Sustainability
Report 2017

1

Philip Morris International Sustainability Report 20171

About PMI
Philip Morris International
Inc. (PMI) is a leadinginternational tobaccocompany with a diverse
workforce of 80,600
people across the globe.

In 2017, our products were sold inover 180 markets, and we operated
46 production facilities globally.
We are building our future on
smoke‑free products that area much better consumer choicethan continuing to smoke cigarettes.
Through our multidisciplinary,state‑of-the-art capabilities in
product development and scientificsubstantiation of the reduced harm
potential of our new products,
we aim to ensure that our smoke-free
products meet adult consumer
preferences and rigorous regulatory
requirements. Our vision is thatthese products replace cigarettes
as soon as possible, to the benefit ofadult smokers, society, our company
and our shareholders.

For more information, see www.pmi.com
and www.pmiscience.com.

Raw materials and other supplies
Leaf

Other

+350,000

50,000Farmers contracted by
PMI and our suppliersin 28 countries

Suppliers worldwide

13

90%

Of the tobacco we purchaseis through direct contracts(by our leaf operations
or our tobacco suppliers)

Number of languages inwhich PMI’s Responsible
Sourcing Principles
are available

2,800

Field technicians providing
support to contracted
tobacco farmers for
GAP implementation

Manufacturing and business facilities

80,600

46

34.4%

31%

Employees worldwide

Employees atmanagerial level
are women

67%

R&D

Employees coveredby collective labor
agreements

2

Research facilities+400

World-class scientists,
engineers andtechnicians hired tosupport our best‑in‑class R&D capability
since 200874%

Of our total R&D
expenditure isdedicated to oursmoke‑free vision+2,900Patents granted
worldwide related
to our smoke‑freeproducts

4.9%

Employee voluntary
turnover

Manufacturing
facilities globally

CO2e scope 1+2
reduction since 2010

Sustainability at PMICreating value at PMI
For PMI, sustainability means creating long-term value
while minimizing the negative externalities associatedwith our products, operations and value chain.
From the more than 350,000 farmers from which wesource tobacco right up to the approximately 150 million
consumers of PMI products, we have an important impact
on the communities and the environment around us,which we are committed to address. We cannot achieve
this alone.
The engagement beyond our own operations is key,as this is where the most significant impacts take place.
While operating in a highly regulated environment,
we strive to go beyond mere compliance to achievea sustainable smoke-free future.

RetailConsumers

$6bn
5.9m

Retailers selling
PMI products

77,000Distributors
and wholesalers

226

1.01

150m

Fleet collision rate(vehicle collisions
per million km driven)

Consumers of PMI
combustible products

+180

100%

Markets where PMI
products are soldTracking andtracing (mastercase level)+4.7m

Adult consumers who
have stopped smoking
cigarettes and madethe change to IQOS

Net earnings$72bn
Excise taxes on
PMI products

10,000
Smokers switching
to IQOS every day

CO2e emissions fromvehicles (g CO2e
per km driven)

Good Agricultural Practices (GAP)& Agricultural Labor Practices (ALP)

AnimalwelfareMarketing Principles Good
Conversion Practices

Responsible Sourcing
Principles

Conﬂictminerals

Anti-diversion
practices and tools

Guidebook for Success(PMI Code of Conduct)

Human Rights
Commitment

Engagement
Principles

Philip Morris International Sustainability Report 20171

Contents

Sustainability at PMI

Transforming
our business

Letter from the CEO

4

Our approach to sustainability

6

Sustainability governanceand management

6

Defining our focus

7

Stakeholder engagement

8

Our work and the UN Sustainable
Development Goals (SDGs)
9
SDGs and UNGC
cross-reference index

10

Driving operational
excellence

Replacing cigarettes withsmoke-free products

12

Our ambition fora smoke-free future

14

The rationale for ourbusiness vision

16

Scientific assessment of
our smoke-free products

16

Encouraging scrutinyof our science throughtransparency and engagement

18

Investing in production capacity
for smoke-free products18
Our commercialization efforts
behind smoke-free products

19

Our view on tobacco regulation 21
Business transformation metrics 24

2

Philip Morris International Sustainability Report 2017

Ethics and compliance26

Responsible marketing

28

Interacting with governments

29

Our approach to corporate tax

29

Data protection

29

Human rights

31

Tackling illicit tobacco tradeand related crimes

32

Responsible supply chain

36

Responsible Sourcing
Principles (RSP)36

Good Agricultural
Practices (GAP)

38

The data and information, including
the infographics, cover the full year2017 and all our operations, unlessexplicitly mentioned.

This report has been reviewed by
PMI’s Senior Management team,including our Chief Executive Officer,
Chief Financial Officer, Chief Operating
Officer and our President, External Affairs& General Counsel.
PricewaterhouseCoopers SA (PwC)
has assured our transformation metrics
on page 25.
We welcome your feedback on this reportby emailing us at: sustainability@pmi.com
This blue tint indicates the stories that
relate to our business transformation.

Managing oursocial impact

Reducing ourenvironmental footprint

Transforming our businessWe are happy to share our third
Sustainability Report. By publishing
this report closer to the release of our
Annual Report 2017, we aim to provide
a more comprehensive overview of ourcompany and sustainability efforts earlier
in the calendar year. This report builds
on the PMI Sustainability Report 2016,
issued in September 2017. As we progresson our sustainability reporting journey,
we will provide deeper insights into
our performance.

The report is structured around theimportant topics of our sustainability
efforts, and our disclosures are mapped
against the Ten Principles of the United
Nations Global Compact (UNGC) and theUnited Nations Sustainable Development
Goals (SDGs). See page 10.

Sustainability at PMI

About this report

Concluding remarks
Driving operational excellence

Working at PMI

40

54

41

Science-based targets
and renewables

54

Labor relations

43

Rewarding our employees

43

Greening our vehicle fleet

55

Living wage

43

Health and well-being

43

Safety in the workplace

46

41

Inclusion and diversity

Agricultural labor practices

48

Working with tobacco
farmers to reduce greenhousegas emissions

56

Water: stewardship acrossand beyond our operations

58
58

Conserving biodiversity andcombatting deforestation

59

Biodiversity

59

64

Forward-looking and cautionary
statements
65
Annex 1: Overview of marketing
principles for combustible
products
66
Annex 2: Overview ofengagement principles

68

Overview of our sustainability
performance

69

Glossary and acronyms

73

Notes

74

Reducing our environmental footprint

Water stewardship in tobacco
agriculture

Next steps

Managing our social impact

Climate change –a science-based approach

Transforming our company
cultureBusiness Transformation Metrics –Independent Assurance Report75
Key developments since 2000

76

Responsible managementof chemicals for crop protection 60
60

Waste management

60

Littering

61

Philip Morris International Sustainability Report 2017Concluding remarks

Deforestation3

Letter from the CEO
Dear reader,
In my mind, sustainability encompasses
four aspects. First, companies need toreduce to the largest extent possible any
harm associated with their products.
Being respectful of people throughout
the value chain and preserving theenvironment are the next two pillars.
Last, but not least, sustainability requires
operational excellence.
My ambition is to make PMI a true
leader in sustainable business practices.
We therefore need to excel in all of thesefour areas, starting first and foremost
with our products.
Smoking cigarettes causes serious disease,and the best way to avoid the harm ofsmoking is never to start, or to quit.
But much more can be done to reduce
health risks for the world’s 1.1 billion men
and women who would otherwise
continue to smoke. While nicotine is
addictive, it is the smoke generated byburning tobacco that is the principal
problem. Through groundbreaking
research, we have developed a range ofsmoke-free products that are enjoyablefor smokers and have the potential tosignificantly reduce health risks whencompared to smoking.
I am often asked when we will stop sellingcigarettes. Our objective is to reach thismoment as soon as possible by replacing
cigarettes with smoke-free products.
Last year, smoke-free products alreadyrepresented over 4% of our shipment
volume and around 13% of our net
revenues, excluding excise taxes, in justtwo years since commercialization.
To further accelerate this transformation,
we continue to shift resources towards
smoke-free products. In 2017, 39% of
our global commercial expenditure and
74% of our global R&D expenditure
were spent on reduced-risk products.1
The results of our efforts exceeded ourown expectations: By year-end 2017,
over 4.7 million adult smokers had stopped
smoking cigarettes and made the change
to IQOS, our main smoke-free product.
And 10,000 more are switching every day.

Clearly, we cannot achieve a smoke-free
future alone. It depends on a number offactors out of our direct control, mainly
support from regulatory and public healthauthorities, that will influence the paceand scale of switching away fromcombustible products. We are committed
to continue leading the industry in thismassive transformation, and we call on
all stakeholders to work together towards
a smoke-free future.
I am also pleased with the way wecontinue making progress on our social
sustainability agenda. For example, with34.4% of management positions held by
women, we are on track to reach our goalof 40% by 2022. Another example is theroll-out of our Responsible Sourcing
Principles that will help to identify andmanage labor issues in our non-agricultural
supply chain, which is becoming
increasingly important as we transform
our company from a cigarette maker
to a smoke-free technology leader.
But challenges remain, in particular oncomplex social issues such as child laborand living conditions for migrant workers
in our tobacco supply chain. We aredetermined to continue to address theseissues in cooperation with civil society
partners and governments, as you canread about in our case study on Mexico.
Last year's environmental milestones
include the fourth consecutive year
in which PMI was recognized in CDP’s
Climate A-List and the first time that
our water programs achieved CDP A-list
ranking. PMI is one of 25 companies tobe A-listed for both climate and water,
placing us in the top 1% of the 3,000
corporations participating. We
acknowledge that the transformationof our company towards smoke‑freeproducts invariably brings along newchallenges we need to address,
in particular increased use of waterand energy at the manufacturing level,
and the management of electronic waste.

As for operational excellence, we remain
focused on securing the integrity of our
supply chain through our efforts to tackle
illicit trade in tobacco products. We also
pushed transparency further by publishing
our approach to corporate tax and data
privacy, as well as an overview of ourMarketing Principles and our Principles forEngagement with third-parties. These lasttwo policies relate to business practices
for which we receive frequent criticism
from tobacco control advocates andothers. We therefore urge concerned
stakeholders to provide us objective
feedback on these policies and examples
of practices that they feel we needto change.
To benchmark ourselves and learn fromother companies, PMI joined the United
Nations Global Compact (UNGC) in 2015.
We participated in many of the UNGC
Local Networks, not only to learn, but also
to contribute and share our experiences,talents and resources on joint initiatives.
We were encouraged by the positive
reactions in many Local Networks to ouractive participation, once initial skepticism
towards our company was overcome. I was
therefore disappointed by the UNGC’s
decision last year to exclude all tobaccocompanies from its membership.
The UNGC’s decision does not change ourcommitment to implement its principles.
Nor does it alter my conviction that asmoke-free world is achievable and,indeed, a better world. However, in mymind, recognizing and encouraging thosewilling to disrupt their existing businessto replace it with a more sustainable one,and thus lead sector transformation,is the fastest way to meet global
societal expectations, rather thanpracticing exclusion.
I am pleased to share with you this reportoutlining our work to transform ourcompany. We are committed to continue
operating responsibly, while successfully
delivering solutions not only to ourconsumers, employees and shareholders,
but also to society in general.
I cordially invite you to comment,challenge, and guide us as we continuously
seek to improve the sustainability of ourbusiness and contribute to the UN
Sustainable Development Goals.

André Calantzopoulos
Chief Executive Officer

4

Philip Morris International Sustainability Report 2017

Sustainability at PMI

My ambition is to make PMI a true leader in sustainablebusiness practices. We therefore need to excel in many
areas, starting first and foremost with our products.

Philip Morris International Sustainability Report 20175

Sustainability at PMI
Our approachto sustainability
To us, sustainability is about creating
long-term value while minimizing thenegative externalities associated with
our products, operations, and value chain.

Our sustainability strategy is a key elementof PMI’s overall business strategy and is
structured around four pillars whichenable our vision of a smoke-free future:——Transforming our business;——Driving operational excellence;——Managing our social impact; andEach pillar encompasses key topics
addressed in this report. They cover
specific programs, management
approaches, activities, processes, goals
and Key Performance Indicators (KPIs),
which are managed throughout thecompany by the relevant functions
and business operations.

——Reducing our environmental footprint.

Smoke-free future

Transforming our business

Managing our social impact

Research & Development

Driving operational
excellence

Health, safety and well-being

Reducing ourenvironmental footprint

Product innovation

Ethics and compliance

Labor relations

Climate change

Sustainable growth

Supply chain management

Inclusion and diversity

Biodiversity

Value chain transformation

Responsible marketing

Talent managementand development

Water

Sustainability management
Human rights

Agricultural Labor Practices (ALP)

Waste management

Illicit trade prevention
Stakeholder engagement
Corporate tax

Sustainability governanceand management
PMI’s Board of Directors believes
that environmental, social, andgovernance (ESG) factors relevantto the company’s business are criticalto PMI’s long-term success.
The Board’s sustainability oversightwas more formally established at the
beginning of 2018 when its Nominating
and Corporate Governance Committee
was given the mandate to oversee thesustainability strategy and performance,
and to advise the Board on sustainability
matters. Part of the Board’s oversightis a focus on management’s efforts toenhance shareholder value responsibly
and sustainably.

6

Our Senior Management Team
(Management Board) is regularly reviewing
sustainability matters – strategy,
key programs, and budget – througha cross-functional representation,
coordinated by the Sustainability Team.
From an operational perspective,
the Sustainability Team manages andcoordinates our sustainability work
across PMI functions and regions seeking
to ensure it is embedded at all levels of
the organization. Finally, we are creating
three cross-functional working groups
to manage environmental, social andreporting matters that are overseen
by committees composed of senior
function heads.

Philip Morris International Sustainability Report 2017

Led by the Vice President, Social &Economic Affairs, who reports to the
President, External Affairs & GeneralCounsel, a member of PMI’s Senior
Management Team, the Sustainability
Team has evolved over the past years
to ensure our company is equippedwith the relevant know-how andexpertise in view of the changing
nature of our business.

In 2016, we worked with Business forSocial Responsibility (BSR) to identify
the areas that are most significant toboth our business sustainability andto our stakeholders and prioritized them.
That analysis also highlighted areasof opportunity and risk, emerging
themes, and gaps for management action.
The analysis consisted of a structured
review and engagement process, carriedout by BSR and involving PMI’s functional
leaders and subject matter experts
as well as external stakeholders.
It considered both our current businessand changes driven by our vision ofa smoke-free future.
The analysis helped us to focus onwhere we need to prioritize and allocate
resources to mitigate negative impacts
and create opportunities for wider
societal value, with product harm
reduction the fundamental premiseof our strategy.
We plan to update this analysis in 2018
and share the results in our 2018
Sustainability Report.
The results of the 2016 analysis were
sorted into four categories as follows:

Fundamental to our business strategy
Three areas are fundamental to thesustainability of PMI’s business strategy:——Product Innovation for Substantial
Harm Reduction: Continued recognitionof the health impacts of our products
and the prioritization and investment
in reducing or eliminating those impacts
through innovation and developmentof products that can substantiallyreduce individual risk and population
harm when compared to cigarettes;——Public Health Policy and Research:
Our role and proactive approachin supporting public health and harm
reduction policies and research; and——Respect for Human Rights:
Understanding, due diligence,
and actions to respect human rights
throughout our global operationsand value chain.

Credibility and responsibility
The analysis also identified aspects thatare critical to building the credibility
and engagement with our stakeholders
required for our business transformation,
particularly the need to substantiate ourcommitments, demonstrate transparency
and consistency in our approach, andmaintain the highest standards in ourpolicies, practices and actions. This also
includes ensuring that we continue tomarket our products in a responsibleway – and only to adult consumers –and being even more transparent in
how we advocate on policy issues related
to our products, including taxation
and regulation.
——Corporate Governance and Ethics:
Promotion of the highest standardsof compliance and integrity acrossour global operations and value chain.
Clear alignment of our public policy
advocacy with our core strategy
and commitment to stakeholders;——Responsible Marketing and Youth
Smoking Prevention: Strive to ensurethat we continue to market our
products responsibly and only toadult consumers; and——Transparency and Reporting:Disclosure of our significant
sustainability performance risks andopportunities in a clear, comparable
and accessible manner.

Turning strategic risks into
opportunities——Good Agricultural Practices: Actions
to ensure tobacco farmers have accessto the information, systems and tools
needed to be successful businessowners who minimize the environmental
impacts of their activities and provide
good working conditions on their farms;——Climate Change Mitigation and
Adaptation: Efforts to reducegreenhouse gas emissions and prepare
for the effects of climate change in ouroperations and supply chain, including
water stewardship actions; and——Post-Consumer Waste: Actions tominimize impacts through productdesign, waste management programs
and recycling where possible. Increasing
our efforts to prevent littering throughconsumer education.

Underpinning our approach
Governance, product, environmental andemployee-related aspects were identified
as being important for our continuous
improvement efforts. Many are describedin this report and include:——Employee engagement and well-being,labor relations, workplace health andsafety, inclusion and diversity, and talent
recruitment and management;——Fighting illicit trade in tobacco products;——Good laboratory and clinical practices
in our R&D efforts; and——Good environmental managementof our operations.

We identified additional areas from a risk
management perspective, including good
agricultural and labor practices in tobacco
farming and the need for climate change
mitigation and related action throughout
the value chain. We also need to anticipate
and manage the supply chain risks related
to our non-tobacco materials, especiallyas our product portfolio now increasingly
includes electronic devices. Our ambition
is to turn these strategic risks into
opportunities to add value.
——Responsible Sourcing of Non-Tobacco
Materials: Actions to identify andtrace non-tobacco materials to origin,and source them in a responsible
and sustainable manner (including
electronics);——Agricultural Labor Practices: Actions
to eliminate all forms of labor abuses
and to achieve safe and fair working
conditions on tobacco farms;

Philip Morris International Sustainability Report 20177

Sustainability at PMI

Defining our focus

Stakeholder engagement
As we progress towards a smoke-free
future, the trust of our stakeholders is
key to our success. We engage withstakeholders on an ongoing basis in a
number of ways. In doing so, we will be

guided by AccountAbility’s Stakeholder
Engagement Standard: AA1000.
Due to the highly regulated natureof our business, we have also
implemented Engagement Principles
found on page 68 of this report.

The graph below highlights our mainstakeholders per category.

Stakeholders
Employees

Bcomusine
mu ss
nit
y

&
ers rsrm rkeFa mworfaSc
com ienti
mu ﬁc
nit
y

s&
tor lderssve oIn reh
a
sh

PMI

Media

Local
communities
Su
p

y
iet
oc
il s

pli
ers

Ci v

Re
go gulave to
rnm rs &ent
s8Philip Morris International Sustainability Report 2017

Adult
consumers

rs
ile
a
t
Re

Sustainability at PMI

Our work and the UN Sustainable Development Goals (SDGs)
We are committed to the SDGs and have adopted a three-pronged approach to help
make them a reality. We have prioritized our work where we can have the greatest
impact. As stakeholder expectations around the SDGs evolve, we will further refine
our work and reporting on how we contribute to the goals through our business vision
and across our operations and value chain.
Taking decisive action where we have the greatest impact
SDG 3: Smoking cigarettes
causes serious disease.
By replacing cigarettes
with less harmful alternatives
we can significantly reduce
the negative impact of our
products on individuals
and society.

This report’s section on“Transforming our business”
describes in detail how ourbusiness vision aligns withthis SDG.

Taking ownership where we can provide a substantial contribution

SDG 2: Through good
agricultural practices and crop
diversification we can help
to improve the productivity
and food security ofsmallholder farmers.

SDG 8: We ensure goodworking conditions for all our
employees and can play a rolein promoting good working
conditions for thousands ofworkers throughout our
supply chain.

SDG 12: We improve thelife-cycle impacts of our
products. From theenvironmental impacts of
tobacco growing, to efficient,
low-carbon, manufacturing,and litter prevention andrecycling programs.

SDG 16: Our efforts to combat
illicit trade in tobacco products
challenge the perception thatillegal tobacco trade is a
victimless crime without links
to funding terrorism and otherserious offences.

Aligning our practices with the overall goals, even where our business has less impact

We certainly care about all other SDGs. Nevertheless, our business has very little impact on certain
SDGs, and therefore we can only make a relatively modest contribution to these global objectives
at this stage.
The table on the next page provides an overview of how our activities and programs relate
to the 17 Sustainable Development Goals and the 10 principles of the UN Global Compact.

Philip Morris International Sustainability Report 20179

SDGs and UNGC cross-reference index

Page
reference

Transforming our business
Replacing cigarettes with smoke-free products

See pages 12 to 25

Driving business excellence
Ethics and compliance

See pages 26 to 27

Responsible marketingSee page 28

Interacting with governments

See page 29

Our approach to corporate tax

See page 29

Data protection

See page 29

Human rights

See page 31

Tackling illicit tobacco trade and related crimes

See pages 32 to 35

Responsible Sourcing Principles (RSP)

See pages 36 to 37

Good Agricultural Practices (GAP)

See pages 38 to 39

Managing our social impact
Working at PMI

See page 40

Inclusion and diversity

See pages 41 to 42

Labor relations & living wage

See page 43

Safety, health and well-being

See page 43

Reducing our environmental footprint
Climate change

See pages 54 to 57

Water

See page 58

Conserving biodiversity and combatting deforestation

See pages 59 to 60

Waste management

See pages 60 to 61

10

Philip Morris International Sustainability Report 2017

Sustainability at PMI

UNGC
Principles

10

10
10

1, 2, 4, 5, 6
10
3, 4, 5, 6, 10
3, 4, 5, 6

3, 4, 5
6

7, 8, 97, 8, 97, 8, 97, 8, 9

Philip Morris International Sustainability Report 201711

Transforming our businessA cigarette manufacturing line (on the left-hand side) and aheated tobacco unit manufacturing line (on the right-hand side)at our factory in Neuchâtel, Switzerland

Replacing cigarettes withsmoke-free products
In 2017, PMI manufactured and shipped
791 billion cigarettes and othercombustible tobacco products and36 billion smoke-free products, reachingapproximately 150 million adult consumers
in more than 180 countries.
Smoking cigarettes causes serious
disease. Smokers are far more likely
than non-smokers to get heart disease,lung cancer, emphysema, and otherdiseases. Smoking is addictive, and it
can be very difficult to stop.
The best way to avoid the harms ofsmoking is never to start, or to quit.
But much more can be done to improve
the health and quality of life of those
who continue to use nicotine products,
through science and innovation.
For over a century, the basic design
and use of cigarettes have not changed.
A smoker lights the cigarette, shredded
tobacco leaves are burned, and the smoker
inhales nicotine, flavors, and various
other substances present in the smoke.
While nicotine is addictive and notrisk-free, experts agree that the primarycause of smoking-related diseases is foundin toxicants generated by combustion
and inhaled in cigarette smoke.
12

While several attempts have been madeto develop better alternatives to smoking,drawbacks in the technological capabilityof these products and a lack of consumer
acceptance rendered them unsuccessful.
Recent advances in science andtechnology have made it possible todevelop innovative products that
consumers accept and that are lessharmful alternatives to continued smoking.
PMI has developed a portfolio of
smoke‑free products, including heated
tobacco products and nicotine-containing
e-vapor products that have the potential
to significantly reduce individual risk andpopulation harm compared to cigarettes.
Many stakeholders have asked us about
the role of these innovative smoke-free
products in the context of our businessvision. Are these products an extension of
our cigarette product portfolio? Are they
intended for developed countries only?
Are they aimed at compensating a decline
in cigarette sales? In 2016, we made a bold
announcement: Our business vision isto replace cigarettes with less harmful,smoke-free products as soon as possible.

Philip Morris International Sustainability Report 2017

Contribution of Smoke-Free
Products to PMI’s Total
Net Revenues

2014

2015

2016

Smoke‑Free Products Net Revenues
Source: PMI Financials or estimates

13%

2017

Smoke-free products: our product Platforms
Heated tobacco products
Platform 2

IQOS, using the consumables HeatSticks or HEETS, features
an electronic holder that heats tobacco rather than burning it,
thereby creating a nicotine-containing vapor with significantly
fewer harmful toxicants compared to cigarette smoke.

TEEPS uses a pressed carbon heat source that, once ignited,heats the tobacco without burning it, to generate a nicotinecontaining vapor with a reduction in harmful toxicants similar to
IQOS. A small-scale city test of the product was initiated in 2017.

Transforming our business

Platform 1

Products without tobacco
Platform 3

Platform 4

Platform 3 is based on acquired technology that uses
a chemical process to create a nicotine-containing vapor.
We are exploring two routes for this platform: one withelectronics and one without.

Products under this platform are e-vapor products:
battery‑powered devices that produce an aerosol by vaporizing
a nicotine solution. One of these – MESH – uses new proprietaryvaporization technology.

Philip Morris International Sustainability Report 201713

Our ambition for a smoke-free future
Projection of smoking
prevalence
Today an estimated 1.1 billion men andwomen around the world smoke cigarettes
or other combustible tobacco products
such as cigars, bidis, and pipe tobacco.
Smoking prevalence, which was estimatedat 22.1% in 2010 (age 15+), has beenin constant decline for several decades,
and the World Health Organization(WHO) projects it will continue declining
by 0.21 percentage points per year.2
At that pace, it will take almost 100 years
until the world is smoke free.
At the same time, global population is
growing by around 70 million people
per year. The combined effect of a
growing population and a declining
smoking prevalence results in a
projected 1.16 billion smokers by
2025. These WHO projections assume
current tobacco control policies anddo not consider the potential ofsmoke‑free products.
Member states of WHO are rightly
dissatisfied with the slow pace at whichsmoking is declining and have establisheda 2025 target to reduce the prevalenceof tobacco use by 30% compared to2010, aiming to achieve a smoking
prevalence of 15.5%.3
As population growth partially offsets
the impact of this prevalence target,
there will still be approximately 950 million
smokers by the year 2025 if the WHO
objective is achieved.

