WE ARE

Delivering asmoke-free future
Progress toward a world without cigarettes
Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Integrated Report 2020

Contents
PI LL A R 1

Overview
About Philip Morris International
About this report2020 highlights
Letter from the Executive Chairman:
Leading with purpose
Letter from the Chief Executive Officer:
Driving change together
An overview of PMI’s response to COVID-19 in 2020
Our global footprint
Transforming our business
Letter from the Chief Sustainability Officer:
Transforming beyond nicotine
Our business environment
Megatrends
Sustainability at PMI
Our 2025 Roadmap
Creating value
Governance and management
Risk management

2
3
4

6
7
8
9
14
17
20
22
27
29
30
32

127
128
129
143
145
146

Cover image: The cover is a tribute to our employees, whose continuous
passion, dedication and perseverance in the face of adversity allowed
our company to continue progressing towards its ambitions in 2020.

1

Philip Morris International Integrated Report 2020

33

Product health impacts

34

Access to smoke-free products

41

Tier 2 topics

50

Operating with excellence51

Responsible marketing and sales practices

52

Sustainable supply chain management

59

Respect for human rights

69

Tier 2 topics

76

Caring for the people we work with

77

Socioeconomic well-being of tobacco-farming communities

78

Health, safety, and well-being at work

91

Tier 2 topics

97

Protecting the environment

98

Climate protection

99

Littering prevention

112

Product eco-design and circularity

116

Tier 2 topics

126

5
PI LL A R 2

PI LL A R 3

Performance
Integrating financial and nonfinancial performance:
Closing remarks from the Chief Financial Officer
PMI’s performance in ESG ratings, indices, and rankings
Performance tables
Glossary and acronyms
Forward-looking and cautionary statements
Independent Assurance ReportInnovating for better products

PI LL A R 4

Overview

Innovating for
better products

Operatingwith excellence

About Philip MorrisInternational
Philip Morris International (PMI) is leading atransformation in the tobacco industry to create asmoke-free future and ultimately replace cigarettes
with smoke-free products to the benefit of adults
who would otherwise continue to smoke, society,the company, and its shareholders. PMI is a leadinginternational tobacco company engaged in the
manufacture and sale of cigarettes, as well assmoke-free products, associated electronic devices
and accessories, and other nicotine-containing
products in markets outside the U.S. In addition,
PMI ships versions of its IQOS Platform 1 device
and consumables to Altria Group, Inc. for sale
under license in the U.S., where these products
have received marketing authorizations fromthe U.S. Food and Drug Administration (FDA)
under the premarket tobacco product application(PMTA) pathway; the FDA has also authorized themarketing of a version of IQOS and its consumables
as a Modified Risk Tobacco Product (MRTP),
finding that an exposure modification order forthese products is appropriate to promote thepublic health. PMI is building a future on a new
category of smoke-free products that, while notrisk-free, are a much better choice than continuing
to smoke. Through multidisciplinary capabilities in
product development, state-of-the-art facilities
and scientific substantiation, PMI aims to ensurethat its smoke-free products meet adult consumer
preferences and rigorous regulatory requirements.
PMI’s smoke-free product portfolio includes
heat-not-burn and nicotine-containing vapor
products. As of December 31, 2020, IQOS wasavailable for sale in 64 markets in key cities or
nationwide, and PMI estimates that approximately
12.7 million adults around the world have alreadyswitched to IQOS and stopped smoking.
For more information, please visit
www.PMI.com and www.PMIscience.com

2

Philip Morris International Integrated Report 2020

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Key milestones

1847

1972

2008

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

Marlboro becomes the world’s
best-selling cigarette brand

PMI is spun off from Altria Group, Inc.

1985

2009

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

PMI unveils its new researchand development facility in
Neuchâtel, Switzerland

1902

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

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

2014
1987

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

2016

1919

A new company is incorporated in
Virginia under the name Philip Morris &Co. Ltd., Inc. and starts to manufacture
cigarettes in its factory in Richmondby the end of the next decade
1963

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

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

2001

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

PMI announces its ambition to deliver
a smoke-free future, shifting its
resources toward the development
and responsible marketing of lessharmful noncombustible alternatives
that are scientifically substantiated2003

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

2020

PMI’s Board of Directors adopts
PMI’s Statement of Purpose,
reaffirming the company’s commitment
to deliver a smoke-free futureOverview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

About this report
We are pleased to share our second Integrated
Report, which follows our first Integrated Reportpublished in June 2020 and constitutes our
sixth consecutive annual disclosure. Evolving
our reporting toward integrated reporting andaligning it with the International <IR> Framework
enables us to better detail our business
transformation and more fully capture ourcompany’s progress in delivering on its purpose.
The report content is shaped by a formal
sustainability materiality assessment, refreshedin 2019, which incorporates diverse stakeholder
perspectives and our impacts on sustainable
development. We have structured oursustainability topics around four strategic pillarsof action and two tiers, which form the basis of
our reporting. This report provides information oncontext, relevance, management approach, targets,and performance for each tier 1 topic. Details
about our management and performance on tier 2
topics, as well as case studies that shed light on ourwork at country level, are available on PMI.com.
Unless otherwise indicated, the scope of the datain this report covers our operations worldwide
for the full calendar year 2020 or reflects thestatus as of December 31, 2020. Where notspecified, data come from PMI estimates.
PricewaterhouseCoopers SA (PwC) has provided
independent assurance on select BusinessTransformation Metrics, available on pages 15
and 130. For more details, see the Independent
Assurance Report on page 146. Externalverification of our environmental and healthand safety data can be found on PMI.com.
This report was completed with oversight from
PMI’s Board of Directors and reviewed by its
Executive Chairman, as well as by members of
PMI’s Company Management, including our Chief
Executive Officer, Chief Financial Officer, andSenior Vice President and General Counsel.

This report has been prepared in accordance with
the Global Reporting Initiative (GRI) Standards:
Core option. We also align our reporting withthe principles and standards of the UN Global
Compact (UNGC) and indicate our contribution
to the UN Sustainable Development Goals(SDGs). The UNGC principles and SDGs are
mapped against the indicators in our GRI
Index. Furthermore, in our SDG Index, we
discuss alignment of our work and ambitions
with the SDGs and corresponding targets.
We also take into account guidance from theSustainability Accounting Standards Board (SASB).
Reflecting our business transformation, the SASB
Index provides links to content within this reportaligned with the Tobacco Standard, as well as withaspects of the Agricultural Products, Hardware,and Medical Equipment and Supplies Standards.
This report also addresses some recommendationsof the Task Force on Climate-related Financial
Disclosures (TCFD), with our reporting to CDP
covering most of the remainder. We will continue
to develop our climate change reporting toreflect the TCFD’s guidance. For the first time, tofurther reflect the importance of stakeholders as
per our Statement of Purpose, we also mapped
our disclosures in a dedicated Index against
the World Economic Forum’s (WEF) Measuring
Stakeholder Capitalism Towards Common Metrics
and Consistent Reporting of Sustainable Value
Creation White Paper, released in September 2020.
Additional information about our sustainability
work, as well as previous reports, is available
in the Sustainability Resources area of PMI.com.
We welcome your feedback and suggestions.
Please contact us at sustainability@pmi.com.

An IQOS store in Athens, Greece

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Philip Morris International Integrated Report 2020

Performance
metrics

Overview

Innovating for
better products

2020
highlights

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Pillar 1: Innovating for better products

12.7 million

64

76%

2

95%

>94%

0.12

37.2%

-18%

84%

Adult users who have switched
to IQOS and stopped smoking,out of 17.5 million total IQOS users

Markets where IQOS was available
for purchase, of which 52 percent
were in non-OECD countries

Of PMI’s total commercial expenditure
dedicated to smoke-free products

Business transformation$28.7 billion

Pillar 2: Operating with excellence

Net revenues

Human rights impact assessmentscompleted in high-risk countries

23.8%

Of net revenues from smoke-free products$4.80/share

Annualized dividend based on a quarterly
dividend of USD 1.20/share, declared
September 9, 2020; 13th consecutive
year with a dividend increase since
becoming a public company in 2008

Of critical non-tobacco supplier spend
assessed against PMI’s Responsible
Sourcing Principles in our supplierdue diligence platform

Of PMI’s total shipment volume(including cigarettes, heated tobacco
units, other tobacco products, ande-cigarettes) represented by markets
with youth access prevention programsin place

Pillar 3: Caring for the people we work with

100%

Of tobacco farmers and farmworkers
provided with access to personal
protective equipment$495 million

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

Of management positions held by
women, up from 36.1 percent in 2019

R&D expenditure, of which 99 percent
was dedicated to smoke-free products

Pillar 4: Protecting the environment

Triple A

Score from CDP for our efforts incombating climate change, protecting
forests, and promoting water security

4

Philip Morris International Integrated Report 2020

Reduction in CO2e emissions acrossour value chain (scope 1+2+3) versus
our 2019 baseline

Recycling rate of IQOS devices
returned at our centralized recycling
hubs (weighted-average percentage
of each device that is recycled)

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Leading with purpose
Letter from the Executive Chairman
The primary responsibility of the Board of
Directors is to support the long-term success ofthe company, consistent with its statutory duty toshareholders. Last year, the PMI Board of Directors
issued a statement of corporate purpose thatrecognized the importance of focusing on key
stakeholders in the Company’s transformation.
A company’s purpose is much more than thereason it is in business. Clarity of purpose isessential for both external stakeholders andinternal alignment. PMI’s Statement of Purpose
reaffirms our company’s commitment to deliver asmoke-free future and lays out our unique businessmodel and value proposition: To relentlessly
focus our resources to replace cigarettes with
better alternatives. The statement explains how
we are disrupting our business from the inside,
leading our industry toward a future without
cigarettes, acknowledging our stakeholders, andensuring the long-term success of our company.

“Clarity of purpose is essential
for both external stakeholders
and internal alignment.
PMI’s Statement of Purpose
reaffirms our company’scommitment to deliver asmoke-free future and laysout our unique business modeland value proposition.”

More concretely, we intend to accelerate thedecline of cigarette smoking beyond what could
be achieved by traditional tobacco control
measures alone. We believe that with theright regulatory encouragement and support
for smoke-free products from governments
and civil society, cigarette sales can end
within 10 to 15 years in many countries.
We understand that maximizing shareholder
value is no longer acceptable as a company’ssole purpose. While our Board must exercise its
fiduciary duties as they relate to the oversightof our company’s financial performance, it also

recognizes the importance of creating value
for a diverse group of stakeholders, including
employees, customers, suppliers, and communities.
To find the right balance, our Board and Company
Management work closely together to makeinformed decisions and evaluate how PMI
manages risks and opportunities associated withour business in order to support long-term value
creation. The devastating impact of COVID-19
on societies and economies in 2020 intensified
the debate around the purpose of business.
Investors are also redefining how to integrate
ESG and the impact of business on society
and the environment. As U.S. Securities andExchange Commission Acting Chair Allison
Herren Lee recently said: “What started out
many years ago as so-called ‘impact’ investing,that is investing specifically for the purposeof supporting positive outcomes on particularenvironmental, social or governance (ESG) goals,
has grown. Today, in addition to impact investing,
ESG risks and metrics are used to support a
number of sustainable investment strategies,
such as inclusionary and exclusionary strategies.
But, significantly, ESG risks and metrics now
often underpin traditional investment analyses
designed to maximize risk-adjusted returns on
investments of all types. They represent a core risk
management strategy for portfolio construction.”1

Philip Morris International Integrated Report 2020

PMI’s key stakeholder constituencies arefundamental to our company’s purpose andcan accelerate the pace at which we achieve it.
Our 2020 Integrated Report aims to address
stakeholder demands for more transparent,
comparable, and reliable information on
our ESG risks and performance.

André Calantzopoulos
Executive Chairman

The surge in ESG reporting is only beginning.
As the market continues to organize around risk
analysis and disclosure standards and methods, thescope of our Board’s oversight of these areas willcontinue to increase. The Board views sustainability
as an integral part of our company’s businessstrategy and sees the opportunities it offers.

Read PMI’s Statement of Purpose

1 https://www.sec.gov/news/speech/lee-playing-long-game-110520

5

In the area of governance, anchoring oursustainability priorities in executive accountabilities
helps ensure that our strategy is embedded
in our daily operations. Aligned with our
purpose, we are working to seamlessly integrate
numerous ESG issues into the corporate culture,business strategy, and executive-compensationplans. We aim to continuously improve our
performance and drive material and measurable
progress toward our targets and aspirations—all
communicated through open and clear reportingand disclosure. We understand the essential needto continue building the necessary legitimacy
and trust to achieve a smoke-free future.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Driving change together
76 percent of our commercial expenditure tosmoke-free products. In July 2020, the U.S.
Food and Drug Administration authorized themarketing of a version of IQOS as a modified
risk tobacco product. It is the only electronic
inhalable nicotine product to have received
such authorization to date. This marks a historic
milestone for our company and presents a
powerful opportunity for improving public health.
Five years since PMI publicly announced its
vision to replace cigarettes with less harmful
alternatives, our efforts and investments aredelivering strong results. In 2020, smoke-free
products represented close to 24 percent of our
total net revenues, and by year-end an estimated
12.7 million adults had already switched to IQOS
and stopped smoking. The strong position of oursmoke-free business has allowed us to increase
our ambition. From a net revenue perspective,
we now aim to become a predominantly
smoke-free product company by 2025.

Letter from the Chief Executive Officer
Sustainability is core to the transformation of
our company, which is based on a deep senseof purpose to create value for our shareholders
and other stakeholders. Our strategy isbased on four pillars, which dictate what we
produce, how we operate, and how we manage
our social and environmental impacts.
I am enormously proud of our 2020 achievements,
made all the more remarkable by the year’s
unprecedented circumstances. We witnessed
what can be achieved when close to 71,000
employees worldwide apply their hard work,
dedication, perspectives, skills, and passion
every day to help us achieve our goals.
In 2020, we continued with relentless focus
on our business transformation, dedicating 99
percent of our research and development and6Philip Morris International Integrated Report 2020

We also achieved significant headway across theother pillars of our strategy. With the introduction
last year of the IQOS VEEV e-vapor product in
New Zealand, we began the journey toward ourtarget of having 100 percent of PMI’s electronic
smoke-free devices introduced on the market
equipped with age-verification technology asof 2023. During the year, we also conducted
human rights impact assessments in two
countries—one in virtual format—and are on track
to cover our 10 highest-risk markets by 2025.
Regarding our employees, our clear priority in2020 was to continue protecting their health,safety, and well-being. As a company, we moved
early and fast to respond to the COVID-19 crisis,taking measures in an array of areas to prevent the
spread of infection, sustain our operations, andsupport not only our employees and their families,
but also the communities in which we operate.
In November 2020, PMI’s CEO signed The
Valuable 500, an initiative that commits PMI
to creating a welcoming space for employees
facing physical and mental health challenges.

We continue to push hard toward a more diverse,
equitable, and inclusive workplace, always
mindful that more progress can be made.
In our tobacco supply chain, we achieved
important targets of our Agricultural Labor
Practices program, strengthened our monitoring,and established additional strategies to promotea living income for our contracted farmers.
We see higher pay as a means of preventing
labor abuses and other social issues.
We also continued to lead on environmental
sustainability. In 2020, CDP awarded PMI
a “triple A” score for our efforts to combat
climate change and protect forests and water
security. We continued to decarbonize ouroperations and value chain, guided by ourrevised science-based targets, and are well on
track to achieve our carbon-neutrality goals.
Looking forward, we will continue to operate
responsibly while striving to deliver value, notonly for our shareholders, employees, andconsumers but for society and the planet.
PMI is committed to serving as an agent of change
and an advocate of positive values. We understandthat our business must become a provider ofeffective solutions. Innovation and inclusivenessare key to solving our challenges, whether related
to tobacco harm reduction, environmental
sustainability, or equity. To accelerate our progress,
we must position ourselves at the forefrontof consumer-centricity, technology, science,and innovation. As part of that vision, we willbuild on PMI’s unique scientific capabilities todevelop products and services that go beyond
nicotine. We aspire to achieve at least USD 1
billion in revenues from such sources by 2025.
We will always have critics and value theirconstructive challenges. We are committed toengaging with them in a frank and transparent
two-way dialogue, pointing out the actions weare taking to address their concerns and soliciting
feedback on how we can do better to achieve
our goals. Data and facts are the foundationof constructive dialogue and engagement.

We will allow our actions to speak louder than
our words. It is equally important that we address
our stakeholders’ legitimate concerns as we
implement our transformation strategy. We
cannot make cigarettes obsolete without building
coalitions of support for a smoke-free future.
As PMI’s new Chief Executive Officer, I present
this report with pride in what we have alreadyachieved, yet with a deep recognition of
the immense work ahead. Transforming ourvalue chain means venturing into uncharted
territories, each bringing fresh challenges.
Five years ago, we set out to create a new
future for PMI—a future in which cigarettes
would be replaced by less harmful, sciencebased alternatives—with a focus on reducing
the negative impacts of our products on
the health of our consumers. Beyond this,we understand the necessity of addressing
the environmental and social implications ofour products, including through principles
of circularity and eco-design, as well as acommitment to diversity, equity, and inclusion.
Sustainability strategy is corporate strategy. ESG
issues are business issues. This is what we wantto emphasize through our integrated report. We
hope it provides a window into our present, as
well as the better future that we envision. We
hope, too, that it will spark a dialogue with those
who can help to accelerate the pace of change.
I cordially invite you to share your feedback,to question, to challenge, and, above all, toengage with us as we remain focused on
making our company one that is centeredon sustainability and a higher purpose.

Jacek Olczak
Chief Executive Officer

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

An overview of PMI’s
response to COVID-19 in 2020
During 2020, our business navigated the financial andoperational challenges of a global pandemic while working toprotect the health and safety of our people and address theneeds of consumers, business partners, and suppliers.
Given the impact COVID-19 has had on our lives,
business, and value chain, we highlight throughout
this report instances in which the pandemic
directly affected our sustainability efforts anddescribe how we adjusted our work in response.
For most of our sustainability priority topics, an“Impact of COVID-19 on our activities in 2020”
subsection can be found under “Progress in 2020.”
Overall, PMI moved early and fast to respondto the crisis, taking measures to prevent the
spread of infection, protect our people, sustain
our operations, and support the communities inwhich we operate. We established a centralized
global team to coordinate our response,
supported by local teams set up by our affiliates
and global functions. This “team of teams”
approach has ensured our response has been
relevant locally and consistent globally.

Our approach has been guided by science andfacts, and is underpinned by five principles:• People first: Our people’s safety
is our primary concern.
• Local decisions, consistent globally:
Decisions must be informed by a deep
understanding of the local situation andapplied consistently across our organization.
• Physical distancing: The most powerful
lever we can pull to prevent transmission.
• Promoting a new balance: Supporting
new ways of working and colleagues
who are facing challenges.
• Preparing for the long haul: Ensuring weare ready for changes in circumstances.
Clear and frequent communications
with employees and stakeholders
throughout this period was essential.
Our employees

Our business partners and suppliers

Our consumers

Our communities

Repurposing our value chain
An important value derived from our company’stransformation is the ability to leverage our
new capabilities to help combat the pandemic.
In Switzerland, our scientific teams at our R&D
center in Neuchâtel helped local hospitals
analyze COVID-19 test samples when local
resources were unable to keep up with thedemand. We temporarily repurposed productionlines in our factories in Brazil, Indonesia, theNetherlands, Poland, and Switzerland to produce
thousands of liters of hand sanitizer, which we
donated to local communities, our employees,
and their families. Our affiliate in Brazil also
made available 10 of our fleet vehicles (withdrivers) to distribute COVID-19 hygiene kits
provided by the municipality across São Paulo,
the city with the largest number of infections.

C A S E S T U DY

Repurposing our scientific capabilities
and fostering multistakeholder partnershipin Switzerland
Our know-how on aerosol
science and our testing
capabilities have allowed
our scientists in Switzerland
to provide expertise related
to mitigating the spread of
COVID-19. In response to thecritical shortages of protective
masks at the start of thepandemic, the team convened
a consortium of internal andpartner experts in mid-March
to develop a high-performance,
reusable face mask.

Read the case study
Scientists in PMI’s R&D center in Neuchâtel, Switzerland

7

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Our global footprint>175

Headquarters
New York, U.S.

Operations Center
Lausanne, Switzerland

PMI’s workforce diversity at a glanceMarkets where ourcigarettes are sold

64

Markets where our heat-not-burnproduct IQOS is available for sale

70,849European Union

Employees worldwide, of whom
41.7 percent are women

Eastern Europe

39

Middle East & Africa, and Duty Free

PMI-owned manufacturing facilities,of which 8 are partially or fully
dedicated to the productionof smoke-free products

285,900

South & South East Asia

Latin America & Canada (incl. the U.S.)

Contracted farmers supplying
tobacco to PMI, located in
23 countries

8

Philip Morris International Integrated Report 2020

East Asia & Australia

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Transforming our businessIn 2016, we set a new course for the company—staking our future on
replacing cigarettes with scientifically substantiated, less harmful alternatives.
PMI’s business transformation

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Delivering on our purpose requires ambitious
goals and targeted decision-making. Transformingfrom a cigarette company into a world-leading
smoke-free business is about more than replacing
one product with another. It requires a holistic
review and overhaul of our entire businessmodel and value proposition, including extensivechanges within our operations and value chain
and in the ways we interact with society.

Ch

More than one billion people worldwide
smoked cigarettes or other combustible tobacco
products in 2020, and, according to the World
Health Organization (WHO), around the same
number will smoke in 2025.1 At PMI, we wantto provide better, science-based alternatives
for those adults who otherwise would continue
to smoke. Our commitment is backed by a
substantial R&D program and significant, sustained
investments in the manufacturing, commercial
and human capabilities, and infrastructureneeded to bring these alternatives to market.

To date, we are the only company within the
traditional international tobacco industry tohave committed to going completely smokefree by encouraging full switch of adultsmokers to better alternatives than continued
smoking. And we have already built a leading
position in the smoke-free category globally.

t tr

Five years since announcing our new vision,
reaffirmed by our Board last year in ourStatement of Purpose, we remain committed
to accelerating the end of smoking. This means
not only transforming our company to deliver on
our purpose, but also inspiring our industry tofollow our lead. We aim to create a sustainable
positive impact that benefits our company,
shareholders, consumers, and society.

A new organization and value chain
1 Source: WHO Global Report on Trends in Prevalence of Tobacco Use
2000–2025, third edition (December 2019).

9

Philip Morris International Integrated Report 2020

Internal transformation

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Transforming our business continued
Product transformation:
Innovating for better products
People who do not smoke should not start.
Those who do smoke should quit, and thoseadult smokers who otherwise would not quit
should switch to one of the better alternatives
to cigarettes now available. Our priority is toaddress the health impacts associated withsmoking by offering science-based options
that have been scientifically proven to be a far
better choice than continued smoking.

Our smoke-free products

Our combustible products

To address a variety of adult consumer preferences,
we have developed a portfolio approach that
includes both heat-not-burn products and nicotinecontaining vapor products. Our current smoke-free
product portfolio incorporates four platforms—all
centered on eliminating combustion—in various
stages of development and commercialization.
An overview of our product platforms isavailable on PMIscience.com. Furthermore,in 2021, we plan to expand our portfolio
and enter the nicotine pouch category.

In support of our transformation, we havereallocated significant proportions of ourcommercial spending from cigarettes to smokefree products and have streamlined our cigarette
portfolio to focus on fewer brands and variants.
Consequently, there is a natural trend toward
reducing the number of our combustible productstock-keeping units (SKUs) globally and conversely
increasing the number of smoke-free product
SKUs. More concretely, our global number of
combustible product SKUs decreased by over
20 percent between 2016 and 2020, while thenumber of smoke-free consumable SKUs increasedby over 160 percent during the same period.

At PMI we want to accelerate the end of
smoking, and are therefore transforming ouroperations to purposefully phase out cigarettes
as quickly as possible. We believe every company
has an ethical and societal responsibility toaddress and mitigate the negative impactsof the products it manufactures and sells.
To be clear, we do not believe it is enoughsimply to offer more choice of combustible
and smoke-free products to consumers.
Instead, we believe the responsible approachis to guide and encourage consumers tomake a fundamental change in behavior byswitching from combustible products tosmoke-free alternatives, while simultaneously
working with policymakers to ensure theseproducts ultimately replace cigarettes.
Science and technology are a vital engine ofinnovation and growth for our company, and they
are also the key to tobacco harm reduction. We
have harnessed the latest scientific advances
to develop better alternatives to cigarettes,
but that is not enough. Now we must ensurethat those adult smokers who otherwise
would not quit are aware of and have accessto them, so that they can switch to them.

Our smoke-free
product platforms
Read more

Currently, our main smoke-free product is a heatnot-burn product that was commercialized underthe IQOS brand name in 64 markets by year-end
2020. In the second half of 2021, we plan tolaunch the next generation of IQOS, IQOS ILUMA,
based on a new internal heating technology
addressing consumer feedback and expectedto ease the switch for adult smokers. In 2020,
we also started commercializing an improved
version of our IQOS MESH e-vapor productunder the IQOS VEEV brand name. By the endof the year, we had launched IQOS VEEV in twomarkets: the Czech Republic and New Zealand.

Nevertheless, maintaining our competitive
position in the cigarette market while wetransition to our smoke-free future is critical, as
it best positions us to significantly accelerate oursmoke-free journey. The extensive commercial
and distribution infrastructure of our traditional
tobacco business provides an effective platformfrom which to launch our smoke-free products at
scale. Furthermore, maintaining leadership within
the cigarette segment during the transition period
enables us to engage more smokers regarding

Read more: Product health impacts andAccess to smoke-free products

PMI’s plant research facility in Switzerland

10

Philip Morris International Integrated Report 2020

the benefits of switching, especially where wecan communicate directly with our consumers.
While seeking to remain competitive in thecigarette segment, we carefully consider thecommercial activities needed to do so. Ourdecisions are based on consumer insights andadherence to responsible commercialization
practices guarding against youth access, andare guided by the following triplet: People
who do not smoke should not start, those who
smoke should quit, and those who won’t quit
should switch to less harmful alternatives.
Our cigarette brands are the choice of an estimated
130 million consumers worldwide. Our cigarettes
are sold in more than 175 markets; in manymarkets, they hold the number one or number
two market share position. Our portfolio includes
a wide range of premium, mid-price, and low-pricebrands, including Marlboro, L&M, Chesterfield, Philip
Morris, and Parliament, which are among the 15
most popular brands in the international cigarettemarket (excluding China and the U.S.). Marlboro is
the world’s best-selling international cigarette; in
2020, it accounted for approximately 37 percent of
our total cigarette shipment volume and held a 9.5
percent share of the international cigarette market.

Innovating for
better products

Overview

Operatingwith excellence

Transforming ourbusiness continued

Internal transformation:
A new organizationand value chain
To deliver on our purpose, we are transforming
our company and our value chain. The
complexity of our strategy comes fromsimultaneously managing the impacts of twovalue chains: the one we are moving away from(our cigarette portfolio) and the one we aremoving toward (our smoke-free portfolio).

Tobacco economics:
Understanding the global
tobacco and nicotine value chain

Over the past years, we have undergone ameaningful reorganization, recruiting the talentand capabilities needed to drive a successfultransformation while also seeking to allow
our employees to build the skills they need toRead more

R&D

Caring for thepeople we work with

SOURCING

MANUFACTURING
AND OPER ATIONS

Protecting theenvironment

contribute to our business transition. We haveincorporated new ways of working to become
an increasingly digitalized, project-basedorganization focused on consumer-centricity,
agility, and data-driven decision-making.
Since 2008, we have invested USD 8.1 billion
to build state-of-the-art scientific research,development, and technology capabilities; launcha commercial engine fit for our new products;
build manufacturing capacity; and conduct
studies on adult smoker understanding. We are
now leveraging those investments to accelerate
our journey toward a smoke-free future.
Beyond our own operations, every step of ourvalue chain is transitioning to serve our company
purpose. For instance, our procurement now
extends to new materials, such as electronic

COMMERCIALIZATION

of R&D
expenditure on
smoke-free
products

33%

of our direct
supply chain spend
on smoke-free
products

Smoke-free products
11

Philip Morris International Integrated Report 2020

8 out of 3976%

of commercial
expenditure on
smoke-free
products

Commercialization
model:B2C

In all aspects of our business, we are relentlessly
shifting resources from cigarettes to smokefree products. For instance, we have set up a
post-consumer waste program to take back andrecycle our electronic devices (read more here).
A transformation of such magnitude does
not happen overnight and we must build on
learnings as we progress. Still, we are committed
to making it happen as fast as possible andto managing the impacts of our two parallelvalue chains, each with its own specificities.

REVENUES

Post-consumer waste:

Cigarette butts

B2B

factories partially or
fully manufacturingsmoke-free
products

components (read more here). Smoke-free
products differ from cigarettes and entailchanges for some of our supply chain partners.
We recognize the challenges these changes
pose to some of them and we are actively
helping them manage the transition.

CONSUMERS

Commercialization
model:

Combustible products

99%

Performance
metrics

17.5m

23.8%

users ofPMI’ssmoke-free
productsof our net
revenues comingfrom smoke-free
products

Post-consumer waste:

Electronic waste

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Transforming our business continued
External transformation:
Changing the way weengage with stakeholders
While PMI’s commitment to a sustainablesmoke-free future is unwavering, wecannot complete this journey alone.
Stakeholder engagement and collaboration area crucial part of innovation, as they help informproduct development. We also recognize that
we cannot design new solutions effectively
unless we first understand the issues we seek
to address and stakeholder concerns.
As we continue to transform our business andour organization, we must rely on the cooperationof a host of stakeholders—from supply chain
partners to regulators and public health authorities.
This requires that we work continuously to build
trust, confidence, and legitimacy and earn thelicense to operate. Multistakeholder engagement
is the way to achieve systemic change; it willallow us to effectively transform and to lead anindustry transition away from cigarettes. Engaging
with stakeholders in an open and transparent
way allows us to develop processes through ashared understanding of the context and thechallenges related to our transformation.
PMI’s key stakeholder constituencies
will be impacted in different ways by ourcontinued transformation. We will seek
to engage and collaborate with all our
stakeholders to speed the transformation
while minimizing negative consequences.
Read our Statement of Purpose

Consumers

Employees

Supply chain

Adult smokers and adultnicotine consumers

Employees, management,
work councils, trade unions

Why we engage

Why we engage

Why we engage

Adult consumers are at the heart of our business
transformation. While we historically operated
mostly under a business-to-business model, our
new model is increasingly adding componentsof business-to-consumer. It is vital that weengage with adult smokers to raise awarenessof smoke-free products and their benefits
compared with cigarettes, and explain how theywork. Engaging with consumers also helps us
develop products that meet their preferences
and needs and enhance our customer services.

Our employees are drivers of change and theambassadors of our purpose. Their dedication
is essential to making PMI’s vision a reality.
Engaging with our employees allows us to
identify and resolve challenges together.

People working in our supply chain, including
tobacco farmers, rely on PMI for a substantial
portion of their income. PMI aims to deal
fairly and ethically with its suppliers and isdedicated to acting as a good partner toother companies, large and small, that help
us achieve our ambitions. Collaborating withothers across our supply chain helps us addresssocial and environmental challenges.

How we engage

How we engage

How we engage• Digital interfaces• Surveys and questionnaires• Hotlines and call centers• Consumer events• Ongoing conversations• Regular surveys• Group-wide intranet and internal platforms• Performance and development reviews• Internal events and conferences• Training programs• Recognition schemes• Ongoing dialogue• Compliance, audits, and risk assessments• Strategic partnerships• Supplier forums and events• Meetings and workshops• On-site visits• Digital retailer interface

Key issues discussed

Key issues discussed

Key issues discussed• Quality and services• Product innovation• Company strategy and performance• Diversity, equity, and inclusion• Training and development• Health, safety, and well-being• Product innovation• Health, safety, and fair working conditions• Responsible supply chain management• Environmental and social impacts• Responsible commercialization practices

Read more about our engagement
efforts in 2020:

Read more about our engagement
efforts in 2020:

Read more about our engagement
efforts in 2020:

Responsible marketing and sales practices

Fair working conditions

Sustainable supply chain management

Access to smoke-free products

Talent attraction, retention, and employability

Socioeconomic well-being of
tobacco-farming communities

Diverse and inclusive working environment
Health, safety, and well-being at work

12

Philip Morris International Integrated Report 2020

Farmers and farmworkers, farmers’
associations, contractors, suppliers,
retailers, wholesalers, business partners,
third party-operated manufacturers

Responsible marketing and sales practices

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Transforming our business continued
Investors andfinance community

Regulators

Equity and fixed income investors,
lending institutions, insurance companies,
financial analysts, rating agencies

Policy influencers, policymakers,
intergovernmental organizations,
regulatory bodies, standard setters,
government authorities (including
legislators), customs organizations

Why we engage

Why we engage

Engaging with the finance community is key topromoting a comprehensive understanding of
PMI’s unique value proposition, strategy, andperformance. Furthermore, investment decisions
increasingly integrate environmental, social, andgovernance (ESG) criteria, and we are confident in
the business opportunity our transformation brings.

How we engage• Annual shareholder meeting• Events and conferences• Investor Days
• Earnings calls• Presentations• Reports and publications• Roadshows• Questionnaires and disclosure platforms
for investors such as CDP• Sustainability reporting frameworks(SASB, GRI, IIRC, TCFD)

Key issues discussed• Business transformation strategy• Financial and ESG performance• Market and industry dynamics• Capital allocation• Sustainability priorities• Governance and remuneration
Read more:

How we engage• Ongoing dialogue• Forums and events• Public consultations• Reports and publications• Trade associations• Training and presentations

Civil society

Scientific community, academia,
researchers, public health agencies

Academia, local communities,
civil society organizations, NGOs,
multistakeholder organizations
and initiatives, media

Why we engage

Why we engage

Conducting our R&D with rigor is of utmost
importance, as is engaging with the public healthcommunity. They are, unfortunately, polarized on
the issue of tobacco harm reduction. By sharing
our findings and asking them to scrutinize our
products and the growing body of scientificevidence surrounding them, we aim to engage
constructively on this topic and collectively
seize the immense opportunity smoke-free
products present for advancing public healthwithin the current generation of adult smokers.

How we engage• Conferences, forums, and events• Reports and publications• Articles and studies• Dedicated scientific website (PMIscience.com)• Online platforms for data transparency andreproducibility in science(sbv IMPROVER and INTERVALS)• Applications and submissions

From best practices and information exchanges
to close partnerships, engaging with civilsociety actors can help inform our strategy,
define our priorities, and advance sustainable
solutions to common challenges.

How we engage• Sustainability materiality assessments• Partnerships• Communication campaigns• Social contributions• Open dialogue

Key issues discussed• Sustainability priorities• Business transformation• Product innovation• Environmental and social impacts• Sustainability megatrends

Key issues discussed• Product health impacts• Access to smoke-free products• Regulatory compliance• Differential fiscal and regulatory frameworks• Sustainability priorities and performance

Key issues discussed• Product innovation• Product health impacts• Scientific research

Read more about our engagement
efforts in 2020:

Read more about our engagement
efforts in 2020:

Read more :Megatrends

Responsible engagement practices

Product health impacts

Access to smoke-free products

Responsible and transparent R&D

Operating with excellence

PMI’s performance in ESG ratings,
indices, and rankings

Our business environment

Access to smoke-free products

Investor Relations section of PMI.com

13

Dialogue with national and local governments andregulators allows us to understand their priorities
and concerns, and share our views, objectives, andscientific findings. We engage with governments,
regulators, and legislators—both directly and throughbusiness and trade associations—in the developmentof proposed legislation and regulations that may
facilitate (or not) a smoke-free future. The right
regulation can accelerate the end of smoking, foster
innovation, and minimize unintended consequences.

Public healthcommunity

Philip Morris International Integrated Report 2020

Innovating for better products
Caring for the people we work withProtecting the environment

Overview

Innovating for
better products

Transforming
beyondnicotine:
Thinking net
positive
Letter from the
Chief Sustainability Officer
As we continue to transform our products,
business model, and value proposition,
stakeholder engagement and constructive
dialogue remain paramount. This implies
having frank conversations that embrace
the concept of transformative change.

Operatingwith excellence

Caring for thepeople we work with

Performance
metrics

The positive impact that phasing out cigarettes,
and thereby ending smoking, can have on publichealth (at both the individual and collective level)is undeniable. And yet, despite much progress,
many of our stakeholders remain skeptical
about our purpose, and question the impact ofour transformation. They often inquire about
our end goal, and whether the completion of
our transformation concludes when the worldis smoke-free. Moreover, and like many othercompanies, we are pressed regularly by certain
stakeholders on the need for a long-term
vision that involves a net-positive future.

at least USD 1 billion derived from “beyond
nicotine” products by 2025. This aspirational
goal aims to further cement the confidence wehave about the long term, as we evolve into a
broader lifestyle and consumer wellness company,
leveraging our ability to monetize the skills andassets we have accrued and developed in theprocess of our transformation. These include
our commercial and digital abilities as well as
our focus on consumer-centricity, which haveenabled us to better inform adult smokers,
allowing them to make fundamental behavior
changes to improve their health and well-being.

Even though the beginning of our transformation
journey started by articulating a vision centeredon phasing out cigarettes and developing
and commercializing better and less harmful
alternatives to smoking, we realize that thiscannot be our end goal. We understand thata complete and successful transformation is
one that allows our company’s business tomove from a value proposition, centered on
doing less harm, toward one where we canhave a net positive impact on society.

Furthermore, we will continue to leverage on
our life sciences capabilities, with the goal of
having a net positive impact on the world. We
will accomplish this by further expanding ourvalue proposition to products that go beyond
nicotine. The way to do that is fourfold.

Net positive strategies are built on the idea that acompany must give back more than it takes fromsociety and the environment. Can a businessbe net positive? How can this be measured or
accounted for? What does a smoke-free future,beyond nicotine, look like? Sustainability offers us
an opportunity for growth through investments inscientific research to continue innovating for better
products, with the aim of becoming net positive.
Researching and developing less harmful noncombustible alternatives that are scientifically
substantiated was the first step; broadening
access for adult smokers, while simultaneously
and deliberately working to phase out cigarettesmoking, completed the equation of oursmoke-free purpose. In the process, we have
expanded our social, human, intellectual, andmanufactured capital in ways that allow us togo a step further and develop products that
seek to be better than merely less harmful.
In order to demonstrate the seriousness of
our endeavor, we introduced a new aspiration
to complement our Business Transformation
Metrics and 2025 Roadmap: Net revenues of

14

Protecting theenvironment

Philip Morris International Integrated Report 2020

Expanding our value proposition to
products that go beyond nicotine
Read more

As we prepare to refresh our sustainability
materiality assessment during 2021, we willappropriately adapt and better reflect thechanges of our business model and value
proposition accurately, to recalibrate andreassess our strategy. We look forward toreporting on progress and elaborating in
greater detail on this topic in our next report.

Jennifer Motles
Chief Sustainability Officer“Many products in the wellness anddrug sector, although demonstrating
good efficacy, still leave open unmet
medical and consumer needs. Two of
those unmet needs pertain to the time
until someone can feel the effect andthe side effects (safety profile) of a given
product; both are linked (at least partially)to the route of administration. When aproduct is taken orally it takes time forthe expected effect to set in. Also, due tothe dose needed to achieve the expected
effect, side effects may occur. Inhalation
as an alternative form of application canoffer advantages in both areas due to thefaster uptake of the active compound,the potentially lower dose necessary(e.g., compared to an oral application),and higher bioavailability of the active
compound achievable compared towhen a product is taken orally in thesame dose range. Our expertise inaerosol chemistry and physics as wellas inhalation device technology can beeffectively repurposed to help addressthese needs. Building upon PMI’s uniquescientific capabilities in smoke-free
products, Life Sciences seeks to outline
our company’s scientific strategy for new
products and services that go beyond
tobacco and nicotine. We have theability to combine scientific excellencewith commercial rigor to continue
elevating our business transformation.”
Patrick Picavet, PMI Vice President Life
Sciences, Program Delivery & GovernanceOverview

Innovating for
better products

Operatingwith excellence

Transparent reporting on progress:
PMI’s Business Transformation Metrics

15

Philip Morris International Integrated Report 2020

R&D
Commercialization
Consumers

2017

2018

2019

2020

429

453

383

465

495

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

72%

74%

92%

98%

99%

Number of R&D positions (FTEs)2

n/a

n/a

764

942

934

Patents granted in IP5 jurisdictions relating to smoke-free products (cumulative)3

170

300

480

740

1,300

36

57

82

109

146

19

22

Number of studies completed by PMI on smoke-free products (cumulative, since 2015)
11

12

19

– Perception and behavior (premarket and post-market)4

7 (7+0)8 (7+1)12 (9+3)

Supply chain direct spend expenditure (smoke-free/total)5

n/a

n/a

n/a

35%

33%

Cumulative investments behind smoke-free products (since 2008, in billions USD)6

3.2

4.6

6.2

7.2

8.1

Number of factories producing smoke-free products out of total number of factories7 *

-6.5%

-6.1%

-5.5%

-4.1%

78.2%

9.9%

37.1%

24.9%

38.2%

4.7%

5.5%

7.8%

10.1%

13.9%

-1.7%

Year-on-year change in number of SKUs—smoke-free products
SKUs (smoke-free/total)
Number of markets where IQOS is available for sale*
Proportion of markets where IQOS is available for sale that are outside the OECD9 *

13 (9+4) 30 (15+15)

3 out of 48 4 out of 46 8 out of 44 8 out of 38 8 out of 39

Year-on-year change in number of SKUs—combustible products8

20

38

44

52

64

32%

41%

44%

45%

52%

Number of IQOS stores10

26

63

81

199

259

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

90

292

488

679

749

15%

39%

60%

71%

76%

8

36

42

60

76

Commercial expenditure (marketing) (smoke-free/total)*
Smoke-free product shipment volume (billion units)*
Combustible product shipment volume (billion units)*

845

791

767

732

654

Smoke-free product shipment ratio (smoke-free/total)11 *

0.9%

4.4%

5.1%

7.6%

10.4%

Total IQOS users (in millions)12 *

2.1

6.9

9.6

13.5

17.5

Estimated users who have switched to IQOS and stopped smoking (in millions)12 *

1.5

4.7

6.6

9.6

12.7

Estimated users outside the OECD countries who have switched to IQOS and stopped
smoking (in millions)9 *

0.0

0.2

1.1

2.9

4.3

2.7%

12.7%

13.8%

18.7%

23.8%

Number of markets where net revenues from smoke-free products exceed
10% of total net revenues14 *

1

5

19

31

38

Number of markets where net revenues from smoke-free products exceed
50% of total net revenues14 *

0

1

3

4

6

Net revenues (smoke-free/total)13 *Revenues

9 Excluding PMI Duty Free. Data are based on 2020 OECD countrylist.
10 Includes flagship stores, and small, large, and temporary boutiques.
11 The smoke-free product shipment ratio is compiled based on
millions of units.
12 Excluding PMI Duty Free; see glossary.
13 Net of excise taxes.
14 Excluding PMI Duty Free and the U.S.

2016

R&D expenditure (in millions USD)*– Clinical assessment* The 2020 metrics marked with an asterisk (*) are subject
to PwC’s Assurance Report (see page 146).
1 Smoke-free products include heated tobacco units, devices, ande-cigarettes. Total products include smoke-free products, cigarettes,
and other combustible products.
2 R&D positions include scientists, engineers, technicians, andsupport staff. Comparable data for years prior to 2018 are notavailable, as the scope of R&D positions changed following
company organizational changes.
3 IP5 jurisdictions are Europe (patents granted by the European
Patent Office), China, South Korea, Japan, and the U.S.
4 Data related to perception and behavior studies were restated toinclude both premarket and post-market studies.
5 Direct spend focuses on materials used in the manufacture of our
products; it includes tobacco leaf, direct materials, and electronic
devices and accessories.
6 Investments reflect research, product and commercial development,
production capacity, scientific substantiation, and studies onadult smoker understanding. Figure does not include commercial
deployment costs.
7 Production temporarily stopped at one of our factories in Germany
in December 2019 and resumed early 2020.
8 “SKUs” stands for stock-keeping units. References to numberof SKUs are based on the latest available data from a numberof internal sources, and exclude People’s Republic of China andthe U.S.

Performance
metrics– Toxicological assessment

Sourcing

Our Business Transformation Metrics also
showcase how we are allocating resourcesaway from our traditional cigarette business,aiming to base our success on a future where
we no longer make or sell cigarettes.

Protecting theenvironment

Business Transformation Metrics

Operations

To make our progress both measurable andverifiable, we developed a set of bespoke key
performance indicators (KPIs) that we callBusiness Transformation Metrics. This set of
metrics, which we report on periodically, allows
our stakeholders to assess both the pace andthe scale of our transformation. Over the years,
based on our stakeholders’ feedback we have
expanded the number of metrics to increasetransparency and clarity about our progress.

Caring for thepeople we work with

New metrics

Metrics linked to 2025 aspirations

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Transforming our business continued
Our 2025 aspirations

Aspirational goals linked to ourBusiness Transformation Metrics
give us a clear roadmap andoffer our stakeholders visibility
into the pace and scale ofour achievements.

Our smoke-free products are realizing a strong
business performance, which we intend toaccelerate in the coming years. Previously, we
had aimed for 38 to 42 percent of our total net
revenues to come from smoke-free products by
2025. In early 2021, we increased that goal toat least 50 percent. This pioneering ambition to
become a predominantly smoke-free company
within the next five years demonstrates ourcommitment to deliver on our purpose and drive
the end of cigarette smoking as fast as possible.

>250

We also aim for at least 40 million adults—
half of them in non-OECD countries—tohave switched to our smoke-free products
and stopped smoking by 2025.

Smoke-free products
shipment volume(in billion units)<550

Combustible productshipment volume(in billion units)

>30%

>50%

100

≥1bn

Net revenues(smoke-free/total)

16

By 2025, we aspire to grow our smoke-free
shipment volume above 250 billion units while
simultaneously decreasing our combustible
product shipment volume to below 550 billion
units. This means we aspire for smoke-free
products to represent more than 30 percent
of our total shipment volume by that year.

Philip Morris International Integrated Report 2020

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

Smoke-free productshipment ratio(smoke-free/total)

Net revenues from“beyond nicotine” products(in USD)>40m

Estimated users who
have switched to PMI
smoke-free products andstopped smoking

Furthermore, we aspire for our smoke-free products
to be available for sale in 100 markets by 2025.
Finally, we are introducing this year a new
aspiration of at least USD 1 billion in annual
net revenues from “beyond nicotine” products
by 2025, leveraging the capabilities we havebuilt in life sciences, device technology, andconsumer expertise (read more in the Letter from
our CSO). We expect to further communicate
on progress in this area in our next report.

