2019

Reducing waste
Another measure currently being put
in place to reduce PMI’s environmental
footprint in Switzerland aims to substantiallyreduce operational waste. On the Neuchâtel
campus, all biogenic waste – for example,
cardboard, paper, and tobacco – will beheat-treated to produce energy. The
goal of this process called pyrolysis is tosubstitute fossil energies used on-site
to produce steam and hot water, and tocreate a cycle whereby the waste that’s
produced despite reduction efforts is
recycled and reused. The waste will firstbe mechanically crushed and shredded,
then heated in a reactor. This will produce
a gas that can replace the natural gas usedin the boiler. We expect this process to
be fully operational by the end of 2020.
Like most other fast-moving consumer
goods companies, PMI is digitalizing andautomating its end-to-end operations. Being
able to react quickly to shifting consumer
demands while using resources responsibly
is a critical factor for success. Printed
materials such as folding cartons have had
one of the longest lead times in the supply
chain, as it can take up to 12 weeks using
traditional technologies to get themproduced and delivered to the factories.
As PMI changes its packs frequently,
also as a result of changing packaging
regulations, it has been difficult to respondBeing able to react quickly toshifting consumer demands while
using resources responsibly isa critical factor for success.

in a timely fashion to market volatilities andchanging consumer demand. Digital printing
solutions can drastically reduce the leadtime required. However, no economically
viable option for PMI’s mass volumes andquality requirements was available.
Consequently, PMI’s Innovation
Development Center in Neuchâtel spent
several years developing a hybrid digitalprinting and converting solution for folding
cartons in-house. Since 2019, thispioneering approach has enabled PMI toprint on demand. This has not only allowed

the company to achieve its objectives of
speed, flexibility, high finishing quality, andefficiency, but also has resulted inconsiderable waste reduction. There is nowaste due to minimum order quantities as
only the actual demand is printed. This
allows the company to avoid printing theequivalent of 1,800 tons of paper per year.
Furthermore, printing digitally has thepotential to eliminate up to 3,000 printing
cylinders made out of copper, steel, andchrome from PMI’s supply chain.

An employee operating the digital printer for packaging material in PMI’s manufacturing facility in Neuchâtel, Switzerland

Since 2019, this pioneering
approach has enabled
PMI to print on demand

71

PILL AR 2

Responsible marketingand sales practices
Page 72

Operatingwithexcellence

Sustainable supply
chain management
Page 80

We strive for excellence in all we do. This
includes making sure that our products arecommercialized responsibly, in line withsocietal expectations. The programs andrules we have established help us to meetthe high standards we have set ourselves
for our marketing and sales activities.
Our supply chain accounts for a significant part of oursocial and environmental footprint. We are embedding
sustainability in our supply chain management, working
closely with our suppliers to create sustainable value.
In all this, our guiding principle is the safeguarding of
human rights of those impacted by our operations.

Respect forhuman rights
Page 92

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Philip Morris International Integrated Report 2019

Responsible
marketingand sales
practices
Globally, the commercializationof tobacco products is subject toextensive rules and regulations.
At PMI, we believe that
regulation should continue todissuade people from starting tosmoke and encourage cessation.

Megatrends• Technological progress• Changing consumer expectations• Purpose of business• Income inequality
An IQOS store in Ginza, Japan

Operatingwith excellenceInnovating for
better products

Caring for thepeople we work withProtecting theenvironment

Performance
metrics73

Why it is important to us and our stakeholders

Topic description
For PMI, responsible marketingand sales means commercializing
our products in a way that limits
access and use by unintended users,
including minors and nonsmokers.
It also entails advertising tobaccoand nicotine-containing products
in a way that is directed to adultsmokers while providing clear
information on the products’
health risks through appropriate
labeling and communication.

model. Our commercialization practices
support our business vision: To createawareness among adults who smokethat better alternatives to cigarettes
exist and to move those adult smokers
who otherwise would not quit toour smoke-free products. Doing this
responsibly, by directing our activities
toward adult smokers and providing themwith accurate and relevant information
about our products, is fundamental to
our long-term success. Responsiblecommercialization demonstrates ourcommitment to regulatory complianceand our own standards, fosters
credibility among our stakeholders,and presents an opportunity toaccelerate a smoke-free future.

The responsible commercializationof tobacco and nicotine-containing
products is an issue of vital interest
to society. While smoking rates,
including youth smoking rates, havegone down in most countries, smoking
continues to be a public health issue.
Moreover, while the recent availabilityof innovative smoke-free products
offers a significant opportunity to move
adult smokers away from cigarettes,
efforts to commercialize these products
should include steps to minimize
the risk that youth and nonsmokers
start using these new products.
The marketing and sale of tobacco andnicotine-containing products are at
the core of PMI’s revenue-generation

Relevance of the topic
Relevance for stakeholders

Overview

Connectivity with other sustainability issues at PMI

2

PMI’s impacts on society

1

Impact in our value chain
Upstream

PMI operations

4

5

3
6

Downstream

7

Responsible
marketingand sales
practices

Key stakeholders
Adultconsumers

Regulators

Employees

Retailers andwholesalers

8
9

13

12

11

10

1 Product health impacts
2 Access to smoke-free products
3 Product addictiveness4 Product reliability
5S ustainable supply
chain management
6 Data privacy and protection
7R esponsible andtransparent R&D
8 Illicit tobacco trade prevention
9 Responsible advocacy
10 Business integrity
11 Climate protection
12 Littering prevention
13 Product eco-designand circularity

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Philip Morris International Integrated Report 2019

Our aims>90%

Youth access prevention (YAP) programsin place in markets representing over 90%
of PMI’s total shipment volume by 2020

100%

Percentage of PMI’s portfolio of electronic
smoke-free devices equipped with ageverification technology by 2023

Achieving our aims
We aim to market and sell our products
responsibly to adult consumers of tobaccoand nicotine-containing products. Providing
clear and meaningful information about our
products, including the risks of consumption,
through our marketing and sales activities,
is fundamental to consumers.
All our commercialization activities acrossthe world are guided by four core principles:• We only market and sell our
products to adult smokers.
• We warn consumers about thehealth effects of our products.
• Our marketing is honest,transparent, and accurate.
• We respect the law andour high standards.
Our marketing and sales practices are codified
in PMI’s Marketing Code for combustible
products, which sets the global standards
we follow, along with applicable nationallaws. Our Good Conversion Practices (GCP)
are a set of rules articulated to govern themarketing and sale of our smoke-free products.
Everyone involved in PMI’s commercialization
activities – including employees and third
parties acting on our behalf – must strictly
follow both the Marketing Code and the GCP
without exception and regardless of country.

In regard to our combustible products,
the head of each PMI market affiliate isaccountable for the affiliate’s compliancewith the Marketing Code. All PMI
employees who are responsible forthe marketing and sale of combustible
products, as well as any third parties
who are substantively involved in suchactivities on behalf of PMI, must receive
training on the Marketing Code. Third
parties, such as creative agencies orindividuals who interact with consumers
on our behalf, are also contractually boundto comply with the Marketing Code.
Each market affiliate that sells smokefree products must do so in accordancewith our centrally developed guidelines,
toolkits, training, and other resources.
All our marketing materials andactivities are reviewed by the relevant
functions, to ensure consistency with
our Marketing Code and the GCP.
In addition, we have developed global
guidelines for digital commercial activities
related to the marketing of our smokefree products, on both the content ofour digital marketing and the tools we
use to reduce the likelihood of youth
being exposed or, most importantly,
attracted to these products.

the Guidebook for Success (our code of
conduct) and our Principles and Practices
through training, communications,controls, investigations, and audits.
In addition, we are seeking to leveragetechnology. PMI closely monitors theevolving technology landscape forsolutions that increase the accuracy ofage verification and minimize the scopefor human error. We are aiming for digitalage-verification processes that are both
effective in preventing youth access, aswell as smooth for legal-age consumers, tofacilitate switching away from cigarettes.
Where possible, we leverage data fromlegitimate sources, such as governmentorganizations, telephone network operators,
or banks, to improve the reliability of ourage-verification processes when sellingelectronic smoke-free devices. In 2019,
we were working with third-party data
providers in 16 markets to authenticate
identification documents, verify thatthe name on the document matches thename of the purchaser, and check that thepurchaser has the legal age applicable in the
country. We are aiming to equip all markets
where we sell smoke-free products withthese solutions to double check prospective
purchaser identification documents. In
addition, we are developing technology
to activate our smoke-free devices forfirst use only after age verification has
taken place. We plan to launch our firstsmoke-free devices with such technology
by the end of 2020, and aim for our full
portfolio of electronic smoke-free devices
to be equipped with age-verification
technology latest by 2023. Secure anduser-friendly age-verification technology
is a novel technology in the smoke-free
product category, which requires strong
collaboration with information technology
service providers and owners of various
software applications. Our teams arereaching out to the main hardware andsoftware players in these industries
to assure best-in-class technology isavailable for PMI’s smoke-free products
and the category in general.

We have policies that set out standards
and requirements for conducting market
research regarding both combustible
and smoke-free products. Research is
restricted to adults who smoke or use
other nicotine-containing products, andall employees or third parties involvedin market research activities must be
formally trained and contractuallybound to comply with the policies.
We are reviewing our practices forboth combustible and smoke-free
products, and we plan to publish a
new Marketing Code in 2020.
Three functions – Ethics and Compliance,
Internal Controls, and Corporate Audit– support and monitor compliance with
A sales representative and a customer in an IQOS store in Bogotá, Colombia

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Commercializing our
products responsibly
Consumer communication and labeling
We warn consumers about the healtheffects of all our products. All advertisingand consumer packaging for combustible
products must contain clear and visible
health warnings, even in markets where
the law does not require them.
We apply strict rules to how wecommunicate about our combustible
products with our consumers. As of 2015,
we do not use social media to market
our combustible products. This applies
to all advertising, direct communications,
campaigns, and activities, whether
branded or unbranded. The same
rule applies to our contracted parties,
including event organizers, third-party
agencies, and brand ambassadors.
Unlike combustible products, smoke-free
products are a new category and still
relatively unknown. Our priority is to createawareness among men and women who
smoke about these better alternatives tocigarettes. Our commercial activities for
smoke-free products need to strike theright balance by attracting the interest of
the intended audience of adult smokers, sothat they consider the product propositionand open themselves to making the effort
to try and eventually switch fully to thesebetter alternatives, while at the same timeminimizing use by unintended audience
like youth and nonsmokers. We also
provide information to consumers on theproper use of our smoke-free products.
In addition, with regard to labeling,
we always include a warning on IQOS
heated tobacco units packaging that the
product is not risk-free and is addictive.
The GCP, which serve as the bedrockof our engagement with adult smokers,
must be displayed for staff andconsumers at stores and other directretail locations we own or control.

A PMI employee at a retailer
in Buenos Aires, Argentina

Employee and third-party training
Our responsible commercialization efforts
rely on the dedication of our employees
and the third parties with whom we work.

In 2019, 14,500 training
sessions on our Marketing
Code were completedby PMI employees andrelevant third parties

In 2019, 14,500 training sessions on
our Marketing Code were delivered
through various channels, around half
to employees and half to relevant third
parties including to suppliers, retailers,and hosts and hostesses (2018: 23,438
sessions). As we plan to publish an updated
Marketing Code in 2020, we expect anincrease in training sessions to follow
as part of the rollout process. We also
trained approximately 33,000 people on
the GCP in the markets where we sellsmoke-free products (2018: 27,100).

Our GCP are discussed during therecruitment of prospective employees andthird parties who will interact with adultsmokers and consumers of smoke-free
products. We hire employees and engage
third parties only if they agree to follow
the GCP. Additionally, all employees andthird parties interacting with consumersof our smoke-free products must complete
in-person training on the GCP. Training isreinforced through in-field observationand coaching by supervisors, as wellas online annual refresher training.

75

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Philip Morris International Integrated Report 2019

Monitoring and remediation
PMI has a robust and tested infrastructure
aimed at ensuring compliance with its
existing policies and processes. We
monitor incidents of noncompliancewith regulations and/or PMI’s Marketing
Code and the GCP concerning marketing
communications, including advertising,promotion, and sponsorship.
Our Ethics and Compliance function
and Corporate Audit department,
which reports directly to the PMI
Board’s Audit Committee, play a
key role in monitoring adherence
to our policies on the ground.

In 2019, there were 42 substantiatedviolations of our Marketing Code or our
GCP (2018: 8). Eleven of these violations
led to termination of employment, 21 to
written warnings, and the rest to suspension
or verbal warning or counseling.
The increase in the number of violationsof the Marketing Code or GCP can be
attributed to the launch of a new global
training toolkit on GCP that has reinforced
the overall awareness, leading to higher
speaking-up rates. In addition, there has
been a constant increase in the numberof IQOS coaches and consequently higher
risk of incidences to occur. The number ofcases of noncompliance is low, consideringthat over 35,000 PMI employees and third
parties working on our behalf are directly
involved in the commercialization of our
products. There is also no pattern thatwould suggest any systemic problems.

Our commitment to youth
access prevention
We support regulation that ensuresthat only adults can buy tobacco andnicotine-containing products, as wellas the strict enforcement of minimum
age laws and penalties for adults who
provide tobacco products to minors.

We apply guidelines to all our commercial
activities to reduce the likelihood that they
will be particularly appealing to minors. At
a minimum, for instance, we (i) do not use
images or promotional materials that holdparticular appeal among minors, including
youth-oriented celebrities or cartoons, orbrands, toys, or other merchandise that is
primarily for, or used by, minors; (ii) do notuse models who are or appear to be under
the age of 25; (iii) do not use branding on
promotional items that are visible to others
when the items are used (this refers mainly
to clothing items such as T-shirts or caps,
which should not display a brand logo
when used or worn) ; and (iv) do not pay for
product placement in movies, entertainment
programs, or theatrical productions, on
television or radio, on the internet, or in
any other production (e.g., video games)that is intended for the general public.
While PMI alone cannot prevent youth
from smoking or using nicotine-containing
products, there is a lot we can do, and are
doing, to minimize the extent to which ourmarketing and products reach youth andother unintended users. We engage withvarious stakeholders on this issue, including
retailers and governments. Further, in2019 – in response to a 2018 shareholder
resolution – a cross-functional team at
PMI undertook a comprehensive andcritical review of the steps we take in ourcommercial activities to restrict productmarketing and sales activities to adults.
This work was supervised by the Deputy
General Counsel and the Chief Ethics andCompliance Officer, who report to the
President, External Affairs and GeneralCounsel. It resulted in Responsible Marketing
Practices at PMI, a report approved by
PMI’s Board of Directors and publishedon PMI.com in December 2019.
The report concluded that, throughout
PMI, people are deeply committed to thefundamental principle that we should nottarget our marketing and sales activities
to minors. Our findings indicate a strong

An employee in PMI’s Operations Center in Lausanne, Switzerland

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

adherence to our responsible marketing
policies and practices. The systems wehave in place to detect noncompliance
are working, we have taken all allegationsof noncompliance seriously, and we haveaddressed issues that have been identified ina timely fashion. As part of our assessment,
we also considered opportunities tostrengthen our existing responsible
marketing policies and practices. We
discuss several of these measures below.
Monitoring our efforts on
youth access prevention
Reviews by our Corporate Audit department
in 2019 showed that only a few affiliates
had issues related to responsible marketingcompliance, and they were mainly procedural.
During 2019, Corporate Audit conducted
additional ﬁeld visits in each of PMI’s six
business regions with a focus on checking
compliance with Marketing Code provisions
related to our responsible marketing
standards. Corporate Audit selected one
country in each business region (China,
Greece, Mexico, Indonesia, Russia, andTurkey). Members of the Corporate Audit
team visited a limited number of points ofsale in each of these countries to assess
compliance with the Marketing Codeprovisions. No issues related to youth accesswere identiﬁed in any of the locations visited.
We also run a mystery shopping program in asample of our smoke-free product retail stores.
We contract an independent third party,
which uses secret shoppers to measure thequality of services offered in our stores aswell as their compliance with our GCP. We
are evaluating whether this program can bescaled up to provide robust feedback on theconsistency of age controls at our stores.
We encourage any member of the generalpublic who notices PMI marketing materials
or sales practices that he or she believes
are inappropriate to contact us so that we
can review the situation and take action
as necessary.
A PMI employee at a retailer in Buenos Aires, Argentina

77

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Philip Morris International Integrated Report 2019

A retailer in Jakarta, Indonesia

Social media influencers

Engaging with our trade partners

We take seriously and investigate
thoroughly any specific allegation
regarding youth targeting, use, oraccess via social media in which thecompany may have been implicated.

We do not own or control the vast
majority of retail outlets around theworld where people buy our products.
However, we set robust standards forour direct trade partners and work withthem to guard against sales to youth.

For example, we received an inquiry in2019 from a media stakeholder aboutsocial media posts that did not appear tocomply with our internal “digital influencer”
guidelines. Our investigation revealed
that, while no laws were broken, we fell
short of our internal guidelines for digital
influencer activities in certain instances (apaid digital influencer was above the legal
age for smoking but under 25, the minimum
age required by our internal guidelines).
On October 16, 2019, senior management
decided that we would no longer engage
with anyone for the purpose of generatingsocial media posts about our products.

During 2019, we surveyed PMI affiliates
around the world on their youth accessprevention programs. The results showedthat not all affiliates had active programsin place and that the scope varied bycountry. In response, we developed aset of guidelines and tools that will help
our affiliates work more effectively with
their trade partners to guard against
sales to underage purchasers.
The tools include templates for contract
clauses that, for example, require retailers
to ensure strict compliance with minimum
age laws or, in the absence of such laws,

We set robust
standards forour direct trade
partners andwork with themto guard against
sales to youth.

to refuse sales of nicotine-containing
products to anyone under the age of
18. The tools also include educational
modules on youth access prevention
on the digital communication platform
we use with our retail trade partners
in various countries (68 countries,
approximately 530,000 registered points
of sale). The modules include educational
materials on youth access prevention
for both combustible and smoke-free
products, as well as knowledge checks.
Trade partners who currently use theplatform will be required to complete theeducational modules by the end of 2020.
Other tools we provide include point-ofsale signage, communications templates
to be used by our affiliates, and training
to guide in-person conversations.

We apply guidelines to all ourcommercial activities to reduce
the likelihood that they will be
particularly appealing to minors
Employees in PMI’s office in Athens, Greece

By the end of 2019, markets representing
over 90 percent of PMI’s total shipment
volume had developed youth accessprevention plans, which are expected
to be implemented in 2020.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

79

Next steps
As described above, PMI has a robust
infrastructure for monitoring compliancewith our Principles and Practices.
In 2020, we will continue implementing
our programs with trade partners on
youth access prevention. We will include
the risk of marketing and selling to youth
in our annual integrated risk assessment
and in our risk-based Corporate Audit
program. We will maintain our monitoringof social media and audience data to detectany ongoing inappropriate marketing
activities. We will also introduce additional
monitoring and controls for age verificationfor online sales and home deliveriesof smoke-free products. And we are
exploring ways to strengthen our controlsof our commercialization practices.

PMI’s ongoingtransformation includes
a heightened level oftransparency. We willcontinue to monitor
stakeholder feedback,and track and address
any complaints.

Furthermore, we aim to equip all ourelectronic smoke-free devices with ageverification technology latest by 2023.
PMI’s ongoing transformation includes aheightened level of transparency. We willcontinue to monitor stakeholder feedback
and track and address any complaints.

Performance
Responsible marketing and sales practices

Total number of compliance training
sessions conducted on PMI’s Marketing
Code (employees/third parties)
Number of violations of the Marketing Codeor Good Conversion Practices (GCP) resulting
in substantiated cases of misconduct

LINKS
2017

2018

2019

37,90323,43814,500(49%/51%)

2

8

Overview of marketing principles
for combustible products
Responsible Marketing
Practices at PMI (report)

42
An IQOS store coach in PMI’s Operations Center in Lausanne, Switzerland

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Philip Morris International Integrated Report 2019

Sustainablesupply chain
management
Our supply chain accounts fora significant part of our socialand environmental footprint.
With an increasingly integrated
and globalized value chain,balancing the security of our
supplies with cost efficiency
and high quality, environmental,
and social standards is a major
priority and challenge.
Increasingly closer supplier relationships
offer opportunities to create sustainablevalue. At the same time, supply chains
may be exposed to potentially significant
environmental, social, and governance risks.
PMI is fully committed to continuously
identifying and addressing such risks,
thereby increasing the sustainability
performance of our supply chain.

Megatrends• Technological progress• Climate change• Purpose of business• Income inequality
A field technician and tobacco farm workers in San Vicente, Argentina

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Why it is important to us and our stakeholders

Topic description
To PMI, sustainable supply chain
management means embedding
sustainability across our procurement
strategies and practices, identifying
and managing risks and impacts,
and continuously evaluating andsupporting our suppliers as theywork to align their sustainability
efforts with our requirements.

Relevance for stakeholders

Relevance of the topic

Sustainable supply chain management plays a vitalrole in safeguarding human and labor rights, as well asprotecting the health and safety of workers.
Optimally, it serves to empower women and alleviate
poverty. Moreover, it represents a key lever in
mitigating the negative impacts of climate change,
reducing greenhouse gas emissions, protecting
forests and biodiversity, and promoting energy
efficiency, water stewardship, and waste management.
Our business model relies on securing high-quality
materials and services from suppliers who are known
to us and who adhere to our environmental, social, andgovernance (ESG) requirements. We recognize thatmost of our sustainability impacts lie within our
supply chain and that it is our duty to manage them
responsibly and to be able to secure resources

responsibly over the longer term. Responsible supply
chain management helps to forge partnerships up the
supply chain and improve our knowledge of suppliers.
Our risk-based approach means we focus on the mostimportant issues while also supporting efficiency
gains, strengthening regulatory compliance, andhelping prevent reputational risks.
There are complex connections between managing
our sustainability impacts and procuring goods andservices. Trying to purchase products and services atthe best price while securing appropriate sustainability
performance from our suppliers could be perceived
as a trade-off. This is not our conception of sustainablesupply chain management: We prefer to develop
longer-term relationships that enable a sustainablesupply chain for both PMI and our suppliers.

Connectivity with other sustainability issues at PMI
4

2

5

3

6

1
7

PMI’s impacts on society

Impact in our value chain
Upstream

PMI operations

8

Downstream

9

Sustainablesupply chain
management

10

12

Key stakeholders

13

Business
community

Regulators

Civil society

Supply chain

17

19
18

16
15

14

11

1 Access to smoke-free products
2 Product reliability
3R esponsible marketing and sales practices
4 Data privacy and protection
5 Respect for human rights
6 Illicit tobacco trade prevention
7 Responsible advocacy
8 Business integrity
9S
 ocio-economic well-being of
tobacco-farming communities
10 Fair working conditions
11 Health, safety, and well-being at work
12 Diverse and inclusive working environment
13 Community support
14 Climate protection
15 Forest conservation
16 Product eco-design and circularity
17 Biodiversity
18 Water stewardship
19 Waste reduction

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Philip Morris International Integrated Report 2019

Our aim

100%

Percentage of critical suppliers fromwhom PMI sources sustainably by 2025

Achieving our aims
We aim to achieve measurable,
tangible improvements in our supply
chain, counting on the commitment
and support of our suppliers tocontinuously improve sustainability
performance. Joint efforts offer ample
opportunities to strengthen our business
relationships and create value for all.
PMI aims to purchase goods andservices from suppliers at best value,commensurate with business needs,
while appropriately managing supply,
financial, legal, and sustainability aspects.
To adhere to the required level of control
and minimize the risk of fraud, different
teams are responsible for approving
commitments, confirming receipt of goods
and services, and processing invoices.

Overview of our supply chain spend in 2019

We expect our suppliers to commit tocontinuous improvement toward bestpractices and ongoing compliance. PMI
is fully committed to working with andsupporting our suppliers on this journey.
Mindful of differences across categories
and geographies, timelines for fullcompliance are reasonable and defined.
The way we work is grounded in our
Responsible Sourcing Principles (RSP),
which align with the UN Guiding Principles
on Business and Human Rights, the Ten
Principles of the UN Global Compact, andthe International Labour Organization (ILO)
Conventions. The RSP, together with theimplementation guidance, set process andperformance standards for the suppliers of
all materials and services, from the directmaterials used in the manufacture of our
products to all other goods and services

Indirect materials andservices (including R&D)

48%

Direct materials and smokefree product devices

33%

Tobacco leaf

13%

Manufacturing equipment

6%

With over 33,200 suppliers across more than 180 markets, our spend
amounts to approximately USD 11.4 billion.
Thirty-three percent of our total supply chain spend is for direct materials(such as cellulose acetate tow for filters and paperboard for packaging) andsmoke-free product devices, 13 percent is on tobacco leaf, and 6 percent
on manufacturing equipment.
Our large agricultural supply chain ranges from tobacco growers to producersof other agricultural raw materials such as clove, menthol, and guar gum.
Our tobacco supply chain includes 16,500 directly contracted tobacco farmers
and a further 318,500 growers contracted through 13 third-party suppliers.1
Regardless of whether our tobacco is sourced directly or through third-party
suppliers, our GAP requirements and monitoring processes are the same. In
2019, we sourced tobacco from 24 countries, mostly from smallholder tobacco
farms of less than two hectares. Our long-term success depends in part on ourability to secure the materials and services required for our operations in a
professional and sustainable manner.

that are required to run our business,
including for example, manufacturing
equipment, R&D services, and consulting.
Sustainability work in our tobacco supply
chains is managed at farm level through ourGood Agricultural Practices (GAP) and ourAgricultural Labor Practices (ALP) programs.
Sustainably sourcing our goods and services
goes beyond the work of our procurement
team and involves a strong crossfunctional collaboration within PMI. With
regard to our agricultural supply chain’s
impact on climate change, for instance,
Procurement, Sustainability Operations,Leaf Department, External Affairs, and R&D
work together on addressing the issue.
To monitor the adherence of our suppliersto the RSP, GAP, and ALP requirements, wehave set up several processes and systems.
STEP (Sustainable Transformation Enables
Performance) is the supplier due diligenceand performance program to achieve
supplier compliance with our RSP. It
serves as the backbone for sustainably
managing our first-tier suppliers; in somecases, second-tier suppliers are also
included. In addition to STEP, we also
engage with suppliers on more specificsustainability issues, train and empower
suppliers, and conduct assessments andaudits through third parties as required.
STEP is based on the risk management
approach that guides our supply chain
due diligence framework. Through
STEP, our suppliers’ potential ESG risks
are determined based on the type ofmaterial or service supplied, as well as
the country in which the material is
produced or the service is delivered.

1 The scope of farm-level data related to our tobacco supply
chain reported in this report cover 22 countries we source from(it excludes Ecuador and Lebanon).

OverviewOperatingwith excellenceInnovating for
better products

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

83

PMI employees at a tobacco buying and quality check facility in Santa Cruz do Sul, Brazil

This inherent risk profile tailors thesubsequent evaluation of the suppliers’
performance in addressing the relevant
sustainability risks. Suppliers identified
as low risk are asked to complete a basic
questionnaire, while those characterized
as medium or high risk complete a fullquestionnaire. In addition, high-risk suppliers
undergo a desktop audit. Dependingon the results of the questionnaire and,as applicable, the desktop audit, thesupplier risk profile may be reevaluatedand require further due diligence.
For instance, a medium-risk supplier that
did not achieve the minimum acceptable
RSP compliance will be required to undergo
a desktop and/or an on-site audit.

Globally, our procurement categories
exposed to the highest sustainability risks
are electronics manufacturing, woodbased products such as paper and board,and agricultural production across Asia,
Africa, and South America. The mainrisks typically relate to the working andliving conditions of migrant workers,
deforestation, and climate change.
In our tobacco supply chain, theoperationalization of our GAP and ALP
codes occurs via the 2,875 field technicians
who work year-round with the contracted
farmers and suppliers of tobacco to
PMI. Our ALP program is externallyverified by Control Union, specialized insupply chain auditing, and we share theirfindings and action plans on PMI.com.

The process of our supplier due diligence platform (STEP)

Low risk

In 2019, for the third
consecutive year, PMI earned
a place on CDP’s Supplier
Engagement Leaderboard
for our actions and strategies
to reduce emissions andlower climate-related risks
in our supply chain

BasicquestionnaireDatapublished

ReportingFullquestionnaireDatapublished

Performance
analysis, gap
identification,and closure

ReportingDesktop audit

Datapublished

Corrective
action plan

ReportingMedium risk

Supplier
invited toprogramCompany
informationand online
registration

Screeningbased onrisk modelHigh risk

On-site audit

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Philip Morris International Integrated Report 2019

Progress in 2019
STEP: Supplier due diligenceprocess and platform
The foundation work behind our STEP
due diligence platform, launched in
2019, was based on an extensive
communication of our RSP to suppliers.
Existing and new suppliers will be
regularly assessed. Depending on theirrisk profile and the outcome of the
STEP assessment, PMI will engage with
suppliers through corrective action plans
and regular performance monitoring.
In 2019, we focused STEP deployment
on critical suppliers identified by ourrisk-based criteria. We started toformally onboard suppliers in July. This
first wave focused mainly on suppliersof direct materials and electronics.

Overview of self-assessment questionnaires completed through STEP in 2019
By the end of 2019, the self-assessment questionnaires (SAQs) of the tier 1 and key
tier 2 direct materials and electronics suppliers were processed in the STEP platform,
with the below results:
STEP
Supplier due diligence process and platform

The initial risk screening identified:Directmaterials

22%

78%

0%

Low riskMedium risk

High risk

Electronics
Tier 1 andtier 2

SAQ(self-assessment
questionnaires)

In 2020, our target is to assess the suppliers
representing 90 percent of our directmaterials and electronics spend through the
STEP platform. We are also onboarding key
tier 2 suppliers for these two categories.
Out of the first wave of assessments,
we have experienced a good level ofengagement from our suppliers in terms ofboth response time and completion rate.
We attribute this strong uptake to training
and communication, webcasts, face-toface engagement, and strong support
from procurement category managers.

71%of the suppliers
completed theirself-assessments

50%
ClosedInitial results:

21%

Targeted follow-up

29%

Significant gaps

Main risks identified, as per preliminary analysis:• Occupational safety• Risk of forced labor• Hazardous materials• Air emissions• Excessive working hours
An employee in PMI’s manufacturing facility
in Batangas in the Philippines

We will undertake results
analysis, audit execution, andcorrective action planningin the course of 2020

Overview

Innovating for
better products

The STEP platform is underpinned by an
external responsible-sourcing audit protocol
provided by Achilles, a leading provider ofsustainability supplier evaluation and PMI’s
partner in our STEP program. Our platform,
based on the principles ISO 19011:2018
and SA8000, is overseen by a steeringcommittee comprising representatives of
PMI and Achilles who formally approve
the audit process and delivery, including
supplier risk profile, governance, audit
frequency, and improvement cycle.

Testing the end-to-end
process with a supplierOperatingwith excellence

Caring for thepeople we work with

Focus on our electronics supply chain
Responsible sourcing at PMI goes further
than our STEP process, as we look at risks
inherent to specific supply chains. For
our electronics supply chain, for instance– which is key to our transformation
toward a smoke-free future – we lookedat risk exposure with an eye to tackling
any potential issues involving our new
electronic manufacturing supply base in
Asia. On top of our STEP program andregular engagement, which incorporates
supplier onboarding and the inclusion ofsustainability clauses in supplier contracts,
we strengthened our monitoring throughspecific sustainability scorecards and key
performance indicators (KPIs) for our

We tested our end-to-end processby assessing a battery supplierin the electronics category. This
supplier completed all steps of theprocess, from initial risk assessment
to the definition of an action plan
resulting from an on-site audit
conducted on its premises in China.
This supplier was classified as
medium risk according to theinitial risk model screening, which
required the completion of theentire set of STEP questionnaires.
The outcome of the online selfassessment highlighted a need forfurther investigation, and the supplier
was asked to complete a desktop
audit. This audit revealed potential
weaknesses in terms of employee
working time, fair and equal treatmentof employees, and the impact ofminerals sourcing on human rights,
as well as resource consumption andwaste minimization. It was therefore
decided to conduct an on-site audit,
which confirmed some of the findings
identified during the desktop audit
and triggered the developmentof a corrective action plan to be
implemented in the course of 2020.
IQOS device manufacturing in Asia

Protecting theenvironment

Performance
metrics

key suppliers and also undertook somepreliminary evaluation of conflict minerals
usage beyond the 3TG. We scaled up
our capacity-building efforts throughface-to-face and online training, focusedon topics such as labor practices in our
supply chain, and expanded our CDP
supplier work. To ensure our upstream
supply chain fulfills PMI’s RSP, we worked
closely with one of our tier 1 suppliers
to identify the moderate- and high-risktier 2 suppliers. Our tier 1 supplier thenconducted self-assessment questionnaires
and on-site audits. We regularly reviewed
the process throughout. In all, a totalof 37 tier 2 suppliers were audited andreported their improvement plans.

Beyond due diligenceIn our engagement and communications
with our electronics suppliers, PMI
maintains a clear focus on our RSP.
Beyond checking systems and monitoring
progress, we aim to build capability andenable positive change in the areas oflabor rights, human rights, environmental
impacts, and business integrity.
One way in which we build capability
and knowledge among our suppliersis through seminars, the first of which
took place in 2019 with 53 participants
representing 28 consumer electronics
suppliers (tier 1 and tier 2). Participants
tackled topics such as how to implement
PMI’s RSP, fire safety, supply chain

85

86

Philip Morris International Integrated Report 2019

management, ethical recruitment,
and the STEP registration process.
Also in 2019, working with the Responsible
Labor Initiative and Responsible Business
Alliance Foundation, we reviewed
management approaches to forced-laborrisk, recruitment surveys, labor relations,training for migrants before they leave
home, awareness of labor rights, and otherthird-party support for migrant workers
through the Responsible Workplace
Program (RWP). We put a spotlight on
recruitment practices and human rights,
following the lessons from our pilot project.
The aim was to transform the recruitment
process given the sector’s reliance on
migrant labor. A “new workers’ helpline”
was installed at our pilot study supplier aspart of efforts to improve the grievancemechanism there. The compliance manager
at one of our suppliers commented:“The RWP is a good initiative for the
improvement of employee–management
communication. The training gave a goodunderstanding to workers about theirrights and respect for human rights.”
A women’s empowerment program waslaunched in 2019 with two suppliersin partnership with Inno, a Chinese
nongovernmental organization (NGO),
supported by external funding. A core focus
was to “train the trainer” so that trainees
could propagate the messages and practices
more widely. The main training topics werecommunications skills, problem-solving,and stress management. In all, 140 female
workers from the two suppliers took part,enhancing their knowledge and skills as
part of PMI’s drive to empower women andpromote well-being at work. More workers
will be recruited into the program in 2020.