14

Philip Morris International Sustainability Report 2017

Projected smoking prevalence

22.1%

18.9%

2010

2025

Projected number of smokers

6130m

5080m

1159m

1123m

2010
GlobalGlobal population
population

2025
Projected number of smokers

These projections are based on WHO/UN data and refer to age 15+

Projected number of smokers

These projections are based on WHO/UN data and refer to age 15+

PMI’s ambition

In the base case scenario, and without
smoke-free products, the number ofsmokers buying PMI products is projected
to increase slightly to an estimated
152 million by 2025. The WHO target
to reduce the prevalence of tobacco
use – assuming a proportionate effecton smokers using PMI products – implies
a 19 million reduction to 133 million
smokers of PMI products by 2025.

The combination of measures todiscourage tobacco initiation andencourage cessation and our full-scale
effort to replace cigarettes withsmoke-free products could reducesmoking of PMI products by 40% withina decade – a major acceleration towards
a smoke-free world.

the use of smoke-free products to replacecigarettes for people who would otherwise
keep smoking.
Our competitors are also increasing theirefforts to develop and commercialize theirown smoke-free products. As a result,
we expect a positive acceleration of
innovation, competition, and consumer
adoption that could reduce global smoking
prevalence at a pace significantly beyond
past reductions and future goals set by
the WHO.

These are illustrative calculations, as weleft out the potential for PMI to growmarket share by switching consumersof competing cigarette brands to oursmoke-free products. We also excluded
the possible positive interventions bygovernments to regulate products
proportionate to the harm they cause.
Clearly, governments and civil society,especially leading scientists and publichealth professionals, and ideally the WHO,can play a decisive role in encouraging

Consumers of PMI products – projection 2025 (assuming constant PMI market share)
People who quit or less people starting
People who switch to PMI smoke-free products
Smokers of PMI products

19m
>40m

Reduction aimed for by
WHO with additional
tobacco control measures
PMI’s aspiration toswitch smokers to oursmoke-free products

152m

Smokers of
PMI products<95m

2025 estimate based on
WHO prevalence projection

2025 estimate based on WHO prevalencetarget and PMI smoke-free aspiration

Philip Morris International Sustainability Report 201715

Transforming our businessWe believe smoking prevalence can be
reduced much faster by supplementing
measures that governments take todiscourage smoking initiation andencourage cessation with efforts toencourage smokers who would otherwise
continue smoking to switch to smoke-free
products. To illustrate the opportunity for
public health, we project the number ofconsumers of PMI products for the year
2025. These calculations are consistent
with the WHO projections, PMI’s BusinessTransformation Metrics shown on
page 25, and assume a constant global
market share for PMI (excluding China
and the U.S., where we do not havea material presence).

It is our ambition that at least 30% of
our consumers who would otherwise
continue smoking switch to oursmoke‑free products by 2025 versus
2010. Based on that ambition, we projectthat by 2025 at least 40 million PMI
cigarette smokers will have switchedto smoke-free products.

The rationale for ourbusiness vision
We understand that our vision of replacing
cigarettes with smoke-free products is
unprecedented for a tobacco company.
Some will question our motives, andothers will question why PMI would seek
to transform a very profitable market for
cigarettes. The answer is simple: Our goalof developing and commercializing lessharmful products to replace cigarettes iscompletely aligned with the expectationsof smokers, society, and our shareholders.
Our success as a business was primarily
built on offering the best smoking
experience through our top-quality
cigarette brands, including Marlboro,
L&M and Chesterfield. We are convincedthat our continued success will depend,
above all, on our ability to offer men
and women who smoke less-harmful
alternative products.
The business case is straightforward.
PMI leads the smoke-free category,
thanks to sustained R&D investments.
We are therefore in an excellent
position to not only switch consumers
who smoke PMI cigarettes, but also
those who smoke competing
cigarette brands.

We are observing this in Japan, where
many IQOS users previously smokedcigarettes made by our competitors.
We are thus increasing market share,
thereby enhancing business results.
In addition, the profit margins ofsmoke‑free products are similar toor exceed those of cigarettes helpedby differentiated excise tax, as many
governments recognize that products
such as IQOS are not cigarettes andrequire a different tax system and yield.

We are often asked about our willingness
to license our technology to other tobaccocompanies. PMI has granted Altria an
exclusive license to commercialize IQOS
in the United States, and we are inprinciple open to other partnerships
where it makes business sense and helps
to advance a smoke-free world.

A smoke-free world can be achieved faster
if the industry as a whole, including new
entrants, are incentivized for efforts
in this direction. A wide variety ofcompanies – from small start-ups tomultinational tobacco companies –is increasingly active in the smoke-freecategory. All multinational tobaccocompanies are commercializing at least
one smoke-free product, and the category
is undergoing rapid change. This is apositive development, provided that allcompanies show the same commitment
to scientific rigor and transparency.

The catalyst for our transformation is
the science behind our smoke-free
products. We knew from the outset that
our science would be met with skepticism.
Since 2008, we have hired over 400
scientists and engineers who are working
in state‑of‑the‑art facilities and use
cutting-edge technologies to develop
and assess our smoke-free products.
Our scientific assessment program follows
a stepwise approach inspired bypharmaceutical industry standards andin line with draft guidance issued by the
U.S. Food and Drug Administration’s (FDA)
Center for Tobacco Products in 2012.
We conduct our research in accordancewith international standards and practices,such as internationally accepted
Good Laboratory Practices (GLPs)
and Good Clinical Practices (GCPs).

Technological innovation is transforming
our industry. Developing, assessing,and commercializing novel, less-harmful
alternatives to cigarettes should, in ourview, become the focus of competition.
PMI has been, and will continue to be,a driving force of this transformation.

Scientific assessment of
our smoke‑free products

Our five-step approach to assess individual risk and population harm
1

1. Developing the productA ssessment of a smoke-free product’s risk

2

3

4

5

3. Clinical studies

5. Long-term assessment

reduction potential relies on the quality of theinitial product design and on strict manufacturingcontrols to ensure that the product delivers aconsistent aerosol. We eliminate combustionand ensure that the product delivers less Harmful
and Potentially Harmful Constituents (HPHCs).
In this initial phase of designing a product,
we verify that the product’s design does not pose
any additional risks to those already known for
cigarettes. Only then can we begin to conduct
further research.

 nce we have completed our laboratory research,O
we conduct clinical studies with adult smokers
to understand whether switching to smoke-free
products reduces their exposure to toxic
compounds. We also determine whether thisleads to a favorable change in clinical risk markers
associated with smoking-related diseases.
The effects measured in smokers who switch toa smoke-free product are compared with thosein smokers who continue to smoke cigarettes
and smokers who quit using any tobacco andnicotine product for the duration of the study.

 e monitor and research the use of ourWsmoke-free products once they are on the market
in order to assess the product’s contribution toharm reduction. We are undertaking post-market
surveillance studies, starting in Japan, where ourobjective is to assess the marketed product inorder to further substantiate the results collectedin the pre-market clinical assessment andperception and behavioral assessment programs.
This is done by collecting a set of qualitative andquantitative data on the use of the smoke-free
product in real world conditions.

2. Laboratory studies

4. Consumer use research ur next step is to verify the potential of aO
smoke-free product’s aerosol to reduce risk
compared to cigarette smoke by measuring
a reduction in toxicity as well as a reduction
in risk using laboratory models. If they
are reduced significantly, we move on toclinical studies.

16

We also conduct several types of perception
and behavioral studies to better understand asmoke-free product’s potential to benefit publichealth. These studies include research into how
smokers perceive a product’s risk and how they
adopt and use a smoke-free product underreal-life conditions. We also verify that neversmokers and former smokers understand thatsmoke-free products are not intended for them.

Philip Morris International Sustainability Report 2017

Our studies on IQOS are very advanced
and point towards risk reduction.
Our findings to date show that:——IQOS does not generate combustion
or smoke;5——IQOS vapor contains on average
90-95% lower levels of toxicants
compared to the smoke from areference cigarette designed forscientific research, with nicotine
at similar levels to cigarette smoke;6

IQOS: Scientific substantiation progress
Totality of scientificevidence supporting
reduced risk potential

Reduced impact
on users and thosearound them

Improved oral
hygieneNo combustion

Less smell

Better breath

Reduced HPHC formation

No ashLess unpleasant aftertaste

Reduced toxicity

No risk of burning

Reduced tooth discoloration

Reduced exposure

No negative impact on indoor
air quality

Reversal of clinical risk
markers
Pre-market perception andbehavior assessment

Transforming our business

Developing and assessing a smoke-free
product is a rigorous process4 that starts
with the initial design of the productplatform, a fundamental step for quality
and consistency. Laboratory and clinicalstudies are then used to evaluate exposureand risk reduction potential. In addition,
we also conduct research on how people
understand communications about aproduct’s risk profile and on how the
product is actually used. Finally, we
monitor the long-term use of all our
products once they are in the marketplace.
To see if our products fulfill their potential
to have a positive impact on public healthin the real world, it is important for us
to follow the products even after they
have been launched on the market.
We combine a number of approaches,
including safety surveillance, clinicalstudies and epidemiological studies,in order to progressively obtain a clearer
picture of the risk-reduction potentialof our products.

Post-market surveillance
Japan——Laboratory studies conducted in animalmodels of disease confirm that theselower levels of toxicants result in IQOS
vapor being significantly less toxic thancigarette smoke;7——Laboratory studies confirm thatswitching to IQOS, conducted in animalmodel of diseases, led to a reduction
in key smoking-related diseases
and their associated mechanisms.
These reductions approached thoseobserved in the cessation group;8——Clinical studies conducted to dateconfirm the results of our laboratory
studies. Smokers who switchedcompletely to IQOS in two one-week
and two three-month clinical studies
significantly reduced their exposure
to 15 toxicants. These reductions

approached levels observed in the
cessation groups;9 and——IQOS use does not adversely affectindoor air quality based on indoor
air quality exposure limits and is nota source of second-hand smoke.8
These results give us confidence thatswitching fully to IQOS is likely to present
less risk of harm than continuing to smoke.
We are convinced its introduction will
benefit public health.
Our research efforts will continue to seek
ways to further reduce the risk of harmand to broaden our smoke-free productportfolio such that we have products thatare acceptable and affordable alternatives
to all smokers.

Two scientists conduct studies to understandthe aerosol of PMI’s main smoke-free product,
IQOS, at our R&D center in Neuchâtel, Switzerland

Philip Morris International Sustainability Report 201717

Encouraging scrutinyof our science throughtransparency andengagement
Ideological rhetoric is often fierce
when tobacco is the topic, preventing
the public from understanding factual
information and undermining soundpublic policy. Confusion can beexacerbated by headlines and media
stories. We understand that harshmedia coverage or biased scientific studies
are inevitable, and certainly take greatcare in our consumer information andour public statements because the publicand consumers expect it – and deserveno less. We recognize these hurdles but
are doing our best to counter and correct
inaccuracies that erode the information
environment in which consumers,
policy makers, and investors are making
important decisions.
Sharing our science, gathering feedback,and participating in robust scientificdebate help answer important questions
we receive about our innovative products
from the public, scientific experts, andregulators. Since 2008, we have publishedmore than 200 smoke-free-productrelated studies and book chapters inpeer-reviewed publications, such as
the American Journal of Physiology,
Nature Biotechnology and Regulatory
Toxicology and Pharmacology.
Over the last two years, we presented
our results at over 150 scientificconferences around the world. In 2017,
our scientists presented research results
at 76 leading scientific conferences
and published over 45 book chaptersand articles in peer-reviewed journals.
In 2018, we are going one step further
in our scientific transparency by making
the data from our non-clinical and clinicalstudies about our smoke-free products
available to the public.
Our systems toxicology program uses
large datasets to build an understandingof disease mechanisms, predict the extent
of damage to the body from exposure
to toxic substances, and estimate
improvements if those exposures are
reduced. In 2011, we launched oursbvIMPROVER platform, a crowd-sourcing
initiative developed with IBM, to enable
independent scientific experts to review
and validate our scientific methods andconclusions. It does so through the
publication of Challenges and defined
criteria by which scientific institutions

18

can independently develop methodologies
and draw their own conclusions.
Through this robust, 21st-century
approach to peer review and scientificverification, we can gauge the extent
to which our own research is in linewith these crowd‑sourced results.
Since the inception of the sbvIMPROVER
platform, nearly 200 institutions acrossthe globe have taken part in the program,and the Challenges have verified our
research. The Challenges and all
publications and news articles related
to this platform are available online.10
We use various print and online
communication tools to share our scienceand encourage further debate andunderstanding about our smoke-free
products. We have a dedicated website(www.PMIscience.com) to share the latest
information about our ongoing research,peer-reviewed publications, and we issue
a regular “Scientific Update for
Smoke‑Free Products.”
We have created an infrastructure
and website, Intervals.science,11 to share
more detail on the methods we use
to assess products and the data we
generate to support our results.
With this platform, we also aim to foster
increased reproducibility and trust in
the science relevant for tobacco harm
reduction and a dialogue among all
relevant stakeholders.
Lastly, on September 12, 2017, weannounced our support of the Foundation
for a Smoke-Free World. We agreed
to contribute $80 million per year
over the next 12 years, as specified in
the agreement. We made an initial
contribution of $4.5 million in 2017 andthe first annual contribution of $80 million
in the beginning of 2018. The Foundation
is an independent body and is governedby its independent Board of Directors.
The Foundation’s role, as set out in its
corporate charter, includes funding
research in the field of tobacco harm
reduction, encouraging measures that
reduce the harm caused by smoking,and assessing the effect of reduced
cigarette consumption on the industry
value chain.

Philip Morris International Sustainability Report 2017

Investing in production
capacity for smoke-free
products
Our company’s shift toward a smoke-free
future means going beyond developing
the products and science. It also means
supplying the demand. The case of IQOS
in Japan illustrates the need to anticipate
demand. Despite optimistic projections
for a nationwide roll-out of IQOS in Japan,
in 2016, consumer demand exceeded our
expectations. We were surprised by the
rapid pace of adult smoker conversion to
the product once we hit a critical mass of
2-3% market share nationwide. By June
2016, we had to ration the number of
IQOS devices sold across the country to
avoid a situation where smokers who had
switched to IQOS would be unable to findheated tobacco units. At the same time,
we accelerated investment in the
manufacturing capacity for heated
tobacco units.
Our factory in Neuchâtel, Switzerland,
was the first to produce the heated
tobacco units used with the IQOS device.
In 2015, our factory in Bologna became
the first site fully dedicated to heated
tobacco unit production. We are also
converting some existing cigarette
factories such as in Greece and Romania.

Milestones and investments+$4.5bn +400
Since 2008, we haveinvested more than
USD 4.5bn infundamental research,
product and commercial
development,
production capacity,
scientific substantiation,and studies on adultsmoker understanding+2,900Patents granted
worldwide related tosmoke-free products

World-class scientists,
engineers, andtechnicians hired since2008 to support ourbest-in-class R&D
capability in our two
R&D facilities in
Neuchâtel (Switzerland)
and Singapore

Transforming our business

PMI’s factory in Greece, its first cigarette
factory fully converted to the manufactureof HeatSticks, used with IQOS

Our commercialization
efforts behind smoke-free
products

their behaviors. For these reasons, we areshifting from a business-to-business model
to a consumer-centric model to assist
smokers with this transition.

Developing and manufacturing
scientifically substantiated smoke-free
products is only the start: The nextchallenge is to convince smokers toswitch. We have learned a great deal
about the consumer conversion journeysince our city tests of IQOS in Milan,
Italy, and Nagoya, Japan, in late 2014.

This effort includes the deployment ofspecialized field personnel, or “coaches,”
who have been rigorously trained toperform quality guided trials with adultsmokers and explain the fundamental
differences between cigarettes and IQOS.

The regulatory environment in which
we commercialize our smoke-free
products varies substantially aroundthe world. As a result, it is easier in somecountries than others to make smokers
aware of smoke-free products and how
they should use them. The differencesin the regulatory environment explain,
to a large extent, why switching rates
to smoke-free products vary from one
geography to another.
As the heated tobacco category is new,
we face several challenges unseen before:
increased time to communicate productbenefits; consumer acceptance of adifferent ritual; and a willingness to staywith the product throughout theconversion process. We know that it
usually takes one to two weeks forsomeone to fully stop smoking cigarettes
and switch to IQOS. We also know thatthose who smoke are reluctant to change

For adult smokers, a successful guided
trial – a truly personalized experience –leads to the purchase of an IQOS kit
and the start of their conversion journey.
Customer care services, including digital
tools, are then available to follow up andto encourage smokers not to fall backto cigarettes, as well as to address anyquestions or issues.
Smoke-free products contain nicotine,
are addictive, and are not risk-free.
We understand that any communication
with adult smokers about these products
must be carried out responsibly, attuned
to the local environment and, observing
regulatory obligations. Our employees
and third parties acting on our behalf
must follow strict principles in thecommercialization of smoke-free products,
which are formalized in our Good
Conversion Practices (GCPs) which
are being implemented as smoke-free
products are launched. See page 28.

A substantial part of our marketingand sales budget in countries where
we have launched IQOS has beenre‑allocated from cigarettes to IQOS.
Clearly, to promote our smoke-freevision we must allocate our budget
and headcount accordingly.
Our goal to replace cigarettes withsmoke-free products extends to all
countries where we operate, regardlessof development status. We are onlyat the beginning of commercializing
a fully fledged portfolio of smoke-free
products and realize that additional
efforts are necessary in finding
products that are affordable andacceptable for consumers in different
parts of the world. We acknowledge
the need to continue working todevelop different product platforms
that can achieve this goal. We arealso experimenting with othersolutions to reduce the financial
barrier of switching to smoke-free
products, such as the temporary
lending of IQOS devices, combinedwith promotional offers if permitted
by local legislation.

Philip Morris International Sustainability Report 201719

Our global progress overview
IQOS is available in key cities in 37 markets
and nationally in Japan in 2017.

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Transforming our business

PMI’s R&D facility in Neuchâtel, Switzerland,
where those interested in our science can visit
to find out more about our scientific work

Our view on tobacco
regulation
The well-known risks of smoking have
led regulators to impose more restrictions
and higher excise taxes on cigarettes
than on any other consumer product –while allowing cigarettes to remain
available to adults. There’s absolutely
no doubt that nicotine-containing
products should be subject to strict
rules and enforcement.
Comprehensive requirements were put
in place to control nearly every aspectof the cigarette business. The question
then becomes: What’s the plan to address
the needs of men and women who arelooking for less harmful, yet satisfying,alternatives to smoking?

The answer, in our view, is innovation –in products and in policies. As we work
to design a smoke-free future, ourpriorities are changing. Technology that
we and others have developed makes it
possible to shift the tobacco and nicotine
market towards a future in whichcigarettes are replaced by less harmful,yet satisfying, smoke-free alternatives.
Not all regulatory and fiscal rules that
apply to cigarettes are relevant andjustified for smoke-free products.
Regulators must differentiate supply
and demand measures – for example,
product, communication, and fiscal
policies – based on product attributes
and risk profiles. This is of criticalimportance for the people who smoke
and who deserve policy choices that
respect them and their ability to decide.
And policies should be sensible,
and based on principled pragmatism
rather than influenced by ideology.

Many regulators, including the U.S.
FDA and Public Health England, haveincluded tobacco harm reduction
as a complementary pillar of theircomprehensive tobacco control plans,complementing cessation andprevention programs.
To be clear, regulations should continue
to dissuade people from starting tosmoke and encourage cessation,
and we support regulatory measures
to this end. But it is equally clear thatmillions of men and women will continue
to smoke, and they should have theopportunity and information to switch
to better alternatives.

Philip Morris International Sustainability Report 201721

Philip Morris Japan on the forefront of our transformation
Nagoya, Japan, was selected as theworld’s first pilot market for IQOS
in November 2014. We found that adultJapanese smokers readily accepted IQOS,
as it allowed them to enjoy a satisfying
tobacco experience with no fire, no ash,less smell, and without negatively
impacting indoor air quality. By theend of the Nagoya pilot launch in August
2015, the offtake share of IQOS had
grown to 0.8% for the city of Nagoya.
In September 2015, Philip Morris Japan(PMJ) expanded the IQOS sales area
to include 12 major Prefectures,
followed by nationwide expansion
in April 2016.
IQOS continued to grow in popularity,and production was soon unable
to meet demand. It was not an
uncommon sight to see lines in frontof IQOS stores where customers
would patiently queue in the mornings
for a chance to purchase an IQOS device.
In addition, the competition
was quickly entering the category
with pilot launches of heated tobacco
products in Fukuoka and Sendai,
in May and December 2016.
Despite the limited supply of both IQOS
devices and HeatSticks, the market sharein Japan continued to grow and by
October 2017, three million smokers had
quit smoking and converted to IQOS.
As of the fourth quarter of 2017,
HeatSticks represented 13.9% of thenationwide tobacco market in Japan.
While the total tobacco industry volumecontinues to decline in line with longterms trends, the decline of combustible
products has accelerated with theintroduction of heated tobacco products.

As the market leader of this new category,
PMJ increased its total tobacco market
share. In fact, around 70% of IQOS users
have switched from competitive brandsof combustible cigarettes.

Transforming our business
In July 2016, PMJ undertook a massive
organizational change wherein thenumber of sales staff were significantly
reduced, and a new IQOS development
team was created. Over the last two
years, 30% of PMJ staff have been fully
reallocated from combustible products
to smoke-free products, with the other
70% supporting both portfolios. On topof that reorganization, more than halfof PMJ marketing and sales budgets
were shifted to smoke-free products.
PMJ continues to transform the businessmodel to address new challenges with
innovative solutions, such as guided trials,
a dedicated customer care call center,
improved logistics chain, IQOS stores,
and digital platforms.

Guided trials
PMJ sales staff meet face-to-face withlegal-age smokers interested in switching
to IQOS to explain the scientific evidence
behind IQOS and how to properly use
and maintain the device. During theseguided trials, the staff can directly
address questions by interested smokers
and seek to ensure that smokers switch
to IQOS with a correct understandingof the product proposition and device
usage. In 2017 alone, 871,000 guided
trials were conducted in Japan.

Total Market – In Market Sales Volume, Annual 2012-2017
Billions

200 197

193

186

182

179

150

Customer care call centerWith the introduction of IQOS, PMJ
established a dedicated call center withstaff trained to respond to a wide varietyof questions ranging from scientificevidence to technical support. In 2017,
the Customer Care Call Center
responded to an average of 15,000
daily contacts through an omni-channel
approach, including phone calls, e-mail,and online self-service support.

Logistics chain
To return and repair devices withtechnical issues, PMJ has created abi-directional logistics network thatallows for the return of defective
devices and the delivery of a new device
nationwide within 24 hours.
PMJ is also undertaking efforts to recycle
the metal from devices that were returned,
and we are considering how to expand
and improve this program in the future.

IQOS stores
PMJ has a network of nine dedicated
IQOS stores across Japan. They serve asa touchpoint for adult smokers interested
in switching to IQOS to learn about thedevice through guided trials, as well as
provide current users with customer
service, IQOS devices, and accessories.

Digital platforms
PMJ has several innovative digital
initiatives that support smokers on
their conversion journey and provide
up-to-date content to IQOS users.
Smokers switching to IQOS are supported
by a “30-Day Challenge” program that
sends information to registered users
at regular intervals either by e-mail orthrough a social networking service
platform to support them in their lifestylechange. Also, the IQOSphere user
community provides a wealth of content
to registered users to enrich their
IQOS experience.

171

Challenges

151

With any new product, there are newchallenges that need to be addressed.
PMJ is on the forefront of PMI’stransformation and is striving diligently
to address these new challenges.

100
50

Accidental ingestion
0

2012

2013

Reduced‑risk products (RRP)

2014

2015

2016

Cigarettes

Source: Tobacco Institute of Japan IMS and PMJ Estimate/RRP includes competitive
RRP IMS

22

Philip Morris International Sustainability Report 2017

2017

According to the Japan Poison Center(JPC), an average of 97 cases ofaccidental or unintended HeatStickingestion per month were reported

Transforming our businessin 2017. As PMI became aware of suchcases, to prevent accidental ingestion
by children, PMJ partnered with JPC toshare information and prompt consumers
calling PMJ call centers to contact JPC.
Additionally, PMJ started an awarenesscampaign through the IQOS website
and leaflets. PMJ will continue to find
new ways to communicate with
consumers regarding the prevention of
accidental HeatStick ingestion by children.

IQOS manners
Although IQOS offers many convenience
benefits, IQOS users still need to beconsiderate of those around them.
PMJ launched a campaign to remind
users to pay attention to theirsurroundings when using IQOS. With
regard to indoor use of IQOS, PMJ isaiming to create space for users ofsmoke-free products without bothering
people who do not use nicotine products,
for instance by transforming existingsmoking areas into IQOS areas.

Transforming society
IQOS can truly transform the way
smokers enjoy tobacco products,
but to achieve a smoke-free Japan,
it is important for the society as awhole to understand the potentialof smoke-free products.
Mitsubishi Estate Co., Ltd. is amarket‑leading comprehensive realestate developer operating a wide
range of real estate-related businesses.
Mitsubishi Estate established 10 IQOS
lounges in common areas of officebuildings which have become very
popular with tenants as they meetthe needs of the rapidly growing

An IQOS store in Ginza, Japan.

number of IQOS users without the smell
and high maintenance fees of traditionalsmoking rooms.
Goshobo is a traditional Japanese ryokan(inn) operating in the Arima hot spring
resort since 1191. The management of
the inn wanted to find a way to remove
the potential fire hazard of combustible
cigarettes while accommodating guests
who wished to enjoy tobacco during theirstay. Learning of IQOS, the management
decided to make the inn completely
non-smoking and offer guests the optionof renting an IQOS device for theduration of their stay.
As another example, employees ofa major telecommunications company
were complaining about the bad smell

PMJ Share of Market, Annual 2012-2017
%
35

32.1

30 27.7

26.7

25

25.9

25.4

25.9

25.3

20

27.1
24.2

21.4

15
10
0

2012

2013

PMI cigarettes and HeatSticks

2014

2015

2016

2017

of the smoking room. The company
met with PMJ to learn more about
IQOS and the product’s scientificsubstantiation, especially the impact
on indoor air quality. Based on these
discussions, the management decided
to remodel the smoking room to an
IQOS lounge where smoking is notallowed, but IQOS use is permitted.
Tests were performed on the air qualityof the lounge, and an employee
satisfaction survey was conducted togauge the results of the new initiative.
The results show that there is no negative
impact on indoor air quality, andemployees who switched from cigarettesmoking to IQOS now enjoy relaxing
in this IQOS lounge.