>20m

Estimated users outside
the OECD countries who haveswitched to PMI smoke-free
products and stopped
smoking

New aspirational targets linked to
our Business Transformation Metrics
Note: Aspirational goals do not constitutefinancial projections

Overview

Innovating for
better products

Our businessenvironment
Key trends shaping our industry

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Consumers
Today, an estimated 1.1 billion people worldwide
smoke cigarettes or other combustible tobacco
products. The latest statistics from the World
Health Organization (WHO) project a decline
in smoking prevalence (age 15+), from 21.5
percent in 2010 to an estimated 17.1 percent
in 2025.1 At the same time, the global adult
population is growing by around 70 million
people per year. The net effect of this population
growth and declining smoking prevalence is aforecast of just under 1.1 billion smokers by2025—essentially no change versus 2010.
WHO member states want faster change, targetinga 30 percent reduction in the prevalence of
tobacco use by 2025 (versus the 2010 baseline)
by encouraging cessation and discouraging
initiation.2 However, even if the WHO target isachieved, there will still be around 930 million
smokers in 2025, according to PMI’s calculations.
1 WHO Global Report on Trends in Prevalence of Tobacco
Use 2000–2025, third edition (December 2019).
2 WHO Global Report on Trends in Prevalenceof Tobacco Smoking 2015.

Our perspective
Our smoke-free vision complements
WHO efforts by offering less harmful
alternatives to adult smokers who wouldn’t
otherwise quit. It is our long-standing
aspiration that by 2025 at least 40
million smokers switch to PMI’s smokefree products and stop smoking.
As of December 31, 2020, we estimate that
there were close to 18 million IQOS users, ofwhich 72 percent—or nearly 13 million—had
switched to IQOS and stopped smoking, withthe remainder in various stages of conversion.

PMI’s Operations Center in Lausanne, Switzerland

17

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Our business environment continued
Market dynamics
The global tobacco and nicotine market ischaracterized by a range of products, including
combusted tobacco products (e.g., cigarettes, finecut tobacco, pipe tobacco, cigars, and cigarillos)
and non-combusted products (also referred toas “smoke-free products” in this report). Those
include heated tobacco, e-vapor, and hybrid
products, as well as oral tobacco and nicotine
products (such as snus and nicotine pouches).
While the number of consumers of tobacco andnicotine products has remained largely unchanged
in recent years, the total retail value continues togrow over time. This largely reflects the impact
of excise tax-driven retail price increases for
combustible tobacco products, coupled withthe growth of smoke-free products. This ispartly offset by a lower volume of combustible
tobacco products, reflecting an increasing
number of adult smokers switching completely
or partially to smoke-free products, and in
addition, in some markets a lower average daily
consumption induced by price elasticity.
In 2020, the total value of the international
tobacco and nicotine market, excluding China

Our perspective

Combustible market
declines reflect
growth of smokefree products

Regulation and taxationand the U.S., reached an estimated USD 450
billion.1 Mostly due to COVID-related disruption,
the estimated total 2020 international industry
volumes for cigarettes and heated tobacco units
declined by almost 6 percent (compared withan average annual decline of 2 to 3 percent
historically), with a disproportionate impact on
Duty Free and markets with a high proportionof daily wage workers, such as Indonesia, thePhilippines, and certain Latin American countries.
We estimate that the international market
for heated tobacco and e-vapor products in2020 reached an approximate value of USD 27
billion. The growth versus the estimated 2019
value reflects the increasing number of adultsmokers who are moving to smoke-free products
and was mainly driven by the heated tobacco
category, which represented an estimated 74
percent of the combined retail value for heated
tobacco and e-vapor products in 2020.
In recent years, some governments havelegalized cannabis for medical and/or recreational
purposes, and some tobacco companies haveinvested in the category. PMI does not produce
or sell cannabis products. We do, however,intend to leverage our capabilities and expertisein aerosolization, scientific substantiation,assessment of safety and efficacy, and consumer
insights to move beyond nicotine into areas suchas botanicals and respiratory drug delivery.

Read more
1 Includes the retail value of cigarettes and other tobacco products(including cigars, cigarillos, pipe tobacco and fine-cut), heated tobacco
units and e-vapor products (including devices), snus, and nicotine pouches.

18

Philip Morris International Integrated Report 2020

The risks of smoking have led legislators andregulators to impose rigorous restrictions and highexcise taxes on cigarettes. Such restrictions arecomprehensive, covering packaging and healthwarnings, ingredients, advertising, marketing,promotions and sponsorships, and public use.
Much of the regulation that shapes thetobacco industry operating environment isdriven by the WHO’s Framework Convention
on Tobacco Control (FCTC), which tookeffect in 2005. The FCTC has established a
global agenda for tobacco regulation, withthe purpose of reducing the prevalence of
tobacco use and exposure to tobacco smoke.
There is currently no global consensus among
regulators on how best to regulate or tax
smoke-free products. Some aim to encouragethese products, seeing them as presenting lessrisk to adult smokers than continued smoking
and an opportunity for public health; others
severely restrict or ban not just communication
about such products but in some cases
the sales of the products themselves.

Our perspective
For many decades, public health strategies toreduce tobacco-related morbidity and mortality
focused primarily on preventing smoking
initiation by youth and encouraging smokers
to quit. Novel, scientifically substantiatedsmoke-free products now provide regulators
the opportunity to supplement and significantly
strengthen the existing public health approachwith a third pillar: tobacco harm reduction.
Government regulation of all nicotine-containing
products, both combusted and non-combusted,
is essential. We advocate for a comprehensive
and risk-proportionate regulatory frameworkthat recognizes that not all these products
are the same. Regulation and taxation should
subject the most harmful products to the mostrestrictive measures and should encourage
those adults who would otherwise continue tosmoke to switch to less harmful alternatives.

We don’t agree with preemptive bans andunreasonable restrictions on scientifically
substantiated smoke-free products, as suchmeasures deprive those adult smokers who will
not quit of alternatives that present less riskof harm than cigarettes. Smoke-free products
contain nicotine, which is addictive, and they
are not risk-free. Regulation should therefore
provide minimum standards for all smoke-free
product categories and specific rules for productassessment methodologies, ingredients, andlabeling. Further, regulations should ensurethat the public continues to be informed about
the relative health risks of all combustible andnoncombustible products. Regulation, as well as
industry practices, should reflect the fact thatyouth should not consume nicotine in any form.

Overview

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Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Our business environment continued
Illicit trade

Competition

The illicit tobacco trade provides a cheap andunregulated supply of tobacco products. It
undermines efforts to reduce smoking prevalence,damages legitimate businesses, stimulatesorganized crime, increases corruption, andreduces government tax revenue. It is estimatedthat illicit trade accounts for as much as 10 to
12 percent of global cigarette consumption andthat governments worldwide are losing USD 40
billion in tax revenues each year as a result.1

The global tobacco sector includes four large
international manufacturers—British American
Tobacco (BAT), Japan Tobacco (JT), Imperial
Brands (IMB), and PMI—along with two major
manufacturers focused primarily on their respective
domestic markets: The China National Tobacco
Corporation (CNTC) in China and Altria Group, Inc.
(the parent company of Philip Morris USA) in the
U.S. Together, these six companies accounted for
close to 86 percent of global cigarette and heated
tobacco unit sales by volume in 2020. Regional andlocal companies, including state-owned enterprises,
accounted for the remaining 14 percent.

Many countries have introduced or are considering
actions to prevent illicit trade. In November 2012,
the FCTC adopted the Protocol to Eliminate Illicit
Trade in Tobacco Products (the “Protocol”), which
includes supply chain control measures such as
the licensing, enforcement in free trade zones,
and the implementation of tracking and tracing
technologies. The Protocol came into force in
September 2018, and parties to it have started
implementing its measures via national legislation.

As in other consumer goods sectors,
manufacturers compete primarily on productquality, brand recognition, brand loyalty, taste,
R&D, innovation, packaging, customer service,
marketing, advertising, and retail price.

Increasingly, competition also focuses on thedevelopment and commercialization of smokefree tobacco and nicotine products, withtobacco manufacturers shifting their resources,
by varying degrees, toward the developmentof such products, particularly heated tobacco,e-vapor products, and nicotine pouches.
The main difference, however, rests oncompetition centering their value proposition
on expanding their portfolios and offering morechoice to their consumers. This drasticallycontrasts with PMI’s, which aims to phase out
cigarettes completely, not only offering choice but
promoting full switching to better alternatives.
Various manufacturers, including PMI, launched
the first heated tobacco products in the late
1990s, with limited commercial traction.
Following the commercial breakthrough by IQOS
after its initial two city launches in 2014, othermanufacturers introduced their own heated

Our global market share 2020, including cigarettes and heated tobacco units

Our perspective

Other

~14%

The illicit tobacco trade is large anddemands integrated action. From our side,
we focus on controlling our supply chainsto prevent the diversion of our products.
For 15 years, we have been operating
a global tracking and tracing system forour products, covering all markets. We
also work with governments and otherpartners in the public and private sectors
to combat illicit trade. Read more about
our efforts to tackle the illicit trade of
tobacco and nicotine products on PMI.com.

Al
tri
aG
ro
up
, In
IMB
c

~4%

1 Source: World Bank Group

19

CNTC

~46%

~8%
BAT

~12%

Source: PMI Financials or estimates

Philip Morris International Integrated Report 2020

The e-cigarette was invented in 2003 in China,
and—after more than a decade of relatively
limited success—the broader e-vapor category
has recorded significant growth in the past
decade, particularly in the U.S., Canada, andcertain European markets. Currently, themarket for “open”2 e-vapor products remains
heavily fragmented. In contrast, the market
for “closed”3 e-vapor products is relatively
consolidated among tobacco manufacturers
and a certain number of e-vapor startups.
Nicotine pouches, an oral, usually tobaccofree product, have also emerged as credible
smoke-free products over the past two to
three years, most notably in markets with anexisting oral tobacco segment, such as the U.S.
and Scandinavia. Outside of these markets, thecategory remains small but is growing. Nicotine
pouches are overwhelmingly produced by the
major tobacco manufacturers and Swedish Match.

Our perspective

~2%

JT

Note: Total heated tobacco unit share
was 1.8 percent in 2020, of which
1.5 percent represented by PMI share.

tobacco products in certain markets. Somemanufacturers have also launched hybrid products,
which combine aspects of heated tobacco ande-vapor products. To date, competition in theheated tobacco category is primarily among
manufacturers of combustible tobacco products.

PMI

13.8%

We have made significant progress intransforming our business. In 2020, smokefree products accounted for over 10 percent
of our total volume and almost one-quarter of
our total net revenues. In fact, net revenues
from smoke-free products already exceeded
50 percent of total net revenues in six
markets, 25 percent or more in three of our
six regions, and over 10 percent in 38 markets.
2 Open systems feature a chamber that can be refilled with e-liquid.
3 Closed systems are disposable or reloadable with prefilled cartridges.

Overview

Innovating for
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Operatingwith excellence

Megatrends
The COVID-19 pandemic has heightenedawareness of a central tenet of sustainabilityrelated megatrends: That disruption does notcome from technologies and business models
alone; it can also be unleashed by politicalevents, climate disruption, or a far-reachinghealth crisis. As a company operating on a
global scale in a fast-paced world, our long-term
success requires that we continuously monitor
and adapt to significant social, environmental,
economic, political, and technological changes.
The megatrends discussed in this report
existed prior to the current pandemic and willcontinue to develop in its aftermath. COVID-19
has both exacerbated and accelerated theirimpact, making them all the more relevant.

PMI’s plant research facility where the team explores avenues for selecting crops for moreenvironmental resilience and reduced footprint, Switzerland

20

Philip Morris International Integrated Report 2020

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Technologicalprogress

Consumer values
and expectations

New technologies are emerging rapidly, including in robotics,
artificial intelligence, and virtual reality. Consumer goods companies
have been at the forefront of digital innovation in marketing andsales. Automation and digital solutions are also widely implemented
in manufacturing and supply chains, introducing risks related to
employment patterns, data privacy, and human rights. Taking amindful and proactive approach to shaping the future of work
will enable companies to respond to people’s need and desire forincome security, well-being, empowerment, and purpose, ensuring
lives are enriched by advancing technology and that people acrosssociety can prosper from equal access to new opportunities.

Consumers are increasingly interested in knowing the socialand environmental impacts of the products they buy andare changing their consumption patterns accordingly. To
mitigate the negative impacts of their consumption, they
focus on sustainability; the capacity to reuse, repair, andrecycle products; and product ingredients and attributes(e.g., organic, natural, locally produced). In addition, consumers
expect a seamless experience across channels. They value
the overall experience more than the channel and appreciate
brands that take service from transactional to personal.

COVID-19 impact

COVID-19 impact

Digitalization has become an imperative, changing how
businesses operate and consumers live. Companies haveaccelerated the digitalization of their customer and supply
chain interactions and internal operations. During the
pandemic, consumers have migrated to online channels, andcompanies have responded in turn. Businesses have seen similar
accelerations in the digitalization of core internal operations,such as administration, production, R&D, and remote working.

As people worldwide adjust to the next normal, there is significant
variance in consumer sentiment and behaviors. COVID-19 hasbrought an unprecedented shift in the priorities and channelsof engagement of consumers and businesses. As the threat of
infection swept across the world, consumer patterns shifted toessential goods and personal safety, seemingly deprioritizing
sustainability. However, now that they are emerging fromisolation, consumers are reassessing their values and rewarding
brands that operate with a clear purpose beyond profits.

How we are responding

How we are responding

Breakthrough developments in science and technology, includingfrom outside our industry, are affecting our products, businessmodel, and value chain. They have enabled us to develop andscientifically substantiate innovative smoke-free products. Adopting
leading-edge technology systems and tools, and building new
capabilities are speeding our transformation from a businessto-business (B2B) toward an increasingly business-to-consumer(B2C) commercial model—a model that requires direct consumer
engagement, online sales, and aftersales support. In 2020, during adifficult year that did not permit much social interaction, technology
allowed us to increasingly migrate from an offline to online model.
This means that we have been able to successfully accelerate
the deployment of our e-commerce platform, as well as remotecoaching to accompany smokers on their conversion journey tosmoke-free products. We also leverage on technology in supportof our activities across our value chain, for instance by leveraging
on satellite imagery to assess deforestation risks or on telematics tominimize road traffic accidents. As the world of work is changing, weare also expanding life-long learning programs that allow employees
to enhance their career opportunities and boost their employability.

We are continuing our transition into a consumer-centricorganization. Consumer feedback continually informs our productdevelopment and improvement. We are serving our consumers
through a wider variety of channels, both offline—e.g., our IQOS
stores and exclusive IQOS retail touchpoints—and increasingly
online. Beyond offering adult smokers a less harmful alternative tocigarettes, we aim to reduce our products’ environmental footprint
by integrating eco-design and circularity considerations at theearly stages of product development, as well as strengthening ourcapabilities to collect and recover used devices and consumables.

Overview

21

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Environmental pressure

Sustainable financeSocial inequality

Business leaders should look at environmental risks in a
new way. The impacts of climate change, biodiversity loss, andwater insecurity—among others—threaten more than supply
chains and physical infrastructure; they endanger progress andbusiness growth by exacerbating systems-level disruption tocustomers, investors, employees, and communities. Averting
catastrophic climate impacts will require drastic reductionsin global greenhouse gas emissions to limit global warming to
1.5 degrees Celsius. Decarbonizing the global economy will
be one of the biggest transformations ever undertaken.

An increasing number of stakeholders are demanding that
capital markets shift from perceived short-term, siloed, andsometimes extractive behavior to a model of long-term, inclusive
and sustainable capitalism. Investors are increasingly moving
beyond a traditional risk-return model to ask how they can deploy
capital as a lever for change. Investment decisions increasingly
integrate environmental, social, and governance (ESG) criteria,
which are growing in sophistication from initial undifferentiatedapproaches, and are expected to ramp up dramatically overthe next decade. The standardization, measurement, andaggregation of nonfinancial data is needed to support the financial
sector in making more sustainable investment decisions.

Social inequality can manifest in the labor market, the source ofincome, health care, and freedom of speech, education, politicalrepresentation, and participation; it is an ethical and moral
concern globally. Promoting equality is a common ideal acrosscultures, a principle that should be upheld and actively pursued.
While global inequality has fallen in the past 30 years, it has risen
sharply within some countries. Globalization has increased the
supply of cheap labor by integrating emerging markets into theglobal economy, thereby displacing low-income jobs in advanced
economies. Technological advances have increased demand forskilled labor at the expense of low-skilled workers everywhere, andmigration has increased the labor supply in advanced economies.

COVID-19 impact

COVID-19 impact

COVID-19 impact

The COVID-19 pandemic has occurred against the backdropof the climate crisis. There are hopeful signs that the global
experience of the pandemic and the lessons learned will help
to mobilize the climate response. As a global community, we
have seen how interconnected and mutually dependent weare—to one another and to the natural world. The pandemic’s
spread and human toll put into sharp focus the need to act
on global existential threats decisively and collectively.

The pandemic has underscored the complexity andinterconnectedness of our world and how quickly these links
and structural supports can collapse if not sustainable. The
focus on ESG investing and sustainable finance and businessintensified in the past year as the COVID-19 shock accelerated
demand for sustainability-based solutions. From sustainable
portfolio construction to specialized stock exchanges andgreen bond markets, many investors have worked to infuse
purposefulness into their investment approaches.

COVID-19 may end up being the most significant development
setback of our lifetime. The pandemic is reversing decadesof progress in poverty reduction, promotion of education,
health improvements, and overall well-being as the livelihoodsof billions of people are being negatively affected. There areindicators that the pandemic may have pushed an additional
100 million people or more into extreme poverty, with adevastating impact on equality. Women, alongside minorities
and the poor, elderly, disabled, and migrant populations,have borne the worst of the fallout from the pandemic.

How we are responding

How we are responding

Carbon neutrality remains a top priority for us. We support theParis Agreement and have revised our targets, making them more
ambitious in line with the recommendations of the Intergovernmental
Panel on Climate Change (IPCC) aimed at stabilizing global
temperature rise below the internationally agreed 1.5 degrees
Celsius. Our efforts extend beyond our own business to our entire
value chain, and our strategies account for the interdependencies
between various environmental challenges. We seek to address ourenvironmental impacts holistically, applying a landscape approach
as we work to prevent cigarette butt littering, integrate eco-designprinciples in our smoke-free products, combat deforestation,
protect biodiversity, manage water responsibly, and reduce waste.

Although at its beginning, we believe the way ESG investing iscurrently applied is not yet capturing the power of the process tomake true change happen, as it mostly uses negative screening—which tends to exclude controversial industries such as tobacco.
This does little to incentivize companies and industries to effectpositive change, or more importantly to encourage change in
consumer behavior. What a company makes is at least as importantas how it makes it, and not all companies within an industry are thesame. In October 2020, we announced that our Chief Sustainability
Officer would report directly to PMI’s Chief Financial Officer, as itis our firm belief that fully integrating ESG drivers into our businessstrategy can significantly enhance both our sustainability and ourfinancial performance. This was the logical next step following ourBoard’s adoption of the PMI Statement of Purpose in 2020 andour shift to integrated reporting in 2019. Those developments
underscore that ESG is core to PMI’s performance and success,and further demonstrate that, at PMI, sustainability and businessperformance do not follow separate paths; they are fully interrelated
and mutually reinforcing and are organized and presented toall stakeholders, including investors, in an integrated way.

Philip Morris International Integrated Report 2020

How we are responding
We pay our employees equally for equal work, and we aim toprovide them with equal opportunities regardless of sex, gender
identity, country of origin, age, or other personal characteristics.
Our global EQUAL-SALARY certification verifies that PMI
pays men and women equally for equal work everywhere we
operate, and we are committed to fostering fairness in theworkplace, rewarding employees based on their performance.
We aim to close our gender pay gap through a range of initiatives
focused on improving the gender balance of our leadership
populations. We are also committed to maintaining at least aliving wage for all our employees. Our efforts to address income
inequality extend to our supply chain, as we aim for the farmers
from whom we source tobacco to make a living income.

Overview

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Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainability at PMI
Our purpose of achieving a smoke-free
future must be conducted sustainably.
For PMI, sustainability is an opportunity forinnovation, growth, and long‑term value
creation, and a means to minimize the negative
externalities while maximizing operational
efficiency and resource allocation. Sustainability
stands at the core of PMI’s transformation andhelps address some of the challenges resulting
from this transition, while spurring innovationand securing success over the long term.
Our message as we pursue a smoke-free future
is clear: People who don’t smoke should notstart, those who do smoke should quit, and those

Mitigatingrisk &
compliance22

smokers who don’t quit should switch to a better
alternative. Our priority is to address the healthimpacts associated with smoking by encouraging
adult smokers to switch to better, science-basedalternatives, ultimately phasing out cigarettes.
Addressing the health impacts of smoking,therefore, requires a three-part approach:
1. Develop and commercialize better alternatives
2. Provide broad access to adult smokers
who will not quit to ensure these products
accelerate the decline of smoking prevalence
3. Work to ensure these products ultimately
replace cigarettes. This is the mostimportant contribution we can make topublic health and is the cornerstone of
PMI’s purpose and business strategy

Operational& resource
efficiency

Philip Morris International Integrated Report 2020

Technology
innovation& growth

Purpose,value& impact

IMD business case studies on PMI’s transformation:
A source for classroom debate and reflection“One of the key issues that I see withcompanies—and not only tobaccocompanies—is how difficult it is todefine what sustainability specificallymeans for them. If you’re a company
that makes chocolates, or cars, what
aspects of sustainability are material
to your core business? Do we definesustainability simply as ‘mitigating
harm’? Or do you need to demonstrate
a positive impact? Do we define it interms of the products or services you
provide? These questions apply across allindustries and can create an interesting
debate in class for my students and theparticipants at IMD to have an original
experience and debate something that isvery controversial. Discussing the tobacco
business’s impact on society brings strong
emotional reactions, which influence thewillingness of various stakeholders to evenconsider the possibility of positive impact.
Those same emotions are expressed inclass—making this case a launchpad forrich analysis and reflective learning.”
Professor Vanina Farber, PhD, IMD Director,
elea Center for Social Innovation

The business case studies—available in The
Case Center and the Harvard Business Review
online store—are based on the idea thatstakeholders have an essential role to play in
PMI’s transformation and that their agendas canratchet up or slow down the process. They dig
deeply into purpose, materiality, and integrated
reporting. Do stakeholders trust PMI’stransformation? Are they willing to engage
in it? Or will they disengage and disinvest
from the push for change? How importantis the nonmarket environment to PMI’s
success in transforming its business model?

PMI’s Vision of a Smoke-Free Future: Can a
Tobacco Company Be Sustainable?
Farber, V.; Olynec, N.
Institute for Management Development (IMD)A World Without Cigarettes? Actions Speak
Louder Than Words
Farber, V.; Jaén, M.
Institute for Management Development (IMD)A World Without Cigarettes? Building a
Sustainability Materiality Matrix
Farber, V.; Jaén, M.
Institute for Management Development (IMD) isclaimer: The IMD business case studies were writtenD
independently, were not commissioned or paid for by PMI,
and Professor Farber and her coauthors received no economic
benefit or incentive from PMI for writing these cases.

Overview

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Operatingwith excellence

Caring for thepeople we work with

Strategic framework

Protecting theenvironment

S TR ATEG I C PILL AR S

Our approach to sustainability is structured aroundfour pillars of action and two tiers of topics. It
provides the framework through which we respondto sustainability challenges and opportunities.
To become a sustainable company, we must makeevery effort to replace cigarettes completely
with better, smoke-free alternatives. Innovating
for better products is therefore at the core of
our strategy. Our other strategic pillars include
effective management of operational topics,
social issues, and environmental matters.

Innovating
for better
products

Our two-tiered grouping of topics is based on thesustainability materiality analysis we conducted in2018 and refreshed in 2019. That analysis identified
10 areas of priority focus—or “tier 1 topics”—acrossour four pillars of action, which are discussed indetail in this report. Tier 2 topics are referred toin this report and further described on PMI.com.
In the Governance and management sectionof this report, we describe how sustainability isembedded throughout our business and how
we delegate accountability to the heads ofdifferent functions within the company linked
to the main impacts they can help address.

Transforming
for asustainablesmoke-free
futureOperatingwithexcellence

Protecting
the environment

Philip Morris International Integrated Report 2020

TIER 1 TOPI C S

Product healthimpacts
Access to smoke-free
products

Responsible marketingand sales practices
Sustainable supply
chain management
Respect for human rights

Caring for thepeople we work
with

23

Performance
metrics

Socioeconomic
well-being of tobaccofarming communities
Health, safety, andwell-being at work

TIER 2 TOPI C S

Product addictivenessProduct reliability

Responsible andtransparent R&D
Data privacy and protection
Business integrity
Illicit tobacco trade prevention
Responsible advocacy
Fair fiscal practices

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

Climate protection

Forest conservation

Littering prevention

Biodiversity

Product eco-designand circularity

Water stewardship
Waste reduction

Overview

Innovating for
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Sustainability materiality
Building on our 2018 exercise, we refreshed
our materiality assessment at the end of 2019to ensure we focus resources for the greatest
impact. The assessment took into accountthe perspectives of more than 800 internaland external stakeholders. It also included anevaluation of impact on sustainable development
and allowed us to identify emerging trends. Our
2019 sustainability materiality refresh (conductedin line with Global Reporting Initiative guidance)
informed the development of our 2025 Roadmap.
Sustainability materiality is a process throughwhich our company identifies, assesses, andprioritizes issues by collecting feedback from a
range of sources. These sources vary in complexity
and include both financial and nonfinancial
quantitative and qualitative information. A
rigorous materiality assessment ensures that
our strategy, work, and reporting cover the right
topics in the right way; this allows us to measureprogress against our sustainability roadmap.
To ensure that our strategy remains current
and is able to best fulfill our stakeholders’expectations, and that our initiatives continue toaddress those issues on which our business canhave the greatest impact, we plan to conduct
a new comprehensive sustainability materiality
assessment in 2021. This will allow us to reassess,recalibrate, and reaffirm our goals. We willcommunicate the findings in our next report.
Read PMI’s Sustainability Materiality Report 2019

Materiality:
PMI’s perspective
Read more

Operatingwith excellence

Caring for thepeople we work with

Impact valuation: Holding
sustainability to accountImpact valuation is a method by which companies
identify, understand, improve, and demonstrate thebenefits and costs of their activities to society andthe environment, translated into monetary terms.
To support the creation of a global impact
measurement and valuation standard formonetizing and disclosing impacts of corporate
activity, PMI joined other companies in 2019
to cofound the Value Balancing Alliance (VBA),a nonprofit organization.
In 2020, we piloted a first version of the VBA
methodology with a set of nine environmental,social, and economic topics covering companies’
operations and upstream supply chains. A crossfunctional team of internal experts within PMI
applied the methodology to evaluate our company’s
impacts, participated in peer-learning sessions,and provided feedback to inform the work of theVBA. The piloted methodology was made publicly
available by VBA in early 2021; find it here.

Performance
metrics

The exercise confirmed that a significant
portion of our impacts lies within our supply
chain and allowed us to define those impacts inmonetary terms. It also shed light on the needto enhance the VBA methodology to consider
additional emerging or existing sustainability
best practices in the calculation models,
including those related to sustainably managed
forests or employee lifelong learning programs.
Finally, piloting the methodology proved
valuable in providing insights into the linkages
between social impacts and macroeconomics.
This allows us to account for such linkages instrategy-setting and scenario forecasting.
Over the next two years, PMI and the othercorporate members of the VBA will continue
expanding the methodology to cover additional
topics and promoting integrated management
practices. We plan to further communicate on
the results of the impact valuation exercise as
we progress on the topic. We will also explore
further how to leverage findings from our valuationassessments to inform business decisions.

“We are glad that industry
leaders such as PMI are
members of the VBA
driving the movement tointegrate environmental,social, and human aspects
in decision-making anddisclosures towards a moresustainable economy.”
Christian Heller, CEO Value Balancing AllianceImpact valuation“Measuring and valuing economic,
social, and environmental impacts
can enhance understanding of
the materiality and interdependenciesof companies’ positive and negative
impacts. It promotes a cross-functional
approach to addressing impacts
and is an essential step to informa decision-making process resting
on a holistic understanding ofcompanies’ value contributions andeffects on society. However, for impact
valuation to be broadly adopted
and relevant to companies and all
stakeholders, we believe it needs
to rest on a common methodology.”
Andreas Kurali, PMI Vice President and Controller

24

Protecting theenvironment

Philip Morris International Integrated Report 2020

Traditional reporting

Impact measurement & valuation

$
Input

OutputOutcome

ImpactValue of impacts

What resources
have been used
for businessactivities?

What activities
have been
done?

What changed
as a resultof the businessactivities?

How does theoutcome affectsociety?

How do people
value the change
in well-being due
to the impact?

Note: Visual adapted from Value Balancing Alliance, Methodology Impact Statement General Paper, Version 0.1 (February 2021)

Overview

Innovating for
better products

Contribution to the UN Sustainable
Development Goals (SDGs)

The 2030 Agenda for Sustainable
Development is a universal call for
action to address global challenges.
At PMI, we are committed to doing ourpart to make the UN SDGs a reality.
Though none is unimportant, we impact andare impacted by different goals to differing
degrees. In 2019, building on our refreshedsustainability materiality assessment, we reviewed
our contribution to the SDGs to identify areas
where we have an opportunity to make thegreatest difference, in line with our sustainability
priorities. As a result, for each of our tier 1
topics, we identified primary SDGs to which PMI
can contribute, as well as secondary SDGs.
This year, we have taken it a step further. To
add more visibility and granularity, we deepened
our analysis and mapped in our SDG Index ourefforts and ambitions with the targets of the
UN SDGs for each of our sustainability topics.
The goals are interconnected and influenceeach other. We have developed initiatives
to systematically address the most criticalsustainability challenges affecting our businessand stakeholders. Through our business
transformation, we aspire to have a significant,positive impact on SDG 3 (Good Health andWell-Being) while contributing to several
other SDGs and corresponding targets.

Operatingwith excellence

Caring for thepeople we work with

TIER 1 TOPI C S

Product health impacts

Access tosmoke-free products

Responsible marketingand sales practices

Sustainable supply
chain management

Respect forhuman rights

Socioeconomic well-beingof tobacco-farming
communities
Health, safety,
and well-being at work

Climate protection

Littering prevention

Product eco-designand circularity

25

Philip Morris International Integrated Report 2020

Protecting theenvironment

PRIMARY S DG s

Performance
metrics

S ECONDARY S DG s

Overview

Innovating for
better products

Connectivity and trade-offs

Sustainability challenges do not exist ina vacuum. They are often linked to one
another, and their interdependencies—
including the direction of causality andmagnitude—must be considered as wecraft appropriate solutions.
These solutions can be mutually reinforcing.
For example, sustainable supply chain
management can be a catalyst for progress on
climate protection or fair working conditions.
As another example, forest protection is key toclimate stability and biodiversity conservation,and is instrumental to the socioeconomic wellbeing of rural tobacco-farming communities.
However, in other instances, addressing a particular
topic may limit the way we tackle another. For
instance, a topic of utmost importance to us is“access to smoke-free products,” an essential
aspect of which is creating awareness that lessharmful alternatives exist and are available (injurisdictions that allow it). While doing our utmost
to reach all adult smokers who will continue tosmoke, we must carefully limit our awarenessraising initiatives in light of another, equallyimportant topic, “responsible marketing andsales practices.” We do this in order to minimize
unintended consequences, including the risk of ourmessages (about smoke-free products) reaching
unintended audiences like non-smokers and youth.

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

At PMI, necessary trade-offs also occur due to ourbusiness transformation. For example, our priority
is to address our biggest externality by replacing
cigarettes with less harmful alternatives. While ourenvironmental footprint is small in comparison withother fast-moving consumer good companies, ourtransformation runs counter to our conservation
efforts. For instance, the manufacturing processof the heated tobacco units uses more energy
and water than cigarettes today. In this report,
we explain how we are tackling this issue andincreasing efficiency in order to mitigate this trend.
As another example, we know that with the growthof our smoke-free business there is a simultaneous
decline of our cigarette business, which translates
into a gradual decrease of demand for tobacco
leaf. Such change has an undeniable impact on ourcontracted farmers. Read how we seek to minimize
the negative effects of such trade-off here.
In designing our strategies and programs, it isvital that we accurately comprehend, analyze,
and account for situations of forced compromise.
We strive to minimize trade-offs, guided byour sustainability materiality assessment. If
appropriately addressed, some trade-offs can also
be a source of innovation, as such compromisespress us to develop plans for tackling thetensions created. Embedding an integrated
approach to sustainability within our businessallows us to monitor and tackle multiple issues
simultaneously, identifying effective solutions
that leverage on interdependencies to makeprogress. Read for instance our case study
describing the holistic strategies we have applied
to tackle our environmental impacts in Malawi.

Given the multifaceted and complex natureof sustainable development, such trade-offs
are inherent to decision-making. In somecircumstances, we are compelled to makesacrifices in one sustainability area to obtainbenefits in another. Beyond natural dependencies
between sustainability topics, trade-offs can alsostem from the competing interests of different
stakeholders, conflicts between short-term andlong-term priorities, and the impacts of external
trends shaping the context in which we operate.
A cigarette manufacturing line (on the right) and heated tobacco unit manufacturing line (on the left) in our
manufacturing facility in Neuchâtel, Switzerland

26

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Our 2025 Roadmap
Besides reporting transparently on progress, it is crucial to have forward-looking
goals that inform the route of our long-term plan. Accordingly, in 2020
we introduced a set of aspirational targets for each of our tier 1 topics.
Known collectively as our 2025 Roadmap, they correspond to the areasin which we believe our company can have the most significant impact.

Despite the unprecedented challenges broughtby the global pandemic, we have not deviatedfrom our efforts to become a sustainable
company. In 2020, we remained focused onachieving our ambitions and realized noteworthy
progress in many of our priority topics.

Product health impacts and access to smoke-free products

Responsible marketing and sales practices

Broaden access for
adult smokers to smokefree products that are
scientifically substantiatedas less harmful alternatives
to cigarettes

Commercialize our
products responsibly,
preventing youth fromaccessing and using themof adult>40m Number
smokers globally

who switch to PMI
smoke-free products
and stop smokingof adult>20m Number
smokers in non-OECD countries
who switch to PMI
smoke-free products
and stop smoking

100

Markets where PMI
smoke-free products
are available for sale

By the end of 2020, we estimate that, out of
17.5 million total IQOS users, 12.7 million had
switched to IQOS and stopped smoking. Of
them, 4.3 million live in non-OECD countries.

In 2020, we launched IQOS in 12 additional
markets. This brought to 64 the total
number of markets in which the productwas commercialized at December 31,
2020. Among these markets, 33 werein non-OECD countries.

>90%

In 2021, we plan to develop our processes
further by structuring key performanceindicators (KPIs) related to our aspirationaltargets. We will communicate our progressin this regard in our next report.

Youth accessprevention (YAP)
programs in place inmarkets representing
over 90 percent
of PMI’s total
shipment volume
by 2020

By the end of 2020, markets representing over
94 percent of PMI’s total shipment volume
had developed and started implementing YAPplans—where allowed, considering COVID-19
restrictions imposed by local governments.

of PMI
100% Percentage
smoke-free electronic

In August 2020, we launched our e-vapor
product IQOS VEEV in New Zealand—our firstelectronic device equipped with ageverification technology.

devices introducedon the market as of2023 equipped withage-verification
technology

Sustainable supply chain management
Further embedsustainability in our
procurement practices,leveraging on opportunities
to create long-lasting socialand environmental impactof critical
100% Percentage
suppliers from whom
PMI sources
sustainably

Not started
Progress, but with challenges
Progress on track
Progress, further than anticipatedCompleted

27

Philip Morris International Integrated Report 2020

In 2020, compliance with our Responsible
Sourcing Principles has been assessed for 95
percent of PMI’s critical nontobacco supplierspend. In our tobacco supply, we purchased 99
percent of our tobacco through direct contracts
between the farmers and PMI or our tobacco
suppliers, and field technicians were able tomonitor the implementation of our Good
Agricultural Practices (GAP) program on
contracted farms. Overall, we estimate that67 percent of our critical suppliers spend wassourced sustainably in 2020.

Respect for human rights
Safeguard the human rightsof people impacted by ouractivities

10

Highest risk countries
covered by external
human rights impact
assessments

We conducted two human rights impact
assessments in 2020, thereby reaching a totalof four assessments completed in high-riskcountries to date. We closely monitor thesubsequent implementation of agreed actionplans in those countries.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Our 2025 Roadmap continued
Socioeconomic well-being of tobacco-farming communities
Eliminate child labor andprovide safe and fairworking conditions
on tobacco farms,
and promote a living
income for farmersof
100% Percentage
contracted farmers

In 2020, we started conducting living income
studies with third-party experts, which willcomplement our internal analysis and help to
guide our efforts toward reaching our goal.
We also continued implementing various
initiatives aimed at improving income levels
in priority markets. In 2020, 48 percent of thecontracted farmers supplying tobacco to PMI
were earning at least a living income.

Zero

We maintained a relentless focus on preventing
incidents of child labor in our tobacco supply
chain, despite impacts on our initiatives due
to COVID-19 and related restrictions. We
introduced a new methodology to measureprevalence of all types of child labor incidents
among our contracted farms, giving us
increased visibility as we aim to eradicate casesthat are repetitive and systemic, and tackle
promptly isolated cases in our supply chain.
In 2020, we continued working to eliminate
the remaining 3.5 percent prevalence ofchild labor among our contracted farms.

supplying tobacco
to PMI who makea living income

Zero child laborin PMI’s tobacco
supply chain

Climate protection
Mitigate climate change
by decarbonizing ouroperations and value
chain, while increasing
our resilience

Net
zero

Achievement ofcarbon neutralityof PMI’s direct
operations (scope1+2) by 2030

Net
zero

Achievement ofcarbon neutralityof PMI’s value
chain (scope 1+2+3)
by 2050-50%Reduction ofplastic litter fromour products(versus 2021)

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

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

<0.3

Total recordable
incidents rate for
employees andcontractors

In 2020, across our factories, offices, and fleet,
our total recordable incidents rate (TRIR) was
0.12 per 200,000 hours worked, covering
our employees, contracted employees, andcontractors. We are proud of the progress
made to date but remain cautious, as
exceptional circumstances in 2020 driven
by COVID-19 have positively impacted
our performance.

Integrate circularity whendeveloping our products,
improving efficiency
and recyclability, andstrengthening ourcollection programof PMI
100% Percentage
smoke-free product

When IQOS users return broken or end-ofservice devices, our reverse-logistics program
CIRCLE helps to cycle materials back into theeconomy. In 2020, we continued the rolloutof our CIRCLE program, achieving 48 percent
market volume coverage (up from 39 percent
in 2019), by adding two new markets to theprogram. For consumables, we progressed in
the development of take-back schemes but anumber of complexities in the setup of suchan innovative program delayed the launch of
our pilots.

of PMI
100% Percentage
smoke-free electronic

In 2020, we focused on establishing a robust
roadmap and launched a program to identify
relevant certification schemes for our smokefree product devices, in partnership with thirdparty experts and informed by comprehensive
benchmarking.

users who haveaccess to collection
and recovery for
devices andconsumables

Progress, but with challenges

Progress, further than anticipatedCompleted

28

Philip Morris International Integrated Report 2020

Since the core of our plastic reduction rests
on cleanup activities and awareness-raising
campaigns aimed at changing behavior,
COVID-19 lockdowns and disruptions adopted
worldwide to contain the pandemic have
prevented us from making progress. During
2020, we focused on establishing partnerships
and on developing a methodology to measure
our global plastic litter footprint over time, andwe plan to establish our baseline in 2021.

Product eco-design and circularity

Not started

Progress on track

We achieved significant absolute CO2e emission
reductions in 2020: Emissions across our value
chain (scope 1+2+3) contracted by 18 percent,and those in our direct operations (scope 1+2)
by 26 percent. These were partially driven
by COVID-19 related impacts, but mainly
due to accelerated efforts toward our carbon
neutrality goals. Our progress in 2020,
supported by our new science-based targets
and revisited approach to carbon pricing,makes us confident we can achieve ourcarbon neutrality target in our operations(scope 1+2) before 2030.

devices introducedon the market as ofthe end of 2025 thathave eco-design
certification

Overview

Innovating for
better products

Creatingvalue
We harness our purpose
and strategy to create
value for our shareholders
and other stakeholders
through the allocation of
our human, intellectual,natural, manufactured,social, and financial capital.

Our mission

Accelerate the endof smoking
What we do

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

Data refer to calendar year 2020 orreflect status at December 31, 2020.

29

Operatingwith excellence

Caring for thepeople we work withKey resources and relationships
Human
Our success depends on the dedication, talent,and consumer-centric focus of our employees.
As of year-end 2020, we directly employed
70,849 people. More than 130 nationalities
are represented within our workforce, and41.7 percent of our employees are women.
Intellectual
Innovation is the backbone of our business
transformation. We invested USD 495 million in
R&D expenditure in 2020, of which 99 percent
related to smoke-free products. Innovation also
guides improvements in our processes, fromsourcing to manufacturing, logistics, and sales.
Natural
To produce our products, we use raw materials
such as timber-based products, metals, water,and energy. In 2020, we sourced 281,000
tons of packed tobacco, a material vital to our
products. We seek to use natural resources
efficiently and to source them sustainably.
Manufactured
Our assets, such as our two main R&D centers,
39 factories, 23,000 vehicles, 24 consumer
call centers, and 259 IQOS stores, allow us todevelop, manufacture, and deliver our products
to meet the demands of consumers.
SocialBuilding trust with our stakeholders is essential.
We develop and sustain relationships with a
network of over 28,000 suppliers, 285,900
contracted farmers, 130 million adult consumersof our cigarette brands, and close to 18 million
IQOS users. Our relationships also extend to
the retailers of our products, the communities
in which we operate, government officials andregulators, nongovernmental organizations, and themultistakeholder initiatives in which we participate.
Financial
Our business activities require financial capital, which
we strive to allocate efficiently to create value. The
capital is provided by our equity and debt holders,
as well as by the cash flow generated from ouroperations. Our company’s market capitalization at
December 31, 2020 was approximately USD 129
billion and PMI’s long-term debt was USD 31 billion.
At that time, PMI’s long-term credit was rated A by
Standard & Poor’s and Fitch and A2 by Moody’s.

Philip Morris International Integrated Report 2020

Protecting theenvironment

Performance
metrics

Our strategic priorities• Grow current smoke-free productplatforms to scale by building a superior
portfolio across segments, IQOS brandequity, a quality consumer experience
across digital and physical touchpoints
at scale, and geographic expansion• Maintain leadership in our conventional
business, through continued branddevelopment and selective innovation
while recognizing its volume will
decline if we are successful• Develop our long-term product andecosystem portfolio for future growthand drive material and measurable
progress in priority sustainability
corridors, ensuring transparent and clear
sustainability reporting and disclosure• Build global societal support forsmoke-free products and advocate
for regulatory and fiscal measuresthat allow adult smokers to learn
about, and convert exclusively to,
our smoke-free products faster• Achieve cost and cash leadership byimproving productivity to reinvest
in smoke-free product expansion• Deliver launch and service agility

Our strategic enablers• Consumer centricity• Digitalized business model• People, culture, ways ofworking, and organization• Real-time communication withexternal stakeholders

PMI’s R&D center in Neuchâtel, Switzerland

Key outputs and outcomes
Human• 12.7 million adults who haveswitched to IQOS and stopped
smoking, of whom 4.3 million
live in non-OECD countries• 3.5% prevalence of childlabor among contracted farms
supplying tobacco to PMI• 0.12 total recordable incidents
rate (TRIR) per 200,000
hours worked, covering
PMI employees, contracted
employees, and contractors• 0.53 collision rate within our
fleet (per million kilometers
driven), down from 0.87 in 2019
• 4 countries covered by humanrights impact assessments since
2018, corresponding actionplans being implemented• +33 employee engagementscore (employee Net Promoter
Score), up from +16 in 2019
• 94% markets representing over
94 percent of PMI’s total shipment
volume with youth accessprevention (YAP) plans in place
Intellectual• 1,300 patents granted in
IP5 jurisdictions relating tosmoke-free products• 418 scientific papers publishedby PMI since 2008 to share
our methods and findings• 146 toxicological assessment
studies, 22 clinical assessment
studies, and 30 perception
and behavior studies
completed by PMI on smokefree products since 2015

Natural• 26% reduction of CO2e emissions
in our direct operations (scope1+2) versus 2019, and 18
percent reduction across ourvalue chain (scope 1+2+3)• 100% of tobacco purchased
at no risk of deforestationof old-growth forest• 14% reduction in water
consumption in ourfactories versus 2019
• 85% of total factory waste
generated that was recycled
Manufactured• 2 smoke-free product platforms
commercialized, one centered onheated tobacco technology, theother in the e-vapor category• 1st smoke-free device introducedon the market equipped withage-verification technology• 64 markets where IQOS wasavailable for sale, of which 52
percent are non-OECD countries
Social
• 99% of tobacco purchased
through direct contracts by PMI
and our tobacco suppliers• 93% of all contracted farms
monitored against PMI’s
Agricultural Labor Practices Code
• 95% of our critical nontobacco
suppliers spend assessedagainst PMI’s Responsible
Sourcing Principles in ourdue diligence platform
Financial• 28.7 billion in net revenues• 23.8% of total net revenues
from smoke-free products• 2.4 billion in corporate
income taxes• 72.4 billion total amount of
excise tax paid by consumers
on PMI products

Overview

Innovating for
better products

Governanceandmanagement

Operatingwith excellence

Caring for thepeople we work with

Company Management
PMI’s Company Management encompasses those
employees who are executive officers under
Section 16 of the Securities Exchange Act of 1934.
As of March 12, 2021, our Company Management
was made up of 25 members, of whom four were
women. A biography of each member of PMI’s
Company Management can be found on PMI.com.

Executive compensation

PMI’s governance structure underlies
our daily activities to ensure that we
conduct our business in compliancewith high standards and with integrity.
Board of Directors
The primary responsibility of the Board of
Directors is to support the long-term successof the company. The Board is responsible forestablishing broad corporate policies, setting
strategic direction, and overseeing Company
Management, the individuals responsible forthe day-to-day operations of the company.
The Board has established various standing
committees to assist with the performance of its
responsibilities. The Board adopted corporate
governance guidelines, which—along with thecompany’s charter, bylaws, charters of Board
committees, code of ethics, code of businessconduct and ethics for directors, and relatedperson transactions policy—provide the framework
for the governance of the company. All ofthese documents are available on PMI.com.
PMI’s annual Proxy Statement contains detailed
information on our Board and committee
structure, the independence and diversityof its members, and the responsibilities andmeeting frequency of each committee.
Board committees

30

Our compensation and benefits programsupports our business and financial objectives.
Each component is designed to achieve one
or more of the following objectives:• Support our ability to attract, develop, and retain
world-class leaders in a controversial industry• Align the interests of executives and shareholders• Reward performance against preestablished objectives• Support long-term business growth, superior
financial results, sustainability efforts, societalalignment, and integrity of conduct• Promote internal fairness and a disciplined
assessment of performance• Align executive incentives with ourrisk management objectives
These objectives provide the framework forthe various components of compensation andbenefits and take into account the specificnature of our business. Together, theseelements form an aggregate package that is
intended to be appropriately competitive. Our
executive compensation program reflects ourcommitment to put sustainability at the core of
our corporate strategy, and our diversity andinclusion goals form a part of this strategy. The
Compensation and Leadership Development
Committee of the Board determined not to makeany substantial modifications to the programin 2021, other than to more clearly reflect theCompany’s commitment to having sustainability
at the core of its corporate strategy.