Conflict minerals
Companies are expected to demonstrate
how they are respecting human rights
and avoiding contributing to conflictin their mineral-purchasing decisions
and practices. This applies particularly
to the potential adverse impacts
associated with sourcing tin, tantalum,
tungsten, and gold from conflict-affected
and high-risk areas of the world.
Our 2019 conflict minerals submission
to the U.S. Securities and Exchange
Commission, covering the year ended
December 31, 2018, showed that thesmelters from which our suppliers source

CobaltCobalt is a key raw material in the
production of batteries used in oursmoke-free products. PMI launchedin 2019 a due diligence program withthe objective to identify and address
potential human right risks related to its
sourcing. This program currently covers
battery suppliers and smelters. We will
provide an update on our work in thisdomain in our next Integrated Report.

Addressing impacts in our electronics supply chain: Progress update
In our last report, we detailed ourwork with a key electronics supplierin Asia. The progress made one year
on is testimony to a robust process ofdue diligence, strong relationships, andexpert support from Verité, a leading
NGO in supply chain sustainability.
The potential risks to which PMI
was exposed from this supplier
relationship centered on migrantworker practices, working conditions,accommodation, and safety, andoversight of external recruiters.
A second audit in 2019 yielded
good news. Interviews with workers
revealed a favorable response to our
supplier as a result of the due diligenceprocess; they now see that they havea voice and that the management
is acting on their concerns.
Building on its success in improving
recruitment standards andcommunication, our supplier deliveredon its commitment to construct new
dormitories in 2019. Further, our team

IQOS device manufacturing in Asia

are either compliant with the Responsible
Minerals Initiative audit program (255smelters) or have gone through theassessment process (four smelters).

in Asia is working to monitor and engage
with suppliers and help improve safety,
productivity, and labor conditions.
Furthermore, in 2019, electronics
suppliers accounting for 80 percent ofour procurement spend attended ourcapability-building program. We piloted
KPIs to better understand working hours
in our supply chain. We focused on 19
key suppliers and asked them to submit
monthly data about weekly working
hours and labor composition. This helped
us understand the pattern of working
hours and to discuss the root causes ofexcessive hours based on the data. We
also integrated working-hour criteria into
our scorecard program. Moreover, we
introduced a new supplier onboarding
process through self-assessment
questionnaires, on-site management
review, and our STEP program.
This illustrates how we work with tier
1 and tier 2 suppliers to constructively
resolve gaps in performance anddeliver positive social outcomes.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Third-party operators aligning with our standards
In 2019, we visited two third-party
operations (TPO) sites that ourIndonesian affiliate Sampoerna partners
with, and which have a total of 38
facilities in Indonesia. Each typically
employs around a thousand skilled
people, mainly women, who work
predominantly in the hand-rolling ofcigarettes. The visits were to determine
to what extent the requirements of
the RSP could be incorporated into theexisting social auditing that was in place.
Takeaways from these visits were thatworking conditions at the third-party sites
are very good, showing an environmentthat goes beyond legal compliance andwhere the welfare of the workers istreated as of primary importance. In
addition, the Industrial and Employee
Relations department of Sampoerna
conducted a formal annual assessmentof working conditions, compliance,
pay, benefits, and environment, health,and safety. All 38 sites scored above
92.8 percent in this assessment.

The TPO we visited already haveexamples of systematic managementof social impact, such as capping thenumber of internships and defining atime period (12 months) for internships.
This is important because internships
are not subject to Indonesia’s minimum
wage laws, and we want to ensure they
are not used to circumvent these laws.
The TPO are looking to embrace
PMI’s RSP more formally in their sitebased assessments. This presents anopportunity to bring around 38,000 moreworkers into the scope of PMI’s humanrights standards. We see signals of strong
performance – at scale – across TPOfrom the reviews conducted so far. Next
steps include deeper communication
on RSP implementation, a governanceprocess to guide the integration, andthe development of training modules.

This presents an opportunity
to bring around 38,000 moreworkers into the scope of
PMI’s human rights standards.

Hand-rollers of kretek cigarettes at Sampoerna, PMI’s Indonesian affiliate

87

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Philip Morris International Integrated Report 2019

Good Agricultural Practices
for tobacco farming
In our agricultural supply chains, sourcing
is managed in accordance with our GAP
standards and our ALP code (see page 106).
GAP is a demanding set of standards
focused on governance, crop,
environment, and labor practices:• PMI expects suppliers to have in place
the necessary governance, procedures,and processes to manage contracts,
field technicians, visits, and training.
• The crop must meet certain criteria
on quality, style, integrity, andregulatory compliance. GAP also
demands that the crop is grown withthe appropriate seed variety, withthe correct plant nutrition, and using
effective integrated pest management
to minimize the use of crop protection
agents while improving the yield.

• The environmental demands of GAP
help farmers to use natural resources
efficiently and minimize negative
impacts such as deforestation, soil
degradation, and pollution.
• PMI is committed to eliminating childlabor and other labor issues on all farms
from which we source tobacco. Our ALP
code guides our work in this regard.
To a large extent, responsible sourcing
succeeds when relationships on the
ground are strong. At PMI, our Integrated
Production System (IPS) connects leaf
suppliers and farmers in a commercial
relationship that enables direct technicalsupport, agronomic advice, financial
loans, and various other services. This isespecially important when markets are
uncertain or when prices become volatile.
The support means the farmer can sellhis or her production at a fair price.

PMI’s tobacco supply chain

PMI

GAP andRSP

GAP andRSP

8 PMI leaf operations

13 third-party leaf
suppliers

23% volume of
tobacco purchased

77% volume of
tobacco purchased

GAP

2,875

GAP

Field technicians
support and monitor
GAP implementation

16,500318,500

Farmers

Farmers

335,000
Tobacco farmers
committed to applying
GAP

A field technician and a tobacco farm worker in Malawi

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

At the center of the system are fieldtechnicians: Men and women who
support the implementation of GAP
and monitor how well commercial andcontractual processes are working.
Some 2,875 field technicians – 170
employed by PMI and 2,705 by our thirdparty suppliers – implement GAP amongthe 335,000 farmers from whom wesource tobacco. These technicians are
facilitators of progress on the ground.
They continuously build relationships withthe farmers, most of whom cultivate lessthan two hectares of tobacco in isolated
locations with only basic infrastructure.
The trust they garner is crucial to theeffective monitoring of GAP and ALP.
It is often their pragmatic and sensitive
interventions that overcome the barriers
facing a program of responsible sourcing.

89

To a large extent, responsible
sourcing succeeds whenrelationships on the
ground are strong.

Field technicians

Provideagronomical
assistance

Delivertraining tofarmers

Monitor
GAP
implementation
A field technician and tobacco farmers in San Vicente, Argentina

Identify andaddress labor
issuesField
technicians

Connect
farmers and leaf
suppliers

Ensureimplementation of
improvement plans

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Philip Morris International Integrated Report 2019

On top of the farm-by-farm monitoringby field technicians, since 2016 we havebeen assessing the conformity of ourcontracted tobacco farmers and suppliersto the GAP standards through the industrywide Sustainable Tobacco Program(STP). Managed by independent supply
chain management specialist AB Sustain,
the program generates performance
ratings that allow us to prioritize where
corrective actions are required.

In 2019, in order to focus on developing
a new STP 2.0 program, the industry did
not run collective assessments with AB
Sustain. However, PMI continued to assess
conformity through annual self-assessments
by all our suppliers. Additionally,
Control Union conducted assessments
for PMI in three locations in 2019.

The STP process includes:• annual self-assessmentscompleted by tobacco suppliers(reviewed by AB Sustain);• on-site audits conducted by
AB Sustain among a sample ofcontracted farmers; and• a comprehensive review of tobacco
suppliers’ policies, procedures, anddocumentation to assess the levelof STP/GAP implementation.

In 2019, PMI assessed conformityof all our tobacco supplierswith the GAP standards of theindustry-wide STP throughannual self-assessments
A field technician and a tobacco farm worker in Mozambique

Relationships and capabilitybuilding are key to improving
sustainability performance.

OverviewOperatingwith excellenceInnovating for
better products

Next steps
We plan further expansion of our STEP
program across all the spend categories inour supply chain and all geographic areas.
In 2020, we will build on our 2019
desktop and on-site audit pilots, andwe are planning to deploy STEP to also
cover nonstrategic suppliers, defined by

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Building on the progress we havemade with our tier 1 suppliers in theelectronics supply chain and the initial
deployment among tier 2 suppliers, weplan to expand our engagement to alltier 1 suppliers in order to evaluate also
our tier 2 suppliers against our RSP.

spend thresholds. In parallel, we will lookto identify and possibly select additional
due diligence digital tools with which to
deploy our compliance program to ourtail spend. Additionally, we will expand
our benchmarking activities to leverageother industry standards and possibly
collaborate with individual companies
on supply chain due diligence programs.

Since relationships and capability-building
are key to improving sustainability

91

performance, we will continue organizing
and delivering seminars, webcasts, andother capability-building measures.
Through 2020, we will be maintaining
compliance with GAP and ALP on the
ground to allow measurable impacts
to show changes in environmental,social, and economic conditions.

Performance
Sustainable supply chain management

Total number of suppliers1

2017

2018

2019

50,000>36,000>33,200

Total procurement spend (in USD billion)2

n/a

10

9.9

Number of critical suppliers3

n/a

n/a

95

Critical suppliers, expressed as a proportion of total procurement spend

n/a

n/a

35%

Critical suppliers’ procurement spend assessed in PMI’s
supplier due diligence platform (STEP)4

n/a

n/a

84%

Critical suppliers of direct materials assessed in STEP, expressed as aproportion of procurement spend on critical suppliers of direct materials

n/a

n/a

73%

Critical suppliers of electronics assessed in STEP, expressed as aproportion of procurement spend on critical suppliers of electronics

n/a

n/a

100%

>350,000 >350,000

335,000

Number of tobacco farmers contracted by PMI and PMI tobacco suppliers
Number of third-party tobacco suppliers with whom
PMI has a direct contractual relationship5

15

15

Goal

90% by2020

13

Number of PMI leaf operations that contract tobacco farmers directly

9

8

8

Number of field technicians providing support to contracted farmers
and monitoring the implementation of PMI’s GAP and ALP

2,790

2,610

2,875

Proportion of tobacco purchased through directcontracts by PMI and PMI tobacco suppliers

90%

93%

96%

Proportion of tobacco purchased assessed by AB Sustain (cumulative, since 2016)6

55%

100%

n/a

Number of tobacco supplier locations (countries)
assessed by Control Union on ALP topics

6

3

3

Cumulative number of tobacco supplier locations (countries)
assessed by Control Union since 2013 on ALP topics7

19

21

22 24 by 2020

>90%
(ongoing)

1 Suppliers: refer to tier 1 suppliers, parent companies.
2 Procurement spend excludes tobacco leaf sourcing.
3 Suppliers’ criticality is evaluated taking into account spend segmentation and nature of component, as well as supply flexibility (single source/not easily substitutable) as relevant. 2019 figure
includes tier 1 suppliers of direct materials and electronics managed by PMI’s central procurement team, and excludes tobacco leaf sourcing.
4 We started to formally onboard critical suppliers into our supplier due diligence platform (STEP) in July 2019.
5 Data refers to parent companies.
6 In 2019, the industry did not run collective assessments with AB Sustain as it focused on the development of a new Sustainable Tobacco Program 2.0 program, but PMI continued to assess
conformity to the GAP standards through annual self-assessments completed by all our suppliers. Over the three-year cycle ending 2018, AB Sustain conducted formal assessments in 100
percent of our sourcing countries.
7 Cumulative number since 2013 excludes locations covered more than once by Control Union assessments over this period.

LINKS

Responsible Sourcing Principles (RSP)
RSP Implementation Guidance
Good Agricultural Practices(GAP) standards
Agricultural Labor Practices (ALP) code

A tobacco farm worker in Nayarit, Mexico

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Philip Morris International Integrated Report 2019

Respect
for humanrightsRespect for human rights must
be embedded in the corporate
culture, allowing human rights
principles to shape the way wework and guide interactions
with employees, suppliers, andbusiness partners, consumers,
and the communities inwhich we operate. Overthe last few years, this topic
has been gaining significant
attention from all stakeholders,
including governments.

Megatrends• Technological progress• Changing consumer expectations• Climate change• Purpose of business• Income inequality
Employees in PMI’s manufacturing facility in Batangas in the Philippines

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

93

Why it is important to us and our stakeholders

Topic description
To PMI, respect for human rights
means safeguarding the rights anddignity of all people affected by ouractivities and ensuring compliancewith both international standards
and PMI’s internal policies.

Relevance for stakeholders

Relevance of the topic

From a societal standpoint, human rights are
inherent to the dignity of human life and area prerequisite for any society to prosper.
As a global company, we can have a significant
impact on safeguarding the human rights of our
stakeholders, and we expect and require the same
behavior of our business partners, including our
suppliers. Beyond being the right thing to do,protecting human rights strengthens our businessby allowing us to better manage operational risks,build trust, and secure our license to operate.
We aim to continuously improve our practices

with respect to identifying and addressing
risks and impacts to “rights holders” across ouroperations and supply chain, including by securing
our supply of raw materials in a responsible way.
As we progress toward our vision of a smokefree future, the realm of our human rights work
is expanding into new sectors and activities.
The increased scope of our work – within theelectronics industry, for instance – represents
an opportunity to identify and tackle humanrights issues right from the start. We continuallyrefine our approach to ensure real impact.

Connectivity with other sustainability issues at PMI

4

1

6

3

5

PMI’s impacts on society

2

Upstream

PMI operations

8

7

Impact in our value chain
Downstream

910

Respect
for humanrights

Key stakeholders
Adultconsumers

Public healthcommunity

Business
community

Regulators

Civil society

Retailers andwholesalers

Employees

Supply chain

Media

11
12

25
13

24
14
21

17
19

22
23

20

16
18

15

1 Product health impacts
2 Access to smokefree products
3 Product addictiveness4 Product reliability
5 Responsible marketingand sales practices
6 Sustainable supply
chain management
7 Data privacy andprotection
8 Responsible andtransparent R&D
9 Fair fiscal practices
10 Illicit tobacco trade
prevention
11 Responsible advocacy
12 Business integrity
13 Socio-economic
well-being of tobaccofarming communities

14 Fair working conditions
15 Health, safety, andwell-being at work
16 Diverse and inclusive
working environment
17 Community support
18 Talent attraction,
retention, andemployability
19 Climate protection
20 Forest conservation
21 Littering prevention
22 Product eco-designand circularity
23 Biodiversity
24 Water stewardship
25 Waste reduction

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Philip Morris International Integrated Report 2019

Achieving our aims

Our aim

We aim to address our adverse impacts
and maximize our opportunities to drive
positive change for people across our value
chain. While this can be challenging given
the scope and complexity of the issues
and the breadth of our operations, we
believe that human rights are an absoluteand universal requirement – and onethat we are committed to upholding.

10

Highest risk countries
covered by external humanrights impact assessments andfindings addressed by 2025

Our Human Rights
Commitment and our Roadmap
are the cornerstones of ourhuman rights strategy

Our Human Rights Commitment (HRC)and our Roadmap are the cornerstonesof our human rights strategy. Our HRC
requires us to avoid, mitigate, and remediate
any human rights risks and impacts that
may rise across our operations and value
chain. Other policy instruments – suchas our Guidebook for Success, RSP,
GAP, and other internal policies andprocedures – guide our approach to
implementing the HRC. They commit us
to managing our work in accordance with
the United Nations Guiding Principles on
Business and Human Rights (UNGPs).
This work is governed internally by across-functional team and delivered

through extensive internal engagement
and training, externally conducted
human rights impact assessment(HRIA), consultation with experts, andpartnership projects with peers.

based on PMI’s footprint (e.g., presenceof manufacturing operations, type of
supply chain, etc.), as well as the country’s
human rights risk profile based oninternationally recognized indicators.

To deliver on our HRC, we have embarked
on a set of actions to be completed by theend of 2020. These actions are guided byour 2018 global risk assessment, which
revealed our most salient risks: thosewith the greatest potential to negatively
impact people as a consequence of ouractivities. These include risks of child labor,
forced labor, poor working conditions, andthe safety of farmers in our agricultural
supply chain. In our operations, they
relate to personal safety and freedomof association. In the markets where our
products are sold, they include risks related
to the use of our products by youth.

These follow a formal process, conducted inaccordance with the UNGPs, to determine
human rights risks and impacts coveringinternal operations and the value chain.
The HRIA results in a comprehensive
action plan defined and developed by themarket in question in collaboration withthe relevant corporate functions. Learnings
from an individual market assessment canthen be shared globally where applicable.

Guided by our 2018 assessment,
we decided to expand our work byconducting HRIAs in the 10 highest risk
countries in which we operate by 2025.
The high-risk countries are determined

Our Human Rights Roadmap at a glance

Embedding aculture of respect

Human rights due
diligence

Grievancemechanisms• Management commitment• Capacity-building• Policies• Risk assessment• HRIA• Integration and action• Monitoring• Gap analysis• Stakeholder/grievance
mapping

Reporting• Report on progress• Integrate external feedbackOverview

Innovating for
better products

Progress in 2019
PMI’s work to embed the protection ofhuman rights into our culture and corporate
processes is built on a foundation ofengagement, partnership, and technicalanalysis across functions and markets.
Success will be defined by meaningful
and systematic action to address gaps,
focusing on the most salient risks first.
We will be expanding the number ofassessments in the next five years and,as we do so, will apply substantial focus
on the depth and scope of each one.
Building on our pilot in Mexico in 2018,
we conducted a second HRIA in thePhilippines in 2019. The exercise covered
our head office, two factories (Batangas
and Marikina), one sales office (Marikina),
suppliers, and surrounding communities.
The scope of the HRIA was broadened
to also include our tobacco supply chain
and our marketing practices, betterreflecting the operating context andissues at stake across our value chain.

Operatingwith excellence

Caring for thepeople we work with

Mexico: Driving change through ourhuman rights impact assessment
The pilot assessment in 2018 triggered
action on working hours, road safety,
suppliers’ working conditions, and security.
Closer analysis of factory work patterns
has led to a four-shift model being trialedin the factory operations to address theissue of excessive overtime. To addressrisks related to road safety and personal
security for workers in our distribution
supply chain, we are now using GPS
tracking on trucks and applying stronger
checks on driver qualifications. Regarding
the risks revealed in our supply chains, weare now engaging with our suppliers toencourage their efforts to provide goodworking conditions and fair wages.

Protecting theenvironment

Performance
metrics

95

The process of a human rights impact assessment

1
Preparation

Review of policies,
procedures,and controls

Interviews withkey stakeholders
within PMI

2
Methodology
and research

Definition of
method and scope of
the assessment

These actions are intended to prevent
risks to third-party workers and otherstakeholders resulting from our business.

3
AssessmentOn-site visits and interviews withrights holders, including internal andexternal stakeholders

4
Integration

We will be expanding thenumber of assessments in thenext five years, and will apply
substantial focus on the depth
and scope of each one.

5
Reporting
Based on thefindings, developmentof recommendations
and a corresponding
action planMonitoringof the follow-up
actions

Reporting on progress against theaction plan and learnings from theassessment

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Philip Morris International Integrated Report 2019

Our latest HRIA in the Philippines
The assessment began early in 2019 withdesktop research, stakeholder mapping,training, and awareness-raising related
to the expanded scope of the exercise.
Learning from our experience in Mexico
the previous year, our preparation in thePhilippines included deeper engagementwith management teams prior to the startof the exercise, incorporating training on
human rights and the assessment process.
To open the on-site assessment, ourlocal affiliate PMFTC organized a launch
event that welcomed all employees, local
NGOs, and government representatives
to discuss human rights and the roles thatcompanies and governments have to playin this area. Several in-country visits andinterviews followed. Our human rights
consultant, Article One, interviewed
not only employees and contracted

workers, but also our tobacco supplier,farmers, and functional experts. The
consultant interviewed, individually or
through focus groups, a representative
sample of women and men across age
groups and functions, including unionizedemployees of the Marikina factory.
Our assessment revealed several
positive developments:• consistent mentions of aboveaverage salaries and industry-leading
benefits, training, development, andsupport for nursing mothers;• recognition of the company
as an employer of choice;• a strong culture of safety and security
among employees and contractors that
extends to their families and communities;• strong awareness of available
grievance-raising channels and
PMI’s “Speak Up” culture;• a strong commitment to diversity
and inclusion, with all feelingwelcome and supported;• good level of knowledge among sales
teams of PMI’s Marketing Code; and• a leaf supplier fully committed to
PMI’s ALP program, with a growing
awareness among farmers.
In addition to these positive elements,
we noted areas in need of improvement.
During the focus group discussions, sales
employees – especially women – raised
concerns about risks to their personalsafety while working in locations withhigh crime rates. To address these risks,
we will undertake mitigating measures,
including a review of route assignments in
consultation with the sales staff, and ensurethat two employees are teamed up whenworking in identified high-risk areas. The
risk for sales employees of being involvedin hold-ups also exists. In addition to allnecessary security measures applicable,
employees will be provided with appropriate
counseling. Employees also raised concerns
about their long working hours coupledwith long commute times. In response,
local management will conduct a surveyof working hours and driving routes andreview relevant compensation schemes.
Despite legal requirements regarding
the minimum age for the sale of tobacco
products, as well as awareness-raisingmaterials and other measures, sales
employees have raised concerns about“sari-sari” small neighborhood stores,
which may not always comply with legal
age limits. Although PMI neither owns
nor has control over these retail points ofsale, we recognize that we need to further
raise awareness of our own standards,
which align with local legislation, and work

Employees in PMI’s manufacturing facility in Batangas in the Philippines

with these retailers to ensure they do
not sell to underage customers. To thisend, the market will roll out additional
activities with retailers based on PMI’s
global youth access prevention program.
Our consultant also raised concernsthat the wages of security and janitorial
contractors, although fully compliant withlegal requirements, may fall below thelevel of a living wage. We were advised
to encourage our service providers toconsider implementing performancebased wage increases as an incentive.
Based on interviews with farmer
representatives and tobacco farmers, ourconsultant recognized PMI’s commitment
to the ALP program and the progress thathas been made in its implementation.
This includes improvements in growing
and working practices, and theoverall performance of our supplierin the Philippines. However, farmer
representatives also stated that, while the
ALP program had improved compliancewith personal protective equipment (PPE)
requirements, some farmers still refuse towear safety equipment, potentially leading
to green tobacco sickness and other healthissues. Providing safe working conditions toboth farmers and workers is a key elementof our ALP program. Our supplier willcontinue ensuring the appropriate PPE isavailable, while raising awareness of safety
to encourage behavior change in PPE use.
Overall this exercise raised awarenessof human rights at the country level andfurther developed employee competencies
and skills to address potential human rights
issues. From a corporate perspective,
we aim to use local learnings to enhance
our global understanding, training, andmanagement of human rights impacts.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withThis iterative process, called‘Human Rights Impact
Assessment,’ requires us toengage with all stakeholders
to whom we need to listen
and from whom we need tolearn. Listening to practitioners
and those that confront thechallenges is the first ingredientin transformation. And thistransformation journey that
our company is undergoing is
not without new challenges or
impacts on human rights – in ouroperations, supply chain, or even
our external engagements. As
an industry leader, we need tobe humble and open to learningfrom others’ lessons, build on
what works, and together plug
the gaps. Together we should
reinforce the key message that
respect for human rights ispossible. It is our responsibility
and a major contributionof our business to realizing
sustainable development.
The perspective of our Managing
Director in the Philippines

Workers at our tobacco supplier’s facility in Isabela in the Philippines

Protecting theenvironment

Performance
metrics

97

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Philip Morris International Integrated Report 2019

Employees in PMI’s manufacturing facility in Guadalajara, Mexico

Common findings of our HRIA
Based on interviews and focus groups with
employees and contractors, the assessments
revealed that, in both Mexico and thePhilippines, PMI is an employer of choice thatinspires pride at work, fosters diversity, andpays above-average wages. Employees areaware of the available grievance mechanisms
and are prepared to use them if things gowrong, with evidence showing that PMI’s
response is appropriate. Finally, the safety
culture within our manufacturing operations
proved to be strong in both countries.
We acknowledge that we cannot analyze thecomplexities of human rights issues in every
corner of our operations straight away, but
we keep strengthening our processes anddeepening our understanding over time
based on ongoing learnings. The journey
to turn inherent risks into managed risks
is ongoing. And we are encouraged by
the progress made so far – for instance,
on working toward alignment of working
hours with the ILO standards, aboveaverage salaries, and cultural openness.
Also, thanks to the HRIA, we can shedlight on local challenges such as safetyissues for commercial teams operating inrisky environments or factory employees
requesting the review of city areas tobe covered by the company’s nighttransport. Finally, structured tools
such as the HRIA provide an importantevaluation of how our Guidebook for
Success, ALP, RSP, and Marketing Codeare implemented on the ground.

Training employees on human rights

The journey toturn inherent
risks into
managed risks
is ongoing.

Embedding an ethos of respect for humanrights in corporate culture starts withawareness-raising and training. We haveprovided tailored human rights training
to the Law department and to regionaland market teams within the Security
function. In 2019, we also delivered
specific training sessions on humanrights policies and procedures to 25
percent of PMI’s security personnel.
In 2019, we decided to revamp ourhuman rights e-learning, informed by ourmost salient risks. The training provides
an overview of human rights and key
insights into child labor, forced labor, andmodern slavery, freedom of association,and environmental impacts. The tool
will be rolled out in 2020, and we willreport on the uptake in our next report.

We decided to revamp
our human rights
e-learning, informed byour most salient risks
An employee in PMI’s manufacturing facility in Marikina in the Philippines

Human rights topics are also covered byother corporate training with respect to our
Guidebook for Success, employment policy,
and health, safety, and environment policies.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

99

Next steps
We are progressing with the delivery of
our Human Rights Roadmap. The rolloutof our key diagnostic tool – the HRIA – willcontinue in 2020 in two geographies. We
plan to conduct a full-fledged HRIA in a
selected high-risk country, which will deliverin-depth analysis and robust action plans.

We are progressing
with the delivery of our
Human Rights Roadmap.

In parallel, to increase our overall
impact on society, we are participating
in industry-wide projects. We plan to
conduct a focused impact assessment of
our tobacco supply chain in Mozambique,which will cover ALP implementation andits effectiveness in addressing risks andimpacts. This work will be carried out by
a human rights consultant, with otherindustry peers, working in collaboration
with our common supplier in Mozambique.
In 2020, we will also review all training
materials and delivery methods of our
ALP program. The objective is to furtheralign our training with the UNGPs and our
step-change approach. In parallel, we will
explore new delivery methods such ase-learning and leverage real-life examples.

LINKS

Performance
Respect for human rights

Cumulative number of human rights
impact assessments conducted

Human Rights Commitment
2017

2018

2019

2025 goal

0

1

2

10

Human Rights Roadmap

Security personnel in PMI’s manufacturing facility in Marikina in the Philippines

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Philip Morris International Integrated Report 2019

CASE STUDY: SOUTH AFRICA

Bringing asmoke-free future
to the African
continent
Philip Morris South Africa(PMSA) was established in2003 and is the country’s
second-largest tobacco company.
It distributes PMI’s products
domestically and also exports
them to markets in the region.

Location

South Africa
Employees~450

Leonard Dingler (Pty) Ltd, an affiliateof PMSA located in Johannesburg, is amanufacturing entity. It produces tobacco
products such as roll-your-own, pipe
tobacco, and nasal snuff. In total, the twoentities employ around 450 people.
PMI’s Leaf Operations Center for
Africa is located in the head office inCape Town. The leaf team coordinates
tobacco-buying activities in South
Africa, Malawi, and Mozambique.

IQOS available since2016

A customer and a sales representative in an IQOS pop-up store in Cape Town, South Africa

101

Access to smoke-free alternatives
To date, South Africa is the only Africancountry in which PMI is commercializing
its heat-not-burn tobacco system IQOS.
The product was introduced to the market
in 2016 in Cape Town. Currently, PMI isconcentrating the commercialization ofsmoke-free products in three regions:Gauteng, with major cities Johannesburg
and Pretoria; the Western Cape region,
including Cape Town; and the KwaZuluNatal region, with Durban as its biggest city.
Since the initial launch, PMI has opened apermanent IQOS boutique in Johannesburgand expanded the sale of the device andits heated tobacco units, marketed underthe brand name HEETS, to 28 retail outlets.
These locations are mainly in shopping
malls, which attract a high volume offoot traffic from the targeted consumer
group: adult smokers. In addition, up to
100 tobacconists now sell IQOS. A wide
network of IQOS coaches is significantly
contributing to the distribution of IQOS in
South Africa through direct interaction withadult consumers. They are charged withpresenting the product and demonstrating
its use, and they also undertake activation
activities in designated hot spots.
The economic circumstances and consumer
preferences of South African consumers
have created some hurdles. South Africa
is a country with vast economic inequality,

The program started in 2019and has delivered good initial
results; it now accounts for around20 percent of devices sold.

A customer and a sales representative in an IQOS
store in Johannesburg, South Africa

making affordability an issue. To ensurethat the largest possible number of adultsmokers can afford this better alternative
to cigarettes, PMSA has introduced amonthly subscription program for IQOS.
Consumers pay the retail price of thedevice in equal installments over 12months, without any interest. This program
started in 2019 and has delivered goodinitial results; it now accounts for around20 percent of IQOS devices sold.

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Philip Morris International Integrated Report 2019

Employees in PMI’s office in Cape Town, South Africa

Tackling the issue oflittering and waste
In September 2019, PMSA increased its
efforts to tackle the issue of cigarette butt
littering. On the occasion of World Cleanup
Day, PMSA employees teamed with theCity of Cape Town and the Central City
Improvement District to clean up the city’scentral business district. The 66 volunteers,
40 of them from PMSA, collected a totalof 80 kilograms of cigarette butts. To raise
public awareness of the littering issue andthe need for proper disposal, the bags were
emptied and the contents displayed on abusy square during lunchtime. Since thelack of a good disposal infrastructure iscontributing to the problem, the volunteers
also handed out pocket ashtrays tosmokers to make proper disposal easier.
Another activity around World Cleanup
Day involved waste pickup by the Leonard
Dingler factory employees in Johannesburg.
Some 300 employees participated,gathering a total of 340 kilograms of waste
on the premises, which was then disposedof safely. The factory plans to turn this into
a quarterly event. In addition, the factory is
striving to not produce any waste for landfill
and runs a Bokashi project with its tobacco,
food, paper, and garden waste. In thiscomposting method, the organic waste is
inoculated with specific microorganisms
and fermented instead of decomposed. The
resulting soil amendment is then used in thelandscaping around the factory. This project
reduces landfill waste. In 2019, it lowered
the disposal rate to around 9 percent
from almost 19 percent in the year prior.
In its head office in Cape Town, PMSA
has made recycling a priority and aims tobecome a “plastic-free” office. Measures
include a dedicated waste-sorting system,a switch from plastic to glass bottles andcups, and the removal of plastic utensils.

103

Improving fleet safety
Overall, PMI’s fleet has a relatively low
collision rate, with 0.87 collisions per million
kilometers driven in 2019. The record wassignificantly worse in South Africa, with
5.63 collisions per million kilometers in
2018, among the worst companywide.
After a thorough investigation andimplementation of several measures,the rate dropped to 2.68 collisions per
million kilometers in just one year, whichequaled an absolute reduction from 44
to 18 collisions. These measures included
an awareness campaign for driving safety
and a prohibition on driving companyowned cars in the off-hours between
11 p.m. and 4 a.m., as most collisions haveoccurred between midnight and 6 a.m.
The most significant improvement camethrough the installation of telematics
devices in all 134 fleet vehicles andstronger involvement on the part ofthe management team. The devices not
only monitor speed, but also provide
indications of undesirable driver behavior– e.g., changing lanes without using theindicator light or not keeping a proper
distance from other vehicles. A fleet
specialist analyzes these data and sends
a report to line managers, who in turngive one-on-one feedback to drivers. In
most cases, this first feedback session isenough to trigger a behavior change in thedriver. In other cases, additional training
is warranted. Using this program, thelocal management team aims to lower thecollision rate further in 2020 and beyond.

The local management teamaims to lower the collision ratefurther in 2020 and beyond.

2.68

134

Fleet collison rate
Our fleet collision rate per
million kilometers driven in
South Africa dropped from5.63 in 2018 to 2.68 in 2019

Vehicles equipped withtelematics devices, notonly monitoring speed, butalso providing indications ofundesirable driver behavior

An employee in PMI’s manufacturing facility in Johannesburg, South Africa

104

Philip Morris International Integrated Report 2019

Adequate housing for
tobacco workers
South Africa is one of the countries fromwhich PMI purchases tobacco. Our leaf
supplier currently works with fewer than
100 farms, which in turn are contracting
close to 1,800 workers. As part of its ALP
program, PMI has set a goal of improving
the working and living conditions of workers
across its tobacco supply chain. In 2017,
during the Control Union assessment of
PMI’s local tobacco supplier, Universal Leaf
South Africa (ULSA), 14 of the 16 farms
visited in the Limpopo region were found tohave inadequate workers’ accommodation.
In the Eastern and Western Cape, sevenof the 11 farms visited did not meetaccommodation standards. PMI developed
a plan with ULSA and strategic partner
Verité to address this issue, with the goalof ensuring that workers’ accommodation
meets the following minimum standards:
Houses need to have a waterproof
and durable roof, glass windows thatcan be opened, and electricity (if theinfrastructure exists on the farm). Moreover,safe water must be available inside thehouse or nearby, and houses must be
no less than 30 square meters in size.