Realizing a smoke-free
futureIn the last quarter of 2017, smoke-free
products from PMJ and its competitors
comprised 17% of the tobacco market,
up from 5% in the same quarter of
2016. As a result of this phenomenal
growth – never before seen in the
tobacco category – cigarette sales inJapan have been declining at record
pace, dropping by 16% over the same
period. Smoke-free products alreadyrepresent over 40% of PMJ’s 2017
sales volume. Our ambition is to realize
a smoke-free Japan by completely
replacing cigarettes with smoke-free
products in Japan as soon as possible.

PMI cigarettes

Source: Tobacco Institute of Japan IMS and PMJ Estimate/Note: Denominator = Cigarettes +RRP including Japan Tobacco’s PloomTECH and British American Tobacco’s glo consumables IMS

Philip Morris International Sustainability Report 201723

Business transformation
metrics
Last year, we introduced a set of business
transformation metrics to make theactions we are taking to pursue oursmoke-free vision measurable andverifiable. The first two metrics show
our resource allocation between
combustible products and smoke-free
products, while the following fourshow progress in making smoke-free
products the core of our business.
We will continue to publish updates
on our performance on a regular basis.
The first metric – R&D expenditure –shows how much of our total spend
on research and development isdedicated to smoke-free products.
It includes the costs related to clinicalstudies, the development of new
machinery, prototype, and productacceptability testing. The R&D
expenditure for our combustible
tobacco products is largely related
to legal compliance requirements,
such as the measurement and reportingof tar, nicotine and carbon monoxide
for cigarettes, and adaptation toregulatory changes.

The third metric – net revenues(operating revenues net of sales andpromotional incentives) – shows the
portion of our revenues that is generated
by the sales of smoke-free products(including electronic devices andaccessories). Excise taxes are excluded
from the net revenue figures.
The next three metrics show oursmoke‑free product shipment volumes(including both heated tobacco units
and e-cigarettes) and our combustible
tobacco product shipment volume(mainly cigarettes), as well as smoke-free
product volumes as a percentage of total
volume. It is our ambition that by 2025
at least 30% of our shipment volume
comes from smoke-free products.
As for previous years, our business
transformation metrics have also
been assured.

The second metric – commercial
expenditure – shows how much of our
total spend on the commercialization of
our products is dedicated to smoke-free
products. Commercial expenditure
includes costs for marketing, consumer
engagement, and trade promotions.
As with the other metrics these refer
to our global business, and therefore,
the total includes commercial expenditures
related to cigarettes in the many markets
where we have not yet launchedsmoke‑free products. For markets where
we are commercializing new products,
this percentage is and will be significantly
higher. Last year, approximately 39%
of our global commercial expenditure
was dedicated to smoke-free products.
The shift in resource allocation willcontinue in the years ahead.

PMI’s first purpose-built factory for manufacturing
HeatSticks, near Bologna, Italy

24

Philip Morris International Sustainability Report 2017

Our performance:
Transforming our business

Actuals

Aspiration

2015

2016

2017

2018

R&D expenditure (Smoke-free/Total)

70%

72%

74%

>80%

Commercial expenditure (Smoke-free/Total)

8%

15%

39%

>55%

0.2%

2.7%

13%

>16%

>38%

Smoke-free product shipment volume (billion units)

0.8

7.7

36

>46

>250

Combustible product4 shipment volume (billion units)

881

845

791

<755

<550

Smoke-free product shipment ratio (Smoke free/Total)

0.1%

0.9%

4.4%

>6%

>30%

Net Revenues (Smoke-free/Total)
2

3

20251

Transforming our business

1 Assuming constant PMI market share. We do not set aspirational targets for R&D and commercial expenditure but we expect both ratios to continue increasing
to enable the stated outcome in terms of shipment volume.
2 Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions.
3 Includes heated tobacco units and e-cigarettes. The 2018 aspiration pertains to in-market sales.
4 Includes cigarettes and other combustible tobacco products.
The 2017 metrics are subject to PwC’s Assurance Report. See page 75.

Philip Morris International Sustainability Report 201725

Driving operational excellence
We believe that acting with integrityand preventing unlawful and unethicalbehavior is essential to our long-term
success. We strive to go beyond merecompliance in our operations and acrossour value chain. Our efforts to drive
operational excellence are reflectedin the way we manage our ethics andcompliance program, market our products
responsibly, engage with stakeholders,approach corporate tax and data privacy,
uphold human rights, tackle illicit
tobacco trading, and implement
responsible business practices in our
supply chain. In this section we provide
an update on our performance andkey developments in 2017 for eachof these topics.

Ethics & Compliance
Our Ethics & Compliance program and our
culture of ethical business conduct provide
a strong foundation as we transform ourbusiness. Honesty, respect, and fairness
are core values which unite and guide us
at PMI. They are integral to our company
culture and the basis of our Code of
Conduct (also referred to internally as
our Guidebook for Success).

We believe that a strong complianceculture is achieved through a combinationof elements: the right Code of Conduct
and Principles & Practices, the required
level of awareness, training andcommitment to our values from all
employees, a working environmentthat fosters appropriate conduct, an
understanding of how and why people
behave in certain ways, followed by adiligent and fair investigation process
for suspected misconduct andproportionate disciplinary action.
The Guidebook for Success, together
with its supporting Principles & Practices,
covers the following core risk areas:
competition law; conflicts of interest;
environment, health, safety, and security(EHS&S); fiscal and trade (including
anti-illicit trade); protection of information;marketing and sales; and workplace andlabor practices. It also covers a rangeof anti-bribery topics, including giving
and receiving gifts and entertainment,
facilitating payments (prohibited),
contributions involving or connectedwith government officials, third parties
who interact with government officials on
our behalf, membership of organizations,advocacy activities, and reporting andrecord keeping.
Last year, we revised our Code of Conduct
and related Principles & Practices toprovide even more clarity and guidance
to employees, especially as smoke-free
products become core to our business.
We outlined specific requirements forscientific integrity and for marketing
reduced-risk products, reflecting thetransformation of our company.
Awareness of, and commitment to, ourGuidebook for Success is implemented
through training for employees andrelevant third parties (in the form ofclassroom and online training, town halls,leadership communications, and teamdiscussions), and the promotion of aworking environment where employees
feel comfortable and safe speaking up
when things don’t seem right or can be
improved. We have a third-party-operated

Compliance training (‘000)

2015

2016

2017

Competition law

7.79

6.54

5.98

Compliance overview

51.00

112.15

53.16

EHS&S

7.57

9.39

7.50

Employment

11.52

10.59

11.37

Fiscal & trade

22.71

14.35

5.87

Government relations

19.00

12.22

12.31

Information protection

8.96

7.57

42.82

Intellectual property

10.26

4.48

3.26

Marketing

44.27

45.00

33.16

Records management

9.61

15.23

9.94

Other compliance

0.85

0.84

0.63

193.54238.36186.00Total number of training1

1 2015 and 2016 training numbers have been updated to include live trainings that were conducted during
these years but reported late, after the publication of our 2016 Sustainability Report.

26

Philip Morris International Sustainability Report 2017

Compliance Helpline available 24 hours
a day, seven days a week, in all languages
spoken at PMI. Although anonymous
reporting is available, approximately
two‑thirds of the people who reported
suspected misconduct gave their name.
In 2017, we reviewed 714 allegations ofwhich approximately 30% were referred
to other departments, and 40% were
substantiated as misconduct across allareas of our Code of Conduct. Of these,
the top two categories were theft andfraud against the company, representing
approximately half of the cases, andworkplace integrity and employment,
representing approximately one quarter ofthe cases. Nearly two‑thirds of employees
whose misconduct was substantiated left
the company, approximately one‑third
received written or verbal warnings or
financial penalties.

In 2017, we provided around 186,000
Ethics & Compliance-related training
through different channels to employees
and relevant third parties. Approximately
half of the training was live and half wasonline. Three‑quarters was given to
employees and one quarter to third
parties. As our Code of Conduct refresher
training is conducted in even years, thenumber of trainings decreased in 2017.

Looking ahead:
Maintaining a strong
compliance culture

Our VP and Chief Ethics & Compliance
Officer oversees our Ethics & Complianceprogram. Adherence to our Principles &Practices is monitored by the Internal
Controls function along with theindependent Corporate Audit department,
which reports directly to the Board’s
Audit Committee.

——A company-wide employee survey on
our compliance culture in 2018 to gain
insights into areas for further
improvement; andAs our company transforms, we must be
mindful of new challenges. A continued
commitment to a strong culture of ethicalbusiness conduct, including anticorruption, is essential. In particular,
we plan:——The global roll-out of our revised
Code of Conduct.

Driving operational excellence

The Ethics & Compliance function runs
annually an integrated risk assessment
together with our Corporate Audit andInternal Controls teams, which look at risks
across the company.12

Employees attend a training
session at PMI’s Operations
Center in Lausanne, Switzerland

Our performance: Ethics and compliance

2015

2016

2017

Number of compliance trainings (‘000)1

193.54238.36186.00

Ratio of employees trained versus third parties trained (%)

77/23

76/24

75/25

Number of reports of suspected misconduct

753

792

714

Number of substantiated claims

279

292

317

1 2015 and 2016 training numbers have been updated to include live trainings that were conducted during these years but reported late, after the publicationof our 2016 report.

Philip Morris International Sustainability Report 201727

Responsible marketing
One area where many express concern
relates to our marketing principles andpractices. Some of the concerns raised
include whether our communications
to adult consumers are appropriate,
whether we target non-smokers or
minors, and whether we have lower
marketing standards in developing
countries than in developed countries.
Our Marketing Code for combustible
products is based on the following key
principles, which are applied acrossthe world without exception:
1. We market and sell our combustible
products to adult smokers (not tominors or non-smokers);

An IQOS flagshipstore in Japan

2. We warn consumers about the healtheffects of combustible products;
3. Our marketing must be honest,
accurate, and transparent; andGood Conversion Practices (GCPs) for Smoke-Free Products

4. We respect the law and ourhigh standards.

1. Smoke-free products are for adultsmokers who want to continue
enjoying tobacco or nicotine.

To proactively invite discussion withstakeholders about opportunities toimprove our approach, we have provided
a complete overview of our marketing
principles for combustible productswith this report. See Annex 1.
We have also developed marketing
practices for our smoke-free products
portfolio: our Good Conversion Practices(GCPs) for Smoke-Free Products,
which are summarized to the right.

2. We do not offer smoke-free
products to people who have neversmoked or who have quit smoking.
3. Our goal is to switch every adultsmoker who would otherwise keepsmoking combustible products tosmoke-free products, such as IQOS.
We are committed to supporting
adult smokers in their switching
journey through educationand guidance.

A pack of Marlboro with a graphic
health warning in Germany

28

Philip Morris International Sustainability Report 2017

4. Smoke-free products are not analternative to quitting. The best
choice for consumers concerned
about the health risks of smoking
is to quit altogether.
5. To experience the benefit ofsmoke-free products, adult smokers
should switch completely andabandon smoking permanently.
6. Smoke-free products are not risk
free or a safe alternative tocigarettes, but they are a muchbetter consumer choice for smokers
who wish to continue to use
tobacco and nicotine.

Interacting withgovernments

To achieve this objective, we havedeveloped mandatory practices
which include:

Some of our critics have voiced concerns
about the way we interact withgovernments. Our Code of Conduct andCompliance Principles & Practices govern
these interactions, which are conductedtransparently, with integrity, and in
adherence with local laws. We strive tocomply with rules for advocacy, reporton our activities as required in several
jurisdictions, and we are transparent
when others engage on our behalf.
We also publicly disclose the limited
political contributions we make.13——Roles and responsibilities: Clear
definition of roles and responsibilities
are formalized in each PMI affiliate
in accordance with PMI’s Tax
Compliance Program.

Our approach tocorporate tax
PMI is committed to conducting businessin compliance with all applicable tax laws,
and it has established tax standards
intended to ensure compliance with thoselaws. Legal obligations and societal
expectations require that our transactions
are based on sound tax strategies and that
we act in good faith in all dealings with tax
authorities and other stakeholders.
Our approach to tax is based on
the following:——We comply with local rules andregulations;——Business decisions are not determinedby tax considerations alone;——We pay tax commensurate with theactivities we perform and substance
we have in a particular country;——We are open and transparent with
tax authorities in the countries where
we do business;——We do not engage in aggressive tax
planning, and we do not have in place
any contrived tax structures; and——We do not operate “letter box”
companies.
PMI has implemented governancearrangements which set out clear
accountabilities for the managementof tax compliance risks and tax planning.
PMI’s tax strategy is to maintain acomprehensive, effective, and practicalrisk management program, shared bestpractices, a structured and documented
control framework, appropriate planning,and coordinated decision making.

——Tax reporting and procedures: PMI’s Tax
Standards and Guidelines are designed
to ensure that effective and predictable
tax compliance and control measures arein place. In accordance with thesepolicies, all tax filing obligations must be
accurately completed on a timely basis
and in accordance with applicable laws
and regulations.
——Documentation and tax records:
In accordance with PMI’s policies,
PMI affiliates are responsible for theappropriate creation and retentionof all relevant tax records.
——Monitoring and reviewing businessactivities: Business structures andtransactions are continually monitored
and reviewed by all PMI affiliates fortax compliance.

Dealing with tax authorities
PMI conducts all transactions on anarm’s-length basis in accordance withcurrent OECD principles, and we support
greater transparency between tax payers
and tax authorities.
When it is relevant and feasible, we haveupfront conversations with tax authorities
in the countries where we operate tominimize uncertainty on both sides.
For example, tax rulings do provide ahigher level of certainty not just for us
but also for the tax authorities.
However, tax rulings are not the onlymeans of securing transparency andcertainty. For example, in Australia we arepart of the Lead Relationship Manager
Program, and in the Netherlands we joined
the Horizontal Monitoring Program.
Both programs promote ongoing andtransparent relations between tax payers

Data protection
In recent years there has been increasing
public awareness of privacy issues
and greater scrutiny by stakeholders of
how companies approach data privacy.
Global data protection laws have become
more prevalent and rigorously enforced.
In anticipation of the new EU General
Data Protection Regulation (GDPR),PMI has developed its Global Privacy
Program (GPP) to establish a new global
standard for data privacy across markets
and functions throughout PMI. The GPP
has been developed over a period of 18
months by a multidisciplinary PMI teamand is based on an internationallyrecognized and established privacy
management system. The program isdesigned to support PMI functions andaffiliates within the EU to achieve GDPR
compliance and to embed policies andpractices that facilitate a fully compliant
approach to data privacy. Outside the EU,
the GPP sets the GDPR as PMI’s global
standard, ensuring that the whole PMI
organization is aligned to a high standardof privacy practice.
One of the key elements of the GPP
is the introduction of greater central
governance for data privacy, throughdata privacy leads (for markets andfunctions), a central privacy office team(a collaboration of External Affairs andthe Information Protection & Governancegroup (IPG)) and the Data Protection
Governance Board, which reports twice
per year into the Corporate Risk
Governance Committee. The GPP also
mandates practices that the GDPR
introduces or enhances, in areas suchas data privacy impact assessments,
awareness and training, privacy
compliance assessments, personal data
inventories, and data subject rights.
Additionally, many existing data protection
approaches have been reviewed andstrengthened, such as the principleof transparency and the managementof third-party risks.

.

Philip Morris International Sustainability Report 201729

Driving operational excellence

While confident about our practices,
we want to be more proactive in
addressing concerns raised. With thisreport we are making available and inviting
feedback on our principles for engagementwith governments and public organizations.
See Annex 2.

——Escalation and involvement of PMI Tax
Department: In accordance with PMI’s
policies, PMI affiliates consult with the
PMI Tax Department on all importanttransactions, including recurring or new
transactions, business structures oroperations with other PMI affiliates
or unrelated parties, and determine
positions, exposures or actions
regarding material, non-routine tax
or customs matters. Where there issufficient uncertainty over the tax
treatment of a particular transaction or
there is a potentially significant impact,
external advice is obtained.

and tax authorities. In the U.K., PMI
interacts in an open and real time mannerwith Her Majesty’s Revenue and Customs(HMRC), and we conduct an annual
Business Risk Review with HMRC at which
key tax issues and business changes witha potential U.K. tax impact are discussed.

A contract farmer
in Santa Catarina, Brazil

30

Philip Morris International Sustainability Report 2017

Human rights
Our Commitment
In 2017, we published PMI’s Human Rights
Commitment,14 which is the basis of our
Human Rights program. Our Commitment
is the result of internal cross-functional
consultations and external stakeholder
dialog, and it reflects our commitment
to the United Nations Guiding Principles
on Business and Human Rights.
In addition, a range of policies andprograms addresses our value chain or
specific groups, such as tobacco workers
and children. Amongst those, our
Responsible Sourcing Principles (RSP)15
and Implementation Guidance apply toall suppliers doing business with PMI andestablish our expectations in the areasof human rights and labor rights, theenvironment, and business integrity.

Human Rights Roadmap toimplement our commitment
In 2017, we developed our Human Rights
Roadmap to identify the practical steps
required to integrate our Human Rights
Commitment throughout our global
operations and value chain. As part ofthis exercise, each functional area hasdeveloped a human rights action plan
focused on the most salient risks torights-holders.

We are committed to business practices
that respect internationally recognizedhuman rights in line with the United
Nations Guiding Principles on Businessand Human Rights. We base our
Commitment on the International Bill of
Human Rights and the International
Labor Organization’s 1998 Declaration

The Roadmap includes threecore elements:
Embedding a culture of respect
The foundation of our Human Rights
program is the commitment of PMI’s
senior management to instilling a cultureof respect for human rights throughout
our operations. Our employees andbusiness partners need to have apractical understanding of human rights
risks and of our expectation to have
PMI’s Commitment embedded throughout
our operations and value chain. We aim
to achieve this through ongoing training
on business and human rights. Last year,
we developed a Human Rights e-learning
module, available to all our employees.
In addition, we are developing tailoredfunctional training sessions to ensurea more in-depth understanding ofwhat human rights mean for individualfunctions, as well as concrete steps
and actions expected from them.
Human rights due diligence
Human rights due diligence is thecornerstone of our human rights program.
Over the last several years, we havedeveloped due diligence processes forlabor rights in our tobacco supply chain,
EHS&S risks throughout our operations,and integrity risks across our value chain.
Our ambition is to scale up theseprocesses in the years to come anddevelop new ones as needed to integrate
due diligence processes covering all humanrights risks across our entire value chain.
This is a vast undertaking, and we willbuild on the existing foundations alreadyput in place across our organization.

on Fundamental Principles and Rights
at Work. We will talk with and listen
to people whose human rights wemight affect. We will look closely at
our practices, continuously strive toimprove them, and operate systems
to implement this commitment fromsupplier to consumer.

As part of the ALP program, we disclosedetailed reports of country-specificexternal assessments18 conducted byan independent third party (Control
Union Certifications) trained andoverseen by Verité, a not-for-profit
organization specializing in labor andhuman rights issues, with action plansto address findings.
We also intend to conduct a pilot humanrights impact assessment (HRIA) in
collaboration with experts and in
consultation with relevant stakeholders.
Through our HRIA, we expect to gain abetter understanding of the actual andpotential human rights impacts at site
level. The results will inform our approachmoving forward as well as our program
design and implementation.
Human rights grievance mechanisms
Providing access to effective grievancemechanisms in line with the Guiding
Principles is a core element of ourapproach. We believe that everyone
in our supply chain should have theappropriate means to voice concernsand seek help when needed. That’s why
we strongly support a culture of speaking
up and ask suppliers, in our RSP, to provide
workers with easily accessible means toraise concerns and to protect them from
retaliation. Properly implemented, suchmechanisms are one of the most efficientmethods for ongoing due diligenceand effective remediation.
As we move forward, we will continue
looking into ways to provide accessto grievance mechanisms throughout
our operations and supply chain.

Philip Morris International Sustainability Report 201731

Driving operational excellence

Our Good Agricultural Practices (GAP)
program16 applies to farmers contractingwith PMI or our suppliers and includes
Agricultural Labor Practices (ALP) covering
the topics of child labor, fair treatment,
income and work hours, forced labor, safe
work environment, freedom of association,and compliance with the law. Affiliates
and suppliers contracting tobacco farmers
are committed to implementing the ALP
program and the ALP Code17 and to
working with us and our tobacco farmers
on continuously improving living andworking conditions on farms.

Our Commitment to respect human rights

Terra Munda: Promoting the integration of migrant workers in Southern Italy
Between 2011 and 2016, approximately
630,000 migrants arrived in Italy
by sea.19 Many stayed in the southof the country to work in the agricultural
sector, which is labor intensive.
Given the imbalance in demandand supply of labor in that sector,
employment costs are low. The
competition among migrant workers
for jobs increases their vulnerability
to labor rights abuses.
Against this backdrop and considering
the company’s sourcing of tobacco
from this part of Italy, PMI began
working with the International
Organization for Migration (IOM) in2015. Since then, PMI has been
supporting a project entitled “Terra
Munda”,20 which focuses on gaining
insights into labor rights abuses andthe various challenges facing migrant
workers in agriculture in Southern Italy.
A preliminary assessment was
conducted in 2016 to establish the mostpressing needs of migrants living in
informal settlements in the regionsof Campania and Apulia. It identified
shortcomings in four priority areas:——Decent accommodation and housing;——Vocational training and job
placement opportunities;

Tackling illicit tobacco
trade and related crimes
According to the United Nations Office on
Drugs and Crime, transnational organizedcrime is an annual business of
USD 870 billion.21 It is not just luxury
goods that are counterfeited or smuggled
and sold illegally. Cigarettes are among themost illegally trafficked goods in the world.
Criminals are increasingly attracted to thehigh profits and minimal risks associatedwith illegally trafficking tobacco products.
Fighting illicit trade in tobacco products,
including preventing the diversion of ourown products, is a key component of oursustainability program. It is within our bestinterest, that of our customers andshareholders, but also of governments
to safeguard the legitimate supply
and purchase of tobacco products.

32——Legal counseling and awarenessof existing social services; and——Italian language classes.
As a result of the findings, IOM
developed two sets of interventions
to address the exploitation of migrant
workers and to protect their rights
under the umbrella of the Terra
Munda program.
Firstly, two teams of dedicated IOM
staff were established on the groundand assisted migrants living in informal
settlements by:——Providing social orientation and legal
counseling to vulnerable migrant
workers living within informal
settlements;——Identifying the most vulnerable cases(including victims of trafficking or
exploitation, unaccompanied children,etc.) and referring them to relevant
authorities for necessary assistance;——Gaining the trust of the local migrantcommunities and monitoring theiremerging needs; and——Providing cultural and linguistic
support.
By December 31, 2017, these teams
had supported over 5,200 individuals
in 14 months.

Secondly, a comprehensive vocational
training program was developed incollaboration with PMI Italy, its partners
and suppliers as well as a number of
local NGOs and institutions to support
the integration of 19 migrants. Over a
six-month period, these individuals
participated in a remunerated
training program, which included
accommodation and transport toand from the workplace, counseling,
Italian language courses, and workplacesafety and security training.

I had never grown tobacco
before, maybe it exists in Africa
but I didn’t know. I was excited
to learn new ways of growing
crops. I am also grateful because
I have learned how to interact
with Italians in the workplace,in the city, and in public places.
Now I feel that I can fight for
my rights and look for a job
on my own.
– A beneficiary from Senegal

Yes, the problem of illegal trade impacts
our business, but the effects stretch far
beyond our bottom line. Fighting illicit
trade links directly to combating
corruption, contributing to improving
human rights, labor rights, andenvironmental standards, principles
that organizations involved in illicit
trade ignore or violate.

For us, this challenge means continuing
to invest time, effort, and resources inmaintaining the integrity of our supply
chain, protecting our consumers, andworking with governments and otherpartners to tackle the systemic causesof illicit trade.

Awareness continued to increase in 2017that illegal tobacco trade is not a victimlesscrime and that it links to the funding ofterrorism and other serious crimes.
This was reflected in many forums
including some in which PMI participated,such as the Helsinki Commission
hearing held in the U.S.,22 an event
held by the Business Council forInternational Understanding in Panama23
and the Financial Times round-tablediscussion on Combating Illicit Trade in
the United Kingdom.24——Effective measures to secure our supply
chain and prevent the illegal diversionof our products;

Philip Morris International Sustainability Report 2017

Our efforts focus on three main
objectives:——Support for regulation andpublic‑private partnerships to stop
illicit trade; and——Investment in research, training,and education to raise awarenessand tackle the issue.

The categories of illegal tobacco trade

Smuggling is a much more diffuse
and difficult criminal activity totackle – and this is where many
criminals have found safe haven.
Cross-border smuggling, bydefinition, introduces jurisdictional
challenges. The capacity tooperate beyond national borders
is an important advantage fororganized criminal groups, which
can quickly change their modus
operandi or trafficking routes.

Counterfeit

Genuine tobacco products that are produced
for lawful distribution in their market ofintended destination but illegally diverted intoa different market.

Tobacco products that have been
manufactured without the permissionof the trademark rights holder.

Illicit whites

Under declaration

Tobacco products that are generally legally
produced in a market and which are smuggled
into another market where they have limited or
no legal distribution.

Tobacco products that are produced anddistributed in the same country, a portionof which is not declared to the domestic
tax authorities.

– Marc Firestone, President External Affairs& General Counsel – U.S. Congressional
hearing, July 2017

In 2017, we also adopted a risk-based
approach and classified markets into risk
categories to focus our resources andcontrols where they are most needed.
Our updated Know Your Customer policy
includes mandatory actions for markets
exposed to higher risk of productdiversion, such as yearly customer due
diligence and monthly volume monitoring,or an assessment of tracking and tracing
controls. For example, our affiliate in
Ukraine introduced the monitoring ofretailer purchases for specific brands
and compared volume requested versus
market-specific dynamics, ensuringthat deliveries of our brands arecontinuously assessed.

Tracking and tracing keeps track of
product shipments. It helps determine
where products have been diverted
from their legitimate supply chain.
In our business environment, we deploy
tracking and tracing at the master case
(10,000 cigarettes, 500 packs), carton(200 cigarettes, 10 packs) and pack levels.