Philip Morris International Integrated Report 2020

Protecting theenvironment

Performance
metrics

We continue to incorporate key measurespertaining to our transformation into both ourannual and three-year management incentives.
In 2020, annual incentive awards were assessedon six measures, including a 20 percent
weight for RRP/non-combustible shipment
volume, and 15 percent on strategic priorities
and enablers (which are heavily focused on
our transformation to smoke-free products).
The remainder is split between measures ofmarket share, net revenue growth, adjusted
operating income growth and operating cash
flow—all of which are highly contingent on the
success of our smoke-free products. For more
information and definitions of these measures,
please refer to PMI’s Proxy Statement 2021.

2021–2023 Performance Share
Units (PSU) Performance Cycle
Our three-year management incentives are
structured in the form of Performance Share
Units (PSUs). As set out in PMI’s 2021 Proxy
Statement, for the 2021–2023 PSUs granted in
February 2021, the Compensation Committee
established performance metrics at what it
believes are appropriately ambitious levels
that reflect the Board-approved three-year
plan. It retained the previously used metrics ofTotal Shareholder Return (TSR), weighted 40
percent, which measures TSR relative to our peergroup; and organic adjusted compound annual
diluted EPS growth, weighted 30 percent. The
final metric is Transformation, defined as net
revenues from our smoke-free products as apercentage of the company’s total net revenues,
in the last year of the performance cycle.
(40%) PMI TSR as a percentile of peer group
ResultBelow Threshold

Below 25th
percentile

Performance
Factor0%

Threshold25th percentile 50%

Target50th percentile 100%

Maximum

80th percentile 200%
and above(30%) Organic compound annual
adjusted diluted EPS growth rate

Below Threshold

ResultPerformance
Factor<5%

0%

Threshold5%50%

Target8%

100%

Maximum≥10.5%

200%(30%) Transformation (net revenues fromsmoke-free products, out of total net revenues)
ResultPerformance
FactorBelow Threshold

<31%

0%

Threshold

31%

50%

Target37%

100%

Maximum

≥42%

200%

Executive compensation linked
to ESG performance
In addition, the Committee preserved its discretion
to use the following modifiers in its certification of
the Transformation performance metric, including:• The quality of the net revenue achievement,
which may have a positive or negative
15-percentage-point impact, and is assessed
based on the heated tobacco products excise tax
differential compared to cigarettes as well as theconversion rate to PMI’s smoke-free products(converted and predominant usage); and• ESG performance, which may have apositive or negative 30-percentage-point
impact, and consists of progress on:

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Governance and management continued––Carbon footprint reduction: We aim tocontinue reducing carbon emissions in linewith our carbon neutrality ambition andscience-based targets. By 2023, our target
is to reduce carbon emissions by 135 tons
CO2e in our direct operations (scope 1+2)
versus a 2020 baseline. Read more about ourefforts to reduce our carbon footprint in the
Climate protection chapter of this report.
––Environmental leadership: We aim to
maintain our Triple A CDP rating forclimate change, forests, and water.
––Electronics circularity: We target an
effective recycling rate for our smokefree IQOS devices (i.e., proportion of IQOS
device sales volume covered by the CIRCLE
program multiplied by the weighted average
recycling rate of IQOS devices at the CIRCLEhubs) of 70% by 2023. Read more about
our efforts in the Product eco-designand circularity chapter of this report.
––Diversity, equity & inclusion: Our target is
to increase the representation of women insenior roles to 32 percent by 2023. Read more
about our efforts to promote a diverse andinclusive working environment on PMI.com.

Sustainability governance and management

Integrating sustainability into ourcompany relies on a formal structurewith clear accountabilities at different
levels of the organization.
Overview of sustainability
management and governanceSeveral committees of the Board of Directors
are tasked with oversight responsibility for the
topics covered in this report. The Nominating
and Corporate Governance Committee (NCGC)
oversees the company’s sustainability strategies
and performance and advises the Board on
sustainability matters. The Product Innovation
and Regulatory Affairs Committee oversees thelong-term portfolio strategy of the company witha particular focus on smoke-free products, andmonitors and reviews key legislative, regulatory,
and public policy issues and trends related
to the research and development of smokefree products. In 2020, the Board established
the Consumer Relationships and Regulation
Committee; this committee oversees the company’scommercialization of smoke-free products andmonitors key legislative, regulatory, and public
policy issues and trends related to the post-market
regulatory environment that may limit consumer
access to RRPs, as well as the risks associated withchanges in consumer preferences regarding smokefree products. The Audit Committee oversees,among other matters, the risk management ofclimate change, of manufacturing and supply chain
disruption, and the cybersecurity risk assessment.
Anchoring our sustainability priorities withexecutive responsibilities and accountabilities
helps embed our strategy into our daily operations.
Within our Company Management, members are
responsible for driving progress and delivering on
our sustainability targets within their respectivefunctions. In addition, as previously stated, theCompensation and Leadership Development
Committee of the Board has tied a significant
portion of our senior management’s compensation
to Transformation and ESG metrics.
Fully integrating environmental, social, andgovernance (ESG) drivers into business strategy
can significantly enhance both sustainability
agendas and financial performance. Accordingly,
our Chief Sustainability Officer (CSO) reports tothe company’s Chief Financial Officer, a memberof the Company Management. The CSO leads theintegration of sustainability across our business.
She updates the Sustainability Committee
quarterly and hosts the Sustainability Coordination
Working Group, which meets every month.
The CSO heads PMI’s Sustainability Team,
which coordinates the implementation of ourstrategy across the different business functions
and markets. The Sustainability Team also leads
PMI’s sustainability materiality analysis, defines
strategy, and manages reporting on performance.

“At PMI, we support and seek to align with guidance and recommendations from different
reporting frameworks and standards, such as those from the GRI, SASB, TCFD, <IR>,
and UN SDGs, as well as the recently published WEF Stakeholder Capitalism Metrics,
which we see as complementary. Applying all of these simultaneously while tailoring ourdisclosures to properly reflect our company’s unique value proposition is a complex exercise,but it is also an enriching one as it brings sophistication and perspective to our work.”
Marie Corger, PMI Head of Sustainability Materiality & Reporting
31

Philip Morris International Integrated Report 2020

Our approach to sustainability programs
Our approach to designing and managing
our sustainability material topics isharmonized across areas. It relies oncommon foundational elements:
Deep understanding of the
topic, context, materiality,
external expectations, andinterdependencies withother issues
Governance structures andpolicies to formally guideour actions and ambitions
Targets to drive improvement
and provide clarity on
our desired outcomes

Performance indicators
to measure progress andevaluate our efforts

Concrete activities to achieve
progress against targets

Transparent reporting on
progress, allowing stakeholders
to scrutinize our actions
and encouraging dialogue
The sustainability landscape is dynamic
and evolving. We continuously update
and strengthen our programs as
knowledge improves or the relative
importance of specific topics changes.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Risk management
We designed our risk management
and internal control practices toaddress all significant and/or emerging
strategic, external, inherent process,and project deployment risks that
could undermine the ability toachieve our business objectives.
We identify and prioritize key enterprise risks
based on four dimensions: the impact of a risk on
PMI if it were to occur, its likelihood, its velocity,and its interconnectivity with other risks.
Risk management is overseen by the committeesof the Board as well as by the full Board. As partof the risk management process, the company
has established a Corporate Risk GovernanceCommittee (CRGC) comprising senior executive
officers, including the Chief Operating Officer(COO), Chief Financial Officer (CFO), Chief
Strategy Officer (CSO), Chief Digital & Information
Officer, VP & PMI Controller, Global Head of Risk
& Controls, Chief Information Security Officer(CISO), VP Chief Ethics & Compliance Officer,
and VP Corporate Audit. As of 2021, the new
General Counsel joined the CRGC. Ownershipof each prioritized key risk area is assigned to amember of senior management; its oversight is
assigned to a particular Board committee or to
the full Board. Management reports regularlyon these risks to the appropriate committees
and to the full Board throughout the year.

Integrated risk assessment
At the request of the CRGC, the Risk & Controls
function defines and coordinates an integrated
enterprise risk assessment, which brings together“first line” business, “second line” risk management,
and “third line” internal audit functions. This
framework includes, beyond the primary business
functions, Risk & Controls, Corporate Audit, Ethics& Compliance, Information Security, and Data
Privacy. Taking a holistic approach, these functions
collaborate to identify, assess, and respond to
emerging strategic, external, inherent process,and project deployment risks. Sustainability risks
and opportunities such as those related to safety,
leaf supply, climate change, electronic waste, andlabor conditions, for instance, are considered aspart of the integrated enterprise risk assessment.
In 2020, “second line” risk management and“third line” internal audit functions held monthly
meetings to allow for a continuous evaluationof the company’s risk environment, aligning andconsolidating risk management and action plans.
The CRGC and the Audit Committee of the Boardof Directors received updates on the company’srisk management and internal controls practices
and observations at least once per quarter.
We discuss the company’s risk factors inour 10-K and 10-Q submissions to the U.S.
Securities and Exchange Commission (SEC).
Click here to access our latest submissions.

Our governance and technical procedures forrelevant controls align with the Sarbanes-Oxley(SOX) Act. We manage corporate strategy andoperations to account for functional, market,
and product risks, and our Chief Strategy Officer
reports to our CEO directly on strategic group risks.

Our risk management
framework
Read more

32

Philip Morris International Integrated Report 2020

Managing risks during the COVID-19 pandemic
Following the outbreak of the COVID-19
pandemic in 2020, specific risk management
activities were established by our Risk &Controls function to allow for continuousalignment between business process
owners, business continuity planning (BCP)
stakeholders, and the risk management
functions. These activities were established withthe objective to provide senior managementwith a biweekly status update of thecompany’s rapidly evolving risk landscape.

Ultimately, these efforts provided our senior
management an aggregated view of thecompany’s risk landscape and the effectivenessof the invoked BCP measures. As such, ourrisk management response to the pandemic
contributed to the successful management of thechallenges our company faced. Furthermore, it
allowed the company to continue its operations
without significant interruption by addressing
risk timely as it arose in the midst of the initial
dynamics caused by the pandemic outbreak.

The established COVID-19 risk
management activities focused on specificand concrete BCP risks, including:

The outbreak of the pandemic and thecompany’s risk management response
demonstrated the added value of focusing on
the early identification of rapidly emerging
and evolving risks during special situations.
Following our risk response to the outbreak of
COVID-19 in 2020, we decided that certain
risk management activities (for instance,
the mobilization of local risk functions in
the rapid testing and validation of centrally
issued guidance in response to risk) will be
structurally embedded in our regular approach
toward risk management going forward.

• The risk of (partial) unavailability of ourpersonnel (e.g., due to regulatory enforced
measures, illness, hospitalization)• The risk of (partial) unavailability of ourphysical locations (e.g., due to voluntary and/or
regulatory enforced “shutdown” of PMI sites)• The risk of (partial) unavailability orvulnerability of our IT infrastructure (e.g., due
to “peak” stress on technology infrastructure)• The risk of (partial) unavailability of our external
parties/dependencies, including suppliers,
third parties, governmental authorities,
and other external parties/dependencies

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

WE ARE

Innovating for
better products
Cigarette smoking causes serious disease and the best way
to avoid the harm of smoking is never to start or, if one does
start, to quit. However, we also recognize that millions ofadult smokers will not stop smoking unless presented with abetter alternative. We believe that product innovation has
the potential to benefit smokers and consequently have apositive impact on public health.
In order to achieve this potential, we must accomplish twothings: First, we must develop products that have a significantly
reduced health impact compared with combustible cigarettes.
We have accomplished this by researching and developing
smoke-free products, whose reduced-risk profile is scientifically
substantiated, employing a step-by-step program derived frompractices followed by the pharmaceutical industry.
Second, in order to successfully reduce harm at the individual
and population level, adult smokers must be motivated toswitch to these better products rather than continuing tosmoke. Here, we must continue innovating, transforming ourorganization, and engaging with policymakers and regulators
to ensure that adults who would otherwise continue to smoke
have access to smoke-free alternatives.
In this section

TIER 1 Product health impacts
Access to smoke-free products
Further reading

TIER 2 Product addictivenessA laboratory analyst in PMI’s manufacturing facility in Izhora, Russia

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Philip Morris International Integrated Report 2020

Product reliability

p.34
p.41

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Product health impacts
Public health authorities, the scientific community, and many regulatory
bodies, such as the U.S. Food and Drug Administration (FDA), agree
that the primary cause of smoking-related disease is not nicotine but theinhalation of harmful and potentially harmful constituents, the vast majorityof which are emitted as a result of burning (combusting) tobacco.1 We havetherefore developed, and continue to refine, a portfolio of products thatdeliver nicotine without combustion—smoke-free products. While not riskfree, these products are a far better choice than continuing to smoke.

The right thing to do

The business case

Cigarette smoking is the most dangerous form of
tobacco use. It is the leading cause of preventablediseases, including cardiovascular disease, lungcancer, and chronic obstructive pulmonary disease.
The best way to avoid the harm of smoking isnever to start, but for those who do smoke, to quit.
However, many smokers do not quit. According
to World Health Organization (WHO) forecasts,
there will still be more than one billion smokers
by the year 2025. For these people, access toalternative products that significantly reduce therisk of disease compared with continued smoking
is critical. When appropriately regulated, theseproducts can complement and help accelerate
existing efforts to reduce smoking prevalence.

The future of the nicotine industry is unarguably
in smoke-free products, which are experiencing
rapid growth. Through our early and sustained
investment in R&D, and consequent leadershipin technology and innovation, we have built avery strong position. As of year-end 2020, ourR&D work and its associated innovations haveresulted in 1,300 patents granted for smokefree technologies by the five largest intellectual
property offices in the world (IP5); moreover, in2020 we held over 80 percent of the international
heated tobacco category and over half of theoverall smoke-free category (as compared withour cigarette volume share of 25.7 percent),
excluding China and the U.S. Heated tobacco
consumables also have higher revenues and grossunit margins per pack compared with cigarettes,
and as scale increases we are also driving significant
operating income margin expansion as we generate
operational leverage on our ongoing development,
device, and commercial infrastructure costs, andrealize digital efficiencies. Through growing thisbusiness as fast as possible, and adult smokers
fully switching to our smoke-free products, we aim
to capture more overall market share at superior
margins and deliver strong organic growth innet revenues and adjusted diluted earnings per
share (EPS). This provides attractive returns on
our significant upfront and ongoing investments
in developing the category, with USD 8.1 billion
invested since 2008 in the development ofscientifically substantiated, commercially
viable smoke-free products such as IQOS.

Read more

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

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Philip Morris International Integrated Report 2020

1 Source: https://www.fda.gov/tobacco-products/health-information/
nicotine-addictive-chemical-tobacco-products

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product health impacts continued
Achieving our aims
The principal source of smoking-related diseases
is known: The burning of tobacco emits the vast
majority of the harmful chemicals that are foundin cigarette smoke. By avoiding combustion, we
reduce or eliminate the formation of harmful
and potentially harmful constituents (HPHCs).
Through substantial investment in R&D, wehave developed products that provide theenjoyable experience of consuming nicotine
and flavors without burning tobacco.
Read more on PMIscience.com

Two fundamental principles guide the scientificassessment of smoke-free products:

Epidemiological
Smoking-related harm and disease are caused
by long-term exposure to the toxicants foundin cigarette smoke. The best way to avoid theseharms is never to start smoking. For men andwomen who do smoke, cessation is the best way
to reduce harm and the risk of tobacco-relateddisease by eliminating exposure to the toxicantsin cigarette smoke. Complete, long-term cessation
offers the maximum risk reduction a smoker canachieve and hence is the “optimum standard”
for the assessment of smoke-free products.

A laboratory analyst in PMI’s manufacturing facility in St Petersburg, Russia

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Philip Morris International Integrated Report 2020

Toxicological
The level and duration of exposure to toxicants
determines the nature and extent of adverse healtheffects. For exposure to take place, toxicantsmust be present—meaning that they are emitted
by the product or process of use. A product withsignificantly lower toxic emissions comparedwith cigarettes has the potential to significantly
reduce exposure to toxicants, which in turnleads to a reduction in adverse health effects.
In line with those two principles, our assessment
program aims to compare health outcomesof switching to smoke-free products withboth ongoing smoking and cessation.
We implement a rigorous scientific assessment
program aligned with the U.S. FDA’s draft guidanceon modified risk tobacco products (learn more
about how we conduct our R&D on PMI.com
and PMIscience.com). In addition to aerosol
chemistry, non-clinical, and clinical studies, ourassessment program includes consumer behavior
studies in order to minimize the use of oursmoke-free products by unintended audiences,such as former smokers, never smokers, andyouth. In addition, following market launch, we
continuously monitor the safety profile of oursmoke-free products to ensure that any new
or different health risks associated with theiruse can be identified in a timely fashion, if theyoccur, and can be managed appropriately. We
do this by improving our products and updatinguser information. We also produce and sharewith regulators—including the U.S. FDA—
annual safety update reports, which include
notifications received directly from consumers.

Our two main R&D centers, located in Switzerland
and Singapore, employ hundreds of scientists,
engineers, and other experts working to develop
and assess smoke-free products. This work isheaded by our Chief Life Sciences Officer, Chief
Product Officer, and Chief Consumer Officer, who
are members of PMI’s Company Management.
In 2020, PMI allocated 99 percent of its R&D
budget of USD 495 million to its portfolio of
smoke-free products. This includes costs related toclinical studies, the development of machinery andprototypes, and product acceptability testing. The
remaining 1 percent of our expenditure is largely
related to regulatory compliance requirementsfor our combustible tobacco products.

“Science and technology
can help society makesignificant strides in ourcollective efforts to address
the world’s most pressing
problems. Giving facts andevidence greater prominencein policymaking—over ideology,
politics, and unsubstantiatedbeliefs—will help match the
public’s expectations forscience to sit at the heartof decisions impacting
them and their future.”
Dr. Moira Gilchrist, PMI Vice President for
Strategic & Scientific Communications

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product health impacts continued
Progress in 2020
Smoking and COVID-19
Read more

The different parts of an IQOS 3 device

Heatedtobacco unit
(consumable)

COMP OSITION OF A
HE ATED TOBACCO UNIT

Our heat-not-burn product, IQOS
What is it, and how does it work?
Our main smoke-free product, IQOS, is a batterypowered, heat-not-burn product that heats
tobacco to produce a nicotine-containing aerosolthat the user inhales. There is no combustion of
the tobacco. Our base model comprises threemain components: A tobacco unit, a holder, anda charger. The tobacco unit is a novel productdesigned specifically and exclusively for use withthe holder (the heating device). It contains two
filter sections and specially processed tobacco
designed to be heated but not burned. Tobacco
leaves are ground and reconstituted into tobacco
sheets, called “cast-leaf.” These sheets are thencrimped and made into a tobacco plug. The
user inserts the tobacco unit into the holder.
Once activated, the holder heats the tobacco
via an electronically controlled heating blade.
Each tobacco unit provides a maximum of 14
puffs or around six minutes of consumption,
whichever comes first. The holder contains
a small battery, which can be recharged byinserting it into the charger; the charger, in turn,can be recharged using a household powersocket. We continue to enhance our IQOS
product portfolio, driven by consumer insights
and supported by scientific substantiation, andcurrently sell a variety of models in each market.

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Philip Morris International Integrated Report 2020

Mouthpiece filter
HolderCharger

PLA filter

Heating
blade

CasingControlelectronics

Battery

Tobaccoplug

Cellulose
acetate (CA)Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product health impacts continued
What scientific evidence have
we gathered to date?
IQOS is the most thoroughly assessed of oursmoke-free platforms. We have accumulated
extensive clinical and nonclinical data to
support its potential to reduce the risk ofdeveloping smoking-related diseases comparedwith continued cigarette smoking.
In our assessment program, we compared thechemical composition of the aerosol produced by
IQOS with the smoke from a reference cigarette,using standardized and validated analytical methods
to quantify the most extensive established list of
HPHCs (the FDA-93) which includes carcinogens,respiratory, and cardiovascular toxicants. We foundthat these HPHCs are reduced on average by 90 to
95 percent compared with the reference cigarette’s
smoke. In addition, we conducted extensive
chemical characterization of the IQOS aerosol.
Our untargeted screening was used to identify all
constituents above 100 ng/stick and resulted in
the characterization of 99.8 percent of the aerosol
mass. These analyses have shown that there areapproximately 10 times fewer constituents in IQOS
aerosol than reference cigarette smoke. As the U.S.
FDA put it when it authorized a version of IQOS for
sale in the US, “these chemicals are present in very
low levels and potential effects are outweighed by
the substantial decrease in the number and levelsof HPHCs found in combusted cigarettes.”1 Wealso conducted indoor air chemistry and quality
studies, which demonstrated that the use of IQOS
does not negatively impact indoor air quality.
We conducted toxicological studies for IQOS,
both in vitro and in vivo, to determine whether
the reduced formation of HPHCs in the aerosol
leads to reduced toxicity. Results from the in vitro
studies show that the IQOS aerosol is significantly
less cytotoxic and genotoxic than the smokefrom cigarettes. The in vivo studies found that,compared with cigarette smoke, the reduced
exposure to toxicants results in significantly
reduced lung inflammation and respiratory toxicity.
A laboratory analyst in PMI’s manufacturing facility in Bergen op Zoom, the Netherlands

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Philip Morris International Integrated Report 2020

“In the case of ourheated tobacco
products, we haveconducted numerous
non-clinical andclinical studies.
The risk reduction
potential of those
products is backed up
by volumes of highquality research data.”
Prof. Manuel C. Peitsch, PMI
Chief Scientific Officer

1 Source: https://www.fda.gov/media/124247/download (p. 41). The
FDA does not endorse or approve tobacco products.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product health impacts continued
In the following stage, we conducted several
systems toxicology studies to assess the diseaserelevant biological mechanisms affected byexposure to toxicants, using human-derived in vitro
cell cultures and organotypic tissue cultures. Thesestudies showed that, compared with the reference
cigarette smoke, the IQOS aerosol has a significantly
reduced impact on key mechanisms involved in
the development of respiratory and cardiovasculardiseases. In a systems toxicology study conductedin an animal disease model (Apoe-/–), we observedthat switching to the IQOS aerosol following twomonths of cigarette smoke exposure reduces
the development of both atherosclerosis andemphysema in a manner similar to smoking
cessation. We also completed an in vivo study toassess the potential of the IQOS aerosol to reduce
the risk of lung inflammation, emphysema, and lungcancer compared with cigarette smoke. The resultsof this study show that, in contrast to cigarettesmoke, the aerosol of IQOS does not increase theincidence and number of lung tumors. The study
also confirmed the significantly reduced effect of
IQOS aerosol on lung inflammation and emphysema
observed in the study mentioned above.1
Our 14 clinical studies on IQOS have involved
thousands of participants and up to 12 monthsof exposure. For example, we conducted four
clinical studies—each involving 160 participants
and an exposure period lasting five days to threemonths—to assess subjects’ relative exposure
to toxicants when using IQOS compared with
continuing to smoke cigarettes. The first two

Our 14 clinical studies on IQOS have
involved thousands of participants
and up to 12 months of exposurestudies—incorporating a five-day exposure, in
confinement—were conducted in Europe andJapan. The subsequent two studies extended
over three months—a five-day confined exposure
period followed by an ambulatory period of
85 days—and were conducted using a menthol
version of heated tobacco units in Japan and the
U.S. The ambulatory study period was intended
to assess whether reductions in exposure
observed in a confined setting were sustained
under “real world” conditions, where factors suchas environment, diet, or passive smoking could
influence exposure to HPHCs. All four studies
showed a significant reduction (ranging from47 to 96 percent relative to continued cigarettesmoking) in the 15 biomarkers of exposure inadult smokers who switched to IQOS. Complete
switching to IQOS achieved a 95 percent
reduction in exposure from smoking abstinence.
We also conducted an exposure-response study tomeasure clinical risk markers when adult smokers
switch to IQOS for six months. The results of thisstudy show that six months after switching to
IQOS all eight co-primary biomarkers of potential
harm displayed favorable changes (i.e., changes inthe same direction as cessation) and that for fiveof the eight markers the favorable changes were
statistically significant compared with continued
smoking. We completed a six-month extensionof the six-month exposure response study tounderstand what the same markers look like 12months after switching. The study showed thatin smokers who switched to IQOS the favorable
changes observed at six months were maintained.
To complement our research, in 2020 we also
initiated ecological studies. These studies areused to measure prevalence and incidence ofdisease, by observing data at the population
or group level, rather than individual level.

1 References: 32780830 and 32780831.
2 “Effect of IQOS introduction on cigarette sales: evidence
of decline and replacement,” June 2019, Tobacco Control,
Michal Stoklosa, American Cancer Society.

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The launched program of ecological studies
explores risk-modifying factors on healthoutcomes at the population level. Independent
evidence already links the launch of IQOS toan accelerated decline in cigarette smoking
in Japan, the first country in which IQOS waslaunched nationwide (2015).2 We are now
studying time series of Japanese hospital dataand health insurance claims for two smokingrelated diseases (chronic obstructive pulmonary

disease and ischemic heart disease) to detect apossible health impact of the introduction of IQOS
at the population level. The first results show
a decline in observed hospitalization rates forchronic obstructive pulmonary disease (COPD)
exacerbations coinciding with the national rollout
of IQOS in Japan. More research is needed
to confirm this first ecological observation.
We aim to publish results of our research inpeer-reviewed journals as soon as possible.

IQOS status of scientific substantiation
Product
health benefits

Access tosmoke-free products

Innovating
for better products

Individual
risk reduction

Consumerswitching

Population
harm reduction

Data gathered so far
Average 95 percent reductionin harmful chemicals measured
in laboratory studies

72 percent of smokers
who switch to IQOS stopsmoking cigarettes

12.7 million smokers have stopped
smoking and switched to IQOS

Analyses of aerosol identify
few to no new risks comparedwith cigarette smoking

Very low levels of use of
IQOS among youth andnonsmokers

IQOS significantly
accelerates decline incigarette smoking

Clinical studies find favorable
changes in risk markers amongsmokers who switch

Data being gathered
A substantial reduction
in morbidity or mortality
among individual tobaccousers is likely to be establishedin future studies

Ecological studies are being
undertaken to establish publichealth impact of IQOS on
smoking-related diseases (COPD
and IHD) at population level

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product health impacts continued
What are the external findings to date?
Our scientific results are supported by a growing
body of independent research. Several government
agencies have already reviewed the available
evidence or conducted research of their own.
In addition to studies on aerosol chemistry andtoxicology, the first independent clinical and postmarket studies have started to emerge. In general,these studies confirm PMI’s results, although somehave contradictory interpretations of the data
(e.g., using fresh air as the comparator instead ofcigarette smoke), methodological differences (e.g.,enrolled populations, studies that do not follow
OECD guidelines), or overstated conclusions.
The list of independent studies (over 160 in total)
published around PMI’s smoke-free products
and/or our methods and results as of April
29, 2021 is available on PMIscience.com.
In 2019, a version of our heat-not-burn product
IQOS became the first innovative electronic
alternative to cigarettes to be authorized by
the FDA for sale in the U.S. (read the decisionsummary here). On July 7, 2020, the FDA went
one step further, authorizing IQOS to be marketed
as a modified risk tobacco product with thefollowing “reduced exposure” information:• The IQOS system heats tobacco
but does not burn it.

• This significantly reduces the production ofharmful and potentially harmful chemicals.
• Scientific studies have shown thatswitching completely from conventional
cigarettes to the IQOS system significantly
reduces your body’s exposure to harmful
or potentially harmful chemicals.
This decision followed a multi-year review ofthe scientific evidence PMI submitted to the
FDA in December 2016. The agency found thatthe use of reduced-exposure claims would be“appropriate to promote the public health and is
expected to benefit the health of the population
as a whole.”1 The FDA also concluded that the
totality of evidence presented suggests that ameasurable and substantial reduction in morbidity
or mortality among individual tobacco users is
reasonably likely to be established in subsequentstudies. The order letter as well as the decisionsummary are available on the FDA’s website.
On December 7, 2020, the FDA authorized forsale in the U.S. the IQOS 3 device, which contains a
number of technological advances compared witha previously authorized version of the IQOS device,including longer battery life and a quicker recharge
between uses. In its decision, the FDA noted thatinternational survey data reviewed by the agency
found no evidence of increased uptake of IQOS
by youth or young adults, while use patterns
available for a previously authorized version of
IQOS within the U.S. have not raised new concerns
regarding product use in youth and young adults.2

Growing scientific and regulatory consensus

Germany
United Kingdom

Netherlands

Belgium

China

United States

Eurasian Union

Korea
Uruguay

1 Source: https://www.fda.gov/news-events/press-announcements/fdaauthorizes-marketing-iqos-tobacco-heating-system-reduced-exposureinformation
2 Source: https://www.pmi.com/media-center/press-releases/pressdetails?newsId=22996

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Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product health impacts continued
Our e-vapor product, IQOS VEEVOur second smoke-free product, IQOS VEEV, isan e-vapor product (or e-cigarette). The batterypowered device uses a liquid solution containing
nicotine and flavoring to produce an inhalable
vapor. The product is composed of a device anddisposable cartridge. The device houses thebattery and the puff sensor, while the cartridgeholds the heating element and the e-liquid.
IQOS VEEV represents a new heating technology
within the e-vapor product category. Until
recently, most e-vapor products used a coiland-wick system to heat a nicotine-containing

solution. The wick draws the liquid onto a coilheating element to create an aerosol. In thesesystems, the temperature of the heater can varysignificantly depending, for example, on theamount of liquid in the system, or how strongly
the user puffs on the e-cigarette. Several studies
have shown that puffing on an e-cigarette
when the liquid level is low results in “dry puffs,”
which can significantly increase exposure tocertain toxicants—especially formaldehyde.
In IQOS VEEV, the wick is eliminated, and the coil
is replaced by a metal mesh. When the liquid is
introduced to the heater, the increased surface area
provided by the mesh design helps heat the liquid

in a more consistent way compared with currentgeneration coil-and-wick systems. The software
ensures that the heater’s temperature is stableand does not vary based on puff strength or frompuff to puff. The low-liquid detection system cuts
off power to the mesh heater once the liquid has
dropped below a certain level, eliminating dry puffs.
Unlike typical e-vapor product cartridges, IQOSVEEV cartridges are manufactured, assembled,
pre-filled, and pre-sealed in a fully automatedprocess to ensure product consistency. This occurs
within our European production facilities. We
launched the product in 2020 in New Zealand andthe Czech Republic and are compiling consumer
insights before proceeding with an internationalrollout planned in 2021. Moreover, IQOS VEEV isthe first of our smoke-free products to be trialed in
New Zealand with technology to prevent underage
use, whereby the device can only be unlocked byregistered, age-verified users (read more here).

2020 performance highlights
See our performance metrics

99%

of our R&D expenditure
dedicated to smoke-free
products

Next steps
We continue to invest in research to develop
and scientifically substantiate a portfolio of everbetter, affordable, and acceptable smoke-free
products for existing adult smokers—in both
OECD and non-OECD countries. As of yearend 2020, our R&D work and its associatedinnovations have resulted in 1,300 patents granted
for smoke-free technologies by the five largest
intellectual property offices in the world (IP5).
To further strengthen the already robust IQOS
evidence package, we are starting to complementlaboratory and clinical studies with real-world
evidence regarding the public health impact of
the introduction of IQOS at the population level.

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

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Philip Morris International Integrated Report 2020

Finally, we will start leveraging our technicaland scientific capabilities beyond the field of
nicotine and reduced risk products by using
our knowledge and expertise in the delivery ofaerosols to humans in both wellness and medical
applications such as respiratory drug delivery.

934

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

1,300

Patents granted to datein IP5 jurisdictions relating tosmoke-free products

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Access tosmoke-free products
The public health benefit of smoke-free products depends not only
on their potential to reduce the risk of smoking-related disease,
but also on their actual use as alternatives to cigarettes by adult smokers.
For smokers to switch to them, these alternatives must be accessible.
Increasing accessibility means improving consumer awareness as well as
the acceptability, availability, and affordability of our smoke-free products.

The right thing to do

The business case

Reducing the harm caused by smoking is a desire
for most smokers and a long-held goal of NGOs,
the scientific community, public health experts,
and regulators. Investing in R&D to understandthe causes of harm and work toward reducing
them significantly was an important first step increating better alternatives to cigarettes. PMI
chose to go beyond that by adopting the broader
purpose of accelerating the decline of smoking
prevalence and phasing out cigarettes. At PMI,
we believe that our value proposition should notrest on expanding our portfolio to offer choice inaddition to cigarettes. Much to the contrary, ourpurpose is to make cigarettes obsolete, encouraging
adult smokers to switch to better alternatives.

Our sustained investments in R&D, commercial
capabilities, and the IQOS brand have created acompetitive advantage, allowing our smoke-free
products to lead the new category of better
alternatives to cigarettes. By focusing the vast
majority of our commercial deployment efforts on
making sure that smokers who do not quit fully
switch to better alternatives, we aim to reach as
many adult smokers as possible in as many markets
as possible; this includes the estimated 130 million
PMI cigarette smokers as well as the over 800
million smokers who buy competitor brands. This
is not only the right thing to do, but the businesscase is clear: Our smoke-free product consumables
drive higher net revenues and profitability perpack than cigarettes, with significant operating
income margin benefits from increased scale as
we start to generate attractive returns on oursignificant upfront and ongoing investments indeveloping the category. We are also gaining shareof the total tobacco market, thereby increasing ourcurrent and future revenue base from which togenerate income. Any delay in providing cigarettesmokers access to smoke-free products means
lower revenues and earnings per share for PMI.

Read more

Our aims>40 million

Number of adult smokers globally who switch to
PMI smoke-free products and stop smoking
by 2025>20 million

Number of adult smokers in non-OECD countries
who switch to PMI smoke-free products and stopsmoking by 2025

100

Number of markets globally where
PMI smoke-free products are available
for sale by 2025
IQOS coaches in an IQOS store in Lausanne, Switzerland

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Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
Achieving our aims

In the four years following our 2016 announcementof our smoke-free vision, PMI’s smoke-free productshipment volume increased from 8 to 76 billion
units. Simultaneously, the shipment volume ofour combustible tobacco products contracted
from 845 to 654 billion units over that period andsmoke-free products played a very important role.

It is our long-standing ambition that by 2025
at least 40 million smokers will have switched
to PMI’s smoke-free products and stopped
smoking, including at least 20 million smokers
in non-OECD countries. This number can bemuch higher if more regulators make tobacco
harm reduction an integral part of their tobacco
control strategies, in addition to preventing
initiation and encouraging cessation.

To succeed in making the world smoke-free, weneed all adult smokers to have access to PMI’s
smoke-free products. By access, we mean that:

We have made good progress toward our targets.
We estimate that by the end of 2020, a totalof 12.7 million smokers—including 4.3 million
smokers in non-OECD countries—had switched
to IQOS and stopped smoking cigarettes.

• Smokers are aware of the benefitsof smoke-free products• The products are accepted by smokers
as a viable alternative to cigarettes• The products are conveniently
available for sale to smokers• Smoke-free products are affordable
to smokers

In this context, a regulatory framework allowing the
products to be sold and adult smokers to know thatthese products exist and are available is essential.
To achieve our objectives, we are leveraging
our resources to, where we can, enhance
the awareness, acceptability, availability, andaffordability of our smoke-free products. Ourcommercial expenditure ratio is a good overall
indicator of our efforts in this regard, showing
how much of our total global spend on marketing,consumer engagement, and trade activities isdedicated to smoke-free products. In 2020,76 percent of PMI’s commercial expenditures
related to smoke-free products (up from 71 percent
in 2019), far exceeding their share of total net
revenues (23.8 percent). While PMI is doing
everything under its control by shifting resources,
government, policy, and regulations should playa key role in enabling and facilitating access.

Consumers of PMI products—projection 2025
(Illustration based on WHO projections, assuming constant PMI market share)

16m

16m

40m

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

Awareness

42

Acceptability

Philip Morris International Integrated Report 2020

Availability

131m

115m

75m

2025 estimatebased on
WHO projection

2025 estimatebased on
WHO target

2025 estimate with PMI
aspiration complementing
WHO target

Affordability

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
Our Chief Executive Officer heads our efforts toroll out smoke-free products across our markets
globally. The team led by PMI’s Chief Consumer
Officer brings together all consumer-facing
experiences across the consumer journey, fromtrends and insights on acquisition channel strategy,
to programs to deter relapse to cigarettes. In
conjunction, our Commercial team, headed by
PMI’s Senior Vice President, Commercial, develops,
tests, and deploys the routes to market for smokefree products. Meanwhile, the team led by our
Chief Product Officer continuously develops andenhances PMI’s smoke-free products, drawing on
consumer feedback. Importantly, our Operations
team, led by our Senior Vice President, Operations,works to ensure our manufacturing capabilities
meet the demand for smoke-free products.

“Providing adult smokers
access to our smoke-free
products is the top priority
at PMI. In addition to
substantial resources, we
dedicate the vast majorityof management time tothe topic, from our entire
Company Management teamto the management teams
in every market in which weare commercializing or plan
to commercialize IQOS.”
Jacek Olczak, PMI Chief Executive Officer

C A S E S T U DY

Can innovative products
like IQOS accelerate thedecline of smoking?
Minimizing tobacco-related harm at the
population level depends not only on the
degree of risk reduction of the smoke-free
products, but also on their adoption by
adults who would otherwise continue tosmoke. It is important that these people
switch completely in large numbers, while
product initiation by nonsmokers—including
youth and ex-smokers—must be minimized.
This case study responds to calls fromresearchers and public health policy experts
for better understanding of the populationlevel impact of the increasing availability anduptake of IQOS, our heat-not-burn product.

Read the case study

A sales representative and a customer in an IQOS store
in Ginza, Japan
A sales representative in an IQOS store in Bratislava, Slovakia

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Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
Progress in 2020
Product awareness
The first component of our access strategy israising awareness. This means understandingby consumers of what causes morbidity andmortality, and raising awareness of smoke-free
products among adults who smoke and willcontinue smoking. We want these smokers
to understand the differences and benefits ofour smoke-free products in comparison withcombustible cigarettes, while also ensuring
they understand that smoke-free products are
addictive and not risk-free. In our awarenessraising efforts, we are cautious to guard against
use by unintended audiences such as neversmokers, former smokers, and youth (read more:
Responsible marketing and sales practices).
Tobacco product marketing is subject to extensive
restrictions worldwide, including outright bansin some countries. The regulatory environment
varies substantially across markets, making
it difficult—or almost impossible—in somecountries to make people who smoke awareof available alternatives to cigarettes and how
and why they should use them instead.
As of the end of 2020, we estimate that only
36 percent of adult smokers in the markets inwhich PMI commercialized IQOS were aware of
the product’s features and benefits comparedwith smoking cigarettes.1 This lack of information
arguably presents the single biggest hurdle toachieving tobacco harm reduction. It is also
potentially the easiest to overcome if and when
1 The estimate is based on studies in 54 markets where IQOS wascommercialized in 2020.
2 Changing Perceptions of Harm of e-Cigarette vs Cigarette Use Among
Adults in 2 US National Surveys From 2012 to 2017, March 2019(https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6450305/).
3 Perception of the relative harm of electronic cigarettes comparedto cigarettes amongst US adults from 2013 to 2016: analysis of the
Population Assessment of Tobacco and Health (PATH) study data, 2020
(https://harmreductionjournal.biomedcentral.com/articles/10.1186/
s12954-020-00410-2).

44

public health organizations decide to inform
adult smokers—or allow them to be informed—
about the benefits of smoke-free products.

Product information
At PMI, we seek to provide adult consumers withaccurate and non-misleading information about oursmoke-free products so that people who would
otherwise continue to smoke can choose to switch.
We have internal processes in place to ensurethat our consumer messages meet this standard.
We have also developed a program of perception
and behavior assessment studies to understandhow our smoke-free products are perceived
and how users will behave with the products.
A cross-functional team of scientists, market
researchers, lawyers, communication experts,
and marketers review consumer messages about
our product features and benefits. To establish
whether a statement is accurate (substantiated),
the team verifies it against available information
on product design and characteristics or scientificevidence available either from the literature or
directly from our scientific studies or consumer
research. To confirm a message is clear andnon-misleading, particularly for reduced risk
messages, we conduct comprehension research invarious markets and carefully analyze the results
before allowing the message to be released.
The team also works directly with markets
to ensure proper deployment of centrally
developed consumer communication and that
locally developed marketing materials meet
our standards and local law requirements.
Perception and behavior assessment studies
help us evaluate risk perceptions of smoke-free
products among various adult consumer groups.
The results of our studies to date show thatthe adult consumer groups tested have a very
good understanding that IQOS presents lessrisk than cigarettes but is not risk-free and that
it is riskier than smoking cessation. Additionally,
when assessed in the context of specificcommunication materials, more than 90 percent

Philip Morris International Integrated Report 2020of participants in consumer studies understoodthat IQOS is not intended for nonsmokers, andmore than 80 percent comprehended thatquitting the use of all tobacco is the best way
to reduce the risk of tobacco-related disease.
We do not conduct studies on individuals under
the legal age to purchase tobacco. We haveconducted studies of our heat-not-burn product
IQOS among young adult never smokers (age18-25) and these tests indicate a very low or no
intention to use or try IQOS among these young
adult never smokers. However, our FDA MRTP
exposure modification order required that we
submit a post-market surveillance and studies plan,
which had to be approved by the Agency. As partof that plan, our commercialization partner in the
United States, Altria, will conduct a secondary
analysis of Altria’s existing Underage Tobacco Use
Survey (UTUS), which is nationally representative
survey of U.S. household-dwelling individuals
13-20 years of age. IQOS specific questions
were added to the UTUS and will be used toestimate awareness and use of IQOS among
underage individuals. This information is part of
FDA’s ongoing post-market surveillance efforts
related to IQOS, which were deemed necessary
to grant the MRTP exposure modification order.

11.5 percent in 2012 to 36.4 percent in 2017.”2
Another study also found that “the proportion of
U.S. adults who correctly perceived e-cigarettes
as less harmful than cigarettes decreased
each year from 41.1% in 2013–2014, 31.5%
2014–2015 and 25.3% in 2015–2016.”3 It is ofparamount importance that science and facts
prevail for the 1.1 billion smokers worldwide.

Unsmoke: Our global
corporate campaign
Read more

Our premarket and post-market studies guide all
our consumer-facing activities and communication,
including the internal assessment of consumer
messages.
The opinions expressed about smoke-free
products by public health organizations, regulatory
bodies, and NGOs have a big impact on individual
smokers’ decisions, so it is critical that theseorganizations avoid contributing to category
confusion or misinformation. To illustrate existing
misconceptions: A study found that “the proportionof U.S. adults who perceived e-cigarettes asless harmful [than cigarettes] declined from 39.4
percent in 2012 to 33.9 percent in 2017” andthat “during the same period, the proportionof adults who perceived e-cigarettes as equallyharmful as cigarettes more than tripled fromAn IQOS store in Stockholm, Sweden

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
Consumer engagement at retailAt the end of 2020, PMI had a footprint of
259 stores dedicated to IQOS and over 2,200
exclusive IQOS retail touchpoints worldwide.1
These retail outlets offer personalized support
to adult consumers, starting with explaining how
the product should be used and how to clean it.
In our boutiques, interested adult smokers canlearn about heated tobacco technology and its
benefits, communicate with our staff, and try the
product. Our IQOS coaches are trained on our
Good Conversion Practices and are required
to interact with adult smokers exclusively.

To help smokers transition to smoke-free products,
we are shifting from a business-to-businessto consumer-centric model. This is a highly
complex and resource-intensive undertaking.
In the table below, we illustrate some of thedimensions of this change in our business model,
showcasing the complexity and scale of thechange. This transformation requires significant
changes to our internal processes, skill set, andmindset. It also requires a substantial and longterm investment in infrastructure, systems,
and capability building. Therefore, we have tomaintain a careful pace while scaling things up.

Digital capabilities help us become more efficientin serving consumers. In 2020, we shifted our
focus in this direction as COVID-19-related
lockdown measures inhibited other means ofconnecting with consumers. In countries where
this is permitted, adult smokers who express aninterest in IQOS are offered an online session
with a remote IQOS coach. Consumers can also
benefit from additional services via other digital

touchpoints. With the consumer’s consent, weuse customer relationship management (CRM)
to offer tailored communication and promotions
to consumers, according to their specificinterests and the stage they have reached intheir conversion journey. CRM also allows us toprocess, analyze, and respond swiftly to consumer
feedback collected across all touchpoints.
1 In 2020, we refined our classification of different retail channels.

In addition to the IQOS stores, there are premium
resellers—select stores in which we provide
information about our smoke-free products toadult smokers, offering them an opportunity
to have a session with trained staff to learn
about the product, its benefits, and how to use
it within the environment they regularly visit
to purchase tobacco products. Additionally,
these locations offer IQOS users with accessto related services such as device cleaning andreplacement (in the case of defects). These sites
also permit current users to experience andaccess new device ranges and accessories withwhich to personalize their IQOS products.

Purchasing and trying a smoke-free productis only one step along the conversion journeyof an adult smoker who switches to a lessharmful alternative. It is essential that we set
in place the right infrastructure to support
smokers along every leg of this journey.
We currently have 24 consumer call centers, where
adult users can contact us if they have a question
about the product or its use. Insights we receive
are fed back into our product development.

From

To

Product

Single productMultiple products withmultiple components (devices,
consumables, accessories)

Consumerjourney

Simple: From one
cigarette brand to anotherComplex: Changing behavior2 byadopting a smoke-free productand stopping smoking

Touchpoints

One type: Retailer

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

2 For the smokers who would otherwise continue to smoke.

A sales representative and a customer in an IQOS store in Ginza, Japan

45

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
Product acceptability
Smokers will only stop smoking and switch
to better alternatives if they preferthese products over cigarettes.
An important indicator of whether our heat-notburn product meets consumer preferences is theso-called full-switching rate: The percentage of
IQOS users who stopped smoking versus total
IQOS users. In 2020, the average full-switchingrate for IQOS was 72 percent, which significantly
exceeds the performance of competing products,
for which dual use (i.e., using both smoke-free
products and cigarettes) is the norm. The perfectfull-switching rate is 100 percent, and this is ourgoal as we continue to develop and improve our
products and make cigarettes truly obsolete. IQOS

is a new product with different characteristics tocigarettes. During the switching journey, users
go through an adaption process where dual use
may occur. Our goal is to support consumers
to make this adaptation process as short as
possible. It is only by switching completely, andeliminating cigarettes, that the full benefits ofsmoke-free products like IQOS can be realized.

Product design
We designed our smoke-free products to
reduce disease risk compared with smoking
while replicating as much as possible the taste,nicotine delivery, and ritual characteristics ofcigarettes so that adults who will not quit are
willing to switch to these alternative products.