Tobacco farming in South Africa

The remediation plan, endorsed by theSouth African Department of Labor, started
with a pilot project in 2017 and expanded
to focus on accommodation on larger farms
in 2018. A full-scale program continued on
all contracted tobacco farms through 2019.
As of the end of 2019, the project hasdelivered 246 new rooms, 400 renovatedrooms, and 92 new or renovated toilets,
as well as the installation of electricity
on 31 farms that previously did not haveaccess to it. Together, these improvements
have benefited over 1,000 workers
and their families on 44 farms.
The Ministry of Labor in Limpopo andMinistry of Agriculture in the Cape havevalidated all the newly built and renovatedaccommodation and confirmed that theymeet the legal standards. This puts us ina great position to achieve our target ofproviding adequate accommodation to allcontracted farms in South Africa ahead of
PMI’s global timeline of the end of 2020.

LimpopoWestern Cape,
Eastern Cape

Tobacco growing
Tobacco:Dark air-cured
Crop season:
July to April
Irrigation type:
Drip irrigation

Workers’ accommodation in Lephalale, South Africa

Curing method:Air-cured, by hanging theleaves in well-ventilated barns
Average farm size:
285 hectares, out of
which 16.2 hectares used
for tobacco cultivation

People~100

Farmers who supply tobacco to PMI~1,800 (18 workers per farm on average)
Workers hired by farmers~600

People living on the farms (farmers’ families),
including over 400 children~5Field technicians, visiting the farms
on average 5 times during the crop season

105

PILL AR 3

Caring forthe people wework with

Socio-economic
well-being of tobaccofarming communities
Page 106

Continuously improving PMI’s social
impact within our operations and beyond
is essential to our long-term success.
Promoting a safe and healthy working environment
is key for our company. In our factories, offices,laboratories, retail outlets, and sales teams, we
aim for a safe and secure workplace populated
by a healthy and motivated workforce.
Our efforts extend to the labor standards we
expect from our suppliers and farmers. In our
tobacco supply chain, our aim is to provide adecent livelihood to all contracted farmers andprevent child labor and other labor abuses.

Health, safety, andwell-being at work
Page 120

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Philip Morris International Integrated Report 2019

Socio-economic
well-being of
tobacco-farming
communities
The tobacco we source is cultivated in many
regions of the world, including low- andmedium-income countries, where it is typicallygrown on smallholder farms of less than two
hectares. The socio-economic well-being of
tobacco-farming communities depends on
many factors, including the nation’s health andeducational facilities, political stability, resilience
to climate shocks, access to markets, and public
infrastructure, as well as regulatory frameworks
and their enforcement. If these factors are notpresent or are insufficiently developed, tobacco
communities risk being locked in a cycle ofpoverty, which can lead to poor working andliving conditions, including the use of child labor.

Megatrends• Purpose of business• Income inequality
A tobacco farm worker stringing tobacco under a Burley barn in Malawi

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics107

Why it is important to PMI and our stakeholders

Topic description
For PMI, it means improving
the capacity of tobacco-farming
communities to achieve a decent
standard of living, which is a key
enabler to eliminating child laborand providing safe and fair working
conditions on tobacco farms. Our
strategy aims to ensure that contracted
farmers achieve a living income,as insufficient income is often theroot cause of child labor and othersocial and environmental issues.

ingredient in our products, and a stable
and successful farmer base is critical toensuring the continuity of a high-quality
tobacco supply. There is opportunity for us
here, as well. As a global business sourcing
tobacco from 24 countries, we can help
address poverty and child labor throughtargeted initiatives and by developing
strong working relationships with farmers,
suppliers, civil society, governments,
industry, and other stakeholders.

Poverty prevents farming communities
from achieving acceptable levels of socioeconomic well-being and stifles local
economic development. It leads to laborabuses and risk of child labor on tobacco
farms because farmers may be unable tohire workers or afford school costs fortheir children, resulting in them keeping
their children home to work on the farm.
Child labor affects an estimated 150 million
children worldwide, with the vast majority
found in agriculture. It prevents children fromgetting a proper education, participatingin the development of their communities,
and fulfilling their potential.

As with other agricultural commodities,
the price of tobacco leaf and cloves canbe influenced by imbalances in supply
and demand, and crop yields and quality
can be affected by variations in weather
patterns, including those caused by climatechange. Tobacco production in certain
countries is subject to a variety of controls,
including government-mandated prices
and production-control programs.

Child labor and other such practices aremorally unacceptable to PMI. From abusiness perspective, these practices
also raise issues of compliance, such as
potential human rights violations, andreputational risk. Tobacco is the main

Relevance of the topic
Relevance for stakeholders

Overview

Connectivity with other sustainability issues at PMI
PMI’s impacts on society

1

Impact in our value chain
Upstream

PMI operations

4

2

6

5

3

7

Downstream

8

Key stakeholders
Civil society

Media

Employees

Regulators

Financialcommunity

Supply chain

9

Socio-economic
well-being of
tobacco farming
communities

10
11

14

13

12

1S
 ustainable supply chain
management
2 Respect for human rights
3 Illicit tobacco trade prevention
4 Business integrity
5 Fair working conditions
6H
 ealth, safety, and well-being
at work7D
 iverse and inclusive
working environment
8 Community support
9T alent attraction, retention,and employability
10 Climate protection
11 Forest conservation
12 Product eco-design and circularity
13 Biodiversity
14 Water stewardship

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Philip Morris International Integrated Report 2019

Our aims

100%

Percentage of contracted farmers
supplying tobacco to PMI whomake a living income by 2025

Zero

Child labor in our tobacco
supply chain by 2025

Achieving our aims
A principal aim of PMI is to provide a decent
livelihood to all contracted farmers in its
tobacco supply chain. This has been afocus since we introduced our Agricultural
Labor Practices (ALP) program in 2011.
We are committed to the following set oftargets to improve the socio-economic wellbeing of tobacco-farming communities:• 100 percent of contracted farmers
supplying tobacco to PMI makea living income by 2025;• zero child labor in our tobacco
supply chain by 2025;• 100 percent of tobacco farmworkers paid
at least the minimum legal wage by 2022;• 100 percent of tobacco farmworkers
provided with safe and adequate
accommodation by the end of 2020; and• 100 percent of farmers and workers
having access to personal protective
equipment (PPE) for the applicationof crop protection agents (CPA)and prevention of green tobacco
sickness (GTS) by the end of 2020.

We use a risk-based approach to identify,
prevent, and mitigate human rights– andlabor rights-related incidents in PMI’s
tobacco supply chain. We conduct ourassessments using information on theprevailing conditions in the agricultural
sector and what we have learned
through years of internal monitoringand external assessments of our ALP
program across our sourcing countries.

The program focuses on Argentina,
Mexico, Indonesia, Pakistan, Malawi,
Mozambique, South Africa, and Turkey,
due to the persistent nature of these issues
there. A key component of the step-change
approach has been to enhance external
assessments and verification to support
our progress toward our ambitious targets.

Our governance arrangements aim to guideand facilitate this work. PMI’s Senior Vice
President of Operations, a member of PMI’s
Company Management, is accountablefor our success in this area, while theoperational responsibility lies with the headof our Leaf Department. In each sourcing
region, a management team oversees
the implementation of ALP and has anestablished steering committee, whichworks closely with the dedicated local teams
across our affiliates, as well as our suppliers.
Effective delivery of the ALP program
depends on five core elements, which
together help contracted farmers earn adecent livelihood, eliminate child labor, andachieve safe and fair working conditions.
The ALP program is supported byrelated policies, such as our Good
Agricultural Practices (GAP), our Human
Rights Commitment (HRC), and our
Responsible Sourcing Principles (RSP).
In 2018, we started a “Step Change”
approach to our ALP program, focusing
on four priority areas: eliminating childlabor, ensuring payment of at least aminimum legal wage, the availability of
PPE, and adequate accommodation for
all farmworkers. Step Change focuses
on resolving the root causes of these
persistent issues in priority countries –which we assess periodically, and is run
in collaboration with our partner Verité.

A field technician and a tobacco farmer in Malawi

We are committed to a setof targets to improve thesocio-economic well-being of
tobacco-farming communities

Overview

Innovating for
better products

The five parts of the
ALP program
1. The ALP Code, comprising sevenprinciples and 33 measurable
standards, applies to the 335,000
farmers from whom we source tobacco
directly or indirectly. The principles
are as follows: no child labor, noforced labor or human trafficking, fairtreatment, safe working environment,
fair income and work hours, freedom of
association, and terms of employment.
The code is based on International
Labour Organization (ILO) conventions.
2. Awareness-raising and training for
suppliers, farmers, workers, and PMI’s
Sustainable Agriculture teams about
applying the code and addressing
any shortcomings in the process.
3. Internal farm-by-farm monitoringby 2,875 field technicians employedby PMI and our tobacco leaf suppliers.
These are the people at the frontlineof communicating PMI’s expectations,visiting farms, and working with
farmers to resolve ongoing challenges.
4. External assessments andverifications – by Control Union (aspecialist supply chain auditor) andlocal partners – to independently
evaluate the implementationof the ALP program.
5. Collaboration with civil society
organizations, governments, and theprivate sector on initiatives to address
systemic issues and to empower
communities through participatory
processes and grievance mechanisms.

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

109

Monitoring the implementation of our ALP program
Internal monitoring: Systematic
monitoring of the ALP program begins
with the collection by field technicians ofindividual farm profile data, updated eachgrowing season. The profiles capture key
information about the people working
and living on the farm, the size and typeof farm, the number and categories ofworkers, housing arrangements, and school
attendance. Field technicians then visit thefarms throughout the tobacco‑growing
season and evaluate, among other things,
how well labor practices align with theprinciples of the ALP Code. “Prompt
actions” are raised by field technicians toflag and trigger a response to any serious
ALP violations. A remediation plan isthen discussed with the farmer, followed
up on, and monitored. If the matter is

not resolved within the agreed timeline,
it is further escalated. This may lead tosanctions, which can include contract
termination in line with the due diligenceand consequence management process.
External assessments: External third‑party
assessments are conducted by Control
Union (CU). CU evaluates the management
system in place for ALP implementation,
as well as the labor practices on the farms
contracted by PMI and our suppliers. The
assessment generally includes a review ofprompt-action protocols and monitoringprocedures. It also examines the internal
capacity to implement the ALP program andunderstanding of farm practices, as well as
how issues are being identified, recorded,
and addressed. At the farm level, it assesses
compliance with the measurable standards.

Focused CU assessments: Under our stepchange approach, we are implementing a
specific assessment of the management
systems in place relating to the stepchange priority areas, in addition to
the farm-level ALP assessment.
External verification: The aim of thirdparty verification is to increase confidence
in our internal monitoring data, as well as toimprove the effectiveness of our programin addressing the targeted issues. Run on
an ongoing basis, we use it to verify ourunderstanding of progress on the ground,to challenge our monitoring data, toevaluate the effectiveness of our initiatives,
and, ultimately, to better assess our impact.
We work with local expert implementing
partners in different geographies.

Child labormonitoring &remediation
systemRaising a prompt action(PA)
FT finds child labor case,stops it immediately, andreports PA to ALP
coordinator

Reporting
Coordinator sends weekly
reports to NGO partnerwith case information

First visit to the farm
NGO visits farm to assess
risk factors and the root
cause(s) and proposes
potential remediation
activities

7 days

Evaluation and approval
Supplier evaluates andestablishes comprehensive
action plan

Report to supplier
Root cause(s) andpotential remediation
activities

Second visit to the farm
The final action plan isshared and agreed withthe farmer

Third visit to the farm
NGO follows up on
the action plan and reports
progress to supplier

PA status
FT closes the PA when theaction plan is established andno recurrence is observed

110Philip Morris International Integrated Report 2019

Despite persistent issues, which theprogram is proactively tackling, PMI’s ALP
program is reaching a level of maturity andsophistication that we are proud of. To
better share what we learn, and to receive
ideas for how we can improve, we regularly
participate in cross-sector events in which
we detail our program experiences.
In 2019, we also began to publish on our
website ALP Progress Updates to share
our experiences throughout the year,
and we participated in various seminars
and conferences on the topic, including a
webinar organized by Sustainable Brands.
Since 2000, PMI has been one of theearly members of the ECLT foundation,a multi-stakeholder partnership thatworks to find collaborative solutions
to address the root causes of childlabor issues in tobacco-growing. PMI isstrongly supporting ECLT’s efforts toprovide a framework (the ECLT Pledge ofCommitment and Minimum Requirements),
which is based on ILO Conventions andthe UN Guiding Principles on Business andHuman Rights, for all members to align,
reinforce, and where necessary, expand
their policies and practices to progressin sustainably eliminating child labor.

Key definitions
A living income and a living wage areboth about achieving a decent standardof living. A living income is the net annual
income required for a household toafford a decent standard of living for all
members of that household, such as selfemployed farmers, whereas a living wage
is applied in the context of hired workers(in factories or on farms, for instance).1
A minimum legal wage, as definedin PMI’s ALP Code, is a wage for all
workers (including temporary, piecerate, seasonal, and migrant) thatmeets, at a minimum, the national legal
standards or formalized agricultural
benchmark standards. An agricultural
benchmark may be formalized wherea minimum legal wage is not available
or applicable to a specific context.
Child labor, as defined by the ILO, is“work that deprives children of theirchildhood, their potential and theirdignity, and that is harmful to physical andmental development.” Under PMI’s ALP
Code, the minimum age for admission
to work is not less than the age at which
compulsory schooling is completed
and, in any case, is not less than 15
years or the minimum age accepted by
the country’s laws, whichever age limit
affords greater protection. No person
below 18 should be involved in any typeof hazardous work. In the case of family
farms, a child may only help on the farm
provided that the work is nonhazardousand light and the child is at least 13 years
old or above the minimum age for lightwork as defined by the country’s laws,
whichever affords greater protection.

Hazardous work means work that,by its nature or by virtue of whenor where it is carried out, is likely toharm the health, safety, or morals ofchildren or others. The following can,for example, be hazardous, particularly
without the proper PPE: applying
crop protection agents; stalk cutting;stringing; carrying heavy loads; working
with sharp tools; working in extreme
temperatures; and working after dark.
Green tobacco sickness (GTS) is a typeof nicotine poisoning caused by theabsorption of nicotine from the surface
of wet, fresh, green tobacco leaves
through the skin. The characteristic
symptoms of GTS include nausea,
vomiting, weakness, dizziness, stomach
cramps, difficulty breathing, excessive
sweating, headache, and fluctuations
in blood pressure and heart rate, andcan last from 12 to 48 hours.2
Personal protective equipment(PPE) in tobacco-farming refers to
any clothes, materials, or devices thatprovide protection from exposure to
CPA and GTS during specific activities
throughout the crop cycle.3

1 Source: https://www.living-income.com/the-global-livingwage-coalition
2 Reference: Schep LJ, Slaughter RJ, Beasley DM (September–
October 2009). “Nicotinic plant poisoning.” Clinical Toxicology.
47 (8): 771–81. doi:10.1080/15563650903252186.
3 Adapted from the FAO/WHO (2014) International Codeof Conduct on Pesticide Management.

A field technician and a tobacco
farmer in San Vicente, Argentina

Overview

Innovating for
better products

Progress in 2019
Contributing to alleviating poverty
PMI is committed to improving the
livelihoods of the contracted farmers
supplying tobacco to the company,
and consequently the communities inwhich they live, not only because it is
the right thing to do, but also because
we see this as a fundamental enabler toaddress social issues in our supply chain
and achieve greater sustainability.
To improve livelihoods in tobacco
communities, it is vital to identify potential
gaps between the actual income of ahousehold and the regional living income
benchmark, which is the net annual income
required for a household in a particularplace to afford a decent standard ofliving for all members of that household.
Where an income gap is identified,
we look at initiatives to improve theefficiency and productivity of tobacco
production and opportunities to implement
complementary crops or other incomegenerating activities to close the gap.

Operatingwith excellence

Caring for thepeople we work withinitiatives under a “Living Income Program,”
which aims to assess actual farmer income
versus the living income benchmark of agiven area. Our partner Verité has been
assisting us to identify suitable partners to
conduct assessments. In this initial stage,
we are conducting the work in Pakistan, andare planning to expand to Malawi in 2020.

Farm efficiency
To improve household income, many
farmers routinely seek out efficiencies andsavings in their operations throughout theyear. PMI supports these efforts. Examples
include farmers hiring only the labor

Protecting theenvironment

Performance
metrics

required, more careful use of inputs suchas fertilizer, and finding ways to increase
yields per hectare. Additionally, introducing
effective irrigation methods, such as drip
systems, can save not only water, but also
time and labor costs, while increasing theyield and quality of tobacco (and othercomplementary crops) produced. Anotherfarm efficiency relates to crop storage,
which can be improved to reduce thepotential financial loss from crops spoilingand the need for insecticides after harvest.
Going further, our programs support
mechanization of field preparation, which
can provide labor savings and elevate yields.

At PMI, we have designed a number of
initiatives to support contracted farmers
in improving their income levels and thus
the livelihoods of their households. The
initiatives offer a clear route to resolving
labor abuses, particularly child labor, andinclude farming efficiency programs,
improved mechanization and irrigation, crop
diversification, and alternative businessmodels. In 2019, we brought together theseWe have designed a numberof initiatives to support
contracted farmers in improving
their income levels.
A farm worker next to a water pump used for drip irrigation in Malawi

Diversification
Our smoke-free products require lesstobacco than cigarettes, and so weforesee a gradual decrease in our tobacco
leaf requirements from some countries.
Consequently, supporting farmers indiversifying their crops has become aneven more important focus area for
PMI. Growing and marketing a range ofcomplementary crops can improve farmincome. By diversifying their crops andengaging in other income-generating
activities, farmers are more resilient against
climate change and economic uncertainty.

111

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Philip Morris International Integrated Report 2019

We see it as our duty to help farmers
and their families improve theirlivelihoods and are seeking ways toimprove farmer income to a levelthat meets the relevant living income
benchmarks in our sourcing countries.
In certain countries, irrigation can play asignificant role in diversification, allowing
farmers to grow crops during the dry
season. In Mozambique, for instance,
the low-cost treadle pump irrigation
trials we began in 2018 provided
interim results in 2019 that show that
smallholder farmers are able to produce
and market their crops during the dry
period and achieve additional income.
Meanwhile, in Pakistan, we have rolled
out our corn support program to 359
farmers, with the aim of increasing
farmer profitability, food security, andlivestock feed. This program supplements
a similar project we established with 75
farmers to grow mushrooms. In 2019,
we also developed and expanded a moreformalized production of home allotment
gardens with seven vegetable crops,
which were mainly consumed by farmers’
families and hired workers. This program
reached a total of 1,700 farmers.
We have also supported the introductionof alternative crops beyond the low-tomiddle-income countries from whichmost PMI tobacco is sourced. In Italy
and Spain, for instance, PMI has helped
to establish fairly extensive cultivation
trials, around 40 hectares, of alternative
crops such as hazelnuts, cardoons,broccoli, potatoes, and tomatoes.

Supporting farmers indiversifying their crops is an
important focus area for PMI

Tobacco farmer’s wives growing alternative crops in Malawi

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work with

PMI’s Living Income Program atwork improving livelihoods in Malawi
PMI has identified Malawi as apriority country for supporting farm
diversification. Existing projects, runin partnership with USAID’s Feed the
Future program, focus on trialing new
varieties of crops and improving how
soybean and groundnuts are cultivated.
We also work with our local third-party
tobacco suppliers to trial an array ofdifferent irrigation systems, which could
provide farmers who have historicallyrelied on a single rain-fed crop with theopportunity to produce crops in a year.
In 2019, production of groundnuts wasincreased to 3,300 hectares, with many
contracted farmers establishing formal
contractual arrangements with our leaf
suppliers to ensure their product is sold.
Another diversification effort isbeekeeping – a project started in 2018
and expanded in 2019 to supplement
farm income through the production
and sale of honey. We have supported
our suppliers in setting up and running
640 hives on their own farms, as wellas on smallholder farms in central
Malawi. Specialist advice and training areprovided to ensure consistently highquality honey. The project will expand
to include hundreds more hives over the
next few years, and field technicians willcollect monitoring data along the way to
track impact. The project is an excellent
example of a connection between anatural capital stock and socio-economic
value. As honey production increases,
it will be processed and commercialized
in local and export markets.

Water and mechanization are also key.
A study under way aims to identify
sustainable sources of water that canbe used for irrigation in central Malawi.
And on mechanization, PMI is running apilot whereby Malawian entrepreneurs
provide field preparation services tofarmers, using tractors. While the pilot
is at an early stage, with 1,500 hectares
serviced to date, we have started tomeasure the impact on smallholder
agricultural productivity, financial
feasibility, and the benefits derived
from using a digital platform to monitor
tractor efficiency and schedule services.
The Living Income Program also tracks
progress. Along with the practicalprojects, we piloted a Household
Welfare Survey in 2019 to analyze
2,150 farmer households and assess
the impact of the ongoing agricultural
initiatives. The survey assesses other
non-tobacco sources of income, thepoverty index, and food security andnutritional diversity. We expect to share
the results of the survey in future reports.

Protecting theenvironment

Performance
metrics

Agricultural Labor Practices
In 2019, field technicians contracted by
PMI and by our leaf suppliers monitored
92 percent of all contracted farms (anincrease from 88 percent in 2018), and weare committed to continually strengthen
our monitoring to improve our visibility ofissues – taking a more risk-based approach,and to also be more effective in addressing
identified issues. In 2019, for instance, we
also piloted our overall ALP program in
China, covering close to 23,000 farms.
Across the countries we source
tobacco from, the most recurrent
and difficult problems include:• work performed by children;• inadequate and unsafe accommodation
for farmworkers;• payment to workers below the minimum
legal wage or formalized agricultural
benchmark; and• inadequate access to PPE that can
prevent harm from exposure to CPA
and GTS.

113

We have developed and are implementing
action plans to address these recurrent
issues in collaboration with key
stakeholders, including our strategic partner
Verité, local NGOs, and governments.
We have also commissioned externalverification in some priority countries.
In 2019, we refined our due diligence,monitoring, follow-up, and consequence
management by introducing specificguidelines. For instance, we want toreward farmers who make an effort toalign with our standards and will stop
doing business with those who repeatedly
do not or are unwilling to change despite
the support they receive from us. We
clearly communicate expectations andpotential sanctions at the beginning of theseason, ensuring consequences are appliedtransparently and consistently acrossall contracted farmers. This systematic
approach resulted in a significant increase incontract terminations due to ALP violationsin 2019, with 641 contracts terminated.

Total prompt actions recorded by field technicians (2017-2019)120

Total:
12,749Total:
18,543

Total:
14,440

100

2%

1%

<1%
8%

Safe working environment issues

80

35%

25%

19%

Income and working hours
Other

60
40
20

Hazardous work performed by children

63%

74%

73%

2017

2018

2019

0

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Philip Morris International Integrated Report 2019

Key countries

Main 2019 interventions in ALP priority areas

Argentina• Provided PPE to farmers and farmworkers• Enhanced case-by-case remediation of child-labor incidents,
partnering with a specialized NGO• Supported childcare centers; provided school kits and scholarships
to children of tobacco farmers• Reduced labor requirements by expanding mechanization

Indonesia• Supported after-school program for children of tobacco farmers• Raised awareness among women of the risks of child labor• Supported skills training for family members of tobacco farmers

Malawi• Improved accommodation for tobacco farmworkers• Provided PPE to farmers and farmworkers• Promoted women’s entrepreneurial groups and financial literacy
training for farmers and family members• Ensured records of payments to workers made by farmers

Mexico• Promoted safe and adequate accommodation for migrant
farmworkers

Child labor
In 2019, out of the 94 percent of farms
monitored by field technicians on this
topic, less than 1 percent were found withchild labor incidents (children performing
hazardous tasks). A total of 2,712 prompt
actions were recorded by field technicians
relating to hazardous work performed by
5,820 children, with 94 percent of thesebeing the farmer’s own children. Thisis lower than the 4,587 prompt actions
recorded in 2018. The 2019 decrease is
primarily driven by a reduction in prompt
actions in Malawi and Turkey, and PMI
no longer sourcing from Tanzania. Outof the 2,712 prompt actions recorded in
2019, 88 percent were resolved. The mostcommon hazardous tasks that children
were found doing were harvesting or
handling green tobacco (50 percent),

followed by stringing (26 percent) andcarrying heavy loads (9 percent).
While this progress is encouraging, we must
maintain a relentless focus on strengthening
the reliability of our monitoring data, as
well as on the remediation steps to support
farmers and workers to address childlabor incidents in a sustainable way. We
remain cautious, and we acknowledge thelimitations of our monitoring system. For
example, field technicians are only present
on the farms for a limited amount of time
during the growing season, and the issues
we face are systemic, complex, and often
persistent. Consequently, in 2019, we
continued to work on standardizing ourmonitoring process and strengthening
it with better guidelines and training.

• Supported childcare centers attended by children of tobacco-farming
communities
Mozambique• Provided PPE to farmers and farmworkers• Installed small-scale irrigation to prevent children from being
involved in seedbed watering (also allowing complementary crop
production during the dry season)• Supported a community leadership accountability program

Pakistan

Types of prompt actions recorded in 2019 relating
to hazardous work performed by children• Supported a school feeding project

Harvesting or handlinggreen tobacco50%• Supported skills training for family members of tobacco farmers

Stringing26%• Supported summer schools during tobacco harvesting season

Carrying heavy loads

9%Working with sharp tools

7%

Driving a tractor oroperating machinery

2%• Introduced female field technicians to monitor GAP implementation,with a specific focus on training and raising awareness of child labor
among women who work on tobacco farms
South Africa• Improved accommodation for tobacco farmworkers

Turkey• Provided PPE to farmers and farmworkers

Handling or applying CPA

1%• Trained women farmers and farmers’ wives on the risks of child laborwith specialized NGO

Other

3%

Note: Where step-change priority areas are not detailed, it is because they are not an issue in that market.

Handling or applying fertilizer 2%

Overview

Innovating for
better products

We are also expanding and deepening theexternal assessments beyond the ongoingControl Union assessments. We havepartnered with local and internationalorganizations to verify the status of our four
ALP priority areas and the effectiveness of
our programs. We began these additional
external verifications in Mexico andArgentina; in 2019, we added Turkey,
Malawi, Mozambique, South Africa, andIndonesia. We are awaiting final results forexternal verification undertaken in 2019;
but the preliminary results have indicatedsignificant discrepancies compared tointernal monitoring in some markets (forexample, Turkey), while in others there isa reasonably good alignment (for example,
Indonesia). In the markets where we arefinding major discrepancies, we are working
hard to understand the root causes of thisand to develop and implement action plans

Operatingwith excellence

Caring for thepeople we work withto strengthen our internal monitoring, and,over time, see a closer alignment of thedata. We will be using this additional layer ofcontrol to verify and report on our progress
toward our targets, and look forward toproviding an update in our future reporting.
In 2019, part of our work to preventchild labor focused on strengthening the
support provided to farmers and workers,
to remedy any cases found. Such support
included awareness-raising and training;efforts to strengthen school access andattendance through provision of school
materials and scholarships, school feeding,
after-school activities, and improving
schooling infrastructure; vocational training
for older children; and other initiatives
to improve household income levels
such as women’s self-help groups, villagesavings and loans associations, and crop
diversification. In Argentina, for instance,

Our approach to social contributions
In 2019, we revised our social
contributions policy approach to makeit more decentralized, providing greater
flexibility and autonomy for affiliates todecide on the community projects thatwill best meet local needs. As part ofour policy changes we also introduced
a distinction between charitable
donations and community investments.
Charitable donations are not linked to
impacts along our value chain and aremade to enhance the overall qualityof life in the communities where we
operate. They are locally managed by ouraffiliates to address local priorities andinclude disaster relief efforts. In 2019,
we made charitable donations valued ataround USD 15 million, supporting 145
projects carried out with 128 partners

across 39 countries. Our disaster relief
efforts amounted to USD 1.2 million.
Community investments help managesocial and environmental impacts
associated with our value chain. In 2019,
we ran 25 projects with 22 partners over
17 countries, directly reaching over 89,000
beneficiaries. In our tobacco supply chain,community investments can complement
our ALP program by sustainably investingin community projects – such as schoolingassistance for the children of tobacco
farmers and farmworkers, after-school
activities, and training for women andbroader community members – which
help address issues requiring a wider
and more collaborative approach.
We provide further details on our
approach to social contributions andour 2019 activities on PMI.com.

Protecting theenvironment

Performance
metrics

we partnered with a specialist NGO toundertake case-by-case remediationof child labor (see box on the right).
Our work on the root causes of child laborintersects with women’s empowerment.
Consequently, we included women’s
empowerment as one of our guiding
principles on ALP Step Change publishedin 2019. Efforts to tackle child labor are
more effective when women play a more
active role. While women are positive
agents of change, they are also a vulnerable
group in many rural environments. In
our work to empower women, we are
beginning to see results, which we willreport on more extensively in the future.
In Malawi, for example, we have provided
seed funding, entrepreneurial training,
and links to microfinancing to 257
women’s entrepreneurial groups, involving
approximately 4,300 women, primarily
farmers and farmers’ wives. In Turkey, wedelivered training to over 1,100 women.
And in Pakistan, we recruited a female teamto strengthen monitoring and to improveengagement with female farmers andfamily members and to raise awarenessabout access to water, sanitation, andhygiene. We also distributed 1,500 hygienekits to women in these communities.

Efforts totackle childlabor are more
effective
when women
play a more
active role.

115

Monitoring and remediationin practice in Argentina
PMI’s Argentina affiliate, MassalínParticulares (MP), was the first company
to implement our new approach toexternal verification and to undertakecase-by-case remediation of child labor
incidents with a specialized NGO. Of
the 32 prompt actions raised by fieldtechnicians during their visits to morethan 4,600 contracted farms in 2019,85 percent concerned children aged
between 13 and 18. Working with
Conciencia, an NGO and expert inchild-labor elimination, we analyzed
the root cause of each case, made aplan with the farmer, and followed up
regularly. The remediation worked well,and many lessons were learned. Of
the 32 cases, 23 were fully resolved
and no recurrence was observed as aresult of the action plans implemented.
Five families are still receiving support,
while four families showed a lack ofwillingness to change despite thesupport provided, and consequently
their contracts were not renewed.
Typical root causes were lowawareness of child-labor legislation,
inadequate access to schools, and theentrenched belief that some hazardous
work by children around the farmis acceptable. Action plans include
training, scholarships and school
kits (bags and books, for instance),enrollment support, and sports
equipment. MP has begun working
with Conciencia to identify high risksof child labor on contracted farms andto provide the necessary support toprevent them from becoming actual
cases of child labor. Furthermore,
the case-by-case remediation has
been expanded to our supplier
Cooperativa Tabacalera de Misiones.

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Philip Morris International Integrated Report 2019

Safe working environment
In line with PMI’s ALP Code, we require
farmers to provide a safe workplace
to prevent accidents and injury andminimize health risks. In 2019, fieldtechnicians recorded a total of 10,519
prompt actions relating to unsafe working
environments (2018: 13,780). Around
42 percent of these related to unsafe
or insufficient accommodation for farmworkers, followed by 38 percent relating
to handling green tobacco and applying
CPA without the proper PPE (21 percent
and 17 percent, respectively).
In 2019, we continued our monitoring andreporting of prompt actions to evaluate
the availability of required PPE and ensure
farmers and workers had the necessary PPE.

Types of prompt actions recorded in 2019
relating to safe working environment issues

A tobacco farm worker in Salta, Argentina

Together with our suppliers, we distributed
a total of 1,632,031 PPE sets (for CPA
application and GTS prevention), including
686,000 full sets of PPE for CPA and
945,000 pairs of GTS gloves in markets
where needs were identified. In othermarkets, we continued to provide PPE asa standard business practice. Overall, we
estimate that 99 percent of farmers (andtheir workers) had access to the required
PPE in 2019, and we are progressing toward
our target of 100 percent PPE availability by
the end of 2020. In parallel, we are working
to ensure farmers and their workers
understand the importance of using thenecessary PPE. To this end, in 2019, 89
percent of contracted farmers received
safety training (CPA and GTS focus).

Unsafe or insufficient
work accomodation

42%

Exposure to GTS due to
not wearing proper PPE

21%

CPA stored in a way that
could cause a healthand safety accident

19%

Exposure to CPA due to
not wearing proper PPE

17%

Other

1%

Overview

Innovating for
better products

Adequate accommodation
for farmworkers
In line with the ALP Code, when a farmer
provides workers with accommodation, we
require it to be clean, safe, and meet basic
standards. Accommodation standards weredeveloped in line with local legislations,with guidance from Verité and other local
partners. In 2019, 6 percent of the total
farmer base provided accomodation to theirworkers, and we recorded a total of 4,374
prompt actions relating to accommodation.
We continued to support farmers toaddress these issues. We specificallyhelped farmers address accommodation
issues in the countries where standards
were not yet met: Argentina, Malawi,
Mexico, Mozambique, and South Africa.

Operatingwith excellence

Caring for thepeople we work with

While improvements take time, we estimate
that, of the farmers providing workers withaccomodation, 80 percent of them weremeeting the standards, and we are on trackto achieve our target for all accommodation
to meet the standards by the end of 2020.

Protecting theenvironment

Performance
metrics

Access to water, sanitation, and hygienein Malawi and Mozambique
Access to water, sanitation, and hygiene(WASH) is a fundamental human rightthat helps ensure healthy, prosperous
communities. Malawi and Mozambique,in particular, lack the infrastructureand funding needed to provide
adequate WASH services to their entire
populations. The link between poverty
and access to water, sanitation, andhygiene is well proven, and addressingthese issues leads to improved
livelihoods and increased productivity.
PMI is committed to helping ensurethat 100 percent of contracted farmers
supplying tobacco to PMI have accessto water by 2025 and access to basic
sanitation and hygiene by 2030.
In 2019, with the support of our leaf
suppliers, PMI made headway on thesegoals by drilling 13 solar-pump boreholes
and 30 hand-pump boreholes in central
Malawi and 60 hand-pump boreholes
in Tete Province, Mozambique. These
boreholes have directly benefited
more than 3,500 tobacco farmers andtheir families and are also estimated tobenefit 80,000 community members.