Effective measures to secure our
supply chain and prevent the illegal
diversion of our products
We are committed to ensuring that our
products are sold legally in the markets
for which they are intended. Collaborationand market-responsible actions, such as
tracking and tracing or volume monitoring,are key to fighting the diversion of our
products. Given the fast-evolving natureof criminal activity in this area, our tools
and processes are continuously refinedand updated to help address new areasof risk.
Under the guidance of our Anti-Diversion
Governance Committee, we continuously
refine our Principles & Practices to ensure
our tools are applied systematically
across PMI.25

Further details can be found in
our Anti-Diversion GovernanceCommittee Progress and Outlook
Report 2016-2017.26

Tracking and tracing to prevent the illegal diversion of PMI legal productsin the supply chain
Tracking

Manufacturing

PMI warehouse

1st externalcustomer

2nd externalcustomer

RetailTracing

Philip Morris International Sustainability Report 201733

Driving operational excellenceContrabandSupport for regulation andpublic‑private partnerships
to stop illicit trade

Investment in research, training,and education to raise awarenessand tackle the issue

PMI welcomes regulation and partnerships
to help address illicit trade. Over the years,
our supply chain controls have been
improved through cooperation withregulators and governmental agencies
with whom we have specific commitments
and obligations.

A key element of our strategy includes
increasing awareness of the illicit tobacco
trade and its drivers. By assessing these
aspects, PMI and others can provide
insights to governments and local
authorities to inform future actions
and combat illicit trade more effectively.

In addition to supporting the ratificationof the World Health Organization’s
Framework Convention for Tobacco
Control (FCTC) Protocol to Eliminate Illicit
Trade in Tobacco Products, we also
support regulations which extend beyond
national borders covering regionalorganizations such as the European Union(EU). With much of the illicit tobacco tradeentering the EU from outside its borders,
we know that concerted action is needed
to have a real impact.
PMI remains committed to anti-diversion
practices through bilateral cooperationagreements with governments and local
customs authorities in the form ofMemoranda of Understanding (MoU).
These MoUs have resulted in thecontinued exchange of information andtechnical training for law enforcement
officers. In 2017, PMI signed 10 MoUs,
bringing the total to more than 50 MoUs,
with governments in 48 countries.27
Thanks to the framework set by our MoUs
and the exchange of information withauthorities, 76 illegal factories producing
counterfeit PMI brands were dismantled
in 2017 by law enforcement agencies,of which 48 were based in Poland.
We estimate that in Poland alone wehelped to avoid the sale of four billion
counterfeit cigarettes. Had the illegal
factories not been dismantled, theestimated tax loss in the EU markets
would have been around EUR 1 billion.28

In 2017, Empty Pack Surveys wereconducted in 79 countries. In total,
117 surveys were commissioned toexternal parties, around 70% thereofwith other tobacco manufacturers.29

Maghreb report 2016
In 2017, for the first time, we studied
the illicit tobacco trends in the Maghreb
region in cooperation with KPMG. In
addition to KPMG’s proprietary analysisof the magnitude of the illicit tobacco
trade, the report also includes a morequalitative analysis by the Royal UnitedServices Institute for Defense Studies(RUSI), which highlighted the dynamics
behind the illicit trade in cigarettes andother diverted products in this region.

Education and training toauthenticate PMI legal products

Raising awareness among
the general public
Accessible and transparent communicationon the illicit trade of tobacco products is
key for PMI. In 2017, we launchedstopillegal.com. The objective of this site
is to inform the general public on themagnitude of illicit trade, its drivers
and consequences, as well as to share
PMI’s Principles & Practices on this issue.

The key to combating illicit tradeis sharing information between
different agencies, whether they
be border guards, coast guards,
police, customs, security services
or tobacco manufacturers.
– Howard Pugh, Europol – Stopillegal,
January 201734

To gain a better understanding of the size,
nature, trends, and actors typifying theillicit tobacco trade, PMI applies a researchmethodology based on the collection of
empty cigarette packs (Empty Pack Survey
or EPS).

Philip Morris International Sustainability Report 2017

PMI works with law enforcement agencies
in countries worldwide, investing in
education and technical training as
another key part of our anti-illicit strategy.
In 2017, we trained more than 700
members of law enforcement agencies
in 15 countries on how to differentiate
between counterfeit and authentic packsof PMI cigarettes.

PMI IMPACT: Combating illegal
trade together
Launched in 2016, PMI IMPACT isthe first-of-its-kind global funding
initiative to support public, private,
and non‑governmental organizationsin implementing effective solutions
against illegal trade and related crimes.
PMI has committed USD 100 million
for this program. In the initiative’s

first round, a total of 32 projects
from 18 countries was selected.
The implementation of all these projects
is now underway and will be reported
upon at www.PMI-Impact.com.
The second funding round of PMI
IMPACT, which opened in September
2017, called for projects that address
different forms of illegal trade andOur performance: Tackling illicit tobacco traderelated crimes, such as money laundering,corruption, and organized crime.
PMI IMPACT has received 157
applications across 56 countries globally,
which are currently being assessed byan independent Expert Council.

2016

2017

2018 goal

Keeping full coverage for tracking and tracing – master case level

100%

100%

100%

100%

Tracking and tracing – % of sold packs with unique code applied

53%

67%

75%

85%

Extending Memoranda of Understanding (MoU) with law
enforcement agencies/governments – number of countries

6 additional

5 additional
inclusive of
SELEC(11 countries)

10 additional

5 additional

Regional studies and country analysis to improve awarenessof illicit trade – % of global cigarette consumption covered

25%

25%

25%

27%

2,176 across 717 across 15
14 countries
countries

At least 500
across 10
countries

18

90

Training for law enforcement agencies to monitor diversionof PMI products – number of law enforcement officers trained
Number of views on stopillegal.com (‘000)2

507 across
15 countries
n/a

n/a

Driving operational excellence2015
1

1 Full coverage equates to 95% tracking and tracing in our supply chain (excluding Kretek business). There are 5% of master cases not covered – these are destined
to countries which are not identified as a source of potential diversion or where PMI sells to a single customer in the country.
2 Data for period July 16, 2017 – December 31, 2017 (the website was launched in 2017).

PMI employee scans a master case aspart of our tracking and tracing system

Philip Morris International Sustainability Report 201735

Responsible supply chain
Our business has a significant, global
supply chain organized by five maincategories. We have a large agricultural
supply chain, ranging from tobacco
growers – in both developed anddeveloping countries – to producers ofother agricultural products, such as clove,
menthol and guar gum. Another part ofthe supply chain consists of manufacturersof direct materials used to produce
cigarettes and other tobacco products,
such as acetate tow (for cigarette filters)
and paper (both cigarette paper andpackaging materials). Key to our businessare also the manufacturers of machines
for our cigarette and heated tobacco
products factories, a highly specialized
industry. A recently added part of our
supply chain consists of the manufacturersof electronic devices for heated tobacco
products and e-cigarettes. Finally, we workwith thousands of suppliers of goods
and services that are not specific to thetobacco business, but essential for any
business, such as office equipment,
company cars, and consultancy.
As a responsible business, we want tounderstand and continuously address
potential sustainability issues in our
global supply chain, ranging fromenvironmental impacts to labor abusesor corruption. We are working withbusiness partners to proactively identify,
manage, and reduce risks, and createshared value. We see this as afundamental part of upholding ourcommitment to sustainability and,in particular, to the UN Guiding Principles
on Business and Human Rights.

Responsible Sourcing
Principles (RSP)
Initially, in the wake of stakeholder
concerns, we focused on addressing laborand other risks in the places where wesource tobacco. In 2011, we developed
the Agricultural Labor Practices (ALP)
program – a key pillar of our broader
Good Agricultural Practices (GAP)
program – with the help of Verité,a leading not-for-profit organization
specializing in labor and human rights
issues.30 This program has been rolled out
globally: Every farmer with whom PMI or
our leaf suppliers have a direct contract
has a contractual obligation to implement
the ALP program.
In 2017, we released our Responsible
Sourcing Principles31 and Implementation
Guidelines, which established thefoundation for a more comprehensive
and systematic approach to addressing
supply chain sustainability beyond our
agricultural supply chain. The RSP provides
PMI’s expectations in the areas of humanrights and labor rights, the environment,
and business integrity, and applies to all
suppliers doing business with PMI, except
for tobacco farmers, who must follow
our GAP/ALP program. The RSP program
was developed in consultation withexternal stakeholders, who are experts
on human rights and sustainability, andwith a selected group of key suppliers.

Ensuring our Responsible Sourcing
Program starts on the right footIn 2017, we started to roll out the RSP,
communicating directly with global
partners covering 99% of our total spend
on global vendors by December 2017.
We also engaged with a number ofsuppliers to clarify questions related
mainly to the implementation ofthese principles.
We launched the RSP in three of our five
regional procurement clusters, startingwith Sustainability and RSP Awarenesssessions with regional and country
procurement management, followedby the development of comprehensive
supplier communication plans.
During 2017, we translated the RSP
into 13 languages to accommodate
local requirements.
To further foster engagement with supply
chain partners, we regularly reach out togroups of suppliers to discuss topics thatare of common interest, and sustainability
is now firmly on the agenda of these
events. For example, with our Turkish
affiliate we organized a suppliersustainability day with the participationof the managing director and senior
management. The coverage of theworkshop represented over 60% of ourdirect and indirect procurement spentin the country.

It was a great pleasure for me tomeet with you and your colleagues
at such a meaningful seminar.
I honestly believe and see thatboth companies, PMI andBillerudKorsnas, are in the samelane to achieve sustainability
targets and it is very nice to seeboth companies are having full
focus on this critical andresponsive issue.
PMI business partners attend
a Sustainability Day organizedby our Turkish affiliate

36

Philip Morris International Sustainability Report 2017

– A workshop participantGovernance

Organizational training

Conflict minerals due diligence

During 2017, we strengthened ourgovernance model. In addition to
the existing Supply Chain Sustainability
Coordinators for Global Suppliers,
we extended the network to include
regional Sustainability Coordinators
in each of our five procurement clusters.
We also increased operational support
for sustainability with dedicated resources
at our European Service Center.

The integration of the RSP into ourorganization is fundamental to achieving
buy-in and understanding. During 2017,
a comprehensive e-learning wasdeveloped in consultation with external
experts in human rights, the environment,
and business integrity. We plan to rollout the e-learning in 2018 to various
target groups worldwide. Our objective
is to train procurement personnel
as well as other relevant functions
within our company.

During 2017, we continued to strengthen
our conflict minerals due diligence process
related to 3TG minerals (tungsten,tantalum, tin, and gold) that are minedin the Democratic Republic of the Congoand adjourning countries. We included
Conflict Minerals as one of the principles
in our RSP.31 We communicated to both
EMS suppliers for IQOS about our
expectation that they should increasingly
source minerals from smelters or refinersthat are certified as “conflict free” byavailable third-party sources.32

Managing risk as we develop our electronics supply chain

Our focus so far has been on our mainsmoke-free product IQOS. In 2016,
PMI worked with Verité to carry out acomprehensive assessment of the labor
management systems, starting with
one of our electronics manufacturingservices (EMS) supplier. The purpose of
the assessment was to identify strengths
and gaps in the supplier’s systems andto understand the living and working
conditions of workers, particularly
migrant workers, who make up asignificant percentage of the supplier’s
labor force. During 2017, PMI and
Verité worked together with the EMS
supplier to address the gaps that
had been identified. In addition toregular reporting, the assessment
team conducted a further on-site
visit to discuss and validate theimprovement measures; the supplierhas made progress in addressing
the gaps and topics like recruitment
fees, and working conditions havebeen addressed.
In addition, we started to map out the
IQOS supply chain to identify humanrights risks down to third-tier suppliers.
We have now identified the supplierswith the highest inherent risk, and during
2018 we will start to work towards
getting a better understanding of these
suppliers and how to manage risks.

We also took steps to integratesustainability criteria into the assessmentof new EMS suppliers for PMI. To selectPMI’s second EMS supplier, weestablished specific qualifying criteria(e.g., regarding labor/human rights risks,preference to suppliers contracting
and managing workers directly) andconducted a one-day assessmentwith an on-site visit and management
interviews for each of the three finalists
in the bidding process. Subsequently,
we also conducted a full sustainability
review, led by Verité, of the selectedsupplier to gain a more in-depth
understanding of its status and seek
alignment with our RSP early on.
The results of the review showedthat the supplier was very well alignedwith our RSP, and minor gaps identified
are being addressed.

Philip Morris International Sustainability Report 2017

Driving operational excellence

We are increasingly expanding a newand complex supply chain that includes
electronics manufacturing. Electronics
suppliers are new partners to PMI and
are often in geographies where wehave not previously done significant
procurement of direct materials(mainly China and Southeast Asia) andwhere human rights issues have been
flagged. Further, the fast-growing natureof this novel part of our business meansthat new suppliers are continuously
being added to our electronics supply
chain, particularly for tier 2 suppliers
and below.

37

Good Agricultural
Practices (GAP)
We source around 90% of our tobaccothrough direct contracts with over
350,000 tobacco farmers in 28 countries
worldwide. PMI has direct contracts
with 23,000 of these farmers. The other
332,000 have direct contracts withover 20 third-party suppliers with whom
PMI has direct contractual relationships.
Around 2,800 trained agronomists,
employed by PMI and our suppliers,
provide support to contracted farmers
throughout the tobacco-growing season
to improve overall conditions andproduction, visiting farms regularly
throughout the crop season.
Direct contracting is critical to enable
us and our tobacco suppliers to work
collaboratively with farmers and to drive
the systematic implementation andmonitoring of our standards. It also
benefits the farmer in a number of ways:——Ahead of the growing season, thecontractual agreement on the volume
and price of the tobacco protects
the farmer from market fluctuations
and provides better assurance that
there is a buyer for the crop;——Farmers can access crop inputs, such as
seeds, at a lower cost than market price;——Removing middlemen reducestransportation costs or other nonvalue-added fees charged to farmers;
and——The contract can be used by thefarmer as collateral for credit or otherfinancing arrangements.

Since 2016, we have assessed conformityof our tobacco leaf suppliers, as well as of
our own tobacco leaf operations, to our
GAP standards through the industry-wide
Sustainable Tobacco Program (STP) that is
independently managed by AB Sustain,
an independent supply chain managementcompany, and includes:33——Annual self-assessments performed by
tobacco suppliers via the online STP
portal and reviewed by AB Sustain; and——On-site reviews conducted by AB
Sustain auditors with visits to a sample
of contracted farmers, as well as athorough review of tobacco suppliers’
policies, procedures, and documentation
demonstrating the level of STP
implementation. One of the outcomesof the formal assessment is anindependent performance rating
against all STP criteria.
In 2017, on-site reviews were conductedin eight countries, making a total of
16 countries reviewed over two years.
Our GAP program focuses on threeareas, with mandatory implementation
for all tobacco farmers with whom PMI or
our leaf suppliers have direct contracts:

1. 	Improving working conditions
on the farm (see pages 48-53)

2.	Minimizing the impact of tobacco
farming on the environment(see pages 56-60)
		GAP promotes environmentally
sustainable practices, including curingbarn improvements, the use of moresustainable tobacco-curing fuel sources
to reduce greenhouse gas emissions,the elimination of highly hazardous
Crop Protective Agents (CPA), thepromotion of bio-pesticides andthe overall reduction of CPA use,biodiversity management andreforestation, as well as water, soil,
and waste management.

3.	Making tobacco farming more
profitable		Tobacco is a valuable crop that helps
strengthen food security and nutrition
and allows farmers to generatesignificant income, particularly inthe case of smallholder farms.
Promoting practices and technologies
to improve farmers’ yields and crop
quality, and to reduce labor
requirements, leads to a higher income
for the farmer. It also frees up land
for alternative crops, thereby helping
to create an additional source ofincome. Our program also includes
assistance to farmers in growing thesealternative crops.

		The Agricultural Labor Practices (ALP)
program focuses on promoting andmonitoring good labor practices,
including health and safety conditions,terms of employment, and preventing
and eliminating child and otherlabor abuses.

Reducing hardship at work and improving efficiency in Greece
Tobacco growing is labor intensive.
As such, efficiency improvements
are crucial for optimal production.
Initiatives to reduce the number ofworking hours required to grow thecrop range from mechanization, curing
preparation, to packing simplification.
While this is a global effort, the specificinitiatives depend on the particularcharacteristics of the crop and thefarms in each country.
For example, labor scarcity and an
aging farmer population in Greece
are concerns for long-term sustainabletobacco production. PMI initiated a
project to find a less-labor-intensive

38

method for harvesting oriental tobacco,
which represents around 45-50% of
total labor requirements in tobacco
harvesting in Greece. In previous years,
different prototypes of harvestingmachines were tested, and in 2017,
working with tobacco suppliers,
we tested two row-harvestingmachine prototypes in Greece
operating on 40 hectares of a land.
The feedback from both tobacco
suppliers and their contracted farmers
has been positive. In addition toincreasing harvesting efficiency,
we see mechanized harvesting oforiental tobacco as a way to mitigate
labor‑related issues, such as child labor.

Philip Morris International Sustainability Report 2017

A contract farmer in Greece harvests
oriental tobacco using a two-row
harvesting machine prototype

Driving operational excellence

A tobacco farm worker
in Nayarit, Mexico

Our performance: Agricultural supply chain 1

2015

2016

2017

Goal

Tobacco purchased through direct contract by our leaf
operations or our tobacco suppliers (%)

88

88

90

>90

Number of tobacco supplier locations (countries) assessedby AB Sustainn/a

8 (22% ofpurchased
tobacco)

Systematic monitoring of labor practices (% coverage)2,3

32.5

72.0

77.0

100

Cumulative number of tobacco supplier locations (countries)
assessed by Control Union since 2013 (ALP topics)3

13

15

19

24 countries
by 2020

Number of contracted farms in the scope of Control Union
assessments per year (ALP topics)3,4

11,043

7,508

6,433

8 (33% of Every tobaccopurchased supplier every
three years
tobacco)1 Data relate to our total tobacco supply chain, except when explicitly mentioned in footnotes.
2 Data relate to crop season, which may span over more than one calendar year.
3 Data cover approximately 90% of our sourced tobacco.
4 According to our methodology, these assessments cover different countries and tobacco suppliers every year. Depending on the geography and typical farm sizein different countries, the number of farms covered by the assessments will vary. The variation in the number of farms assessed over the last three years does
therefore not reflect a reduction in the scope of the assessments.

Philip Morris International Sustainability Report 201739

Managing our social impact
Continuously improving PMI’s social
impact within our operations and beyond
is essential to our long-term success.
This starts with how we attract andretain people at PMI, the labor standards
we expect from farmers and suppliers,and our shifting attitude towards
consumer centricity. In this section,
we provide an overview of what it is liketo work at PMI: our company culture,
our approach to inclusion and diversity,labor relations as a foundation forsustainable business, and ongoing efforts
in the areas of employee safety, healthand well-being. We also look to the future

and the steps we are taking to equip our
people to adapt and thrive as our company
shifts towards smoke-free products.
Social responsibility does not stop at
our operations: We also discuss ourAgricultural Labor Practices program.

Working at PMI
We are a multigenerational, diverse
community of 80,600 employees
worldwide, speaking over 80 languages
and working together in a culture ofhonesty, respect, and fairness.

The transformation of our business goes
hand in hand with evolving our ways ofworking, our mindset and behaviors, aswell as our culture. PMI’s People & Culture(P&C) Leadership Team is accountable fordriving the internal transformation thatwill enable the success of our smoke-freevision. Defining the behaviors required todrive this vision and attracting, supporting,and retaining people from every part of
the globe are key P&C priorities.

PMI employees around the world
Indonesia

35.8%
Philippines

5.7%

Other Asia

Japan

Argentina

2.4%

3.4%

BrazilOther EEMA

3.7%

Mexico2.1%

Other LA&C
TurkeyRussia2.4%

4.8%
Poland

4.8%

40

Italy

3.8%

Switzerland

3.7%

Philip Morris International Sustainability Report 2017

Germany

2.7%

Other EU

Transforming ourcompany culture
Converting our Human Resources
function to People & Culture reflects
the importance of developing a new
culture within PMI that is focused on
enabling a smoke-free future throughinsight and innovation, and on putting
our consumer at the core of everything
we do.
The P&C function is organized to deliver
a new and exciting people agenda in linewith our aspirations to continue making
PMI a great place to work. The function
has been designed so that it will maintainand grow the capabilities that have madePMI so successful in the past, whiledeveloping our people and equipping themto successfully transform the company.

A diverse global leadership
15%

51%
16%

18%
European Union

Inclusion and diversity
We believe the best way to spark
innovation, solve problems, and makebetter decisions is to harness the powerof different skills, ideas, and perspectives
from diverse groups of people who aresupported by an inclusive culture. We area truly global and diverse organization.

An essential element of our inclusionand diversity agenda is a focus onleveraging the full potential of womenin the workplace. By closing 2017, with34.4% women in management positions,up 1.6 point versus 2016, we continue
to progress towards our 2022 goal ofreaching 40% female representation at
the managerial level. To support this goal,
we aim for a 50:50 gender ratio in our
recruitment pipeline. In 2017, womenaccounted for 43% of new hires atmanagerial levels and 47% of new hires
at more junior levels. Career support
and advancement are also critical forachieving this goal. In 2017, 38% ofpromotions at managerial levels wereof women.

Asia and Paciﬁc

Giving people autonomy over where
and when they work and focusing on
output instead of “being seen working”
can increase productivity, provide
environmental benefits from cutting
business travel, and support employees
in balancing business and personal
priorities. Fifty-one markets now operate
flexible work arrangements. While wehave laid the foundation, we have more
to do to fully leverage the benefits offlexible work.

Eastern Europe,
Middle East and Africa

To further enable our people to develop
mindsets and capabilities to act and leadothers inclusively, we continuously train
People & Culture professionals and people
managers on how to mitigate unconscious
biases in recruitment, talent, andperformance management. Over the past
year, we completed 60 awareness-building
workshops; in which:——1,552 employees participated; andManaging our social impact

Diversity is about differences. At PMI,
we think about differences broadly,
including, without limitation – gender,
gender identity, ethnicity, nationality, age,sexual orientation, religious background,ability, education, and technical skills.
All of these differences contribute todiversity of thought because they impact
how we see the world. Inclusion is about
treating people fairly and equitably
so that they can contribute their personal
best in every way. It is about mindsets,behaviors, and employment practices
that value, respect, and accommodate
differences, promote listening, andlearning from others, and create spacefor constructive disagreement.

Americas——14,119 training hours were provided.

We have launched parental support
programs and initiatives designed to help
employees achieve their ambitions to beboth great parents and great professionals.
These include the creation of a networkgroup called “Parents@pmi” andworkshops for pre- and post‑maternity
and for new fathers. We also continued
to support the International Dual Career
Network, a platform designed to support
the careers of the partners and spousesof our internationally mobile employees.

Philip Morris International Sustainability Report 201741

Snapshot of local inclusion and diversity initiatives

All PMI regions and affiliates have customized their Inclusion and Diversity (I&D) agenda
and activities to focus on their own priorities. Here are some highlights:
AfricaAsia and Pacific

Europe and Middle East

Launched the AFRICAN CUP tofurther develop talent from diverse
backgrounds and build new capabilities
across the region. This project leverages
PMI’s talents to help solve businessissues and fast-track capability buildingin Africa through international
assignments in that region.

Australia
Created innovative ways to engage
employees on I&D issues by providing
platforms to share views andperspectives. Examples: “Don’t Argue”
debate on pros and cons of flexible
working arrangements and BAR-BGRAS BBQ to raise awareness andsupport for the plebiscite of the
Marriage Equality Act.

Italy
Implemented the Women in
Development program for theGreenfield factory in Bologna. Offers
opportunities for women without atechnical background to pursue a careerin a manufacturing environment.

Algeria
Conducted a conference for all
employees to raise awareness of
I&D, including unconscious bias
and challenging culturaland gender stereotypes.
SenegalParticipated in the very first womendevelopment forum in sub-SaharanAfrica, attended by more than
200 top-level business executives
from multiple sectors.
South Africa
Worked with organizations like the
Global Fund for Women and local
communities on initiatives relating
to the abuse of women and children.

Americas
Argentina
Promoted flexible working arrangementswith the #QuieroRemoteWork challenge.
People were encouraged to work
remotely and share their experiences
via a knowledge-sharing platform
including posts with pictures,comments, and “likes”.
CanadaContinued to improve its disability
agenda through ongoing training,
implementing an accessibility plan,and removing barriers for people
with disabilities.

Indonesia
Launched the Sampoerna Inclusive
Leadership Award (SILA) to engage
managers and their people to “walkthe talk” and recognize those showing
exemplary inclusive behaviors. Aims
to propagate inclusive leaders to help
foster a more inclusive environment.
Malaysia
Promoted work-life balance practices
and participated in the Life at WorkAwards to recognize companies
creating increasingly diverse, inclusive,and family-friendly workplaces.
Philippines
PRIDE month was celebrated forthe second year in a row as partof affiliate‑wide communication
and awareness building programs.
Singapore & Taiwan
Embarked on efforts to better
understand the needs and expectationsof different generations in theworkforce. A Generational Efficacy
Workshop took place to gain insights
into diverse generational needs andto map out priorities and actionable
next steps.

MexicoImplemented a program aligned with
the Official Mexican Standards (NOM)
25 Local Bronze Certification,
focusing on gender equality andnon‑discrimination, salary equity,
prevention of workplace violence,
work-life balance, and equal treatment
and opportunities.

42

Philip Morris International Sustainability Report 2017

RussiaIntroduced flexible time and remote
working arrangements to help foster
an inclusive work environment as
an enabler of transformation, andto support professional growth
and work-life balance.
Switzerland
Participated at the Bern PRIDE paradein support of the Swiss LGBT+
community, launched unisex toilets
in its premises, and conducted forums
where senior PMI leaders spoke
about LGBT+ inclusion.
TurkeyCollaborated with the Women
Entrepreneurs Association of Turkey(KAGIDER) to help women achieve theircareer goals and aspirations throughan external mentorship program.
United Arab Emirates
Increased its focus on gender diversity
by targeting a balanced gender ratio
in the talent acquisition pipeline,
implementing contemporary onboarding
programs, and promoting flexible
working arrangements.
United Kingdom
The LGBT+ and allies group “PML
Stripes” directed efforts to successfully
celebrate “National Coming Out Day”
and conducted a fundraising event
for a local charity, the Terrence Higgins
Trust, in commemoration of WorldAIDS Day.