An IQOS coach and a customer in an IQOS store in Lausanne, Switzerland

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Philip Morris International Integrated Report 2020

The likelihood that adult smokers will consider
a smoke-free product a viable alternative tocigarettes is dependent on the overall sensory
experience and nicotine delivery and clarity on
potential health benefits. With regard to nicotine,
the FDA stated in its 2019 premarket tobacco
application decision: “IQOS delivers nicotine inlevels close to combustible cigarettes suggestinga likelihood that IQOS users may be able tocompletely transition away from combustible
cigarettes and use IQOS exclusively.”1 We discussin more detail the role of nicotine in our smokefree products on PMIscience.com and PMI.com.
As of December 31, 2020, IQOS heated tobacco
units were available in over 30 taste variants
to cater to a variety of tastes and maximize theprobability that a smoker will switch. In 2020, welaunched a flavor adviser tool, both at retail andonline, to guide consumers in selecting the variant
that best matches their preferences. Flavors are
essential to encourage adult smokers to switch,and their use should be preserved; however, certain
flavors, such as candy- or dessert-like, could beparticularly appealing to youth and should not be
used. In all circumstances, heated tobacco units,
as any tobacco or nicotine products, should be
regulated, including the way they are marketed,to ensure they do not particularly appeal to youth.
At PMI, we have implemented a central governancesystem, under which new flavored heated tobacco
products and e-vapor products are assessed andby which those product variants are subject to a
specific assessment framework that requires dataand checkpoints in the process to demonstratepremarket that a new flavored product proposition

1 Source: https://www.fda.gov/news-events/press-announcements/fdapermits-sale-iqos-tobacco-heating-system-through-premarket-tobaccoproduct-application-pathway. The FDA does not endorse or approve
tobacco products.

is not particularly appealing to minors or otherunintended audiences. As part of the assessment,
we review literature and market data and we also
conduct behavior research assessment by “online”
consumer testing on a case-by-case basis. Only
once this review and validation process is done,
new flavored heated tobacco or e-vapor products
are commercialized. To confirm premarket findings,
we also conduct post-market studies to verify
that flavored tobacco and nicotine products
commercialized by PMI are not particularly
appealing to unintended audiences, including youth.
From concept design to commercialization atscale, our efforts to continuously enhance theexperience of our smoke-free products are guided
by consumer insights. We regularly incorporate
product updates and new features designed toaddress consumer pain points to help adult smokers
switch from cigarettes more seamlessly. In recent
years, we have broadened our portfolio of IQOS
heat-not-burn devices, and we are currently
commercializing four models. In 2020, we focusedon finalizing a major product update: A newheating technology that addresses consumer
pain points related to the need for regular device
cleaning and the risk of breaking the heating blade.
We will launch this new technology in 2021.

Our efforts to continuously enhance theexperience of our smoke-free products
are guided by consumer insights

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
Post-market studies and surveillance
We conduct post-market studies to understandhow the product is used and by whom. Thesestudies are necessary to confirm the results of ourpremarket perception and behavior assessments,
to measure the extent to which current adultsmokers switch to the product, and to ensure
never and former smokers are not using it.
We have established repeated studies in 45
countries among adult IQOS users. Thesestudies involve in total about 100,000
participants and allow to measure the use
patterns of IQOS adult owners over time.
In Japan, we are conducting cross-sectional surveys
to measure trends in prevalence and patterns of
IQOS use over time and to assess the impact ofthe product on public health. The results thus
far have highlighted a very low proportion of
tobacco-use initiation with IQOS (2.0 percent
of IQOS users in 2017, 1.3 percent in 2018, and
0.6 percent in 2019) and very low use by former
smokers (only 0.1 percent of adult former smokers
reinitiated tobacco use with IQOS). Additionally,
results from an independent study commissionedby the Japanese Ministry of Health among middle
and high school students found that the use ofheated tobacco products among this group is
extremely low—and lower than smoking cigarettes.1
We are also conducting similar cross-sectional
surveys in Italy and Germany. The results ofthese studies have shown comparable dynamics
to the ones observed in Japan. Between 2018and 2019, the highest proportion of tobacco use
initiation with IQOS among the IQOS users was
0.7 percent and it was observed in Italy, while
the lowest proportion was 0.2 percent and it was
detected in Germany. With respect to former

smokers reinitiating tobacco use with IQOS,
the highest value was equal to 1.5 percent inGermany and the lowest was 0.1 percent in Italy.
Overall, the data from our studies, as well as
independent studies, confirm that IQOS isreaching the intended audience, adult smokers,
and is of very limited interest to adults who
have never used nicotine products before or
who had already stopped using tobacco.
We welcome and encourage rigorous monitoringof the overall tobacco and nicotine market bygovernmental bodies in a way to comprehend
the dynamics of this new market and enhancea constructive dialogue on regulation that
can accelerate switching of smokers, who
do not quit, to better alternatives.

Product availability

build new factories or convert existing cigarette
factories and increase our capital expenditure—for example, to purchase new machinery. In
2020, eight of our 39 factories were dedicated—either partially or fully—to the manufactureof our smoke-free product consumables.

regulations that would allow under a welldefined framework the sale of IQOS and otherscientifically substantiated smoke-free products inthese countries. We do not believe that banningsuch products is a rational policy, especiallyconsidering that these countries permit the saleof the most harmful tobacco product: cigarettes.

Market launches

In addition to external factors, internal constraints
affect the rate at which we can roll out smokefree products globally. PMI is present in over
175 markets, but the size and capacity of our
local organizations vary. Not every market has
the resources and capacity to launch smokefree products immediately. We evaluate thecommercial viability of launching smoke-free
products in each market to decide how toprioritize internal resources internationally.

In 2020, we launched IQOS in 12 additional
markets, including Lebanon and the Philippines.
This brought to 64 the total number of markets
in which the product is commercialized. Of thesemarkets, 52 percent are in non-OECD countries.
Several countries, including Australia, India, andSingapore, do not permit the sale of heated
tobacco products. We nonetheless continue
to engage with stakeholders to advocate for

Whether we can make our smoke-free products
available to adult smokers depends on several
factors, including some beyond our control.
The country’s regulatory conditions must be
favorable to allow the launch of the productthere in a commercially viable way. If they are,we must build sufficient production capacity,which depends in part on trade zones andtariff barriers. Lastly, we need to establish theright market organization to commercialize theproduct and implement the necessary consumer
interaction described earlier in this section.
As of December 2020, our smoke-free products
were available in 64 markets, either in key cities or
nationwide. Based on this geographic footprint, weestimate that around 150 million adult smokers (i.e.,
64 percent of the total number of adult smokers in
the markets where we have launched) have physicalaccess to purchase IQOS devices and consumables.

Production capacity
1 Kumamaru H & Osaki Y (2019). Update of Current Status in Japanon Tobacco Harm Reduction. Global Nicotine Forum (GNF) 2019presentation. Available at :https://gfn.net.co/downloads/2019/presentations/Hiroya_Kumamaru.pdf

47

Expanding the sale of smoke-free products
requires significant investment in our production
capacity. In particular, the manufacturing of
smoke-free product consumables requires that we

Philip Morris International Integrated Report 2020

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

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
Distribution channels
By the end of 2020, there were 27 markets
in which our heat-not-burn product, IQOS,
and its consumables were available forpurchase nationwide in physical channels
or e-commerce, where allowed.

The IQOS
consumer journey
Read moreIn the other markets in which we have launched
IQOS, the product initially is offered in key cities,
allowing us to gain experience and build capacity
before we proceed with a nationwide rollout.
Expanding the geographic availability of our smokefree products requires that we leverage a varietyof retail channels. In 2015, we started opening andrunning our own retail stores in markets where
IQOS was present. These consumer touchpoints
allow us to communicate and engage directly withadult smokers. They enable adult smokers to see,touch, and test the product where allowed. We
rely on both stationary and temporary sales areas,
with established flagship stores and pop-ups.
As of the end of 2020, we had 259 permanent
IQOS boutiques and stores worldwide, mainly
in key cities and areas of high consumer traffic.
Where legally permitted, we also run e-commercesites for IQOS, allowing adult consumers

to purchase the product online and have itdelivered to their homes (51 markets in 2020).
The indirect retail environment consists of our
traditional trade partners (e.g., tobacco retailers)
and key account chains (e.g., convenience storesand petrol/gas stations). Based on the productportfolio handled and the services provided
to consumers, we classify the general tradeand key accounts universe into three groups:
Consumable sellers, service points, and premium
resellers. At consumable sellers, the main focus
is to provide IQOS users with a convenient
option for everyday purchases of the heated
tobacco units. At service points, consumers canalso access services related to IQOS, such asdevice replacement in case of defect. Premium
resellers offer consumers the full spectrum ofservices, including device cleaning and learning
sessions, along with a full brand experience.
At the end of 2020, there were over 2,200
exclusive IQOS retail touchpoints and 3,800
indirect retail brand experience touchpoints
worldwide, and around 749,000 points of saleat which IQOS heated tobacco units were sold.

Product affordability
We will only achieve a smoke-free future
if all those adult smokers who do not quit
tobacco and nicotine but would like to switch
to smoke-free products can afford to do so.
Economics of innovative smoke-free
products are massively different than thoseof a century-old product like cigarettes.
Unlike with cigarettes, adult smokers who wantto switch to IQOS must first buy a device. The
retail price of these devices ranges from around
USD 29 to 136, depending on the model andcountry, with a geographic average price forthe lowest-cost IQOS device being USD 50.
These high-quality devices require significant
production costs to ensure they consistently
function within the well-defined specificationsof the scientific substantiation package.
An IQOS store in Bratislava, Slovakia

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Philip Morris International Integrated Report 2020

To address the potential cost barrier for adultsmokers who would like to switch, we have
implemented various solutions, including initial
lending of the device or payment over time,
and we have lowered the price of existing
IQOS device versions following the launch ofnewer versions. We also enhanced battery
performance, thus improving the longevity ofthe devices. Beyond lowering the average annual
costs for the user, this improves the ecologicalfootprint of IQOS devices. In 2020, we also
introduced the licensed LIL SOLID device, foruse with Fiit consumables, at a price below thecheapest IQOS device in Russia and Ukraine.
A second aspect of affordability is the price ofthe consumable. Currently, the production costsof the heated tobacco units used with IQOS
devices are, on average, somewhat higher thanthose of cigarettes. Heated tobacco units undergoa special manufacturing process that is vastlydifferent from the manufacturing of cigarettes,
and the products require an increased level ofquality assurance in factories. We also incurother costs that are not applicable to cigarettes,
such as the costs of scientifically substantiating
the reduced-risk profile of these products.
Importantly, IQOS has much higher
commercialization costs compared with cigarettes
due to the need to properly introduce consumers
to this new product and explain its functionalities.
These costs include our customer care call centersand follow-up to ensure users do not fall backinto smoking during their conversion journey.
Beyond production and commercialization costs,
a key factor driving tobacco product retail prices
is the excise tax. Excise taxes on cigarettes
are generally higher than those on smoke-free
products. Within the smoke-free category,electronic cigarettes tend to be taxed at a lower
rate than heat-not-burn tobacco products.
Differential taxation is an appropriate
fiscal policy considering the fundamentallydifferent risk profiles of combusted tobacco
products and non-combusted alternatives.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Access to smoke-free products continued
This approach plays an important role inincentivizing adult smokers, who would otherwise
continue smoking, to switch away from cigarettes
and other combusted tobacco products, andencourages manufacturers to channel their future
investments and R&D toward better alternatives.
The combined effect of cost and tax differences
is such that the price to the consumer of IQOS
heated tobacco units is typically below thatof premium cigarettes and is sometimes, as
in New Zealand and the U.K., at the low endof cigarette pricing. We estimate that heated
tobacco units are priced the same as or lower
than a smoker’s current cigarette brand for58.6 percent of smokers in the geographies
where we currently commercialize IQOS.1
To help address potential affordability barriers,
we are also expanding our heated tobacco unit
consumables range by offering brands at multiple
price points in certain markets. The most notable
example is in Japan, where we introduced amainstream-priced brand in 2019, and we view
this as a necessary strategy for a broader rangeof markets over time. We have also leveraged ouragreement with KT&G in this regard, by offering

heated tobacco units (HTU) brands at price points
below our HEETS consumables in both Russia
and Ukraine, as part of our strategy to grow theheated tobacco category by offering a wider rangeof product choices, including based on price.
Clearly, to achieve our vision of a smoke-free
future, our smoke-free products must be affordable
to all adult smokers within each market.
The same reasoning applies across countries. Our
efforts aim to reach all adult smokers in all countries,
both in the OECD and outside the OECD.
We are only at the beginning of commercializing afull-fledged portfolio of smoke-free products at a
global scale and are actively seeking partnerships
to accelerate a smoke-free future. In addition to
our cooperation with Altria Group, Inc. on thecommercialization of IQOS in the U.S., we secured
an agreement with KT&G in January 2020 tocommercialize its portfolio of smoke-free products
outside its home country of South Korea. In 2020,
we successfully commercialized KT&G’s heat-notburn product, LIL SOLID, in Russia and Ukraine
alongside our IQOS product, offering consumers awider range of taste, price, and technology choices.

IQOS geographic
expansion

Next steps
Our long-standing aspiration is that by 2025
at least 40 million people will have switched toour smoke-free products and stopped smoking.
To achieve this ambitious goal, we will need
to work on all four access drivers: Awareness,
acceptability, availability, and affordability.
This, in turn, requires that we continue tofocus resources on smoke-free products.
Consumer feedback received during the launchof IQOS VEEV in New Zealand and the Czech
Republic in 2020 will inform our launch inadditional countries in 2021. We also plan toenter the nicotine pouch category in 2021.
We expect that the launch of the new induction
heating version of the IQOS heat-not-burn productin 2021 will effectively address consumer pain
points related to our current heating technology
and enable easier conversion due to increased
intuitiveness. We anticipate that this will
boost consumer acceptance of IQOS, thereby
accelerating a full switching away from cigarettes.
We will continue to do all we can to give fullaccess to our smoke-free products to thoseadults who otherwise would continue to smoke.
However, several factors are outside our control.
Governments, in particular, can accelerate
the end of smoking. They can ensure throughregulation that adult smokers have accurate
information about smoke-free products. They
can introduce product standards to ensure that
only scientifically substantiated smoke-free
products are commercialized. And, through riskproportionate regulation and taxation, they canprovide the right incentives to encourage smokers
and manufacturers to switch from cigarettes tobetter, scientifically substantiated alternatives.

2020 performance highlights
See our performance metrics

Number of consumers who havestopped smoking and switched
to PMI smoke-free products(in millions)

1.5
2016

A sales representative and a customer in an IQOS store in St. Petersburg, Russia

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Philip Morris International Integrated Report 2020

1 Against 53.4% in 2019 (figure restated). Main drivers of year-on-yearincrease are pricing differentials between cigarettes and HTUs, as wellas launch of IQOS consumables at lower price points.

2017

6.6

2018

2019

12.7

2020

Net revenues (smoke-free/total) andsmoke-free product net revenues(in billions USD)

2025
Aspiration

>50%

23.8%
18.7%
12.7% 13.8%
2.7%
2016
$0.7

Read more

4.7

9.6

>40

2017
$3.6

2018
$4.1

2019
$5.6

2020
$6.8

2025
Aspiration

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 2

Product addictivenessProduct reliability

To PMI, this topic is about better
understanding nicotine and its rolein addiction, separate from the risks
to health associated with the useof our products, in particular thosethat combust tobacco. The publichealth and scientific community
continues to explore ways in which
nicotine, when isolated and used asa potential therapeutic compound,
could confer certain health benefits.

Product reliability means securing
the quality and integrity of our
products, their components, andingredients, in line with appropriate
design and manufacturing standards.

Read more online

50

Philip Morris International Integrated Report 2020

Read more online

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

WE ARE

Operating withexcellence
We strive for excellence in all we do. This includes ensuring
our products are commercialized responsibly, in line withregulation and societal expectations. The programs and rules
we have established help us meet the high standards we haveset for our marketing and sales activities.
Our supply chain accounts for a significant portion of oursocial and environmental footprint. As we embed sustainability
in our supply chain management, we continue to work closelywith our suppliers to create sustainable value. In all this,our guiding principle remains to protect and promote
the human rights of those impacted by our operations.
In this section

TIER 1 Responsible marketing and sales practices
Sustainable supply chain management

p.59

Respect for human rights

p.69

Further reading

TIER 2 Responsible and transparent R&D
Data privacy and protection
Business integrity
Illicit tobacco trade prevention
Responsible engagement
Fair fiscal practices
An employee in PMI’s manufacturing facility in Guadalajara, Mexico

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Philip Morris International Integrated Report 2020

p.52

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Responsible marketingand sales practices
Globally, the commercialization of tobacco products is subject to extensive
rules and regulations. At PMI, we support regulation that supports tobacco
harm reduction, as well as measures to discourage initiation, encourage
cessation, and encourage smokers who do not intend to quit to switch toless harmful non-combusted alternatives to cigarettes.
Read more

The right thing to do

The business case

The responsible commercialization of tobaccoand nicotine-containing products is of profoundinterest to society. Cigarette smoking is one of
the leading causes of preventable mortality andmorbidity in the world. While smoking rates,
including among youth, have declined in mostcountries, smoking continues to be a publichealth issue. There are also legitimate concernson youth uptake of nicotine-containing smokefree products, notably exacerbated by youth useof e-vapor products in the U.S. We take this risk
extremely seriously, and while our smoke-free
portfolio has no evidence of any significant use byyouth, we must place strong focus on continuing
to minimize use by unintended audiences as we
expand to more categories and geographies.

Consumer-centric product design, development,
marketing, sales, and engagement drive ourcommercial success and can propel our mission.
Responsible marketing and sales practices arefundamental to minimizing unintended use of
our products and reputational damage to ourbrand equity. Driving sustainable organic growthin net revenues and earnings per share relies on
a continued license to operate with regulations
which allow us to communicate with and market
to adult smokers. Maintaining and growing strong
brand equity for our smoke-free products is
also critical to growing our market share anddelivering an attractive financial performance.
Concerns that our products, marketing, andsales could discourage cessation, encourage
initiation, or particularly appeal to minors canundermine our credibility, harm our reputation,and even trigger adverse regulation, threatening
our ability to engage or jeopardizing productcategories. How we market and sell our products
can either enhance or undermine our credibility
and trust, especially for smoke-free products,
where meaningful dialogue is indispensable forachieving our purpose of accelerating the endof smoking. Enforcing the most responsible
marketing practices allows us to lead by example.

There are still an estimated one billion plus
people who smoke in the world, and hundredsof millions of people who would otherwise
continue to smoke are looking for better
alternatives to cigarettes. The availability ofinnovative smoke-free products offers significant
opportunity for adult smokers to move awayfrom cigarettes, as well as benefit public health.

Our aims>90%

Youth access prevention (YAP) programs in placein markets representing more than 90 percent
of PMI’s total shipment volume by 2020

An IQOS store in Stockholm, Sweden

52

Philip Morris International Integrated Report 2020

100%

Percentage of PMI smoke-free electronic
devices introduced on the market as of 2023
equipped with age-verification technology

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Responsible marketing and sales practices continued
Achieving our aims
We aim to market and sell our products
responsibly to adult consumers of tobacco andnicotine-containing products. Fundamental toachieving this objective is providing clear andmeaningful information about our products,
including about the risks of consumption,
through our marketing and sales activities.
All our commercialization activities across theworld are guided by a set of core principles:• PMI products are only for adults who smoke or
use other nicotine-containing consumer products.
• We warn consumers about the health effectsof our products.
• We communicate about our products toenable adult consumers to make choices.

• We market truthfully and transparently.
We design, develop, and commercialize
our products in ways that are consistent
with our smoke-free mission.
Our marketing and sales principles and practices
are codified in separate Marketing Codes for
combusted tobacco products and non-combusted
alternatives (smoke-free products). Until 2021,
PMI’s (only) Marketing Code focused exclusively
on combusted tobacco products—which, together
with national laws, set the standards for themarketing and sale of our combusted tobacco
products. In parallel, our Good Conversion
Practices (GCP) articulated the rules governing themarketing and sale of our smoke-free products.
Early 2021, PMI released internally an updated
Marketing Code for combusted tobacco products
and a new, separate Marketing Code for noncombusted alternatives that codifies and elaborates
on the principles contained in the GCP.

“In order to maximize
the potential ofsmoke-free products
while simultaneously
minimizing unintended
consequences, we areaiming for digital ageverification processes
that are both effective
in preventing youth
access and seamless forlegal-age consumers, tofacilitate their switchingaway from cigarettes.”

The new Marketing Codes establish a robust
governance process to ensure that all commercial
programs, campaigns, and initiatives comply withall relevant laws and the principles in the Codes.

Stefano Volpetti, PMI Chief Consumer Officer

Most of our marketing expenditure is geared
toward our smoke-free products. In 2020,76 percent of our total commercial expenditure
related to the marketing and sale of smokefree products, while only 24 percent pertained
to our combusted tobacco products.

Everyone involved in PMI’s commercialization
activities—including employees and third
parties acting on our behalf—must be
trained on the Codes and follow them.
We also have policies that set standards andrequirements for conducting market research
regarding combusted tobacco products andnon-combusted alternatives. Research is
restricted to adults who smoke or use othernicotine-containing products, and all employees
and third parties involved in market research
activities must be formally trained and arecontractually bound to comply with the policies.
Three functions—Ethics & Compliance, Risk &Controls, and Corporate Audit—support andmonitor compliance with the Guidebook for
Success (our code of conduct) and our Principles
and Practices through training, communication,
controls, investigations, and audits.

In addition, we seek to leverage technology
and closely monitor emerging solutions withpotential to increase the accuracy of age
verification and minimize the scope for humanerror. Preventing unintended use of smokefree products is fundamental to building asustainable business. Cooperation with external
stakeholders, especially technology companies,
is key in that regard to accelerate the paceof progress and help us meet our goals.

A retailer in Tokyo, Japan

53

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Responsible marketing and sales practices continued
Progress in 2020
Consumer communication and labeling
We apply strict rules to how we communicate
about our products with our adult consumers.
We warn consumers about the health effectsof all our products. All advertising andconsumer packaging for combusted tobacco
products and non-combusted alternatives
must contain clear and visible health warnings,
even in markets where not required by law.
As of 2015, we do not use social media tomarket our combusted tobacco products. Thisapplies to all advertising, direct communication,
campaigns, and activities, whether branded
or unbranded. The same rule applies to ourcontracted parties, including event organizers,
third-party agencies, and brand ambassadors.

the consumables packaging that the product is
not risk-free, contains nicotine, and is addictive.

Unlike combusted tobacco products, noncombusted alternatives are a new category and still
relatively unfamiliar to most people. Our priority
is to create awareness among adults who smoke(and will not quit) about these better alternatives
to continued cigarette smoking. Our commercial
activities for non-combusted alternatives must
strike the right balance between encouraging
those adult smokers to switch fully to these better
alternatives and minimizing access, initiation, anduse by youth and nonsmokers. As the consumptionof smoke-free products may not be as intuitive
as cigarette smoking, we also need to informconsumers of their proper use. In addition, evenwhen not required by law, because these products
are not risk-free, we include a health warning on

Our Good Conversion Practices must be
displayed for staff and consumers at stores andother direct-retail locations we own or control.

Leveraging the power of our brands to drive positive behavior change
Our brands and marketing activities allow us
to connect with adult consumers and can raiseawareness and encourage them to switch tobetter alternatives to combusted tobacco products.
We seek to use our brands’ power to encourage
adult smokers who otherwise would continue
smoking to try our smoke-free products. Since
2019, we have been utilizing an innovative
mobile digital platform called Scanpack, which
can be accessed by adult smokers by scanning a
QR code or using a weblink featured on theinsert inside the cigarette pack. It combines
image-recognition and age-verification
technology to trigger unique and targetedcommunication campaigns through which we
can engage with legal age adult smokers. This
new channel provides the opportunity toincrease awareness about smoke-free products
by digitally communicating their benefits whiledriving trial within the target audience—adultsmokers. Scanpack is highly engaging,encompassing interactive features such as
54

quizzes or augmented reality. So far, we haveleveraged Scanpack across 30 markets, whichhave enabled us to engage with more than
850,000 adult smokers in 2020 alone.
Engagement has been powerful, with over 15
percent of the adult smokers exposed to smokefree content signing up for a free trial. In 2021,
we plan to further roll out this technology,
covering additional markets, and we expect toreach an additional one million adult smokers.
Where allowed, our brands can also serve
as a means to increase environmental
considerations. For instance, they canencourage adult smokers not to litter theircigarette butts. Since 2019, we have been
deploying a limited pack edition for our
Marlboro brand that communicates anti-littering
messages to adult smokers, complementing
our broader awareness-raising efforts.

Philip Morris International Integrated Report 2020

Read more: Littering prevention

As a leading manufacturer of tobacco and nicotine
products, we have a key role to play in guarding
against youth access to tobacco and nicotine
products and to our marketing communications.
This is a role we take seriously. There are various
channels through which an adult consumer
can obtain access to PMI smoke-free products.
They range from PMI-owned and operated
e-commerce platforms, to third-party online
marketplaces; and from PMI owned and operated
boutiques, to third-party retailers. While thelevel of control we have over these different
channels varies, it is critically important that,even in those channels where our influence islimited, we use our best efforts to guard against
youth access to PMI non-combusted alternatives.
We take a similar approach when we reach out
to adults with our marketing communications
related to PMI non-combusted alternatives
and/or allow access to such marketing content.
For example, we open commercial social media
accounts for PMI non-combusted alternatives
in countries where we obtain reliable audience
data which show that the audience of the social
media platform in the relevant country is atleast 75 percent adult. In addition, we use allnative age gates made available on such social
media platforms. As of October 2019, we do
not engage with anyone for the purpose ofgenerating social media posts to market oursmoke-free products. We do not hire social media
influencers to advertise our smoke-free products.
Moreover, we do not encourage adult consumers
to share commercial content related to PMI
non-combusted alternatives on their personalsocial media accounts and pages in order to limit
the reach of our marketing communications tothe unintended audience, including minors.

Employee and third-party training
Our responsible commercialization efforts rely on
the adherence and dedication of our employees
and the third parties with whom we work.
In 2020, 28,569 training sessions on our Marketing
Code were delivered through various channels.
Around 64 percent of these training sessions wereto employees and 36 percent to third parties,
including suppliers, retailers, and hosts (2019:14,500 sessions). This also includes over 15,000
people trained on our GCP in the markets in which
we sell smoke-free products (2019: 33,000).
Training plays a crucial role in ensuring employees
and third parties understand our principles andpractices and embed them in their work. In
parallel to the release of our Marketing Codes,
we will deploy new training in 2021 to reach all
PMI employees directly involved in developing
or commercializing our products as well as third
parties contracted or engaged by PMI to do so.
Our Marketing Codes are discussed during
the recruitment of prospective employees
and third parties who will interact with adultsmokers and consumers of smoke-free
products. We hire employees and engage third
parties only if they agree to follow them.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Responsible marketing and sales practices continued
Monitoring and remediation
PMI has a robust and tested infrastructure aimed
at ensuring compliance with its policies andprocesses. Our Ethics and Compliance function
monitors adherence to our policies on the ground.
We monitor incidents of noncompliance withlaws and PMI’s Marketing Codes in marketing
communications, including advertising, promotion,and sponsorship.
In 2020, there were 29 substantiated violationsof our Marketing Code or GCP (2019: 42). As aconsequence of these violations, we terminatedthe employment of eight employees. Furthermore,
six employees were suspended and received
a written warning, eight employees received awritten warning or pay cut, and seven employees
received a verbal warning or counseling.

Our commitment to youth
access prevention
We support regulation that ensures that only
adults can buy tobacco and nicotine-containing
products, as well as the strict enforcementof minimum age laws and penalties for those
who provide tobacco products to minors.
We apply global guidelines, even when not requiredby local laws, to all our commercial activities toreduce the likelihood that our products will appeal
to minors. For example, our creative materials
must not contain any of the following: (i) images

The number of cases of noncompliance is low,
considering that over 35,000 PMI employees
and third parties working on our behalf are
directly involved in the commercialization of our
products. There is also no pattern that would
suggest systemic problems.

“While PMI alone cannot prevent youth
from smoking or using nicotine-containing
products, there is a lot we can do, andare doing, to minimize the extent towhich our marketing and products reachyouth and other unintended users. We
engage with various stakeholders on thisissue, including retailers and governments.”
Werner Barth, PMI Senior Vice President, Commercial
An IQOS store in Moscow, Russia

55

Philip Morris International Integrated Report 2020of models who are, or appear to be, under age
25; (ii) images of youth-oriented celebrities; (iii)characters from children’s TV, cartoons, films,
online video or audio programs, books, or nursery
rhymes; or (iv) brands, toys, or other content or
merchandise primarily intended for, or used by,minors. We do not pay for product placement
in entertainment programs, films, or theatrical
productions in or on the internet, cinema,
television, radio, video games, or any other program
intended for or disseminated to the general public.
While flavors are essential to encourage adultsmokers to switch to smoke-free products, someflavors such as those with candy- or dessert-likedescriptions could be particularly appealing toyouth and should not be used. At PMI, we have
implemented a central governance system, underwhich new flavored heated tobacco products,
e-vapor products, and combusted products areassessed and by which those product variants
are subject to a specific assessment frameworkthat requires data and checkpoints in the process
to demonstrate premarket that a new flavored
product proposition is not particularly appealing
to minors or other unintended audiences (readmore: Access to smoke-free products).

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Responsible marketing and sales practices continued
Monitoring our efforts on
youth access prevention
The risk of marketing and selling to youth iscovered in our annual integrated risk assessment
and in our risk-based audit program.
Reviews by our Corporate Audit department in2020 found that only a few affiliates had issues
related to responsible marketing compliance,
and these issues were mainly procedural.
During 2020, Corporate Audit conductedseven audits covering 10 markets as well as thegovernance of the youth access prevention (YAP)
program by our central Commercial functionin our Operations Center in Switzerland.
Processes and controls were reviewed in allthese markets, and members of the Corporate
Audit team visited a limited number of points
of sale in most locations (in a few of them,
COVID-19 restrictions did not permit field visits)
to assess compliance with the Marketing Codeprovisions and our GCP. No significant issues
related to youth access were identiﬁed in anyof the locations visited. The audit of the central
YAP program led to further enhancements
embedded in our new Marketing Codes.
We also run a mystery shopping program in asample of our smoke-free product stores, contact
centers, and website operations. An independent
third party uses mystery shoppers to assess theconsumer experience delivery, the quality ofservice offered, and compliance with our GCP.

We encourage any member of the public who spots
PMI marketing materials or sales practices that they
believe are inappropriate to contact us so we canreview the situation and take action, as necessary.
Last but not least, we support establishment
by the regulators of post-market monitoringand surveillance, which can help addressconcerns related to the use of novel smoke-free
products by measuring whether such products
are in fact reaching the intended audience ofadult smokers, as well as by collecting dataand evidence on the safety of these products
and their impact on the health of users. Such
post-market surveillance should be conductedindependently but paid for by the manufacturers.

The tools include templates for contract clauses
that, for example, require retailers to ensure
strict compliance with minimum age laws or,in the absence of such laws, to refuse salesof nicotine-containing products to anyone
below 18 years old. The tools also include YAP
educational modules on the digital communication
platform we use with our retail trade partners invarious countries (76 countries, approximately
955,000 registered points of sale). The modules
include educational materials on YAP for both
combusted and smoke-free products, as well as
knowledge checks. Trade partners who currently
use the platform were required to complete theeducational modules by the end of 2020.

Engaging with our trade partners
We do not own or control the vast majorityof retail outlets in which people buy our
products. However, we set robust standards
for our direct trade partners and work withthem to guard against sales to youth.
In 2020, we implemented a set of YAP guidelines
and tools to help our affiliates work more
effectively with their trade partners to guard
against sales of our combusted and smokefree products to underage purchasers.

What is a youth
access prevention(YAP) program?
Read more

A retailer in Istanbul, Turkey

56

Philip Morris International Integrated Report 2020

Other tools we provide include point-of-salesignage, communication templates to be usedby our affiliates, and talking points to guide inperson conversations with trade partners.
By the end of 2020, markets representing over
94 percent of PMI’s total shipment volume
had developed and started implementing YAPplans where allowed, considering COVID-19
restrictions imposed by local governments.
In 2021, we will launch a new toolkit with updated
communication and educational materials toalign with the new Marketing Codes and further
strengthen the local practices to prevent youth
access to our products. Markets will continue todeploy the initiatives aimed at maintaining YAP
implementation in markets accounting for over
90 percent of PMI’s total shipment volume.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Responsible marketing and sales practices continued
Age-verification technology
We have established and follow internal guidelines
informing processes requiring that a consumer’s
age is verified before providing them with accessto our products in owned and third-party-operated
retailers, including e-commerce and marketplaces.
When performing online age verification, weleverage data from authoritative sources, suchas government organizations, telephone network
operators, and banks in order to use reliable
sources to perform age verification prior to sellingelectronic smoke-free devices. In 2020, we worked
with third-party age-verification providers in 16
markets to online-verify adult consumers seeking
to purchase our products on one of our websites.

Piloting age-verification technology in New Zealand: How does it work?

Buy VEEV
deviceAge is verified
at purchase

Createadult user
account

Verifyadult user age
via third-party
age-verification
providerOnline age-verification technology corresponds
to the ability to corroborate that a purchaser isof the minimum legal age authorized to purchasenicotine-containing products in a particularmarket, without the need for a face-to-faceinteraction with a retailer. We are aiming toequip all markets in which we sell smoke-free
products through owned e-commerce platforms
with online age-verification solutions.
In addition, we are developing technology to help
guard against minors from using our smoke-freedevices via compulsory age verification prior to firstusage and allowing users to lock and unlock theirdevice—when they choose—to prevent unintended
use. In the second half of 2020, we launched our
IQOS VEEV product equipped with age-verification
technology pilot in New Zealand. Our aim is tohave our portfolio of electronic smoke-free devices
designed by PMI and introduced on the market asof 2023 equipped with age-verification technology.
Secure and user-friendly age-verification
technology is a novel advance in the smoke-free
product category and requires strong collaboration
with information technology service providers
and owners of various software applications. Our
teams are reaching out to the main hardware andsoftware players in these industries to ensurethat best-in-class technology is available for PMI’s
smoke-free products and the category in general.
57

Philip Morris International Integrated Report 2020

Note: This is one process for age-verification technology; a range of options may be considered in the future.

Activate
VEEV device
via one of PMI’s
digital solutions

VAPE

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Responsible marketing and sales practices continued
Next steps
As described, PMI has a robust
infrastructure for monitoring compliancewith our Principles and Practices.
In May 2021, we introduced two new Marketing
Codes and implementation guidelines and will
implement with a full training program for all
PMI employees directly involved in developingor deploying consumer-focused product,
packaging, marketing, and sales initiatives,
as well as all third parties engaged by PMI to
conduct those activities. We will roll out theMarketing Codes and implementation guidelines
during 2021 to allow the organization to embed
the principles in the Codes into PMI’s sales
and marketing practices. We are planning to
publish the two Codes externally in 2022.
As a leading manufacturer of tobacco and nicotine
products, we have a critical role to play in guarding
against youth access to our products. This is arole we take seriously. We will continue to deploy
measures to age-verify consumers throughchannels ranging from PMI owned and operated
e-commerce platforms and boutiques to thirdparty online marketplaces and retailers. Whilethe level of control we have over these channels
varies, it is critically important that, even where
our influence is limited, we use our best efforts
to guard against youth access to our products.
We remain committed to implementing our
YAP programs, including new communicationand education materials, with trade partners.
We will continue to investigate ways to further
enhance our age-verification technology,
aiming to equip all the electronic smokefree devices we introduce on the market
as of 2023 with such technology.

An IQOS “shop-in-shop” store in Tokyo, Japan

58

Philip Morris International Integrated Report 2020

2020 performance highlights
See our performance metrics

36% third p

64% employ

28,569training sessions
conducted on PMI’s
Marketing Code

36% third parties
64% employees>94%

Of our total shipment volume
represented by markets
with youth access prevention
programs in place in 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Sustainable supply
chain management
With increasingly integrated and globalized value chains, balancing thesecurity of our supplies with cost-efficiency and ambitious environmental,social, and quality standards is a major priority. Our supply chain accounts
for a significant portion of our potential social and environmental risks
and impacts, which we are committed to managing and addressing
responsibly. It is also a challenging aspect to tackle, as we need to engage
and influence a large number of suppliers—companies with different
strategies, priorities, and cultures—to onboard them on our sustainability
journey and to jointly commit and deliver on our ambitions.
Read more

The right thing to do

The business case

Our supply chain is central to our business,and sustainability is essential to protecting anddeveloping our supply chain. Our operations
rely on securing high-quality, cost-effective,
and fit-for-use materials and services fromsuppliers that are selected and managed by
PMI to also adhere to our environmental,social, and governance (ESG) requirements.

The increasing environmental, social, and economic
impacts of global supply chains and the growing
consumer expectations for greater sustainability
and transparency led PMI to integrate sustainability
in our end-to-end supply chain management. This
shift is reflected by an understanding that asustainable supply chain brings new and significant
value creation opportunities while at the sametime contributing to the greater good. Besides that,traditional objectives, including cost optimization,
ensuring continuity of our operations, and reducing
time required for preparing the materials fortransportation, allow better reaction to businesschallenges. In addition to strengthening regulatorycompliance and preventing reputational risks,
responsible supply chain management supports ourability to secure the resources needed to deliver on
our company purpose and make tangible positive
contributions to environmental and social issues.
Agile, reliable, and high-quality suppliers are also
critical to our ability to innovate and deploy oursmoke-free products rapidly at scale, and respondto consumer feedback, which in turn allows us toacquire more adult nicotine users, grow market
share, and benefit from the growth in top- andbottom-line performance that this implies. Further,
improving collaboration with our suppliers andour knowledge of their operations enables us
to strengthen and broaden partnerships. Suchpartnerships are key to sustainability, innovation,and growth, allowing us to accelerate progress
toward achieving our company targets.

We strongly believe that PMI has an importantrole in engaging with our suppliers to minimize oursocial and environmental footprint and in bringing
positive social, environmental, and economic
value to those with whom we collaborate.
Sustainable supply chain management plays
a vital role in safeguarding human rights, andlabor rights, as well as protecting the healthand safety of workers. Optimally, it also serves
to resolve gender-related inequalities andinequities, and alleviate poverty. Moreover,
it represents a key lever in mitigating theadverse impacts of climate change, reducing
greenhouse gas emissions, protecting forests andbiodiversity, and promoting energy efficiency,
water stewardship, and waste management.

Our aim

100%

Percentage of critical suppliers fromwhom PMI sources sustainably by 2025

A tobacco farmworker in Salta, Argentina

59

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
Achieving our aims
We aim to purchase goods and services fromsuppliers at best value, commensurate withbusiness requirements, while appropriately
managing supply, financial, legal, quality,
and sustainability requirements. We seek tocontinuously identify and address potential andcurrent risks while also seizing opportunities tocreate a positive impact in the communities inwhich we and our suppliers operate, thereby
increasing the sustainability performanceof our supply chain. We work with our
suppliers and contracted farmers to achievea solid economic performance and tangible
environmental and social improvements.
Our approach to sustainable supply
chain management is built on thefollowing principles and values:• Proactive engagement: Engagement is at
the core of responsible sourcing at PMI.
Successful partnerships require an open
and transparent relationship and ongoing
communication in which expertise is sharedand built together, both in one-to-one

activities and through participation in relevant
multistakeholder and industry initiatives.
• Risk mitigation: We take a risk-based approach,focusing our efforts on where they can havethe greatest impact. Establishing risk-based
criteria enables us to identify critical suppliers,
tailor our due diligence tools and actions,and target interventions to address inherent
risks, with a special focus on strategic supply
chains, such as electronics and tobacco leaf.

Overview of our supply chain in 2020
With over 28,000 tier 1
suppliers across more than
175 markets, our supply chain
spend amounted to approximately
USD 10.1 billion in 2020.

• Continuous improvement: By proactively
strengthening collaboration and engagementwith our suppliers, we clearly achieve
greater commitment and support from our
suppliers to continuously improve theirsustainability performance and achieve
the highest standards of compliance.

Supply chain spend in 2020

• Programs with impact: We leverage our reachand increasing understanding of our supply
base to implement impactful programs in our
key sustainability focus areas, such as thosepertaining to our carbon neutrality, zerodeforestation, and zero child labor ambitions.

Our global supply chain is supporting
our two main finished product streams
and it is organized in seven categories
managed by our Leaf (for tobacco)and Procurement (for the other six
categories) organizations.
Read more

Indirect materials and services(including R&D)

53%

Direct materials and smokefree product devices

31%

Tobacco leaf

12%

Manufacturing equipment

4%

Manufacturing facility of Papastratos, PMI’s Greek affiliate
Tobacco bales being loaded at a tobacco buying station in Misiones, Argentina

60

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
We aim to source sustainably from all our criticalsuppliers by 2025. Critical suppliers are thosethat manufacture or sell components used in
the manufacture of PMI finished products.
To meet our ambition of sourcing sustainably
by 2025, we will require all our critical nontobacco tier 1 suppliers to undergo an evaluationof their sustainability performance throughan assessment in our due diligence STEP
(Sustainable Transformation Enables Performance)
platform. Those that achieve a satisfactory
score demonstrating compliance with PMI’s
Responsible Sourcing Principles (RSP) will beconsidered sustainable. In addition, we consider
all tobacco farmers contracted by PMI or by our
tobacco suppliers critical. Sourcing sustainably
means continued contractual commitment to
PMI’s RSP and Good Agricultural Practices(GAP) by all our tobacco suppliers and monitoringof their adherence to GAP through yearly selfassessments—complemented with on-site audits
and on-the-ground reviews. At the farm level,sustainable sourcing requires monitoring by fieldtechnicians of GAP implementation, through bothplanned and unannounced visits to all contracted
farms several times a year, and addressing any
issue raised. Noncompliance can lead to contract
termination for Agricultural Labor Practices (ALP)
violation, or supplier lot rejection if exceeding
maximum limits for tobacco lot integrity.

61

Philip Morris International Integrated Report 2020

PMI’s supplier due diligence platform: STEP
STEP is the due diligence and performance
program we use to ensure suppliers comply
with our RSP. It serves as the backbone forsustainably managing our critical tier 1 suppliers
and selectively extends to tier 2 suppliers as
well. Through STEP, our suppliers’ potential
ESG risks are evaluated based on the type ofmaterial or service supplied and the country
in which it is produced or delivered.

Screenrisk

Within the frame of STEP, we segmentsuppliers on a range of risks using indicatorsfrom international bodies such as theWorld Bank, United Nations Development
Programme, and Inequality-adjusted
Human Development Index.

more detailed questionnaire. In addition,
high-risk suppliers undergo a desktop
audit. Depending on the results of thequestionnaire—and, as applicable, ofthe desktop audit—the suppliers may berequired to undergo an on-site audit.

This inherent-risk profile tailors the subsequentevaluation of suppliers’ performance. Suppliers
identified as low risk are required to completea basic self-assessment questionnaire, while thosecharacterized as medium or high risk complete a

The STEP platform is underpinned by
an external responsible-sourcing audit
protocol developed by Achilles, a key playerin sustainability supplier evaluation.

Supplier
performance

Corrective
action plan

Supply chain
risks

Supplier
auditsAssesssuppliers

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
Our supply chain sustainability strategy is groundedin our Responsible Sourcing Principles (RSP),
which align with the UN Guiding Principles on
Business and Human Rights, the Ten Principlesof the UN Global Compact, and the International
Labour Organization (ILO) Conventions. The RSP,
together with its corresponding Implementation
Guidance, set process and performancestandards for our suppliers of materials andservices, from the direct materials used in the
manufacturing of our products, to the goods
and services required to run our business.
Sustainability work in our tobacco supply chain ismanaged by our Leaf department and governed
by our Good Agricultural Practices (GAP) and
our Agricultural Labor Practices (ALP) Code.

The operationalization of GAP and ALP occurs
at farm level via the 2,675 field technicians,
who work year-round with the farmers
contracted by PMI and our suppliers.
Adherence to our RSP—and GAP for our
tobacco supply chain—is part of our contractual
agreements with suppliers. On an ongoing basis,
we monitor the activities of our critical suppliers
through a suite of tools, including third-party
assessments, on-site audits, and field visits.
Sustainable sourcing of goods and services
goes beyond the work of our Procurementand Leaf teams and involves strong crossfunctional collaboration within PMI.
Globally, our supply chain categories exposedto the highest sustainability risk are:• Tobacco production across Asia, Africa,and South America, with main risks
pertaining to working conditions, child labor,
climate change, and access to water• Electronics manufacturing, with the main risks
relating to the working conditions of workers• Wood and paper materials, with mainrisks linked to deforestation

Our supply chain sustainability
strategy is grounded in our
Responsible Sourcing Principles

A tobacco buying station in Misiones, Argentina

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Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
Progress in 2020
Impact of COVID-19 on our
activities in 2020

Read more

Monitoring the sustainability
performance of our critical suppliers
We started onboarding our critical non-tobacco
suppliers to our due diligence STEP platform in
2019, focusing first on our direct materials andelectronics supply chains. In 2020, we exceeded
our target of assessing suppliers representing
90 percent of our spend in those categories.
By the end of the year, 113 critical tier 1 suppliers,
representing 95 percent of our critical supplierspend on the direct materials and electronics
categories, completed self-assessments. Of them,
45 percent were shown to be compliant with
PMI’s RSP, while for 17 percent, the selfassessment triggered targeted follow-up actions.
The assessments revealed significant gaps forthe remaining 38 percent of suppliers, mainly
related to resource consumption and waste
minimization, freedom of association, and riskof child labor. In a number of cases, desktop
audits were undertaken—as on-site audits were
not possible due to the COVID-19 pandemic.
In 2020, we completed 29 desktop audits: 93
percent of suppliers increased their performancecompared with the results of their selfassessment. This indicates that the guidance
provided by auditors at the time of the desktop
audits improves the quality and completenessof the answers provided by respondents to
our STEP questionnaire. Overall, 86 percentof the suppliers that underwent the desktop
audit demonstrated compliance with our RSP,
while 14 percent reported significant gaps.
In parallel, we started onboarding non-tobacco
suppliers in other supply chain categories. In total,
suppliers representing more than 15 percent
of our spend on technical procurement, R&D
expenditure, and indirect materials and services
completed our due diligence process by the endof the year. In 2020, we also onboarded to our
STEP program tier 2 suppliers with whom PMI
manages a commercial relationship and holds
an agreement. We covered 100 percent of thetier 2 suppliers of our board and paper direct
suppliers and 92 percent of the tier 2 suppliersof electronic components (such as batteries andblades) of our electronic manufacturing suppliers.
During the year, to address our evolving needs
and reflect market developments, we embarked
on a reassessment of our STEP platform. We
benchmarked our solution with the broader
due diligence market, with the aim of leveraging
state-of-the-art digital solutions aligned with bestpractices and standards and allowing for advanced
reporting capabilities. Further, we considered how
to optimize efforts for both our company andour suppliers through a collaboration-promoting
tool that enables us to share assessments acrosscompanies and industries. We concluded that ourcurrent platform did not provide the functionalities
and capabilities required to advance our due
diligence program to the next level, and plan tostart the implementation of a new solution in
2021. Our analysis also highlighted the opportunity
to enhance our approach by focusing themanagement of online evaluations and on-site
audits through different service providers. With
regard to on-site audits, we plan to select andpartner with several specialized providers in 2021.