New boreholes havedirectly benefited morethan 3,500 tobacco
farmers and their families
Tobacco farm workers’ accomodation in Malawi

The response from communities that
benefit from these services has been
inspiring. The impact of improved, readily
available water is transformational. The
economic benefits of improved sanitation
can include increased productivity,
reduced healthcare costs, and theprevention of illness, disability, andearly death. People who have access toclean, safe, and convenient sanitation
services also experience greater dignity,
privacy, and security. This is especially
important for women and girls, who
may miss work or school when they are
menstruating and do not have access tosafe sanitation facilities. It also reduces
the risk of sexual assault by minimizing
the walking distance to water sources.
The positive impact of PMI WASH
initiatives is already significant andinspires us as we continue working
to reach our 2025 and 2030 goals.
In 2020, PMI will perform a WASH
baseline study to better understand thecurrent situation in our tobacco supply
chain and better measure the impactof future interventions. Additionally,
PMI is developing a plan to provide
communities with the most sustainable
basic sanitation and hygiene facilities.

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Minimum wages for workers
Income earned during a pay period, or
growing season, should be enough tomeet workers’ basic needs. Our ALP Coderequires that the wages of all workers(including those of temporary, piece-rate,seasonal, and migrant workers) meet –at a minimum – national legal standards
or formalized agricultural benchmark
standards. In a typical crop year, less than athird of contracted farmers supplying to PMI
or PMI’s suppliers (or over 100,000 farmers)
hire workers throughout the season.
In 2019, we expanded our monitoring ofminimum wages to cover 90 percent ofcontracted farmers in our tobacco supply
chain, compared to 82 percent the previous
year, and we introduced prompt actions forthe non-payment of the minimum wage, as
well as external verification to validate thepayments. We also conducted a number ofminimum wage studies in certain countries
to better understand payment schemes toworkers. A total of 1,158 prompt actions
were recorded by field technicians relating
to farmers paying less than the minimum
wage to their workers. The challenges
are most commonly found in Malawi,
Mozambique, the Philippines, Indonesia,
Pakistan, India, and the Misiones province inArgentina. In addition to payment amounts,
terms of employment may be informal orinconsistent and pay may be agreed unfairly.
Improved visibility on workers’ wages
enabled us to take a number of steps totackle the issue in relevant countries andensure farmers pay the required minimum
wage. To this end, we reiterated our
expectations from farmers on this matter,in line with local laws. We also equippedfarmers and workers with tools – such as
time-recording templates and payment
records – to keep track of working time andcalculate payments in line with the minimum
wage. In countries where the payment
gap is significant, we provided financial
literacy training to farmers and supported
them to improve their farm productivity
and efficiency, and their overall income
levels in order for them to be able to pay
the minimum wage to their workers. A key
component of our work to achieve paymentof minimum wages and to ensure farmers
are managing their costs responsibly is
to support them in their hiring practices,
so that they only hire workers whennecessary and depending on their landsize. In Mozambique, for example, we haveclearly communicated the expectation forfarmers to pay their workers appropriately
and guided them in their hiring practices– this resulted in a 60 percent reduction
in full-time workers hired by farmers witha farm size of 0.67 hectares or below.
Clearly, there are challenges to formalizing
minimum wages in many communities.
In India, for instance, where a national
minimum wage is a challenging issue, ourthird-party assessment showed several
farmers were paying below the minimum
wage and that women workers often were
paid less than men for the same type ofwork, a clear violation of the ALP Code.
This issue is common in Indian agriculture:
Farmers and workers agree on a fee inadvance of the season that is in line withprevailing rates in the communities andoften lower than the legal minimum wage.
In 2019, we analyzed payment practices
and devised action plans for delivery in2020. Given the vulnerability of womenin the rural economy, we also developed
projects on capacity building and financial
training, as well as self-help groups
that work with existing governmental
programs and microbusiness initiatives.

A tobacco farm worker in Nayarit, Mexico

PMI’s position on tenancy
in Malawi
Tenant farming is an agricultural
production system in which
landowners contribute their land,
while tenant farmers contribute theirlabor. Tenancy agreements can takemultiple forms; typically, in Malawi,
landowners pay tenant farmers anagreed cash amount for each kilogramof tobacco delivered at the end of theseason (a percentage of the selling
price to the final buyer) and provide
the crop inputs, subsistence goods,
and accommodation. Historically, we
have discouraged the tenancy practicebecause we cannot properly ensure
our ALP Code is respected. In 2018,
PMI went a step further and requested
from our suppliers in Malawi that the
tobacco supplied to us should not
originate from farms with tenancy
agreements. PMI maintained thisposition in 2019, and we expect that
this has helped to mitigate the risksof exploitation of vulnerable tenant
farmers and their families, as wellas to drive improved adoption andimplementation of our ALP standards.

Innovating for
better products

Overview

Next steps
A key focus for 2020 will be to establish
living income benchmarks and undertake
income assessments to ascertain theincome gap, validating our internal
analysis with independent third-party
studies following proven methodologies.
In parallel, we will continue projects toalleviate poverty, and we aim to refine how
we measure our impact. Our household
welfare surveys will also continue in 2020
to help us measure, on an annual basis,the impacts of our projects on householdincome, poverty indices, food security, andnutritional diversity. Practical interventions
will continue in 2020; these will include
low-cost irrigation expansion, accessto affordable mechanization services,and the development of agreements
between farmers and offtake partners.
We will continue to strengthen ourmonitoring of the implementation of
our ALP program, and improve theeffectiveness and consistency of how
we respond to identified issues. We will
analyze the impact of our initiatives using
indicators developed with our expert
partner Verité. This will allow us to further
refine our work on child labor, safe working
environments, and minimum wages.
We will use the results of the externalverification undertaken in 2019 to improvethe effectiveness of our overall program.

LINKS

ALP Code
Step Change Guiding Principles
ALP Progress Updates
CU external assessment reports
and action plans

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

119

Performance
Socio-economic well-being of tobacco farming-communities1

Number of tobacco farmers contracted by PMI and PMI tobacco suppliers

2018

2019

>350,000 >350,000

2017

335,000

Number of countries where farmers contracted by PMI
and PMI tobacco suppliers are located

24

28

27

Number of farmers with whom PMI has direct contracts

23,00021,00016,500

Number of farmers who have direct contracts with PMI tobacco suppliers

332,000 >329,000

318,500

Number of third-party tobacco suppliers with whom
PMI has a direct contractual relationship2

15

15

13

Number of PMI leaf operations that contract tobacco farmers directly

9

8

8

Number of field technicians providing support to contracted farmers
and monitoring the implementation of PMI’s GAP and ALP

2,790

2,610

2,875

Proportion of tobacco purchased for which labor practices
have been systematically monitored

77%

88%

92%

36

50

641

Total number of ALP prompt actions recorded by field technicians

12,74918,543

14,440

Proportion of ALP prompt actions recorded by field technicians:• Safe working environment• Hazardous work performed by children• Other

63%
35%
2%

74%
25%
1%

73%
19%
8%

Total number of ALP prompt actions resolved

10,154

13,687

8,137

Number of ALP prompt actions recorded by field technicians
relating to safe working environment

8,087

13,78010,519Number of terminated contracts due to ALP violations (per crop season)

Number of ALP prompt actions recorded by field technicians relating
to non-payment of the minimum wage to farmworkers3

Goal

n/a

n/a

1,158

Number of ALP prompt actions recorded by field technicians
relating to child labor4

4,417

4,587

2,712

Proportion of farms monitored found with child labor incidents4

1.2%

1.3%

0.8%

Proportion of ALP prompt actions recorded by field technicians
relating to child labor that were resolved4

67%

89%

88%

Proportion of tobacco farmworkers provided with safe andadequate accommodation5

n/a

n/a

80%

100% by
2020

Proportion of farmers and farmworkers having access to personal
protective equipment6

n/a

n/a

99%

100% by
2020

1 The farm-level data related to our tobacco supply chain reported in this report cover 22 countries we source from. It excludes Ecuador and Lebanon.
2 Data refers to parent companies.
3 We introduced this category of prompt actions in 2019.
4 Our monitoring and reporting of child labor refer to situations of hazardous work performed by children below 18 years old.
5 We introduced this category of prompt actions in 2019. Scope is limited to farmers providing accommodation to workers (approximately 6 percent of the total farmer base).
6 We introduced this category of prompt actions in 2019.

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Philip Morris International Integrated Report 2019

Health,safety, andwell-being
at work
An environment that keeps
everyone safe and protects thewell-being of all is a prerequisite
to productive work. We arecommitted to providing a safe
and secure working environment
for all employees, contractors,
and visitors. Our responsibility
doesn’t stop at the factorygate; we expect our suppliers
and tobacco growers to keep
their own workers safe, too.

Megatrends• Purpose of business• Technological progress
Employees in the manufacturing facility of Tabaqueira, PMI’s Portuguese affiliate

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics121

Why it is important to us and our stakeholders

Topic description
To PMI, this topic means promoting asafe and healthy working environmentthat protects the physical andmental well-being of all involved.

potential reputational issues, and helps
us to manage operational costs. Safe andhealthy working environments also equip
the company to adapt to megatrends,
such as technological progress.

From a societal perspective, ensuringthat people stay safe and well every day
is of paramount importance. At workand at home, a sense of well-being helps
people maintain motivation and perform
at their best and lessens demands
on social and healthcare systems.

At PMI, we see high-quality leadershipand management, as well as a cultureof shared responsibility – defined bypersonal involvement, engagement,
and observation – as central toresolving such challenges.

Promoting a safe and healthy working
environment is key for PMI, as thewell-being of our employees fosters
engagement and productivity. A highly
dedicated and productive workforce is anenabler of PMI’s business transformation.
Implementing strong safety and wellbeing management is the right thing to
do: It creates and protects value, prevents

Relevance of the topic
Relevance for stakeholders

Overview

Connectivity with other sustainability issues at PMI

PMI’s impacts on society

42Impact in our value chain
Upstream

PMI operations

5
6

3

1

Downstream

7

8

Key stakeholders
Civil society

Regulators

Employees

Supply chain

9

Promotinghealth,safety, andwell-being
at work

10

13

11
12

1 Product health impacts
2 Access to smoke-free products
3S ustainable supply
chain management
4 Data privacy and protection
5 Respect for human rights
6 Business integrity
7S
 ocio-economic well-being of
tobacco-farming communities
8 Fair working conditions
9D
 iverse and inclusive
working environment
10 Community support
11 Talent attraction, retention,and employability
12 Climate protection
13 Product eco-designand circularity

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Philip Morris International Integrated Report 2019

Our aim<0.3

Total recordable incident rate for
employees and contractors by 2025

Achieving our aims
In our factories, offices, laboratories,
retail outlets, and fleet, we aim for aworkplace promoting health and safety,
and populated by a motivated workforce.
Working conditions at PMI are governed
by our Guidebook for Success (our codeof conduct) and our health, safety, andsecurity principles and practices. Our safety
management system enables us to monitor
health and safety performance across all
our manufacturing facilities. In 2019, we
achieved the global multisite certification
to ISO 14001 and OHSAS 18001 of
98 percent of our factories producing
more than 3 billion cigarettes equivalentannually. At site level, each manufacturing
operation has a dedicated team that
ensures the standards are delivered on
the ground. Team members constructively
challenge their peers and benefit fromcross-auditing by colleagues at other sites.

In our manufacturing
operations, we focus on instillinga culture of behavioral andobservation-based safety.

We routinely update our systems andtrain our staff. Our corporate targets on
incidents help us evaluate the effectivenessof our safety policies and programs.
All incidents in our manufacturing
operations are subject to in-depth root
cause analysis, and we apply the same
thorough approach to all contractors
in our manufacturing facilities.

by providing medical assistance andpromoting physical activity, healthyeating habits, and work-life balance.
Many teams across PMI manage and contributeto health and well-being, including Health& Safety, Inclusion & Diversity, and People& Culture (our human resources team).

In our manufacturing operations, theprimary focus in 2019 was to instill a cultureof behavioral and observation-based safety(BOS). Within such a culture, everyone
involves themselves in openness, care,observation, and behavior reinforcement.
We help move this culture change forward
through communication with employees
and safety alerts or notice boards. Every
person’s contribution counts – a fact
we recognize through awards and othermeans of acknowledgment. Through
BOS, we are further embedding safety
into the DNA of the organization in aplanned, structured, and standardized
way. It will make a significant contribution
to delivering on our safety ambition.
For our fleet of almost 24,000 vehicles,
a total of 160 people are allocated to
manage security and market safety, led
by our global Head of Market and Fleet
Safety. These personnel run safety
programs, training, and engagement at
the country level, using fleet diagnostics
and performance indicators to evaluate
progress annually. Our specific mediumterm target in fleet operations is to reducehigh-severity collisions, with an ongoing goalof eliminating fatal accidents completely.
Also important to us is achieving ourwell-being goals by continuing to focus
on a variety of initiatives grouped under
our BalancedYou program. Here, we
support healthy lifestyles, including

Employees in PMI’s office in Buenos Aires, Argentina

BalancedYou is “owned” by employees;
it is governed at the country level byhealth, safety, and well-being (H&WB)
committees composed of workforce
representatives. There are currently 55
such committees to ensure maximum
employee representation and coverage.

Overview

Innovating for
better products

Progress in 2019
Safety in manufacturing
In 2019, shared responsibility forsafety evolved rapidly across PMI. A
sustainable and active attitude of careis leading to an interdependent safety
culture, guided by our behavioral andobservation-based approach.
Initial evidence suggests that our people
are beginning to recognize the importanceof behaviors such as engagement andopenness, endorsement of safe personalactions, anticipatory feedback, andsafety reporting. The challenge is to
standardize how we create a BOS culture
and then to formulate tools that work.
We share instances of success around
PMI. For example, an operator in Argentina
shared that he has overcome his initialskepticism of the observation-correction
method: “Now that we apply BOS every
day, I believe it is a good practice. It makes
me more alert, and I feel more conscious

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metricsof what is unsafe for me.” Many teams try
out the BOS approach at a simple level
first; for example, asking a colleague not
to walk while using a mobile phone. In
Portugal, after our teams returned fromvacation, we noticed a higher accident
rate, so we used BOS in a “Back to Work”
project to help people return to the normalheightened state of safety awareness(read more in our case study on page 36).
To promote an “active caring” approach in
2019, we delivered training on behavioral
and observation-based safety to shopfloor teams, supervisors, and high-level
management in selected affiliates. To
complement this, we provided train-thetrainer sessions to environmental, health,and safety (EHS) managers. Following
our pilots in Brazil, Poland, and thePhilippines, we rolled out the full training
package to all affiliates. Among otherpositive outcomes, supervisors now have
BOS role models, helping them to set
expectations and demonstrate leadership.

What is a behavioral observation-based safety culture?
It is an approach aimed at focusing
employees’ attention on their own andtheir colleagues’ daily safety behaviors.
Drawing on peer-to-peer observations,
it allows data-driven decision-making andhelps us evaluate and inform our healthand safety strategy. BOS encourages
every employee to demonstrate his or
her personal commitment to safety, torecognize whether a behavior is safe,
and to understand the triggers thatlead to risky behavior. By creating aculture of mutual observation, we areencouraging colleagues to actively
care for one another with kindness andgenuine attention. The practice reinforces
positive attitudes and behaviors while
preventing accidents and injuries.

As an example, a worker may observe acolleague whose behavior poses a risk,
perhaps due to fatigue or distraction.
In keeping with our employee culture,
the observer would address the person
involved with respect and calmly offer
assistance. More generally, we mightuse an “active care” training module toinspire colleagues demonstrating unsafe
behaviors to analyze the cause of their
behavior or condition. We would thenoffer support and solutions, and seek apersonal commitment to safer actions.
On an ongoing basis, we review thefactors that drive or trigger particularunsafe behaviors (“safety triggers”)
to prevent them happening again.

Employees in PMI’s manufacturing facility in Crespellano, Italy

123

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Philip Morris International Integrated Report 2019

And shop-floor workers are more confident
in how to observe colleagues and cleareron using the BOS management andreporting tools. In 2019, we trained over
25 percent of manufacturing employees
to practice BOS. In 2020, we aim to train
and engage all employees and contractors
to practice BOS on a weekly basis at aminimum. BOS digitalization will allow
us to better understand the causesof unsafe behaviors and to be more
focused in our prevention programs.
In 2019, based on data for PMI employees
and contracted employees, our lost time
incident rate (LTIR) in manufacturing
was 0.06 (2018: 0.07), against a targetof 0.10 or less. Our equivalent total
recordable incident rate (TRIR) was 0.17
(2018: 0.20), against a target of 0.30.
No employee or contractor fatalities
occurred in our factories in 2019. The
rates are improving versus 2018, thanks
to the improved quality of accident root
cause analysis and to the BOS deployment
initiated in the second half of 2019.
In parallel, 2019 saw extensive workon in-depth root cause analysis for
all incidents affecting employees andcontractors. This involved analyzing
the risk, its controls, impact severity,
predictability, and near misses, helping
us to direct resources to priority areas.
Allied to the evolving safety culture at
PMI is the work we are doing to influenceworking conditions at third-party
operators. In 2019, we visited two thirdparty manufacturing sites in Indonesia toreview labor conditions, and we assessed
health, safety, and well-being as partof this. Each third-party site typically
employs around a thousand skilled people,
mainly women, who work predominantlyin the hand-rolling of cigarettes (pleasesee page 87 for more information).

Employees in PMI’s manufacturing facility in Dakar, Senegal

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work with

Focus on fleet safety
Driving presents a risk to workers at PMI.
We have almost 24,000 cars on the road,covering around 500 million kilometers ayear. The safety risks faced by our sales
and distribution personnel, especiallythose at the wheel, are exacerbated inregions where road conditions can be moretreacherous. Road traffic accidents not
only affect PMI staff but also the public, so
fleet safety management is a top priority.

PMI’s fleet safety management
system covers driver
training, vehicle safety,
and driver behavior.

Protecting theenvironment

Performance
metrics

be under stress, so organizational risk
controls can be impaired. Technology
can help manage these risks, and we use
telematics to monitor driver behavior to
improve safety and efficiency. In various
countries, the introduction of telematics,
coupled with other elements of our
fleet safety management system, hassignificantly decreased our collision rate.
For instance, it dropped from 2.88 to 0.91
in Ukraine between 2014 and 2019, from

PMI’s fleet safety management
system covers driver training, vehicle
safety, and driver behavior; ourprocurement policy ensures maximum
safety features in fleet contracts.
Although we continue to reduce collisions,
it is to our deep regret that we again
endured road traffic fatalities in 2019,
including one PMI employee and 10
members of the public. The accidents
occurred in six countries in Asia andSouth America, involving challenging
circumstances related to distracted driving
and disrespect of basic defensive-driving
techniques, such as traffic anticipationand maintaining safe speeds for the roadconditions. The lessons learned include
an intensified need for proactive riskydriving detection, followed by adequate
actions and a balance among behavioral
programs, technology implementation,
and a fleet safety management system.
The challenges we face in delivering
safe working conditions relate to roadconditions, law enforcement, and driving
culture. Drivers almost always work alone,
and we recognize that they may at times

In 2019, we reduced our
fleet collision rate per million
kilometers driven, achieving
0.87 (versus 0.91 in 2018)
Loading of a delivery truck in PMI’s manufacturing facility in Marikina in the Philippines

0.87 to 0.49 in Egypt between 2017 and2019, and from 5.63 to 2.46 in South
Africa between 2018 and 2019 (readmore in our case study on page 100).
We will continue to focus on road safety.
In 2019, globally, we reduced collisions per
million kilometers driven, achieving 0.87
(2018: 0.91), and we are now working
toward our target of <0.80 by 2022.

125

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Philip Morris International Integrated Report 2019

Employee well-being
The pace of change in the working
world creates stress and anxiety, and we
recognize that this may be heightenedin some instances by PMI’s current
transformation. We consider it our
duty to equip our employees to better
cope with stress and uncertainty.
Fundamental to this are the flexible work
arrangements that encourage a healthy
work-life balance, currently available
across 85 countries where our employees
are located. These arrangements
include the possibility of remote work,
a compressed working week, parttime employment, and unpaid leave.

Our employees want to be great parents
and great professionals, and we support
this by running pre-maternity, postmaternity, and new-father workshops, aswell as by facilitating peer-to-peer support
through the employee-run Parents@PMI
network piloted in Switzerland. Buildingon the success of this pilot, we shareda toolkit with all our markets in order tosupport them in building their own parents
networks if relevant. These complement
employee benefits such as health insurance,
paternity and maternity leave, nutritious
canteen food, and sporting facilities.
On top of flexible working arrangements
and life-centered benefits, and to further
focus on mental health issues, we offera blend of awareness raising, training,and coaching. To support generalemployee health and well-being, and tofoster a better working environment, we
invite employees to conduct their own
health risk assessment to monitor theirmental and physical biometric healthdata, and to act on it accordingly.
Other health and well-being initiatives
for employees continued in 2019
through our Health & Well-being online
platform. In some of our factories, forexample, there is on-site blood pressure
monitoring by nurses. Also, at shopfloor level, we provide advice on healthy
lifestyles, including nutrition, heart andback health, exercise, alcohol abuse, heatstress, and dengue fever risk, for instance,
depending on site location. Further, we
promote active involvement in our H&WB
committees as a way to improve employee
involvement in how BalancedYou evolves.
Employees’ mental health was also on
the agenda of our work with the European
Works Council regarding the Stress
Management Directive.

Employees in the office of Sampoerna, PMI’s Indonesian affiliate

Focusing on mental healthin our Swiss operations
In 2019, PMI focused its well-being
program in Switzerland on mental
health, including stress management
and resilience, in line with the WHO’s
special initiative for mental health.
We undertook various activities
throughout the year, including healthand well-being weeks dedicated tomental health and resilience, with morethan 500 employees participating inworkshops. And we tailored some ofour training courses to better reflect
mental health considerations. For
example, our Leadership Fundamentals
training now includes a focus on
strengthening managerial soft
skills. We also ran a pilot health risk
assessment at our Operations Center
throughout summer 2019 to better
understand where to focus support
on collective health and resilience. The
assessment was optional, completely
confidential, and provided by an
external company. The first analysis
confirmed the continued need tofocus our efforts on mental healthand resilience; we will use the findings
to build our strategy and roadmap
with targeted actions to be delivered
throughout 2020. These actions will
focus on individual needs, leadershipbehavior, and organizational stress.

Overview

Innovating for
better products

Next steps
We will continue to deliver initiatives toimprove manufacturing and fleet safety,
and to meet country-level and global
targets, backed up by certified safety
management systems within our operations.
Specific priorities for fleet safety in 2020
are to refine driver safety, launch new
engagement practices in priority markets,and evaluate the potential for a global
telematics solution for the whole of PMI.
In manufacturing, the focus is to roll out
BOS training and push the communicationof safety fundamentals. We expect the
impact of the BOS safety culture to takeeffect gradually over the next few years.

Operatingwith excellence

Caring for thepeople we work with

Our safety culture shift will continue as newawareness and skills make us all stop, think,
and act in anticipation of unsafe behaviors
and conditions. The message we will be
pushing throughout 2020 is that safety
is free of silo-thinking, it is cross-cutting,and it applies at all levels, from shop floor
to point of sale and the boardroom.
At the top of our well-being agenda
in 2020 is improved monitoring andmanagement of mental health and personal
resilience. Based on the outcome of ourpilot program in our Operations Center in
Switzerland, we will refine mental healthmanagement tools and programs for
employees. We will also report in the futureon how our new certification approachis delivering smoke-free PMI offices.

A snapshot of our efforts to promote employee
well-being, and diversity and inclusion worldwide*• In 2019, we became the first company
to receive the global EQUAL-SALARY
certification certifying that we pay
men and women equally for equal work
everywhere PMI operates in the world,covering more than 90 countries.
• 55 health, safety, and well-beingcommittees are set up at countrylevel, composed of workforce
representatives.
• Maternity or primary caregiver leave or
benefits going beyond local legislation
requirements are offered to employees
in 77 of our markets.
• Women network groups are set up
in 22 countries.

• Flexible working arrangements
are available to PMI employees in
85 countries.
• 71 countries offer paternity or
secondary caregiver leave or benefits
going beyond local legislation.
• Childcare facilities or contributions areprovided in 41 of our markets.
• 32 markets employ people withdisability, and 65 markets havebuildings accessible for disabled
persons.
• We have initiatives or networks tosupport the LGBTQ+ community in
27 countries.

* Data was collected from over 90 countries where PMI has employees and is estimatedto cover over 95 percent of office-based employees.

Protecting theenvironment

Performance
metrics127

Performance
Health, safety, and well-being at work

2017

2018

2019

Goal

Lost time incident (LTI) rate per 200,000 hours
worked – PMI and contracted employees1

0.10

0.13

0.12

<0.10

LTI rate per 200,000 hours
worked – PMI employees

0.10

0.13

0.12

LTI rate per 200,000 hours worked –contracted employees

0.07

0.08

0.10

Total recordable incidents rate (TRIR)
per 200,000 hours worked – PMI
and contracted employees

0.22

0.22

0.20

TRIR per 200,000 hours
worked – PMI employees

0.22

0.22

0.20

TRIR per 200,000 hours worked –contracted employees

0.20

0.30

0.17

Number of fatalities – PMI andcontracted employees

2

2

1

0

Number of fatalities – contractors2

1

1

0

0

Number of fatalities – members of the public3

9

3

10

0

Collision rate within PMI’s fleet of vehicles
per year (collisions per million km driven)

1.01

0.91

0.87

<0.80 by2022

Proportion of manufacturing facilities withOHSAS 18001 and ISO 14001 certification4

91%

97%

98%

100% by2020

0.00270.0013

0

36

>40

55

Occupational illness frequency rate
(OIFR) per 200,000 hours worked –PMI and contracted employees
Number of markets with healthand well-being committees<0.30

1 We define a contracted employee as an employee who is under the direct supervision of PMI employees but employed by a temporary
employment agency.
2 We define a contractor as a person employed or working on behalf of a third-party company contracted by PMI, who remains under
the direct supervision of their employer rather than PMI and are often involved in project-specific or outsourcing arrangements.
3 It is to our deep regret that we endured road traffic fatalities in 2019, including one PMI employee and 10 members of the public (readmore on page 125).
4S
 cope: manufacturing facilities producing more than 3 billion cigarette equivalents annually. The 2018 figure has been adjusted due toan internal reporting error.

LINKS

Third-party verification of PMI
health and safety indicators

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Philip Morris International Integrated Report 2019

CASE STUDY: PHILIPPINES
Location

PMFTC:A sustainablefootprint
PMFTC is the Philippines affiliate of PMI.
Established as a business combination
between PMI and Fortune Tobacco in
2010, it is the leading tobacco manufacturer
in the Philippines. It produces six ofthe 10 leading cigarette brands in themarket, led by Marlboro and the locally
best-selling brand Fortune. PMI is also
preparing to launch its heat-not-burnproduct IQOS in the Philippines.
PMFTC’s diverse workforce of around 3,800 employees
is mainly spread across its corporate office in Taguig
City, and two manufacturing facilities in Tanauan City,
Batangas and Marikina City, Metro Manila. Its factories
produce cigarettes for the domestic and export
markets, and semi-finished goods such as cut filler
and cigarette filters, primarily for neighboring markets.

Philippines
Employees~3,800
Manufacturing
facilities

2

Contributing to local communities
As a responsible corporate citizen, PMFTC
is strongly committed to the development
and growth of local communities. Its
corporate social responsibility program,called Embrace, partners with various
governmental institutions, NGOs, andlocal stakeholders to support programs
that are based on needs assessment. The
charitable giving, social contributions, andcommunity investments are focused onaccess to education, empowering women,
economic opportunity, and especiallydisaster preparedness and relief efforts.
Projects supported by Embrace in 2019were aimed at making Filipino communities
in geographically isolated and disadvantaged
areas more resilient, including theconstruction of a multi-purpose shelter
for fishermen in the Batanes region,
the building of a new primary school in
Sitangkai in the Tawi-Tawi region, and alivelihood project to support indigenous
people in the Zambales province.
Employees in PMI’s manufacturing facility in Marikina in the Philippines

129

Due to the Philippines’ geographic location,
the country has a high vulnerability tonatural disasters like earthquakes, volcanic
eruptions, typhoons, and floods. In Octoberand November 2019, PMFTC provided
relief assistance to more than 25,000
individuals (close to 7 percent of thetotal affected population) in earthquakestricken areas in Batanes and Mindanao.
After the eruption of the Taal volcano
in January 2020, the company’s
immediate concern was the safety andwelfare of affected employees. Withina short period of time, 150 displaced
employees had been accounted for andwere given immediate assistance.

A childcare center in Isabela in the Philippines

PMFTC employees
were at the core ofthese relief operations.
In parallel, PMFTC provided relief toaffected communities in the form offood packs, sleeping mats, face masks,and hygiene kits. A total of 7,384
families benefited from this effort.
With their strong spirit of volunteerism
and compassion for the community,
PMFTC employees were at the core ofthese relief operations. In addition to the
cash donation generated by employees,
the first wave of 500 relief packs werepersonally delivered by volunteers
from the head office, sales offices, andfactories to nearby evacuation centers.

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Philip Morris International Integrated Report 2019

Employees in PMI’s office in Taguig in the Philippines

Employee engagement
and well-being
Overall, there is a strong sense ofcommunity and pride among PMFTC
employees. This was highlighted during ourhuman rights impact assessment in 2019
(read more on page 96). The well-being
and health of its employees is a primaryconcern for the company, and it launchedseveral support initiatives in 2019. To help
maintain the communal spirit, regular social
events are held such as sport festivals,
family summer outings, and employee fairs.
A company-wide annual physical exam did
reveal instances of high blood pressureand overweightness among employees.
To build awareness of their personal
health and provide personal expert
advice on medical, mental, nutritional,
and physical fitness, PMFTC launcheda “Wellness Superstar Program” acrossits offices and factories, focusing on:• assessing the individual participant’s
status, as well as the status of thecompany as a whole, on different healthdomains such as lifestyle, medical
conditions, and overall well-being;• identifying specific factors affecting
participants’ health, such as food choices,
physical activity, sleeping habits, andhealth-seeking behavior;• providing opportunities for employees tolearn about exercises and routines, create
achievable goals, practice them, andattain a healthier lifestyle, through healthworkshops and challenges.

The well-being and healthof its employees is a primaryconcern for the company

Initially, 150 employees have participatedin the pilot project, and the company plans
to improve the program based on initial
results and expand it to wider participation.
Since many employees expressed thatthey had limited time and opportunity
to exercise, PMFTC devised a number of
initiatives to address this. The initiatives
aimed to offer opportunities within working
hours for exercise, while also providing theemployees with routines they could use athome to improve their physical well-being.
These measures included Zumba classes
during lunchtime hours at the two factories,
as well as dance classes and the provisionof a fitness coach in the offices. This coachconducts five-minute exercise sessions for
employees on site. The sessions focus onquick mobility workouts to demonstrate
the importance of movement, especiallyin a sedentary workplace. They take placeeach Friday at the employees’ workstation
and are conducted with the aim of reducing
stress levels and fatigue at the end of theworkweek. Participation is high: around
200 to 250 employees join the workout
sessions at their workstations every week.

131

Forest conservation in the
tobacco supply chain

Tobacco farming in the Philippines
Tobacco growing

To assess and mitigate the risk of
deforestation, PMI has adopted a
global risk map. This global map iscomplemented by local maps to givethe company a more detailed andaccurate assessment in a defined
location and forms the basis to develop
targeted initiatives, when necessary.

TobaccoIlocos: Virginia and Dark cured
Cagayan Valley: Burleyand Dark cured
Crop season
Ilocos: October to May
Cagayan Valley:
November to May

The first forest risk map had beendeveloped in 2015 by South Pole, aleading sustainable solutions consultancy,
and revised in 2017, as part of a study on
the potential impacts of tobacco curing
on old growth and primary forests in
the Philippines. In 2019, PMI decided to
update the local forest risk map for thecountry, following a change of farmers’
bases where it sources tobacco fromin the Flue Cured Virginia tobacco
production areas in the provinces of Ilocos
Norte, Ilocos Sur, Abra, and La Union.

Irrigation type
Alternate furrow
CagayanValley region
Ilocos region

Curing method
Virginia tobacco: Flue-cured,with leaves hung into curing barns
where heated air is generated,
mainly using firewood

The following information was
included in the assessment:• geographic location of the farmers;• areas of old growth forests, protected
forests, and other natural forests;• tobacco forest impact zones, defined
based on the location of the farmers andthe maximum transport distance of thefirewood from where it is sourced; and• areas with high, medium, and low
deforestation risk of old growthforests and protected forests.
This information helped to identify thefarms closest to the old growth forest,
protected forests, and other natural forest
landscapes. The Philippines land cover map
from the Department of Environment andNatural Resource (DENR) classifies between
open and closed forests. Closed forests are
considered to be sufficiently similar to PMI’s
adopted definition of old growth forest.

Average farm size
Ilocos: 1.0 hectare
Cagayan Valley: 0.8 hectare

Burley and Dark cured tobacco:Air-cured, by hanging the leaves inwell-ventilated barns

People~13,600

Contracted farmers who supply tobacco to PMI

hired by farmers (four to five workers per~63,500 Workers
farm on average)
living on the farms (farmers’ family members),~44,700 People
out of whom around are 12,600 children~240

Field technicians, who visit the farms on average eight to
10 times during the crop season to monitor GAP and
ALP implementation

132

Philip Morris International Integrated Report 2019

The forest risk map shows that the majorityof closed forest with medium and high risk
is located in Abra and in Ilocos Norte.
Mitigation plans have been developedwith tobacco leaf suppliers to ensure that
contracted farmers are able to trace thesource of the firewood they use, whether
self-collected from their own wood lot orpurchased from vendors, and verify that
it is not coming from old growth forests.
This has been done by conducting a fullinventory of farmers’ sources of fuelwood,
100 percent monitoring of fuelwood
consumption of farmers, providing thefarmers with forestry training sessions,assisting the farmers through the provisionof planting stocks for silvicultural treatment,
and registering with DENR. In 2019, around
3,200 farmers either underwent a fullinventory check of their wood lot or set up
supply chains with accredited vendors who
provide sustainable and traceable fuelwood.