Labor relations
Building and strengthening respect andtrust are at the core of our labor relations
principles. Today, with the efforts we are
currently deploying to transform thebusiness towards a smoke-free future,
this becomes even more important.
Our Workplace Integrity Policy, which
all PMI employees are expected to know
and follow, speaks to our commitment tofundamental principles and rights at work.
We respect the right of our employees
to form or join trade unions and employee
representative organizations of their own
choice, and they should be able to makean informed decision free from coercion,
thereby guaranteeing freedom of
association. We recognize our employees’right to bargain collectively throughemployee representatives. We respect theterms of collective agreements and, wherecollective bargaining arrangements are inplace, we ensure that PMI bargains in goodfaith. We make all efforts to conduct fairand cooperative negotiations, to overcome
potential difficulties that may arise andreach sustainable and business responsible
agreements, which will serve the parties
in the long term. Overall, we maintaina strong commitment to promote
cooperation on matters of mutual
concern and observe high standardsof employment and labor relations.

Rewarding our employees
Our total reward programs enable us
to attract the talent we need tosuccessfully achieve our businessstrategy. We offer compelling programsin the areas of compensation and benefits,
health and well-being, financial planning,and education.

We are committed to pay men andwomen equally for equal work andseniority, wherever we operate aroundthe world. We are proud to have been
the first multinational company to achieve
Equal-Salary certification in Switzerland
and Japan, and we aim to receive a global
Equal-Salary certification by 2019.

Living wage
In 2016, we started a project with
Business for Social Responsibility (BSR)
to assess whether the lowest-paid peoplein our organization are able to maintaina fair standard of living. After defining
the concept and methodology with BSR,
we ran a living wage survey in countries
where we had over 50 permanent
employees in 2017. The results confirmed
that, in the 58 countries34 surveyed,no permanent employee was paid below
the living wage rate.
In 2018, we will run a similar survey
for temporary and seasonal employees.
Our ambition is that none of ouremployees get paid below the living
wage rate.

Living wage
According to our concept,
a living wage:——Is earned within normal
working hours;——Provides the means for anindividual/family to purchase
the goods and services necessary
to attain a basic standard of living
and to accumulate a minimum
level of savings; and——Is aligned with the social andcultural expectations of thecommunity and/or countryof which individuals are part.

Health and well-being
The health and well-being (H&WB) of
our employees, both inside and outside
the workplace, is a multifaceted topic
touching on the physical, emotional,
and behavioral aspects of living. It is
understood differently from country tocountry and is influenced by personal
preferences, local culture, behaviors,and demographics. With this in mind,
we continue to roll out our program andminimum requirements on promoting
H&WB initiatives through our BalancedYou
program across affiliates worldwide.
This covers four main areas:——Illness and disease prevention;——Encouraging physical activity;——Promoting healthy eating; and——Supporting stress management
and work-life balance.
We encourage the establishment oflocal H&WB committees in our affiliates.
In 2017, such committees existed in
36 of our markets. Composed ofcross‑functional team members andemployee representatives, they foster
the collaboration and dialogue necessary
to tailor the activities according to
the specific needs of local employees.
During the latter part of 2017, we initiateda global survey on health and well-being
internally in collaboration with our Market
Research team to collect feedback onwhat H&WB means across the globe.
This allowed us to identify the top threeareas of concern to our employees: stress,
sleep, and work-life balance, and theactivities of interest to employees insideand outside the workplace. This assisted
us in forming the global strategy for healthand well‑being. We also launched a digital
BalancedYou module to support our global
approach toward H&WB. Aimed to define,
inform, and support employee
participation in health and well-being
activities, it covers for example: articles
written on contemporary topics,
challenges to encourage cross-borderparticipation and a sense of community,and coaching tips and support via live chatand personal support.
We plan to implement a smoking cessation
program for employees, which is currently
under development in order to enhance
PMI’s H&WB approach. Separately, we
also envisage introducing smoke-freealternatives for employees who do notwant to quit tobacco use, in local markets
where such options are available.

Philip Morris International Sustainability Report 2017

43

Managing our social impact

Collective Labor Agreements (CLAs)
with trade unions and employee
representatives demonstrate ourcommitment to meaningful engagement.
CLAs govern many of our employees’
terms and conditions at work and may
include working hours, occupational
health and safety, holidays, wages,
and procedures for dispute resolution.
In 2017, we had 80 CLAs in 35 countries,
covering approximately 67% of ouremployees. We strengthened the labor
relations capability within our People& Culture function by rolling out ane-learning tool for employees who leadlabor relations at the country level.
For 2018, we plan a progressive roll-out
to line managers in other business areas.

We establish our programs considering
all elements important to our existing
and future employees. Our compensation
programs are at, or above, market medianin all countries where we do business.
Along with the transformation of ourbusiness, we adapt our programs to be
the most relevant to our diverse,
multicultural and multigenerational
workforce. We are committed to
rewarding superior performancealigned with our short- and long-termtransformation targets.

Equipping our people and organization to successfully transform our business
PMI is undergoing a significant
transformation which affects every partof our business and every employee.
It is crucial that we put the necessary
systems and processes in place to fully
support people throughout this pivotal
period and equip them for success.
The year 2017 saw considerable efforts
across the key pillars enabling ourtransformation: How we organize
ourselves, how we lead and behave,and how we work.

1. The way we organize
To accelerate and enhance our ability
to deliver on our vision, we have
implemented a new Operating Model,
which separates development from
deployment to enable the company tobetter focus on both innovation andconsumer centricity. To bring thisOperating Model to life, building new
capabilities (e.g., in science and intechnology, to be equipped in today’s
digital era) and upskilling our employees
will be the focus for 2018.

2. The way we lead and behave
Today’s challenges differ from those
we faced in the past. We need to change
many of the ways we think and act,
both as individuals and as a company.
That is why we need a new approachto leadership within PMI and a new
culture that helps ensure that ourpeople have the mindset and behaviors
necessary to drive the innovation,
collaboration, and consumer – andstakeholder – centricity required tosuccessfully operate our transformation.
Through an innovative survey, we
engaged over 10,000 employees todefine the behaviors required to drive
long-term success and ultimately
create a smoke-free future.

3. The way we work
To ensure no employee is left behindin our transformation journey, we have
implemented various programs to help
them understand different businesschallenges and equip them with thenecessary knowledge to lead thetransformation towards PMI’s smokefree vision:

Employees working together
at PMI

44

Philip Morris International Sustainability Report 2017——We have developed an online training
program designed to give people thefoundational information they needon our new product portfolio that has
been accessed by 27,000 users.
——We have developed the Transformation
Academy – a 12-week training programfor management teams worldwide,
focusing on smoke-free products
regulatory complexities, responsible
marketing, and sustainability. In 2017,
250 leaders in 20 markets participatedin this program.
——In our operations, we have introduceda manufacturing excellence programusing new standardized routines,
processes, and tools, which is deployed
sequentially to develop the capabilitiesof our people. In 2017, 14 factories
implemented this program and over
1,500 employees were trained.
——We have also introduced a different
way of working based on consumer
centricity, enabling employees todeliver faster while ensuring solutions
meet the final consumer needs.
This program covered over 3,000
employees in 2017.

A hand roller ofkretek cigarettes
in Indonesia

2015

2016

2017

Number of employees

80,20079,50080,600

Women employees (%)

40.6

41.2

41.6

Women in management positions (%)

31.0

32.8

34.4

Number of women in Company Management (management board)

1 (out of16)

1 (out of17)

2 (out of20)

Number of women on Board of Directors

2 (out of12)

2 (out of13)

2 (out of
13)

13.8

11.2

11.0

Employee voluntary turnover rate (%)

4.3

4.3

4.9

Employees covered by collective labor agreements (%)

67

68

672

Employee turnover rate (%)1
1

GoalManaging our social impact

Our performance: Working at PMI

40 by
2022

1 The aggregated data cover approximately 70% of our employees.
2 As of October 1, 2017, approximately 74% of our workforce in non OECD countries was covered by collective labor agreements.

Looking ahead——Our business vision to createa smoke‑free future entails anorganizational transformation, whichcalls for a new mindset and perspective.
Consumer centricity, a multistakeholder
approach, and continuous focus on
inclusion and diversity are key enablers
to achieve this.
——In the next few years, we will continue
to work on our goal of increasing therepresentation of female employees

in management positions to 40% by2022, and we will pursue our goal toreach a global Equal-Salary certification
by 2019 with the Equal-SalaryFoundation, working in partnershipwith PricewaterhouseCoopers (PwC)
for the 18-month audit andcertification procedure.
——We believe that sound labor relations
and a constructive dialogue with our
employees and their representatives
will help us to respond to the challenges
and opportunities arising from ourcompany transformation. We willcontinue building and reinforcing
our labor relations capabilities acrossthe globe.
——We want to ensure that none of ouremployees receive a salary below
the living wage rate.
——We are studying best practices andlooking at ways to define and embed
evidence-based employee health andwell-being metrics into our broader
corporate reporting framework.

Philip Morris International Sustainability Report 201745

Safety in the workplace
PMI has 46 production facilities globally.
We have developed and implemented aleading environmental and occupational
health, safety, and security management
system, which involves policies, standardpractices, and procedures at all of ourmanufacturing centers. We have set
minimum requirements based on PMI
best practices and local regulations
and have embedded these requirements
into every level of our organization.
Training and awareness programs
support our ambitions, globally andat the affiliate level.
In 2017, we expanded the scope of
our Mission Zero program beyond ourmanufacturing operations to reach ourcountry sales and marketing organizations.
We piloted safety cultural assessments
in several markets that allowed us to builda systematic approach to improve safety
performance. We launched new safety
executive leadership workshops and tools,
and undertook employee engagement
activities across our affiliates.
We established PMI Markets Safety
Awards for the first time, to recognize
those markets that had already started
applying the Mission Zero philosophy
to their day-to-day work, and toencourage their further commitment
to sustain PMI’s safety culture andenvironmental commitments.
In 2017, our Lost Time Injury (LTI) rate,
the most widely used benchmark toassess prevalence of serious work-related
injuries, was the best in our industry andone of the lowest among our fast‑moving
consumer goods peer group.

Safety across our fleet

In 2017, the LTI rate across the whole of
PMI was 0.10 (injuries per 200,000 hours
worked) and in our factories it stood at
0.05. Thirty-five of our factories achieved
zero LTI for more than a year, and several
sites have reached up to five years
without LTIs.
We also conduct regular safetyassessments at our offices, warehouses,
and car fleet organizations. Additionally,
we have engaged Bureau Veritas, anexternal certification body, to assess
the management systems at our
manufacturing centers around the worldin accordance with internationallyrecognized standards for safety andenvironmental management.
In 2017, 42 (some 91%) of our factories
were certified to OHSAS 18001,
the international safety management
standard. Newly acquired or built factories
have begun the certification process.
Because we have new onboarding
factories we may not reach 100%,
but that remains our goal. Due to a factoryclosure in the Dominican Republic andthe geopolitical situation in Venezuela,
where we could not have our site certified,our certification percentage decreased
versus 2016.
Despite good results and low injury
rates, we are committed to exploring
more innovative and engaging ways
to keep our performance world class.
Managing change with safety in mind
is essential as we convert existing
factories or build new production sites
for smoke‑free products.

With a fleet of more than 25,000 vehicles
in more than 100 countries and over
500 million kilometers driven in 2017,
road safety is a key concern. Despite our
low injury rate, unfortunately in 2017,
two PMI employees lost their lives in roadaccidents. We continue to make our best
effort and invest in a safe fleet, fleet
safety programs, and employee awareness.
We manage our vehicle fleet with an
integrated approach based on nineelements: leadership, baseline assessment,risk assessment, hiring of drivers andplacement, training, performancerecognition, vehicle selection andmaintenance, incident reporting andinvestigation, and management reviews
and communication.
In 2017, we made progress across our
Fleet Safety program:——We implemented our Fleet Safety
program in all markets where we
operate and involved our sales
force organization;——We focused on innovative technology
solutions (gamification and telematics)
to facilitate safe driving and accident
prevention;——Our collision rate (collisions per million
km driven), which covers higher
severity road accidents, has declined
to 1.01 per million km driven (from 1.22
in 2016);——We launched a new global online driverrisk assessment tool complemented by
local practical fleet driving programs;——We established a working group withthe top 12 biggest markets (covering
approximately 18,000 vehicles) togovern global fleet safety development;
and——We have gained better understandingof safety dynamics in our fleet basedon employee feedback and reporting.

Our performance: Safety in the workplace

2015

2016

2017

Goal

Lost Time Injury (LTI) rate (per 200,000 hours worked)

0.11

0.12

0.10

<0.10

Fatalities (PMI employees and contracted employees)

0

1

2

0

Fleet crash rate – vehicles crashes per million km driven1

5.3

6.8

6.2

<4.0

Fleet collision rate – vehicles collision per million km driven

1.24

1.22

1.01

<1.50

93

93

91

100

Manufacturing facilities with OHSAS 18001 certification (% of PMI factories)

1 Regarding fleet safety, as of our 2018 Sustainability Report we will no longer report on Fleet crash rate (which includes cosmetic damage) as we believe collision rate
(collisions per million km driven), which covers higher severity road accidents, is a better indication of our safety performance.

46

Philip Morris International Sustainability Report 2017

Managing our social impact

An employee at PMI’s first purpose-built
factory for manufacturing HeatSticks,
near Bologna, Italy

Philip Morris International Sustainability Report 201747

Agricultural Labor
Practices35
According to the International Labor
Organization (ILO), the largest share ofchild labor occurs in the agricultural sector:
Around 108 million children are impacted
worldwide, involved in different forms ofhazardous work.36
PMI’s Agricultural Labor Practices (ALP)
program aims to eliminate child labor andother labor abuses and to achieve safeand fair working conditions in all farms
where our tobacco is sourced. Our over
350,000 contracted farmers, representing
over 90% of the tobacco PMI buys, arerequired to comply with the ALP Code.37

Our approach
The ALP Code sets out seven principles
related to child labor, income and work
hours, fair treatment, forced labor, safe
work environment, freedom of association,and compliance with the law; and 32
standards to measure compliance withthese principles. Training is provided tofarmers, workers, agronomists, and fieldtechnicians on these topics.
Striving to ensure that our standards
are met, field technicians working for
PMI or our tobacco suppliers conduct
regular farm visits to detect potential
issues. The field technicians also provide
additional support, such as distributing
Personal Protective Equipment (PPE)to reduce labor-related risks, and moregenerally work with farmers on
continuously improving living and working
conditions on farms. We also collaborate
with other stakeholders in the tobacco
supply chain, including governments
and NGOs, to tackle underlying systemic
problems present in the agricultural sector.

Systematic monitoring
Systematic monitoring of farms
implementing the ALP program begins
with the collection of individual farm
profile data. The farm profiles, updated
each growing season, provide the fieldtechnicians with key information about
the farm and the people working andliving there (demographic information,
size and nature of the farm, number
and age of people present, categories
of workers, housing arrangements,and school attendance).
The field technicians then visit the farms
throughout the tobacco-growing season
and evaluate how well labor practices alignwith the ALP Code principles. When they
identify issues requiring immediate
intervention, called “Prompt Actions”,
they immediately address them withthe farmer and together develop an
individual improvement plan against which
progress is monitored. In those cases
where a farmer consistently resists making
the changes required, the contract is notrenewed or may be terminated. In the
2016/2017 season, 36 contracts were
terminated. In addition to Prompt Actions,less serious issues are also monitored
and addressed.
The aggregation of data collected acrossover 350,000 farms is challenging.
In 2015 and 2016, we made steadyprogress in standardizing our processes
and systems by developing data templates
and electronic records. This allowed us
to create a global ALP monitoring dataset
enabling analysis at market and regional
levels. To gain a more complete andaccurate overview of the risks andpatterns of vulnerability of tobacco
workers, we also compare the ALP
monitoring data with information gained
through CU third-party assessments.

In addition, external third-party
assessments are conducted by Control
Union (CU) certifications,38 a certification
agency specialized in sustainablesupply chains across multiple industries.
The results of these CU assessments,
including the action plans to address
identified issues, are disclosed publicly.39
We also publish comprehensive progress
reports of the ALP program.39

A field technician in Malawi supports
farmers in implementing good agricultural
practices in tobacco growing

48

Philip Morris International Sustainability Report 2017

Evaluating the impact of
the ALP program
To assess the effectiveness of the ALP
program, we focus on four questions:——Is child labor being eliminated on farms
supplying tobacco to PMI?
——Is the working environment safe?
——Are workers being paid enough tomeet their basic needs?
——Is all farm labor voluntary?
The year 2017 is the first year that
we were able to assess performanceof the program based on the fourquestions above, establishing a baseline
for future analysis.
In 2017, approximately 13,000 Prompt
Actions were recorded by field technicians.
Almost two-thirds related to unsafe
work environment, mainly linked toinadequate Crop Protection Agents (CPA)
storage practices and application of CPA
without appropriate personal
protective equipment.
Approximately one-third of Prompt
Actions related to hazardous tasks
performed by children below 18 years
old. The most common hazardous
work performed relates to the contact
with fresh tobacco leaves and theassociated risk of exposure to nicotine,
mainly during harvesting, and during
the preparation of strings of tobacco
leaves for curing.
The remaining 1.9% of Prompt Actions,representing 245 cases, were related to
the following topics: income and work
hours, fair treatment, or situations that
could be related to forced labor.

ALP Prompt Actions in 2017
34.6%

1.9%

63.5%
Hazardous work performed bychildren below 18 years old

Safe work environment issues

Types of hazardous work performedby children below 18 years old

Other

Types of safe work environment
issues39%

CPA1 stored in a way that couldcause a health and accident risk

46%

Stringing

27%

32%

Carrying heavy loads

10%

Exposure to CPA1 due to not
wearing proper protective
equipment

17%3%Working with sharp tools

7%

Exposure to GTS2 due to not
wearing proper protective
equipment

Handling or applying fertilizer

5%

Unsafe or insufficient worker
accommodation

Working in extreme temperatures

3%

OthersDriving a tractor or operating 
machinery with moving parts

3%

Handling or applying CPA1

2%

Others
1 CPA: Crop Protection Agents
2 GTS: Green Tobacco Sickness

<4%

<2%

Evaluating the overall impact of the ALP
program is a complex exercise requiring
multiple, complementary approaches.
We will continue to explore new ways toevaluate the effectiveness of our programand make changes where necessary.
We will continue to be fully transparent
in disclosing the program’s performance.

Focus on migrant workers
Data gathered on farm profiles show
there are many seasonal workers on
the tobacco farms supplying PMI,
especially during the peak harvestingtime. Their presence on farms is associatedwith many risks to the standards of the
ALP Code, as illustrated in our case study
on Mexico. These include inadequate
accommodation, low pay, pay via a crewor group leader, lack of redress for harm,
accidents or unfair treatment, anddifficulties in ensuring effective training
on work safety. Furthermore, migrant
workers' families frequently bring theirchildren, creating a risk of child labor.

Philip Morris International Sustainability Report 201749

Managing our social impact

Harvesting or handling
green tobacco

In addition to this quantitative analysis,
we have been gathering qualitative
information on the impact of the ALP
program on people’s lives throughinterviews with farmers and workers.
In a pilot exercise, conducted in 2017
in a community in Malawi with our
suppliers’ farmers growing tobacco,a new participatory method for impact
evaluation was tested involving thecollection of “Most Significant Change”
stories from farmers and workers on
farms enrolled in the ALP program.
In that exercise, coordinated by third-party
facilitators (unaffiliated with PMI’s
suppliers), participants expressed the mostsignificant changes that have occurredin their lives as a result of the farm’s
participation in the ALP program.
Although the sample was not statistically
representative, the stories revealed astriking range of meaningful and often
inter-connected impacts. Farmers oftenemphasized the increased economic
security they and their families havebeen able to realize as a result of
direct contracting and support fromthe PMI supplier.40

Improving the living and working conditions of migrant workers in Nayarit, Mexico
In the State of Nayarit (Mexico), burleyand sun-cured tobacco farmers rely
on indigenous Cora and Wixáritari(or Huichol) workers for the harvestingseason. These workers migrate with
their families from Mexico’s highlands
and settle in tobacco-growing areas,
where they live in very poor conditions
throughout the harvesting period.
While PMI previously reported onprogress in addressing child labor
among this community, attempts toimprove living conditions for theseworkers and their families have hadvery limited success.41
In the last quarter of 2017, PMI did anin-depth analysis of this complex anddeep-rooted problem and developed
a plan aiming to:——Provide adequate accommodation
to all migrant workers;——Provide workers access to shade area
for rest and lunch, and to sanitationin the field;——Prevent workers from living in
the tobacco fields as of the current
harvesting season; and——Prevent night work in the fields.

The plan was developed together with
our local supplier Tabaco del Pacifico
Norte (TPN – a subsidiary of Universal
Corporation) in consultation with all
relevant stakeholders (workers,
indigenous leaders, supplier’s field staff,
third-party NGOs, local authorities,
companies from other sectors) and
our ALP program partner Verité.
Typically, the four to five months ofearnings during the tobacco season
are the main source of annual income
for the Cora and Wixáritari families.
Maximizing the number of working hours
and income is thus the key reason why
they often prefer living in the field during
the harvest period, as other possible
accommodation options are generally
at some distance from the fields andwould imply loss of time and money
due to commuting.
In the 2016-2017 season, TPN provided
basic emergency shelters to 100% of
contracted farmers. However, these did
not fully provide a safe and sanitary
solution for workers and their families,
and further investments in morepermanent and improved infrastructure
was not a feasible solution, as most of
the farmers’ land is rented and maychange year-on-year. Moreover, even if
adequate accommodation in the field
could be provided, there would still be
issues with long working hours andA migrant worker in Nayarit,
Mexico, with her three children
as they wait for the school bus

50

Philip Morris International Sustainability Report 2017

children’s presence in the field when
they return from daycare centers,with continued risk of child labor.
PMI concluded that any intervention
to fully address the living conditions ofworkers and their families would involve
changes in the traditional organization ofwork in Nayarit’s burley and sun-cured
crop. With that in mind, as of December
2017, PMI introduced a series ofmeasures to reorganize labor schedules
and activities and to prohibit field work
after sunset.
To enable this change and assure workers
income and buy-in, PMI agreed with TPN
to a 25% increase on the piece-rate paid
to workers, and TPN developed asensitization campaign in the workers’communities of origin with support fromthe National Committee of Indigenous
Peoples (CDI).
Farmers with contractual agreementswith TPN agreed they would be
responsible for ensuring adequate
accommodation for workers, thetransportation logistics to and fromthe field, and the provision of sanitationand clean water for washing in the fields.
TPN also agreed with farmers that,provided these conditions were met,
they would provide a monetary incentive
to cover the farmers’ costs.

Managing our social impact

A migrant worker in tobacco fields
in Nayarit, Mexico

PMI supports five childcare centers,
which provide education, nutrition,and medical services for the childrenof the migrant families, and are run
by a local NGO (Desarrollo Rural de
Nayarit – Dernay). For the 2017-2018
season (finishing in May-June 2018),
Dernay extended the opening timeof the centers and increased theaccommodation capacity to welcome
the maximum possible numberof children.
TPN is implementing the measuresagreed with PMI, providing the logisticalsupport to farmers, monitoring theirprogress, and coordinating efforts
withall stakeholders, including indigenous
representatives. Furthermore, PMI
engaged a third-party NGO (Fundación
Mexicana de Apoyo Infantil – FAI), which
independently monitors housing andworking conditions provided by thefarmers and collecting workers feedback.
FAI regularly updates TPN on the resultsof their monitoring, and TPN field staff
follow up on individual issues identified.

FAI’s early monitoring data andfeedback from workers and farmers
is very encouraging. While there aremany challenges to overcome in
the implementation of this plan(e.g., improvements in the housing
conditions offered to workers,
preventing children accompanying
their parents to the field from engaging
in child labor) we believe that we havecreated the right conditions to address
the critical issue of the working andliving conditions of Cora and Wixáritarifamilies working in tobacco. We estimatethat by the end of the season we will
have reached over 6,000 people(workers and respective families)
covering every single burley andsun‑cured tobacco farm contracted
by TPN in the State of Nayarit.

PMI assumed the overall implementation
costs of this program and informed our
supplier that we would not be willing topurchase tobacco sourced from farmers
who do not participate in this season’s
effort or who do not comply with the fullrange of conditions established.

Philip Morris International Sustainability Report 2017

51

The PCSD Partnership – A multistakeholder Partnership for Enhancing Policy Coherence for Sustainable Development42
The PCSD Partnership, facilitated by
the OECD’s Unit on Policy Coherence,
was added to the UN’s global registryof voluntary commitments andmultistakeholder partnerships in 2016.
It brings together governments, civilsociety, and the private sector from all
regions of the world committed andworking to enhance policy coherence forsustainable development as a key means
to implement the Agenda 2030 for

Sustainable Development. Members of
the Partnership work together to foster
synergies across economic, social, andenvironmental policy areas, identify
trade-offs and reconcile domestic policy
objectives with internationally agreed
objectives, and address the spilloversof domestic policies.
Philip Morris International joined
the PCSD Partnership in late 2017and is committed to compile acomprehensive case study onsustainable agricultural transformation
through a policy coherence lens andits sectoral implications in long-term
economic development (2030-2063).
The case study will identify the key
barriers to this transition, document
leading practices, and illustrate the most
likely economic development scenarios
in 2030 and 2063.