Fostering collaboration
with our network of suppliers
We dedicated a section of PMI.com to describing
our company, goals, and purpose with regard
to our current and potential suppliers. It alsodetails how Procurement is organized within
PMI, reinforces the expectations we have toward
our suppliers regarding our RSP, and discloses
some of the guidelines and general terms andconditions we build our partnerships on.
To increase awareness of sustainability in our
supply chain, we held virtual events, webcasts, andtraining sessions with strategic suppliers globallyin 2020. These events covered both generaland specific topics, from supplier onboarding to
STEP to partnering on our Zero Deforestation
Manifesto and carbon footprint reduction
targets. For instance, we organized two CDP
training sessions for our electronics suppliers,
one in English and one in Mandarin, with over
100 participants. Such activities reinforce our
expectations and commitments, promote theexchange of expertise and best practices, andidentify potential areas for closer collaboration.
Our suppliers play a major role in ourtransformation journey. Therefore, we consider it
fundamental to recognize our suppliers’ excellent
performance and contribution to PMI’s businessgoals, fostering long-term partnerships andvalue creation. To this end, in 2020 we launched
our Global Supplier Recognition program.
We recognized selected suppliers for theirsustainability commitment and performance,
active contribution to PMI’s value creation, andengagement in innovation. In a virtual ceremony
attended by around 400 participants, five of
our suppliers were awarded in the areas ofsustainability, innovation, and value creation.

For the fourth consecutive year, in 2020 CDP
placed PMI on the CDP Supplier Engagement
Leaderboard in recognition of our efforts
and progress on our supplier engagement on
climate change. PMI’s Supplier Engagement
Rating (SER) positions us in the top 7 percent ofcompanies that disclosed for CDP’s full climate
questionnaire. By engaging our suppliers on climatechange, we aim to contribute to their transition
toward the net-zero sustainable economy.

“Developing long-term
effective relationships
across our supply
chains is most criticalto success, as close
collaboration andongoing engagementwith our suppliers are
essential to realize theambitious sustainability
objectives we set forth.”
Cesare Guarini, PMI Director,
Sustainability Procurement

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Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
Focus on our electronics supply chain
As our company continues to transform andbuild new capabilities, we simultaneously lookat risks inherent in specific supply chains; a key
area of focus is our relatively new and expanding
electronic manufacturing supply base in Asia.
As our supply base widens, we strengthen our
selection and onboarding process of electronic
suppliers involved in the manufacture of oursmoke-free devices. For new suppliers, wecollect information on their practices, ask themto complete a self-assessment questionnaire,and provide a third-party audit report and an
update on any corrective actions taken as a result.
We then hold an on-site management review
before entering into a contractual agreementin which we include sustainability clauses andrequired adherence and compliance with our
RSP. We then integrate the supplier into our
STEP platform and due diligence program.
Our tier 1 electronics suppliers were assessed
through our STEP platform in 2020 anddemonstrated excellent performance by reporting
practices in line with PMI standards. No follow-up
action in any sustainability area was necessary
from this assessment. On top of our due diligencethrough STEP, we monitored manufacturers’
performance via sustainability scorecards andkey performance indicators. We revamped ourcriteria in 2020 to focus on inherent risks suchas working hours and labor rights, environmental
performance, supply chain management, andoverall sustainability and business integrity.
To ensure our upstream supply chain fulfills our
RSP, we also onboarded and completed the STEP
assessment of a total of 35 tier 2 electronics
suppliers, representing over 92 percent of the
spend managed by PMI with such suppliers. We
conducted desktop audits on those suppliers forwhich the STEP assessment had revealed gaps.

The audits showed improvements related to main
gaps identified, such as in the provision of personal
protective equipment or emergency preparedness.
In our engagement and communication withelectronics suppliers, PMI maintains a clear
focus on our RSP. Beyond checking systems andmonitoring progress, we aim to build capability andpromote progress in the areas of human and laborrights, environmental impact, and business integrity.

Participation in multistakeholder initiatives
The electronics supply chain is complex andvery dynamic, and it faces specific challenges.
Therefore, we engage with different stakeholders
to better understand inherent risks, increase
traceability of the materials used in our products,
and assess how we can enhance responsible
sourcing practices through collaboration. To
this end, we participate in several initiatives,
including the Responsible Business Alliance (RBA)
Foundation’s Responsible Minerals Initiative(RMI), and continued our work on the RBA
Foundation’s Responsible Workplace Program.
In addition, during 2020 we further enhanced ourcollaboration with industry initiatives and notably
the RBA, the world’s largest industry coalition
dedicated to corporate social responsibility in theelectronics global supply chains. We were pleased
to join the RBA as an Affiliate Member in early
2021, underscoring our ongoing commitment
to sustainable sourcing in electronics, as thismembership will help PMI to step-change thequality and impact of our supplier sustainability
program in our electronics supply base.

Conflict minerals
Companies are expected to demonstrate how
they respect human rights and avoid contributing
to conflict in their mineral-purchasing decisions
and practices. This applies particularly to thepotential adverse impacts associated with sourcing
tin, tantalum, tungsten, and gold (“3TGs”) fromconflict-affected and high-risk areas of theworld. Our 2020 conflict minerals submission
to the U.S. Securities and Exchange Commission,
covering the year ended December 31, 2019,
showed that the smelters from which our suppliers
source 3TGs for our Covered Products (asdefined in the submission) are either compliant
with the Responsible Minerals Initiative audit
program (265 smelters) or were going throughthe assessment process (two smelters).

CobaltCobalt is a critical raw material in the productionof the batteries used in our smoke-free products.
While the quantities of cobalt required for our
products are minor compared with the total global
market size, since 2019 we have been deploying adue diligence program based on the RMI approachand tools to identify and address potential humanrights risks in the supply chains of our suppliers.
In 2020, all our battery suppliers fulfilled specificreporting requirements, including information on
the smelters from which they source. On that basis,
subsequent due diligence deploying additional RMI
tools indicated that, as of December 31, 2020,
all the smelters from which PMI battery suppliers
source cobalt were on either RMI’s conformant(seven smelters) or active list (eight smelters).

In 2020, we also worked with the CDP to promote
the Science-Based Target initiative (SBTi) to ourelectronic suppliers. Furthermore, we continued
to involve additional workers in the women’s
empowerment program we launched in 2019 inpartnership with Inno, a Chinese nongovernmentalorganization (NGO), supported by external funding.
IQOS device manufacturing in Asia (pre COVID-19 photography)

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Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
PMI’s Good Agricultural
Practices program
PMI defines sustainable tobacco production
as the efficient and competitive production ofquality tobacco in conditions that limit as much as
possible the impact on the natural environment
and improve the socioeconomic condition of thepeople and communities involved in its production.
In our tobacco supply chain, production is managedin accordance with our Good Agricultural Practices(GAP). GAP was first introduced in 2002. Since
then, it has been updated and improved to reflect
feedback received from farmers, suppliers, andstakeholders and to keep up with ever moredemanding expectations and technologicaldevelopments. PMI has initiated major revisions of
GAP, introducing the Agricultural Labor Practices(ALP) Code in 2011 and ALP Step Change in 2018.
GAP defines the principles and measurable
standards to be met by all those who growand supply tobacco to PMI. The principles
guide suppliers and farmers toward sustainableproduction. We use measurable standards
to measure how well the practices on thefarms or at the suppliers are aligned with ourprinciples. These principles and standards
are organized around four focus areas:• Governance: PMI expects suppliers tohave in place the necessary governance,
procedures, and processes to manage contracts,
field technicians, visits, and training.
• Crop: The crop must meet specific criteria on
quality, style, integrity, and regulatory compliance.
GAP also demands that the crop is grown withthe appropriate seed variety, with the correct
plant nutrition, and using effective integrated
pest management practices to minimize the useof crop protection agents while improving yield.
Mechanization practices are also promoted.
• Environment: Tobacco farmers areencouraged to preserve, reuse, and recycle
the natural resources used in tobacco
production, including wood, water and fuel.
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Philip Morris International Integrated Report 2020

Overview of our tobacco
supply chain in 2020
In 2020, we sourced tobacco from 285,900
farmers we either directly contracted throughour Leaf operations in six countries or who were
contracted by our 14 third-party suppliers. In
both instances, our GAP standards and relatedmonitoring and remediation system apply at
farm level. Our third-party leaf suppliers are
required to adhere to PMI’s RSP and GAP.
During the year, we sourced 281,000
tons of packed tobacco grown across 23
countries, with most of our volume comingfrom Argentina, Brazil, and Indonesia.
While the profile of each contracted farmer
varies significantly between geographies, mostof our supply base consists of smallholder
farmers cultivating less than two hectares oftobacco in rural areas with limited access tobasic infrastructure. Under our program toensure contracted farmers earn a living income,we aim to help them improve productivity,
which can imply increasing the averagesurface of tobacco grown per farmer.
Read more: Socioeconomic well-beingof tobacco-farming communities

PMI

GAP &
RSP

GAP &
RSP

6 PMI leaf
operations

14 third-party
leaf suppliers

25% of volume
purchased

75% of volume
purchased

GAP

2,675

Field technicians
support and monitor
GAP implementation

GAP

272,300

13,600Farmers
via third-party
suppliers

Farmers
contracted
by PMI

285,900
Total tobacco farmers
committed to applying
GAP

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued• People: PMI is committed to eliminating
child labor and other labor abuses on all
farms from which we source tobacco. Our
ALP Code guides our work in this regard.
GAP is mandatory for all suppliers of tobacco to
PMI, as is reflected in the supply contracts of PMI
and its affiliates. PMI expects all its suppliers tocontinuously improve the implementation of GAP

principles and standards in coordination with thefarmers from whom they purchase. The absence ofa clear commitment to act on issues identified, or apersistent lack of action and improvement, can leadto contractual implications for both farmers andsuppliers. PMI also reserves the right to terminate
contracts immediately in cases of severe violations
impacting people, the crop, or the environment.

Monitoring GAP implementation
To a large extent, responsible sourcing is achieved
when relationships on the ground are strong.
PMI’s Integrated Production System (IPS) connects
leaf suppliers and farmers beyond the customaryboundaries of a commercial relationship andenables direct technical support, agronomic
advice, financial loans, and various other services.
This direct contractual relationship between
PMI and our leaf suppliers and farmers without
intermediaries is especially important whenconditions are uncertain, as was demonstrated
in 2020 during the COVID-19 pandemic.
IPS—which covered 99 percent of our tobaccopurchases in 2020—brought financial security
to our farmers by ensuring them a guaranteeof purchase for the contracted volume.
IPS is vital in providing traceability and visibility in
our supply base; it enables the deployment of our
GAP monitoring system down to the farm level.
At the center of our system are field technicians.
Field technicians are men and women who
support GAP implementation and monitor how
well sustainability requirements are applied andcommercial processes are working. Some 2,675
field technicians—132 employed by PMI and
2,543 by our third-party suppliers—implement
GAP among the 285,900 farmers from whom wesource tobacco, across 23 countries worldwide.
Concurrently, they provide agronomical assistance,
deliver training to farmers, identify and address
labor issues, and ensure implementation of
improvement plans. Field technicians facilitate
progress on the ground by building relationships
with the farmers and usually visiting each farmon average five to ten times during the growing

A field technician and a tobacco farmworker in Indonesia

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Philip Morris International Integrated Report 2020

season. The trust they garner is crucial to theeffective implementation and monitoring of
GAP and ALP; it is often their pragmatic andsensitive interventions that overcome the barriers
facing a program of responsible sourcing.
In 2020, despite the COVID-19 pandemic,
field technicians allowed us to monitor the
implementation of GAP on all contracted
farms. In a few countries facing stringent
confinement measures during the crop season,
farm visits were adapted and remote support
was offered when needed, always respecting
the governmental measures and restrictions.
For instance, in Pakistan the local team collaborated
with an external IT partner to create an automatedplatform communicating messages to over
6,000 farmers and workers. These messages,
focused on both the ALP Code and COVID-19
prevention, have been distributed despite existing
infrastructural constraints due to, sometimes,
poor internet connection. In addition, this platform
also spread awareness to the workers about
independent grievance mechanism channels where
they can confidentially report potential complaints.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
Industry-wide Sustainable
Tobacco Program
In parallel to our GAP program, and as an additional
way to evaluate supplier performance, we havebeen participating since 2016 in the industrywide Sustainable Tobacco Program (STP). The
program is administered by a third-party service
provider and has been adopted by all major global
tobacco manufacturers and their leaf suppliers. The
objective of STP is to assess suppliers’ performance
more consistently to drive continuous improvementin addressing systemic issues across the global
tobacco leaf supply chain. At PMI, STP applies toour tier 1 suppliers, including our third-party leaf
suppliers, as well as our own leaf operations. Allof our sourcing origins were formally reviewed
and visited between 2016 and 2018 (including
on-the-ground visits to a sample of tobacco
farms and a comprehensive review of suppliers’

policies, procedures, and practices by a thirdparty specialist in supply chain management).
In 2019 and 2020, the industry—with sevenmajor manufacturers involved—focused on
the development of a new STP standard.
Following an in-depth review, the due diligenceprocess was revised to center on five steps(identify, prioritize, respond, measure, and report)
applied to eight themes and 25 topics. The
development team referred for the guidance tothe most relevant reference frameworks suchas the UN Guiding Principles on Business andHuman Rights, ILO conventions, OECD-FAO
Guidance on Sustainable Agricultural Supply
Chains, 1.5 Playbook, Setting Site Water Targets,
and CORESTA guidance documents to name a few.

The eight themes of the Sustainable Tobacco Program 2.0

LIVELIHOODS

GOVERNANCE

CLIMATE CHANGE

Basic needs
Living income

General information

Targets
Adaptation
Resilience

CROP

HUMAN AND
L ABOR RIGHTSWATER
STE WARDSHIPChild labor
Fair treatment
Modern slavery
Freedom of association
Income, working hours andbenefits
Safe working environment
Other impacts

Quantity
Water, sanitation, and hygiene(WASH)
Quality

The revamped program aims to foster a risk-based,
impact-focused approach promoting continuous
improvement and multistakeholder cooperation.

CPA residues
Highly hazardous pesticides(HHPs)
Integrated pest management(IPM)
Integrity
Traceability

A field technician during a tobacco farm visit in Malawi

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Philip Morris International Integrated Report 2020

SOIL HE ALTH

NATUR AL HABITAT

Productivity
Degradation

Biodiversity
Forestation

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued
At PMI, we also support efforts of the
STP program to promote transparent
communication of responsible practices
across the tobacco supply chain.
2020 marked the first year of implementationof the revamped STP self-assessment
questionnaires. During the year, our suppliers
demonstrated high levels of engagement andall except one completed the questionnaires. In
total, those covered 98 percent of our tobacco
supply chain (i.e., 49 questionnaires completed,defined by supplier, origin, and tobacco type).

Under this STP 2.0, suppliers’ self-assessments
will be guided by a risk assessment and trigger anadapted action plan centered on the eight themes
listed above. A secretariat has just been selected
in 2021 and will be responsible for reviewing theaction plans and monitoring the implementationof the agreed improvements. Independent thirdparty assessors will review progress by meansof an in-depth, on-the-ground assessment in thepriority markets determined by the risk-based
approach. We plan to pilot this new in-depth
assessment concept in 2021 and target a full rolloutof the new program by the end of 2021. We willcommunicate on progress in our next report.

Pilot with Produzindo Certo in Brazil
In 2020, our affiliate in Brazil (PMB) partneredwith Produzindo Certo, a local company
specialized in agribusiness socio-environmental
management, to pilot a project aimed at
improving farming efficiency and promoting
effective use of natural and human resources.
We felt the need to specialize further our
PMB field technicians in sustainability to bettersupport our integrated farmers to make more
impact and to reach ambitious sustainability
targets in Brazil. The pilot was carried out
with the participation of 123 farmers.
To execute the program, PMB divided thefield technicians into two groups: “production
field technicians,” who continued to support
all aspects related to GAP implementation,
improvements in productivity, quality, andproduct integrity; and the “sustainability
field technicians,” who focused exclusively
on the environmental and social aspects.
The sustainability technicians were trainedby Produzindo Certo to evaluate the farmer
practices, with regard to water quality, soil
erosion, native vegetation, and work safety,
among other aspects. To do this, they relied on
the Produzindo Certo platform, which offers
68

all the resources and indicators necessary for
diagnosing and improving farming practices
from a socio-environmental standpoint. Eachfarm assessment highlighted both areas ofstrengths and areas for improvement andresulted in an individual “sustainability scorecard”
broken down for social, environmental,
and production aspects. Action plans werethen established, tailored to each farm.
Farmers could commit on a voluntary basis
to implement the action plan designed
specifically for their farm and see their score
improving over time as they progress.
The pilot proved valuable to gain insights
into improvement areas and generated avery high acceptance level among farmers.
The strength of the program comes from theindependent third-party assessment conductedby specialized teams, defining action plans inagreement with the growers and monitoring
progress over time. PMB already plans toextend this program to all its contracted farmers(around 5,300 in total) by 2022 and considers
opening the initiative to tobacco suppliers
and to service providers in the supply chain.

Philip Morris International Integrated Report 2020

Next steps
In 2021, we plan to further enhance oursustainability programs in the supply chain.
We plan to transition our STEP due diligenceplatform, partnering with a leading service
provider. Through this, we will be able toaccess and leverage the provider’s state-ofthe-art digital platform and tools, and existing
very large supplier base, while continuing to
expand our STEP program across different
spend categories in our supply chain.
We also expect to onboard PMI and ourelectronics suppliers to the RBA initiatives throughthe deployment of the coalition’s approaches,
tools, and capability-building activities.
We will extend the deployment of the PMI RSP
sustainability clause in suppliers’ commercial
agreements, while also continuing to organize
and deliver capability-building activities,
both internally and with our suppliers.
We will explore opportunities to extend
grievance mechanisms for workers in our
supply chain, focusing first on electronics
suppliers, while continuing to strengthen our
programs in cobalt and conflict minerals.
In our tobacco supply chain, we will roll out
the STP 2.0 program with the first indepth assessments on the ground andwill evaluate inviting global tobacco leaf
suppliers to our STEP program.

2020 performance highlights
See our performance metrics

33%

Proportion of direct
supply chain spend
related to smoke-free products

95%

Of our non-tobacco criticalsuppliers spend assessed in PMI’s
supplier due diligence platform99%

Of tobacco purchased throughdirect contracts by PMI
and PMI tobacco suppliers

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Respect for human rights
Respect for human rights must be embedded in thecorporate culture, allowing human rights principles toshape the way we work and guide interactions with
employees, suppliers, business partners, consumers,
and the communities in which we operate.
Read more

The right thing to do

The business case

The United Nations Guiding Principles on Businessand Human Rights (UNGPs), as well as academia,
recognize that businesses now operate under an
expanding web of liability that results from therise of cross-border human rights legislation.

At PMI, respecting human rights is fundamental
to sound risk management and value creation. It
is not only the right thing to do—there is also astrong business case: Fostering and promoting
the continuous integration of human rights
considerations in our strategy and operations
allows us to minimize legal and financial risks, aswell as prevent the risk of supply chain disruption.
A company’s overall reputation is based on its
acts and the trust it garners around how thoseacts are perceived by stakeholders. Moreover,potential exclusion from public procurement, as
well as exposure to human rights related litigation,
may affect us negatively. The risk is particularly
important for multinational companies like ours,
operating across the world. Safeguarding andpromoting human rights within our value chain
creates the basic environment and conditions
for our stakeholders, including our employees, tothrive and create value. Combined with a positive,
inclusive culture and sound management, thisprovides the space and opportunity to fulfill our
key business enablers of innovation, collaboration,
continuous improvement, and execution.

From a societal standpoint, human rights are
inherent in the dignity of human life and area prerequisite for any society to prosper. Asa global company, we can have a significant
impact on protecting and promoting therights of our stakeholders, and we expect
and require the same behavior of ourbusiness partners, including our suppliers.

Our aim

10

Highest-risk countries covered by external
human rights impact assessments andfindings addressed by 2025
Employees in PMI’s manufacturing facility in St. Petersburg, Russia

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Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Respect for human rights continued
Achieving our aims
We aim to address our adverse impacts andmaximize our opportunities to drive positivechange for people across our value chain. While
this can be challenging given the scope andcomplexity of the issues and the breadth of
our operations, we believe that human rights
are an absolute and universal requirement—arequirement we are committed to upholding.
We aim to continuously improve our practices
with respect to identifying and addressing
risks and impacts to “rights-holders” across
our operations and supply chain, including by
securing our supply of raw materials responsibly.

“As we progress toward our visionof a smoke-free future, the realm of
our human rights work is expanding
into new sectors and activities. The
broadened scope of our work—within the electronics industry, forinstance—represents an opportunity
to identify and tackle human rights
issues from the start. We continuallyrefine our approach to ensure real,positive impact for rights-holders.”
Anna Kletsidou, PMI Head of Social
Sustainability & Human Rights

Our work, which is governed by PMI’s
Commitment to Human Rights, is managed
by a cross-functional team and delivered
through extensive internal engagement andtraining, externally conducted human rights
impact assessments (HRIAs), consultation
with experts, and partnership projects withpeers. Tackling human rights abuses requires
a collaborative effort involving suppliers,
governments, NGOs, and other stakeholders.
PMI’s efforts—and the underlying methods—havebeen highlighted in a case study published early2021 by Shift, the leading center of expertiseon the UN Guiding Principles on Business andHuman Rights. According to Shift, building
good relationships with affected stakeholders,
communities, and consumers is a prerequisite fordoing business with respect for human rights.
Over the past three years, Shift has engaged
with companies and organizations that havebeen piloting ways to measure the quality of
their relationships with stakeholders. As a result,the center developed a case study on PMI’s
work to prevent child labor and other labor
issues in its tobacco supply chain by applying
a series of participatory methodologies.

In 2020, our efforts to respect and promote
human rights were recognized by the Dow
Jones Sustainability Index (DJSI), as we achieved
the industry-best score for this criterion of
its corporate sustainability assessment.
The Human Rights Roadmap we developed in2018 guided us in establishing strong foundations
and further integrating the promotion andprotection of human rights into our policies,
processes, and practices as we committed toa set of actions to be completed by the end of
2020. This report describes the progress madein the past year across our key areas of focus.

Our approach torespecting humanrightsIn addition, PMI’s ongoing efforts to eliminate
child labor on tobacco farming have beenrecognized by the World Business Council for
Sustainable Development (WBCSD), which
included the company as a “sector leader”
case study in its toolkit on advancing humanrights policy and practice in the agribusinesssector issued in November 2020.

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

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Philip Morris International Integrated Report 2020

Read moreOverview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Respect for human rights continued
Progress in 2020
Impact of COVID-19 on our
activities in 2020
Read more

Implementing our Human
Rights Commitment
PMI’s Human Rights Commitment (HRC) is thecornerstone of our human rights strategy andcommits us to managing our work in accordancewith the United Nations Guiding Principles on
Business and Human Rights (UNGPs). Our HRC
requires us to avoid, mitigate, and remediate
any human rights risks and impacts that may
arise across our operations and value chain.
The implementation of our HRC is focusedon establishing the right controls throughout
our processes and practices. Human rights

considerations are included in our code of
conduct (our Guidebook for Success) and its
accompanying set of Principles and Practices(P&P), which apply to all PMI employees andreflect our core values of a culture of honesty,
respect, and fairness. Those policies govern our
day-to-day operations and enable us to implement
and safeguard our HRC. Our P&P cover risk
areas such as environment, health, safety andsecurity, supply chain management, responsible
marketing and sales, workplace and labor
practices, privacy protection, and anti-bribery.

“Respect for Human Rights is
integral to our approach to
Early 2021, PMI also released internally an updated
security worldwide. We work
Marketing Code for combusted tobacco products,
to ensure our business practices
as well as a new, separate Marketing Code for noncombusted alternatives that codifies and elaborates reflect the values and principles
the principles related to preventing youth access.
adopted by PMI and the
A complex global supply chain brings potential
international community.
human rights risks that we need to understand,manage, and continuously address. Our
Training and awareness among
RSP and GAP guide our work to safeguard
our own team is an ongoing
human rights throughout our supply chain.
priority in this journey, in addition
Raising awareness among employees
to holding our key security
Embedding an ethos of respect for human rights
provider partners accountable.”in our corporate culture starts with awarenessraising and training.

In November last year, we launched a revamped
e-learning to give our employees a practicalunderstanding of human rights risks and the
expectation for PMI’s HRC to be embedded
throughout our operations and value chain.
We developed the training in collaboration
with an external expert organization, and its
various modules align with our most salient
risks by covering child labor, forced labor,
freedom of association, and environmental
stewardship. The e-learning seeks to explain
what human rights are, how they relate toboth PMI and each employee, and the roleof employees in helping safeguard them.

An employee in PMI’s manufacturing facility in Guadalajara, Mexico

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We made the e-learning available to all employees
and have integrated it into existing learning
frameworks of certain business functions, such as
Operations and External Affairs. In some cases,
it was rolled out as a mandatory requirement forpriority teams, such as Security. By year-end, all
Security employees had completed the e-learning.

Richard Gould, PMI Head of Security
and Market Safety

We also continued to provide targeted humanrights training tailored to the regional andmarket teams within our Security function. We
partner with the International Code of Conduct
Association (ICoCA), a multistakeholder initiative
formed in 2013 to ensure that providers ofprivate security services respect human rights
and humanitarian law. ICoCA delivered focusedtraining sessions on human rights to all security
regional and country heads. With this, in 2020
we covered 100 percent of our global security
personnel (over 160 employees in total).

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Respect for human rights continued
Human rights topics are also covered by othercompliance training related to our Guidebook
for Success and its accompanying set of P&P,
such as our employment policy and our health,safety, and environment policies. They are also
a key component of various corporate training
programs, such as those to equip supervisors
with appropriate management skills or to sensitize
talent acquisition teams to discrimination.
With regard to our tobacco supply chain,
we reviewed training materials and delivery
methods of our ALP program in 2020. We
began revamping our materials and developing
a learning framework for ALP professionals
and field technicians around the world, withguidance from our strategic partner Verité.

Identifying human rights
risks and issues
Our due diligence process is embedded in our
approach to risk management across our value
chain. Human rights risks are incorporated
into our overall integrated risk assessment, ourcompliance program, our supplier due diligenceand evaluation processes, and our ALP monitoring
and remediation system deployed on the tobacco
farms contracted by PMI and our suppliers.
In complement, we periodically conduct
human rights risk assessments to proactively
identify and mitigate potential adverse humanrights impacts across our value chain.

In 2020, we updated our global human rights risk
assessment (saliency mapping) to account for the
rapid pace of our business transformation and our
evolving supply chain, as well as for external trends
such as the COVID-19 pandemic and heightened
concerns around diversity, equity, inclusion,equality, and racial justice. These updates focusedon key groups of rights-holders who may be
impacted by our activities: Consumers, employees
and contractors, suppliers and supply chain
workers, and communities. Our review broadly
confirmed PMI’s salient risks (before mitigation).
Salient risks include the reduction of products’
health risk and, in the markets where our products
are sold, risks related to the use of our products
by youth. The review also highlighted risks
related to health and safety, working hours andwages, and diversity, equality, and inclusion in
our operations. Risks of child labor, forced labor,
and freedom of association were mentioned as
more relevant for our supply chain. Environmental
risks resulting from our activities and supply
chain footprint, as well as risks related to conflictminerals, were mentioned as potential risks forthe communities where we operate. The visualon the right shows these risks and directs to
the relevant sections within this report that
explain how PMI mitigates the identified risks.

Human rights saliency mapping: Putting rights-holders at the center

Consumer

Employees
and contractors

Suppliers andsupply chain workers

Communities

Reduction of
products’health risk

Workplacehealthand safety

Child
labor

Environmental
stewardship

Read more here

Read more here

Read more here

Read more here

Responsible
marketing andcommercialization

Workinghours
and wages

Forcedlabor andmodern slavery

Conflict
minerals

Read more here

Read more here

Read more here
and here

Diversity,
equality,
and inclusion

Freedom of
association andcollective bargaining

Read more here

Read more here

Access to grievance mechanisms

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Read more here

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Respect for human rights continued
C A S E S T U DY

Conducting a humanrights impact assessmentin Russia remotely
Due to the extraordinary circumstancesof the COVID-19 pandemic, we decided
to conduct our assessment in Russia in a
fully virtual format. We selected Russia
for our significant manufacturing and
IQOS retail operations in the country;
corporate culture and digital expertise; andexpected level of social risks. We collectedlessons learned in Russia to improve virtual
engagement in the future, if needed.
Read more online

An employee in PMI’s manufacturing facility in
St. Petersburg, Russia

Assessing human rights impacts
To strengthen our due diligence framework andproactively identify risks and mitigate potential
adverse impacts in our operations and value
chain, we aim to conduct human rights impact
assessments (HRIAs) in the 10 highest-riskcountries in which we operate by 2025. Our
HRIAs are carried out by independent expert
organizations. The list of high-risk countries isdetermined—and periodically reviewed—based on
PMI’s footprint (e.g., presence of manufacturing
operations and type of supply chain) and thecountry’s human rights risk profile, as determinedby internationally recognized indicators such as the
Heidelberg Conflict Barometer, the Freedom House
Freedom of the World Index, and U.S. Trafficking
in Persons Report and Transparency International.
These assessments follow a formal process
and are conducted in accordance with the
UNGPs. After each HRIA, the external expert
organization presents its findings and suggests
ways to address issues identified. The report isshared with the corresponding market leadershipteam, which develops a time-bound action planin collaboration with the relevant corporate
functions. The action plan assigns responsibilities
for implementation and progress measurement at
the local level. Learnings from an individual market
HRIA are shared globally, where applicable.

Action plans: Monitoring implementation
We monitor action plans that have been developed
following our previous HRIAs. The first layer ofmonitoring takes place at market level wherecross-functional teams are responsible for the
implementation of the established action plans. In
addition to local checks, biannual status updates
sessions with representatives from relevant
central functions (mainly sustainability, operations,people & culture, and legal) are also taking place.
Progress as well as delays and potential challenges
are also discussed. Success is measured against
the implementation of action plans. Actions canalso lead to additional positive impacts beyond
what was originally intended. One representative
example is our work in Mexico where, within
two years and as a result of our 2018 HRIA, wetransformed our distribution model from being
exclusively dependent on drivers, to mostlytransporting our products by train. This change
did not only manage to successfully address
security concerns and the related safety issue
raised due to excessive overtime but is also
expected to contribute to significant financial andenvironmental benefits. Concretely, it is estimatedto represent a reduction of 75 percent of security
spend and 66 percent reduction of carbon
emissions. More information on the 2018 pilot
assessment in Mexico is available on PMI.com.
Following our HRIA in the Philippines in 2019,
various actions have been undertaken toaddress concerns among sales teams—especiallywomen—about risks to their personal safety,
working hours, lack of compliance with legal age
limits at small neighborhood stores, the wagesof security and janitorial contractors, and theuse of protective equipment by tobacco farmers
and workers. Read more about it on PMI.com.

C A S E S T U DY

Assessing human rights impacts in our tobacco
supply chain in Mozambique
Mozambique is an important
tobacco sourcing market for ourcompany, and a country thatfaces systemic social issues. In
2020, we collaborated with apeer company and our common
suppliers to conduct a humanrights impact assessment,
focusing on impacts within
the tobacco supply chain.

We apply substantial focus to the depth andscope of each assessment and leverage learnings
from each exercise to further strengthen our
procedures. Following our pilot project in Mexico
in 2018 and the 2019 exercise in the Philippines,
we conducted HRIAs in Mozambique and in Russia
in 2020, with different approaches. Findings
reflect the unique range of human rights issues
that arise in the context of any individual market.

Read more online
A farmworker in Mozambique

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Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Respect for human rights continued
Key learnings from our HRIAs
Each HRIA we have conducted to date has provenhighly valuable. The structured methodology
provides an important evaluation of how our
Commitment to Human Rights and other policy
instruments are implemented on the ground.
The HRIAs have raised awareness among ourorganization on human rights at the country leveland further developed employee competencies
and skills to identify and address potential issues.
They have shed light on local challenges andtriggered targeted remediation interventions.
In parallel, local learnings have allowed us toenhance our global understanding and tailor ourmanagement of human rights impacts accordingly.
For instance, they informed the content of thee-learning we launched globally in 2020. The
findings and learnings from the HRIAs were also
considered in our global human rights saliency

mapping, which led to the establishment of PMI’s
11 salient human rights risks (described above).
Human rights considerations are embedded
in key business decision-making at PMI. For
instance, findings from HRIAs in Mexico and thePhilippines were key inputs into the decision
to consolidate security service providers anddevelop standard human rights expectations forthese providers, in partnership with ICoCA.
We acknowledge that we cannot analyze thecomplexities of human rights issues in every cornerof our operations straightaway, but we use ourlearning to continually deepen our understanding
and strengthen our processes. The journey toturn inherent risks into managed risks is ongoing,
and we are encouraged by the progress made so
far—for instance, in working toward alignmentof working hours with ILO standards, providing
above-average salaries, and maintaining ourstrong compliance and speaking-up culture.

“At the International Code of
Conduct Association (ICoCA)
we value the leadershiprole PMI are taking toinstitutionalize human rights
due diligence throughout theirprivate security supply chain.
By partnering with ICoCA andrequiring their private security
providers be Members or
Affiliates of the Association,
PMI are paving the way forothers to follow, showing how
responsible private security
procurement practices that
respect human rights aregood for business because
it’s good for the communities
in which they operate.”
Jamie Williamson, Executive Director, ICoCA

An employee in PMI’s office in Rome, Italy

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Assessing impacts in mediumand low-risk countries
To strengthen our due diligence framework,
we worked with our consultant Article One in2020 to develop a “self-service” HRIA process
and toolkit that will enable our medium- andlow-risk country affiliates to identify and addresssalient human rights risks in their markets. The
toolkit will be available to these affiliates and willfeature a set of self-service tools, embedded
instructions, and additional resources that willallow local experts to conduct an HRIA for theirmarket with external expert review and support.
Specifically, the HRIA toolkit will include:• A human rights saliency mapping tool
to identify and prioritize risks• A gap analysis tool to assess
existing mitigation measures• A stakeholder mapping and prioritization tool
• Sample interview guides for internaland external engagement• Potential sources for additional desktop research• Assessment report templates• Embedded instructions for eachtool and process step
The toolkit aligns with the UNGPs and other key
international human rights standards such as
relevant ILO conventions. We plan to pilot it inthree countries in 2021, incorporate and address
insights and feedback from the pilot markets, androll it out globally in 2022. In parallel, we will build
the relevant governance to ensure support andappropriate consolidation of the countries’ results.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Respect for human rights continued
Grievance mechanisms
Providing access to effective grievance mechanisms
in our operations and across our supply chain
is a key requirement of the UNGPs and a coreelement of our due diligence approach.
Internally, we maintain clear policies, run regulartraining, and work to ensure that robust processes
are in place to encourage employees to speak up
if things don’t seem right or can be improved.
Read more: Business integrity

The same applies to our supply chain, where webelieve everyone should have a voice and be able toseek help. In our RSP, we specifically ask suppliers
to provide their workers with easily accessible ways
to raise concerns, free from risk of retaliation.
Read more: Sustainable supply chain management

In our tobacco supply chain, our ALP Codestates that “Workers should have access to a fair,transparent, and anonymous grievance mechanism.”
Such mechanisms are available in some countries
where we source tobacco; and concerns can also
be raised with field technicians at any time.
Read more: Socioeconomic well-beingof tobacco-farming communities

Next steps
The rollout of our key diagnostic tool—the
HRIA—will continue in 2021. Depending on
the restrictions due to COVID-19, we areassessing and will re-evaluate our options.
We plan to conduct at least one HRIA in a
select high-risk country, which should deliverin-depth analysis and robust action plan.

We will leverage learnings from our virtualassessment conducted in Russia in 2020 to potentiallyreplicate the format should conditions require it.
We plan to pilot our HRIA self-assessment toolkit
in three medium- or low-risk geographies in 2021
and gather insights to further inform our tools
and processes before global rollout in 2022.
Our Human Rights Roadmap helped us establish
strong foundations and a more structured
approach in our work related to human rights.
The maturity acquired so far helped us establish
ambitious targets across all functions to bedelivered by 2025. Although the focus will be toachieve these targets, we will continue listening
to our stakeholders, learning from our current
control mechanisms, reinforcing our due diligenceand remediation processes, and staying up to
speed with external and internal developments.

2020 performance highlights
See our performance metrics

Cumulative number of humanrights impact assessments conducted

TargetIn this respect, we are currently conducting ahuman rights saliency mapping for our electronics
supply chain to identify potential risks andaddress them proactively. We will share findings
and actions in our next integrated report.
In addition to this focused assessment, we
acknowledge that the climate crisis threatens
livelihoods, in particular of the most vulnerable
people around the world. Recognizing theimportance of identifying synergies and integrating
efforts to mitigate climate change and humanrights impacts throughout our business activities,
we decided to explore how the climate crisisand human rights relate to each other, andthe role a company can play in addressing theinterconnected challenges they present. We will
publish this year a white paper analyzing this topic.

4

We will also continue raising awareness on
the topic of human rights and further rollingout our e-learning across our organization.
Moreover, during 2021, we will continue toreview and look for opportunities to further
strengthen the grievance mechanisms thatexist in our operations and value chain.
A field technician and a tobacco farmer in Pakistan

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10

2
1

2018

2019

2020

2025

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 2

Responsible and transparent R&D

Data privacy and protection

Business integrity

For PMI, responsible R&D
means ensuring the credibility,
integrity, and robustness ofour scientific research throughalignment with international
standards, as well as transparency
in our methods and results.

In recent years, there has been
increasing public awareness ofprivacy issues and greater scrutiny
by stakeholders of how companies
approach data privacy. We havedeveloped and maintain programs
designed to protect our company’s
and stakeholders’ data privacy
from attacks and improper use.

For PMI, conducting business with integrity
means complying with the law, our Guidebook
for Success (PMI’s Code of Conduct),and other company commitments. Our
Guidebook for Success defines the rules wefollow and describes the values that form
the foundation of good ethical judgment.

Read more online

Read more online

Fair fiscal practices

Illicit tobacco trade prevention

Responsible engagement

PMI aspires to be a good corporate citizen
in every country where we operate.
Paying taxes commensurate with ouractivities in each country is not only
our duty but the responsible thing to
do and a key part of our social contractin every country where we operate.

Eliminating illicit tobacco trade
is a long-standing priority for
PMI. Addressing this issue isabout applying strict supply chain
control measures and, wheneverpossible, cooperating with law
enforcement agencies and otherpartners in the public and private
sectors to prevent and reducethe illicit trade of PMI products,
including combustible tobacco
products as well as smoke-freeconsumables and devices.

For PMI, responsible advocacy
is about conducting engagement
in a way that respects the law,observes professional standards
and ethical principles, and isconsistent with the company’s
vision and internal policies.
This means acting in a fair,honest, and respectful manner
when advocating our position
with external stakeholders.

Read more online

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Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

WE ARE

Caring for the people
we work with
Continuously improving our social impact within
and beyond our operations is essential to PMI’s
long-term success.
Promoting a safe and healthy working environment
is vital. In our factories, offices, laboratories, retail outlets,and for our sales teams in the field, we aim for a safe andsecure work environment populated by a healthy andmotivated workforce.
Our efforts extend to the labor standards we expectof our suppliers and farmers. In our tobacco supply chain,
our aim is to provide a decent livelihood to all contracted
farmers, promote safe working conditions, and preventchild labor and other labor abuses.

In this section

TIER 1 Socioeconomic well-being of tobaccofarming communities

p.78

Health, safety, and well-being at work

p.91

Further reading

TIER 2 Fair working conditions
Community support
Diverse and inclusive working environment
An employee in PMI’s Plant Research facility in Switzerland

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Talent attraction, retention, and employability

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1Socioeconomic
well-being of tobaccofarming communities
The tobacco we source is cultivated in many regions of the world,
including low- and medium-income countries, where it is typically grownon smallholder farms of less than two hectares. The socioeconomic
well-being of tobacco-farming communities depends on many factors,
including the nation’s socioeconomic development, health and educational
services, political stability, resilience to climate shocks, access to markets,and public infrastructure, as well as regulatory frameworks and theirenforcement. If these factors are insufficiently developed, the population
risks being locked in a cycle of systemic poverty, which, consequently,
leads to poor working and living conditions, including the use of child labor.
Read more

The right thing to do

The business caseChild labor and other labor abuses are unacceptable
to PMI. They raise ethical, social, and legal issues,
including potential human rights violations, as well
as reputational risk. As a global business sourcing
tobacco from 23 countries, we have a role to playin addressing systemic issues such as poverty andother social issues such as child labor, forced labor,
and human trafficking that are resulting from it.

Our business can have a significant socioeconomic
impact on people, which is a major predictorof success, especially in the long term. By
creating jobs, training workers, building physicalinfrastructure, procuring raw materials, transferring
technology, paying taxes, and expanding accessto products and services ranging from food andhealthcare to energy and information technology,
our company affects people’s assets, capabilities,
opportunities, and standards of living—their
growth and well-being matter to the bottom line.
If done right, agriculture can contribute to poverty
reduction beyond a direct effect on farmers’
incomes. We have found that farmers who makea decent living from growing tobacco among
other crops or other income-generating activities
are more likely to think long term, apply good
agricultural practices, and send their children toschool. These are the farmers that PMI prefers towork with, because they ensure the continuity ofa high-quality tobacco supply at reasonable cost.
A successful farmer base also helps to prevent childlabor and other labor abuses, minimizing the risk ofimport bans and reputational risk. By implementing
targeted initiatives and by developing strong
working relationships with farmers, suppliers,
civil society, governments, industry, and otherstakeholders, PMI can create net benefits for the
economies and societies in which we operate—
and mitigate reputational and operational risks.

Poverty prevents farming communities fromachieving acceptable levels of socioeconomic wellbeing and hinders their economic development.
It leads to labor abuses and exacerbates the riskof child labor on tobacco farms because farmers
may be unable to hire workers or afford school
costs for their children, resulting in them keeping
their children home to work on the farm. Childlabor affects an estimated 150 million children
worldwide,1 with the vast majority found in
agriculture. It prevents children from getting aproper education, participating in the developmentof their communities, and fulfilling their potential.
Agricultural development can stimulate
economic development outside of the
agricultural sector, and lead to alleviating poverty,
thereby preventing human rights issues andcontributing to higher job and growth creation.
Increased productivity of agriculture raises
farm incomes, increases food supply, reduces
food prices, and provides greater employment
opportunities in both rural and urban areas.

1 International Labour Office—Global Estimates of Child Labour, Results andtrends 2012-2016 (wcms_575499.pdf (ilo.org))

Our aims

100%

Percentage of contracted farmers supplying tobacco
to PMI who make a living income by 2025
A tobacco farmworker stringing tobacco leaves in Nayarit, Mexico

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ZeroChild labor in our tobacco supply chain by 2025

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
Achieving our aims
A principal aim of PMI is to provide a decent
livelihood to all contracted farmers in its
tobacco supply chain. This has been a focus
since we introduced our Agricultural Labor
Practices (ALP) program in 2011, supplemented
by the ALP Step Change in 2018.
We are committed to the following set oftargets to improve the socioeconomic wellbeing of tobacco-farming communities:• 100 percent of tobacco farmworkers to be paid
at least the minimum legal wage by 2022
• 100 percent of contracted farmers supplying
tobacco to PMI to make a living income by 2025
• Zero child labor in our tobacco supply chain
by 2025• 100 percent of contracted farmers supplying
tobacco to PMI to have access to water by 2025
• 100 percent of contracted farmers
supplying tobacco to PMI to have accessto basic sanitation and hygiene by 2030
We had also committed to achieveby the end of 2020:• 100 percent of tobacco farmworkers to beprovided safe and adequate accommodation

Our ALP Code, based on International Labour
Organization (ILO) conventions and alignedwith the United Nations Guiding Principles on
Business and Human Rights, sets the principles
and measurable standards applicable to all thecontracted farmers from whom we source
tobacco: No child labor, fair income and work
hours, no forced labor and human trafficking, asafe work environment, fair treatment, freedomof association, and terms of employment. Our
Sustainable Agriculture teams, suppliers, contracted
farmers, and workers are regularly trained on
the ALP Code. The ALP program is supported byrelated policies, such as our Good Agricultural
Practices (GAP), Human Rights Commitment(HRC), and Responsible Sourcing Principles (RSP).
We have a robust due diligence framework in place
to evaluate the implementation of our ALP Code;this is enabled by the traceability at farm-levelprovided by our integrated production system.
Read more: Sustainable supply chain management

Our approach comprises internal monitoring by
field technicians, external comprehensive andfocused assessments conducted by Control Union,and external verification by specialized third parties.

• 100 percent of farmers and workers to haveaccess to personal protective equipment (PPE) for
the application of crop protection agents (CPA)and prevention of green tobacco sickness (GTS)

Monitoring of ALP implementation
Internal monitoring

External assessments

Field technicians collect and update individual
farm profile data at the start of each growing
season and visit the farms throughout the season
to evaluate, among other things, how well labor
practices align with the principles of the ALP
Code. Field technicians raise “prompt actions”
to flag and trigger an immediate response to
any serious ALP violation. They work with thefarmer to develop a remediation plan to addressthese and any other non-conformities identified,
which they then follow up on and monitor. If thematter is not resolved within the agreed timeline,
it is further escalated and may lead to sanctions,which can include contract termination.

Control Union (CU) conducts assessments toevaluate the management system in place for
ALP implementation, reviewing prompt-action
protocols and procedures to identify, record, andaddress issues, while also examining the internal
capacity to implement the ALP program. CU also
evaluates labor practices at farm level, assessing
compliance with the ALP measurable standards.
Reports from CU are available on PMI.com.
Under our Step Change approach, we are also
implementing specific focused assessments
to evaluate the management systems in place
relating to the step-change priority areas,in addition to the farm-level assessment.

In 2020, we reinforced our risk-based approachin our farm-by-farm monitoring in order tostrengthen the monitoring procedures andtechniques to better identify risks and address
them before they evolve into issues. The“non-conformities” are identified throughinterviews with multiple stakeholders or
observations and are raised with the farmers.
Their reporting helps us flag risks andproactively take action to mitigate them.

Read more
A tobacco farmer in Nayarit, Mexico

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External verification
Specialized third parties verify our understandingof progress being made on the ground,challenge our monitoring data, evaluate theeffectiveness of our initiatives, and, ultimately,
better assess our impact. We work withlocal expert partners in each geography.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
We use a risk-based approach to identify, prevent,and mitigate incidents related to human rights
and labor rights in our tobacco supply chain.
For this undertaking, we collaborate with key
stakeholders—such as suppliers, farmers andfarmer associations, civil society organizations,academics, governments, and the private
sector—to tackle more effectively persistentand systemic issues in the agricultural sector.
In 2018, we started a Step Change approach to
our ALP program, focusing on four priority areas:
Eliminating child labor, ensuring payment of at least
a minimum legal wage or agricultural benchmark

standards, ensuring the availability and appropriate
use of PPE, and ensuring adequate accommodation
for all farmworkers. Step Change focuses on
resolving the root causes of these persistent issues
in priority countries—which we assess periodically—
and is run in collaboration with our long-term
strategic partner on the ALP program, Verité. In
2020, the program focused on Argentina, India,
Indonesia, Malawi, Mexico, Mozambique, Pakistan,
and Turkey due to the persistent nature of issues
there. India was added in 2020 to the list of priority
markets due to the complexities of challenges
pertaining to gender inequality and the paymentof minimum wages. Also in 2020, South Africa wasremoved after intensive work to address the issues
identified there—particularly the accommodation
provided to farmworkers—was externally validated
to have been successful. A key component of
the Step Change approach has been to enhanceexternal assessments and verification to support
our progress toward meeting our ambitious targets.
Our governance arrangements guide andfacilitate this work. PMI’s Senior Vice Presidentof Operations, a member of our Company
Management, is accountable for our success inthis area, while the operational responsibilitylies with the head of our Leaf department.
In each sourcing region, a management teamoversees the implementation of ALP. A steeringcommittee works closely with the dedicatedlocal teams across our affiliates and suppliers.