Littering prevention
PMFTC has launched initiatives to help
address the issue of littering, including
ongoing cleanup activities, aimed atraising awareness of cigarette butt littering
as a public issue and encouraging the
public to take action to address it.
In 2019, cleanups around World Clean Up
Day took place across four cities: Western
Bicutan, Taguig; Lapasan Coastal, Cagayan
de Oro; Baguio City Public Market; andMandaue City, Cebu. Over 1,000 people
participated, including 253 employees from
PMFTC as well as volunteers from NGOs,
government institutions, and the generalpublic. They collected over 45 tons ofwaste and around 57,000 cigarette butts.
Too often, cigarette butts are not properly
disposed in ashtrays or bins. To tackle this,
PMFTC ran a two-pronged awarenesscampaign, targeted directly at adultsmokers and retailers to adopt proper

disposal. The company placed receptacle
units directly in front of tobacco points
of sale. In order to help shift the mindsetof adult smokers, the team came up with
innovative ways to collect the cigarettebutts: the containers were designed likeballot bins, letting consumers choose
between two answers and cast their “vote”
by disposing their cigarette butts. Aftera trial period of four weeks, more than
18,000 pieces of discarded cigarette butts
were collected at four points of sale.
The other campaign track included a
community of commuter tricycle drivers,
who were asked to collect cigarette butts
in empty 330ml plastic bottles. Each fullbottle could then be exchanged with apartner retailer for USD 1 worth of goods,
while the participating retailers received
25 cents per bottle. Nearly 15,000
pieces of discarded cigarette butts werecollected in the course of a month.
PMFTC also seeks to address the issueof litter from used cigarette packs. The
retailers were engaged in these efforts,
and they were asked to recover empty
packs. PMFTC’s salesmen would thenweigh the empty pack received fromretailers, and for each kilo collected, retailers
would then receive a PHP 100 gift cardor 10 coffee sachets (equivalent to USD
2). The affiliate would then consolidate
the empty packs and send them tothird-party service providers for proper
disposal. The program was well received: it
increased the awareness of environmental
sustainability of more than 62,000
retailers nationwide, who appreciatedits simplicity in terms of ease of joining.
In 2019 alone, the program helped toretrieve 946kg of pack waste, which equals
approximately 172 million empty packs.

Employees in PMI’s office in Taguig in the Philippines

133

PILL AR 4

Climateprotection
Page 134

Protecting theenvironment
Effective environmental management
across our operations and value chain
goes beyond compliance with applicablelaws and regulations. We are committed
to constantly improve our businessactivities to achieve the highest standardsof environmental sustainability, in linewith our Environmental Commitment.
While improving the environmental performanceof our manufacturing operations is key, the majorityof our environmental impacts arise elsewhere in ourvalue chain, especially in tobacco growing and curing,
and with consumer waste. Working collaboratively
with tobacco growers, suppliers, retailers, NGOs,
and governments is key to the success of ourenvironmental programs and to achieving our targets.

Product eco-designand circularity
Page 158

Littering prevention
Page 152

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Philip Morris International Integrated Report 2019

Climateprotection
The climate crisis affects
ecosystems, agriculture, industry,finance, and people’s livelihoods.
Alongside physical impacts such as sealevel rise and changing weather patterns,
there are transition risks such as new
carbon-related regulations and taxes,changes in manufacturing technology, andevolving consumer preferences. Beingat the forefront of addressing the global
challenge of climate change also presents
opportunities. Some correlate to goodpractices such as energy-use reduction andthe protection of forests and waterways;
others arise through product eco-design
and adaptation measures. PMI, alongside
many of its suppliers, is working within acontext of stabilizing the global temperaturerise to below the internationally agreed
1.5-degree Celsius scenario.1 We
understand the potential impacts of climatechange across all areas of our operations,particularly upstream in our supply chain.

Megatrends• Technological progress• Changing consumer expectations• Climate change• Purpose of business• Income inequality
1 Reference: https://www.ipcc.ch/sr15/

Employees in the manufacturing facility of Papastratos, PMI’s Greek affiliate

Innovating for
better products

Operatingwith excellence

Protecting theenvironment

Caring for thepeople we work with

Performance
metrics

For PMI, climate protection means
mitigating climate change by
reducing greenhouse gas (GHG)
emissions and energy consumption
and adapting to climate change
by increasing our resilience.

becoming increasingly sensitized
to the environmental impact ofcorporate actions. Upfront investmentswith longer-term returns are required.
Furthermore, the consequences ofclimate risk could expose investors tochanges in corporate stock value.

The climate crisis, as acknowledgedby the international community,
threatens livelihoods, in particular of
the most vulnerable people around theworld. It impacts human population
movement, biodiversity, access towater, global health, food security, andother environmental changes such as
soil degradation and desertification.

At the same time, PMI’s efforts to
reduce GHG, such as through increased
energy efficiency, could alleviate
potential costs and create a competitive
advantage by meeting or exceeding
the expectations of consumers,
employees, and other stakeholders.

Beyond its human repercussions, climatechange threatens business continuity.
This is especially the case for businesses
involving an agricultural supply chain.
For PMI, costs of raw materials such as
tobacco leaf and cloves may rise, andboth consumers and our employees are

Relevance of the topic

PMI’s impacts on society

Connectivity with other sustainability issues at PMI

Impact in our value chain
Upstream

PMI operations

135

Why it is important to us and our stakeholders

Topic description

Relevance for stakeholders

Overview

4

Downstream

2

3

6

5

1
7

Key stakeholders

8

Adult
consumers

Media

Business
community

Public healthcommunity

Civil society

Regulators

Employees

Retailers andwholesalers

Financialcommunity

Supply chain

9

Climateprotection

10
11

14

13

12

1 Access to smoke-free products
2R esponsible marketingand sales practices
3S ustainable supply
chain management
4 Respect for human rights
5 Fair fiscal practices
6 Responsible advocacy
7S
 ocio-economic well-being of
tobacco-farming communities
8H ealth, safety, andwell-being at work
9 Forest conservation
10 Littering prevention
11 P
 roduct eco-designand circularity
12 Biodiversity
13 Water stewardship
14 Waste reduction

136

Philip Morris International Integrated Report 2019

Our aims

Net zero

Achievement of carbon neutrality of PMI’s
direct operations (scope 1+2) by 2030

Net zero

Achievement of carbon neutrality of
PMI’s value chain (scope 1+2+3) by 2050

Achieving our aims
We aim to reduce our carbon emissions
across our value chain. We have several
programs in place to meet corporate
targets and achieve our ambition.
In this report, we provide an update on
progress made to achieve our current
science-based targets, which align to a
scenario for a 2-degree Celsius increasein global warming.
At the same time, following the 2018
report by the Intergovernmental Panelon Climate Change (IPCC), it became clearthat we must step up our ambition andreduce carbon emissions to align withthe more prudent 1.5-degrees pathway.
We also conducted a deeper analysis of
our climate change risk assessment inline with the recommendations of the

Task Force on Climate-related Financial
Disclosures (TCFD). Based on thesedevelopments, we recently established
new and more ambitious targets toguide our decarbonization journey:• PMI to be carbon-neutral by 2030
(scope 1 and 2);• our whole value chain to be carbonneutral by 2050 (scope 1, 2, and 3);• a reduction in absolute CO2 emissions
consistent with science-based targets
for a 1.5-degree scenario.
During the course of 2020 we will submit
our revised absolute reduction targets
to the Science-Based Targets Initiative
Committee for validation and reporton progress in next year’s report.
Our approach to decarbonizing ouroperations and value chain is guided byseveral corporate policies. Reducing ourenergy consumption and carbon emissions
is embedded in our Environmental
Commitment, our Guidebook for Success,our Responsible Sourcing Principles, and
our Good Agricultural Practices program;protecting forests, as a fundamental
climate-regulation mechanism, is directedby our Zero Deforestation Manifesto.
PMI’s governance and management systems
aim to ensure that climate-related risks andopportunities are considered in relevant
decision-making processes. The PMI
Board of Directors (BoD) believes thatenvironmental, social and governance (ESG)
factors relevant to the company’s business,
including those related to climate change,
are important to PMI’s long-term success.
These factors are part of the responsibilityof the Board and are considered in its
evaluation of the annual performance of thecompany and its management. The BoD
approves the company’s annual budget andreceives updates on its performance andtargets against the budget throughout
the year, including those related to theachievement of sustainability and climate
protection targets.
The Nominating and Corporate GovernanceCommittee of the BoD oversees PMI’ssustainability strategies and performance,
including climate change-related issues andinitiatives aimed at eliminating negative
impacts of our business on the environment.
The Audit Committee of the BoD oversees

We established new and more
ambitious targets to guide ourdecarbonization journey.
Employees in PMI’s manufacturing facility in Guadalajara, Mexico

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withthe assessment and management ofcompany risks, including those related toclimate change such as natural disasters,
water scarcity, and agricultural supply
chain instability.

and with local market coordinators. This
helps ensure that our global strategies
and programs can be implemented at
the market level and that local realities
are reflected in our global efforts.

As part of PMI’s risk management process,the Audit Committee oversees the
management of climate change initiatives.
A member of the Company Management,
the Senior Vice President, Operations (SVP,
Operations), was tasked with addressing
climate change risk across all activitiesof the company, including physicalclimate and water-related risks. Our SVP,
Operations reports directly to PMI’s Chief
Operating Officer (COO) and is delegatedwith operational responsibility, including
maintaining robust business resiliency,
risk assessment processes, and strategies
to support business continuity. Our SVP,
Operations examines and monitors climatechange-related issues, ensuring that risk
assessment and management are integrated
into long-range plans, objectives, budgets,and performance review processes. Our
COO is also a member of PMI’s Company
Management and reports to the CEO; heis updated regularly on climate change
issues by the SVP, Operations. In 2019,
the COO and SVP, Operations were thehighest management level of climaterelated issues. They were responsible formonitoring and reviewing PMI’s objectives,
strategies, and action plans related toclimate change with the CEO, and theyreported their findings to the Nominating
and Corporate Governance Committee
and Audit Committee of the BoD.

Our tobacco leaf buyers, procurement
managers, environmental managers,
and other relevant employees are also
incentivized through monetary rewards
or other forms of recognition for emission
reduction projects, climate change
mitigation activities, and behavioral
change toward climate protection.

Protecting theenvironment

Performance
metrics

Our carbon footprint model accounts
for emissions generated across our value
chain. Accordingly, our strategy responds
directly to the scale and expanse of
our impacts, from our supply chains for
tobacco and direct materials through toour operations, land and sea transport,
distribution and retail, products, andpackaging. Across our global operations
and upstream in our supply chain, we havein place long-standing mitigation initiatives
designed to reduce our carbon footprint.

From an operational perspective, ourOperations Sustainability and Corporate
Sustainability functions coordinate thecompany’s climate change-related activities.
Most of the coordination takes place in thecontext of sustainability working groups

A field technician with a tobacco farm worker in Salta, Argentina

137

138

Philip Morris International Integrated Report 2019

Assessing climate changerisks and opportunities
On top of the company risk management
process described above, we periodicallyconduct a climate change risk andopportunities assessment to fully
understand PMI’s impact across ourentire value chain. This work aligns
with international expectations suchas the Paris Agreement to mitigate
and adapt to climate impacts.
Scenario analysis formed part of the climatechange risk and opportunities assessment
we conducted in 2015 on physical risks
and opportunities. Throughout 2018and 2019, we updated that earlier risk
assessment, accounting for changes in
PMI’s footprint and business model. Our
objective was also to further align our workand reporting with the recommendations of
the TCFD, which aims to foster voluntary
climate-related financial disclosuresthat provide clear, reliable, and useful
information to the financial community.

The updated assessment identified climatechange risks and opportunities (CCRO)
that align with the TCFD transition andphysical risk categorizations. Throughout
this process, we mapped 149 CCROs
across materiality and certainty andthen divided them according to PMI’s
risk categories: proactive, reactive,nonmaterial, watch, and potential quick
wins, so we could better integrate theminto the business. After further analysis,
it was decided to prioritize the proactive
CCROs, as they have the highest certainty
and materiality levels. These results are
discussed in more detail in our CDP
submission, which can be found online.
The tables on the right highlight certain
climate-related risks and opportunities,
along with a description of how PMI ismanaging them based on the findingsof our 2018–2019 assessment.

Climate change-related risks

Key risks

Transition risk
Our operations acrossthe globe are subject tovarious climate-related
regulations. There is aclear international trend
toward stricter regulation,
which could increase
our operational costs.

Physical risk
Changes in precipitation
patterns and extreme
variability in weather patterns
could affect the yield, quality,
and availability of crops
such as tobacco and cloves,changing our buying patterns
and increasing operationalcosts in the medium term.

Potential financial
impact under the
2-degree scenario

How we address them

Our energy management
program, which includes energyconsumption monitoring, as
well as investments to improveenergy efficiency, positions us
well to manage these risks.
Read more on page 144

PMI’s operations and supply chain
are spread across geographies,
mitigating the potential effects
of severe catastrophic climatic
disruption. Moreover, we havedesigned our business continuity
management plans to mitigate
the consequences of supply
chain interruption and disruption.
We conduct a global water risk
assessment, complemented by
local assessments in specifictobacco-growing areas, to mitigate
risks in our supply chain.
Read more on PMI.com

Transition risk
Increased production costs
for farmers in the supply
chain due to changing input
prices, specifically diesel
fuel costs. For PMI, this has
an impact on procurement
expenditure on tobacco fromthird-party leaf suppliersand directly contracted
farmers in the long term.

Employees in PMI’s manufacturing facility in Guadalajara, Mexico

Since 2002, we have been
implementing our GAP program,which includes mandatory
requirements for our tobacco
suppliers. The program provides
specific guidance on initiatives tomitigate tobacco-growing risks
and impacts related to climatechange. Strategic initiatives
include improving efficiency andswitching to low-carbon energies.
Read more on page 88

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Climate change-related opportunities

Key opportunities

Workers at our local supplier’s facility in Malawi holding briquettes made out ofgroundnut shells and sawdust used as fuel for tobacco curing

Potential financial
impact under the
2-degree scenario

How we seize themCompliance with and anticipation of
future country-specific legislation
provide PMI with the opportunity
to reduce energy consumption,
lower CO2 emissions, and reduce
operational costs. This is embedded
in our “zero-carbon factory” strategy,
and annual and long-range plans toincrease the use of renewable energy
in our manufacturing sites throughself-generation or purchases.

PMI’s strategy to achieve carbon neutrality
in our direct operations by 2030 leverages
various initiatives to eliminate losses andimprove operational efficiency, as well as toincrease the use of renewable energy. Options
to self-generate or purchase renewableenergy are evaluated at the local level.

Accelerating the transition to a lowcarbon economy will likely require policy
levers to reduce the cost of renewable
technologies. This is likely to include
subsidies for energy generation. Suchpolicies are already a feature in manymarkets and are being used successfully
to support the commercializationof renewable technologies, making
them cost-competitive withconventional alternatives.

PMI’s strategy to achieve carbon neutrality inour direct operations by 2030 leverages various
initiatives to eliminate losses and improve
operational efficiency, as well as to increase theuse of renewable energy. PMI uses a marginal
abatement cost curve and internal carbon
price to help prioritize projects for renewableenergy generation and GHG reduction.

As alternatives to fossil fuels become
more readily available and costcomparable to their conventionalcounterparts, it becomes attractive
for tobacco farmers to switch fromfossil fuels to low-carbon energy
sources. In addition to the change infuels used, farms may become more
efficient thanks to new technologies.
If PMI continues to invest in programs
to improve agricultural practices
and encourage the uptake of lowcarbon equipment, contracted
tobacco farmers’ expenditures onfuel and energy inputs will fall.

Since 2002, we have been implementing our
GAP program, which includes mandatory
requirements for our tobacco suppliers. The
program provides specific guidance on initiatives
to mitigate tobacco-growing risks and impacts
related to climate change. Strategic initiatives
include improving efficiency and switching to
low-carbon energies. For instance, PMI supports
contracted farmers in improving curing-barn
efficiency and switching to renewables.

Read more on page 142

Read more on page 145

Read more on page 146

139

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Philip Morris International Integrated Report 2019

Progress in 2019
Our 2019 carbon footprint
Reducing carbon emissions is central
to PMI’s environmental management,alongside our adaptation to the potential
business impacts of climate change.
All emissions generated across our value
chain contribute to our carbon footprint.
Carbon emissions principally occur
upstream, including those generated bycuring fuels and fertilizers in our tobacco
supply chain, acquiring direct materials
such as paper and cellulose acetate tow,
and procuring indirect materials andservices such as marketing, sales, andother professional services. Althoughmanufacturing represents a smaller

part of our footprint, we recognize that
more energy is required to produce
IQOS heated tobacco units comparedwith cigarettes, with a consequent
increase in greenhouse gas emissions.
We are seeking to reduce this impact.
Based on our footprint model, our carbonreduction strategy focuses on four
climate impacts across our value chain:• Direct operations (factories, offices’and fleet): We aim to becomecarbon-neutral by 2030.
• Tobacco supply chain: Working with
our suppliers and farmers, we seek
to reduce carbon emissions createdby tobacco cultivation, with a special
focus on tobacco curing. We aim to
improve curing efficiency, promote theadoption of biomass fuels, and ensuresustainable and traceable firewood.
• Direct materials supply chain: We arefurther accelerating the deploymentof our supplier engagement strategy
across all our procurement categories toachieve greater coverage hence carbon
footprint reductions. We focus on:–– ensuring CO2 suppliermeasurement capabilities;–– establishing deep-dive carbon
value chain analysis;–– identifying and delivering supplierimprovement plans; and–– consolidating, validating andreporting on data and results.
• Product development: We haveintroduced a set of sustainable designprinciples aimed at reducing theenvironmental footprint of our new
products (read more on page 158).

We are on track to achieve our current
targets, with an absolute reduction versus
2018 in scope 1 emissions of three percent,in scope 2 of 10 percent, and in scope 3
of 12 percent, amounting to an overall
reduction of 615,595 tons of CO2e in 2019.

615,595t
We are on track to achieve
our current targets, with an
overall reduction of615,595 tons of CO2e in 2019

Global greenhouse gas emissions scope 1, 2, and 3 (‘000 tons CO2e)
8,062

Scope 1

88.7%

Scope 2
Scope 3

5,536

5.8%
5.5%
2010
(Baseline)
An employee in PMI’s manufacturing facility in Klaipėda, Lithuania

88.6%

5,298

4,682

3.3%
7.7%

4.4%
7.0%
2017

89.0%

2018

88.1%

3.4%
8.5%
2019

Innovating for
better products

Overview

Operatingwith excellence

Protecting theenvironment

Caring for thepeople we work with

Performance
metrics

141

Carbon emissions along our value chain in 2019

UPSTRE AM VALUE CHAINOUR DIREC T OPER ATIONSDOWNSTRE AM VALUE CHAINSCOPE 3: 83.6%

SCOPE 1: 8. 5%

SCOPE 3: 4. 5%

3.6%

Business travel
and employee
commuting

2.3%

Offices andwarehouses

Use of our
products

2.4%

22.5%
Tobaccogrowing

6.1%

9.3%

Transportation anddistribution

Fuel consumption
from our vehicles
and aircraft

1.0%

Transport anddistribution

Fuel consumption
in our offices,
factories, andwarehouses

SCOPE 2: 3.4%

48.1%

3.4%

Materials and services
purchased

2030
2050

Indirect emissions from thegeneration of purchased or
acquired electricity, steam, heat, or
cooling consumed by PMIC ARBON-NEUTR AL OPER ATIONS BY 203 0
C ARBON-NEUTR AL VALUE CHAIN BY 2050

Presentation of information aligns with guidance of the Greenhouse Gas Protocol.

1.2%
Products
end-of-life

PATH TODEC ARBONIZ ATION

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Philip Morris International Integrated Report 2019

Toward carbon-neutral manufacturing
Our strategy follows a three-step approach:• drive energy efficiency to
reduce consumption;• switch to renewable energy,
including green electricity; and• as a last resort, offset unavoidable carbon
emissions, ideally by in-setting projects
developed in our supply chain andgenerating certified carbon credits, andalternatively by purchasing carbon credits.
In 2019, our factory in Klaipėda, Lithuania,
became our first carbon-neutral factory,
receiving its certification from Swiss
nonprofit myclimate (read more on the nextpage). We are aiming for an additional two
production sites to be certified by 2021.

Decarbonizing our direct operations: our strategy

Energy efficiency and switch
to renewable energy
Offsetting

Reducwith tion in abs
scien
ce-b olute em
asedtarge issions cots fo
r a 1 nsistent
.5-de
gree
scen
ario

We are aiming for an
additional two production
sites to be certified
carbon-neutral by 2021.

An employee in PMI’s manufacturing facility in Klaipėda, Lithuania

In-setting projects
Unavoidable emissions threshold

Carbonneutrality

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Klaipėda, Lithuania: Our first carbon-neutral factory
In 2019, we reached the first milestone
toward carbon neutrality in our factories– through energy-saving measures,
renewable energies, and carbon offsets
at our site in Klaipėda, Lithuania. Our
factory there has been in operation since1997 and employs over 500 people.
We have been running energy-efficiency
projects at the site for many years,
upgrading utility equipment, such as
chillers and compressors, and facilitatingheat recovery to optimize fuel use,
including installing a biomass boiler.

Combined, these initiatives reduced
our carbon emissions by 47 percent
versus our 2010 baseline. As part of ourrenewable energy strategy, we purchasecertified renewable electricity and offset
natural gas carbon emissions with biogas
certificates. These efforts led to a 52
percent reduction in our carbon emissions
versus 2010. To offset the remaining 1
percent carbon emissions at this factory,
we invested in Gold Standard certificatesfrom a climate protection initiative
seeking to switch households in India
from kerosene and firewood to biogas.

Klaipėda: carbon-neutrality journey
Energy-eﬃciency initiatives (-47%)
Renewable energy (-52%)
Oﬀsetting (-1%)

Scope 1 & 2 Carbon neutral-43%

Biomass

100%

Energyeﬃciency
initiatives-14%

Upgradedchillers

-2%

Green
electricity

-27%

Heat
recovery-2%

Biogas-11%
Baseline

2010–
2013

2014

2015

2015

2018

2018

Carboncredits-1%
2018

Employees in PMI’s manufacturing facility in Klaipėda, Lithuania

143

144

Philip Morris International Integrated Report 2019

Driving energy efficiency

Switching to renewable energy

Our activities in this area center on our
Drive 4 Zero program, which aims toeliminate economic losses caused byinefficient energy use. Under the program,
we look for industrial and manufacturingsolutions such as heat recovery andmanufacturing-process optimization.
We also promote behavioral change
through our Zero Loss Mindset program.

We implement renewable technologies
across our manufacturing sites. This
includes producing greener energy via
photovoltaic panels and tri-generation
processes (combining cooling, heat, andpower). We also focus on thermal energy
by installing biomass boilers and heat pumps
and investigating pyrolysis techniques.

In our factory in Russia, for example, it wasnecessary to drain around 1 percent of
the steam our boiler produced to maintainthe desired water-quality parameters.
This meant heat loss. We found a way torecover the wasted heat by installing a heatexchanger, which used the heat to generatesteam. In that same factory, the waterused for domestic purposes and radiators
was heated by inefficient electric heaters,
leading to avoidable losses. We installeda thermal pump that was five times more
efficient, leading to a reduction of 210
tons of CO2 equivalent (CO2e) per year.

In 2019, we operated five biomass boilers in
our manufacturing facilities and installed a
total of 6,660 square meters of photovoltaic
panels, contributing to a total of over
72,300 square meters of photovoltaic
panels in our manufacturing facilities.
We select technologies based on clearly
defined criteria: They must lead to anannual emissions reduction, have a payback
period of no more than five years, and beamong the more cost-effective projects
in comparison to other carbon emissions
reduction projects proposed within PMI.
To complement our approach, we alsopurchase certified green electricity. We
aim to source 100 percent green electricity
in our manufacturing sites by 2025.
Finally, we have worked to eradicate coalfrom our factories. We achieved this at
the end of 2019 by replacing our last coalboiler, located in our South African factory.

In 2019, we installed a totalof 6,660 square metersof photovoltaic panels in
our manufacturing facilities
Employees at a solar panel farm of Sampoerna, PMI’s Indonisian affiliate, in Karawang

Overview

Innovating for
better productsInternal carbon pricing at PMI
Over the last years, PMI has applied
an internal carbon price of USD 17 per
ton of CO2e in order to allocate capitalfor the best return in terms of carbon
reduction and cost-effectiveness.
As we are stepping up our ambition
to reduce carbon emissions, westarted an internal project to definea carbon price that will align with the
1.5-degree target and help to solidify
the company’s climate leadership.
Based on a comprehensive review
of policies and methodologies
applied by organizations across avariety of industries, we recognize
the importance of defining a carbon
price that will remain consistentover time and ensures that climatetransition risks are embedded incapital expenditure decisions.

Operatingwith excellence

Caring for thepeople we work with

In-setting and off-setting
unavoidable carbon emissions
We compensate our absolute carbon
emissions only as a last resort – once wehave maximized our emissions reduction
via energy efficiencies and renewableenergy. We do so ideally through insetting projects or alternatively bypurchasing certified carbon credits.
As an example of an in-setting project,
in collaboration with CarbonSink weevaluated the feasibility of a project thatwould provide access to clean and safe
drinking water to farmers within the
tobacco-growing areas of Mozambique– in line with our water, sanitation, andhygiene (WASH) program, also benefiting

Protecting theenvironment

Performance
metrics

the schools we support through school
feeding initiatives. We determined that thebest approach would be to pilot 10 wateraccess sites to determine how well theselected technology works within the local
context and its potential to scale up. Ideally,
the project will qualify for certification by
the Gold Standard Foundation, thereby
generating internationally recognizedverified emission reductions andcontributing to PMI’s carbon-neutrality
targets. According to our feasibility
assessment, the installation of 10 boreholes
could benefit around 35,000 people andavoid 865,000 tons of CO2 emissions over
10 years, while providing approximately
245 cubic meters of water per day.

Offices and fleet
In addition to our carbon-reduction efforts
at our manufacturing facilities, which
represent most of our scope 1 and 2
emissions, we are also exploring ways toreduce emissions from our offices and fleet.

In our fleet, we plan to improve
efficiency through telematics,
increasing the proportion ofelectric and hybrid vehicles, andproviding eco-driving training to
reduce our emissions further.
In our fleet, we plan to improve efficiency
through telematics, increasing the
proportion of electric and hybrid vehicles,
and providing eco-driving training to reduce
our emissions further. In our offices, we arefocused on strengthening our reporting to
identify appropriate interventions. Someof our offices are already reducing theirfootprints; this is the case, for example,
with our Operations Center in Switzerland,
which became carbon-neutral in 2019
(read more in our case study on page 68).

We are considering setting ashadow price to drive investment
decisions as well as a carbon levy:• Shadow pricing will enable us
to include carbon prices whenevaluating alternative investment
options; for instance, for capital
expenditure decisions.
• A carbon levy would enable us
to internalize external costs bycharging our business functions
or affiliates for their respective
emissions. With the aim ofsupporting behavioral change,
the levy would be collected in a
climate fund, which could financehigh-quality carbon in-setting
or off-setting projects.
We plan to finalize our approach
during 2020 and report next year
on its implementation.

Community project to provide farmers with access to water in Mozambique

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Philip Morris International Integrated Report 2019

Reducing carbon in our
tobacco supply chain
We are currently running strategic
initiatives to reduce carbon emissions
in our tobacco supply chain, which arefocused on three areas: reducing fuelconsumption by improving curing-barn
efficiency, promoting the switch fromfossil fuels to biomass fuels, and ensuring
sustainable and traceable firewood.

In our tobacco supply chain, we achieved
an absolute reduction in 2019 of 244,423
tons of CO2e versus the previous year,with over two-thirds of that reduction
attributable to efficiency gains in curingbarns and reductions in use of curing fuels.

Reducing fuel consumption by
improving curing-barn efficiency
We mainly source three types of tobacco:
Virginia, Burley, and Oriental. Virginia
tobacco (approximately 46 percent ofpurchased volumes) is cultivated around

Curing tobacco
Curing is the term used for drying
tobacco. Performed after the leaves
are harvested, curing plays a majorrole in determining the final quality
and character of the tobacco leaf.
Tobacco curing must be carefully
controlled to bring out the different
characteristics of each tobacco type.
Curing methods vary dependingon the type of tobacco:• Burley tobacco is air-cured byhanging the leaves in well-ventilatedbarns; the tobacco is allowed to
dry over four to eight weeks.
• Oriental tobacco is sun-curedby hanging the leaves outside in
the sun for about two weeks.
• Virginia tobacco is flue-cured, whichmeans that the leaves are hung incuring barns, where heated air isgenerated to dry the leaves. As theylose their moisture, they develop
their distinct aroma, texture, andcolor. Over a third of the GHG
emissions related to our tobacco
supply chain come from the curing
process of flue-cured tobacco.

Curing barns in Jujuy, Argentina

the world and, once harvested, mustbe cured to dry out the leaves using an
external heat source. Curing barns may
be heated with coal, diesel, natural gas,
firewood, or biofuels such as agricultural
by-products. The GHG emissions offlue-cured tobacco curing represent
10 percent of our total carbon footprint.
To meet our 2020 target of a 70 percent
reduction, versus our 2010 baseline, in
GHG emissions per kilogram of tobaccoflue-cured, we have made curing barns
more efficient, with a commitment to

10%
The GHG emissions offlue-cured tobacco curing
represent 10 percent of our
total carbon footprint

Overview

Innovating for
better products

improve 80,000 barns by 2020. Whilemost farmers own their curing barns, PMI
and our suppliers provide guidance andsupport to make them more fuel-efficient.
A primary reason for low efficiency is lackof insulation and the thermal conductivityof the construction materials. We workwith farmers and suppliers to improve
combustion efficiency, ventilation, andheating control, together with insulation.
The improvement projects carried out in2019 increased the efficiency of 4,731
barns, for a cumulative total of 80,782
barns upgraded since 2014. Data on
fuel use per kilogram of tobacco cured
are subject to on-the-ground audits by
third-party verifiers operating within our
Monitoring and Verification Framework
for Sustainable Fuel; these audits cover all
CO2-reduction activities across our fluecured tobacco supply chain. The challenges
in improving curing barns pertain to farmer
training, consistent delivery of the agreed
improvements over the long term andverifying the new levels of efficiency.
In 2019, we delivered improvement
projects around the world, which
typically included training farmers onfuel efficiency. Depending on the farm
upgrades needed, this training might
focus on better convection of hot air
inside the barn; insulation of the walls,
ceiling, and floor; flue pipe and chimney
adaptations for better heat control;
innovative heat exchanger technology;
or automation of dampers to control air
circulation during the curing process.
We are seeing farmer profitability improveas a result of cost savings on farms. In Brazil,
for example, the use of a “bulk barn” (anall-metal, rectangular barn) reduces thecost of production by 5 percent comparedwith a conventional barn, leading to an
average increase in income of USD 242
per hectare. Efficiency improvements
have led to savings of approximately
USD 46 per hectare in the Philippinesand USD 215 per hectare in Malawi.

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Ensuring sustainable andtraceable firewood sources
The curing process depends on heat,
which, in some countries, is generated byburning firewood. By 2020, we are targeting
100 percent of the tobacco we purchaseto be cured at no risk of deforestation ofold growth forests. In 2019, we reached
97 percent, up from 90 percent in 2018.
We detail our 2019 progress in the“Forest protection” section on PMI.com.

Reduction in CO2e emissions
from tobacco flue-curing (%) –baseline 2010
Baseline

2017

2018

2019

38%
47%

61%
Target:
70% reduction
by 2020

An employee of our local third-party tobacco supplier next to sustainable firewood in Malawi

147

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Philip Morris International Integrated Report 2019

Promoting the adoptionof renewable fuels
Our aim was to ensure that by 2019 55
percent and by 2020 70 percent of theflue-cured tobacco we purchase is cured
using renewable and fully traceable fuels.1
These include sustainable biomass, suchas wood sources, agro-pellets, or otheragricultural waste products. We areapplying our Monitoring and Verification
Framework in all flue-cured sourcing
markets. For audits begun in 2019, we
aim to complete on-site visits covering all
flue-cured origins by the end of 2020.

Proportion of flue-cured tobaccopurchased cured with renewable sources

Self-suﬃcient ﬁrewood
Biomass adoption

Target70%

In 2019, 51 percent of the tobacco wepurchased was cured using renewable fuels(2018: 46 percent).
We have set a target to phase out
completely the use of coal in curing the
tobacco we purchase by 2020, with anintermediary target to achieve maximum
10 percent by 2019 (against 15 percent
in 2018). The strong collaboration
with our suppliers has led to significant
improvements in the past years. By the endof 2019, the share of coal used as a curing
fuel unfortunately increased slightly, to
16 percent. Due to shifts in our sourcing
strategy and local curing capacities in
specific markets, this figure does not fullyreflect the steady progress made in fuelswitch as a result of barn conversions inseveral markets. An example has been
the cooperation with the China National
Tobacco Corporation (CNTC) with theconversion of 51,567 barns from coal tobiomass in recent years in the provinces
PMI sources from, providing a reliable andconsistent increase in curing capacity withrenewable fuels. We remain committed
to eliminating coal from our curing fuelportfolio and will provide an update on
progress made in our next report.

Wood chip used for fuel in Bahia, Brazil

Fertilizers
The use of fertilizers in tobacco production
represented around 10 percent of PMI’s
total carbon footprint in 2018, making
it the third largest contributor of GHG
emissions, after tobacco curing and acetate
tow. While we encourage the optimizationof fertilizers – minimizing their use in our
tobacco supply chain in line with our Good
Agricultural Practices – technologicaldevelopments in the manufacturing
process for fertilizers have also contributed
to reducing their CO2 footprint.

51%
46%
15%
36%

13%

7%

29%

2017

33%

2018

36%

2019

2020

1 We calculate our carbon footprint using the“precautionary approach”: We use a full carbon
emissions factor for firewood until proof is available
that the source is sustainable.

In 2019, PMI updated its calculation model
for fertilizers’ CO2 emissions, which had
been developed in 2015,

to more precisely assess their impact
on the company’s carbon footprint. The
total emissions calculated for 2019 are
based on the updated model – taking
into consideration efficiency gains andtechnological developments occurringin the manufacturing of fertilizers – andprovide a more accurate figure. Emissionsfor 2019 represented 8 percent of PMI’s
total footprint, and were significantly
lower in absolute terms than in 2018.
The decrease is explained both by the new
emission factors, representing a 27 percent
emission reduction compared with 2018
figures, and a further contribution due toa 13 percent decrease in fertilizer use.