Smoke-free products and their impact on tobacco growing
The production of smoke-free products
requires less tobacco compared tocigarettes. When large numbers ofconsumers eventually switch tosmoke‑free products, we expect
a gradual decrease in tobacco leaf
requirements, which will free up landand capacity for other uses.
To proactively prepare for and enable
this crop diversification in the mosteffective way, we are following a
multistakeholder approach involving
suppliers, NGOs, and other companies
active in the agricultural sector. We are,for example, partnering with USAID
Malawi Feed the Future Program todiversify smallholder farmers
production away from tobacco andinto other food crops such as soybean
or groundnuts, and have joined the
Global Agribusiness Alliance (GAA) .43

farmers are growing around 2,000
hectares of pigeon peas and morethan 100 hectares of chuma beans.
As part of this work, farm trials are
conducted to identify high‑yielding,disease-resistant, and drought‑tolerantvarieties of groundnuts and soyabeans that should ensure top
performance for the Malawian
climatic conditions. Our tobacco
suppliers are supporting the selected
farmers for this trial by providing
and distributing crop inputs, helping
with insurance and storage, as wellas providing advice by theiragronomists and support in themarketing of their production.

A key component for the successof these initiatives is ensuring theavailability of water when required,regardless of whether the alternative
crops are grown during the dry or
rainy season. We are working with
Netafim, a company specialized
in precision irrigation, to promoterelevant solutions. Solar boreholes
and storage tanks will be constructed
and different irrigation systems will betested. Finally, to reduce post-harvest
losses, the more than 12,000 farmers
involved in the food crop program
are provided with Purdue Improved
Crop Storage bags, which are specificallydesigned to reduce insect damage tocrops in storage.

We are also working with our tobacco
suppliers and their farmers to introduce
additional varieties of alternative crops
to smallholder farmers. This allows
them to not only grow food crops fortheir own consumption, but also cropsthat can serve as additional sourcesof income.
Malawi has been selected as one of thepriority markets for our diversification
efforts as tobacco accounts for morethan half of the country’s export.
At this initial stage, more than 7,600
farmers are growing 1,000 hectares ofgroundnuts, 267 farmers are growing
200 hectares of soybeans and 4,600

52

Food crops (maize and groundnuts) grown alongside
tobacco on an IPS contracted farm in Malawi

Philip Morris International Sustainability Report 2017

Focus on supporting farmers
to grow alternative crops
For several years, we have been
supporting smallholder farmers to growfood crops alongside tobacco. In Malawi
and Mozambique these efforts encompass
technical assistance and financing for
fertilizer and seeds, mainly for maize.
In 2017, 117,000 contracted smallholder
farmers produced 290,000 tons offood, with 110,000 farmers receiving
financial support.
We have seen significant improvements
in food crop yields, up nearly fourfold in
the case of maize. This is strengthening
food security and often results in a surplus
for sale at local markets.

Together with our tobacco leaf suppliers,
we are exploring with international foodcrop buyers and NGOs the possibilities
to create a route to market for surplus
food crops produced by tobacco growers
in these countries, leveraging on theinfrastructure and logistics alreadyin place for tobacco production.

Looking ahead

Although the proportion of farmers
growing food crops for their own
consumption remained stable globally,
at approximately 70%, the number oftobacco farmers growing and selling foodcrops as an additional source of income
rose from 35% in 2015, 41% in 2016 to
46% in 2017.

——Children under 18 involved inhazardous work;

Now that we have established acomprehensive and systematic wayof evaluating the effectiveness of our
ALP program, we will review and update
the program as necessary in 2018,
focusing on four critical areas:——Safe working conditions, including
the availability of Personal Protective
Equipment to prevent exposure to CPA
and Green Tobacco Sickness (GTS);44——Accommodation for workers; and——Minimum wage for workers.

Our performance: Agricultural Labor Practices1

2015

2016

2017

Goal

Systematic monitoring of labor practices (% coverage)2

32.7

72.0

77.0

100

13

15

11,043

7,508

Cumulative number of tobacco supplier locations (countries)
assessed by Control Union since 2013 (ALP topics)
Number of contracted farms in scope of Control Union
assessments by year (ALP topics)3

19 24 countries
by 2020
6,433

1 Data cover approximately 90% of our sourced tobacco.
2 Data relate to crop season, which may span over more than one calendar year.
3 According to our methodology, these assessments cover different countries and tobacco suppliers every year. Depending on the geography and typical farm sizein different countries, the number of farms covered by the assessments will vary. The variation in the number of farms assessed over the last three years does
therefore not reflect a reduction in the scope of the assessments.

Managing our social impact

Philip Morris International Sustainability Report 201753

Reducing our environmental footprint
Effective environmental management
across our operations and value chain goesbeyond compliance with applicable laws
and regulations: It is central to the securityof raw material supply, promotes efficiency
and savings, and minimizes negativeenvironmental impacts.
Our environmental management strategy
follows a two-pronged approach:——Minimizing our impact on theenvironment through carbon footprint
and water use reduction, conserving
biodiversity and combating
deforestation, as well as waste
minimization; and——Understanding and adapting to potential
future business impacts of major
environmental trends, such as theimpact of climate change on tobacco
growing. We undertake risk assessments
to quantify the impacts of these trends
along our value chain. Based on the
results, we develop management andadaptation strategies.
Through life-cycle and other assessments
along our value chain we understand
our main areas of impact and therefore
where to set priorities. These areas
include tobacco farming for carbon
footprint reduction and water stewardship
action and product end-of-use for action
on litter and waste. We also need to
manage new areas of impact due to theincreasing use of electronics and batteriesin our products.
In this section, we provide an update
on our 2017 activities related to climatechange, water use, biodiversity,
deforestation, and waste. These efforts
demonstrate how we are embedding
SDGs 6-7 and 13-15 into our sustainability
strategy and how these activities
contribute towards advancing SDG 12 on
Responsible Consumption and Production.

Climate change –a science-based approach
Climate change, one of the biggest
challenges facing humanity today, requires
collective global action. Following the
adoption of the Paris Climate Agreementin 2015, there is widespread
understanding of what needs to be done
to protect the planet. PMI supports theAgreement, and we are playing our partin delivering on the necessary action.
In 2017, we continued to make progressin reducing our environmental impact
across our value chain: in our factories
where our carbon footprint is relatively
small compared to other industries, as well
as beyond the factory gates. That includes
looking at both our upstream supply chain
activities (currently focusing on tobacco
farming) and downstream, following our
product and packaging environmental
impacts to end-of-use. We also work
towards ambitious targets, based on
climate science, which guide and inform
our climate change programs as part ofour culture of continuous improvement.

CDP Climate leadership for
the fourth year in a row
Every year we report on the status of ouractivities and progress to CDP, the leadinginternational not-for-profit organizationassessing companies’ efforts on climatechange. Out of over a thousand of theworld’s largest companies assessed by
CDP last year, PMI’s operational carbon
footprint is nearly 90% lower than the
average, and PMI is one of only 25
companies recognized in CDP’s 2017
“Climate A List,” for consistently taking
comprehensive action to reducegreenhouse gas (GHG) emissions
and mitigate climate change, and forthe transparency of our disclosures.

PMI also achieved CDP Supplier
Engagement Leadership for our actions
and strategies to reduce emissions andlower climate-related risks in our supply
chain, making it onto CDP's Supplier
Engagement leader board, and placing
PMI within the top 2% of companies
in 2017.

Science-based targets andrenewables
PMI supported the call for a price on
carbon in the Paris Climate Agreement andcommitted to developing science-basedtargets. Our targets, which wererecognized by the Science-Based Targets
initiative in 2017, demonstrate how PMI
can contribute to keeping global warming
below 2°C based on pre-industrial levels.
We have set our performance baseline
as 2010. Against that baseline, we aim to
reduce absolute CO2e emissions fromour own operations by 30% by 2020,
40% by 2030 and 60% by 2040. We are
well on track in 2017, achieving an overall
reduction of 31% for our GHG scopes 1
and 2 emissions, driven by the use ofgreener electricity, exceeding our2020 target.
Across our value chain, we aim to reduce
absolute CO2e emissions by 40% by 2030.
In 2017, we achieved a 30% reduction
across scopes 1, 2 and 3, driven by gains
in curing efficiency and use of greener
fuels in tobacco agriculture. We also havea long-standing commitment to reduce
the emissions intensity of our value chain(measured in CO2e per million cigarettes
equivalent) by 30% by 2020. In 2017,
we remained on track to meet this target,
reaching a 24% reduction since 2010.

Global greenhouse gas emissions scope 1, 2 and 3 (‘000 metric tons CO2e)2010 88%baseline2015 89%54

5%2016 88%6%2017 88%5%

Scope 3

6%

6%

Scope 2

Scope 1

Philip Morris International Sustainability Report 2017

6%

6,381

6%
8%

7,401

5,691
5,149

Absolute GHG Emissions: Scope 1 and 2 – Results and Targets
1m
900k
800k
700k
600k
500k
400k
300
200k
100k
0

2010
Set our baseline
and targets to2015 and 2020

2015

2016

Achieved 27%
Beat our target
absolute reduction.
of 20% reduction
Developed
in factory
science‑based targets
GHG intensity

The programs for achieving our targets
are comprehensive and include:——eco-design in new facilities;——fuel efficiency in our manufacturing
processes;——purchasing greener electricity;——purchasing greener fuels;——greening our fleet; and——helping farmers improve fuel efficiency
and use greener fuels in our tobacco
supply chain.

2020

2030

2040

30% absolute
reduction

40% absolute
reduction –science‑basedtarget60% absolute
reduction –science‑basedtargetIn order to support our science-basedtargets and green technology
development, we set a target to source
80% of our production electricity needsfrom renewables by 2030. In 2017,with green electricity supplied to ourfacilities for the first time in Mexico,
Colombia and Serbia, 53% of electricity
was sourced from wind, solar or hydroplants. We will continue sourcing more
as renewable electricity becomes available
in the countries where we operate.

Greening our vehicle fleet
PMI operates a fleet of more than
25,000 vehicles across the world.
In 2017, fleet emissions represented
around 30% of our Scope 1 GHG
emissions. Reducing those emissions
must therefore form a core part ofour carbon reduction strategy. In 2017,
the absolute CO2e emissions fromour fleet decreased by approximately
16% versus our 2010 baseline.

One example of how we have
implemented this approach comesfrom our affiliate in Spain, where we
replaced the entire diesel-powered fleet
with hybrid electric cars (around 300 cars).
As a result of this project, the fleet CO2eemissions were reduced by 21%, with anassociated reduction in other pollutants
typical of diesel vehicles. Beyond theenvironmental improvements, there wasan outstanding engagement within ourorganization whereby our employees
actively participated in the selectionof hybrid vehicle models available fromdifferent manufacturers. We also
recognize that having the correct vehicles
is only the starting point and are now
focusing on eco-driving initiatives withtechnical training for our employees
on how to drive in the most efficient way.

Significant technological advancement
in electric vehicles make them morecommercially competitive for fleet
managers, and a range of fully electric,
hybrid, and other low carbon emissions
vehicles are now available in many ofthe markets where we operate. We are
therefore developing a global roadmap
on how to move towards a moresustainable fleet, cutting carbon
emissions, generating cost savings,
and maximizing efficiency.

Philip Morris International Sustainability Report 2017

Reducing our environmental footprint

We are continuing our Marginal
Abatement Cost Curve (MACC) approach
to identify where to act by comparing andranking all our GHG reduction projects
globally based on their cost-effectivenessin reducing emissions. We have also set
an internal carbon price (USD 17 per tonCO2e), necessary to drive the investments
needed. On a day-to-day basis we use
MACC to refresh and enhance our listof initiatives. As an example, in 2017
we installed three high-efficiency
tri‑generation power plants – systems
which generate heat, cold, and power in
one efficient combined process – coupledwith solar photovoltaic energy generationin Indonesia and Turkey.

2017
Achieved
31% absolute
reduction

55

Working with tobacco
farmers to reducegreenhouse gas emissions
The environmental impact of tobacco
farming can be significant, and the
GAP program is therefore crucial for
managing and reducing our overall
environmental footprint.
Most GHG emissions related to thetobacco supply chain come from thecuring process for Virginia flue-cured
tobacco (Virginia). Our target is to lower
the GHG emission intensity related tothis curing process by 70% by 2020,
compared to a 2010 baseline. We are
well on track, with a 38% reduction
achieved so far by 2017. To achieve
this target we focus on improving curingbarn efficiency and eliminating the useof coal and non‑sustainable firewood.

Improving curing barn efficiency
One of the main tobacco types usedin our products is Virginia tobacco,
which is cured in heated barns and thus
requires an energy source, such as wood.
About five kilograms of wood are needed
to cure one kilogram of Virginia tobacco.
With Virginia tobacco representing
approximately two-thirds of our global
tobacco variety needs, and around
140 grams of tobacco to produce
a carton of 200 cigarettes, approximately
0.5 kilogram of wood is required forthe curing of 200 cigarettes.45
Most tobacco growers around the world
own their own curing barns. Our GAP
program focuses on improving combustion
efficiency, ventilation, and controls of
the barns. In 2017 alone, approximately
23,000 barns were improved in Brazil,
Indonesia, Italy, Malawi, Pakistan,
the Philippines, Spain, and Tanzania,
bringing the total number of barns
improved since the beginning of the
program in 2014 to approximately
45,000. We aim to improve a totalof 60,000 barns by 2020.

Eliminating the use of coaland non-sustainable firewood
Based on current plans, more than
70% of our flue-cured tobacco purchases
should be cured with renewable fuelsources by 2020. In 2017, 36% of theflue-cured tobacco we purchased was
cured with renewable fuels (versus
29% in 2016) of which 29% was cured
with sustainably sourced firewood
and 7% with biomass. As a result,
GHG emissions from curing activities
were reduced by over 330,000 tCO2e.
To increase the use of renewable andtraceable curing fuel sources, PMI leaf
operations and tobacco suppliers planted
more than 26 million trees in Brazil,
Indonesia, Malawi, Mozambique, Pakistan,
the Philippines, and Tanzania. Naturalforest regeneration practices were
implemented in collaboration with ourtobacco suppliers in the secondary
Miombo woodland46 in Malawi,
Mozambique, and Tanzania.
To further improve the supply ofsustainable firewood for both curing
Virginia tobacco and for domestic
requirements in tobacco farming
communities, our tobacco supplier piloted
two community management plans forthe secondary Miombo woodlands in
Mozambique. These were based onproviding technical and financial support
to the tobacco farming communities,
which will gradually take up the
management and ultimately harvest
the firewood.

To further improve curing efficiency,
a trial has been carried out in Brazil andPakistan involving the installation of finson the heating pipes in flue-curing barns
to increase the exposed surface areaand hence the efficiency of the heatexchange. Based on initial results inPakistan, this method can lead to savingsof more than 10% of firewood-fuel.

Sustainably sourced wood chips
used as fuel in tobacco curing

56

Philip Morris International Sustainability Report 2017

In 2018, we expect to review the firstoutcomes of the Miombo regeneration
strategy and management plans to validate
whether they provide a sustainableapproach to the supply of firewood.
If the practices are demonstrated as
feasible and sustainable, we intend toestablish more than 10,000 hectaresof such managed forestry by 2020.
In 2017, approximately 23% of our
Virginia purchases were still cured
with coal. Plans have been developed toreplace coal with agricultural waste pellets,green electricity produced by hydropower plants, and sustainable firewood
in countries still using coal to cure our
Virginia purchases. Our objective is thatby 2020, no coal will be used to cure
our flue-cured tobacco purchases.
In 2018 and 2019, our GHG emissions
related to tobacco flue-curing areexpected to decrease further througha significant increase in the usage oftraceable firewood coming fromsustainably managed tree plantations(more than 200 million trees were planted
between 2000 and 2017). As part of our
precautionary approach, we do notassume that fuelwood is from sustainablesources unless we have proof – andwe calculate our carbon footprint
accordingly, using a “full carbon” emission
factor for fuel wood that we are not sureis renewable.

CO2e reductions in our tobacco
supply chain
A monitoring and verification frameworkhas been launched in 2017 across ourleaf supply chain to monitor and verify
the impact of the more than 40 initiatives
being implemented. These initiatives
support the achievement of our 70%
carbon footprint reduction goal for2020 by eliminating the use of coal andnon‑sustainable firewood, promoting
the use of alternative biomass fuels
and improving curing efficiency.

PMI targets for 2020 to improve environmental
performance in our tobacco supply chain
CO2e reduction (%)
2020
target 70
2017 382016 142015 12

Tobacco purchased at no risk of deforestation of old growth forest (%)
2020 100
target2017 942016 882015 87

Renewable and traceable fuel sources (%)
2020
target 70
2017 2972016 2552015 26

4

Biomass adoption

Renewable and traceable fuel sources

Philip Morris International Sustainability Report 2017

Reducing our environmental footprint

Self-suﬃcient ﬁrewood

57

Water: stewardship acrossand beyond our operations
In comparison to other products, tobacco
is not particularly water intensive. Water isused in our factories, in the manufactureof raw materials such as filters, paper
and packaging materials, and in agriculture,even though more than half of thetobacco grown is rain-fed and does
not require irrigation.
In our environmental programs, we do notjust seek to reduce what we use but also
to act as a water steward. That means
responsibly using the water we needwithout negatively affecting the needsof others by:——Understanding how much water weneed and using it optimally;——Not negatively impacting the qualityof water resources;——Striving to ensure access to safe
Water, Sanitation and Hygiene (WASH)
in all our facilities and increaseavailability of WASH services on
our contracted farms;——Respecting the vulnerability of water
resources we use and the role of thoseresources in the wider community;——Seeking partnerships to improve ourwater management practices; and——Continuously improving these practices
through our Good Agricultural Practices
program in our tobacco supply chain.
In 2017, we achieved A-List status for
CDP Water, which recognizes our water
stewardship initiatives.
Water is not a major input to conventional
tobacco product manufacturing, but weseek continual water use reduction across
manufacturing facilities and focus onachieving improvements in water
efficiency, conservation, and reusing or
recycling water where possible.
In 2017, the process to manufacture our
new smoke-free products required
approximately four times more water per
unit of product than for conventional
cigarettes. Our efforts are geared towards
improving water efficiency throughout thatprocess by implementing new process
designs, reusing or recycling water, and byusing rainwater harvesting where feasible,
with a view to minimum water discharge.
In 2017, PMI implemented other initiatives
to reduce water use and increase water
recovery; however, due to our new
manufacturing process, our average water
consumption increased from our lowest
level of 4.0m3 in 2016 to 4.8m³ of waterfor every million units of productequivalent (cigarettes and Heatsticks).
58

Putting tobacco’s water footprint into context
Tobacco growing and manufacturing take around one‑third of the water required
to make the same amount of tea or one sixth of that required for coffee or chocolate(per weight of finished product).¹

TobaccoTea

Chocolate

1 Estimation based on PMI water use data for manufacturing and “The green, blue and grey water
footprint of crops and derived crop products”, M. M. Mekonnen and A. Y. Hoekstra, 2011.
(http://wfn.project-platforms.com/Reports/Mekonnen-Hoekstra-2011-WaterFootprintCrops.pdf)

We joined the Alliance for Water
Stewardship (AWS) in 2017, a leadingorganization dedicated to better managing
water within the local watersheds.
We successfully piloted the adoptionof the AWS Standard in our factoryin Brazil and developed a toolbox for
wider implementation. In March 2018,
our factory became the first factoryin the country to be certified by AWS.
Based on the results and learnings
from this pilot, we will roll out the AWS
Standard globally. As a priority, we planto certify the ten factories which ranked
highest in our previous risk assessment
by 2020 and to extend to the rest of
our operations until 2030.

WASH services,47 and there are no
indications that the situation ofsmallholder tobacco farmers andcontracted workers would differ muchfrom other rural households. Our firstpriority is on smallholder farms where
PMI’s active support in providing WASH
services is most needed.

Water stewardshipin tobacco agriculture——An improved drinking water source
within a 30-minute roundtrip;

More than half of the tobacco crops
supplied to PMI globally are rain-fed anddo not require supplementary irrigation
other than at the seedling stage.
In 2017, water baseline studies wereconducted in 60 different geographicalareas where specific types of tobacco
are grown. The selected areas represent
90% of PMI’s global purchases of tobacco
leaf. A water risk assessment system has
been developed, including a global risk
assessment tool and a tailored local risk
assessment methodology and guideline.
Three important tobacco-sourcing
countries – Brazil, Malawi and U.S. –were selected to pilot and validate
the risk assessment methodology.
The pilot risk assessment in Malawi helped
us highlight the lack of access to adequate
safe Water, Sanitation and Hygiene
services (WASH), which poses a risk tofarmers’ and workers’ health andlivelihoods. In Malawi, more than 30% of
the rural population lacks access to basic

Philip Morris International Sustainability Report 2017

The pilot project in Malawi aims to provide
a concrete example of how to invest into
improving WASH services for farmers
in the supply chain and to identify
opportunities for further roll-out of a
WASH intervention. In developing our
project, we used UNICEF/WHO criteria
for basic service level provision, which
are defined as:——An improved sanitation facility which is
not shared with other households; and——A handwashing facility with waterand soap.
In 2018, we plan to begin a program ofproviding and adapting boreholes fittedwith hand pumps. We are also
investigating more innovative solutions,such as cloud fishing nets (condensing
water from air) and ferro-cement water
storage tanks. PMI is engaging with local
stakeholders during the pilot to leverage
their local expertise and networks,
and we already see their strong interest
to be involved and contribute to thesocio‑economic development of Malawi.

A live barn structure in Malawi

Conserving biodiversity
and combating
deforestation
Biodiversity

It is important for successful agriculturethat diversity in habitats and species
is maintained, as biodiversity raises
the resilience of ecosystems and helps
provide valuable ecological services
including genetic diversity, which is key
for biological pest control.

GAP provides guidance on biodiversity
management practices and requires
our tobacco suppliers to develop andimplement a biodiversity management
plan that incorporates, and goes beyond
compliance with the applicable laws,
and regulations for tobacco- andforest‑growing areas. Tobacco production
areas must not be located in places
that could cause negative effects onnational parks, wildlife refuges, biologicalcorridors, forestry reserves, buffer zones,or other public or private biologicalconservation areas.

The tobacco supplier plan must aim toenhance habitats, promote native species,
maintain biodiversity on the farm throughprotection of conservation areas andendangered species; the conservation ofnatural habitats and corridors between
natural habitats; land conversion; soil
conservation practices; and minimizationof pollution to the air, water, or land.
Biodiversity initiatives are linked totobacco-farming systems or farmed
landscape where our tobacco suppliers
work with the farmers to make themunderstand the requirements andprovide examples that apply to their
daily work.

Philip Morris International Sustainability Report 2017

Reducing our environmental footprint

Biodiversity represents the diversityof natural habitats, of species in thesehabitats, and of the genome within these
species. Its conservation is essential,
not only because we utilize a great
diversity of species but also because
healthy habitats provide vital services
like pollination, biological pest control,
filter functions of soils, and the regulationof nutrient cycles.

Due to the nature of PMI’s business,there are no significant impacts on
biodiversity or deforestation from ourown operations. Where we do havea larger role to play on biodiversity isin our supply chain. Impacts linked totobacco farming are addressed throughour Good Agricultural Practices program
for tobacco suppliers, where we
describe our requirements for goodenvironmental practices, including
integrated pest management and soil
conservation practices, as well as
biodiversity management.

59

Responsible management ofchemicals for crop protection
To achieve responsible managementof chemicals for crop protection, andto reduce risks to the health and safetyof farmers and farm workers, we haveestablished an Integrated Pest
Management (IPM) program.
IPM plans are underway in all the mainareas where tobacco is grown for PMI.
Tools have been developed to support
the implementation of the program
in collaboration with the not-for-profit
Centre for Agriculture and Bioscience
International (CABI),48 namely a manual
to help screen bio pesticides, a databasewith over 300 non-Highly Hazardous
Pesticides (non-HHP) alternatives,and best practice guidelines for PersonalProtective Equipment (PPE) and forthe disposal of empty Crop Protection
Agent (CPA) containers. Our newly
launched IPM app has reachedapproximately 700 users, while the
new IPM website 49 has reached morethan 6,500 views in 2017. Both the
IPM app and website benefited fromthe addition of newly developed content.
We have made significant progress
towards achieving our target to eliminate
WHO TOX150 CPAs by crop year 2018
and HHPs by crop year 2020 throughpromoting alternative and less toxic CPAs
and bio pesticides. At the end of 2016,the volume of purchased tobacco without
quantifiable level of any WHO TOX1 CPAs
was at 98%, in line with our target to reach
100% by 2018. Eighty-four percent of
our tobacco purchases did not containany other quantifiable HHP residues,
which represented progress against
our target to completely eliminate
the use of HHPs by 2020.

Deforestation
One of the most significant environmental
issues facing the world is deforestation,
which results in both a loss of biodiversity
and climate change impacts.
PMI has been working for many years
with suppliers and farmers to address
the issue of wood used as fuel in tobacco
curing, which in some places is associatedwith risk of deforestation. We address
this by improving curing-barn efficiency
and increasing the use of sustainable
and traceable curing-fuel sources.
We currently purchase 94% of tobacco
cured at no risk of deforestation,
up from 88% in 2016.

60

Identifying and promoting the use of natural agents to combat pests
in tobacco plants

950

Semiochemicals(pheromones)

Microorganisms(bacteria, fungi,
oomycetes, virus)

148

active substances
identified

36

Botanicals© CABI

An example of our efforts in this areais the collaboration with our tobacco
suppliers in the “Live Barn” initiativein Malawi and Mozambique: Trees areplanted in such a way that they will
eventually serve, in-situ, as the poles
for a curing barn, hence removing theneed to cut trees to build curing barns.
More than 85,000 live barns havebeen planted across the two countries,
and the first 1,000 are starting to be
used in the current curing season.
Tobacco growing is, however, not asignificant contributor to deforestation
through land-use change, mainly due tothe decreasing area of tobacco farmland.
A 2017 study using the Big Chain Tool 51
confirmed this for PMI’s tobacco supply
chain. In 2017, we also supported aland-use change study, which led tothe publication of the Land-Use
Change Guidance.52
In addition to considering deforestation
risk in tobacco farming, in 2017, PMI
assessed the risks of deforestation acrossits entire value chain. Among thecommodities most linked to deforestation,
wood pulp is important to PMI as the raw
material for paper, cardboard, andcigarettes filters. The corresponding
supply chains tend to be more complex
than for tobacco, and a small share ofthese materials is made from pulp sourced
from countries known to experience

Philip Morris International Sustainability Report 201753

Macroorganisms(beneficial nematodes,
lacewings, ladybird beetles,
parasitoid wasps, predatory
bugs and mites)

deforestation. We plan to work withkey suppliers to map these material
flows and increase the traceabilityof our supplies.
Going forward, we intend to develop
a company-wide policy and increase
our disclosure on this topic throughsubmission to CDP Forests in 2018.