Stakeholder engagement
Poverty and inadequate enforcement of labor
legislation are some of the causes of child laborin agriculture. Stakeholders in the agricultural
sector can play an important role to end this.
In that regard, we realize that partnerships andmultistakeholder engagement is paramount toadvance our goals—during 2020, we participated invarious events, such as seminars and conferenceson the topic. For instance, we participated in
the Sustainable Landscapes and Commodities
Forum organized by the Innovation Forum andsponsored by the Global Agribusiness Alliance,
discussing how agribusiness drives rural socialand economic development. We also participatedin the panel on leaf and sustainability during thevirtual Global Tobacco and Nicotine Forum.
Moreover, PMI’s ongoing efforts to eliminate childlabor on all farms that supply us with tobacco havebeen recognized by the World Business Council
for Sustainable Development (WBCSD). The
organization has included PMI as a “sector leader”
case study in its new toolkit on advancing humanrights policy and practice in the agribusiness sector.
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“Since the start of Step
Change, we have solidified
the approach and identified
critical enablers to address
the root causes of social
issues in our tobacco
supply chain. Improving
the livelihoods of ourcontracted tobacco
farmers is instrumental inpreventing labor abuses.
Accordingly, we deploy
initiatives to improveincome levels for ourcontracted farmers, support
women in taking an activerole in their households andcommunities, and ensure
access to clean water,
sanitation, and hygiene.”
Pedro Braga, PMI Vice President, Leaf

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
Since 2016, we have also participated in theindustry-wide Sustainable Tobacco Program.
Read more: Sustainable supply chain management

In 2019, we decided to consolidate a numberof initiatives, developed through GAP, ALP, andthe industry-wide STP to support contracted
farmers in improving their income levels andthus the livelihoods of their households. As wecontinue to expand and grow our Living Income
program, our strategy will remain to focus on
implementing more targeted, integrated, andlocalized initiatives which will best address
the needs of our tobacco supply chain.

PMI has been a Board member of the ECLTFoundation, a multistakeholder partnership thatworks to find collaborative solutions to address theroot causes of child labor issues in tobacco growing.
After 20 years of fruitful partnership, in 2020
we decided to end our ECLT Foundation Board
membership, as of 2022. This was by no means aneasy decision, yet the status and maturity of ourprograms invited us to reflect on more impactful
ways to continue making progress. In that regard,
we will allocate our resources and efforts towardfurther implementing our Living Income program,which we consider a key enabler to address
labor abuses and particularly child labor issues.

“We would like to thank the ECLTFoundation, their Board of Directors,
as well as all ECLT Secretariat members
for a tremendously successful andrewarding two-decade partnership.
We expect and look forward tocontinuing to support the Foundation’s
mission at the local level in its continued
efforts to eliminate child labor fromtobacco-growing supply chains.”

tailor and implement sustainable solutions
that can help farmers transition to sustainable
alternative livelihoods where needed.

we partnered with the local NGO, Proterritorio,
which organized 50 workshops in the different
farming communities. Around 1,370 farmers
participated (i.e., all the farmers we contracted
in the country to source tobacco from thatyear) and were provided with technical training
sessions and financial education to help them
design agricultural production projects.

“We are proud of the maturity andsophistication of PMI’s ALP program.
To share our learning and solicit
recommendations for improvement,
we publish on our website quarterly
ALP Progress Updates detailing our
experiences throughout the year.”
Massimo Andolina
PMI Senior Vice President, Operations

Mauro Gonzalez
PMI Director, Sustainable Agriculture

A gradual decrease in tobacco demand
One of the defining characteristics ofsustainability is that it provides an opportunity forthe explicit consideration of the trade-offs that are
inherent in complex decision-making processes.
As we often refer to our transformation andsustainability strategy indistinctively, tradeoffs in this regard become more evident as
our business transformation progresses. We
know that with the growth of our smoke-freebusiness there is a simultaneous decline in
our cigarette business, which translates into a
gradual decrease of demand for tobacco leaf.
This means that, in some markets, we are
reducing the volume of tobacco we purchase,or we are stopping our sourcing activities
altogether. Such change has an undeniable
impact on our contracted farmers, especiallythose whose main source of income would
traditionally derive from tobacco growing.
We are committed to addressing and, to theextent we can, minimizing the negative effectsof these trade-offs. We do this through a
dedicated assessment of the unique realities
and contingencies that define each country
or region where we source tobacco, building
an understanding of the local ecosystem to81

Philip Morris International Integrated Report 2020

In some cases, farmers are not heavily relying on
tobacco production for their livelihoods or havethe means to fairly easily switch to other crops, orthey will continue growing tobacco as suppliers
will continue purchasing their crops to fulfill othercustomers’ requirements. In other geographies,
we provide additional support to help mitigate thenegative impact of the reduction in our purchases.
For instance, as of 2021 we are stopping ourtobacco purchases in Colombia. The impact ofsuch a decision was assessed well in advance,
and, since 2018, we have been developing
and deploying a corresponding plan to help
farmers bridge to viable economic models.
More concretely, in 2018 and 2019, we funded
diversification initiatives that provided farmers
with corn seed packages and advice on the
production of vegetable crops in home gardens,
banana plantations, poultry production, andwater tanks for fish production. Furthermore,in 2019 we rolled out two other initiatives,
consisting of financial support as well as
capacity building for the farmers. On the latter,

More broadly, in the past years, we’ve
introduced together with our suppliers a range
of initiatives aimed at helping our contracted
farmers make a living income by 2025. Under
this program, we support the tobacco growers
in eliminating farming inefficiencies. We also
promote practices—such as mechanizationand irrigation technologies—that not only
allow them to improve productivity of thetobacco crop, but also help them diversify theirproduction to other crops. In the coming years,
we expect these efforts to play an importantrole in minimizing the potential negative
economic impacts our transformation, andconsequential reduction in demand of tobacco,
may have on our current contracted farmers.

“Thanks to our partnership with
Coltabaco, we completed a project
aimed to develop and increasecommercial and product related
capabilities with 1,380 farming
families, who were fully dedicatedto tobacco growing. Through thesetrainings, we identified 10 sustainable
alternative crops that would allow
the beneficiaries of the training tocount with a solid base of income
and, at the same time, continue theirdevelopment in order to increase boththeir productivity and their ability tocompete in the agribusiness sector.
Thanks to this project, as well as ourpartnership with other institutions,these farmers will be able to continue
developing to transition on toalternative sources of livelihood.”
Fundación ProterritorioOverview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
Progress in 2020
Impact of COVID-19 on our
activities in 2020

Read more

Contributing to alleviating poverty
PMI is committed to improving the livelihoodsof the contracted farmers supplying tobacco
to the company and, consequently, thecommunities in which they live. We see this as
a fundamental way to address social inequality,
as well as other issues in our supply chain.

Assessing income levels in our
tobacco sourcing markets
To be able to achieve our ambitious goal of 100
percent of contracted farmers supplying tobacco
to PMI to make a living income by 2025, we started

by performing our own analysis to help us identify
those markets where there is a gap between
the farmers’ current income levels and the living
income benchmark. Our priority is to focus ourefforts on those markets with the greatest gaps.
In order to validate the initial outcome of
our internal analysis, we approached variousorganizations with expertise in the living
income calculation field, such as the Global
Living Wage Coalition and the Living Income
Community of Practice. As a result of thisengagement, we decided to adopt the Anker
methodology, which is widely recognized toestimate living income benchmarks worldwide.
Moreover, in 2020 we started our partnershipwith Social Accountability International andthe Living Income Anker Research Network to
conduct living income studies, comprising bothliving income benchmarks and reference values.1
During the year, we ran two living income
benchmark studies in Malawi and Pakistan. Dueto the COVID-19 pandemic, we could only secure
partial results (i.e., based on secondary data only)
and, in 2021, we expect to have access to theprimary data needed for the completion of thestudies. In addition to this, we completed threeliving income reference values in Argentina,
Mozambique, and Turkey, which were used in
the design of comprehensive action plans thatwill help address the income gaps over time.
In parallel, we conducted farmer income studies
in Malawi, Mozambique, Pakistan, the Philippines,
and Turkey to assess the current income levelsof our contracted farmers. We are using local
and international partners in these countries. We
had planned to conduct a farmer income study
in Argentina; however, due to COVID-19 and thetravel restrictions, this was delayed to 2021.

“PMI has taken an important stepby using the Anker methodology,
which is recognized around theworld as the gold standard ofliving wage and income estimates.
Using such rigorous, independentstudies of the income levels
required for a decent standardof living is a critical component
for PMI if they are to credibly
achieve their target by 2025. To
date, Anker studies have been
performed in 60 locations in over
40 countries. The new studies
commissioned by PMI will not
only support PMI’s ambitious
goal for their contracted farmers,
they will be made publicly
available and add to global efforts
on living wages and income.”
Jane Hwang, President and CEO, Social
Accountability International

Calculating the living
income benchmark
Read more

A tobacco farmworker stringing tobacco leaves in Malawi

82

Philip Morris International Integrated Report 2020

1 See glossary.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
When designing comprehensive action plansin our markets, we aim to exceed the living
income benchmark targets that are required
to achieve a decent standard of living, to makea provision for potential fluctuations in farmer
incomes due to climatic shocks or volatility due
to market dynamics. We will periodically review
the living income benchmarks to account forannual inflationary increases, and revise farmer
income studies to consider market dynamics
that may impact farmers’ overall income.
The results of the third-party studies are encouraging
as they do not highlight major deviations from
our initial assumptions. This provides us with theconfidence in the prioritization of our markets as
we work toward our 2025 target.
It also showed that our contracted farmers
already make a living income in some markets,
such as Pakistan, or that a significant portion ofthem already make it in other countries, such as
Argentina, Malawi, Turkey, and the Philippines.
Globally, in 2020 48 percent of the contracted
farmers supplying tobacco to PMI were making
a living income.
We expect to further examine and act on
insights from these studies in 2021. The results
will complement our internal analysis and help
to guide our efforts and target initiatives
toward reaching our target of 100 percent
of our contracted farmers making a living
income by 2025.

“PMI has set an ambitious targetof 100% of their contracted
farmers achieving a living income
by 2025. To be able to achieve thisobjective, our Anker Living Wageand Income Research Network,
together with Social Accountability
International (SAI), have worked
with PMI to conduct living income
benchmarks and reference value
studies in their tobacco-sourcing
countries. The living income studies
will use the research methodology
we developed, which is widelyused by many leading companies
and sustainability standards. As astart, in 2020 PMI commissioned
us to estimate the living income
for tobacco farming areas in fivecountries. This will allow them thevisibility on the required income
levels for their contracted farmers
to be able to achieve a decent
standard of living and develop
strategies in those markets where
income gaps have been identified.”

Initiatives to improve livelihoods

Improving productivity

In 2020, we continued implementing various
initiatives aimed at improving income levels. Basedon our internal analysis, we focused primarily
on Argentina, Malawi, and Mozambique. Whileactivities are tailored to local realities, our overall
strategy is twofold: Firstly, on the tobacco crop
to improve productivity and competitivenessand secondly, as needed, on supporting
households to diversify their sources of income.

We focus on enhancing tobacco productionand encouraging farm efficiency. To improvehousehold income, many farmers routinely seekout efficiencies in their operations—for example,
by hiring only the labor required, making careful
use of inputs such as fertilizer, and finding ways toincrease yields per hectare. PMI supports these
efforts. Additional efficiencies include supporting
the mechanization of field preparation, which
can provide labor savings and elevate yields.

C A S E S T U DY

Advancing income levels of
farmers and farmworkers in Argentina
A fundamental step toward achieving aliving income for our contracted tobacco
farmers in the region of Misiones, Argentina
was to conduct a study assessing what theappropriate living income should be, helping
us refine our activities and further inform
our strategy moving forward. In parallel, we
promoted multistakeholder dialogue andachieved an agreement defining a minimum
wage for tobacco farmworkers in thisregion, applicable as of September 2020.
Read more online

Living wage experts Dr. Richard and Ms. Martha
Anker, Global Living Wage Coalition

A tobacco farmworker in Salta, Argentina

83

Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
For instance, in 2020 mechanization for field
preparation covered a total of 2,115 hectaresin Malawi while, in Argentina, the main focus ofactivity was on mechanized harvesting, with a totalof 3,566 hectares covered in 2020. Additionally, we
continued with improved crop storage to reduce
the potential financial loss from crops spoilingand the need for insecticides after harvest.
Supporting households to diversify
their income sources
We also look at opportunities to implement
other income-generating activities, such as thecultivation of complementary crops. Growing
and marketing a range of crops can improve farmincome while enhancing resilience against climatechange and economic uncertainty. In 2020, we
estimate that approximately 75 percent of ourcontracted farmers grew crops other than tobacco.
Of these, 53 percent were intended for selfconsumption, 10 percent were aimed at providing
additional income, while 37 percent were grown
for both self-consumption and additional income.

A tobacco farmer tending air dried tobacco
leaves in Nayarit, Mexico
1 The annual GDP per capita (USD) in Mozambique was USD 504 in2019 (source: https://data.worldbank.org/indicator/NY.GDP.PCAP.
CD?locations=MZ ).
2 The annual GDP per capita (USD) in India was USD 2,100 in2019 (source: https://data.worldbank.org/indicator/NY.GDP.PCAP.
CD?locations=IN).

84

Philip Morris International Integrated Report 2020

Our Living Income program at work
MalawiMozambique

India

In Malawi, 2020 saw the expansion of ourmechanization initiative, which aims to improve
farmer yields by mechanizing the land preparation,
which promotes better root development,
increasing water retention and allowing timely
planting. Additional benefits include a reduction
in labor hours related to land preparation,
which in turn can enable farmers to consider
increasing their total cultivated area. During
2020, 844 farmers received mechanization
services (covering 2,115 hectares covered) and
we plan to expand this coverage year on year.

In Mozambique, a key focus area during 2020
was the development of a cotton supply chain
in collaboration with an international retailer.
Around 80 farmers were contracted for cotton
production in 2020, and the quality results
conducted during buying exceeded the initialproject expectations. The 2020 production has
been ginned and will be shipped to spinners
early 2021. We plan to expand this programto 275 farmers for the 2021 season.

Most farmers in Vinukonda, Andhra Pradesh,
India are smallholders with an average tobacco
cultivated land area of below 1.5 hectares.
The weather patterns (drought and rainfall
seasonality) have in the past prevented thesefarmers from implementing a sustainable crop
rotation cycle. Without intervention, they only
have one crop window per year, which leaves
the community struggling to alleviate poverty.
This, in turn, aggravates potential social issues
such as child labor and poor living conditions.

Together with our suppliers, we continued toencourage the production of complementary
crops and other income-generating activities.
2020 saw a significant increase in the coverageof groundnut contracting, with 30 percent of the
farmers within the PMI footprint contracted forgroundnut production. The quality of available
groundnut seed has historically proved to bea challenge in the successful cultivation of
the crop; however, during 2020 our suppliers
produced significant volumes of superior quality
seed on their own commercial farms, which
will be provided to smallholder farmers whoshould in turn realize improved germination
rates and yields during the 2021 season.

We started in 2019 an initiative to installtreadle-pumps, aimed originally at reducing therisk of having children involved in the wateringof seedbeds. However, we identified that thisinitiative proved valuable in assisting farmers in
the production of winter crops as well, resulting
in an improvement in their incomes. During 2020,an additional 1,760 farmers were provided withtreadle-pumps, winter-crop inputs, and a sixmodule winter-crop training program. An impact
assessment conducted during the year indicatedthat these treadle-pumps contributed to an
additional USD 300 to 400 profit per farmer per
year on average by allowing them to grow twocycles of winter crops during the dry season.1

We are working with our tobacco leaf supplierin the country and local organizations to
implement improvements, targeting root causes
and factors that impact farmers’ livelihoods.
For instance, it is essential for farmers to haveaccess to a reliable water source for irrigation to
face droughts and mitigate rainfall seasonality,
and to allow them to grow an additional cropduring the year. Between 2016 and 2018, 86
reservoirs, to provide water for 600 hectares ofland, were built. Farmers now harvest additional
crops during tobacco off-season (in March andApril), generating an additional annual income
ranging from USD 825 to 2,000 per farmer.2
We also supported farmers’ expansion tocomplementary crops. Among a set of crops
trialed, guar, a legume, was introduced to 11
farmers in 2020. PMI provided free seeds andcrop inputs, as well as technical training. So
far, farmers have benefited from an additional
annual revenue of over USD 1,600 per farmer
on average. Building on the success of thetrial, in 2021 we plan to expand the guar
project and are looking at other potential
crops to cover an additional 140 farmers.

Beekeeping was highlighted as an initiative that
could provide farmers with an additional income,with minimal labor and land requirements.
In 2020, we expanded the project by anadditional 300 hives, taking the total hives to910. One of our local suppliers has received
Malawi Bureau of Standards approval to start
processing the harvested honey and marketingthe product both locally and internationally.

Beekeeping, part of diversification efforts in MozambiqueOverview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
Enhancing access to water,
sanitation, and hygiene
While substantial progress has been made inincreasing access to clean drinking water andsanitation, billions of people worldwide—mostly
in rural areas—still lack these basic services.
The link between poverty and limited access towater, sanitation, and hygiene (WASH) is wellestablished, and enhancing WASH infrastructure
can provide substantial improvements to both
the well-being and livelihoods of community
members. The COVID-19 pandemic has also
further demonstrated the critical importanceof sanitation, hygiene, and adequate access toclean water to prevent and contain disease.
In 2020, we strengthened our approachand committed to ambitious targets: We
aim for 100 percent of our contracted
farmers to have basic water access by 2025
and sanitation and hygiene by 2030.
To set those targets and develop our framework,
we aligned with the Joint Monitoring Programme
for Water Supply, Sanitation, and Hygiene (JMP)
established by the World Health Organization(WHO) and UNICEF.1 Our WASH program isfollowing JMP’s service ladder, which starts withbasic water access defined as from an improved
source and less than 30 minutes away. Currently
many of our farmers are using unimproved
sources, often more than 30 minutes from theirhome, which means that the next few years
will be focused on monitoring WASH access,mapping water source locations, and building new
infrastructure (or improving existing infrastructure)
where needed. In 2020, we also developed global
WASH Monitoring Guidelines to standardize
our approach (again connecting with JMP) andhave shared these with our suppliers. In 2021,
we will collect WASH data through farm-by-farmmonitoring in the field, applying JMP’s universal
indicators to determine our final WASH priority
markets, setting a baseline for each of them.
During the year, together with our suppliers,
we continued the work started in 2019 in our
two preliminary priority countries, building
47 hand-pump boreholes in Malawi and 50 in
Mozambique—with each borehole estimated tobenefit approximately 500 people in Malawi and
1,000 people in Mozambique —while continuing toraise awareness around WASH among community
members. The economic benefits of improved
sanitation can include increased productivity,
reduced healthcare costs, and the preventionof illness, disability, and early death. People
who have access to clean, safe, and convenient
sanitation services also experience greater
dignity, privacy, and security. This is especially
important for women and girls, who may misswork or school when they are menstruating anddo not have access to safe sanitation facilities.
It also reduces the risk of sexual assault by
reducing the walking distance to water sources.
Read more in our Q3 2020 ALP Progress Update

Empowering women in tobacco farming
Around the world, women participate in agriculture
both as members of family farming households
and as hired wage labor on farms owned andoperated by other households or companies.
Agriculture remains the primary source of
livelihood for both men and women living in rural
areas in developing countries. Globally, only 13
percent of agricultural land is owned by women.2
Many of the gender inequalities faced by womenare exacerbated for women in agriculture. Moreconcretely, women involved in tobacco farming
often face structural and cultural barriers such as
employment segmentation and gender gaps inearnings, financial inclusion and access to credit,
ownership of land and property, and opportunities
to receive training or technical support. Women
typically also have to balance their financial
contribution to the household with domestic
responsibilities, which puts additional constraints
on their time, and too often they still lack theauthority to manage the income generated fromthe crops they produce. Additionally, girls tend tohave higher school dropout rates, reinforced bygender norms that limit their possibilities. To breakthis cycle and overcome the dropout problem,
policies need to be put in place and enforced,
improving educational access and retention while
simultaneously reducing gender inequality.
Since the inception of our ALP program, genderequality and fair treatment have been included
as key principles in all the countries where wesource tobacco. Gender equality is not only
a fundamental human right but a necessary
foundation for a peaceful, prosperous, andsustainable world. When we evolved our ALP
program to include a Step Change approach in2018, our objective was to address the root causesof the most prevalent and persistent issues in our
tobacco supply chain. We saw an opportunity
1 WHO/UNICEF Joint Monitoring Programme for Water Supply,
Sanitation and Hygiene (JMP).

A field technician in Nayarit, Mexico

85

Philip Morris International Integrated Report 2020

2 Report Of The UN Secretary-General’s High-Level Panel On Women’s
Economic Empowerment.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
to strengthen our approach, considering the
instrumental role women play in improving
household economic conditions, while also
addressing child labor and other social challenges.
We included women’s empowerment as one of
the 10 principles of our Step Change approach.
Based on local needs, we are developing targeted
initiatives in several priority countries.
Our activities include conducting focused
women’s training, hiring female field technicians
to perform farm-by-farm monitoring, financial
literacy training, and empowering women throughentrepreneurial opportunities to bring positivechange to their households and communities.
A representative example of our work on women’s
empowerment is found in India. Alongside thelocal NGO, ASSIST, we support Self Help Groups(SHGs) developed by local government. In 2020,
we rolled out a project with the aim of building
entrepreneurial capabilities of 200 women,
members of the SHGs, by training them on
financial and organizational skills. ASSIST uses a“train the trainer” approach equipping selected
women with knowledge to empower and trainothers after them. Some 100 women from 11
SHGs, after having received training, have been
selected to set up their own microbusinesses; theseinclude dairy farms and grocery stores. In turn,they will support the funding of microbusinesses
for 100 new beneficiaries, creating a positive
domino effect. The approach is that all womenparticipating in the project are committed tosupport other women within the community
by donating a portion of their profit to ensure
continuity, reach, and greater impact. In 2021,
we plan to train an additional 200 women who
can in turn further cascade their knowledge andprovide funding for 100 additional women.
Read more in our Q1 2020 ALP Progress Update
1 In Lebanon, we source through the state-run tobacco monopoly and do
not receive granular information at farm level. In Switzerland, where wesourced from around 120 farmers in 2020, we aligned requirements withpeer companies to apply deeper ALP monitoring to be included in our
2021 reporting.

86

Promoting PMI’s Agricultural
Labor Practices
In 2020, field technicians contracted either by PMI
or by our leaf suppliers systematically monitored
the implementation of ALP on 93 percent of allcontracted farms (2019: 92 percent). We arecommitted to continually strengthening ourmonitoring to improve our visibility of existing
issues, to taking a more risk-based approach,and to more effectively address identified
issues. Our farm-level data cover 21 out of the
23 countries from which we source. It excludes
Lebanon and Switzerland1 but accounts forincreased coverage of our ALP program in China.
Across the countries from which wesource tobacco, the most recurrent anddifficult problems are as follows:• Work performed by children• Inadequate and unsafe accommodation
for farmworkers• Payment to workers below the minimum legal
wage or formalized agricultural benchmark• Inadequate access to PPE that can prevent
harm from exposure to CPA and GTS
We have developed and are implementing
action plans to address these recurrent issues
in collaboration with key stakeholders, including
our strategic partner Verité, local NGOs, andgovernments. While Control Union was able to
finalize its assessment in Argentina (covering
two suppliers) early 2020, due to COVID-19
no additional external assessments wereconducted during the year. However, local expert
organizations were able to complete externalverification in some priority countries. Externalverification allows us to evaluate the effectivenessof our initiatives and the accuracy of our internalmonitoring. In 2020, we completed externalverifications in seven markets: Three where we
conducted an external verification for the first time
(India, Malawi, and Mozambique), and four where
we did it for the second time, in order to assess
progress (Argentina, Indonesia, Mexico, and Turkey).

Philip Morris International Integrated Report 2020

Furthermore, in 2020 we conducted a humanrights impact assessment in Mozambique, thefirst one targeted on our tobacco supply chain,in collaboration with a peer company and ourcommon tobacco leaf supplier. This assessment
focused on identifying and addressing humanrights risks and impacts resulting from our
production and supply chain activities there.
Read the case study

The overwhelming majority of our relationships
with contracted farmers feature a sharedcommitment to continuous improvementin addressing social issues. In the event of
a contracted farmer’s noncompliance and acontinued failure to address gaps identified,
we may end our business relationship with that
farmer. In 2020, 1,794 contracts were terminated

due to ALP violations (up from 641 in 2019).
Some 83 percent of the increased number ofcontract terminations in 2020 was due to childlabor violations, predominately coming from
Mozambique and Turkey. The increase canbe attributed to the introduction (in 2019) ofstandardized guidelines related to due diligence,
consequence management, and rewards.
To further support compliance, in 2020 we
reviewed our ALP training materials (including
some developed locally) and delivery methods.
In terms of content, our objective is to update
the training materials to align with changes on
the ALP code, reflect changes driven by our
Step Change approach, and bring consistency
across sourcing markets. When it comes todelivery methods, we are exploring options andpotential solutions accessible to all people working
within our ALP structure, including suppliers’
relevant personnel and field technicians.

Total prompt actions recorded by field technicians (2018–2020)

Total:
18,543

Total:
14,440Total:
14,751

<1%
8%

<1%
11%

19%

16%

73%

73%

1%
25%

74%

Safe working environment issues
Child labor
Income and working hours
Other

2018

2019

2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
Eliminating child labor
In 2020, we maintained a relentless focus on
preventing incidents of child labor. Our robust due
diligence system allowed us to identify risks andincidences of child labor and take immediate action.
Our ambitious goal is to eliminate child laborby 2025. Our objective is to eradicate casesthat are repetitive and systemic in our tobacco
supply chain. We also acknowledge that isolatedcases (even when systemic occurrences are fully
addressed) might continue occurring, due tofarmer base turnover or unintentional misbehaving
incidences. We will, in all cases, remain alert
and tackle them promptly when identified.
The COVID-19 pandemic and the restrictions
introduced in several sourcing countries
unfortunately impacted our initiatives and relevant
child labor remediation actions. Nonetheless,a key focus was to ensure that there would be
no increase in child labor prevalence due toschool closures and economic slowdown.
First of all, our field technicians, where possible,
continued performing farm-by-farm monitoringand supporting farmers to address andremedy child labor incidences. Such support
included awareness-raising and training (often
redesigned to be delivered virtually); efforts topromote school access and attendance throughscholarships, school feeding programs, afterschool activities, and improvements in school
infrastructure; vocational training for older
children; and initiatives to improve householdincome levels such as women’s self-help groups.
In markets where community initiatives, key topreventing child labor, could not be implemented
due to restrictions, programs have been redesigned
and funds reallocated to ensure continuous

87

support to children and their families. For example,
in Mexico, PMI-funded migrant childcare centerswere closed due to the pandemic. In response,and in partnership with our supplier and a local
implementing partner, we delivered food baskets
to more than 180 migrant families reaching over
370 children that could not attend the centers.
A similar approach was taken by our team inIndia, where food baskets were provided to over
800 families who were under full lockdown.
Our progress toward our target of zero child laboris measured based on internationally defined
ILO standards. It includes the following three
categories: Children performing hazardous tasks,
children under 15 hired, and children under 13
doing any tobacco related tasks. In this respect, in
2020 we enhanced our reporting on child labor
issues by expanding its scope to include the latter
two categories. During the year, field techniciansmonitored 99 percent of farms for child labor
related issues and recorded a total of 2,352 prompt
actions. Out of that, 2,285 cases involved children
performing hazardous tasks (versus 2,712 recorded
in 2019), three cases of children under 15 hired,and 64 cases of children under 13 working. In total,
these prompt actions involved 2,502 children, with
95 percent of them being the farmers’ children.
A significant proportion of child labor incidents(1,560 prompt actions) were recorded in Turkey
across a farmer base of around 23,600 farms.
These involved 1,692 children, of which over 99
percent were family members. The predominant
activities performed by these children were
harvesting or handling green tobacco and stringing.
Regarding prompt actions raised for children
performing hazardous tasks, there is a reduction
from 2019 figures mainly driven by farm baseconsolidation efforts conducted in Mozambiqueand Malawi. Of the 2,352 prompt actions
recorded in 2020, 75 percent were resolved andPhilip Morris International Integrated Report 2020

Types of prompt actions recorded in 2020 relating to hazardous work performed by children

Harvesting or handling green tobacco

49%

Stringing

26%

Working with sharp tools

9%

Carrying heavy loads

4%

Driving a tractor or operating machinery

3%

Working in extreme temperature3%

Handling or applying fertilizer

1%

Other

5%

Total number of child labor prompt actions recorded, by geography

Turkey1,560

Mozambique

336

Malawi238

Macedonia

57

Greece37

Pakistan

29

Indonesia

26

Other

69

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
the remaining 25 percent were being followed
up against the action plans developed withconcerned farmers. This is a decline from theprevious year, mainly due to local initiatives
impacted by COVID-19 restrictions. The mostcommon hazardous tasks our technicians foundchildren doing were harvesting or handling green
tobacco (49 percent), followed by stringing (26percent) and working with sharp tools (9 percent).

Despite this decreasing trend, we remain cautious
and acknowledge the limitations of our monitoring
system. For example, field technicians are only
present on the farms for a limited time during thegrowing season, and the COVID-19 pandemic
restricted their ability to conduct regular visits insome countries (read more: Sustainable supply
chain management). Moreover, the issues
we face are complex and often persistent.

In many geographies, external assessments related
to child labor are reasonably well aligned with
our internal monitoring data, which show that
we are enhancing the visibility on the groundand the accuracy of our data. However, in two
countries, Mozambique and Turkey, significant
discrepancies were revealed. In those instances,
we focused on engaging with our suppliers,
understanding the causes of discrepancies, anddeveloping and implementing action plans tostrengthen the internal monitoring. More concretly,
we increased the number of unannounced visits
performed by ALP supervisors, strengthened
the due diligence and consequence management
process, and reinforced internal capacity on
ALP monitoring and reporting while introducing
in-depth data analytics. Both countries willreconduct external verification in 2021.

Zero child labor
Our target to eliminate child labor by 2025 isambitious. We have put all the foundations inplace to be able to achieve it on time: A robust
farm-by-farm monitoring system, a networkof field technicians and ALP experts, external
assessments verifying our data accuracy, and arange of stakeholders supporting us in this journey.
We are dealing, however, with a very complex
societal issue, especially present in some of oursourcing markets. In order to increase the accuracyof the instances of child labor prevalence in ourreporting, we developed a new methodology
integrating results from third-party verification as
well as external sources (e.g., country human rights
records). This supports our risk-based approachand provides us with country-level granularity on
this specific topic. Based on this exercise, we feel
confident that in most of our sourcing countries,
child labor is not a systemic issue and we arecontinuously working to eliminate the remaining
prevalence of 3.5 percent. We will maintain arelentless focus on further strengthening thereliability of our monitoring data, as well as theremediation steps to support farmers and workers
to address child labor incidents in a sustainable way.

A school in Misiones, Argentina

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Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continued
Promoting a safe working environment
In line with PMI’s ALP Code, we require
farmers to provide a safe workplace to prevent
accidents and injury and minimize health risks.
In 2020, field technicians recorded a totalof 10,816 prompt actions relating to unsafe
working environments (2019: 10,519). Around
52 percent related to handling green tobaccoand applying CPA without the proper PPE(34 and 18 percent, respectively), followed
by 23 percent related to unsafe or insufficientaccommodation for farmworkers.
Our internal monitoring data over the past few
years revealed that a significant proportion of
the prompt actions raised by field technicians
pertained to exposure to green tobacco sickness
GTS or to CPA due to the farmers and workers
not wearing the proper PPE. To address thisissue, we committed that 100 percent of ourcontracted farmers and their workers would
have access to PPE for the application of

CPA and prevention of GTS by 2020. During
the year, our monitoring on PPE availability
confirmed the achievement of the 2020 target.
Having achieved our target, we will continue
ensuring full availability of PPE across the markets
and raising awareness on the importance ofappropriate PPE usage. Acquiring the fundamental
understanding of the hazards of certain tobaccotasks and driving behavior change toward
appropriate PPE usage is key to safeguard thehealth and safety of those involved. In 2020,
our targeted training reached 99 percent ofcontracted farmers (and their workers).
In 2021, we will establish our baseline in termsof PPE usage and, based on the outcome,we will define our target—as our goal is toensure that PPE is not only available but also
appropriately used by farmers and farmworkers.

Exposure to GTS due to not wearing PPE

34%

Unsafe or insufficient work accommodation

23%

CPA stored in a way that could causea health and safety accident

22%

Thinking ahead, we already reinforced ourrequirements by issuing a set of global minimum
accommodation standards to be implemented
across all sourcing markets. This was the resultof an extensive mapping exercise between local
practices in all sourcing markets and relevantinternational standards. Additionally, following
the commitment related to our Water Access,
Sanitation and Hygiene (WASH) program, relevant
requirements have been included in theseguidelines. This approach brings not only better
standardization and consistency but will further
enhance the living and working conditions forfarmers and workers. In 2021, we will roll out these
new standards to our tobacco leaf suppliers.

Exposure to CPA due to not
wearing proper PPE

18%

Minimum wages for workers

Other

3%

We also continued our work regarding
accommodation. In 2020, around 8 percent of
the total farmer base provided accommodation

Types of prompt action recorded in 2020 relating to safe working environment issues

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Philip Morris International Integrated Report 2020

to their workers. In line with the ALP Code, whena farmer provides a worker with accommodation,
we require it to be clean and safe and meet basic
standards. We developed our accommodation
standards in line with local legislation, withguidance from Verité and local partners. Field
technicians monitor against these lists and whenissues are identified, for example the window isbroken or waste is improperly thrown out, action
is taken. Specific action plans are agreed directlywith the farmer and, when needed, together
with our suppliers, we support with the provisionof construction materials, refurbishments, andrepairs. By the end of 2020, 100 percent offarmworkers receiving accommodation had been
provided safe and adequate accommodationthat met the above-described standards.

Income earned during a pay period, or growing
season, should be enough to meet workers’
basic needs. Our ALP Code requires that thewages of all workers (including temporary, piecerate, seasonal, and migrant workers) meet—at aminimum—the national legal standard or formalized
agricultural benchmark standard. In a typicalcrop year, less than a third of contracted farmers
supplying PMI or its suppliers (over 100,000
farmers) hire workers throughout the season.

In 2020, our monitoring on wages covered 92
percent of contracted farmers in our tobacco
supply chain. In 2020, 65 percent of farmworkers
were paid at least the minimum wage. Field
technicians recorded a total of 1,541 prompt
actions related to farmers paying less than theminimum wage to their workers (2019: 1,158).
The increase in prompt actions is mainly due
to more accurate monitoring and reporting ofcases. The issues are most commonly found in
India, Indonesia, Mozambique, the Philippines,
Turkey, and the Misiones province in Argentina.
The challenges relate to not only substandard
payment amounts but also informal terms of
employment, inconsistency between supply anddemand of labor, and workers’ lack of knowledge
on their rights. Another challenge we face in somecountries is the lack of applicable legal minimum
wage or formalized agricultural benchmarks. Readthe example of Argentina in our case study.
Improved visibility on workers’ wages via ourmonitoring system enables us to take steps totackle the issue and ensure farmers pay therequired minimum wage. We reiterated our
expectations to farmers on this matter, in linewith local laws. We also equipped farmers andworkers with tools—such as time-recording
templates and payment records—to help themtrack work hours and calculate payments inline with the minimum wage, a task that canbe challenging when piece-rate payments orpartial in-kind payments are the norm.
In countries where the pay gap is significant, we
provided financial literacy training to farmers
and supported them in improving their farm
productivity and efficiency—and, thus, their overall
incomes—to better position them to pay theminimum wage to their workers. A key componentof this effort is helping farmers manage their costs
responsibly by only hiring workers when necessary
and according to their land size. In Mozambique,for example, our supplier ran an awarenesscampaign on over-hiring that discouraged farms

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities continuedof 0.67 hectares and below from hiring full-timeworkers, which resulted in a 60 percent reduction
in farms hiring full-time workers in this category.
In certain geographies, there are important
challenges to formalizing minimum wages. For
instance, in India, where a national minimum wage
is a challenging issue, our third-party assessment
showed that several farmers were paying below
the minimum wage and that women workers
often were paid less than men for the same
type of work, in clear violation of the ALP Code.
Informality of labor employment has been one of
the biggest challenges in enforcing compliancewith the national legal minimum wage. Workers
are commonly hired for certain tasks and they arepaid through different payment terms such as daily
payment, volume based, and piece rate. And it iscommon that farmers and workers agree on a fee,
which, although in line with prevailing community
rates, is often lower than the legal minimum
wage. To understand better the complexity ofthis issue, in 2020 we conducted a desk researchwith the support of twentyfifty, a human rights
and business consultancy. The objective of thisresearch was to understand the factors influencing
the wage-setting mechanism in the agricultural
sector through stakeholder engagement ofdifferent companies and organizations. The key
finding from this benchmarking exercise is thatawareness, lack of documentation of wages, andenforcement of national minimum wage are still
weak. Furthermore, we expect that our efforts topromote a living income for our contracted farmers
will in turn help advance income levels for theirworkers. Our main focus in that regard will be toincrease farmers’ efficiency and productivity. We
will also explore the introduction of mechanization
for different tobacco stages. On top of that,given the vulnerability of women in the rural
economy, we also developed projects on capacity
building and financial training, as well as self-helpgroups that work with existing governmental
programs and microbusiness initiatives.

90

Next steps
In 2020, we reached important milestones,
achieving two ALP Step Change targets:• 100 percent of contracted farmers
and workers having access to PPE• 100 percent of tobacco farmworkers provided
safe and adequate accommodation
We will continue to work toward achieving
our 2022 and 2025 targets.
2021 marks the 10th year anniversary of
PMI’s ALP program. We plan to celebrate
the progress and achievements of our ALP
program, publishing a dedicated report. We
will continue publishing quarterly Progress
Updates on specific topics or countries.
We will continue to strengthen our monitoringof the implementation of our ALP Code andimprove our effectiveness and consistency inresponding to identified issues. We will pilot
our newly developed learning framework tofurther build capabilities and understanding of
our requirements among field technicians andwithin the ALP community. In addition, we willconduct external verifications in Argentina,
Mexico, Mozambique, Pakistan, the Philippines,
and Turkey. We also expect Control Union to
conduct assessments in China and Indonesia in
2021—if pandemic-related conditions allow.
Most importantly, as we continue to expand
our monitoring of child labor incidents beyond
hazardous work, we will aim to also analyze theimpact of our initiatives using indicators developedwith our expert partner Verité. This will allow
us to further refine our work on child labor, safe
working environments, and minimum wages.

Philip Morris International Integrated Report 2020

2020 performance highlights
We expect to issue a revised version of ourmonitoring guidelines on Step Change priority
areas, as well as new guidance on WASH. These
will be shared with our suppliers and will bringfurther consistency, clarity, and standardization.
In 2021, we will also develop a WASH training
video to raise awareness among our fieldtechnicians and farmers about what “WASH”
stands for, how it impacts their health and wellbeing, and why PMI will be continuously monitoringwater access, sanitation, and hygiene. This video
will be shown on a tablet to farmers in the field andwill be available in multiple languages for easiest
understanding. We will continue strengthening our
WASH program on the ground, and specificallyin Malawi and Mozambique, where we will start
focusing on rehabilitating unusable boreholes.
A key focus for 2021 will be to continue
implementing our strategy to ensure that
contracted farmers achieve a living income,drawing on insights from the living income
studies and farmer income surveys conducted in2020. In 2021, we will continue to expand thegeographies to perform living income studies, bycovering the Philippines, India, Greece, Mexico,
and Brazil. In addition to this, we will initiate
third-party farmer income studies in Argentina
and Mexico while continuing to strengthen andmonitor our internal analysis of farmers’ incomes.

See our performance metrics

48%

Of contracted farmers whomake a living income100%

Of farmers and farmworkers having
access to personal protective equipment
for CPA application and GTS prevention

3.5%

Prevalence of child labor among farms
contracted by PMI directly or by PMI’s
tobacco suppliers

100%

Of tobacco farmworkers provided
with safe and adequate accommodation(when applicable)

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Health, safety, andwell-being at work
An environment that keeps everyone safe and protects the well-beingof all is a prerequisite for productive work. We are committed to providing
a safe and secure working environment for all employees, contractors,
and visitors. Our responsibility doesn’t stop at the factory gate; we expect
our suppliers and tobacco growers to keep their workers safe, too.
Read more

The right thing to do

The business case

By ensuring that all people who work with us
enjoy a safe and healthy work environment,
and by paying attention to their physical andmental well-being, we can positively impact
their lives beyond their time spent at work.
In addition to the benefits that provides to ourcompany and our people, it helps to lessen
demands on national healthcare systems.

Maintaining a happy, safe, and healthy workplace
isn’t just good for employees, it is also good for ourbusiness; happy workers are more engaged, moreproductive, and more likely to stay at the company.
Promoting a safe and healthy working environmentis therefore key for PMI and our business. Making
sure that our employees are mentally well, sociallystimulated, and physically safe is every bit asimportant as looking after their financial security.
It helps manage operational costs and foster aculture that attracts and retains great people. In
short, implementing strong health, safety, andwell-being management creates and protects value.
It boosts morale, fosters teamwork, increases
productivity, reduces absenteeism, increases job
satisfaction, and strengthens engagement. A highly
motivated, dedicated, and productive workforce isthe key enabler of PMI’s business transformation.

Our aim<0.3

Total recordable incident rate for
employees and contractors by 2025

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

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Philip Morris International Integrated Report 2020

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Health, safety, and well-being at work continued
Achieving our aims
We aim for a workplace that promotes the health,safety, and well-being of our workforce. We haveembedded clear methodologies, procedures,and robust controls in our factories, offices,and fleet aimed at ensuring our employees
and others who are on PMI sites stay safe.
Working conditions at PMI are governed by our
Guidebook for Success (our code of conduct)and our health, safety, and security principles andpractices. PMI’s Global Head, People & Culture
and Senior Vice President, Operations oversee thecompany’s strategy and performance in this area.
The health and safety of employees andcontractors is covered by our management
systems, which are based on recognized guidelines
and standards, including ISO 45001, and assessed
and audited internally and externally. Thesesystems enable us to monitor health and safety
performance across all our manufacturing facilities,
offices, and in our fleet. We routinely update ourstandards and train our staff to ensure teams
understand and align with the requirements.
We conduct risk assessments to identify
hazards and implement necessary controls.
Our corporate targets on incidents help us
evaluate the effectiveness of our safety
policies and programs. Our health and safety
metrics are externally verified by SGS.
See the External Verification Statement of ourenvironmental and health and safety data

Our training programs, delivered in a rangeof formats, cover all aspects of health andsafety, including risk assessment, safety
management, incident investigation,and standards and procedures.
Health and safety in our factories is coordinatedcentrally by our Global Manufacturing team. At
site level, each facility has a dedicated team that
ensures the standards are met on the ground.
Team members constructively challenge their peers
and benefit from cross-auditing by colleagues
at other sites. All incidents in our manufacturing
operations are subject to in-depth root cause
analysis, and we apply the same thoroughapproach to all contractors in our manufacturing
facilities. We use behavioral observation systems(BOS) in our factories to instill a culture in which
everyone involves themselves in openness,care, observation, and behavior reinforcement.
We advance this culture change throughcommunication with employees and safety alerts
or notice boards. Every person’s contribution
counts—a fact we recognize through awards
and other means of acknowledgment. Through
BOS, we are further embedding safety into the
DNA of the organization in a planned, structured,and standardized way. It will make a significant
contribution to delivering on our safety ambition.
Yearly, we conduct assessments to evaluate
our sites’ safety culture level and we survey
employees to identify improvement opportunities.

progress. PMI’s fleet safety management systemcovers risk assessment, driver training, vehicle
safety, and driver behavior; our procurement
policy ensures maximum safety features in fleet
contracts. In our fleet operations, our target is to
reduce high-severity collisions, with an ongoinggoal of eliminating fatal accidents completely.
We are committed to a holistic approach tosupporting employee well-being that addresses
physical, emotional, and mental health. We
provide employees with a range of healthcare
options tailored to local needs and contexts.
Many teams across PMI manage and contributeto employees’ health and well-being at the local

We allocate a total of over 160 people to manage
security and market safety, including safety for our
fleet of around 23,000 vehicles, led by our global
Head of Security and Market Safety in coordination
with local fleet safety committees. These personnel
run safety programs, training, and engagement
at the country level, using fleet diagnostics andperformance indicators to continually evaluate

An employee in PMI’s manufacturing facility in Izmir, Turkey

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Philip Morris International Integrated Report 2020

country or site level, including occupational healthand safety and human resources specialists. While
this approach allows the design of well-being
support by and for local needs, it is somewhat
fragmented and inconsistent. In 2020, we began
moving to a more centralized approach, forexample introducing a global approach to Employee
Assistance Programs, flexible work options, andparental leave. In 2021, we will bring accountability
for a global holistic well-being roadmap made undera newly appointed Global Head, Health & Resiliencerole, reporting to the Chief Diversity Officer.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Health, safety, and well-being at work continued
Progress in 2020
Impact of COVID-19 on our
activities in 2020

Read more

0.12

Total recordable incidents
rate in 2020 (employees,
contracted employees,
and contractors)

Health and safety performance
Our health and safety performance monitoringcovers both PMI employees and contracted
workers who are under the direct supervision of
PMI but employed by a temporary employment
agency (we had around 7,000 contracted
employees per month in 2020). We also seek
to continuously improve our monitoring ofcontractors when present on PMI premises.
In 2020, across our factories, offices, and fleet,
our lost time incident rate (LTIR) for employees,
contracted employees, and contractors was 0.08
(2019: 0.14). More specifically, it was 0.07 (2019:0.12) for employees and contracted employees
and 0.12 (2019: 0.23) for contractors. We do not
set targets on lost time incidents, because wewant to handle every single accident with the samelevel of importance, analysis quality, and mitigating
actions regardless of whether or not the accidents

involve lost time. We address equally all types of
injury happening to all people in our premises—
employees, contracted employees, and contractors.
Our total recordable incidents rate (TRIR) was 0.12
(2019: 0.22)—which breaks down into 0.11 (2019:0.20) for employees and contracted employees and0.16 (2019: 0.32) for contractors.
Our LTIR and TRIR rates improved versus 2019,
thanks to the strong commitment of our senior
management, continued training and capacitybuilding, and a heightened safety awareness acrossthe organization.
We are proud of the progress made to date but
remain cautious, as exceptional circumstancesin 2020 driven by COVID-19 have positively
impacted figures. We will keep strengthening ourmonitoring and remain committed to achieving a
TRIR below 0.3 by 2025 in a sustainable manner.