Overview

Innovating for
better products

Our direct materials supply chain
All our materials must be responsibly
sourced, in line with our Responsible
Sourcing Principles. In 2019, we workedon collecting primary data for our scope 3
emissions pertaining to our direct materials.
The procurement categories with thegreatest impact on our CO2 footprint arecellulose acetate tow, pulp, and paper(packaging board). We are currently
engaging with our suppliers to develop

Operatingwith excellence

Caring for thepeople we work with

an emissions reduction strategy in line withour carbon emissions reduction objectives.
In 2019, the CO2 reductions in our
direct materials supply chain amounted
to 71,225 tons of CO2, contributing 12
percent to our annual reduction acrossour value chain. We expect to achieve
increasingly greater reductions in thiscategory as we further develop ouremissions reduction strategy in this area.

How we calculate CO2 emissions
PMI has collected CO2 emissions
data over many years as part of ourefforts to improve performance andachieve targets. We need robust
data for our science-based targets,carbon footprint, product life-cycle
analysis, and decisions on investment
in low-carbon technologies.
In line with good practices and theWorld Resources Institute’s (WRI)
GHG Protocol, we source emission
factors from the U.K. government’s
GHG Conversion Factors for Company
Reporting (2019) and the International
Energy Agency’s Emission Factors (2019).
Global warming potential rates are
sourced from the IPCC Fifth Assessment
Report, 2014 (AR5). The scope of thedata encompasses assets under ouroperational control, including PMI’s fleet
and offices (scope 1 and 2), as well as
our overall upstream and downstream
supply chain (scope 3). Scope 2
emissions are primarily market-based.
Our value chain carbon footprint modelaligns with the Corporate Value Chain(Scope 3) Accounting and ReportingStandard methodology from the WRI,
the accepted international standard.

We undertake third-party verificationof scope 1, 2, and 3 emissions to
ISO 14064-3 standards (please see
our verification statements online).
Real data are used where possible, but
in cases where primary data are notavailable, we extrapolate emissions
from international databases such as
ecoinvent. Transport relating to the end
consumer traveling to the retailer is notincluded under value chain or productfootprint standards. Gases included in
calculations are CO2, CH4, and N2O (notHFCs, PFCs, SF4, or NF3). Biogenic CO2
emissions are included under our scope
3 emissions. The climate neutrality at ourfactory in Lithuania in 2019 encompassed
all scope 1 and 2 GHG emissions of the
manufacturing site that were validated;
all remaining emissions were offset
with high-quality carbon offset projects
from myclimate, using certificationfrom the Gold Standard Foundation.

Protecting theenvironment

Performance
metrics

Next steps
In 2019, we were on track or alreadymeeting most of our existing CO2 targets,
which had been based on the 2.0-degree
scenario consistent with the 2016 Paris
Agreement. Nevertheless, it became
increasingly clear that society, including
businesses, needs to be more ambitious
to avert a climate crisis. The 2018 IPCC
report recommended limiting global
warming to 1.5 degrees, because of its“clear benefits to people and natural
ecosystems,” as well as to ensure “a moresustainable and equitable society.” Toward
the end of 2019, the European Union
announced its Green Deal, aiming for EUwide net zero carbon emissions by 2050.
These developments led to a heightened
sense of urgency at PMI when it comes toreducing carbon emissions, and made us
decide to step up our ambition. At the sametime, the ongoing change in our businessmodel toward smoke-free products madeit opportune to update our baseline fortarget setting to 2019. We also wanted
to better align our new targets with theambitions conveyed by the European Union
in its Green Deal, and other governments,
and continue setting our targets consistent
with the best scientific evidence.

Therefore, in early 2020, weestablished new and more ambitious
targets to guide our decarbonization
journey for the years to come:• PMI to be carbon-neutral by2030 (scope 1 and 2);• our whole value chain to be carbonneutral by 2050 (scope 1, 2, and 3); and• a reduction in absolute CO2 emissions
consistent with science-basedtargets for a 1.5-degree scenario.
During the course of 2020, we plan tosubmit our absolute reduction targets
to the Science-Based Targets Initiative
Committee for validation and expect toreport on progress in next year’s report.
In addition to continuing, and where
needed, stepping up our work, we alsoplan to roll out internal carbon pricing todrive PMI’s transition to a low-carbon
operating scheme. Our roadmap also
includes a gradual shift from improved
process technologies to more disruptive
technologies such as CO2 capture. In
our product development work, we are
increasingly embedding environmental
criteria into the design process. To offset
our unavoidable emissions, we focus oncarbon in-setting projects to generate
carbon credits. We will also launch an
employee engagement campaign toprompt behavioral change. Finally, we
will continue to improve the qualityof our climate-related disclosures.

149

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Philip Morris International Integrated Report 2019

Performance
Climate protection2010 baseline

2017

2018

2019

CO2e scope 1 (metric tons)

443,186

388,384

408,162

397,210CO2e scope 2 (metric tons)

470,864

241,355

175,785

158,672CO2e scope 1+2 (metric tons)

914,050

629,739

583,947

555,882CO2e scope 1 from fleet (metric tons)

143,148

119,588

114,936

111,400

Goal

Scope

PMI factories, offices1, and fleet
PMI factories and offices
Carbon neutrality
by 2030

PMI factories, offices, and fleet
PMI fleetCO2e emissions from vehicles (g CO2e per km driven)

296

226

221

222

PMI fleetCO2e scope 3 (’000 metric tons)2

7,148

4,906

4,714

4,127

PMI value chain

CO2e scope 1+2+3 (’000 metric tons)

8,062

5,536

5,298

4,682

Carbon neutrality
by 2050

PMI value chain

Carbon in-setting credits (metric tons)

0

0

0

PMI factories, offices, and fleet

Carbon off-setting certificates (metric tons)3

0

956

1,242

PMI factories, offices, and fleet

Number of carbon-neutral factories
CO2e scope 1+2+3 intensity (kg per million cigarettes equivalent)4CO2e scope 3 biogenic emissions (’000 metric tons)

8,706
n/a

CO2e scope 1+2 absolute reduction versus 2010 baseline5

0

0

1

6,687

6,552

5,917

n/a

3,442

2,438

31%

36%

39%

All by 2030

PMI factories
PMI value chain
PMI value chain

30% by 2020

PMI factories, offices, and fleet

40% by 2030
60% by 2040
CO2e scope 1+2+3 absolute reduction versus 2010 baseline5

31%

34%

42%

40% by 2030

PMI value chain

CO2e scope 1+2+3 intensity reduction versus 2010 baseline

22%

25%

32%

30% by 2020

PMI value chain

CO2e intensity reduction in tobacco curing versus 2010 baseline

38%

47%

61%

70% by 2020

PMI tobacco supply chain

Proportion of flue-cured tobacco purchased cured with renewable
fuel sources (self-sufficient firewood and biomass adoption)

36%

46%

51%

70% by 2020

PMI tobacco supply chain(29% + 7%) (33% + 13%) (36% + 15%)
20%

15%

16%

0% by 2020

PMI tobacco supply chain

57,00076,00080,80080,000 by 2020

PMI tobacco supply chain

8,025,559

8,896,274

9,353,222

9,456,576

PMI factories, offices, and fleet

8.60

10.75

11.57

11.95

PMI factories, offices, and fleet

5,597,766

5,988,022

5,819,072

PMI factories, offices, and fleet

44,38961,163

128,967

PMI factories, offices, and fleet

Proportion of Virginia tobacco purchased cured with coal
Approximate total number of curing barns
upgraded since 2014 (cumulative)
Total energy consumption (gigajoules)6
Energy intensity (gigajoules per million cigarettes equivalent)7
Fuel consumption from nonrenewable sources (gigajoules)
Fuel consumption from renewable sources (gigajoules)
Total electricity consumed (MWh)8

885,385899,706

959,723

PMI factories and offices

Total electricity consumed that is from renewable sources (MWh)443,837

546,944623,940

PMI factories and offices

50%

61%

65%

PMI factories, offices, and fleet

Proportion of electricity used and purchasedthat is from renewable sourcesOverview

Innovating for
better products

Climate protection

Proportion of electricity used and purchasedthat is from renewable sources
CDP Climate Change rating

Operatingwith excellence

Protecting theenvironment

Caring for thepeople we work with

Performance
metrics

151

2010 baseline

2017

2018

2019

Goal

Scope

0%

53%

65%

72%

100% by 2025

PMI factories

A

A

A

A

1 We include warehouses in PMI offices.
2 In 2019, we reviewed our carbon footprint model, taking into account more primary data from suppliers and updating our methodology, leading to more accurate figures for our scope 3 emissions. We have restated our 2017 and 2018 data according to the new model.
Other figures that include scope 3 emissions have also been restated.
3 2019 figure includes carbon off-setting certificates purchased in our factory in Klaipėda (see page 143) and our Operations Center in Lausanne (see page 68).
4 From 2019 onward, intensity is measured in CO2e per million shipped cigarettes equivalent. Our baseline and previous years’ data have been restated accordingly.
5 We report on our progress against our current science-based targets, which align with a 2-degree scenario: we committed to achieve an absolute reduction of our scope 1+2 emissions of 30 percent by 2020, 40 percent by 2030, and 60% by 2040; and to achieve an absolute
reduction of our scope 1+2+3 emissions of 40 percent by 2030.
6 The 2018 figure has been adjusted due to an internal reporting error.
7 From 2019 onward, energy intensity is reported in gigajoules per million cigarettes shipped equivalent. Previous years’ data have been restated accordingly.
8 We have reviewed the calculation methodology for our electricity consumption to account for the electricity produced in our facilities, and we have restated previous years’ data accordingly. Other figures that include electricity have also been restated.

LINKS

Preparing tobacco leaves for curing in Jujuy, Argentina

PMI’s Environmental Commitment

Responsible Sourcing Principles

PMI Zero Deforestation Manifesto

Good Agricultural Practices Code

Guidebook for Success

Third-party verification of scope 1, 2, and3 emissions to ISO 14064-3 standards

152

Philip Morris International Integrated Report 2019

Littering
prevention
Around the world each year
over 350 million tons of plastic
waste are generated. Improperly
disposed plastics can spoil
landscapes and impact wildlife.
About one million tons ofcigarette filters are produced
annually across the tobacco
industry. While made of cellulose
acetate (CA), a wood-sourced
bioplastic that biodegrades
slowly, they are among the mostfrequently found litter items.
We aim to reduce littering at
its source by encouraging andenabling smokers to dispose
properly of their cigarette butts.

Megatrends• Technological progress• Changing consumer expectations• Climate change• Purpose of business• Income inequality
PMI employees cleaning up a beach in Portugal

Innovating for
better products

Operatingwith excellence

Protecting theenvironment

Caring for thepeople we work with

Performance
metrics

Litter is any solid product or
its packaging discarded in theenvironment after use. Litteringrefers to the act by a consumerof discarding such material in theenvironment. PMI’s littering prevention
initiatives focus on consumerawareness and cleanup campaignsof cigarette butts, in partnershipwith a wide range of stakeholders.
Relevance of the topic

consumables, devices, and packaging
sold by PMI amounted in 2019 to
165,000 tons of plastic. The largest
share (86 percent) is composed of
the bioplastics used in the filtersof conventional cigarettes and
IQOS heated tobacco units.

A cigarette butt consists mostly of CA, finepaper, and small amounts of tobacco, ash,and smoke residues. The fine paper andtobacco residues degrade rapidly; thecigarette filter, which is made of CA, takes
longer to degrade. The overall degradabilityof cigarette butts depends on thesurrounding biophysical conditions, withdegradation times ranging from threemonths to 15 years. Beyond environmental
considerations, cigarette butt litter and litterin general have a social impact, from thecleanup costs to perceptions of untidinessand lack of safety in areas where litter isprevalent. There is also a risk, yet to bequantified, of ingestion by wild animals.

While many consumers dispose of
their waste properly, too much wasteends up in the environment. We are
addressing this littering issue witha multipronged approach, including
awareness-raising campaigns, ongoing
research into alternatives to CA filters,
and improved design of products andpackaging. Such efforts also have thepotential to help mitigate costs related
to emerging environmental legislation.
Moreover, given the highly visible
nature of butt littering, addressing
the issue carries reputational benefits
for our brands and company.

As a global manufacturer producing
766 billion cigarettes and heated tobacco
units per year, sold across more than
180 markets, PMI is in a position to play
an important role with its consumers inlittering prevention. Plastic waste from

PMI’s impacts on society

Connectivity with other sustainability issues at PMI

Impact in our value chain
Upstream

PMI operations

153

Why it is important to us and our stakeholders

Topic description

Relevance for stakeholders

Overview

2

Downstream

1

3

4
5

6

7

8

Key stakeholders

9

Adult
consumers

Employees

Business
community

Media

Civil society

Regulators

Littering
prevention

10

12

11

1 Access to smoke-free products
2R esponsible marketingand sales practices
3R esponsible andtransparent R&D
4 Respect for human rights
5 Fair fiscal practices
6 Responsible advocacy
7 Community support
8 Climate protection
9 Forest conservation
10 Product eco-designand circularity
11 Biodiversity
12 Water stewardship

154

Philip Morris International Integrated Report 2019

Our aim-50%

Reduction of plastic litter from our
products by 2025 (versus 2021)

We have an anti-littering
policy in place and are acting
across PMI to deliver on it

Achieving our aims
Littering is clearly linked to consumerawareness and attitudes, as well as to theavailability of an adequate waste-disposal
infrastructure. To curb butt littering,
PMI emphasizes changing consumer
habits. Many consumers do not perceive
cigarette butts as having a significant
environmental impact, due to the items’small size and to misconceptions about
their composition and degradability.
Our efforts focus on raising consumerawareness and promoting the availabilityof proper disposal infrastructures. We
then seek to contribute to effective public
policy development by sharing insights into
the environmental, social, and economic
aspects of anti-littering approaches.
We have an anti-littering policy in place andare acting across PMI to deliver on it. To
ensure activities are implemented globallyand will have a tangible impact, we havedeveloped an anti-littering toolbox that
our affiliates use to develop local, contextbased strategies. By the end of 2019, 64
countries were using the toolbox to develop

their plans, with 31 of them ready to startor already having started implementation.
We develop, monitor, and assess both global
and local programs. We are committed toworking in partnership with all relevant
stakeholders in our markets to develop andshare the most innovative approaches.
On June 5, 2019, the EU Council and the
EU Parliament adopted Directive (EU)2019/904 (Single Use Plastics Directive)on the reduction of the impact of certain
plastic products on the environment. This
will require tobacco manufacturers andimporters to participate in the extended
producer responsibility (EPR) costs ofthe collection of cigarette butts frompublic collection systems and the cleanup
of butts littered on public grounds. To
take effect, the directive will have to betransposed by the European member statesby July 2021. We support the conceptof EPR, provided that the schemes put inplace are ecologically and economically
efﬁcient and socially acceptable anddeliver on the goal of reducing littering.

Plastic footprint of PMI products

PMI employees taking part in a cleanup activity in
Lausanne, Switzerland

Cigarette filters

72.7%

Packaging

13.5%

Heated tobacco
unit filters

13.1%

Electronic devices

0.6%

Research for filterswith higher degradability
For many years, PMI has been
actively evaluating alternative
cigarette filter materials with a lower
environmental impact than cellulose
acetate (CA), an already renewableand partially biodegradable material.
To be acceptable, any new material
has to satisfy four criteria:• good filtration efficiency andconsistency, similar to CA filters;• significant reduction in total
carbon footprint and/or significant
improvement in marine, aquatic, andsoil biodegradation versus a CA filter;• acceptable taste characteristics,
as a product must be successful
in the market to have thedesired positive impact on
the environment; and• commercially viable at scale (allmaterials science developments
start in the laboratory and need tobe conducive to industrialization atlarge scale and at competitive costs).
Based on extensive chemical testing,machinability trials, biodegradation
evaluations, and consumer-testing
conducted using prototypes, past
projects have met one or more of
the above criteria, but no better
alternative to CA has yet beenfound. We will continue to explore
options as new materials andprocesses become available.

Overview

Innovating for
better products

Progress in 2019
Throughout 2019, we expanded
our programs, implemented cleanup
projects in 31 countries, andformalized our anti-littering policy.

Raising awarenessAnti-littering campaigns
Education is the starting point in our
promotion of anti-littering. We aim tocreate impact by developing campaigns
that raise awareness, appeal to individuals’
consciences, and show them how toproperly dispose of cigarette butts andother litter. An essential starting point to any
campaign is to identify the littering hot spots
perceived as focal areas by local authorities,
anti-littering organizations, and citizens.
These might include areas such as particularstreets, squares, parks, beaches, andoutdoor event spaces. We also collaborate
with industry peers and partner with antilittering organizations and public authorities.
Smoking habits, environmental awareness,and disposal practices vary by country,
and combating cigarette butt littering
requires a locally customized approach.
Anti-littering programs led by PMI at thecountry level have grown: By the end of
2019, we had 54 anti-littering initiatives
mobilizing our employees globally.
In September 2019, PMI joined the annual
World Cleanup Day, the world’s largest
litter cleanup event. Over 3,900 PMI
employees and other volunteers in 51
cities across 31 countries participatedin cleanups. Highlights included:• Mexico – 140 colleagues in seven cities
filled a hundred bags with waste;• Senegal – Our team helped to clean
up the beach in Ngo, the westernmost
point of the African mainland;• Poland – We launched a digitalcompetition through which 500
employees conducted individual cleanups;

Operatingwith excellence

Caring for thepeople we work with• Indonesia – More than 260 participants
between Jakarta and Surabaya gathereda total of 12,500 kilograms of waste
and 25,000 cigarette butts; and• Philippines – We mobilized
community partners, recruiting morethan 1,000 cleanup participantsin four cities over two days.
Overall, our teams picked up 83 tons ofwaste and more than 827,000 cigarettebutts (representing almost 170 kilograms).
While these cleanup efforts will not resolve
the problem of littering, we believe they area good way to raise awareness among thegeneral public and show our commitment totackling the issue of cigarette butt littering.
Technology also can play a role in raisingawareness and encouraging behavior
change. During World Cleanup Day,
PMI trialed the technology of antilittering organization Litterati, whichempowers people to run neighborhoodcleanups. Litterati’s app enables users
to collectively map litter hot spots byphotographing and tagging items of litter.

Leveraging our largest brand
Where this is allowed, cigarette packs
can be a means to communicate antilittering messages to adult smokers andinspire collective action. In 2019, wedeveloped a limited-edition pack for ourflagship Marlboro brand. By the end of
2019, the special pack was on sale in ninemarkets across the EU, with an estimatedreach of 2.9 million legal age smokers
and 190,000 retail outlets. The plan is
to significantly scale it up by the end of2020 to amplify our message on litter
reduction among a wider audience. We will
share the outcomes in future reporting.

Protecting theenvironment

Performance
metrics

155

827,000
Marlboro limited-edition pack launchedin Austria in 2019, communicating
anti-littering messages to adult smokers(“We only have one planet”; “Leave no trace”)

Our teams picked up 83
tons of waste and morethan 827,000 cigarette butts
during World Cleanup Day

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Philip Morris International Integrated Report 2019

Anti-littering awareness campaign in Austria:
piloting a multipronged approach to drive social change
PM Austria piloted a multipronged,
unbranded, anti-littering campaign
in the city of Vienna. This campaign
aimed to (i) increase both awarenessand declared non-littering behavior
among adult smokers, and (ii) reduce theincidence of both cigarette butt litterand general litter in selected hot spots.
As part of the campaign, awarenessmessages were placed in 301 points
of sale and at public transport stops.
To trigger curiosity and connect
with adult consumers, the teamused local expressions, humor, andnudging elements into campaign
visuals, design, and execution.
The on-the-ground campaign encouraged
citizens to visit a website to learn
more about reducing littering. This
website presented factual information
about cigarette butts (e.g., how longa cigarette butt takes to decompose),
inspiring stories about fighting theissue, and a call to action for visitors tojoin an anti-litter challenge, aiming tocollect pieces of litter in Vienna. This
challenge was hosted on the Litterati
app, which enabled users to photographand tag individual items of litter andcreated a virtual community that jointly
collected over 26,000 pieces of litter.

Vienna’s 7th district was a special focus
for this campaign, with an intensified
set of activities in bars, clubs, andrestaurants, as well as bus and tram stops,for instance. The team also ran different
experiments to better understand what
drives change in consumer behavior,using pocket ashtrays (available at points
of sale, legal age meeting points, andevents) and nudging techniques in fixed
ashtrays (installed in private companies).
The impact of this campaign was
carefully assessed and included actual
physical measurements by Litterati ofcigarette butt litter incidence before,
during, and after the campaign.
While the campaign did not seem tomeasurably affect cigarette butt litterawareness nor declared non-littering
behavior among consumers, the street
measurements showed it did have apositive effect in reducing cigarette butt
litter incidence in the city of Vienna (-8percent), and this reduction was more
pronounced (-15 percent) in the hot spotsof the 7th district that were the target ofthe campaign’s intensified set of activities.
The insights from this pilot will help
us shape our future initiatives.

Exploring the potential of
disposal solutions
We are clear that education must be
accompanied by convenient cigarettebutt disposal solutions. PMI continuously
seeks expert input to develop and shareinnovative approaches to alternative waste
receptacles and other portable solutions.
In Italy, for example, our #cambiogesto
multichannel campaign in Palermo paired
awareness-raising with the distribution of
a portable ashtray device. It is estimatedthat the new awareness and practicalsupport resulted in 120,000 fewer litteredcigarette butts in Palermo’s campaign
beach sites during the month of August.
Where smokers are on the move, portable
ashtrays can help reduce littering. Currently,
however, the adoption rates of portable
ashtrays among smokers are very low,
typically under 1 percent. Adoption rates
are higher in countries such as Japan,
where local culture and legal enforcement
drive their use. The limited uptake in othermarkets is due to inconvenience: It is an
extra item to carry, it requires cleaning,
extinguishing the cigarette is a more
involved process, and there is some risk ofmess and odor. We believe that improved
design and availability will lead moreconsumers to accept and use the devices.
In the U.K., PMI has partnered with Clean
Up Britain, a leading anti-litter behavioral
change organization, to research littering
behavior and portable ashtrays. The
findings indicate that attitudes to littering
depend on ashtray design, but also on
respondent demographics, social situations,and perceived risk of fines. The factors
affecting acceptance include ease of use(easy stubbing, opening, closing, cleaning),
safety (perceived risk of melting andplastic), effectiveness of seal (to prevent
smell or risk of spill of ashes), portability(size, shape, and presence of clip to carry),

We are clear that education mustbe accompanied by convenientcigarette butt disposal solutions.
quality (reliability and durability), and design(look, customization, and sustainability).
The findings will be used to develop
portable solutions that are more likely tobe adopted by smokers on the move.

Social norms and enforcement
Enforcement can refer to penalties andfines, but it can also be more broadlyinterpreted to include social control andappealing to the values of citizens. To curb
littering, consumers should be remindedof existing regulations and shown thatlittering is socially unacceptable. The#cambiogesto campaign in Italy appealed
to the conscience of smokers (“Partof you already knows what to do”) to
shift their habits from flicking on the
ground to disposing in an ashtray.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

157

Next steps
We will ramp up anti-littering campaigns
across the markets where we operate, in
cooperation with key stakeholders, in order
to meet our target to halve the plastic
litter from our products by 2025. We hadplanned to define the baseline in 2020,
but due to the COVID-19 confinement,
this year will not be representative, so
we will define the baseline in 2021. We
will develop an online platform to share
information, testimonials, messages,
and tools to encourage as many people
as possible to combat littering. Our
approach to materials, packaging, waste
management, and electronic productstewardship increasingly aligns withthe concept of the “circular economy”
and is discussed on the next page.

We will ramp
up anti-littering
campaigns
across themarkets where
we operate.

Performance
Littering prevention¹

2019

Number of anti-littering initiatives conducted

54

Number of affiliates with anti-littering strategy

31

Number of affiliates participating in World Cleanup Day

31

Number of participants in World Cleanup Day(PMI employees and other volunteers)
Number of cigarette butts collected during World Cleanup Day

3,962

LINKS

Environmental Commitment
Anti-littering policy

827,160

We introduced these indicators in 2019.

Heated tobacco units production in PMI’s manufacturing facility in Neuchâtel, Switzerland

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Philip Morris International Integrated Report 2019

Product
ecodesign andcircularity
There is a need to change
economic models of production
and use, moving to a more
restorative model. Building
sustainability considerations
into product design is a way tocontrol environmental and social
impacts across the life cycle of a
product – from development andmanufacture to use and disposal.

Megatrends• Technological progress• Changing consumer expectations• Climate change• Purpose of business
IQOS device recycling hub in Japan

Innovating for
better products

Operatingwith excellence

Protecting theenvironment

Caring for thepeople we work with

Performance
metrics159

Why it is important to us and our stakeholders

Topic description
For PMI, contributing to the circular
economy means developing moreenvironmentally friendly products –devices, consumables, accessories,
and packaging – by improving theirrecyclability, efficiency, and repairability.

At PMI, we are committed to playing
our part in promoting a circular
economy. Our stakeholders, startingwith our consumers, expect productsthat are durable and reliable, and thatare manufactured using responsibly
sourced materials and the efficientuse of resources. While a circularapproach requires upfront investments– for example, to set up take-backand recycling systems or lower our
carbon footprint – it also spurs
innovation, boosts competitiveness,
and adds value to our brands.

By integrating sustainability
considerations into our products, fromdevelopment to end-of-use, we can lower
their environmental and social impacts
and costs. Potential benefits include
energy savings, reduced use of natural
resources, waste reduction, and, typically,a longer product lifespan. Minimizing
the negative environmental and social
impacts of products commercialized
at scale can help safeguard theinterests of future generations.

Relevance of the topic
Relevance for stakeholders

Overview

Connectivity with other sustainability issues at PMI

2
PMI’s impacts on society

5

4

6

3
1

7

Impact in our value chain
Upstream

PMI operations

8

Downstream
9

Product
ecodesign andcircularity

10

11

Key stakeholders
12

Adult
consumers

Regulators

Civil society

Supply chain

Employees

16
17

15

14

13

1 Product health impacts
2 Access to smoke-free products
3 Product reliability
4R esponsible marketingand sales practices
5S ustainable supply
chain management
6R esponsible andtransparent R&D
7 Respect for human rights
8 Fair fiscal practices
9 Illicit tobacco trade prevention
10 Socio-economic well-being of
tobacco-farming communities
11 Fair working conditions
12 Health, safety, andwell-being at work
13 Climate protection
14 Forest conservation
15 Littering prevention
16 Biodiversity
17 Water stewardship

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Philip Morris International Integrated Report 2019

Our aims

100%

Percentage of PMI smoke-free
product users who have access tocollection and recovery for devices
and consumables by 2025

100%

Percentage of PMI’s smoke-free devices
that have eco-design certification by 2025

Achieving our aims
At PMI, we are committed to understanding
and managing the environmental andsocial impacts across our entire value chain,including the life cycles of our products.
With respect to our smoke-free products,
our 2025 eco-design and circularity
ambitions, which extend to electronic
devices, accessories, consumables, andpackaging, are as follows:

Our journey to meet thesegoals relies on a systematicmanagement approach in whichsustainability is consideredfrom the start of the productdevelopment process.

• providing collection and recovery
access for the device and its consumables
to all IQOS users;• reducing the carbon footprint of smokefree products to below that of
combustible cigarettes per user;• ensuring 100 percent of packaging
materials are recyclable and 95 percent
are from renewable sources; and• achieving eco-certification for all ourelectronic devices.
Our journey to meet these goals relies on asystematic management approach in whichsustainability is considered from the start ofthe product development process. The way
we work is guided by the foundation
principles of eco-design and circularity,
which account for impacts relating tomaterials sourcing, product function anddesign, manufacturing, use, and end-of-life.
These general principles informed ourdecision to integrate sustainable design into
our corporate ambitions and ensurealignment with our R&D processes. Our
designers and engineers increasingly aretrained in eco-design by internal and thirdparty experts. Focusing on the major
sustainability impacts of our products isparticularly important as we deliver thetechnologically advanced products that areat the heart of our transition to a smokefree future. In our operations, eco-designprinciples inform how we use life-cycle
analysis (LCA) to assess the comparative
carbon footprint of our products, fromtobacco sourcing to end-of-life impacts. So
far, we have analyzed IQOS, IQOS MESH,
consumables (heated tobacco units), andpackaging. Additionally, we are finalizing theresults for the new generation of our
Platform 4 product, the IQOS VEEV. Thisnew version shows a continued
improvement in CO2 footprint driven byefforts to reduce the overall product size,
decreasing material usage. We will
benchmark ourselves against peer
companies that are also operationalizing
eco-design.

Foundation principles of eco-design and circularity guiding our work

Productionof components& products

Material
selection andsourcing

Distribution

Choices fromdesigners incollaboration withother functions

Use

End-of-lifeLife-cycle assessment – comparison of some PMI products (kgCO2e/2 years)

66

66

IQOS 2.4+

IQOS 364

51
43

Combustible
Cigarette

IQOS MESH@ 18mgIQOS 3 MULTI

Note: This graphic is an internal assessment based on data compiled from three different LCAs, and assumes 20 heated tobacco units or
combustible cigarettes per day. Scope includes materials, manufacturing, use, and end-of-life, but excludes logistics.

Overview

Innovating for
better products

IQOS currently has a higher carbon
footprint compared to combustible
cigarettes due to several factors. Primarily,
there is the addition of an electronic
device, which involves new components
and requires electricity to charge. Thiselement accounts for 18 percent of
the total carbon footprint of the IQOS
3 system. Additionally, the process to
manufacture heated tobacco units is moreenergy intensive than cigarettes, due tothe production of the cast leaf tobacco.
We are working to close the gap between
combustible and smoke-free products

Operatingwith excellence

Caring for thepeople we work withthrough improved manufacturing processes,
extending the usable life of our electronic
devices, and working to decrease thetotal CO2 footprint through smart material
selection and sustainable design practices.
Over the past two years, we have reduced
the overall CO2 impact of our smoke-free
products through improvements in
manufacturing processes and in our tobacco
supply chain.
Focusing on the end-of-life of our devices,
we adopted a centralized approach withthe establishment of two recycling hubs

Protecting theenvironment

Performance
metrics

in 2018 – one in Europe and the otherin Asia. The benefits associated withsuch an approach include economies ofscale, regional investment, illicit trade
prevention, and quality enhancement (byidentifying potential manufacturing anddesign improvements). In certain instances,owing to regulatory restrictions governing
cross-border e-waste transportation,
we may complement our centralized
approach with more local solutions.
With regard to our consumables, for both
our smoke-free and combustible products,
we center our research efforts on testingbiodegradable materials. We focus onmaterials that have the potential to perform
similarly to or better than what we use
currently and that may also reduce life-cycle
CO2 emissions and have scientifically verified
enhanced biodegradation properties inaquatic, soil, and marine conditions.
In packaging, more than 90 percent of ourmaterials were paper and cardboard in
2019. The primary function of packaging
is to contain and protect products fromthe point of manufacture to the retailstore or end user, as well as to provide
product information. Some of our smokefree product consumables, such as
MESH cartridges, require additional
protection, which makes it challenging
to ensure that packaging is made fromfully recyclable materials. To address
this challenge, we are committed todeveloping, by 2025, packaging solutions
that minimize the use of plastics andaluminum and are fully recyclable.
Governance of eco-design and circularity
is guided by our design and development
teams and is fully embedded within ourinnovation process, including regularcheckpoints with senior leadership. We
are committed to evaluating sustainability
characteristics and making design
choices that will continually enhance
the performance of all our products
and packaging. Life-cycle analysis (LCA)
and/or other relevant environmental
assessments are performed prior to
the launch of any new products, andresults are presented in internal decisionmaking forums, in accordance with oursustainable design governance programs.

We are committed to evaluating
sustainability characteristics andmaking design choices that willcontinually enhance the performanceof all our products and packaging
IQOS device recycling hub in Japan

161

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Philip Morris International Integrated Report 2019

Progress in 2019
Eco-design of smoke-free products
In 2019, we strengthened our efforts
to integrate sustainability enhancements
into product design.
We have formalized our operational
guidance on product design to incorporate
eco-design principles. Prior to each launch,
we compare product versions to ensure ournewest iterations reflect these principles.
This guidance supports decision-making
and helps to integrate sustainability into
our innovation process. We will continue
to monitor the process using targets andperformance indicators.

Packaging of heated tobacco units in PMI’s
manufacturing facility in Crespellano, Italy

We promote five eco-design practices at PMI
1

Sustainable
materials

Products should contain the correct quantities
of materials, which are sustainably produced, andwhich have the lowest carbon footprint possible.
This will deliver less waste during use and at theend-of-life. For instance, it means using recycled
and sustainably sourced materials, produced
in energy- and water-efficient processes.

2

Minimize carbon
footprint from energy
and transport

Energy efficiency is a priority in PMI manufacturing
operations (see page 142). We are also alreadyconsidering in the design process the energy
consumption of the electronic devices that we sellto consumers. Furthermore, we aim to minimize
the carbon footprint from transportation of raw
materials and product distribution and reduce theweight of packaged products being transported.

3

 ifetimeL
optimization

PMI electronic devices and accessories should
be designed to have an optimal lifetime with due
regard for materials, electronics, and mechanicalcomponents available. Product design should include
lasting aesthetics, products should be repairable,and packaging should be reusable or recyclable.

4

Reuse, recycling,
and recovery

We are increasingly adapting our design touse recycled materials and materials that arerecyclable or biodegradable. Design should
enable reuse and recycling by avoiding gluingor laminating, and new ways of doing businessshould embrace product take-back into a
disassembly, separation, and recycling system.

5

Social responsibility
in production, use,and end-of-life

PMI devices and accessories should have no negativesocial impacts. PMI strives for positive social andethical impacts upstream in the supply chain;for instance, by avoiding selecting and sourcing
conflict minerals (see page 86). Downstream,anti-littering behavior should be encouraged, andpackaging should be informative about standards
in production and how to recycle the device.

The five eco-design practices shown in
the table are currently applied to various
degrees in PMI’s product innovation.
Each generation of product we launchincorporates improvements in, for example,
quality, functionality, ease of use, orrobustness. A core group of employees– including our design and engineering
teams – has been trained to our new
standards, and we have set expectations
and requirements for each new productiteration. These requirements are monitored
throughout the design and production
process, and performance is shared
regularly with senior management in our
Product and Consumer teams throughthe established development governanceframework. Continued training andmonitoring will occur in 2020 and beyond.