Waste management
Each of our factories operates a waste
management program to reduce, reuse,
and recycle waste before any final
treatment or disposal. In 2017, 94%of our factory waste was recycled,
composted or sent for energy recovery.
Beyond our own manufacturing
operations, a bigger challenge liesin the waste resulting from the useof our products. Our products andpackaging are mostly made of renewablematerials, such as tobacco leaves, paper,
cellulose acetate filters, and cardboard.
After use, paper and cardboard
components, such as empty packs, arerecyclable, and the rest, such as plastic
film wrapping and cigarette butts,
should be properly disposed ofwith general waste.

Littering
Littering of consumer goods is an issueof concern to society in many parts of
the world and is linked to two main drivers:
consumer behavior and the availabilityof waste disposal infrastructure.
Cigarette butts are among the mostfrequently littered items. In naturalenvironments, cigarette butts decompose
slowly, leach smoke residues, and risk
being accidentally ingested by animals.
Smokers should avoid littering and disposeof their cigarette butts responsibly.

We believe that the best way of dealing
with cigarette butts is to stub them out
and dispose of them with general waste,
which in many countries is processed
for energy recovery.
We can play an important role in raisingawareness and encouraging consumers
not to litter, through both information
campaigns and the distribution of portable
ashtrays. As littering is an increasingly
important topic in many places, werecognize that there is an opportunity
to be more impactful in our work overthe long term.

We can achieve more by working withothers – industry peers, anti-litteringorganizations and authorities – andsharing best practices across culturesand geographies. We are developing a
guidance and a toolbox of best practices
that we intend to share with our affiliates
in 2018, when they develop and support
local anti-littering campaigns.

Recycling after consumer use
With the growth of smoke-free
products, such as IQOS, we want toensure that the entire life-cycle ofthese products is managed sustainably.
Heated tobacco units for IQOS do notburn and carry less odor than cigarettebutts. Our observations also suggestthat they have a lower propensity to
be littered than conventional cigarettes.
In 2017, we started the collection ofused heated tobacco units from
employees in our Operations Center,
Factory and R&D facility in Switzerland.
During the year, we collected 356,000
units, which represents an estimated
50% of consumption. The user feedback
and collection statistics confirmed
the interest and readiness of users

to dispose of their used products
responsibly, and we have confirmed
the feasibility of this approach. We are
currently studying the economic
feasibility of developing market recycling
schemes for these heated tobacco units.

Electronic waste
The IQOS heated tobacco units areused with an electronic device,composed of a holder and a pocket
charger. PMI’s aim is that the devices
are returned after use and recycled tothe highest industry standards in every
country where we market IQOS.
In all countries where IQOS is soldthe devices can be returned at service
points for proper disposal. Consumers

can either bring back the device toa point of sale or return the device
through a delivery service if bought
online in countries with online sales.
Returned devices were inspected
and sent for recycling and recovery.
In 2017, in our largest market for IQOS,
Japan, returned devices were recycled
to recover valuable metals. The share ofrecycling is limited by currently available
infrastructure and market conditions,so our objective is to improve this overtime. In cooperation with recycling
experts, we have defined new internal
standards for traceability and sustainable
recycling. We are now identifying global
partners to manage the inspection
and recycling process incorporatingthese new standards.

Reducing our environmental footprint

PMI employees discuss recycling of
HeatSticks for IQOS during a pilot recycling
initiative at PMI’s Operations Centerin Lausanne, Switzerland

Philip Morris International Sustainability Report 201761

Looking ahead
Our business transformation brings
new challenges but also significant
opportunities for environmental
sustainability. Our long-term targets onenvironment, including our science-basedtargets, have been developed taking into
account the changes in our business.
Beyond our own operations, we also want
to apply good environmental stewardshippractices. Building on the successful
Brazilian pilot, we plan to start
implementing water stewardship across
our operations, with ten factories
expected to be certified by 2020
and the remaining by 2030.

We believe that we can also play a rolein combating deforestation in the
tobacco supply chain and, to someextent, in our wood pulp supply chain.
We want to work more closely with
suppliers to improve pulp sustainability
and traceability.
With the success of our smoke-free
products, our new electronics supply
chain is gaining importance. We wantto ensure a responsible and sustainable
use of batteries, plastics, and printed
circuits. We are identifying potential
partners to make the production
process for our electronic devices
more efficient.

A tobacco field in Dowa, Malawi

62

Philip Morris International Sustainability Report 2017

We are committed to continuous
improvement by incorporating goodenvironmental management into
product design, using componentsthat can be recovered or recycled,
and working with experts to develop
the best technologies to reuse materials.
This is especially important for future
IQOS models and other new products.

Our performance: Reducing ourenvironmental footprint

2010(baseline)

2015

2016

2017

CO2e scope 1 (metric tons)

443,186

361,720

351,990

388,384

PMI factories,
offices, and fleet

CO2e scope 2 (metric tons)

470,864

329,323

314,049

241,355

PMI factories
and offices

CO2e scope 1+2 (metric tons)

914,050

691,044666,039629,739

PMI factories,
offices, and fleet

CO2e scope 1 from fleet (metric tons)

143,148

119,471

122,434

119,588

PMI fleet

296

215

227

226

PMI fleetCO2e scope 3 ('000 metric tons)1

6,487

5,690

5,025

4,519

PMI operationsand value chain

CO2e scope 1+2+3 (‘000 metric tons)

7,401

6,381

5,691

5,149

PMI value chain

CO2e scope 1+2+3 per million cigarettes
equivalent (kg)

7,911

7,070

6,620

5,994

PMI value chain

CO2e scope 1+2 absolute reduction versus
2010 baseline (%)

24

27

PMI factories,
31 30 by 2020
40 by 2030 offices, and fleet
60 by 2040

CO2e scope 1+2+3 absolute reduction
versus 2010 baseline (%)

14

23

30 40 by 2030

PMI value chain

CO2e scope 1+2+3 intensity reduction
versus 2010 baseline (%)211

16

24 30 by 2020

PMI value chain

Energy used and purchased (Gigajoules)

8,025,559

8,230,327

0

30

32

Water use (‘000 m3)

4,998

3,654

3,394

4,152

PMI factories

Water ratio (water use in m3 per million unitsof cigarette equivalent)

5.34

4.05

3.95

4.83

PMI factories

Waste (metric tons)

127,631130,077

140,316

PMI factories

Waste recycled (%)

87

87

82

85

PMI factories

Waste disposed to landfill or incineration
without energy recover (%)

5.7

4.8

6.5

<5.0

PMI factories

Manufacturing facilities certified
to ISO14001 (%)

93

93

91

100

PMI factories

A

A

A

B

B

A

A-

A

2015

2016

2017

Goal

Tobacco purchased through direct contract by our leaf operations
or our tobacco suppliers (%)

88

88

90

>90

Tobacco purchased without detection of any
WHO TOX1 Crop Protection Agents (%)

94

98

Not yetavailable

100% by crop
year 2018

Tobacco purchased without any detection of otheridentified HHP residues (%)

69

84

Not yetavailable

100% by crop
year 2020

CO2e intensity reduction versus 2010 baseline (%)

12

14

38

70 by 2020

Tobacco purchased at no risk of deforestation of old growth forest (%)

87

88

94

100 by 2020

CO2e emissions from vehicles(g CO2e per km driven)

Renewable electricity (%)

CDP Climate Change (rating)B

CDP Supplier engagement (rating)

8,875,006

Scope

PMI factories,
offices, and fleet

53 80 by 2030

PMI factories

Reducing our environmental footprint

CDP Water (rating)Goal

1 The breakdown of scope 3 emissions is published in our CDP submission.
2 Intensity is measured in CO2e per million cigarettes equivalent.

Our performance: Environmental metrics in our tobacco supply chain

Philip Morris International Sustainability Report 201763

Next steps
In this third Sustainability Report,
we have tried to provide a morecomprehensive picture of oursustainability work. With the aim toachieve greater transparency and toallow readers to assess our progress,
we have included a fuller set of metrics
and data trends.
We have also shared more contextual
information on our business and how
we manage sustainability, and wehave taken into account the feedback
we received on our last report.
The progress we have made acrossthe four pillars of our strategy is anindication of our sustainability ambition:
We are on track with the transformationof our company, we are delivering
towards our CO2 reduction targets
within our operations and beyond,
we are improving on our inclusionand diversity KPIs, and we havestrengthened the governance of
our sustainability management.

We realize that the transformationof our company brings along newchallenges we need to address:
reducing the environmental footprintof smoke-free products manufacturing
process, promoting crop diversification
amongst tobacco farmers, and equipping
our people to successfully transformthe company.
Starting in 2018, we aim to:——Refresh the analysis of our significant
sustainability topics;——Implement our Human Rights Roadmap
and carry out a Human Rights Impact
Assessment pilot for one market;——Update our Agricultural Labor Practices(ALP) program based on learnings ofthe past years;——Expand our efforts on deforestation
prevention and post-consumer
waste management;

PMI’s state-of-the-art R&D facility for smoke-free
products in Neuchâtel, Switzerland

64

Philip Morris International Sustainability Report 2017——Conduct a carbon and water
footprinting of our new productportfolio; and——Further raise internal awarenessof sustainability.
We welcome your feedback on thisreport and look forward to sharing
our progress in our next report.

Forward-looking and cautionary statements
This report contains projections of
future results and other forward-looking
statements. Achievement of future
results is subject to risks, uncertainties,
and inaccurate assumptions.
In the event that risks or uncertainties
materialize, or underlying assumptions
prove inaccurate, actual results could varymaterially from those contained in suchforward-looking statements.
Pursuant to the “safe harbor” provisionsof the Private Securities Litigation ReformAct of 1995, PMI is identifying importantfactors that, individually or in theaggregate, could cause actual results
and outcomes to differ materially fromthose 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 tobacco
products and exposure to environmental
tobacco smoke; litigation related totobacco use; intense competition; theeffects of global and individual country
economic, regulatory, and politicaldevelopments, natural disasters andconflicts; changes in adult smoker
behavior; lost revenues as a result 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;
and the integrity of its information
systems. 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 andproductivity 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. 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, 2018.
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 totime, except in the normal course of its
public disclosure obligations.

Concluding remarks

Philip Morris International Sustainability Report 201765

Annex 1: Overview of marketing principles
for combustible products
What we do
Our Guidebook for Success (Code of
Conduct) and internal Practices andPolices, including the PMI Marketing Code,reflect our commitment to market our
products responsibly, in compliance withapplicable laws, only to adult smokers, andproviding accurate information. This is asummary of those standards, as they areset forth on different internal documents.
Our brands are among the most valuable
in the world. We put our creativity andinnovation into developing and maintaining
brand value. At the same time we knowthat tobacco products create health risks
to consumers. This is why it is so
important to market our products
responsibly and only to adult smokers.
At PMI we have to ensure that ouremployees and agents only engage in
responsible sales and marketing practices.

How we do it
The Marketing Code contains our
minimum global standards that apply
to all sales and marketing activities
of PMI relating to Combustible Tobacco
Products. We apply these standards
voluntarily when there is no applicable law
or when the applicable law is less strict.
As Combustible Tobacco Products
represent the largest part of our business
today, the Marketing Code provides
a solid foundation for responsibly sellingand communicating these products.
The top priority for PMI is to develop
and market smoke-free products that are
a better choice for smokers than continued
smoking and have the potential to reduce
the risks of smoking-related diseases.
These innovative smoke-free products,
like heat-not-burn, are subject to different
marketing and sales rules, namely the“Good Conversion Practices”.
While we are moving with speed to makeour vision of a smoke-free world a reality,
we must acknowledge that the majorityof our business today is traditional
combustible cigarettes. At PMI, we
operate under Responsible Marketing
Principles. These principles, as defined
below, embody our Company’scommitment to engage in responsible
marketing directed only to Adult Smokers.

66

Responsible marketing
principles
1. We market and sell our
combustible tobacco products
to adult smokers only
What do we mean?
We sell Combustible Tobacco Products
and compete for market share among
Adult Smokers who have chosen to smoke.
We do not seek to influence any adultconsumer’s decision about whether or
not to smoke.

Our standards:——We must not use images that haveparticular appeal to minors, including
youth-oriented celebrities or cartoons.
We must not use models who are or
who clearly appear to be under the ageof 25.
——We must only place Advertising in media
channels, venues or events that are notdirected to minors and whose audience
is reasonably estimated to be at least
75% adults. Advertising on television,in radio broadcasts, or in cinemas should
only appear in the later evening hours.
——We must not place Advertising on
the front or back cover of a printed
publication for general circulationor general circulation to the trade.
——We must not use outdoor Advertisingthat exceeds 35 square meters in totalsize, either individually or in deliberatecombination with other Advertising,unless we can do so responsibly in lightof existing local circumstances (e.g.,where most of the billboards available
for placement of Advertising exceed
35 square meters in size).
——We must not place outdoor Advertisingwhere the Advertising is readablefrom facilities attended or frequented
primarily by minors. Outdoor
Advertising should not be placed
within 100 meters of such facilities.
——Company activities involving
engagement and interaction with
consumers, whether offline or online
via digital media, such as events or
Direct Communication, must be
directed only to age-verified
Adult Smokers, subject to specificage verification process.

Philip Morris International Sustainability Report 2017——Premiums must be designed for adults
and must not have particular appeal tominors. We may brand smoking-related
premiums such as ashtrays and lighters.
If premiums are not smoking-related,the branding, if any, must not be visible
to others when the premium is used.
——We may sell and deliver Combustible
Tobacco Products directly only to
age-verified Adult Smokers residingin the country of intended sale.
——We may offer free Combustible Tobacco
Products in limited quantities (typicallyno more than one pack) only toage‑verified Adult Smokers as part ofproduct trial, switch-selling or swapping
activities. We must not engage inswitch-selling until after the initialpurchase has occurred.

2. We warn consumers about thehealth effects of our combustible
tobacco products
What do we mean?
Smoking causes serious disease and is
addictive. We warn consumers about
the health effects of smoking.

Our standards:——All Advertising and Consumer Packaging
must have health warnings, even if thelaw does not require these warnings.
If the law does not require or specify
health warning content and appearance,
we must ensure that health warnings
are clear and conspicuous.
——If there is a legal requirement to print
yields, we may voluntarily print tar,nicotine and/or CO yield numbers on
Advertising and on Consumer Packaging
in addition to yield labeling requiredby law, as long as we also print thefollowing statement in a clearly legible
typeface and size: “The amount of tar,nicotine and/or CO you inhale willvary depending on how you smoke
the cigarette.”

3. Our marketing must be honest,
accurate and transparent
What do we mean?
All of our marketing and sales activities
must respect applicable laws, global
standards of decency, and the local culture
and practices prevailing in the country
where the activities will be implemented.

Our standards:——Product or brand-related statements
must be accurate and not misleading,including about the health risks ofsmoking. All product-related claims
require adequate substantiation.
——PMI employees or contractors whointeract with consumers, including in
the context of Unbranded platforms or
campaigns, must make it clear that they
are working for a tobacco company.
——We must not pay to include the useof Combustible Tobacco Products,
a Combustible Tobacco Product brandname or items bearing a Combustible
Tobacco Product brand name in movies,
entertainment programs or theatrical
productions, on television or radio, on
the Internet or in any other production(e.g., video games).
——Standard brand presentation (i.e., brand
name, trademark and/or logo) must
predominate in all Consumer Packaging
designs. We must not use Advertisingvisuals on Consumer Packaging. Any
text placed on the external part ofConsumer Packaging must be factual,brand-related and/or product-specific,
and not Advertising copy.

4. We respect the law and also
ensure that:——All persons, such as hosts, hostesses,
brand ambassadors and trend experts,
acting on behalf of the Company toengage with Adult Smokers must beof legal age to purchase Combustible
Tobacco Products and at least 19 years
old. We must ensure that it is clear to
Adult Smokers that these persons are
acting on behalf of the Company.
We must also adequately monitor theiractivities for compliance with theseprinciples and practices.

5. Implementation
We have a robust process for ensuringthat our Marketing Code is implemented
at the market level. The Affiliate Head is
accountable for compliance with theseprinciples and practices, and must ensurethat the affiliate uses a robust andsubstantive review and approval process,such as a Brand Marketing Review.
All activities subject to these principles
and practices must be (i) approved by
the Affiliate Head and the Affiliate Headof Marketing and/or Sales and (ii) reviewed
by the Affiliate Law and Corporate Affairs
Departments. All decisions taken during
the review process must be documented.

6. Training
All Company employees who are directly
involved in marketing and sales activities
must receive training on these principles
and practices. All third parties who aresubstantively involved in marketing andsales activities on behalf of the Company
must be trained on the parts of theseprinciples and practices that are relevantto their activities. The Affiliate Heads,
the Regional Marketing & Sales Heads
and the Marketing Code Program Owner
are accountable to implement thesetrainings for all employees in andthird‑parties contracted by theirrespective organizations.

Definitions
Advertising – any branded commercial
communication aimed at promoting
a PMI Combustible Tobacco Product toAdult Smokers, regardless of the medium.
Adult Smoker – a consumer of
Combustible Tobacco Products who isof legal age to purchase such products
and is at least 18 years old.
Company or PMI – Philip MorrisInternational Inc. and its direct andindirect subsidiaries.
Consumer Packaging – packaging,wrapping, bundles or any materials inwhich Combustible Tobacco Products
are offered for sale to Adult Smokers.

Combustible Tobacco Products –cigarettes and other combustible tobacco
products, such as “roll your own”, “makeyour own”, pipe tobacco, cigars, cigarillos,
and cigarittos.
Direct Communications – Company
communications to an Adult Smoker thatare not intended for the general public,
including communications via one-to-one
consumer engagement, direct mail,electronic mail, telephone, shortmessaging, and Company consumer
websites.
PMI Marketing Council – the PMI SeniorVice President Marketing and Sales,
the Senior Vice President Corporate
Affairs and the Vice President &Associate General Counsel responsiblefor Brand Building.
Smoke-Free Products or Reduced Risk
Products (RRPs) – products that
present, are likely to present, or havethe potential to present less risk of harm
to smokers who switch to these products
versus continued smoking. We havea range of RRPs in various stages ofdevelopment, scientific assessment
and commercialization. These products
are not Combustible Tobacco Products
and because they do not burn tobacco,
they produce far lower quantitiesof harmful and potentially harmful
compounds than found in cigarette smoke.
Trade Partner – any representativeof a retail outlet, legal age meeting
point (LAMP), or other business thatis involved in the sale of Combustible
Tobacco Products.
Unbranded – without a name, trademark,logo or indicia of a Combustible Tobacco
Product brand.

Who must follow
the marketing code
This Marketing Code applies to Philip
Morris International Inc. and its direct
and indirect subsidiaries, collectively
referred to as Philip Morris International,
PMI, or the company. Compliance with
the Marketing Code is mandatory for
all PMI employees and anyone doing
business on behalf of PMI.

Philip Morris International Sustainability Report 2017Concluding remarks——All written communications with
Trade Partners must clearly state“For Trade Only. Not for Distribution
to Consumers.” Advertisementsin publications intended for generalcirculation to the trade must have
health warnings in black text ona white background, occupying
no less than 10% of the total areaof the advertisement.

67Annex 2: Overview of engagement principles
Our framework
Our Guidebook for Success (Code of
Conduct) and several Principles &Practices set out detailed standards forengaging with governments and publicorganizations or third parties generally,
doing external communications or publicstatements, making contributions orproviding financial support to certain
projects, giving gifts or providing
entertainment to third parties, andrecording and reporting such expenses.
This document does not replace thosestandards, but it describes their basic
tenets and summarizes their spirit. It also
provides a means for PMI to tell the
public what is important to PMI wheninteracting with governments and publicorganizations, and allows PMI to invite
feedback on these fundamental tenets.

Key points to remember——Communication and respectfulexchange of informed, substantiated,
and reasoned ideas is the best way
to achieve regulatory and fiscal
frameworks beneficial to the societies
they apply to.
——We think it is our responsibility to share
our knowledge and expertise withgovernments, authorities and publicorganizations.
——The merit of PMI’s ideas, the rigor andvalidity of its scientific conclusions, theverifiability of its facts and the integrityof its employees should be the onlymeans through which PMI advances its
positions and communicates them togovernments, public organizations
and opinion leaders.
——Corruption, bribery, influencetrafficking, misleading information,
secrecy about issues that are material
to a decision, and dishonesty in general
are not acceptable forms of doing
business at PMI.

What we do——PMI’s research and development
activities follow rigorous scientificstandards. When it comes to our
Reduced-Risk Products, PMI makes
its findings public and invites
external review.
——PMI scientists are committed tothose rigorous standards.

68——PMI only communicates to governments
and public organizations productinformation that has been substantiatedby such rigorous scientific methods.
——The positions PMI publicly advocatesfor, and the arguments supporting such
positions, are consistent with PMI’s
internal positions and do not overlook
any information that PMI may internallyhave that might be material to
PMI’s audience.
——PMI’s positions on regulation of its
products, taxation, harm-reduction,
employment, safety, and a vast array ofimportant topics result from self-critical,
respectful internal debate that considers
not only business objectives but also,
among other things, PMI’s legal
obligations, societal expectations,human rights, long-term environmental
effects, and consumers’ rights to fulland accurate information.
——We believe that regulation and taxationof tobacco and nicotine products should
be consistent with their different risk
profiles. We make our views known
through our website, the media, andcommunications to governments such as
through public consultations and otheravailable platforms.
——We do not bribe or try to
inappropriately influence otherpeople’s objectivity.
——We have strict standards governing
how we provide gifts and entertainment
to government officials, membersof public institutions and private
individuals. We comply withthose standards.
——We have strict rules concerning what
contributions are appropriate, what due
diligence is required before making
them, what disclosures are in order and,
when needed, how to maintain the
independence of those that receive suchcontributions. The same applies to ourmembership in external organizations.
We comply with these rules.
——We require third parties interacting withgovernments, public institutions or otheraudiences on our behalf to refrain fromengaging in bribery or in other forms of
inappropriate influence. We make ourinternal standards known to them andmonitor their compliance therewith.
——We require third parties interacting withothers on our behalf and communicating
about PMI’s position on topics such as
harm-reduction, product regulation,

Philip Morris International Sustainability Report 2017

taxation and others, to disclose theirrelationship with, and any financial
support they receive from, us so that
their audience has access to theinformation material for them to makea decision or adopt a view.
——We keep accurate and complete
financial records of all expenses incurredin interacting with government officials,
public organizations and any otherthird party.
——We communicate honestly andrespectfully, internally and externally.
——We market and sell our products
according to the following principles:——We do not market or sell to minors,
non-smokers or non-users of nicotine
products.
——Consumption of combustible tobacco
products is harmful to health.
——Non-combustible products are notrisk-free.
——People concerned about the risks
associated with any of our products,
should quit.
——Any positions or messages
communicated or advocated for withgovernments or public organizations
are consistent with, and respectful of,these principles.
——We comply with reasonable, legal
governmental requirements to provide
information to authorities.
——We communicate institutionally anddo not allow the use of personal email
accounts, or other means that might
be misleading, for company
communications or the transmittalof PMI information.
——We do not seek to gain access to, nor
discuss with governments or other third
parties, confidential information ofothers, including our competitors.
We comply with anti-trust regulations.
——Our Compliance help-line andDepartment are available to anyone
working at PMI wanting to reportsuspected violations of our Guidebook
for Success or Principles & Practices.
Reports can be made anonymously. PMI
respects and protects the identity of
those that raise concerns. PMI does nottolerate retaliation of any kind against
good-faith reporting.

Overview of our sustainability performance
Transforming our business
Our performance:
Transforming our business

Actuals

Aspiration

2015

2016

2017

2018

R&D expenditure (Smoke-free/Total)

70%

72%

74%

>80%

Commercial expenditure (Smoke-free/Total)

8%

15%

39%

>55%

0.2%

2.7%

13%

>16%

>38%

Smoke-free product3 shipment volume (billion units)

0.8

7.7

36

>46

>250

Combustible product shipment volume (billion units)

881

845

791

<755

<550

Smoke-free product shipment ratio (Smoke free/Total)

0.1%

0.9%

4.4%

>6%

>30%

Net Revenues2 (Smoke-free/Total)

4

20251

1 Assuming constant PMI market share. We do not set aspirational targets for R&D and commercial expenditure but we expect both ratios to continue increasing
to enable the stated outcome in terms of shipment volume.
2 Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions.
3 Includes heated tobacco units and e-cigarettes. The 2018 aspiration pertains to in-market sales.
4 Includes cigarettes and other combustible tobacco products.
The 2017 metrics are subject to PwC’s Assurance Report. See page 75.

Driving operational excellence
Our performance: Ethics and compliance

2015

2016

2017

Number of compliance trainings (‘000)1

193.54238.36186.00

Ratio of employees trained versus third parties trained (%)

77/23

76/24

75/25

Number of reports of suspected misconduct

753

792

714

Number of substantiated claims

279

292

317

1 2015 and 2016 training numbers have been updated to include live trainings that were conducted during these years but reported late, after the publicationof our 2016 report.

Our performance: Tackling illicit tobacco trade

2015

2016

2017

2018 goal

Keeping full coverage for tracking and tracing – master case level

100%

100%

100%

100%

Tracking and tracing – % of sold packs with unique code applied

53%

67%

75%

85%

Extending Memoranda of Understanding (MoU) with law
enforcement agencies/governments – number of countries

6 additional

5 additional
inclusive of
SELEC(11 countries)

10 additional

5 additional

Regional studies and country analysis to improve awarenessof illicit trade – % of global cigarette consumption covered

25%

25%

25%

27%

2,176 across 717 across 15
14 countries
countries

At least 500
across 10
countries

18

90

1

Training for law enforcement agencies to monitor diversionof PMI products – number of law enforcement officers trained
Number of views on stopillegal.com (‘000)2

507 across
15 countries
n/a

n/a

Philip Morris International Sustainability Report 2017Concluding remarks

1 Full coverage equates to 95% tracking and tracing in our supply chain (excluding Kretek business). There are 5% of master cases not covered – these are destined
to countries which are not identified as a source of potential diversion or where PMI sells to a single customer in the country.
2 Data for period July 16, 2017 – December 31, 2017 (the website was launched in 2017).