Top seven direct causes of injury in 2020

Fleet crash20%

Cut by a sharp object

15%

Slip, trip, or fall on the same level

11%

Caught/trapped in, under, or between

An employee in PMI’s manufacturing facility in Guadalajara, Mexico

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Philip Morris International Integrated Report 2020

10%

Impact with something ﬁxed or stationary

7%

Injury through manual handling or lifting

7%

Contact with moving machinery7%

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Health, safety, and well-being at work continued
Working with contractors

Safety in manufacturing

Focus on fleet safety

Contractors are workers who are employedby or work on behalf of a third-party company
contracted by PMI but who remain under
the direct supervision of their employer.
Typically, such workers are involved in projectspecific or outsourcing arrangements.

External certification helps us continuously improveand drive efficiency. In 2020, all our factories
producing the equivalent of more than threebillion cigarettes annually achieved certification to
ISO 14001 and ISO 45001. The global multisite
certification process included third-party auditsof a sample of our sites, demonstrating that bestpractices are embedded across all our factories.

Driving presents a risk to employees at PMI. We
have around 23,000 cars on the road, covering
around 370 million kilometers a year. The safety
risks faced by our sales and distribution personnel,
especially those at the wheel, are exacerbated inregions where road conditions can be hazardous.
Road traffic accidents affect not only PMI staff
but also the public, so fleet safety management is
a top priority. During the year, we reinforced our
fleet safety management system, strengthening
our procedures and standardizing our incident
reporting. We continued to engage fleet safetycommittee teams at each of our affiliates,

The contractors with whom we work are employedby companies with varying approaches andrequirements related to health and safety.
We had on average around 17,000 contractors
per month in 2020, across our global organization.
Their work typically includes specific projects(such as machine installation or construction),
facility management (such as building
maintenance), logistics (such as transportation
and administration), or services such as canteensand medical centers available on PMI premises.
In 2020, our Health & Safety and Procurement
teams reviewed our standards to further define
health and safety requirements and performancemeasurement for contractors working on PMI
premises. Moving forward, these more detailed
measures will strengthen our reporting as we
remain committed to achieving a TRIR of less than
0.30 for employees, contracted employees, andcontractors by 2025 in a sustainable manner.
Although in previous years we had a zero-trend
related to market fatalities, it is to our deep
regret that we endured one market fatality in
2020, involving one of our contractors. The
accident occurred during market field activities
in Indonesia, involving challenging circumstances
related to non-compliance with basic work-atheight safety standards. Detailed investigations
have been carried out to understand root causes
and identify ways to prevent such occurrencesin the future. The lessons learned include
process improvement in contractor management
specifically for raising risk awareness regarding
work at height and safe usage of ladders.

In our manufacturing facilities in 2020, our LTIR
for employees and contracted employees was
0.07 (2019: 0.06). Our TRIR was 0.13 (2019:0.17). Including contractors in the scope, our
TRIR was 0.14, a decrease from 0.2 in 2019. No
employee, contracted employee, or contractor
fatalities occurred in our factories in 2020.

composed of the head of local management andrepresentatives of relevant business units.
The challenges we face in delivering safe
working conditions relate to road conditions, law
enforcement, and driving culture. Drivers almost
always work alone, and we recognize that they
may be under stress at times. Technology canhelp manage these risks, and we use telematics
to monitor driver behavior to improve safety
and efficiency. By the end of 2020, around 35
percent of our vehicles were equipped withtelematics, and we plan to have all working
tool cars equipped by the end of 2023.

Following the deployment of behavioral
observation systems (BOS) in 2019, we continued
in 2020 to reinforce an “active caring” approach
aimed at focusing employees’ attention on
daily safety behaviors—their own and those ofcolleagues. Drawing on peer-to-peer observations,
BOS allows for data-driven decision-making andhelps us evaluate and improve our health andsafety strategy. We continued engaging employees
and delivering training on BOS to shop floor teams,
supervisors, and high-level management acrossall our factories. Globally, we engaged over 90
percent of employees in our manufacturing sites
in BOS in 2020, and they conducted an averageof nine observations per employee every month,contributing directly to improvements in our TRIR.
Learning and data from BOS help us adjust our
initiatives and inform our strategy. We plan todigitalize the system in 2021, which will allow us tobetter understand the causes of unsafe behaviors
and better tailor our prevention programs.

An employee in PMI’s Indonesian affiliate, Sampoerna, conducting a fleet safety assessment in Sukorejo, Indonesia

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Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Health, safety, and well-being at work continued
In 2020, globally, we reduced collisions per
million kilometers driven, achieving 0.53 (2019:0.87), continuing the positive trend of the pastseven years (2014: 1.8). We must consider the
COVID-19 impact in 2020 as a contributing factor,
which additionally mitigated collision exposure
risk, and we have improved our target, aiming tomaintain our collision rate below <0.65 by 2022.
Although we continue to reduce collisions, it is
to our deep regret that we endured road traffic
fatalities in 2020, involving one PMI employee andfive members of the public. The accidents occurredin two countries in Asia, involving challenging
circumstances related to negligence of basic
defensive-driving techniques, such as advancetraffic anticipation and maintaining safe speeds forthe road conditions or some elements of distracted
driving. Robust investigations have been carriedout to understand what happened and identify
ways to prevent such occurrences in the future.
The lessons learned include the necessity for a
proactive risky driving detection platform, relying
on a robust fleet safety management program andbalance among behavioral programs, technology
implementation, and a PMI fleet safety policy.

Employee well-being
Along with the many challenges, some positives
have come from the need to adapt to COVID-19.
One of these is the acceptance that remote work
can be effective, productive, and, for some, amore satisfactory way of working compared witha full-time on-site presence. That said, sustained
remote work presents its own challenges, andin-person interaction remains valuable. With thisin mind, we have developed a global plan andadopted the concept of “Smart Work”—a hybrid of
remote and office-based work—over the summer
as the new standard way of working for PMI.
Our Smart Work philosophy enables employees
to define more effective and efficient ways
to achieve their objectives through greater
flexibility in how and where they choose
to work, facilitating increased productivity,
flexibility, enjoyment, and ultimately balance inour everyday lives. A detailed suite of resources
has been developed to guide markets in theimplementation. The program is a post COVID-19
initiative. Due to the COVID-19 resurgence inmany countries during the second half of theyear, to date we have launched Smart Work inthree markets (India, Thailand, and Vietnam). In
the markets not yet covered by Smart Work, ourFlexAbility program allowing for remote work, acompressed workweek, part-time employment,
and unpaid leave remain available, subject tolocal COVID-19 restrictions and guidance.
During the year, we launched a global Employee
Assistance Program which provides employees
and their families with psychological andemotional counseling support as well as legal
and financial support. This program was initiallylaunched in 52 countries where the service did
not exist previously and, by the end of 2020,75 countries were part of the global program,covering over 80 percent of our employees andtheir immediate family members. Initial feedbackon the program was positive, with utilization inline with global norms for such a program.

Employees in PMI’s Indonesian affiliate, Sampoerna, office in Sukorejo, Indonesia

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During the early stages of the pandemic,
communications from senior management
emphasized understanding of and empathy for
personal situations and the extra pressure that
pandemic restrictions were putting on individuals
and families. They set the expectation that people
managers be flexible with work priorities, andemployees prioritize care for themselves and theirfamilies. We hosted several panel discussions
with senior leaders, employees, and outside
experts and facilitated conversations on ourinternal social media channel to raise awareness ofmental healthcare and destigmatize struggles andasking for help. We also have an online learning
platform with external expert resources for mental
healthcare. We ran holistic resilience capability
building workshops for our top 200 leaders.
Those workshops define resilience as dealing witheveryday stress without compromising well-being,
coping with setbacks, and adapting to change
and preparing proactively for future challenges.
As part of our regular employee listening, we ask
employees once a year to answer the following
question: How would you rate your current
psychological or emotional well-being at present?
This gets measured on a five-point scale fromvery bad to very good. In 2020, 58 percent of
employees responded “good” or “very good.”
We will track progress on this indicator andaim to achieve a 5 percent increase in 2021.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Health, safety, and well-being at work continued
Next steps

Building a smoke-free future starts with us:
Leading by example
Across the organization, from our offices toour factories, we are doing our part to makeour vision of a smoke-free future a reality.
For any individual, and in turn an employeeof our company, a smoke-free future means
quitting cigarettes for good. The next best
option for those who would otherwise
continue to smoke is to switch completely toa smoke-free alternative such as an e-vapor
or heated tobacco product. Our Smoke-Free
Employer Program brings this belief to life, withconcrete action and information to educate
and transform our workforce and workplaces.
Being a large organization, it is imperativethat we are as clear and as straightforwardwith our own teams on what the smoke-free
future is, as we are with the rest of the world.
The basis of the program starts with reinforcing
the message to employees that smoking isharmful and encouraging them to quit all
nicotine and tobacco products altogether.
The program also informs those who would
otherwise continue to smoke that better
alternatives to cigarettes are available. Coupledwith education and awareness building, we havecreated sessions on both understanding thosealternatives as well as the science behind them,for employees to make more informed choices.
The final piece of the Smoke-Free Employer
Program is taking all available actions to ban
indoor smoking of cigarettes, remove indoor
cigarette smoking rooms, and for employers
to offer the use of smoke-free alternatives inaccordance with local laws and regulations.

PMI affiliates around the world have been
implementing this program. Once locations
have successfully implemented the Smoke-Free
Employer Program, they can apply to become“Smoke-Free Culture” certified by a third-party
independent body. The protocol for the “SmokeFree Culture” certification was developed by
TÜV AUSTRIA. It is available to organizations
such as events, corporations, and publicauthorities (e.g., municipalities), recognizing theircommitment to reduce smoking and cigarette
consumption through tangible actions andmeasurable objectives. “Smoke-Free Culture”
certified organizations plan, support, implement,
monitor, and continuously improve a set ofactions with the aim of ensuring this vision.
PMI’s Greek affiliate Papastratos was the first
affiliate to implement the Smoke-Free Employer
Program and to become “Smoke-Free Culture”
certified in 2018. To date, in addition to Greece,
PMI affiliate offices in Canada, Japan, Lithuania,
the Czech Republic, the Slovak Republic, andthe U.K. have been “Smoke-Free Culture”
certified. Additional affiliates are currently in
preparation for the certification process, andour goal is for PMI to become the first globally“Smoke-Free Culture” certified company.

Our goal is for PMI to become thefirst globally “Smoke-Free Culture”
certified company
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At the end of 2020, many countries were facing
a second wave of COVID-19, with governments
issuing new requirements to try to slow the spreadof the virus. To contribute to mitigation efforts,
we remain committed to promoting the behaviors
and measures recommended by authorities
and public health experts. We will stay diligent
and ready to react as the situation evolves.
In our manufacturing facilities and fleet, we willcontinue to deliver initiatives to improve safety
and meet country-level and global targets.
Specific priorities for 2021 are to establish an
integrated data-driven roadmap of priority action
to support holistic well-being of employees
across the company. This will include accelerated
promotion of mental health support worldwide. We
will continue to actively encourage talking about
mental health and sharing stories to reduce stigma,
as well as providing training to employees and line
managers to understand the impact of mental
health issues, recognize signs of struggle, and know
how to support themselves and their teams.

2020 performance highlights
See our performance metrics

0.12

Total recordable incident rate (TRIR) per
200,000 hours worked for PMI employees,
contracted employees, and contractors

100%

Of our manufacturing facilities certified
OHSAS 18001 and ISO 14001

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TIER 2

Diverse and inclusive working environment

Community support

We believe diverse and inclusive workforces
make businesses and society stronger, boosting
innovation, creativity, responsiveness tochange, performance, employee motivation,
engagement, and well-being. PMI’s goal is
to uphold an inclusive environment in which
all employees feel respected, supported,and engaged—and thus able to perform attheir best. We are committed to improving
the workplace by fostering an inclusive
culture and enhancing our diversity.

Supporting the communities in which we
operate primarily means contributing tolocal development through community
investments, charitable donations,and employee volunteerism.

Read more online

Fair working conditions

Talent attraction, retention, and employability

For PMI, fair working conditions are definedas conducting effective labor relations
through ongoing engagement and social
dialogue, promoting freedom of associationand the right to collective bargaining.

For PMI, talent management includes two
primary areas of focus: Providing a workplacethat is attractive to prospective employees andin which current employees can grow personallyand professionally, and develop careers thatsatisfy and engage them; and responsibly
addressing the future of work by considering
the potential impacts of automation,
digitalization, and business transformation.

Read more online

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Read more online

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WE ARE

Protecting theenvironment
Effective environmental management across ouroperations and value chain goes beyond compliance withapplicable laws and regulations. We are committed tocontinually improving our business activities to achieve thehighest standards of sustainability, in line with ourEnvironmental Commitment.
While improving the environmental performance ofour manufacturing operations is vital, most of our ecologicalimpacts arise elsewhere in our value chain—in particular,
in tobacco growing and curing, and consumer waste.
Working collaboratively with tobacco growers, suppliers,
retailers, NGOs, and governments is critical to achieving
our environmental targets.

In this section

TIER 1 Climate protection

p.99

Littering prevention

p.112

Product eco-design and circularity

p.116

Further reading

TIER 2 Forest conservation
Biodiversity
Water stewardshipA field technician next to a renewable and sustainable forest in Pakistan

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Waste reduction

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TIER 1

Climate protection
Climate change is among the greatest threats society faces.
There is scientific consensus on necessary greenhouse gas(GHG) emission reduction targets; what is needed now is action
from all parts of society to achieve them. PMI has beenrecognized as a climate leader and we continue working
closely with our suppliers to achieve our science-based targets.
Read more

The right thing to do

The business case

The climate crisis, as acknowledged by theinternational community, threatens livelihoods,
particularly those of the world’s most vulnerable
people. It impacts human rights, biodiversity,
water access, global health, and food security,and exacerbates environmental changes such as
ecosystem degradation, drought, flooding, anddesertification. While science tells us that climatechange is irrefutable and unavoidable, it also tells
us that it is not too late to limit the warming to
the 1.5 degrees Celsius that is considered thelimit beyond which impacts will be catastrophic.
This will require fundamental transformations
in all aspects of society—how we grow foodcrops, use land, transport goods, and power our
economies. The great challenge of our times
is to find a way to effectively align the public
and private sectors to take critical action andto put aside existing separate approaches andobjectives. As a business with a multinational
environmental footprint, PMI will continue to playa role in contributing to addressing this crisis.

We recognize climate change as both a risk and an
opportunity. It changes weather patterns, whichis particularly important for businesses like ourswith an agricultural supply chain. Climate change
also threatens facilities and operations, supply
and distribution chains, as well as access to power
networks and water. At PMI, we are taking steps
to strengthen our resilience to climate impacts,
reduce our GHG emissions, apply innovative
low-carbon technologies, and support policies
enabling a smooth transition to a low-carbon
economy. Consistently, we voice support fornational and global climate policies that help us planfor business growth, as we believe that effective
climate policies give us more certainty for shortand long-term planning and investments, as wellas help us better anticipate regulatory risks andseize economic opportunities. Moreover, we havereviewed our approach to carbon pricing, which
we see as a powerful tool to consider the potential
impact of external carbon taxes. But beyond
helping mitigate risk related to investments that
could become stranded with carbon-constrained
regulation, shadow carbon pricing and carbon levy
allow us to be more efficient and communicate
to stakeholders, including investors, how we aremaking decisions, efficiently managing the shift
from high-carbon to low-carbon activities.

Our aims

Net zero

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

Tobacco seedling in Salta, Argentina

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Philip Morris International Integrated Report 2020

Net zero

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

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Climate protection continued
Achieving our aims
Our climate strategy aims to address pertinentclimate change risks and build resilience while
seizing opportunities presented by a low-carbon
future. To deliver on our climate ambition, werely on robust carbon footprint accounting,sound analysis of climate change-related risks
and opportunities, ambitious targets, clear
management and governance structures, and key
enablers such as our internal carbon pricing.
The past year marked a milestone in oursustainability journey, as many of our targets
had been set against 2020. We achieved or
exceeded most of them. As anticipated in ourprevious report, we scaled up our ambition andfurther strengthened our climate strategy in2020, leveraging the progress made so far.
Based on our performance, we believe we canachieve our aim of carbon neutrality in our
direct operations by 2030 significantly sooner.
Likewise, we remain committed to achieving net
zero emissions across our value chain by 2050.1
To achieve our carbon-neutrality targets, we focus
primarily on reducing absolute carbon emissions.
To guide our work in the years to come, we revised
our absolute CO2e emission reduction targets in2020 to align with a scenario of an increase inglobal temperatures of no more than 1.5 degrees
Celsius above pre-industrial levels. In doing so,
we aligned with the recommendations of theIntergovernmental Panel on Climate Change(IPCC) 2018 report. We also updated our baseline,
moving it from 2010 to 2019, to account forchanges in our footprint and business model.

• Reducing our absolute scope 1+2 GHG emissions
by 50 percent by 2030 from a 2019 base year
• Reducing our absolute scope 3 GHG emissions
by 50 percent within the same timeframe2
To deliver on our targets, we take a holistic,
three-part approach to emissions reduction: First,
we seek to reduce consumption and optimize
efficiency. Second, we minimize the use of fossil
fuels and promote the switch to renewable energy.
Third, once we have maximized our emissions
reduction, we compensate for the remaining
unavoidable emissions. When possible, we
prioritize in-setting projects in our supply chain;alternatively, we purchase certified carbon credits.
Our carbon-neutrality work covers our entire
value chain, which extends from the supply of
tobacco and other materials to the production,
packaging, commercialization, use, and end-oflife of our products. Guided by our footprint
model, we have targets and tailored strategies
in place that take into consideration the mostsignificant climate impacts across our value chain.

PMI’s pathway to carbon neutrality (scope 1+2) by 2030 and net zero (scope 1+2+3) by 2050
Impact of
COVID-19(CO₂e metric tons)

Carbon neutrality(scope 1+2)

Net zero(scope 1+2+3)

8,000,000

Science-based targets:

6,000,000-50% absolute emissions reduction by 2030
versus 2019 (scope 1+2)
-50% absolute emissions reduction by 2030
versus 2019 (scope 3)

4,000,000

2,000,000

0

Scope 1+2 emissions

Scope 3 emissions

Oﬀsets and carbon removals

Net carbon emissions

This chart aims to be indicative; underlying data are based on simulation and actual assumptions until 2030 (based on our science-based targets),and on simplified assumptions as of 2030.

2050-2,000,000

2040

Philip Morris International Integrated Report 2020

We have received external recognition for ourefforts, achieving the highest possible score of 100
in the climate strategy, environmental reporting,and environmental policy and management
systems categories of the 2020 Dow Jones
Sustainability Index. We disclose our efforts
to the CDP annually, and in 2020 we achieved
a “triple A” score for sustainability leadershipand maintained our position on the A List for
Climate Change for the seventh year in a row.

2030

100

targets consistent with keeping global warming
to 1.5 degrees Celsius above pre-industrial levels,
we signed the Business Ambition for 1.5°C
commitment—responding to the call-to-actions forcompanies to step up their ambition for the best
chance of tackling the climate crisis. Our affiliates
also belong to national business associations
that are engaging with governments to advance
progress on climate protection at the local level.

2021

2 The boundary of our targets includes biogenic emissions
and removals from bioenergy feedstocks.

We know that partnership is critical to successfully
addressing climate change and achieving UN
SDG 13 (“take urgent action to combat climatechange and its impacts”). PMI partners, supports,
participates, and is a member of sustainabilityrelated initiatives and organizations such as
the World Business Council for Sustainable
Development (WBCSD), Business for Social
Responsibility (BSR), CSR Europe, and the We
Mean Business coalition, which harness the powerof collaboration to implement solutions at scale.
In 2020, our CEO joined in an open letter from
CEOs from over 170 businesses, investors, andbusiness and investor networks, in a letter tocall on EU policymakers to support an EU 2030
GHG emissions reduction target of at least 55
percent. Moreover, following the establishmentof our new science-based emissions reduction

2020

Our approach to decarbonizing our operationsand value chain is guided by several corporate
policies. Reducing energy consumption
and carbon emissions is embedded in ourEnvironmental Commitment, our Guidebook
for Success (PMI’s Code of Conduct), our
Responsible Sourcing Principles, and our Good
Agricultural Practices program; our efforts
to protect forests, as a fundamental climateregulation mechanism, are in accordance with
our Zero Deforestation Manifesto. Our wellestablished environmental management system,
based on international standards such as ISO
14001, supports the implementation of ourenvironmental policies across our operations.

Stakeholder engagement

2010

1 Net zero GHG emissions are achieved when anthropogenic
emissions are balanced globally by anthropogenic removals
over a specified period (source: World Resources Institute).

Our new targets, assessed and approvedby the Science-Based Targets initiative(SBTi) in 2020, commit us to:Overview

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Assessing climate change risks
and opportunities
In conjunction with our integrated risk management
process, we periodically conduct a climatechange risks and opportunities assessment tofully understand PMI’s impact across our entire
value chain. This work aligns with international
expectations such as those of the Paris Agreement
to mitigate and adapt to climate impacts, as wellas the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD).
Our most recent risk assessment was conducted
in 2019 and reported on in our last report
as well as in our submission to the CDP.

“Strong action must be taken
to reduce the risks of climatechange impacts and stop
the destruction of nature.
At PMI, we are investing ininnovative programs and taking
a multidisciplinary approachto reduce the environmental
impact of our products,
operations, and value chain.”
André Calantzopoulos
Executive Chairman of PMI’s Board of Directors

Governance and management
PMI’s governance and management systems
aim to ensure that climate-related risks andopportunities are considered in relevant
decision-making processes. The Nominating
and Corporate Governance Committee of PMI’s
Board of Directors (BoD) oversees the company’ssustainability strategies and performance, including
climate change-related issues and initiatives aimed
at eliminating negative impacts of our businesson the environment. The Audit Committee of the
BoD oversees the assessment and managementof company risks, including those related toclimate change such as natural disasters, water
scarcity, and agricultural supply chain instability.
A member of PMI’s Company Management,
the Senior Vice President (SVP), Operations istasked with addressing climate change risks,
including physical and water-related risks, acrossall company activities. In 2020, this person
reported to PMI’s Chief Operating Officer,
who himself reported directly to the CEO.
He monitored and reviewed progress against
objectives, strategies, and action plans related
to climate change, and reported findings to
the Nominating and Corporate GovernanceCommittee and Audit Committee of the BoD.
As of May 2021, the SVP, Operations reports
directly to and regularly updates PMI’s CEO on
climate issues and has operational responsibility,
including for maintaining robust business resilience,risk assessment processes, and strategies tosupport business continuity. He examines
and monitors issues related to climate change,
ensuring that risk assessment and management
are integrated into long-range plans, objectives,budgets, and performance review processes.

Employees in PMI’s manufacturing facility in Guadalajara, Mexico

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Philip Morris International Integrated Report 2020

From an operational perspective, our Operations,
Product, Consumer, Commercial, and Financefunctions coordinate the company’s climatechange-related activities. Most of the coordination
is done by the Sustainability team and takes placein the context of sustainability-related working
groups and with local market coordinators.

“We strongly believe that
PMI must play its part inprotecting our planet by
reducing our environmental
impact across our value chain
and by defining and executing
strategies and initiatives toachieve our long-term targets.
Our business and sustainability
strategies are advancing
hand in hand with increasing
momentum. As we transform
our company, we are also
accelerating our sustainability
efforts to achieve a smoke-freeand more sustainable world.”
Massimo Andolina
PMI Senior Vice President, Operations

This helps ensure that our global strategies
and programs can be implemented at
the market level and that local realities
are reflected in our global efforts.
We incentivize our tobacco leaf buyers,procurement managers, environmental managers,
and other relevant employees through monetary
rewards or other forms of recognition for the
successful implementation of GHG emission
reduction projects, climate change mitigation
activities, and behavioral change toward climate
protection. We also seek to sensitize our entire
workforce to the issue of climate change throughregular internal communication and training.

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Climate protection continued
Progress in 2020

Overview of our 2020 carbon footprint
Accurate measurement and transparent reportingof our footprint enables us to shape our strategy,
set targets, and measure progress. We calculate our
GHG footprint annually, following guidance fromthe Greenhouse Gas Protocol and accounting for
all emissions generated across our value chain.

Impact of COVID-19
on our activities in 2020

The emissions generated by our direct operations—
including our factories, offices, and fleet—are a
key focus, but they amount to around 10 percent
of our total GHG footprint. One critical producerof GHG emissions we seek to address is theenergy required to produce the consumables forour smoke-free products, which is approximately
four times greater than for cigarettes. This ismainly due to the additional steam requiredin the manufacturing process. This leads to anincrease in GHG emissions, which we address
with multiple energy-saving measures.

Read more

Global greenhouse gas emissions scope 1+2+3 (‘000 tons CO2e)5,298

Scope 1

89.0%

4,865

Scope 2

88.6%

Scope 3

4,003

89.7%

88.6%

Representing 85 percent of our total GHG
footprint, our upstream emissions include thosegenerated by curing fuels and fertilizers in our
tobacco supply chain, acquiring and transporting
direct materials such as paper and cellulose acetate
tow, procuring indirect materials and services suchas marketing, sales, and other professional services,third-party disposal and treatment of waste, andbusiness travel and employee commuting.
Our upstream emissions reduced by 17 percent
versus 2019, as a result of the reductions
that we drove in our tobacco supply chain,
our efforts in reducing the materials for our
packaging, and the progress made by our directmaterials suppliers to reduce their emissions.
Furthermore, this year a small amount of the
GHG reduction in our upstream emissions wasdue to the pandemic-related decrease in our
employees’ business travels and commuting.
Downstream, emissions generated by thetransport and distribution, use, and end-of-life
management of our products represent 5 percent
of our total footprint. The emissions related touse and end-of-life management of our products
are slowly but steadily decreasing mainly due
to improvements in our heated tobacco units
as well as the devices design that impact its use
and end-of-life emissions. Eco-design principles
inform how we use life-cycle analysis (LCA) toassess the carbon footprint of our products,from tobacco sourcing to end-of-life impacts.
Read more: Product eco-design and circularity

2018

102

3.3%

3.3%

7.7%

8.1%
2019
(Baseline)

Philip Morris International Integrated Report 2020

2.3%
8.1%

Overall, in 2020 our emissions decreased in absoluteterms by 18 percent across our value chain versus
2019, amounting to a reduction of 862,699 tons ofCO2e. More specifically, we achieved a year-on-year
absolute reduction in scope 1 emissions of 19
percent, in scope 2 of 43 percent, and in scope 3 of
17 percent.

2020
An employee at PMI’s Indonesian affiliate, Sampoerna, solar panel farm in
Karawang, Indonesia

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Carbon emissions along our value chain in 2020

UPSTRE AM VALUE CHAINOUR DIREC T OPER ATIONSDOWNSTRE AM VALUE CHAINSCOPE 3: 8 4. 5%

SCOPE 1: 8.1%

SCOPE 3: 5.1%

1.4%

2.5%

Business travel
and employee
commuting

Use of our
products

Offices andwarehouses

2.0%

19.0%
Tobaccogrowing

6.1%

13.0%

Transportation anddistribution

1.3%

Fuel consumption
from our vehicles
and aircraft

Transport anddistribution

Fuel consumption
in our offices,
factories, andwarehouses

SCOPE 2: 2 .3%

51.1%

Materials and services
purchased, andrelated activities

2030
2050

103

2.3%

Indirect emissions from the generationof purchased or acquired electricity,
steam, heat, or cooling consumed by PMIC ARBON-NEUTR AL OPER ATIONS BY 2030
C ARBON-NEUTR AL VALUE CHAIN BY 2050
Philip Morris International Integrated Report 2020

1.3%
Products
end-of-life

PATH TODEC ARBONIZ ATION

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A new approach to carbon
pricing at PMI
An increasing number of organizations andsustainability leaders are using internal carbon
pricing to structurally drive a reduction in
CO2 emissions. Assigning a price—and hencea theoretical cost—to the emissions generated
makes an intangible more concrete andfurther incentivizes actions to reduce theemissions contributing to global warming.
In 2020, we took a new approach to internalcarbon pricing at PMI, developing twocomplementary internal carbon prices:
A shadow price and a carbon levy.
• A shadow price of USD 65 per ton of CO2e:
Our shadow price is an internal lever designed
to accelerate carbon emissions reduction by
ensuring that the company’s investment decisions
reflect all costs, including environmental ones.
We use this price to better understand thepotential impact of external carbon pricing (e.g.,
carbon taxes) on the profitability of a project,a new business model, or an investment, andhence drive and prioritize investments that
accelerate CO2 emissions reduction to a levelthat is considered as unavoidable (i.e., technicallyor economically not further abatable). We
modeled what an adequate shadow price should
be for PMI following a robust methodology,
best international practices (such as guidancefrom the World Bank and the Stiglitz and Stern
price corridor concept), a worst-case scenario
analysis of transition risks projected by 2040,
and specificities of our emission profile andgeographic footprint. PMI’s shadow carbon
price is integrated into the financial evaluationand preparation of business cases that will
impact our carbon emissions (favorably or
unfavorably); in 2020, it was instrumental in
the approval of 13 additional carbon emission
reduction projects as part of our energy saving
initiatives program in our manufacturing sites.

• A carbon levy of USD 8 per ton of CO2e:
The carbon levy internalizes external costs andsupports behavioral change. It is an internal tax
that is virtually charged to selected business
units for their emissions, with the aim to use thecalculated virtual revenue to size and fundinvestments that contribute to the decarbonizationof the business. While the shadow price helps inthe prioritization of business cases for investment
in activities aimed at structurally reducing ourcarbon emissions, the carbon levy helps size
the investments required today to abate ouremissions through offsetting (e.g., acquisitionof green certificates) or in-setting initiatives(e.g., agroforestry projects, and carbon
sequestration programs). We have modeled what
the carbon levy should be for PMI basing our
calculation on data on the forecasted voluntarycarbon market prices, our CO2 compensation
profile (i.e., the number of tons of CO2 to becompensated through offsetting/in-setting
investments), our carbon neutrality time horizon,
and the compensation strategy we want toadopt. We started implementing our carbon levy
in 2020 within the business functions accounting
for the bulk of our direct emissions, such as
our manufacturing sites, offices, and fleet,to form a budget that will be conducive to
set up a portfolio of climate investments tocompensate remaining unavoidable CO2
emissions and achieve carbon neutrality.

How we calculate GHG emissions
PMI has collected CO2 emissions data over many
years as part of our efforts to improve performanceand achieve targets. We need robust data to
inform our science-based targets, carbon footprint
calculations, product life-cycle analysis, anddecisions on investment in low-carbon technologies.
In line with good practices and the GHG Protocolof the World Resources Institute (WRI), we source
emission factors from the U.K. government’s
GHG Conversion Factors for Company Reporting(2020) and the International Energy Agency’s
Emissions Factors (2020). We source global
warming potential rates from the IPCC Fifth
Assessment Report, 2014 (AR5). The scope of thedata encompasses assets under our operational
control, including PMI’s fleet and offices (scope1+2) and our overall upstream and downstream
supply chain (scope 3). Scope 2 emissions areprimarily market-based. Our value chain carbon
footprint model aligns with WRI’s Corporate
Value Chain (Scope 3) Accounting and ReportingStandard, the accepted international standard.

We will revise our shadow price and carbon
levy annually to allow the integration ofchanges in our risk or emissions profiles.

An employee in PMI’s manufacturing facility in Izmir, Turkey

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We undertake third-party verification ofscope 1, 2, and 3 emissions to ISO 140643 standards (please see the verification
statements: scope 1+2 and scope 3).
We use real data when possible; when
primary data are not available, we extrapolate
emissions from international databases suchas ecoinvent. Transport relating to the endconsumer traveling to the retailer is notincluded under value chain or product footprint
standards. Gases included in calculations are
CO2, CH4, and N2O (not HFCs, PFCs, SF4, orNF3). Biogenic CO2 emissions are included in
our SBTi targets both in direct operation andin our value chain. The climate neutrality at ourfactories in Lithuania and Switzerland in 2020
encompassed all validated scope 1 and 2 GHG
emissions; the remaining emissions were offset
by high-quality carbon offset projects frommyclimate, using certification from Plan Vivo.

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Decarbonizing our operations
Our sites and fleet are the parts of our value chain
over which we have the greatest control. We havecommitted to becoming carbon neutral in our
direct operations by 2030, and this commitment
applies to our manufacturing facilities, our offices
and warehouses, and our fleet. To achieve ourambition, we combine good management practices
with strategic energy-related investments across
our operations. We invest in optimizing energy andprocess efficiencies and replacing fossil fuel-basedenergy with renewable sources. We compensate
our absolute carbon emissions only as a lastresort—once we have maximized our emissions
reduction via energy efficiencies and renewableenergy. Our aim is to compensate unavoidable
emissions via credits generated through in-setting
projects, including nature-based solutions andother carbon removal technologies. Based on our

new carbon levy, we are setting up a portfolio ofclimate investments (resulting in carbon credits
generation or acquisition) for carbon compensation.

Our factories
A key component of the program is encouraging
behavioral change and an ownership mentality.
To reduce carbon emissions in our manufacturing
sites, we promote efficient energy use throughour Drive 4 Zero program, which establishes acommon way of working across our factories. To
promote a zero-loss mindset, we designed oursystems to facilitate new ideas aimed at eliminatingprocess losses (e.g., energy, materials and water).
This seeks to empower every worker to look forlosses and recommend and implement solutions.
We apply improvements not only across thefactories but also throughout the company.

Through this program, we implemented energysaving projects across all our factories in 2020.
Throughout the year, the program triggered
more than 140 projects worldwide, ranging
from chilled water optimization, heat-recovery
projects, and LED lighting to heating, ventilation,
and air conditioning system upgrades. Overall,our efficiency initiatives helped drive around 10
percent reduction in carbon emissions across our
manufacturing facilities in 2020 versus 2019.
In parallel to our efforts to drive energy efficiency,
we focus on switching to renewable energy
sources. We implement technologies to generate
renewable energy across our manufacturing
sites, such as photovoltaic panels, biomass boilers
and heat pumps, and tri-generation processes(combining cooling, heat, and power). For instance,
in 2020 we installed pyrolysis technology in ourfactory in Neuchâtel, which uses operational waste
instead of fossil energies to produce steam andhot water. It will be operational in 2021, and wewill communicate results in our next report. Thisfactory became our second carbon-neutral facility,
receiving certification from the Swiss nonprofit
organization myclimate. As another example, in
2020 our photovoltaic installation at our Bologna
factory in Italy reached its full capacity, generatingaround 4 percent of the total energy used on thesite in a year. In 2020, 34 percent of our totalenergy consumption came from renewable sources.
We are also on track to achieve our target of
100 percent electricity used in our factories tobe from renewable sources by 2025. In total, 78
percent of the electricity used in our manufacturing
facilities in 2020 came from renewable sources.
Overall, our efforts led to a reduction of 89,112
tons of CO2e in our manufacturing facilities
in 2020 versus the previous year, with theincreased energy required to produce smokefree products offset by our efficiency efforts
and our switch to renewable energy.

Electricity purchased and produced in PMI factories
Renewable sources

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35%

28%

22%

65%

72%

78%

100%

2018

2019

2020

Target2025

Non-renewable sources

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Our fleet
In 2020, our fleet of around 23,000 vehicles
covered around 370 million kilometers.
Our fleet comprises working tool cars (75percent) and benefit cars (25 percent).
During the year, we developed a carbonneutrality strategy for our fleet, along withsupporting targets, and built organizational
capability within the company.
From an environmental perspective, the first focus
for our fleet is to optimize fuel consumption andimprove operational efficiency. We do so througheco-driving training and the use of telematics.
In 2020, we established a dedicated fleet safety
e-learning platform with eco-driving modules.
We started rolling it out early 2021, and we
intend to reach a participation rate of over 70
percent in 2021. Telematics were installed in 35
percent of our vehicles by the end of 2020. This
technology provides the driver and the company
with data on driving behaviors and helps improveroad safety, reduces occurrence of fatalities
and injuries, and—as an outcome—leads to adecrease in carbon emissions. We aim to equip
75 percent of our total fleet (i.e., all working toolscars) with such technology by the end of 2023.

As an important step toward the reduction of ourcarbon emissions, we are also making changes
to our fleet of cars and vehicles, minimizing theuse of combustible fossil fuels and switching
to alternative eco-powertrains—such as hybrid
and electric vehicles. This shift has alreadybegun, with green vehicles representing 4.7
percent of our fleet in 2020, but we plan tofurther accelerate it following the introductionof our global Fleet Policy in January 2021.
We estimate that our efforts translated into
more than 2 percent GHG emissions reduction
in 2020 versus 2019 in our fleet. Additionally,
due to less mileage (COVID-19 impact) GHG
emissions were reduced by more than 20 percent.

Our offices
We have offices and warehouses in over 80
markets worldwide, most of which we lease rather
than own. In 2020, we focused on gaining visibility
into energy use at those sites and preparing actionplans to optimize energy consumption and promote
the switch to renewable sources. In 2021, we will
pilot these action plans in markets identified as thebiggest contributors to our carbon footprint. Those
include Indonesia, the Philippines, Poland, Russia,
and Singapore.
In 2020, with 28,161 tons of CO2e produced, ouroffices and warehouses represented 7 percent ofour carbon emissions in our direct operations(scope 1+2), but only 0.7 percent of our total
carbon footprint. Our offices in Switzerland wereagain certified carbon neutral and we purchased
100 percent green electricity in our offices in
Portugal, New Zealand, and Sweden, as wellas in our tobacco warehouse in Greece.

Telematics were installedin 35 percent of our vehicles
by the end of 2020

An employee in PMI’s Indonesian affiliate, Sampoerna, conducting a fleet safety assessment in Sukorejo, Indonesia

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Innovating for
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Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Climate protection continued
Driving carbon reduction in
our tobacco supply chain
Our tobacco supply chain represented 23 percent
of our total carbon footprint in 2020. It amounted
to a total of 911,160 tons of CO2e, a decrease of
28 percent versus 2019. This significant reduction
was driven largely by our efforts to tackle ourmain source of carbon emissions—the processof curing tobacco—but also due to a gradualdecrease in our overall tobacco demand.

In line with PMI’s carbon-neutrality ambitions,
we developed new targets for our tobacco
supply chain: We aim to achieve an absolutecarbon emissions reduction of 35 percent by
2025 and of 50 percent by 2030 versus the2019 baseline. We will continue our efforts todecarbonize tobacco curing while implementing
additional reduction initiatives focused on
the use of fertilizer and mechanization.

2019

Mechanizedactivities

-13%

2020

500

Our Monitoring and Verification Framework
for Sustainable Leaf Curing Fuels allows us tosystematically monitor the sustainability of all
fuel types used in our tobacco supply chain.
We apply it in all flue-cured sourcing markets
to verify results on the ground and foster
improvement. During 2020, we completed

450

We mainly source three types of tobacco:
Virginia, Burley, and Oriental. Virginia tobacco(approximately 47 percent of our purchasedvolume) is cultivated around the world and,once harvested, is generally cured by using an
external heat source to dry out the leaves—aprocess called “flue-curing.” Curing barns may beheated with coal, diesel, natural gas, firewood, or
biofuels containing agricultural and wood-sawing
by-products. The GHG emissions of flue-cured
tobacco represent 6 percent of our total carbon
footprint and over a quarter of the total GHG
emissions related to our tobacco supply chain.

400

Tobacco curing

350

300

Philip Morris International Integrated Report 2020

-50%

250

107

2020

200

Read more online

2019

Curing fuels

150

Read our case study on environmental
practices in Malawi, which describes how
we apply a landscape approach accounting
for the relationships between different
environmental drivers—such as climate,water, forest, and biodiversity—todevelop and implement programs withpositive impacts not only for the planet
but also for the local communities.

-11%

2020

100

An integrated approachto our environmental
impacts in Malawi

2019

Fertilizers

50

C A S E S T U DY

Our tobacco supply chain
emissions have decreased
significantly in 2020,
against our 2019 baseline.
In particular, the emissions
from the curing of fluecured Virginia tobacco
have dropped by half as
we reached our targets
related to fuel sustainability,barn improvements,and overall efficiency ofthe curing process.

The main contributors to carbon emissions
in our tobacco supply chain: Year-on-year reductions

0

Now that we have achieved significant progress in
reducing GHG emissions from tobacco curing, weare exploring other contributors to our footprint,
such as the use of fertilizers and mechanization.
We are already exploring opportunities on the
reduction of emissions through technologicalinnovations that are rapidly becoming moreavailable in farming. In parallel to our reduction
strategy, we are assessing nature-based solutions,which present an important opportunity due tothe high potential for carbon removal and thelinkages with our tobacco operations both on thefarm and next to the farm at landscape level.

‘000 tCO2e

23 audits—performed remotely due to the
COVID-19 pandemic—covering all flue-cured
origins to verify carbon reduction activities anddata on fuel use per kilogram of tobacco cured.
In 2020, we achieved a 77 percent reduction
in GHG emissions per kilogram of flue-cured
tobacco versus our 2010 baseline, exceeding ourtarget of 70 percent. One-third of this decrease
was driven by efforts to make curing barns
more efficient, while the remaining two-thirds
resulted from the switch to renewable fuels.
We have set new targets related to decarbonizing
the tobacco curing process, which will guideour efforts in the years to come. By 2025, weaim for a 75 percent reduction in emissions
generated by curing one kilogram of tobacco,
against our 2019 baseline. We will focus on
increasing the use of renewable fuels in markets
that still use a mix that includes fossil fuels.

Innovating for
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Performance
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Climate protection continued
Curing barns efficiency
A primary reason for the low energy efficiencyof tobacco curing barns is the lack of insulationand the thermal conductivity of the construction
materials. As most farmers own their curing barns,
we collaborate with our suppliers to provide
guidance and support to make the barns more
thermal-efficient. Typically, our efforts aim to
improve combustion efficiency, ventilation, andheating control, together with insulation. Whiledelivering improvement projects worldwide, it isimportant also to train farmers on fuel efficiency,
barn maintenance, and fuel sustainability.

The improvement projects we carried out in 2020
increased the efficiency of 2,146 barns in China,
Malawi, the Philippines, Pakistan, and Brazil for a
cumulative total of around 82,500 barns upgradedsince 2014 and covering farmers in more than 10
countries. The reduction of carbon emissions in
the curing process have also benefited from theincreased efficiency of the barns that have been
improved year on year with interventions mostly
related to the thermal cycle and the insulationof the barn structures against fugitive heat.

Renewable fuels

Sustainable firewood

To reduce GHG emissions, we are graduallyphasing out fossil fuels such as coal and diesel infavor of renewable fuels. In 2020, 67 percent of
the flue-cured tobacco we purchased was cured
with renewable fuels, mainly sustainable firewood,
but also biomass, such as wood sources, agropellets, and other agricultural waste products. We
aim for 70 percent of our purchased flue-cured
tobacco to be cured with renewables by 2021.

Protecting natural ecosystems and sustainably
managing forests, which are important carbon
sinks, are key drivers in reducing greenhouse gas
emissions. Critical to our work on curing fuelsis ensuring that the firewood and other woodbased materials used to cure the tobacco wepurchase do not contribute to deforestation.
We are committed to sourcing wood fuels fromtraceable, sustainable, and legal sources andhave set targets for our tobacco supply chainas part of our Zero Deforestation Manifesto.

Switching to renewable fuels to cure flue-cured tobacco in our supply chain70%

We aim for 70% of our purchased flue-cured
tobacco to be cured with renewables by 2021

45%

2020

2019

2018

36%

32%

Self-suﬃcient ﬁrewood

An employee of our local third-party tobacco supplier and a field technician next to sustainable firewood in Pakistan

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Philip Morris International Integrated Report 2020

22%

13%

10%

Biomass

8%

19%

1%

11%

18%

25%

17%

Non self-suﬃcient ﬁrewood

21%

22%

Coal

Other fossil fuelInnovating for
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Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Climate protection continued
Our Monitoring and Verification Framework for
Sustainable Leaf Curing Fuels enables us to assess
the risk of deforestation represented by different
wood fuels, collect sourcing information on thewood fuels farmers use to cure tobacco, andconfirm that those sources do not contribute to
deforestation. In 2020, we achieved our target of
having 100 percent of the tobacco we purchase
cured with no risk of deforestation of old-growthforests (i.e., primary and protected forests).
Read more: Forest conservation

Eliminating coalEliminating coal by switching to renewablefuels, which implies the conversion of curing
infrastructures, remains a priority for us. We had
set a target to phase out coal completely by theend of 2020 and had made steady progress inswitching to more sustainable fuels across oursourcing countries. However, shifts in our sourcing
strategy and local curing capacities in certain
regions resulted in 11 percent of the flue-cured
tobacco we purchased in 2020 being still cured
with coal (down from 16 percent in 2019).

100%

Of the flue-cured tobacco
we purchased in 2020 was cured
at no risk of deforestation of
old-growth forests

This pertained to tobacco purchased from the
Yunnan and Guizhou provinces of China, where
the prevailing curing fuel used by tobacco farmers
is coal due to its competitive price and availability.
In 2016, we embarked on a multistakeholder
initiative led by the China National Tobacco
Corporation and supported by local governments
aimed at converting curing barns from coal tobiomass and creating a fuel pellets supply chain
produced from agricultural waste. By the end of
2020, more than 71,000 curing barns had phasedout coal and converted to biomass, leading toa significant reduction in GHG emissions fromtobacco curing (from 4.62 to 2.84 kg per kilogramof cured tobacco), measured and verified throughour Monitoring and Verification Framework.
Beyond the carbon reduction achieved by thebarn conversions, the project increased farmers’
incomes, as commercial tobacco grades were lifted
between 8.6 percent and 11.8 percent for the
farmers who switched to biomass-based curing.
More detail on this project is available in a casestudy we published with the World BusinessCouncil for Sustainable Development in 2020.
Biomass pellet auto-feeder attached to the burnerhas reduced by half the requirements in hours oflabor for fuel loading and ash cleaning, lowering
the overall cost of production. The estimated costsaving in labor equates close to USD 43 per farmer
per season. Coupled with an average price increaseof USD 0.17 per kilogram of tobacco driven byquality improvement compared with coal curing,
we estimate an average additional income of USD
357 per farmer and per season from tobacco sales.
We remain committed to eliminating coalfrom our curing fuel portfolio and expect
to phase out coal completely by 2023.

Wood chips used for fuel in Guadalajara, Mexico

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Innovating for
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Overview

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Performance
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Climate protection continued
Fertilizers

In-setting and nature-based solutions

The use of fertilizers in tobacco production
represented around 8 percent of PMI’s total
carbon footprint in 2020, making it thesecond largest contributor of GHG emissions
upstream in our supply chain, after acetate
tow. While we encourage the optimizationof fertilizers—minimizing their use in linewith our Good Agricultural Practices—the
adoption of carbon abatement technologies
in the manufacturing of fertilizers has also
contributed to reducing their CO2 footprint.

In 2020, we developed a targeted study to
map the potential of nature-based solutions(NBS) in our tobacco supply chain and evaluate
natural carbon sinks in the context of our carbon
neutrality ambition. The focus has been on
testing multiple methodologies in three markets(Brazil, Mozambique, and the Philippines) where
we believe opportunities are significant andinvestments could yield the best return in carbon
removals generated. The methodologies that
we selected are internationally recognized andaligned with the strategy of promoting more
resilient forests and sustainable agriculture. We
applied reforestation, afforestation, and adoptionof sustainable agricultural land management
methodological approaches. The study was useful
to define the lines of intervention and the scale
we will be adopting for future NBS projects in our
supply chain. We plan to pilot NBS on the groundby developing one project in 2021, leveraging on
the experience that we have acquired this year.