A core group of employees –including our design andengineering teams – has been
trained to our new standards,
and we have set expectations
and requirements for eachnew product iteration.

Overview

Innovating for
better productsElectronic devices and accessories
Regarding product innovation, we are
pursuing improvements in areas such as
durability, design for repair and/or
disassembly, energy efficiency, and battery
life. These characteristics will support our
ambition to have all electronic devices
certified to validated standards for ecodesign by 2025. We will also be working
toward the meaningful inclusion ofrecycled content in all devices by 2025.
As our business model is adjusting,circularity is steadily being applied. The userof a PMI device now has more opportunity
to be part of the circular economy and toreturn a device that is broken or at the endof its life through a PMI take-back service.

Operatingwith excellence

Caring for thepeople we work with

devices to specified locations. We aim torecycle these devices via local partners
with similarly high standards of electronics
recycling. We also participate in schemesthat ensure a consumer can return devices
to local e-waste collection centers incountries with such programs in place. In
2019, our CIRCLE hubs processed over 150
tons of end-of-life devices and materials
destined for recycling or energy recovery.
The CIRCLE recycling hubs offer several
benefits. The inspection of returned
products allows us to improve quality
by feeding back into our development
process information related to possible

Protecting theenvironment

Performance
metrics

manufacturing improvements or diagnosed
defects. The recycling itself provides
data that inform better design. The hubs
contribute to our fight against illicit tradeand counterfeiting (fewer product diversion
opportunities) and bring benefits to theregional economies in which they arelocated. Through our CIRCLE hubs, werecover and recycle significantly morematerials than if the devices were to follow
traditional electronic waste streams in mostmarkets. We continue to pursue reuse
opportunities for these materials in both
open- and closed-loop recycling systems.

163

150t
In 2019, our CIRCLE hubs
processed over 150 tonsof end-of-life devices andmaterials destined forrecycling or energy recovery

We reported on our state-of-the-art
reverse logistics hubs in our 2018 report.
CIRCLE (Central Inspection and Recycling
for a Closed Loop Economy) is a PMI service
that provides centralized hubs that inspect,
process, and separate materials from ourelectronic devices for recycling. In 2019, a
third-party audit of our facility in Europe
showed that we recycled at rates between
70 and 79 percent by weight based on
device version; the remainder of materials
went to energy recovery. Materials sent forenergy recovery include some elementsof the batteries and printed circuit board
assemblies, which pose unique challenges.
In 2019, 39 percent of our IQOS market
volume was covered by the CIRCLE takeback service, via retail stores or mail. IQOS
users are always able to return an old
device to specified locations; interested
users should contact their local customer
service channels for details. CIRCLE is acentralized service that ensures recycling iscompleted to the highest standards. To theextent possible, we are rolling out CIRCLE
globally; however, it currently is not possible
to implement the service in all markets
due to legislative restrictions related towaste transport. In some markets where
CIRCLE has not yet been implemented,
IQOS users nonetheless can return their

1 In a sample of 350 adult IQOS purchasers randomly selectedfrom the existing consumer panel in Italy, and in a sample of
450 adult IQOS purchasers randomly selected from an existing
online panel in Japan (see 3rd attachment of report submitted
to FDA)IQOS device recycling hub in Japan

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Philip Morris International Integrated Report 2019

Consumables
As the design development process forelectronic devices and accessories evolves,
PMI is exploring how to minimize theenvironmental and social impacts of heated
tobacco units – the sticks of tobaccothat are inserted into an IQOS device.
We are clear that there is a risk thatheated tobacco units (HTUs) could be
littered, but we have good indications, asmentioned below, that the littering rate for
HTUs is lower than for cigarette butts.
In Italy, 80 percent of respondents toour survey claimed that they “never” or“rarely” dispose of the used HTUs on the
ground when using IQOS outdoors. The
corresponding proportion for our HTUs
in Japan was 90 percent. In Italy, the datasuggests that respondents dispose of used
HTUs more properly compared to theclaimed behaviors for cigarette butts at thetime when the participants were not using
IQOS (44 percent of participants claimed
that they “never” or “rarely” dispose ofcigarette butts on the ground, when they
were smoking cigarettes outdoors). In Japan,
the behavior of disposing cigarette buttson the ground was already infrequent (85percent of the participants claimed thatthey “never” or “rarely” dispose of cigarettebutts on the ground).1 These data points
indicate that the new rituals introduced tolegal-age smokers following their conversion
to smoke-free products presents us with
an opportunity to help consumers change
former habits of cigarette butt littering.

We will continue in 2020 to workwith partners to evaluate innovative
solutions that may enable us to bringour long-term vision of full circularityof our consumables to life

In addition to these surveys, we haveconducted actual counting surveys oflittered HTUs as well as cigarette buttson the ground in Athens (see PMI’s
Sustainability Report 2018). In this instance,
the share of littered HTUs in proportion
to cigarette butts came out at about halfof the HTUs’ market share – indicatinga significant lower littering propensityof HTUs compared to cigarettes.
In 2019, through extensive market
research projects in some of our key
markets, we continued to build ourunderstanding of consumer behavior
related to the disposal of used HTUs
and consumers’ potential motivations
and requirements for participating
in a PMI-driven collection scheme.
Collectively, these insights are shaping ourunderstanding of how we can successfully
deploy an effective and economically
viable end-of-life collection service
for our IQOS users in order to further
reduce littering through our products.
Our long-term vision remains to recycle
any waste that we collect while minimizing
our CO2 footprint. In 2019, we continued
to discuss with several waste management
and recycling partners the potential second
life that we could give to our recycled
HTUs. Our exploration is primarily focusedon the recycling of the cellulose acetate,
the material our filters are made from.
Our investigations to date show that thechemical properties of cellulose acetate
enable the material to be upcycled intoa variety of applications such as spinningof the fibers into fabrics or creation ofpellets that can then be pressed/injection
molded into a variety of hard goods. Thoughthese results are promising, the recyclingof cellulose acetate – unlike recycling formany metals or plastics – is not a widely
available and developed waste stream
across the globe that we can leverage.

We will continue in 2020 to workwith partners to evaluate innovative
solutions that may enable us to bringour long-term vision of full circularityof our consumables to life.
In addition to developing services to reduce
the end-of-life impact of our products,
our innovation and design teams arealso exploring low carbon, recyclable,
and biodegradable options for filters andcartridges. We are committed to significant
investment into continued research on
the biodegradability of filters, and weare working toward a viable solution thatmeets strict international standards2,
satisfies market requirements, and works
with high volume manufacturing.

U.S. Food and Drug
Administration
The U.S. Food and Drug Administration
published its programmatic
environmental assessment of IQOS
and HeatSticks in March 2019(https://www.fda.gov/media/134458/
download). The assessment covered
potential impacts on, among otherthings, air quality, biological resources,
solid waste, and water, and foundthat no significant environmental
impacts would be caused from the
take-up of IQOS in the U.S. The reportcompared IQOS use with continued
cigarette smoking and concluded thateither negligible or no significant newenvironmental impacts were expectedfrom a move to IQOS use. Of particularnote is that, while the FDA consideredsmoking cigarettes to be associatedwith 14 percent of fatal residentialbuilding fires and 11 percent of brush,
grass, and forest fires, the risk of fires
due to discarded heated tobacco
units was assessed to be negligible.

Packaging
PMI has a history of successful packaging
innovation, and packaging is an important
aspect of sustainable design. Our packaging
is made primarily from paper and board,
renewable materials that can be recycled
and that biodegrade in the environment.
Sometimes these sorts of materials may
come from supply chains exposed tosignificant risks of deforestation andbiodiversity loss. We are committed tosourcing board and paper from traceable,
sustainable, and legal sources, and wework with our suppliers to achieve fulltraceability through our Zero Deforestation
program (read more on PMI.com).
Plastic packaging poses a risk to theenvironment if it is discarded improperly,
and we still have less than 10 percentof plastics-containing materials used in
our portfolio, e.g. for wrapping films andpouches. To address this risk, we are testing
potential alternatives to plastic packaging.
The development process involves the useof recyclable cellulose materials meetingproduct protection requirements.
Besides plastics, one of our goals as wework toward fully recyclable packaging
is to replace the non-recyclable
aluminum liners used in some cigaretteand HTU packets with recyclable
alternatives by the end of 2022.
In addition, for our combustible products
packaging, we have established a program
to reduce the weight of packaging by
15 percent over five years by optimizing
material specifications and avoiding overpackaging where possible without impacting
product protection and package quality.

1 In a sample of 350 adult IQOS purchasers randomly selectedfrom the existing consumer panel in Italy, and in a sample
of 450 adult IQOS purchasers randomly selected from anexisting online panel in Japan (see third attachment of reportsubmitted to FDA).
2 For example, good filtration efficiency and consistency toensure that consumers are not exposed to increased levelsof HPHCs versus products made with cellulose acetate filters.

Overview

Innovating for
better products

Next steps
We will continue the systematic
implementation of our sustainable designprinciples throughout our development
process. This will include a continuationof the internal training undertaken in2019 to increase awareness and ensure
uptake of our programs across PMI. This
new design program will be benchmarked
against leading companies to determine
whether any modifications are needed
to ensure the highest standards.
We will also launch a program to identify
the relevant certification schemes for oursmoke-free product devices as part of ourefforts to reach our 2025 target for all
electronic devices. We developed our ecodesign principles with an eye to existingcertification schemes and so anticipate thatour devices will achieve these standards.
Regarding take-back for devices andconsumables, such as HTUs and e-vapor
cartridges, we will continue to evaluate
and expand our offerings, with additional

Operatingwith excellence

Protecting theenvironment

Caring for thepeople we work with

Performance
metrics

165

pilot programs for consumables planned in2020. Our objective is to establish best-inclass recycling process for VEEV cartridges.
We are working with an external partner
on the collection and disintegration of the
cartridges, and are entering explorations
with the main polymer manufacturerof VEEV cartridges on how to recycle
the plastic parts into new cartridges, as
the polymer itself is proprietary and no
independent recycling options exist.
We will also implement additional
initiatives to encourage end-of-life
returns of our devices to ensure ourconsumers have full access to our highrecycling standards for electronics.
Research will continue on device, accessory,
consumable, and packaging design to
identify new technologies and materials that
could enhance the overall sustainability of
our smoke-free product portfolio. Internalcross-functional teams are already hard atwork establishing these innovation pipelines.

Performance
Product eco-design and circularity

2017

2018

2019

Recycling rate of IQOS devices at the
CIRCLE hubs (weighted average)1

n/a

45%

74% 80% by 2025

Proportion of IQOS device sales volume
covered by the CIRCLE program2

n/a

66%

39% 100% by 2025

Carbon footprint of PMI smoke-free
products per user (kgCO2e/year)3

n/a

n/a

Proportion of packaging material that is recyclable4

94.4% 93.6%

Proportion of packaging material that is renewable4 88.9% 88.3%
Reduction of packaging materials
used versus 2018 baseline

n/a

n/a

Goal

IQOS 3: 33
IQOS 3 MULTI: 32
IQOS MESH: 21.5
93.5% 100% by 2025
87.7%

95% by 2025

3%

15% by 2025

1 We established our two recycling CIRCLE hubs in 2018. Recycling rate: Depending on device type and processing facility (figures provided for productprocessed through CIRCLE hubs, varied by device type, zero landfill, remainder to energy recovery or material loss).
2 We established our two recycling CIRCLE hubs in 2018. While we expanded the number of markets covered by CIRCLE in 2019, the decrease incoverage of sales volume is explained by IQOS growth in markets not yet covered by the program.
3 Depends on device and assumes 20 heated tobacco units/day. Scope includes materials, manufacturing, use, and end-of-life, but excludes logistics.
4 While we continued our efforts to substitute or reduce the use of materials from non-renewable sources and non-recyclable materials in our packaging,
the slightly decreasing trend in the past years is driven by the volume mix evolution over this period of time.

LINKS

Environmental Commitment

Device research and development in PMI’s R&D center in Neuchâtel, Switzerland

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Philip Morris International Integrated Report 2019

CASE STUDY: BR AZIL

Building onsustainablefoundations

Location

BrazilEmployees~2,300
Factory

1
Philip Morris Brazil (PMB),
founded in 1973, is one of theleading tobacco companies in
the Brazilian market. It employsaround 2,300 people acrossits various locations, withover 800 employees in its
factory in Santa Cruz do Sul(Rio Grande do Sul state).
The factory produces cigarettes, cutfiller, and expanded tobacco for domestic
consumption and export. In 2018, it
became the first of PMI’s factories tobe certified for meeting the Alliance for
Water Stewardship (AWS) standard.
Brazil is a key tobacco leaf sourcing
country for PMI, and PMB is one of thelargest tobacco leaf buyers locally.

Eliminating child labor in
our tobacco supply chain
PMB is working with approximately
47,500 contracted farmers in Brazil. In
the past few years, the approximately
330 field technicians who monitor the
implementation of PMI’s Agricultural Labor
Practices (ALP) program in the country
recorded a decrease in the number ofprompt actions relating to child labor
incidences. In 2019, less than 1 percent
of farms had child labor incidences, andall 39 cases were resolved during thecrop season. While encouraged by the
progress to date, PMB remains diligent andis committed to do the utmost to address
and ultimately prevent such incidences.
Ongoing farm-by-farm monitoring isused to identify the main causes thatcan lead to child labor incidences:• parents wanting to teach theirchildren farming skills to learn how
to manage a farm and contributeto the household; and• limited opportunities for professional
development outside of school hours.
PMI employees in Bahia, Brazil

167

As part of its efforts to tackle thoseroot causes, our Brazilian affiliate
has engaged with local partners on
different community projects, withthe aim of providing a structured
prevention and remediation system.
For instance, PMB supports theGrowing Up Right Institute, which runs
a rural professional learning program.
Through this program, youth fromunderprivileged families aged 15 to 17
years are enrolled in one-year vocational
training. It comprises both practicaland theoretical courses centered on
management and entrepreneurship skills.
In the form of an apprenticeship, theproject provides additional income tothe students’ households while offering
participants a safe setting to learn therequired skills to manage a farm. In
2019, around 130 students graduatedand received a professional degree.
In Santa Cruz do Sul and Vale do Sol,
PMB supports scholarships for youths
at two schools with agricultural learning
centers. Both schools offer three-year
programs that consist of 5,500 hours
of high school level classes focused on
agriculture training. The course is basedon the alternance pedagogy methodology,
whereby students spend one week atthe school, and one week at their farms,
applying what they have learned from theprevious week. In 2019, 35 students aged
15 to 19 years graduated with agriculture
technician qualifications from both schools.

Our Brazilian affiliate has
engaged with local partners on
different community projects.

Tobacco farmers in Santa Cruz do Sul, Brazil

Another example is PMB’s support of
the Digital Inclusion project, run by the
local NGO Center for Digital Inclusion,
which provides schools located inrural tobacco-growing areas with highquality computer classes and access totechnology. Aimed at complementing
the standard public education curriculumwith quality IT training, this program helps
to empower both students and teachers
while preventing school dropouts. In
2019, close to 500 students aged nine
to 18 benefited from this digital training
and graduated across the seven schools
supported by the program. A total of
2,000 students have participated since
PMB began supporting it in 2016.

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Philip Morris International Integrated Report 2019

A tobacco farm worker with a PMI production technician in Bahia, Brazil

Ensuring safe working conditions
on contracted farms
PMI is committed to achieving safe andfair working conditions on all farms fromwhich it sources tobacco. This has beena key priority since the establishment of
PMI’s ALP code in 2011. In Brazil, PMB
has been running an itinerant farming
community training program called+Campo since 2015, to increase theawareness of this topic among farmers.
The courses are run by specialized PMB
trainers, who visit farms with speciallyequipped vehicles and deliver the training
directly in the fields. Up to 20 farmers andfamily members are trained per session.
The training content is defined year-by-year,
in response to the most significant issues
identified by field technicians through farmby-farm monitoring. In 2019, two modules
were developed to address the main type ofincidence recorded on farms in the country:
issues related to safe working environments,
and in particular the availability and use of
personal protective equipment (PPE). The
first training module focused on the useof PPE to prevent green tobacco sickness
and when applying crop protection agents(CPA), the appropriate storage of CPAs, andnew technologies for their safe application.
The second module reiterated the properuse of PPE, while also covering basic
sanitation, electrical safety, solar exposure,and caution when handling sharp tools.

Over 2,900 contracted
farmers participated in the
training sessions in 2019.

While it’s a requirement to use PPE – itis included as a contractual provision inaccordance with PMI’s ALP code and in
Brazilian law – violations remained themain issue recorded in relation to ourcode in the past few years in the country,
even though this requirement is clearlycommunicated to contracted farmers andtheir workers, and the availability and use of
PPE is monitored throughout the growing
season by field technicians. To increase
PPE usage for farmers and workers, PMB
is not only providing training and raisingawareness, but also provides the equipment
needed. During the crop season 2019,
over 9,000 PPE items were delivered.
Over 2,900 contracted farmers
participated in the training sessions
in 2019. Their level of knowledge was
evaluated before and after the training
sessions, and their feedback will help
improve future sessions planned in 2020.
The farm-by-farm monitoring should
further help evaluate the effectivenessof the program, as it’s expected that the
prompt actions related to safe working
environment raised in the upcoming
growing season among participating farmers
are decreasing thanks to the training.
Since women play an important role
in tobacco farming in Brazil, PMB also
developed +Campo Rosa, a program
tailored to female farmers and farmers’
wives. It was first introduced in Parana
in 2017. +Campo Rosa training sessions
are attended exclusively by women,with the objective of providing themwith knowledge about safety on farms
as well as improving their awareness ofbreast cancer. Overall, more than 300
women have attended the different
training modules, and due to its success,the program will be expanded in 2020.

169

Building an inclusive workplace

Tobacco farming in Brazil Southern Region
Tobacco growing
Curing method
Virginia: flue-cured, with leaves hungin curing barns where heated air isgenerated, mainly using firewood
Burley and Dark cured: air-cured, by hanging
the leaves in well-ventilated barns

TobaccoVirginia, Burleyand Dark cured
Crop season
July to January
Irrigation typeRain-fed

Average farm size
10.8 hectares, out of which 2.5 hectares
used for tobacco cultivation

Peoplefarmers who supply tobacco to~47,500 Contracted
PMI (directly or via third-party suppliers)

Santa Cruzdo Sul~35,600 Workers hired by farmers
living on the farms (farmers’ families),~94,900 People
out of which around 30,900 children~330

Field technicians, visiting the farms on
average five times during the crop season
to monitor GAP and ALP implementation

Employees in PMI’s manufacturing facility in Santa Cruz do Sul, Brazil

Establishing an inclusive culture that
promotes equal opportunities and respect
for all is a priority for PMB. Following anorganic movement led by its employees
to raise the importance of inclusion anddiversity (I&D) within the organization, ouraffiliate identified three areas to focus its
efforts on: LGBTQ awareness, empowering
women in the business, and equal
opportunities for people with disabilities.
PMB organized workshops to raiseawareness around LGBTQ and genderequality issues within the company, witharound 650 employees from all seniority
levels participating. The workshops focusedon unconscious bias, identifying what it
meant by using practical examples, andhow to tackle this issue in the workplace.
It also included a seminar organized by
the Grupo Dignidade – one of Brazil’s
first LGBTQ organizations – that focusedon understanding common elements
in LGBTQ culture, understanding
terminology and its use, and creatinga safe space for conversation.
In addition, more than 300 employees
across PMB’s operations and sales teams
participated in disability awarenessworkshops. These helped to build
knowledge and understanding of theissues faced by people with disabilities
in employment. An internal analysis ofthree PMB sites, run in parallel to theworkshops, identified issues that needed
to be addressed. In the factory, theparking slots dedicated to people withdisabilities were altered, guaranteeing
sufficient space to move between slots.
The company also adapted ramps used
to access the facility and across the unit
in order to make it possible for a person
in a wheelchair to move around.

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Philip Morris International Integrated Report 2019

Performance
metrics

In this section
Closing remarks from ourChief Sustainability Officer
ESG ratings performance
Our performance
Glossary and acronyms
Forward-looking andcautionary statements

A tractor from one of the mechanization hubs that provides preparation services used by Malawian entrepreneurs, next to alternative crops on the left, and a tobacco curing barn on the right

171
172
173
188
189

Overview

Innovating for
better products

Closing
remarks from
our Chief
Sustainability
Officer

Operatingwith excellence

Caring for thepeople we work with

To our stakeholders,
The 2030 Agenda for Sustainable
Development has become the North Star
for stakeholders from all sectors of society
and all over the world, providing an action
plan for people, planet, and prosperity. Four
years into the 2030 Agenda, it is clear thatthe actions society is collectively taking
are neither sufficient nor transformationalenough to achieve the 17 Sustainable
Development Goals (SDGs). Our planetis deteriorating at an alarming rate, andrising inequality now affects more than
two-thirds of the global population.
We are all asking ourselves how we cancontribute and make a difference beyond
just voting our preferred candidate into
office. All individuals who hold a stake canplay a role in driving change. In our case,internal and external stakeholders help shape
the future of PMI and its role in society.
Together with my team, we are trying tohelp all of our around 73,500 employees
discover their role in making PMI a moresustainable company. Until five years
ago, our company was running strong
sustainability programs in very specificareas, notably related to agriculture andmanufacturing, yet we were reluctant togive this work much visibility, knowingthat our most material issue – the producthealth impacts – remained unaddressed.
That changed dramatically when ourcompany embraced the vision of a world
without cigarettes. We felt the time hadcome to develop a more strategic, cohesive,and forward-looking corporate sustainability
strategy situating product transformation
at its core, while integrating other materialsocial and environmental topics. Fromthen on, sustainability has become a crossfunctional theme affecting the work of many
PMI employees – encompassing the way
we source tobacco and other materials, ourmanufacturing operations, the circularityand eco-design of our products, and theway we commercialize our products andreduce post-consumer waste and litter.

Protecting theenvironment

Performance
metrics

Although at its beginning, we are working
hard to make sure that PMI has the bestsustainability strategy and programs inplace. We are now able to leverage themotivation and energy of our company’sbold purpose and empower our employees
to integrate sustainability into their jobs.
My colleagues and I dedicate substantial
time to engage with external stakeholders,
and listen to their concerns and feedback.
Our sustainability materiality assessment is
an important part of this process and the
backbone for our strategy development andreporting. Last year, we received input fromover 800 internal and external stakeholders;
although time-consuming, it has been ahuge opportunity to solicit views on what
PMI should be focused on. Not surprisingly,
product health impacts continue to be
identified as the most material issue, thus
reinforcing that for our company in particular,
and for the industry in general, sustainability
cannot exist without transformation.
But what does transformation mean? It has
become a buzzword many refer to lightly.
Some companies are “transforming” byselling off the “bad” part of their business,often to private investors not subject to thelevel of scrutiny applied to publicly listedcompanies. Our stakeholders sometimes
ask us why we haven’t sold our cigarettebusiness to speed up our transformation.
Even though selling off our cigarette businesswould (indeed) make our company smokefree faster, it would not resolve the cigarette
problem – it would just become somebody
else’s problem to solve. Our purpose is not(only) to make our company smoke-free,
but to make cigarettes obsolete. This, weare convinced, can best be achieved bytransforming from the inside out, replacing
cigarettes with smoke-free products,
market-by-market, and as soon as possible.
How can stakeholders know if ourtransformation is real? Are we really doing
everything we can to achieve a world
without cigarettes? To allow anyone
to scrutinize the pace and scale of our

Even though selling off ourcigarette business would (indeed)make our company smoke-freefaster, it would not resolve thecigarette problem – it would justbecome somebody else’s problem
to solve.
transformation, we introduced a set ofBusiness Transformation Metrics in 2016(see pages 173–174). These metrics can help
our stakeholders assess our purpose, actions,
resource allocation, and outcomes achieved;
and we constantly review and expand the listof metrics based on stakeholder feedback.
Critics will always emerge, but data canhelp dispel misperceptions. This reportaims to provide a comprehensive overview
of what PMI is about, combined with aholistic set of metrics that go beyond
our financial disclosures, covering ourbusiness transformation, as well as
environmental, social, and governancetopics. We support and seek to alignwith GRI, SASB, and TCFD disclosure
standards, enabling all stakeholders tobenchmark our strategy and performance.
I thank you for your time reading our first
integrated report, which aims to enable all
stakeholders to assess progress in fulfilling
our Statement of Purpose. We appreciate
your views and opinions and need yourfeedback to continuously improve. With
your feedback you help shape PMI’s future
and make this world a better place.

Huub Savelkouls
Chief Sustainability Officer

171

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Philip Morris International Integrated Report 2019

ESG ratings
performance
At PMI, we understand the value ofparticipating in ESG ratings; it helps us
to assess our sustainability performance,
benchmark ourselves against our peers,
and, most important, identify improvement
areas. We prioritize our participationin ratings that are most useful to us
and our stakeholders, based on:• credibility of the methodology and ourability to interpret and use the results;• recognition of the rating among
our stakeholders and the investor
community, as well as participation
by our competitors and peers so we
can benchmark our performance;• value as a learning opportunity,with sufficient feedback to allow
us to improve over time;• resources required, which should notundermine our company’s focus on
performance improvement; and• openness to dialogue; we want to beable to understand expectations andresults, share knowledge, and provide
input on ratings enhancements.

Rating agencies

PMI’s performance in 2019

Score

CDP Climate

Recognized as a Climate A List company for sixth year in a rowA

CDP Forest

Achieved A- ranking for Forest Disclosure

A-

CDP Supplier
Engagement

Placed on Supplier Engagement Leaderboard for third year in a row

CDP Water Security

Achieved Water Security A ListA

ISS-oekom

Earned a “C” score, achieving industry leadership

C

MSCI

Improved performance versus previous year

SAM Corporate
Sustainability
Assessment

Earned third place among our industry in second year of active participation

3rd rank

Sustainalytics

Ranked 34th out of 180 companies; awarded “Leader” status for environmental
performance

34th rank

State Street
R-factor Score

Outperformer within the tobacco industry; industry average score 44

LeaderBBB

52

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics173

Ourperformance
Pillar 1

Innovating for
better products

Business transformation metrics: Product health impacts

2016

2017

2018

2019

R&D expenditure (smoke-free/total)1

72%

74%

92%

98%

Total R&D expenditure (in millions USD)

429

453

383

465

Number of R&D positions (FTEs)2

n/a

n/a

764

942

1,800

2,900

4,600

5,800

170

300

480

740

36
11
7

57
12
7

82
19
9

109
19
9

Patents granted relating to smoke-free products (cumulative)
Patents granted in IP5 jurisdictions relating to smoke-free products (cumulative)3
Number of studies completed by PMI on smoke-free products(cumulative, since 2015)• Toxicological assessment• Clinical assessment (short-term, focused on biomarkers)• Perception and behavior

1 Smoke-free products include heated tobacco units, devices, and e-cigarettes. Total products include smoke-free products, cigarettes, and other combustible products.
2	R&D positions include scientists, engineers, technicians, and support staff. Comparable data for years prior to 2018 are not available, as the scope of R&D positions changed following company
organizational changes.
3	Includes published international (PCT) patent applications. IP5 jurisdictions include Europe (patent applications published and patents granted by the European Patent Office), China, South Korea, Japan, andthe U.S.

174

Philip Morris International Integrated Report 2019

Pillar 1

Innovating for
better products
Business transformation metrics: Access to smoke-free products1

2016

2017

2018

2019

Number of factories producing smoke-free products out of total number of factories3

3 out
of 48

4 out
of 46

8 out
of 44

8 out
of 38

Total SKU4 count – cigarettes

4,421

4,201

3,968

3,799

Total SKU count – heated tobacco units

62

145

253

414

Number of markets where PMI smoke-free products are available for purchase

20

38

44

52
47%

Proportion of markets where PMI smoke-free products are available, which are outside the OECD5
Number of IQOS stores
Number of retailers that sell PMI smoke-free product consumables (in thousands)

32%

43%

47%

26

63

81

199
679

90

292

488

Commercial expenditure (smoke-free/total)

15%

39%

60%

71%

Net revenues (smoke-free/total)6

2.7%

12.7%

13.8%

18.7%

Number of markets where net revenues from smoke-free products exceed 10% of total net revenues

1

5

19

31

Number of markets where net revenues from smoke-free products exceed 50% of total net revenues

0

1

3

4

2025 aspirations238‒42%

Smoke-free product shipment volume (billion units)

7.7

36

42

60

>250

Combustible product shipment volume (billion units)

845

791

767

732

<550
>30%

Smoke-free product shipment ratio (smoke-free/total)7

0.9%

4.4%

5.1%

7.6%

Total users of PMI smoke-free products (in millions)8

2.1

6.9

9.6

13.6

Estimated users who have stopped smoking and switched to PMI smoke-free products – non-OECD (in millions)8

0.0

0.2

1.1

3.0

>20

Estimated users who have stopped smoking and switched to PMI smoke-free products – worldwide (in millions)8

1.5

4.7

6.6

9.7

>40

1 Smoke-free products: include heated tobacco units and e-cigarettes. Total products: include smoke-free products, cigarettes, and other combustible products.
2	Aspirations: assuming constant PMI market share. We do not set aspirational targets for commercial expenditure, but expect ratio to continue increasing to enable the stated outcome in terms of shipment volume. Note: Aspirational targets and goals do not constitutefinancial projections.
3 Previous years’ data were restated to account for our second manufacturing facility in Italy, Bologna, that started producing heated tobacco units in 2016.
4 “SKU” stands for stock keeping unit.
5 Excluding PMI Duty Free.
6 Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions.
7 The smoke-free product shipment ratio is compiled based on millions of units.
8 See glossary on page 188.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

175

Pillar 2

Operating withexcellence

Responsible marketing and sales practices

2017

2018

2019

Total number of compliance training sessions conducted on PMI’s Marketing Code(employees/third parties)

37,90323,43814,500(49%/51%)

Number of violations of the Marketing Code or Good Conversion Practices (GCP)
resulting in substantiated cases of misconduct

2

8

42

2017

2018

2019

Sustainable supply chain management

50,000>36,000>33,200

Total procurement spend (in billion USD)2

n/a

10

9.9

Total number of suppliers1
Number of critical suppliers3

n/a

n/a

95

Critical suppliers, as a proportion of total procurement spend

n/a

n/a

35%

Critical suppliers’ procurement spend assessed in PMI’s supplier due diligenceplatform (STEP)4

n/a

n/a

84%

Critical suppliers of direct materials assessed in STEP, expressed as a proportionof procurement spend on critical suppliers of direct materials

n/a

n/a

73%

Critical suppliers of electronics assessed in STEP, expressed as a proportionof procurement spend on critical suppliers of electronics

n/a

n/a

100%

>350,000 >350,000

335,000

Number of tobacco farmers contracted by PMI and PMI tobacco suppliers
Number of third-party tobacco suppliers with whom PMI has a directcontractual relationship5

15

15

13

Number of PMI leaf operations that contract tobacco farmers directly

9

8

8

Number of field technicians providing support to contracted farmers andmonitoring the implementation of PMI’s Good Agricultural Practices (GAP)and Agricultural Labor Practices (ALP)

2,790

2,610

2,875

Proportion of tobacco purchased through direct contracts by PMI and
PMI tobacco suppliers

90%

93%

96%

Proportion of tobacco purchased for which labor practices have beensystematically monitored

77%

88%

92%

Proportion of tobacco purchased assessed by AB Sustain (cumulative, since 2016)6

55%

100%

n/a

Number of tobacco supplier locations (countries) assessed by Control Union
on ALP topics

6

3

3

Cumulative number of tobacco supplier locations (countries) assessed byControl Union since 2013 on ALP topics7

19

21

22

Goal

90% by 2020

>90%
(ongoing)

24 by 2020

1 Suppliers refers to tier 1 suppliers, parent companies.
2 Procurement spend excludes tobacco leaf sourcing.
3	Suppliers’ criticality is evaluated taking into account spend segmentation and nature of component, as well as supply flexibility (single source/not easily substitutable) as relevant. 2019 figure includes tier 1
suppliers of direct materials and electronics managed by PMI’s central procurement team, and excludes tobacco leaf sourcing.
4 We started to formally onboard critical suppliers into our supplier due diligence platform (STEP) in July 2019.
5 Data refers to parent companies.
6	In 2019, the industry did not run collective assessments with AB Sustain as it focused on the development of a new Sustainable Tobacco Program (STP) 2.0 program, but PMI continued to assess conformity to
the GAP standards through annual self-assessments completed by all our suppliers. Over the three-year cycle ending 2018, AB Sustain conducted formal assessments in 100% of our sourcing countries.
7 Cumulative number since 2013 excludes locations covered more than once by Control Union assessments over this period.

176

Philip Morris International Integrated Report 2019

Pillar 2

Operating withexcellence

Respect for human rights

2017

2018

2019

2025 goal

0

1

2

10

Responsible and transparent R&D

2017

2018

2019

Cumulative number of scientific publications by PMI since 2008

<200

340

365

Cumulative number of institutions that have taken part in sbv IMPROVER
since 2011

400

450

500

Cumulative number of countries where institutions that have taken part in
sbv IMPROVER since 2011 are located

60

63

65

Cumulative number of peer-reviewed publications issued as a result of sbv
IMPROVER challenges since 20111

16

16

16

Cumulative number of studies published on INTERVALS platform since
2018

n/a

9

40

Cumulative number of protocols published on INTERVALS platform since
2018

n/a

57

103

Cumulative number of data sets published on INTERVALS platform since
2018

n/a

144

354

Cumulative number of human rights impact
assessments conducted1	Peer-reviewed publications issued as a result of sbv IMPROVER challenges conducted in the past three years are currently under preparation or validation, andare expected to be published in 2020.