69

Our performance: Agricultural supply chain 1

2015

2016

2017

Goal

Tobacco purchased through direct contract by our leaf
operations or our tobacco suppliers (%)

88

88

90

>90

Number of tobacco supplier locations (countries) assessedby AB Sustainn/a

8 (22% ofpurchased
tobacco)

Systematic monitoring of labor practices (% coverage)2,3

32.5

72.0

77.0

100

Cumulative number of tobacco supplier locations (countries)
assessed by Control Union since 2013 (ALP topics)3

13

15

19

24 countries
by 2020

Number of contracted farms in the scope of Control Union
assessments per year (ALP topics)3,4

11,043

7,508

6,433

8 (33% of Every tobaccopurchased supplier every
three years
tobacco)1 Data relate to our total tobacco supply chain, except when explicitly mentioned in footnotes.
2 Data relate to crop season, which may span over more than one calendar year.
3 Data cover approximately 90% of our sourced tobacco.
4 According to our methodology, these assessments cover different countries and tobacco suppliers every year. Depending on the geography and typical farm sizein different countries, the number of farms covered by the assessments will vary. The variation in the number of farms assessed over the last three years does
therefore not reflect a reduction in the scope of the assessments.

Managing our social impact
Our performance: Working at PMI

2015

2016

2017

Number of employees

80,20079,50080,600

Women employees (%)

40.6

41.2

41.6

Women in management positions (%)

31.0

32.8

34.4

Number of women in Company Management (management board)

1 (out of16)

1 (out of17)

2 (out of20)

Number of women on Board of Directors

2 (out of12)

2 (out of13)

2 (out of
13)

13.8

11.2

11.0

Employee voluntary turnover rate (%)

4.3

4.3

4.9

Employees covered by collective labor agreements (%)

67

68

672

Employee turnover rate (%)1
1

Goal

40 by 2022

1 The aggregated data cover approximately 70% of our employees.
2 As of October 1, 2017, approximately 74% of our workforce in non OECD countries was covered by collective labor agreements.

Our performance: Safety in the workplace

2015

2016

2017

Goal

Lost Time Injury (LTI) rate (per 200,000 hours worked)

0.11

0.12

0.10

<0.10

0

1

2

0

Fleet crash rate – vehicles crashes per million km driven

5.3

6.8

6.2

<4.0

Fleet collision rate – vehicles collision per million km driven

1.24

1.22

1.01

<1.50

93

93

91

100

Fatalities (PMI employees and contracted employees)
1

Manufacturing facilities with OHSAS 18001 certification (% of PMI factories)

1 Regarding fleet safety, as of our 2018 Sustainability Report we will no longer report on Fleet crash rate (which includes cosmetic damage) as we believe collision rate
(collisions per million km driven), which covers higher severity road accidents, is a better indication of our safety performance.

70

Philip Morris International Sustainability Report 2017

Reducing our environmental footprint
Our performance: Reducing ourenvironmental footprint

2010(baseline)

2015

2016

2017

CO2e scope 1 (metric tons)

443,186

361,720

351,990

388,384

PMI factories,
offices, and fleet

CO2e scope 2 (metric tons)

470,864

329,323

314,049

241,355

PMI factories
and offices

CO2e scope 1+2 (metric tons)

914,050

691,044666,039629,739

PMI factories,
offices, and fleet

CO2e scope 1 from fleet (metric tons)

143,148

119,471

122,434

119,588

PMI fleet

296

215

227

226

PMI fleetCO2e scope 3 ('000 metric tons)1

6,487

5,690

5,025

4,519

PMI operationsand value chain

CO2e scope 1+2+3 (‘000 metric tons)

7,401

6,381

5,691

5,149

PMI value chain

CO2e scope 1+2+3 per million cigarettes
equivalent (kg)

7,911

7,070

6,620

5,994

PMI value chain

CO2e scope 1+2 absolute reduction versus
2010 baseline (%)

24

27

PMI factories,
31 30 by 2020
40 by 2030 offices, and fleet
60 by 2040

CO2e scope 1+2+3 absolute reduction
versus 2010 baseline (%)

14

23

30 40 by 2030

PMI value chain

CO2e scope 1+2+3 intensity reduction
versus 2010 baseline (%)211

16

24 30 by 2020

PMI value chain

Energy used and purchased (Gigajoules)

8,025,559

8,230,327

0

30

32

4,998

3,654

3,394

4,152

PMI factories

5.34

4.05

3.95

4.83

PMI factories

Waste (metric tons)

127,631130,077

140,316

PMI factories

Waste recycled (%)

87

87

82

85

PMI factories

Waste disposed to landfill or incineration
without energy recover (%)

5.7

4.8

6.5

<5.0

PMI factories

Manufacturing facilities certified
to ISO14001 (%)

93

93

91

100

PMI factories

A

A

A

B

B

A

A-

A

CO2e emissions from vehicles(g CO2e per km driven)

Renewable electricity (%)
Water use (‘000 m )3Water ratio (water use in m per million unitsof cigarette equivalent)
3

CDP Climate Change (rating)B

CDP Water (rating)
CDP Supplier engagement (rating)Goal

8,875,006

Scope

PMI factories,
offices, and fleet

53 80 by 2030

PMI factories

1 The breakdown of scope 3 emissions is published in our CDP submission.
2 Intensity is measured in CO2e per million cigarettes equivalent.
Concluding remarks

Philip Morris International Sustainability Report 201771

Our performance: Environmental metrics in our tobacco supply chain

72

2015

2016

2017

Goal

Tobacco purchased through direct contract by our leaf operations
or our tobacco suppliers (%)

88

88

90

>90

Tobacco purchased without detection of any
WHO TOX1 Crop Protection Agents (%)

94

98

Not yetavailable

100% by crop
year 2018

Tobacco purchased without any detection of otheridentified HHP residues (%)

69

84

Not yetavailable

100% by crop
year 2020

CO2e intensity reduction versus 2010 baseline (%)

12

14

38

70 by 2020

Tobacco purchased at no risk of deforestation of old growth forest (%)

87

88

94

100 by 2020

Philip Morris International Sustainability Report 2017

Glossary and acronyms
ALP – Agricultural Labor Practices

STP – Sustainable Tobacco Program

APAC – Asia and Pacific

UNGC – United Nations Global Compact

CDP – Carbon Disclosure Project

WHO – World Health Organisation

CPA – Crop protective agent

Aerosol – Gaseous suspension of finesolid particles and/or liquid droplets

CLAs – Collective Labor Agreements
CU – Control Unions
EEMA – Eastern Europe, Middle East,
and Africa
EMS – Electronics manufacturing services
EU – European Union
FDA – U.S. Food & Drug Administration
GAP – Good Agricultural Practices
GCP – Good Conversion Practices
GHG – Greenhouse gas
GTS – Green Tobacco Sickness
HHP – Highly hazardous pesticides
HPHC – Harmful and potentially harmful
constituents
LA&C – Latin America and Canada
MACC – Marginal abatement cost curve
NGOs – Intergovernmental organizations
and non-governmental organizations,
respectively
OECD – Organisation for Economic
Co-operation and Development
P&C – People and Culture
PMI – Philip Morris International Inc.
and its subsidiaries
PMJ – Philip Morris Japan Limited
PPE – Personal protective equipment
R&D – Research & Development
RSP – Responsible Sourcing Principles

IQOS – The brand name under which PMI
has chosen to commercialize its Platform 1
controlled heating device into which a
specially designed and proprietary tobacco
unit is inserted and heated to generate
an aerosol

Combustion – The process of burninga substance in oxygen, producing heatand often light

MESH – The brand name that PMI haschosen for one of its Platform 4
reduced‑risk products that leverages
new proprietary vaporization technology

Combustible products – The term
PMI uses to refer to cigarettes andOTP, combined

MRTP – Modified Risk Tobacco Product,
the term used by the U.S. FDA to refer
to RRPs

Converted IQOS Users – The estimatednumber of Legal Age (minimum 18-yearold) IQOS users that used HeatSticks/
HEETS heated tobacco units for over
95% of their daily tobacco consumption
over the past seven days

MRTP application – Modified Risk
Tobacco Product application under
section 911 of the FD&C Act

Direct materials – Include printed board
and paper (used to manufacture packs,
cartons and bundles), acetate tow(the key component of cigarette filters),
fine papers (used to manufacture cigaretteand filter rods), flexibles (mainly wrapping
films, inner liner and tear tape) and avariety of materials such as shipping cases,
and ingredients
An e-vapor product – An electrical
product that generates an aerosol byheating a nicotine or non-nicotine
containing liquid, such as electronic
cigarettes (or“e-cigarettes”)
Heated tobacco units – The term
PMI uses to refer to heated tobacco
consumables, which include HEETS,HEETS Marlboro and HEETS FROMMARLBORO, defined collectively as
HEETS, as well as Marlboro Heatsticks
and Parliament HeatSticks

Heated tobacco unit “offtake share” –The estimated retail offtake volume ofheated tobacco units divided by the sumof estimated total offtake volume forcigarettes, heated tobacco units and,
where the data is available, other RRPs
OTP – Other tobacco products, primarilyroll-your-own and make‑your‑own
cigarettes, pipe tobacco, cigars andcigarillos, and does not include
reduced‑risk products
Reduced-risk products (RRPs) or
smoke‑free products – Products that
present, are likely to present, or havethe potential to present less risk of harm
to smokers who switch to these products
versus continued smoking. We havea range of RRPs in various stages ofdevelopment, scientific assessment
and commercialization. Because they
do not burn tobacco, they produce
an aerosol that contains far lower
quantities of harmful and potentiallyharmful constituents than found incigarette smoke

HPHCs – Harmful or potentially harmful
constituents which have been identified
as likely causes of tobacco related diseases
Illicit trade – Domestic non-tax
paid products

SDGs – Sustainable Development Goals
Concluding remarks

Philip Morris International Sustainability Report 201773

Notes1 As of December 31, 2017.
2 Data and projections are based on WHO global report on trends in prevalenceof tobacco smoking, 2015, and UN Population Prospects. These official
projections refer to age 15+.
3 WHO Budget 2016-2017.
4 Smith et al. (2016) Evaluation of the Tobacco Heating System 2.2. Part 1:
Description of the System and the Scientific Assessment Program. Regulatory
Toxicology and Pharmacology, 81 Suppl 2:S17-S26. (PMID: 27450400).
5 https://www.pmiscience.com/news/absence-combustion-pmi%E2%80%99sheated-tobacco-product-platform-1 ; and https://www.pmiscience.com/
system/files/publications/gfn_2017_mcgrath_what_is_combustion_and_why_
the_absence_of_ combustion_is_important_in_heated_tobacco_ products.pdf
6 Schaller et al. (2016) Evaluation of the Tobacco Heating System 2.2. Part 2:
Chemical composition, genotoxicity, cytotoxicity, and physical properties of theaerosol. Regulatory Toxicology and Pharmacology, 81 Suppl 2:S27-S47. (PMID:
27720919).
7 Phillips et al. (2016) An 8-Month Systems Toxicology Inhalation/Cessation
Study in Apoe-/- Mice to Investigate Cardiovascular and Respiratory Exposure
Effects of a Candidate Modified Risk Tobacco Product, THS 2.2, Comparedwith Conventional Cigarettes. Toxicological Sciences, 149:411-432. (PMID:
26609137).
8 Mitova et al. (2016) Comparison of the impact of the Tobacco Heating System
2.2 and a cigarette on indoor air quality. Regulatory Toxicology andPharmacology, 80:91-101. (PMID: 27311683).
9 Haziza et al. (2016) Evaluation of the Tobacco Heating System 2.2. Part 8:
5-day randomized reduced exposure clinical trial in Poland. Regulatory
Toxicology and Pharmacology, 81 Suppl 2:S139-S150. (PMID: 27816672).
Luedicke et al. (2018) Effects of switching to the Menthol Tobacco Heating
System 2.2, Smoking Abstinence or Continuing Cigarettes on Biomarkers of
Exposure: A randomized controlled, open-label, multicentre study in sequential
confinement and ambulatory settings (Part 1). Nicotine and Tobacco Research,
20:161-172. (PMID: 28177489).
10 https://www.sbvimprover.com/sbv-improver/publications
11 http://intervals.science/
12 In this report, we describe our continued commitment to a strong culture of
ethical business conduct and sustainability of our business. Despite our highethical standards and rigorous control and compliance procedures aimed at
detecting and preventing unlawful conduct, given the breadth and scope of ourinternational operations, we may not be able to detect all potential improper orunlawful conduct by our employees and partners.
13 www.pmi.com/transparency
14 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/0000pmi-human-rights-commitment-whitepaper_final.pdf?sfvrsn=c71985b5_4
15 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/
responsible-sourcing-principles.pdf?sfvrsn=15c19ab5_14
16 https://www.pmi.com/sustainability/good-agricultural-practices
17 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/alp-co
de9a7cd8bc6c7468f696e2ff0400458fff.pdf?sfvrsn=908b0b5_0
18 https://www.pmi.com/sustainability/good-agricultural-practices/upholdinglabor-rights-on-the-farms

24 FT’s Combating Illicit Trade event in London, organized by the Financial Times
and financially supported by PMI.
25 https://www.stopillegal.com/docs/default-source/anti-diversion/anti_
diversion_toolkit.pdf?sfvrsn=2da673d7_2
26 https://www.stopillegal.com/docs/default-source/anti-diversion/anti-diversiongovernance-comittee-report-2016-17.pdf?sfvrsn=b8973d7_2
27 Argentina, Croatia, Czech Republic, Denmark, Dominican Republic, Estonia,
France, Poland, the Philippines and Switzerland.
28 Internal estimation based on the assumption that the main targeted markets
would have been Germany, France and the UK.
29 E.g.,The Nielsen Company: http://www.nielsen.com/eu/en.html
30 https://www.verite.org/
31 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/
responsible-sourcing-principles.pdf?sfvrsn=15c19ab5_14
32 http://www.lbma.org.uk/refiners-gold-current (London Bullion Market
Association- Good Delivery list) http://www.responsiblemineralsinitiative.org/
conformant-smelter-refiner-lists/
33 https://www.absustain.com/
34 We excluded Venezuela from our analysis due to hyperinflation rate in the
country throughout 2017.
35 The numbers provided in this section are approximate numbers, considering
the limitations faced during the data collection, the high number of people
reported and the diversity of the markets assessed. The scope of our ALP data
excludes China, France and the Dominican Republic.
36 http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_575499.pdf
37 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/
alp-code9a7cd8bc6c7468f696e2ff0400458fff.pdf?sfvrsn=908b0b5_0
38 https://certifications.controlunion.com/en
39 https://www.pmi.com/sustainability/good-agricultural-practices/upholdinglabor-rights-on-the-farms
40 https://www.verite.org/verite-pilots-participatory-impact-evaluationtechnique/
41 ALP Progress Report 2014-2015: https://www.pmi.com/resources/docs/
default-source/pmi-sustainability/alp-progress-report-2014-2015.
pdf?sfvrsn=6c08b0b5_6
42 Philip Morris International is a member of the PCSD Partnership and thespecific mention to it in this report is provided for informational purposes only
and is not to be construed as providing endorsements by the OECD or theUnited Nations.
43 https://globalagribusinessalliance.com/
44 Green Tobacco Sickness is a form of nicotine poisoning that may be contracted
by handling wet, fresh, green tobacco leaves.
45 Estimations based on requirements for a classical American Blend. For an
overview of our tobacco types, please see: https://www.pmi.com/ourbusiness/about-us/products/tobacco-farming.
46 Miombo is an ecosystem that includes tropical and sub-tropical grasslands,
savannahs and scrublands.

19		 https://publications.iom.int/system/files/pdf/wmr_2018_en.pdf

47 According to the Joint Monitoring Program for Water Supply and Sanitation(WHO/UNICEF).

20 http://www.italy.iom.int/en/activities/vulnerable-groups-and-minors/
terra-munda

48		 https://www.cabi.org/

21 https://www.unodc.org/unodc/en/frontpage/2012/July/new-unodccampaign-highlights-transnational-organized-crime-as-an-us-870-billion-ayear-business.html
22 US: congressional Hearing, Helsinki commission, July 2017 – US Congressional
appointment where PMI was invited to testify as expert witness.
23 Panama: Business Council for International Understanding October 2017financially supported by PMI and by Panamanian Alliance Against Illicit Trade.

74

Philip Morris International Sustainability Report 2017

49 www.tobaccoipm.com
50 http://www.who.int/ipcs/publications/pesticides_hazard_2009.pdf
51 https://www.tfa2020.org/en/reports/annual-report-2017/#the-big-chain-tool
52 https://quantis-intl.com/lucguidance/Independent Assurance Report on the Business Transformation
Metrics Reporting 2017
To the Board of Directors of Philip Morris International Inc.
Lausanne
We have been engaged to performassurance procedures to provide
reasonable assurance on the BusinessTransformation Metrics reporting ofPhilip Morris International Inc. andSubsidiaries (‘PMI’).

Scope and subject matter
Our reasonable assurance engagement
focused on the Business Transformation
Metrics of PMI for the financial year ended
December 31, 2017 included in the
Sustainability Report 2017:——The application of the internal financial
reporting guidelines for the preparationof the Business Transformation Metrics
published on page 24;——The internal reporting system andprocedures to collect and aggregate theBusiness Transformation Metrics data;
and——The data and information in theBusiness Transformation Metrics table,
in all material aspects, on page 25.
The prospective data in the Aspiration
columns for 2018 and 2025 are notsubject to this assurance report.
Consequently, we do not express any
conclusion on this data.

Criteria
The reporting criteria used by PMI are
described and disclosed on page 24 and in
the internal financial reporting guidelines.
These define those procedures, by which
the Business Transformation Metrics
data are internally gathered, collated
and aggregated.

PMI’s Management Responsibilities

Summary of work performed

PMI’s management is responsible
for both the subject matter and thereporting criteria as well as for the entire
reporting process of the selected
information in accordance with the criteria.
This responsibility includes the design,
implementation and maintenance ofrelated internal control relevant to thisreporting process that is free frommaterial misstatement, whether due
to fraud or error.

Our assurance procedures included thefollowing work but are not limited to:

Our Responsibility
Our responsibility is to perform areasonable assurance engagement toexpress an opinion on positions in therelated Business Transformation Metrics
table on page 25. We planned andconducted our engagement in accordancewith International Standard on Assurance
Engagements (ISAE 3000) (revised)‘Assurance engagements other than audits
or reviews of historical financial
information’. That standard requires that
we comply with ethical requirements andplan and perform our procedures to obtainreasonable or limited assurance whether
the related Business Transformation
Metrics summary was prepared, in allmaterial aspects, in accordance withthe reporting criteria.

——Reviewing the application of the internalfinancial reporting guidelines——Interviewing PMI representatives
responsible for the internal reportingand data collection——Test a sample of data from PMI
operations in Switzerland, Japan andGermany concerning the completeness,accuracy, consistency and classification
as Smoke-Free Products——Inspecting relevant documentation ona sample basis, including PMI policies,
management reporting structuresand documentation——Reviewing and assessing themanagement reporting processes
for Business Transformation Metrics
data and consolidation and theirrelated controls
We believe that the evidence wehave obtained is sufficient andappropriate to provide a basis forour assurance conclusions.

Reasonable assurance conclusion
In our opinion,——The internal financial reporting
guidelines are applied in all material
aspects as published on page 24;

Our Independence andQuality Control
We have complied with the independence
and other ethical requirements of theCode of Ethics for Professional
Accountants issued by the International
Ethics Standards Board for Accountants,
which is founded on fundamental
principles of integrity, objectivity,
professional competence and due care,confidentiality and professional behavior.

——The data and information disclosed in
the Business Transformation Metrics
table on page 25 give a fair picture of
PMI’s Smoke-Free Product performance.
Lausanne, May 9, 2018
PricewaterhouseCoopers SA

Richard Thomas

Raphael Rutishauser

Philip Morris International Sustainability Report 201775

Concluding remarks

Our firm applies International Standard on
Quality Control 1 and accordingly
maintains a comprehensive system of
quality control including documented
policies and procedures regarding
compliance with ethical requirements,
professional standards and applicable legal
and regulatory requirements.

——The internal reporting systems to collectand aggregate the BusinessTransformation Metrics data arefunctioning as designed and provide anappropriate basis for the reporting; andKey developments since 2000 towards a smoke-free future

The first e-cigarettes arecommercialized in China

Late 1980s: PM USA
commercialized Next,
a nicotine-free cigarette
It failed to satisfy
consumers
and was later
withdrawn

US Institute ofMedicine publishes“Clearing the Smoke”
It concludes that “reducing
risk of disease by reducing
exposure to tobacco
toxicants is feasible”

PMI expands R&D on
smoke-free products

Pre 2000s

2001

2003

1996: Launch of Eclipse in
the USA by RJ Reynolds
The first attempt at a heated
tobacco product, using acarbon tip; consumer
acceptance was low, andthe product was withdrawn
1998-9: PM USA andPMI launch the firstelectronically heated
tobacco product, called
Accord in the USA andOasis in Japan
Consumer acceptance waslow, and the product was
subsequently withdrawn

76

Philip Morris International Sustainability Report 2017

Adoption of the
WHO Framework
Convention for Tobacco
Control (FCTC)
It defines “tobacco control”
as “a range of supply,
demand and harm reduction
strategies that aim to
improve the health of
a population”

2004

PMI opens The Cube,a new R&D facility dedicatedto smoke-free products
in Neuchâtel, Switzerland

The Cube R&D facility
in Neuchâtel, Switzerland

2006

2006-7: Launch of Heatbar
by PMI in Switzerland
and Australia
Heatbar is the second
generation of electronicallyheated tobacco products;
consumer acceptance was
low due to thebulky device andsub-optimal taste,
and the productwas withdrawn

2007

2009

US Family Smoking Prevention
and Tobacco Control Act
Provides authority to US Foodand Drug Administration (FDA)
to regulate tobacco products andcreates a regulatory framework
for the commercialization of“Modified Risk Tobacco Products”

Philip Morris International Sustainability Report 2017Concluding remarks

UK Royal College of Physicians
publishes a report on 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.”

77

PMI completes multiple five-day
clinical studies on IQOS, one of its
smoke-free tobacco products
Smokers who switched
to IQOS reduced their exposure toharmful chemicals, on average tolevels approaching those found insmokers who quit for the durationof the study

PMI’s R&D facility in Singapore

PMI opens R&D facility
in Singapore dedicatedto assessing smoke-free
products

2010

US FDA releases draft
guidance on evidence thatshould support a Modified
Risk Tobacco ProductApplication (MRTPA)

Launch of PMIScience.com toshare PMI’s research methods
and findings

2012

2014

PMI launches IQOS city tests
in Italy and Japan
PMI acquires Nicocigs Ltd.
and enters the e-cigarettemarket in the UK
PMI announces its first new
factory dedicated to heated
tobacco unit production
PMI invests USD 680m
in its first purpose-built factoryfor heated tobacco units in
Bologna, Italy
EU Tobacco Products
Directive II adopted
establishing specific rules formarketing “novel tobacco
products” and electronic
cigarettes

78

Philip Morris International Sustainability Report 2017

PMI launches an e-vapor product,
Solaris, in Spain and Israel

PMI’s CEO announces ambition
to convince all adult smokers
who intend to continue using
tobacco products to switch tosmoke-free products assoon as possible
JT launches PloomTECH in Japana hybrid e-vapor product
PMI city test of MESH
in Birmingham, UK
an innovative e-vapor product

In Japan, HeatSticks for IQOS
achieve a 10.8% or 13.9% in
Q4 2017 market share in 2017
PMI reaches 200 peer-reviewed
publications and book chapters on
the science around its smoke-freeresearch
UK Department of Health publishes
five-year tobacco control planwelcoming innovative technologies
that minimize the risk of harmfor smokers
Launch of the Foundation
for a Smoke-Free World(September 2017)
FDA announces comprehensive
plan to significantly reduce
tobacco-related diseaserecognizing that innovation canlead to less harmful products

Public Health England publishes
a report on electronic cigarettes
The report concludes thate-cigarettes are significantly
less harmful than cigarettes

2015

2016

2017

IQOS available in six markets
launches in key cities
in Portugal, Romania,
Russia and Switzerland

IQOS available in 19 markets
launches in key cities in Canada,
Denmark, Germany, Greece,
Israel, Kazakhstan, Monaco,
the Netherlands, New Zealand,South Africa, Spain,
the United Kingdom
and Ukraine

KT&G launches its lil heated
tobacco product in South Korea

PMI completes two
three‑month clinical studies
in the US and Japan on IQOS,
confirming results from theearlier five-day study

BAT launches Glo in Japana heated tobacco product

UK Committee on Toxicity (COT)
issues report on heated tobacco
products
The report concludes that, while still
harmful to health, they “are likely
to be less risky than smoking
conventional cigarettes”
Pilot test of PMI heated tobacco
products TEEPS in the Dominican
Republic (December 2017)

PMI submits an MRTPA
for IQOS to the US FDA
More than 1m adult smokers havestopped smoking cigarettes andmade the change to IQOS
(December 2016)

IQOS available in key citiesin 37 markets and nationallyin Japan
Concluding remarks

Nearly 40% of global commercial
expenditure is dedicated tosmoke-free products
More than 4.7m adult smokers
have stopped smoking cigarettes
and made the change to IQOS
(December 2017)

Philip Morris International Sustainability Report 201779

Trademarks: Trademarks and service marks in thisreport are the registered property of, or licensed by,
the subsidiaries of Philip Morris International Inc.,and are italicized or shown in their logo form.
Photography: Vickers & Beechler, Thomas Jantscher,
Sarah Hazlegrove (Tobacco People)

80

Philip Morris International Sustainability Report 2017

Recognition in 2017:

Philip Morris International
Management SA
Avenue de Rhodanie 50
1007 Lausanne
Switzerland
www.pmi.com