Business integrity

2017

2018

2019

93.5%

86.9%

86.6%

Total number of compliance training sessions on PMI’s Guidebook for
Success completed (employees/third parties)

189,696(75%/25%)

193,063(82%/18%)

253,763(88%/12%)

Total number of reports received, involving compliance allegations andother concerns

714

872

977

Number of closed cases involving compliance allegations(number of unsubstantiated cases/number of substantiated cases)

505(188/317)

582(246/338)

653(284/369)

Proportion of substantiated claims, out of all closed cases involving
compliance allegations

62.8%

57.7%

56.5%

Proportion of employees participating in training sessions pertaining to
PMI’s Guidebook for SuccessOverview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Illicit tobacco trade prevention1

Performance
metrics

177

2017

2018

2019

Goal

Coverage for tracking and tracing – master case level2

100%

100%

100%

100%

Tracking and tracing – proportion of packs sold with unique code applied3

75%

85%

100%

100%

Additional Framework Cooperation Agreements signed with law enforcement
agencies/governments in a given year – number of countries

10

5

2

+5 by 2021
+12 by 2025

Regional studies and country analysis to improve awareness of illicit trade –proportion of global consumption covered4

25%

27%

20%

35% by 2020

Number of law enforcement officers trained on how to authenticate PMI
products5

717

500

6,617

500 by 2021
+ 2,500 by 2025

Number of countries with law enforcement agencies trained on how toauthenticate PMI products

15

10

23

10 per year

Anti-Counterfeiting Cooperation Agreements signed with our suppliers

100% by 2025

Number of PMI IMPACT projects selected per funding round6

31

29

0

90 by 2021

Number of countries from which PMI IMPACT projects were selected per
funding round6

16

22

0

60 by 2021

Number of applications (project proposals) received by PMI IMPACT per
funding round6

157

0

0

540 by 2021

Number of countries from which applications were received by PMI IMPACT
per funding round6

56

0

0

140 by 2021

PMI IMPACT grants allocated in USD million7

28

20

0

100

1 Data cover PMI combustible tobacco products and smoke-free product consumables and devices.
2	Full coverage equates to 95 percent tracking and tracing in our supply chain (excluding kretek business). Five percent of master cases are not covered; these are destined to countries that are not identified
as a source of potential diversion or where PMI sells to a single customer in the country.
3 Excludes kretek business.
4 In 2019, we did not reach our target of 35 percent, as one study was not carried out.
5	The number of training sessions delivered each year depends on specific needs and requests raised locally by law enforcement agencies. The significant increase in 2019 was mainly driven by additional
training sessions delivered in Latin America and Canada to better tackle the nature of illicit trade in the region, where smuggled “illicit white” cigarettes are predominant, whereas counterfeiting of PMI
cigarettes remains low within the illicit trade of cigarettes.
6	There were no funding rounds of PMI IMPACT in 2018-2019. Data for 2017 and 2018 were restated: one project in 2017 was implemented without PMI IMPACT funding, and two projects in 2018 were
not implemented. Other data related to PMI IMPACT were restated accordingly.
7 PMI pledged USD 100 million to PMI IMPACT. Goals related to PMI IMPACT are stated for the period 2016-2021.

178

Philip Morris International Integrated Report 2019

Pillar 3

Caring forthe people
we work with

Socio-economic well-being of tobacco-farming communities1

Number of tobacco farmers contracted by PMI and PMI tobacco suppliers
Number of countries where farmers contracted by PMI and PMI tobacco suppliers arelocated

2018

2019

>350,000 >350,000

2017

335,000
24

28

27

Number of farmers with whom PMI has direct contracts

23,00021,00016,500

Number of farmers who have direct contracts with PMI tobacco suppliers

332,000 >329,000

318,500

Number of third-party tobacco suppliers with whom PMI has a direct contractual
relationship2

15

15

13

9

8

8

Number of field technicians providing support to contracted farmers and monitoring theimplementation of PMI’s Good Agricultural Practices (GAP) and Agricultural Labor Practices
(ALP)

2,790

2,610

2,875

Proportion of tobacco purchased for which labor practices have been systematicallymonitored

77%

88%

92%

Number of PMI leaf operations that contract tobacco farmers directly

36

50

641

Total number of ALP prompt actions recorded by field technicians

12,74918,543

14,440

Proportion of ALP prompt actions recorded by field technicians:• safe working environment• hazardous work performed by children• other

63%
35%
2%

74%
25%
1%

73%
19%
8%

Total number of ALP prompt actions resolved

10,154

13,687

8,137

Number of ALP prompt actions recorded by field technicians relating to safe working
environment

8,087

13,78010,519

n/a

n/a

1,158

Number of terminated contracts due to ALP violations (per crop season)

Number of ALP prompt actions recorded by field technicians relating to non-payment ofminimum wage to farmworkers3

Goal

Number of ALP prompt actions recorded by field technicians relating to child labor4

4,417

4,587

2,712

Proportion of farms monitored found with child labor incidents4

1.2%

1.3%

0.8%

Proportion of ALP prompt actions recorded by field technicians relating to child labor thatwere resolved4

67%

89%

88%

Proportion of tobacco farmworkers provided with safe and adequate accommodation5

n/a

n/a

80%

100% by
2020

Proportion of farmers and farmworkers having access to personal protective equipment6

n/a

n/a

99%

100% by
2020

1 The farm-level data related to our tobacco supply chain reported in this report cover 22 countries we source from. It excludes Ecuador and Lebanon.
2 Data refers to parent companies.
3 We introduced this category of prompt actions in 2019.
4 Our monitoring and reporting of child labor refer to situations of hazardous work performed by children below 18 years old.
5 We introduced this category of prompt actions in 2019. Scope is limited to farmers providing accommodation to workers (approximately 6 percent of the total farmer base).
6 We introduced this category of prompt actions in 2019.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

179

Health, safety, and well-being at work

2017

2018

2019

Goal

Lost time incident (LTI) rate per 200,000 hours worked – PMI and contracted employees1

0.10

0.13

0.12

<0.10

LTI rate per 200,000 hours worked – PMI employees

0.10

0.13

0.12

LTI rate per 200,000 hours worked – contracted employees

0.07

0.08

0.10

Total recordable incidents rate (TRIR) per 200,000 hours worked – PMI and contracted
employees

0.22

0.22

0.20

TRIR per 200,000 hours worked – PMI employees

0.22

0.22

0.20

TRIR per 200,000 hours worked – contracted employees

0.20

0.30

0.17

Number of fatalities – PMI and contracted employees

2

2

1

0

Number of fatalities – contractors2

1

1

0

0

Number of fatalities – members of the public3

9

3

10

0

Collision rate within PMI’s fleet of vehicles per year (collisions per million km driven)
Proportion of manufacturing facilities with OHSAS 18001 and ISO 14001 certification4
Occupational illness frequency rate (OIFR) per 200,000 hours worked – PMI andcontracted employees
Number of markets with health and well-being committees

<0.30

1.01

0.91

0.87

<0.80 by
2022

91%

97%

98%

100% by2020

0.00270.0013

0

36

>40

55

1	We define a contracted employee as an employee who is under the direct supervision of PMI employees but employed by a temporary employment agency.
2	We define a contractor as a person employed or working on behalf of a third-party company contracted by PMI, who remains under the direct supervision of their employer rather than PMI and are often
involved in project-specific or outsourcing arrangements.
3 It is to our deep regret that we endured road traffic fatalities in 2019, including one PMI employee and 10 members of the public (read more on page 125).
4	Scope: manufacturing facilities producing more than 3 billion cigarette equivalents annually. The 2018 figure has been adjusted due to an internal reporting error.

Fair working conditions

2017

2018

2019

80,591

77,43573,542

Number of PMI full-time equivalent (FTE) positions

n/a

77,03971,795

Proportion of employees covered by Collective Labor Agreements

Number of PMI employees

67%

65%

63%

Total number of Collective Labor Agreements

80

81

80

Total number of countries with Collective Labor Agreements

35

35

35

180

Philip Morris International Integrated Report 2019

Pillar 3

Caring forthe people
we work with

PMI’s workforce at year-end 2019
Number of employees by employment contract (permanent and temporary), by gender

Women employed on a permanent contract

29,137

Women employed on a temporary contract

1,494

Men employed on a permanent contract

40,965Men employed on a temporary contract

1,946

Number of employees by employment contract (permanent and temporary), by region

Employees on a permanent contract in European Union region

18,167

Employees on a temporary contract in European Union region

2,272

Employees on a permanent contract in Eastern Europe region

6,786

Employees on a temporary contract in Eastern Europe region

171

Employees on a permanent contract in Middle East & Africa region, including PMI Duty
Free
Employees on a temporary contract in Middle East & Africa region, including PMI Duty Free

3,239
186

Employees on a permanent contract in South & Southeast Asia region

29,646

Employees on a temporary contract in South & Southeast Asia region

137

Employees on a permanent contract in East Asia & Australia region

4,365

Employees on a temporary contract in East Asia & Australia region

154

Employees on a permanent contract in Latin America & Canada region, and U.S.

7,899

Employees on a temporary contract in Latin America & Canada region, and U.S.

520

Number of employees by employment type (full-time and part-time), by gender

Women employed on a full-time contract
Women employed on a part-time contract

30,028603

Men employed on a full-time contract

42,667

Men employed on a part-time contract244

All data as of December 31, 2019. Presentation of information and data aligns with guidance of GRI standard 102-8 (2016).

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Diverse and inclusive working environment

Performance
metrics

181

2017

2018

2019

Proportion of female employees

41.6%

42.1%

41.7%

Proportion of management positions held by women1

34.4%

35.1%

36.1% At least 40%
by 2022

Proportion of female employees at different managerial levels1:• managers• directors• senior management

36.1%
27.9%
13.7%

36.6%
29.4%
15.2%

37.5%
31.2%
17.4%

Proportion of new hires in management positions that are women1

42.8%

40.6%

40.7%

50%

Proportion of new hires at junior levels that are women1

40.6%

40.4%

43.8%

50%

Proportion of promotions in management positions that are
women1

37.4%

37.8%

37.4%

2 (out of 20)

2 (out of 22)

2 (out of 25)

Number of women on PMI’s Company Management

10%

9%

8%

2 (out of 13)

3 (out of 12)

3 (out of 12)

15%

25%

25%

n/a

18.6%
71.6%
9.8%

17.3%
72.0%
10.7%

Number of nationalities among PMI’s employees

n/a

>100

126

Number of countries with affiliates with LGBTQ+ initiatives or
networks

n/a

25

27

Proportion of women on PMI’s Company Management
Number of women on PMI’s Board of Directors
Proportion of women on PMI’s Board of Directors
Proportion of employees at different age groups:• below 30• between 30 and 50• above 50 years old

Goal1	We have expanded the scope of our gender diversity data to cover approximately 95 percent of PMI’s total workforce. Other related data and previous years’ data have been restated accordingly.

Talent attraction, retention, and employability

2017

2018

2019

9.37%

11.51%

14.10%

Women employee overall turnover rate

7.72%

10.80%

15.54%

Employee voluntary turnover rate

3.96%

4.12%

4.53%

Employee overall turnover rate1

Spend for learning per employee (in USD)2
Proportion of employees covered by performance review3
Employee Net Promoter Score4

n/a

n/a

464

77.3%

77.0%

79.4%

n/a

n/a

Goal

+16 At least +30
by 20251	Our transformation journey as we mobilized to deliver our vision of a smoke-free future resulted in higher turnover in 2019. This, combined with our business strategy to close our skills gap, a number ofplanned restructures, and closure of some factories, contributed to the increase observed.
2 2019 figure only covers external vendor spend.
3 Data cover approximately 75 percent of PMI’s total workforce.
4	In 2019, we conducted a global survey to which over 34,000 employees (close to half our total workforce) responded. We measured the engagement of our workforce using the employee Net Promoter
Score (eNPS), following a methodology similar to that we use to measure consumer engagement. The score can range from -100 to +100. The 2019 Transformation survey will serve as a baseline throughwhich to track employee engagement.

182

Philip Morris International Integrated Report 2019

Pillar 3

Caring forthe people
we work with

Community support

2017

2018

2019

Number of social contributions supported by PMI(charitable donations/community investments)1

275

280

170
(145/25)

Number of partner organizations supported by PMI’s social contributions1

242

239

147

Number of countries where projects supported by PMI’s social contributions
were implemented

63

63

43

Number of direct beneficiaries of projects supported by PMI’s social contributions

n/a >300,000>467,000

Value of cash contributions (in millions USD)
(charitable donations/community investments)

29.5

28.3

17.0
(14.8/2.2)

Approximate value of in-kind donations (in ’000 USD)

175

260

205

Approximate value of management costs of PMI’s social contributions (in ’000 USD)2

n/a

n/a

650

Approximate total number of volunteer hours by PMI employees3

n/a

18,00016,700Approximate value of employee time spent on volunteering (in ’000 USD)3

n/a

500

430

1	The decline in value and number of social contributions in 2019 resulted from the decentralization of our policy approach and the elimination of the central budget that was previously allocated to themarkets on an yearly basis. As part of our policy changes we also introduced a distinction between charitable donations and community investments. Our charitable donations are now funded and initiatedby the markets while the community investments, focused on sustainability issues associated with our value chain, are now funded and managed by the business function leading the efforts to address theissue (e.g., child labor prevention programs in tobacco growing communities are now managed by our Leaf department). While these changes led to a reduction in both charitable donations and community
investments in this first year, we do expect to see an increase in community investments in coming years.
2 This indicator was introduced in 2019.
3	Data was initially collected in 2018 and covers volunteering during paid working hours. The decrease in 2019 is mainly driven by changes in Japan and Russia: PM Japan had a large volunteering event in2018 that did not take place in 2019, and PM Russia conducted a higher number of activities outside of working hours (with the purpose of involving employees’ family). We are currently finalizing a PMI
wide volunteering guideline, which will be rolled out in 2020 and that we expect will significantly boost employee volunteering.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work with

Performance
metrics

Protecting theenvironment

183

Pillar 4

Protecting theenvironment

2010 baseline

2017

2018

2019

CO2e scope 1 (metric tons)

Climate protection

443,186

388,384

408,162

397,210

Goal

PMI factories,
offices1, and fleet

CO2e scope 2 (metric tons)

470,864

241,355

175,785

158,672

PMI factories andofficesCO2e scope 1+2 (metric tons)

914,050

629,739

583,947

555,882CO2e scope 1 from fleet (metric tons)

143,148

119,588

114,936

111,400

PMI fleetCO2e emissions from vehicles (g CO2e
per km driven)

296

226

221

222

PMI fleet

Carbon neutrality
by 2030

Scope

PMI factories,
offices, and fleet

CO2e scope 3 (’000 metric tons)2

7,148

4,906

4,714

4,127

CO2e scope 1+2+3 (’000 metric tons)

8,062

5,536

5,298

4,682

Carbon in-setting credits (metric tons)

0

0

0

PMI factories,
offices, and fleet

Carbon off-setting certificates(metric tons)3

0

956

1,242

PMI factories,
offices, and fleet

Number of carbon-neutral factories

0

0

1

6,687

6,552

5,917

PMI value chain

CO2e scope 3 biogenic emissions(’000 metric tons)

n/a

3,442

2,438

PMI value chain

CO2e scope 1+2 absolute reduction
versus 2010 baseline5

31%

36%

39%

CO2e scope 1+2+3 absolute reduction
versus 2010 baseline5

31%

34%

42%

40% by 2030

PMI value chain

CO2e scope 1+2+3 intensity reduction
versus 2010 baseline

22%

25%

32%

30% by 2020

PMI value chain

CO2e intensity reduction in tobacco
curing versus 2010 baseline

38%

47%

61%

70% by 2020

PMI tobacco
supply chain

Proportion of flue-cured tobaccopurchased cured with renewable fuelsources (self-sufficient firewood andbiomass adoption)

36%

46%

51%

70% by 2020

PMI tobacco
supply chain

0% by 2020

PMI tobacco
supply chain

CO2e scope 1+2+3 intensity (kg per
million cigarettes equivalent)4

8,706

PMI value chain
Carbon neutrality
by 2050

All by 2030

30% by 2020
40% by 2030

PMI value chain

PMI factories

PMI factories,
offices, and fleet

60% by 2040

Proportion of Virginia tobaccopurchased cured with coal

(29% + 7%) (33% + 13%) (36% + 15%)
20%

15%

16%

184

Philip Morris International Integrated Report 2019

Pillar 4

Protecting theenvironment

Climate protection2010 baseline

2017

2018

2019

Goal

Scope

57,00076,00080,80080,000 by 2020

PMI tobacco
supply chain

8,025,559

8,896,274

9,353,222

9,456,576

PMI factories,
offices, and fleet

8.60

10.75

11.57

11.95

PMI factories,
offices, and fleet

5,597,766

5,988,022

5,819,072

PMI factories,
offices, and fleet

Fuel consumption from renewablesources (gigajoules)

44,38961,163

128,967

PMI factories,
offices, and fleet

Total electricity consumed (MWh)8

885,385899,706

959,723

PMI factories andoffices

Total electricity consumed that is fromrenewable sources (MWh)443,837

546,944623,940

PMI factories andoffices

50%

61%

65%

PMI factories,
offices, and fleet

53%

65%

72%

100% by 2025

A

A

A

A

Approximate total number of curingbarns upgraded since 2014
(cumulative)
Total energy consumption(gigajoules)6
Energy intensity (gigajoules per million
cigarettes equivalent)7
Fuel consumption from nonrenewable sources (gigajoules)

Proportion of electricity used andpurchased that is from renewablesources
Proportion of electricity used andpurchased that is from renewablesources
CDP Climate Change rating

0%

PMI factories

1	We include warehouses in PMI offices.
2	In 2019, we reviewed our carbon footprint model, taking into account more primary data from suppliers and updating our methodology, leading to more accurate figures for our scope 3 emissions. We haverestated our 2017 and 2018 data according to the new model. Other figures that include scope 3 emissions have also been restated.
3	2019 figure includes carbon off-setting certificates purchased in our factory in Klaipėda (see page 143) and our Operations Center in Lausanne (see page 68).
4	From 2019 onward, intensity is measured in CO2e per million shipped cigarettes equivalent. Our baseline and previous years’ data have been restated accordingly.
5	We report on our progress against our current science-based targets, which align with a 2-degree scenario: We committed to achieve an absolute reduction of our scope 1+2 emissions of 30% by 2020,
40% by 2030, and 60% by 2040; and to achieve an absolute reduction of our scope 1+2+3 emissions of 40% by 2030.
6	The 2018 figure has been adjusted due to an internal reporting error.
7	From 2019 onward, energy intensity is reported in gigajoules per million shipped cigarettes equivalent. Previous years’ data have been restated accordingly.
8	We have reviewed the calculation methodology for our electricity consumption to account for the electricity produced in our facilities, and we have restated previous years’ data accordingly. Other figuresthat include electricity have also been restated.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

185

Littering prevention1

2019

Number of anti-littering initiatives conducted

54

Number of affiliates with anti-littering strategy

31
31

Number of affiliates participating in World Cleanup Day

3,962

Number of participants in World Cleanup Day (PMI employees and other volunteers)

827,160

Number of cigarette butts collected during World Cleanup Day
1 These indicators were introduced in 2019.

Product eco-design and circularity

2017

2018

2019

Goal

Recycling rate of IQOS devices (weighted average)1

n/a

45%

61-79%

80% by 2025

Proportion of IQOS device sales volume covered by the CIRCLE program2

n/a

66%

39%

100% by 2025

Carbon footprint of PMI smoke-free products per user (kgCO2e/year)3

n/a

n/a

IQOS 3.0: 33
IQOS 3 MULTI: 32
IQOS MESH: 21.5

Proportion of packaging material that is recyclable4

94.4%

93.6%

93.5%

Proportion of packaging material that is renewable4

88.9%

88.3%

87.7%

95% by 2025

n/a

n/a

3%

15% by 2025

Reduction of packaging materials used versus 2018 baseline

100% by 2025

1	We established our two recycling CIRCLE hubs in 2018. Recycling rate: Depending on device type and processing facility (figures provided for product processed through CIRCLE hubs, varied by device
type, zero landfill, remainder to energy recovery or material loss).
2	We established our two recycling CIRCLE hubs in 2018. While we expanded the number of markets covered by CIRCLE in 2019, the decrease in coverage of sales volume is explained by IQOS growth
in markets not yet covered by the program.
3	Depends on device and assumes 20 heated tobacco units/day. Scope includes materials, manufacturing, use, and end-of-life, but excludes logistics.
4	While we continued our efforts to substitute or reduce the use of materials from non-renewable sources and non-recyclable materials in our packaging, the slightly decreasing trend in the past years
is driven by the volume mix evolution over this period of time.

Forest protection

2017

2018

2019

Goal

Proportion of tobacco purchased cured at no risk of deforestationof old-growth forests1

94%

90%

97%

100% by 202036%
46%(29%+7%) (33%+13%)51%(36%+15%)70% by 2020

Proportion of flue-cured tobacco purchased cured with renewablesources (self-sufficient firewood and biomass adoption)
Approximate cumulative number of curing barns upgraded since 2014
CDP forest rating

57,00076,000n/a

B80,800 80,000 by 2020
A-

1	The category “old-growth forests” includes both primary (untouched) forests and secondary high conservation value forests. Old-growth forests are living, functional ecosystems that need protection.
We use our Monitoring and Verification Framework for Sustainable Curing Fuel to systematically monitor the sustainability of all fuel types used in our tobacco supply chain.

A

186

Philip Morris International Integrated Report 2019

Pillar 4

Protecting theenvironment

Water stewardship2010 baseline

2017

2018

2019

Total amount of water withdrawn (’000 m3)

4,998

4,152

4,371

4,008

Goal

PMI factories

Total amount of water consumed (withdrawn
minus discharged) (’000 m3)

2,449

1,672

1,958

1,883

PMI factories

Water ratio (water withdrawn in m3 per million
cigarettes equivalent)1

5.35

4.83

5.14

4.74

4.4 by 2020
3.1 by 2022

Scope

PMI factories

Number of fines2

0

0

1

PMI factories

Number of spills2

0

0

1

PMI factories

Cumulative number of local water risk
assessments performed

n/a

8

15

Quantity of water used per ton of tobacco
produced (m3)

n/a

266

330

Tobaccosupply chain

Total amount of water used (’000 m3)

n/a

119,600

138,200

Tobaccosupply chain

A

B

A

CDP water rating

22 by 2020

Tobaccosupply chain

A

1 From 2019 onward, water intensity is measured in m³ per million cigarettes produced equivalent. Our baseline and previous years’ data have been restated accordingly.
2	Last year in the waste water treatment plant in Yangsan Factory of Philip Morris Korea, some of the waste water was accidentally drained to rainwater due to operational mistake of the contracted service
provider. PMI informed the authorities, implemented preventive measures, and paid the corresponding fine.

Biodiversity

2017

2018

2019

Goal

Proportion of tobacco purchased without detection of residues
attributable to the use of WHO Toxicity Class 1 crop protection agents1

99%

100%

n/a

100% by crop year
2018

Proportion of tobacco purchased without detection of residues
attributable to the use of HHPs, as defined by FAO and WHO guidelines
in 20161

88%

89%

n/a

100% by crop year
2020

1 The 2019 crop season data were not available at the time of the publication of this report.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work with

Waste reduction1

Protecting theenvironment

Performance
metrics

187

2010 baseline

2017

2018

2019

143,596

140,316

134,367

131,104

Total amount of waste generated (metric tons)
Proportion of total waste generated that is recycled

79%

81%

84%

84%

Proportion of total waste generated that is incinerated
with energy recovery

9%

12%

12%

12%

Proportion of total waste generated that is disposed tolandfill

6%

4%

4%

Proportion of total waste generated that is incinerated
without energy recovery

<1%

<1%

<1%

Amount of hazardous waste generated (metric tons)

1,357

1,423

1,486

Proportion of hazardous waste generated that is recycled

37%

41%

33%

Proportion of hazardous waste generated that isincinerated with energy recovery

44%

44%

49%

Proportion of hazardous waste generated that is disposedto landfill

9%

6%

8%

Proportion of hazardous waste generated that isincinerated without energy recovery

10%

9%

10%

1 The scope of waste data covers factory waste but excludes marketing and project waste.

Goal

85%

188

Philip Morris International Integrated Report 2019

Glossary
and acronyms

Aerosol – Gaseous suspension of finesolid particles and/or liquid droplets

GPP – Global Privacy Program

ALP – Agricultural Labor Practices

HCV – High conservation value

AWS – Alliance for Water Stewardship
CDP – Carbon Disclosure Project
CHTP – Carbon-Heated Tobacco ProductIn this report, “PMI,” “we,” “us,” and “our”
refers to Philip Morris International Inc.
and its subsidiaries.

CLAs – Collective Labor Agreements
Combustible products – The term PMI uses
to refer to cigarettes and OTP, combined

GTS – Green tobacco sickness
Heated tobacco product or HTP – A
manufactured tobacco product that delivers
a nicotine-containing vapor (aerosol), without
combustion of the tobacco mixture
Heated tobacco units or HTUs – The
term PMI uses to refer to heated tobacco
consumables, which for PMI include thecompany’s HEETS, HEETS Creations, HEETS
Marlboro and HEETS FROM MARLBORO,
defined collectively as HEETS, as well as
Marlboro HeatSticks and Parliament HeatSticks

Reduced-risk products (RRPs) or smoke-free
products – Products that present, are likely topresent, or have the potential to present lessrisk of harm to smokers who switch to theseproducts versus continued smoking. PMI has arange of RRPs in various stages of development,scientific assessment and commercialization.
PMI’s RRPs are smoke-free products that
produce an aerosol that contains far lower
quantities of harmful and potentially harmful
constituents than found in cigarette smoke

Trademarks: Trademarks and service
marks in this report are the registeredproperty of, or licensed by, the subsidiaries
of Philip Morris International Inc., and are
italicized or shown in their logo form.

Combustion – The process ofburning a substance in oxygen,producing heat and often light
EHTS – Electrically Heated Tobacco System

HHPs – Highly hazardous pesticides

In this report and in related communications,the term “materiality,” “material,” andsimilar terms, when used in the context
of economic, environmental and social
topics, are defined in the referenced
sustainability standards, and are notmeant to correspond to the concept ofmateriality under the U.S. securities laws
and/or disclosures required by the U.S.
Securities and Exchange Commission.

E-liquids – Refers to a liquid solutionthat is used in/with e-cigarettes. E-liquids
contain different levels of nicotine in a
propylene glycol and/or vegetable glycerinbased solution with various flavors

HPHCs – The harmful or potentially harmful
constituents which have been identified as
likely causes of tobacco-related diseases
Illicit trade – Refers to domestic
non-tax paid products

EPR – Extended Producer Responsibility

IPM – Integrated Pest Management

Smoke-free product consumables – The
term PMI uses to refer to heated tobacco
units used with the IQOS heat-not-burnproduct, and cartridges containing e-liquids
that are used for e-vapor products

Estimated users who have stopped smoking
and switched to IQOS – For markets where
IQOS is the only heat-not-burn product, this isdefined as the daily individual consumption of
PMI HTUs representing the totality of their daily
tobacco consumption in the past seven days. For
markets where IQOS is one among other heatnot-burn products, this is the daily individual
consumption of HTUs representing the totalityof their daily tobacco consumption in the pastseven days, of which at least 70% are PMI HTUs

IPS – Integrated Production System

STP – Sustainable Tobacco Program

KPIs – Key performance indicators

SUP – Single-use plastics

LMICs – Low and middle income countries

THS – Tobacco Heating System

LTI – Lost Time Injury

Tons – “Tons” equates to “metrictons” throughout this report

This report contains references and links
to websites operated by third parties.
These references are provided as aconvenience to you and as an additional
avenue of access to the information
contained in those sources; they should
not be viewed as an endorsement by usof the content of these references andlinked sites or opinions of their authors.

CPA – Crop protective agent

EVA – Economic value added
E-vapor product – Electrical product thatgenerates an aerosol by heating a nicotine
or non-nicotine containing liquid, such as
electronic cigarettes (or “e-cigarettes”)
FAO – Food and Agriculture
Organization of the United Nations
FCTC – Framework Convention
on Tobacco Control

MRTP – Modified Risk Tobacco Product, theterm used by the U.S. FDA to refer to RRPs
MRTPA – Modified Risk Tobacco ProductApplication under section 911 of theFederal Food, Drug, and Cosmetic Act
NGOs – Non-governmental organizations
OECD – Organisation for Economic
Co-operation and Development
OTP – Defined as "other tobacco products,"
primarily roll-your-own and make-your-own
cigarettes, pipe tobacco, cigars and cigarillos,
and does not include reduced-risk products
P&C – People and Culture

GAP – Good Agricultural Practices

PMI Regions – Effective January 1, 2018, PMI
began managing its business in six reporting
segments as follows: the European Union Region(EU); the Eastern Europe Region (EE); the Middle
East & Africa Region (ME&A), which includes PMI
Duty Free; the South & Southeast Asia Region(S&SA); the East Asia & Australia Region (EA&A);
and the Latin America & Canada Region (LA&C)

GDPR – General Data Protection Regulation

PPE – Personal protective equipment

FDA – U.S. Food and Drug Administration
FTs – Field technicians monitoring
the implementation of PMI’s Good
Agricultural Practices and Agricultural
Labor Practices programs

GHG – Greenhouse gas

R&D – Research and development
RSP – Responsible Sourcing Principles
SDGs – Sustainable Development Goals
Smoke – A visible suspension of solid
particles, liquid droplets, and gases inair, emitted when a material burns

Total IQOS users – The estimated number oflegal age (minimum 18 years) IQOS users thatused PMI HTUs for at least 5% of their daily
tobacco consumption over the past seven days
Total shipment volume – The combined
total of cigarette shipment volume
and HTU shipment volume
TPSAC – Tobacco Products
Scientific Advisory Committee
UNGPs – United Nations Guiding Principles
on Business and Human Rights
WASH – Water access, sanitation, and hygiene
WHO – World Health Organization

Overview

Innovating for
better products

Forwardlooking andcautionary
statements
This report contains projectionsof future results and otherforward-looking statements.
Achievement of future results
is subject to risks, uncertainties
and inaccurate assumptions.

Operatingwith excellence

Caring for thepeople we work withIn the event that risks or uncertainties
materialize, or underlying assumptions
prove inaccurate, actual results could
vary materially from those containedin such forward-looking statements.
Pursuant to the “safe harbor” provisionsof the Private Securities Litigation ReformAct of 1995, PMI is identifying importantfactors that, individually or in the aggregate,
could cause actual results and outcomes todiffer materially from those contained in any
forward-looking statements made by PMI.
PMI’s business risks include: excise
tax increases and discriminatory tax
structures; increasing marketing andregulatory restrictions that could reduce
our competitiveness, eliminate our ability
to communicate with adult consumers,
or ban certain of our products; healthconcerns relating to the use of tobaccoand nicotine-containing products andexposure to environmental tobaccosmoke; litigation related to tobaccouse; intense competition; the effects ofglobal and individual country economic,
regulatory, and political developments,
natural disasters and conflicts; changes inadult smoker behavior; lost revenues as aresult of counterfeiting, contraband, andcross-border purchases; governmental
investigations; unfavorable currency
exchange rates and currency devaluations,and limitations on the ability to repatriate
funds; adverse changes in applicablecorporate tax laws; adverse changes in
the cost and quality of tobacco and otheragricultural products and raw materials; andthe integrity of its information systems andeffectiveness of its data privacy policies.
PMI’s future profitability may also
be adversely affected: should it beunsuccessful in its attempts to produce
and commercialize reduced-risk products
or if regulation or taxation do notdifferentiate between such products andcigarettes; if it is unable to successfully
introduce new products, promote brandequity, enter new markets or improve
its margins through increased prices andProtecting theenvironment

Performance
metrics

productivity gains; if it is unable to expand
its brand portfolio internally or throughacquisitions and the development ofstrategic business relationships; or if it isunable to attract and retain the best global
talent. Future results are also subject tothe lower predictability of our reducedrisk product category’s performance.
The COVID-19 pandemic has createdsignificant societal and economic disruption,and resulted in closures of stores,
factories and offices, and restrictions on
manufacturing, distribution, and travel, allof which will adversely impact our business,
results of operations, cash flows, andfinancial position during the continuation of
the pandemic. Our business continuity plansand other safeguards may not be effective
to mitigate the results of the pandemic.
While much of the COVID-19 pandemic andits effect on our business is still unknown,currently, significant risks include ourdiminished ability to convert adult smokers
to our RRPs as store closures preclude
in-person guided trials, significant volume
declines in our duty-free business andcertain other key markets, disruptions ordelays in our manufacturing and supply
chain, increased currency volatility, anddelays in certain cost saving, transformation,and restructuring initiatives. Our businesscould also be adversely impacted if key
personnel or a significant number of
employees or business partners become
unavailable due to the COVID-19 outbreak.
The significant adverse impact of COVID-19
on the economic or political conditions inmarkets in which we operate could resultin changes to the preferences of our adultconsumers and lower demand for our
products, particularly for our mid-price or
premium-price brands. Continuation of thepandemic could disrupt our access to thecredit markets or increase our borrowing
costs. Governments may temporarily beunable to focus on the development ofscience-based regulatory frameworks forthe development and commercializationof RRPs or on the enforcement or

implementation of regulations that are
significant to our business. In addition,
messaging about the potential negative
impacts of the use of our products on
COVID-19 risks may lead to increasingly
restrictive regulatory measures on thesale and use of our products, negatively
impact demand for our products, thewillingness of adult consumers to switch
to our RRPs and our efforts to advocate
for the development of science-based
regulatory frameworks for the development
and commercialization of RRPs.
The impact of these risks also depends
on factors beyond our knowledge orcontrol, including the duration and severityof the outbreak and actions taken tocontain its spread and to mitigate its
public health effects, and the ultimate
economic consequences thereof.
PMI is further subject to other risks
detailed from time to time in its publicly
filed documents, including the Form 10-Q
for the quarter ended March 31, 2020.
Aspirational targets do not constitutefinancial projections. PMI cautions thatthe foregoing list of important factors is
not a complete discussion of all potential
risks and uncertainties. PMI does notundertake to update any forward-looking
statement that it may make from time
to time, except in the normal courseof its public disclosure obligations.

189

Design and production
Friend Studio
www.friendstudio.com
Headquarters
Philip Morris International Inc.
120 Park Avenue
New York, NY 10017-5579
USA

Operations Center
Philip Morris Products S.A.
Avenue de Rhodanie 50
1007 Lausanne
Switzerland

www.pmi.com

www.pmi.com

Photography
George Brooks
www.georgebrooks.net
Printer
Baudat imprimerie
www.baudat-favj.ch

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