In 2019, PMI updated its calculation model for theCO2 emissions of fertilizers. In 2020, we refined
the calculations to more precisely assess theirimpact on the company’s carbon footprint using
more accurate primary inputs on production
yield against fertilizer application rate. We
focused on understanding the geographic origin(i.e., production plant location) of the nitrogencomponent of some fertilizers to assign thema more precise emissions factor. By taking into
consideration efficiency gains and technologicaldevelopments occurring in the manufacturing of
fertilizers, the total emissions calculated for 2020are more accurate. While emissions represented
an increased share of PMI’s total carbon footprintin 2020, they were 11 percent lower in absoluteterms than in 2019. The next step in developing themodel will be aimed at understanding the impact onemissions of different types of application methodof nitrogen-based fertilizers. In 2020, we focused
our efforts on improving productivity versus inputs,
through the constant implementation of our GAP
program and some specific projects linked to betteruse of inputs. For instance, in Argentina we started
together with our farmers to switch irrigation
technology to drip in order to both save water andreduce the application of fertilizer per hectare.

In our last report, we communicated on plans
related to an in-setting project related to provisionof clean and safe drinking water to farmers within
the tobacco-growing areas of Mozambique. The
development of the in-setting project has been
postponed for a year, given challenges brought by
the COVID-19 pandemic. We are actively working
on its implementation in 2021 with Carbonsink andwe will report on progress next year.

Climate protection in our directmaterials supply chain
Beyond tobacco, the materials and services wepurchased represented 45 percent of our total
GHG footprint in 2020. Of this, 66 percent
originated from the direct materials we source,
such as cellulose acetate tow, pulp and paper,and our smoke-free electronic devices.
Engagement with our suppliers is instrumental indriving carbon reduction efforts. We accomplish
this in a variety of ways. For instance, weorganized two webinars in 2020 involving over
50 suppliers across our supply chain categories.
The webinars reaffirmed PMI’s carbon neutralitycommitments and explained our strategies while
also training participants on CDP disclosure. In
recognition of our efforts, CDP placed PMI on
its Supplier Engagement Leaderboard in 2020
for the fourth consecutive year for our actions
and strategies to reduce emissions and lower
climate-related risks in our supply chain.
Within our supply chain, the direct materials usedin the manufacturing of our products—cellulose
acetate tow, pulp, and paper (packaging board)—
have the greatest impact on our footprint. During
the year, we developed and launched a new andcomprehensive Supplier Engagement programwith our suppliers to collect primary carbon data
and understand their GHG emission reduction
programs and targets. In 2020, we engaged with
41 suppliers across our direct materials category,
representing 80 percent of the category’s total
carbon footprint. This engagement and the datacollected allowed us to significantly improve
the accuracy level of the associated carbon
emissions calculation, drive the future engagement
strategy, and develop a comprehensive roadmap
to accelerate the decarbonization of our supply
chain. In our engagements with suppliers, we alsoemphasized our Zero Deforestation Manifesto
as a critical driver in tackling climate change.

In 2020, emissions from our non-tobacco directmaterials supply chain amounted to 1,182,445 tonsof CO2e, a decrease of 14 percent versus 2019.

“An organization’s upstream
emissions are typically morethan 10 times greater than theirdirect operations. Therefore, wemust replicate and champion ourown sustainability efforts with
suppliers by working together
on solutions and programs
that have the greatest impact
in reducing our environmental
footprint. This year’s recognition
from CDP further reinforces ourcommitment to transparently
report on our progress as wework toward tackling climatechange and accelerating oursustainability efforts.”
Laurence Ruffieux
PMI Director of Operations, Sustainability

14%

Reduction in emissions from ournon-tobacco direct materials supply
chain in 2020 versus 2019110

Philip Morris International Integrated Report 2020

Innovating for
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Overview

Operatingwith excellence

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Performance
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Climate protection continued
Next steps
In 2021, we will roll out our new internal carbon
pricing to help drive PMI’s transition to a lowcarbon operating scheme. We will further
accelerate the decarbonization of our fleet andoffices, deploying the strategies developed in 2020.
In our factories, we will continue to implement
energy efficiency and conservation initiatives,
increase the share of renewables, switch togreen electricity, and promote efficient energy
use through our Drive 4 Zero program. We planto certify additional sites as carbon-neutral by
the end of 2021 and aim to develop a roadmap
to certify the majority of our factories—that will
be representing around 80 percent of PMI’s
estimated total production—by 2025. In themedium term, we aim for a gradual shift from
improved process technologies to more disruptive
technologies such as carbon removal technologies.
In our fleet, we will roll out our new Global Fleet
policy, accelerating the transition to electric andhybrid cars and equipping our vehicles with newtechnologies to drive efficiency. As regards ouroffices and warehouses, we will start rolling out
our strategy in our top 10 contributing markets.
Best practices we will gather related to facility
management (e.g., lighting and temperature
efficiency, renewable energy sources, and purchaseof green energy) will be recorded and used forfurther reapplication across other markets.
In our tobacco supply chain, we will focus on our
newly set targets and further reduce absoluteemissions through continuous improvement incuring fuels and additional emissions-reduction
initiatives for fertilizers and mechanization.
Building on the major progress we have achieved
over the past several years, we are now exploring
natural climate solutions, working with ourcontracted farmers on actively managing andrestoring soils and growing more trees, which
will naturally remove CO2 from the atmosphere
if properly preserved. In 2020, we conducteda preliminary study to assess the potentialof nature-based solutions in three markets
and, in 2021, we will develop our first pilot
project on the methodologies we have tested.
The contribution of removal projects will bereported separately from the reductions.
In our non-tobacco supply chain, we plan to extend
our supplier engagement and data collection efforts
in 2021 to cover additional product categories. We
are also exploring the use of a digital platform tofacilitate our carbon data management and amplify
our supplier-focused activities. Moreover, we plan
to evaluate the inclusion of reduction commitments
in our business volume allocation criteria andcarbon pricing as part of the tender process.
Encouraged by our progress, recent achievements,
external recognition by CDP’s Triple A, andthe validation of our new targets by the SBTi,
we are confident we can achieve our carbon
neutrality target in our operations (scope 1+2)
before 2030. During 2021, we will work on
developing a plan to significantly accelerate ourefforts and communicate on it accordingly.
We also plan to reassess climate change risks
and opportunities in line with a 1.5 degrees
Celsius scenario in 2022.
PMI wants to remain at the forefront of theclimate neutral agenda. We believe investments
and bold strategies will be key, and conditions
today are optimal to accelerate decarbonization
strategies and projects, and to reduce the overall
company’s footprint and improve our supply chain
resiliency in managing climate-related risks andseizing opportunities in the low-carbon economy.

A tobacco farmworker in Salta, Argentina

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2020 performance highlights
See our performance metrics

18%

Reduction in CO2e emissions across ourvalue chain versus 2019 (scope 1+2+3)

26%

Reduction in CO2e emissions in our direct
operations versus 2019 (scope 1+2)

67%

Of flue-cured tobacco purchased cured
with renewable fuel sources78%

Of electricity purchased andproduced in PMI factories that is fromrenewable sources

Innovating for
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Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Littering prevention
Around the world each year, over 360 million tons of plastic waste are
generated.1 Littering is what happens when waste products are discarded
incorrectly. It spoils the environment and pollutes the land and the waters, andit has increasingly become a cause for concern in many countries. As individuals
are largely responsible for littering, it is important to understand why people
litter, as well as how to encourage people not to litter. About one million tons ofcigarette filters are produced annually across the tobacco industry. Whereas
most cigarette butts are properly disposed, yet too many are casually litteredinto the environment and are among the most frequently found litter items.2
Read more

The right thing to do

The business case

While most of a cigarette’s tobacco and paper
wrapping disintegrate when smoked, some parts
remain after consumption. A cigarette butt consists
mostly of a filter, fine paper, small amounts of
tobacco, and residues of smoke constituents inthe filter. Whereas the fine paper and tobacco
residues degrade rapidly, the filter material—which
is made of cellulose acetate (CA), a wood-sourced
bioplastic—biodegrades slowly. Depending on
the surrounding biophysical conditions, thebiodegradation times for cigarette butts can range
from three months to 15 years. This, as well asother kinds of litter, can have serious consequences
for the environment, such as pollution, harm
to wildlife, and spread of disease. Committing
to the safe and responsible disposal of postconsumer waste is the right thing to do, as weshare the concerns regarding the effects of litterand recognize our responsibility to work toward
an unaffected natural environment. Moreover,there is a proven social impact which we believe
we can drive, by engaging with our stakeholders,
to take action on matters regarding cleanup
initiatives and encouraging behavioral change.

Beyond environmental considerations, cigarettebutt litter and litter in general have a social andfinancial impact which ranges from cleanup
costs to the perception of untidiness and lack ofsafety in areas of high litter prevalence. Cleaning
streets of litter is costly for society, and any
reduction of littering at the source, by educatingand encouraging consumers to dispose properly,
can help reduce these costs. Producers are
increasingly asked to participate in these costs.
At PMI, we believe we can and should playa role in addressing the issue of littering byhelping develop and scale up new emerging andinnovative solutions. Appropriately addressing
post-consumer waste will help us enhance brandand reputation by directly addressing consumer
misperception; it will also allow us to mitigate
national and international regulatory risks, which
can have financial implications for our bottom
line. Finally, it invites us to innovate in a waythat can secure our competitive advantage bydevising more circular value chains. These arecorrelated not only with less waste and less litter,but also with less extraction, conversion, andmanufacture of raw materials, a better use ofmaterials, and higher operational efficiency—allof which are good for the triple bottom line.

Our aim
1 Source: https://www.statista.com/statistics/282732/global-productionof-plastics-since-1950/#:~:text=In%202019%2C%20the%20global%20
production,quarter%20of%20the%20global%20production.
2 Source: https://missionmegots.fr/ and https://www.pmi.com/mediacenter/news/new-pmi-survey-finds-encouraging-signs-in-cigarette-buttlittering-behavior-and-attitudes-and-key-areas-to-address

A waste management facility in Jakarta, Indonesia

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Philip Morris International Integrated Report 2020

50%

Reduction of plastic litter from our
products by 2025 (versus 2021)

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Littering prevention continued
Achieving our aims
While many consumers dispose of their waste
properly, sadly still too much waste ends up in theenvironment. We seek to help change behavior toprevent cigarette butt littering and to encourage
proper waste disposal. To do this, we have an
Anti-Littering Policy in place and are acting across
PMI to deliver on it; accordingly, we have launchedglobal awareness campaigns and run anti-littering
campaigns in several countries across the world.
Our approach to address the issueof littering is three-pronged:• Reduce litter on the ground throughefficient and cost-effective collection
schemes and cleanup campaigns.

• Encourage behavioral change: Inspire change in
consumer habits through impactful anti-litteringawareness campaigns, involving for example
the promotion of effective disposal solutions.

• Plastic footprint, which indicates the amount ofplastic in the products we commercialize in a year

A model has been developed which will extrapolate
data collected locally to provide global figures,
based on georeferenced data. The model wascalibrated in 2020 in a city pilot (Lisbon, Portugal).
We are aware that COVID-19 is still affecting
outdoor activities in many countries, which
will impact the amount of litter found on the
ground. This may result in relatively low litter
prevalence still in 2021 and any baseline data
points quantifying the litter incidence taken during
this period may require controlling for this.

• Plastic litter footprint, which indicates how
much of our plastic footprint ends up as litter

Stakeholder engagement• Design for circularity: Replace the plastic in
our products with better, more sustainable
material alternatives where possible.
Through these three simultaneous strategies,
we aim to reduce by 50 percent the amount ofplastic littered from our products by 2025.
We plan to use three KPIs to track progress:

PMI’s 2020 plastic footprint
As a global manufacturer, we source plastic materials and plastic-containing
items for products such as our consumables, packaging, and devices. In 2020,
the amount of plastic we purchased was around 127,000 tons.
The largest share (79 percent) of that amount came from the bioplastics usedin the filters of conventional cigarettes and IQOS heated tobacco units.

Cigarette ﬁlters

54%

Heated tobacco
unit ﬁlters

25%

Packaging

20%

Electronic devices

1%

Note: In 2020, we adjusted our methodology to calculate our plastic
footprint based on purchased quantities.

113

ﬁlters54%Integrated Report 2020
Philip Cigarette
Morris International
Heated tobacco
unit ﬁlters

25%• Plastic litter density, which measures thedensity of plastic litter resulting fromour products found on the groundWe have partnered with the anti-littering NGO
Litterati, data analyst CARTO, and high-techclean city expert Cortexia to develop a global
plastic litter model that will allow us to calculate
our annual plastic litter footprint and measureplastic litter prevalence. In 2020, we worked withthese organizations to develop a methodology
to measure plastic litter prevalence and trackprogress against our plastic litter target. We
plan to establish our baseline in 2021.

We understand that scalable solutions require
the right kind of partnership, and in thatregard, we also collaborate with industry
peers, work with anti-littering organizations,and engage with public authorities.
Moreover, and to ensure activities are
implemented globally and have a tangible
impact, we have developed an antilittering toolkit for use by our affiliates.
Our efforts to raise awareness focus on littering
hot spots, such as highly frequented urban areas,squares, and parks identified as priority areas
by local authorities. Some of the awarenessraising campaigns are paired with cleanup
efforts involving PMI employee participation.
Cleanup campaigns are predominantly designed
to raise public awareness on the littering problem
in the communities they take place, yet they are
not meant to resolve the problem of littering or
to replace cost-efficient public cleaning services.
They must be accompanied by convenient cigarettebutt disposal solutions. We continuously seek
expert input to develop and share innovative
approaches to alternative waste receptables,
as well as portable solutions for consumers.

Smoking habits, environmental awareness, anddisposal practices vary by country, so combating
cigarette butt littering requires a customized
approach. Accordingly, our affiliates work,
based on our global methodology, to devise
impactful, context-based strategies appropriate
for their respective market realities. These
local anti-littering campaigns are run by ouraffiliates, with central support and guidance.

Sorting of cigarette butt litter at a waste management
facility in Jakarta, Indonesia

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Performance
metrics

Littering prevention continued
Progress in 2020
Impact of COVID-19
on our activities in 2020

Read more

Reducing litter on the groundIn the EU, cigarette manufacturers will be required
to participate in the collection and cleanup ofcigarette butt litter. The Single-Use Plastics (SUP)
Directive will mandate that producers participate
in industry-wide Extended Producer Responsibility(EPR) schemes. EPR is an established governancescheme to collect waste for recycling or special
treatment; it is now being used for the first time
to address littering. We support the concept of anindustry-wide EPR, provided such schemes aremanaged in a cost-efficient, proportionate, andtargeted way which addresses the objective of
reducing litter and changing consumers’ behavior.
The question on how to better enforce existinganti-littering regulations, or to introduce regulation
seeking to address the problem of plastic litter,and more specifically cigarette butt litter, is being
discussed in other countries such as Australia,
Brazil, Canada, Costa Rica, and the U.S. Regulatory
initiatives in this context primarily seek to raise thegeneral public’s awareness on the litter problem
and its environmental impacts, and at the sametime propose that producers of products withplastic packaging, or containing plastics, assume
responsibility for related litter cleaning cost.

In 2019, we had joined the annual World Clean
Up Day, the world’s largest litter cleanup event.
Our affiliates’ participation in World Clean Up
Day symbolizes the company’s commitment toaddress the issue of cigarette butt litter and ispart of our public sensitization efforts. In 2020,
given the generalized restrictions in place atthe time of the event (September), we decided
it was not appropriate for us to run a global
mobilization campaign to take part in this event.
Nonetheless, a few of our affiliates, where thepandemic-related restrictions were less severe,
were able to participate. That was the casefor our affiliate in Pakistan (PMPKL), where
over 70 of our employees got together withpartners from the local NGO NOWPDP, during
Pakistan’s independence day, collecting over
700 kg of litter from the shoreline in Karachi.

“While our primary focus ison changing people’s behavior
to encourage the proper
disposal of cigarette butts,
awareness raising will notprevent all littering. To meet
our target of halving our plastic
litter footprint by 2025, we
need to continue exploring
innovative solutions to reduceand collect plastic litter.”Jens Rupp, PMI Head Environmental Sustainability

In this regard, we are exploring opportunities
to participate in plastic litter collection projects
that can reduce not only cigarette butt litter but
possibly other unrecyclable plastic waste as well.
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Tailoring our efforts to local realities
Despite all the constraints arising from the
COVID-19 pandemic, some affiliates werestill able to deploy a comprehensive strategy
involving trade partners, local NGOs, experts,
and local authorities. These involved not only
awareness-raising initiatives, but also thedeployment and assessment of innovative
cigarette butt disposal solutions, and eventhe trialing of alternative disposal methods.
In the Nordics, in partnership with reputed
local organizations, we supported thelaunch of portable ashtrays and anti-littercommunications, with QR codes linking to
websites with key facts about cigarette butt
littering (involving approximately 20 key accountpartners and reaching around 2,750 points
of sale). Additionally, in Oslo we supported
the deployment of ballot bins in strategicparts of the city, partnering with a group of
behavioral scientists (Mindshift) and the local
municipality. With them, we conducted several
experiments in a city park to assess the efficacy
of pocket ashtrays, environmental messaging,and gamification. These experiments showed
reductions of cigarette butt littering of up to
32 percent and generated important insightsthat are being incorporated in our plans.
In Germany, our affiliate’s activities aimed toestablish the usage of pocket ashtrays, assess the
behavioral change triggered by visual, auditiveand integrative methods, and measure theeffectiveness of the campaign in the preventionof cigarette butt littering in pre-definedareas in Berlin. The project was developed inpartnership with the local NGO wirBerlin and
it ran on eight different locations (outdoor
hotspots) over the summer of 2020. Despite
the adjustments necessary due to COVID-19(which limited the execution of some activities
and measurements), the overall feedback from
Berliners was very positive with measurements

showing it is possible to decrease the incidenceof cigarette butt littering through education.
In Russia, our affiliate launched Marlboro’s “Leaveno Trace” limited editions and, in partnershipwith the All-Russian Society for Nature
Conservation and National Geographic Russia,
launched the project “Russia without trash.”This project includes a series of educational
publications, webinars, and online activities
to sensitize the Russian public to the overall
problem of waste and pollution sources,
including cigarette butts (here a link to oneof the websites of the project). Also, in six
major cities along the river Volga, our affiliate
supported a series of initiatives involving the
Ministry of Natural Resources and Environment,
including measurements of water quality andmicroplastic pollution, to sensitize the publicin these cities to the link between littering andthe contamination of this vital water stream.
In Mexico, most of our affiliate’s ongoing
activities had to be adjusted as of March and agreater focus placed on the online education andawareness-raising campaign. Notwithstanding,in partnership with the local company Ecofilter,
PM Mexico was able to deploy 300 publiccigarette bins in Mexico City and will continue
this effort in 2021; 400 butt collection centers
have also been deployed nationally. This
deployment was supported with the launch of
a dedicated website, a social media plan, and anout of home (OOH) communication campaign.
The level of engagement of this campaign was
outstanding, with over 30 million impressions
and a reach of over 120,000 people on social
media and OOH. Also, we continue to support
Ecofilter with a view to trial environmentallyfriendly alternative disposal solutions.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Littering prevention continued
Encouraging behavior change
In July 2020, we launched Our World Is
Not an Ashtray, a web-based, corporate
platform to educate, inspire, and engage thepublic on the issue of littering. Through thisawareness campaign, we share facts andfigures, testimonials, and calls to action.
Besides leveraging on our brands to encourage
adult smokers to change behavior and switch
to better alternatives, we also aim to promote
post-consumption behaviors related to proper
disposal. In that regard, in 2020 we continued
the deployment of our Marlboro limited-edition“Leave No Trace” pack, which communicates antilittering messages to adult smokers. Developed in
2019, the pack was sold in nine markets in 2020.
Our proprietary toolkit aims to support ourmarkets to be able to achieve that, adapting
their efforts to local realities. We are committed
to working in partnership with all relevant
stakeholders to develop and share the mostinnovative approaches. By the end of 2020, 65
markets were using our global toolkit to develop
localized strategies, with 33 of them having started
implementation. The toolkit provides guidanceon the development, monitoring, and evaluationof local programs, as well as best practices.

Eco-design for better filters
From an environmental perspective, the ideal
scenario would be for our products not to resultin any litter at all. In line with our Environmental
Commitment and our litter reduction target, wemust play our role in designing options that avoid orat least significantly reduce the amount and impactof our plastic litter, and develop filters with morenatural, biodegradable, or recyclable materials.
We are aware that material change itself does not
solve the littering problem but helps to mitigate
the impacts of residual littering of those users
who do not respond to anti-littering campaigns.

For many years, we have been actively evaluating
exploring and assessing the viability of alternative
cigarette filter materials with a lower environmental
impact than cellulose acetate (CA), an alreadyrenewable and partially biodegradable material.
Any new material must satisfy the following criteria:
1. Consumer impact:• Comparable filtration efficiency andconsistent performance to CA filters• Acceptable taste characteristics, as a productmust be successful in the market to have thedesired positive impact on the environment
2. Environmental impact:• Significant reduction in total carbon footprint• Substantial improvement in marine,
aquatic, and soil biodegradation versus
CA filters, and/or significant reductionin the plastic content of the filter

Next steps
In 2021, if conditions allow, we will ramp up antilittering campaigns across the countries in which
we operate, in coordination with key stakeholders.

2020 performance
See our performance metrics

We remain committed to our target of halving theplastic litter from our products by 2025. In 2021,
we will also establish our plastic litter baseline.
We plan to deploy our Marlboro limited-edition“Leave No Trace” pack in 14 additional markets
in 2021 and we will continue to expand it into
other brands and find solutions to increase theawareness of the issue across our adult smokers.
We will continue to explore and assess alternative
filtering materials to cellulose acetate, consideringboth manufacturability and product performance.

3. Commercially viable:• Material needs to be allowed to be utilized
for purpose• Conducive to industrialization at scale
We evaluate alternative filter materials via extensive
chemical testing, machinability trials, biodegradation
evaluations, and prototype testing among consumers.
Despite challenges faced during 2020 due to
COVID-19 restrictions at our suppliers and facilities,
we continued to explore and assess alternative
filtering materials with improved biodegradability,
including some plastic-free materials.
To date, while some tested materials have met
one or more of the above criteria, we are yet
to find an alternative to CA that satisfies thosecriteria. We will continue to explore options as
new materials and processes become available.
With regard to our smoke-free products
and our packaging, we seek to alleviate theirenvironmental impacts through eco-design.
Read more: Product eco-design and circularity
A “ballot bin” used to raise awareness on cigarette butt litter in Senec, Slovakia

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Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 1

Product eco-designand circularity
There is a need to move to more restorative economic models
of production and use. Building sustainability considerations
into product design is a way to control environmental and social
impacts across a product’s life cycle—from development andmanufacturing to use and disposal.
Read more

The right thing to do

The business case

By integrating sustainability considerations into
our products—from development to end-ofuse—we can lower their environmental and social
impacts and associated costs. Potential benefits
include energy savings, reduced consumptionof natural resources, waste minimization, anda longer product life span. Minimizing thenegative environmental and social impacts
of products commercialized at scale can help
safeguard the interests of future generations.

Natural and social capital costs of non-renewable
resource extraction and disposal impact the costof doing business. Commodity and raw material
prices will continue to remain volatile as climatechange, demographics, and technologicalinnovation impact resource supply and demand. In
addition, regulatory requirements, including landfill
closures, material bans, and extended producer
responsibility policies, are proliferating globally.
The concept of the eco-design and circularity
makes business sense as it represents a remarkableeconomic opportunity, while simultaneously
delivering environmental and social benefits.
It increases speed and reduces cost acrossdifferent electronic products due to common
components. It also reduces costs of returns,
obsolescence, and disposal, which can otherwise
be significant. We further believe that investingin eco-design and circularity may accelerate
growth by spurring innovation of new products
and reducing operating costs. Moreover, it can
prevent reputational challenges by strenghtening
relationships with customers and employees.

Our aims

100%

Percentage of PMI smoke-free product users
who have access to collection and recovery
for devices and consumables by end 2025

100%

Percentage of PMI’s smoke-free electronic
devices introduced on the market as of end
2025 that have eco-design certification
An IQOS store in Lausanne, Switzerland

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Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product eco-design and circularity continued
Achieving our aims
At PMI, we are committed to understanding andmanaging environmental and social impacts acrossour entire value chain, including the life cycle ofour products. Focusing on their sustainability isparticularly important as we continue to delivertechnologically advanced products that are at theheart of our transition to a smoke-free future.

With respect to our smoke-free products, our2025 eco-design and circularity ambitions,which extend to electronic devices, accessories,
and consumables, are as follows:• Provide access to collection and recovery for thedevice and its consumables to all IQOS users• Continue to reduce the carbon footprintof our smoke-free products in linewith our science-based targets• Achieve eco-certification for all our PMI
smoke-free electronic devices introducedon the market as of the end of 2025

Five fundamental eco-design principles guide our progress

117

1.
Effective use ofsustainable (such as
renewable, recyclable
or recycled) materials

2.
Minimization ofcarbon footprint related
to energy consumption
and transport

4.
Circularity: Reuse,
repair, recycling, recovery,and zero waste

5.
Social responsibility
in the production, use,and end-of-life phases

Philip Morris International Integrated Report 20203.
Product lifetime
optimization

Meeting these goals relies on a systematic
approach whereby sustainability is consideredfrom the start of the product development
process. Our work is guided by our sustainableproduct design strategies, which account for
impacts related to materials selection andsourcing, components production and productmanufacturing, distribution, use, and end-of-life.
Our sustainable design guidelines, developedin 2019, support decision-making and help to
integrate sustainability throughout our innovation
process. We have now fully embedded theseguidelines into our innovation stage-gate processes
and continually reinforce our requirements andprinciples at each stage. In 2020, we continued
to advance this program by incorporating
sustainability into our predevelopment
processes, recognizing that the exploration of
new technologies will play a critical role in thesustainability performance of our future productportfolio. Our five eco-design principles areapplied to various degrees across PMI’s productinnovation, with an eye to achieving the highest
sustainability impact. Each product generation welaunch incorporates improvements in, for example,
quality, functionality, ease of use, or robustness.

“Our design and engineering teams
have been trained by internal andthird-party experts to embed
our eco-design standards. Thisapplies to devices, consumables,
accessories, as well as packaging.
To continue building momentum
for this program, the ProductSustainability team regularly
engages in various departmental
forums to promote sustainability
in design, share strategies,
and workshop ways in which
individuals and teams can better
contribute to meeting our overall
product design goals. We have set
expectations and requirements
for each new product iterationand monitor them throughout thedesign and production process.”
Bin Li, PMI Chief Product Officer

Overview

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Operatingwith excellence

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Product eco-design and circularity continued
Performance is shared regularly with senior
management in our Product and Consumer
teams through the established development
governance framework. We are committed toevaluating sustainability characteristics and making
design choices that will continually enhance theperformance of all our products and packaging.
Life-cycle analysis (LCA) and other relevant
environmental assessments are performed prior
to the launch of any product, and results arepresented in internal decision-making forums per
our sustainable design governance programs. We
continue to advance these technical environmental
assessments earlier into our development cycle,
understanding the impacts and sustainability
potential of new innovations at the earliest stage.
In 2018, we adopted a centralized approach to
the end-of-life of our devices by establishing
two CIRCLE (Central Inspection and Recycling
for a Closed Loop Economy) hubs, in Europe
and Asia. The benefits of this approach include
economies of scale, regional investment, illicit trade
prevention, and quality enhancement (accelerating
manufacturing and design improvements minimizes
product returns). On certain occasions, due toregulatory restrictions governing cross-bordere-waste transportation, we may complement ourcentralized approach with more localized solutions.
Our 2025 eco-design and circularity ambitions
apply to the electronic devices developed by PMI.
In 2020, PMI commercialized devices developedby KT&G under the endorsement of the IQOS
brand in certain markets. As KT&G owns thedevelopment and manufacturing of these devices,many of our sustainability initiatives cannot beapplied. However, due to our commitments
toward environmental protection and productquality, the CIRCLE inspection and take-backprogram is open to KT&G devices commercialized
by PMI, and we aim to achieve similarly highstandards of performance for these devices.

Stakeholder engagement
We periodically benchmark our design program
against those of other leading companies todetermine whether modifications are needed
to ensure the highest standards, including
engagement in forums focused on circularity
within the electronics industry—directly
addressing some of our highest priority issues.
To support our efforts to build a more circularbusiness model for our reduced-risk products,
we actively seek to engage with external
stakeholders and learn from industry leaders. In
2020, we engaged in a project with the World
Business Council for Sustainable Development(WBCSD), on identifying best practices incircular electronics, including business model
development and product design. The learnings
identified will help PMI further develop our
ambitions in eco-design and circularity.

We are committed to making design
choices that will continually enhance
the sustainability performance of all
our products and packaging

IQOS device recycling hub in Japan

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Performance
metrics

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product eco-design and circularity continued
Progress in 2020
Impact of COVID-19 on
our activities in 2020

Read more

Electronic devices
In the area of product innovation, we aim to haveall our new electronic devices commercialized
as of end 2025 certified to validated standards
for eco-design. We are also working toward themeaningful inclusion of recycled content in all
devices by 2025. To those ends, we are pursuing
improvements in areas such as durability, design
for repair and recycling, and energy efficiency.

Sustainable design
In 2020, we started commercializing an
improved version of our e-vapor product in
New Zealand under the IQOS VEEV brand
name. Due to efforts to minimize the size ofboth the device and the e-liquid cartridge, thisproduct represents a significant enhancementin sustainability over the previous IQOS MESH
product, which we commercialized in the U.K.
Our design innovations decreased the product’s
CO2 emissions and material consumption whileproviding a better consumer experience.
Another focus this year was changing thebattery technology within our IQOS charging
units. Our new battery chemistry offers thesame performance but with a reduced carbon
footprint versus our previous version. Thischange was incorporated in the IQOS 2.4+ and
IQOS 3 DUO chargers, resulting in a 9 percent
reduction in the product’s CO2 footprint.

Circularity
We strive for our products to last andincreasingly aim to repair or refurbish them,so they stay in use for as long as possible.

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Lifetime optimization
In 2020, we established a cross-functional global
program, taking a holistic approach to address
product returns and enhance the lifetime ofour devices. This effort focused on reducing
unnecessary device replacement and limiting
e-waste generation, as a consequence. This
program was the first step in our journey toimprove the overall lifetime of our products,
primarily through optimization with theoutlook toward refurbishment and repair.
Our IQOS devices are subject to standard
product warranties, generally for 12 months
from the date of purchase or such other periods
as required by law. In many cases, we offer
warranty policies beyond the legal minimums toprovide additional benefits to our consumers. In
2020, we launched or expanded several servicebased solutions to minimize environmental
impacts aimed at extending product lifetime
through device optimization and maintenance.
We standardized our global guidelines, setting
consistent criteria and procedures across all
markets where our smoke-free products arecommercialized. These guidelines norm ourverified returns procedures, as well as theconditions which grant a replacement underwarranty or specific loyalty programs. We
trained our retail and call center teams on how
to assess potential product issues faced by the
consumer. We strived to ensure a diagnosis is
made before replacing a device, as some issues
may be resolved without a replacement andhindering the consumer experience—for instance,
by deep cleaning the device or ensuring thesoftware is up to date directly at our brand retailstore. We also launched in certain markets amobile application for IQOS users, which provides
tips on how to use and clean the device, as
well as basic troubleshooting instructions.

As a pilot effort in the last quarter of 2020, we
started installing firmware upgrade capabilities
across our consumer touch points, in several
core markets. In 2021, we will continue toexpand these capabilities across geographies,
channels, and touch points leveraging
our ever-evolving digital ecosystem.
Inspection, disassembly, recycling, and repair
When IQOS users return broken or end-of-service
products, our reverse-logistics program helps tocycle materials back into the economy. Our CIRCLE
program provides centralized hubs that inspect,
process, and separate materials from our electronic
devices for recycling. Our recycling partners are
certified R2, a stringent certification governed by
Sustainable Electronics Recycling International(SERI). This standard covers all aspects of theelectronics recycling value chain—including on-siteenvironment, health, and safety (EHS) practices,waste disposal hierarchy, and traceability of raw
materials—and helps to ensure our recycling
processes meet the highest possible requirements.
In addition, our CIRCLE hub in the European
Union obtained WEEELabex certification in
2020, reflecting our commitment to due diligencepractices and advanced recycling. Throughour CIRCLE program, we recover and recycle
significantly more materials than if the devices
were to follow traditional electronic waste streams.
Moreover, the inspection and recycling of returned
products allows us to improve quality and design
by feeding back into our development processes.
In addition, the hubs contribute to our fight against
illicit trade and counterfeiting—as they reduce
opportunities for product diversion—and benefit
the regional economies in which they are located.

Overview

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Operatingwith excellence

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Performance
metrics

Product eco-design and circularity continued“We began working with PMI in 2018 to collect heated tobacco
devices that have failed under warranty period and provide
assistance with inspection, intellectual property protection, andrecycling. During device inspection, the causes of default are
identified and fed back to PMI so that return rate can be reduced
through improved product design. In terms of recycling, we do
not dispose of any PMI-related waste in landfill and are also
making efforts to reduce the percentage of thermal recycling as
much as possible. For example, in Japan, there are only a limited
number of recycling businesses that will accept mixed plastics,
so in order to increase the recycling rate, we sort materials
into as high a purity as possible and actively seek out recycling
businesses that can accept even small lots of the sorted materials.
We meet with PMI regularly to discuss the possibility of reusing
waste plastics for our own products, and we also work closely
towards the resolution of recycling issues. Working with PMI was
the first time for our company, which has 130 business locations
around the world, to propose a solution that fully incorporates
the concept of resource recycling. In the future, we intend touse our work with PMI as a case study for further expanding
our efforts toward the realization of a circular economy.”
Representative from the company running the CIRCLE hub in Japan

191 tons

Of end-of-life devices and materials processedat the CIRCLE hubs in 2020

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Philip Morris International Integrated Report 2020

In 2020, we continued the rollout of our CIRCLE
program, achieving 48 percent market volume
coverage up from 39 percent the previous year,
by adding two new markets to the program(Bulgaria and Ukraine). CIRCLE processed over
191 tons of end-of-life devices and materials(of which, around 160 tons were recycled, withthe remainder going to incineration for energy
recovery). We significantly improved our recycling
rates in 2020 by working with our recycling
partners to identify additional technologies,
improved disassembly methodologies, andmaterial applications, resulting in an increase to84 percent in 2020, up from 74 percent in 2019.
With the aim of expanding our current footprint,
we also established plans to launch a third
centralized facility, located in Russia, in 2021.
Since the introduction of our CIRCLE hubs in2018, with recycling rates of 45 percent wehave made tremendous progress in improving
our performance. Our aggressive goals leadto top performance levels of our existingproducts at over 80 percent. The next stepfor us is to maintain these results and recycle
our materials to higher quality standards, while
expanding coverage of our product returns andrecollection. With regular introduction of new
products and versions to the IQOS portfolio, we
recognize the continued challenge to maintainperformance levels. We are now focusing on
quality of material output and efficiency throughimproved disassembly techniques and enhanced
automation, in addition to our efforts in repair andrefurbishment. Moving forward while maintaining
superior recycling performance of over 80
percent, our aim is to expand our geographic
and volume coverage, and repair capabilities toamplify the positive impact of these programs.

Our preference is to roll out CIRCLE globally;
however, it is not possible to implement theservice in all markets at this time due to legislative
restrictions related to e-waste transportation.
In markets where CIRCLE has not yet been
implemented, IQOS users can still return theirdevices to specified locations. We aim torecycle these devices via local partners withsimilarly high standards of electronics recycling;for example, our affiliate in the United ArabEmirates uses an R2-certified recycler.
We strive to establish commercially viable repairand-refurbish programs to offer a second life todevices and cycle them back into the economy.
We are also leveraging on digital infrastructure
to ensure upgrade capabilities for all our
devices. In 2020, we worked with our reverse
logistics partners to leverage and expand ourexisting CIRCLE infrastructure for the future
possibility of repair and refurbishment. We willcontinue to expand these initiatives in 2021.

Our recycling rate increased
to 84 percent in 2020, up from
74 percent in 2019

Innovating for
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Overview

Operatingwith excellence

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Performance
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Product eco-design and circularity continued
Carbon footprint

conducted further investigations into the carbon
footprint of nicotine liquid in partnership with athird party and one of our primary suppliers. This
study allowed us a more detailed understandingof the impacts along the value chain and will
provide insight for future improvement.

In our operations, eco-design principles inform
how we use life-cycle analysis (LCA) to assess
the carbon footprint of our products, fromtobacco sourcing to end-of-life impacts.
So far, we have analyzed IQOS devices, heated
tobacco units, and packaging. In 2020, we
finalized the results for our new e-vapor product,
IQOS VEEV. This new version has a lower carbon
footprint thanks to efforts to reduce the overall
product size and decrease material use. We also

IQOS currently has a higher carbon footprint than
combusted cigarettes. Primarily, this is due to theuse of an electronic device, which involves newcomponents and requires electricity to charge.
This element accounts for 13 percent of the total

Life-cycle assessment—comparison of some PMI products (kgCO2e/year)
33

32

32

24

19

Combustible
cigarette

IQOS 2.4+

IQOS 3IQOS 3 MULTIIQOS VEEV

Note: This graphic is an internal assessment based on data compiled from three different LCAs and assumes 20 heated tobacco units
or cigarettes per day. Scope includes materials, manufacturing, use, and end-of-life, but excludes logistics.

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carbon footprint of the IQOS 3 system. Additionally,
the process to manufacture heated tobacco
units is more energy intensive than for cigarettes,
due to the production of cast leaf tobacco.
We are working to close the gap between
combustible and smoke-free products throughimproved manufacturing processes, extending theusable life of our electronic devices, and decreasing
the total CO2 footprint through smart material
selection and sustainable design practices.
Over the past two years, we have reduced theoverall CO2 impact of our smoke-free products
through improvements in manufacturing processes
and in our tobacco supply chain. One of these
initiatives has been to look at the density of
tobacco within the product, to reduce both CO2
impact and provide a better consumer experience.
By modifying the design of the heated tobacco
plug slightly, we were able to reduce the CO2
impact per stick (considering the raw materials
and manufacturing impact) by 4 percent while
enabling a smoother insertion of the heated
tobacco unit (HTU) in the holder and generating
a more consistent aerosol delivery, addressing
one of our more common consumer pain points.
We continue to explore additional material
optimizations for our HTUs, including material
replacement to drive down CO2 impact per stick.

Product certifications
Product certification can help drive performanceby raising the standards to pursue and provide
comprehensive information to consumers,
enabling them to make more sustainableproduct choices. These certifications are also
a way for us to transparently and consistently
disclose the environmental performance ofour products to all of our stakeholders.
Smoke-free products—and heated tobacco
products, in particular—are a relatively new productcategory; as such, they typically are not coveredby existing eco-standards. In order to achieve ourobjectives, we will ensure devices are designed per
our sustainable design criteria and we will seek todevelop and implement new category standards
as necessary to achieve our certification goals.
In 2020, we launched a program to identify
relevant certification schemes for our smoke-free
product devices as part of our efforts to reach ourtarget of having all electronic devices eco-design
certified by the end of 2025. This exercise wasconducted with third-party experts and informedby comprehensive benchmarking. The next stepin our journey is to reach out to the prioritizedagencies and evaluate the process for rule making
for our heat-not-burn product portfolio. We will
also, in the short term, work to identify otherways to publicly disclose performance of our
products through structured disclosure programs.
Establishing a robust roadmap is the foundationto achieve our aim of eco-certification for all PMI
developed devices launched by the end of 2025.

Innovating for
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Overview

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Performance
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Product eco-design and circularity continued
Consumables
We are exploring ways to minimize theenvironmental and social impacts of theconsumables for our smoke-free products;
these include the HTUs used with our IQOS
heat-not-burn product and the cartridges
used with our IQOS VEEV e-vapor product.
In addition to developing services to reduce
the end-of-life impact of our products, ourinnovation and design teams are exploring
low-carbon, recyclable, and biodegradable
options for the materials used in our heated
tobacco units and combustible cigarettes.
We are committed to investing significantly
in continued research on the sustainability ofmaterials contained in our consumables, and weare working toward viable solutions that meetstrict international standards, satisfy market
requirements, and work with high-volume
manufacturing (read more: Littering prevention).
We are clear that there is a risk that HTUs could
be littered, but we have good indication that thelittering rate for HTUs is lower than for cigarettebutts. We want to make littering a thing of thepast—along with cigarette smoking. In recent years,
we conducted surveys in Italy and Japan, andcounted littered HTUs compared with cigarettebutts in Athens. Those surveys indicated thatthe new rituals introduced to legal-age smokers
following their conversion to smoke-free productspresent an opportunity to help consumers
change former habits of cigarette butt littering.
In 2020, we deepened our understanding of
consumer behavior related to the disposal of used
HTUs and consumers’ potential motivations andrequirements for participating in a PMI-driven
collection scheme. More specifically, we found thatthe statements that resonate most with consumers
are those referring to anti-littering and streetscleanup as opposed to recycling applications,
HTUs’ second life, or broader statements about

corporate responsibility. Adult users believe thatrecycling initiatives require effort on their part;consequently, 60 percent of them believe thatincentives (e.g., product discounts) could positively
influence a program’s participation rate. Finally,
participatory recycling initiatives were shown tohave the potential to differentiate the brand andits attractiveness, and to reinforce adult smokers’
decision to switch from combustible cigarettes to
IQOS. We explored ways to deploy an effective andeconomically viable end-of-life collection service
for our IQOS products to further reduce littering.
We continue to work with waste management andrecycling partners to explore the potential second
life we could give to recycled HTUs. Our research
to date shows that the properties of cellulose
acetate would enable the material to be given asecond life through a variety of applications suchas spinning the fibers into fabrics or creating pellets
that can be pressed/injection-molded into a varietyof hard goods. Though these results are promising,recycling opportunities for cellulose acetate—unlike
for many metals and plastics—are not widely
available, and there is not yet a developed waste
stream across the globe that we can leverage.

Accessories
A focus in 2020 was exploring potential usesof recycled materials processed through our
CIRCLE hubs to manufacture IQOS accessories.
We identified PC/ABC, a common plastic foundin many electronics and consumer goods, as thematerial with the highest potential. We havelaid the groundwork to set up a closed-loop
recycling system in one of our CIRCLE hubs andhave developed several Proof of Concepts in
our investigations considering our current IQOS
accessories range. We expect to operationalize

As HTUs and cartridges don’t burn, and theconsumers don’t have to stub them out, we aim
to offer effortless, convenient, and fully recyclable
solutions for these consumables. We believe that
this would allow us to support our consumers
to adopt better behaviors from a sustainability
perspective by giving them the practical, easy, andfree tools they need. In 2020, we designed pilot
programs to collect and recycle the consumablesfrom our smoke-free products (including various
generations of HTUs and cartridges), partneringwith the best-in-class recycling companies
all around the world to make sure the usedconsumables don’t end up in landfill but are used
for recycling or energy creating incineration. We
plan to launch our first pilot in Switzerland in 2021
and will communicate progress in our next report.
IQOS accessories in an IQOS store in Rome, Italy

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Philip Morris International Integrated Report 2020

this project in the coming years with closed-loop
accessories sold globally. In addition to closed-loop
material reuse, we continue to explore alternative
sustainable materials for our accessories range.
In line with the EU SUP Directive, we modified our
IQOS cleaning sticks so they are now composedof paper instead of plastic. We commercialized
these sticks in the U.K. and France in 2020
and will deploy them in all EU markets in 2021.
Going beyond the regulatory requirements,
we are investigating packaging improvements,
including moving to a fiber-based solution.

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product eco-design and circularity continued
Packaging
Our approach to packaging contributes
significantly to our efforts to preserve andprotect the planet’s resources.
We use packaging for all our products, including
combustible cigarettes and our smoke-freeelectronic devices, consumables, and accessories.
Our product packaging is made primarily fromboard and paper. In 2020, we estimate (mainly
based on preliminary suppliers self-declarations)that over 70 percent of the volume of board andpaper we sourced for our packaging came fromsuppliers certified to Forest Stewardship Council(FSC) or Programme for the Endorsement of Forest
Certification (PEFC) standards. Furthermore, wedeveloped an assurance framework coupling thewood, pulp, and fiber’s countries of origin with theholding of FSC or PEFC Chain of Custodycertifications by our board and paper suppliers andtheir supply chain partners. This methodology wasreviewed and validated by a third party. As a result,based on our 2020 purchased volumes, 61 percent
of our board- and paper-based packaging materials
were sourced at no risk of deforestation of primaryand high conservation value forests. These results
are being audited by a third party at the time of
preparation of this report.
We aim to develop solutions that minimize
the use of packaging materials and improve theircircularity without compromising protection
and convenience. We are driving our approachthrough ambitious commitments. By 2025,
we aim to achieve:• 100 percent of packaging madewith recyclable materials• 95 percent of packaging materials
from renewable sources• 15 percent reduction in packaging
weight (versus 2018 baseline)

A sales representative in an IQOS store in Rome, Italy

Use of materials in our packaging in 2020

Paper and board

91%(Packs and bundles, inner liners,
shipping cases) (388,850 tons)
Plastic(Overwrap of packs and bundles, pouches,seal inner liners and labels) (25,470 tons)
Aluminum(Inner liners (including seal) and othertobacco product packaging) (3,400 tons)
Other

6%

1%

2%
(Inks and composite materials used inother tobacco product packaging) (10,4200 tons)

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Philip Morris International Integrated Report 2020

To deliver on these commitments, we employ
a twofold strategy: First, we aim to eliminate
unnecessary packaging, and in particular plastic
packaging, and to implement solutions allowing us
to minimize materials used. Second, to prevent the
depletion of finite resources, we seek to increase
the recyclability of our packaging and to reduce
the use of materials made from non-renewablesources. We are working to eliminate the use ofaluminum inner liners by the end of 2022 andof non-recyclable plastics by the end of 2025.
Fundamental to our work is integrating circularity
considerations covering the sourcing of renewablematerials, the minimization of packaging, andthe reduction of end-of-life implications. In thedesign stage, for instance, we prioritize the useof recyclable mono-materials and reducing thevoid inside packaging to optimize transportation,
both of which reduce the product’s CO2 footprint.
To ensure circularity, the packaging should be

easily recycled by consumers; this requires thata recycling infrastructure be available for thematerials selected in markets across the globe.
Our teams in the Consumer, Product, andProcurement departments work hand-in-hand topromote the various elements of circular package
design. We leverage our in-house R&D andproduct development capabilities, for instance,
to formulate the appropriate chemistry to
produce new materials and to develop packaging
concepts and packing technologies. It is equallyimportant that we engage with our materials andequipment suppliers, as they must implement at
industrial scale any solution we develop. Suchengagement also allows us to benefit from theirexpertise and technological developments.

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work with

Reducing packaging

Increasing recyclability

Key to our work in 2020 were our efforts to
reduce the volume of board required in our HTU
and cigarette packaging. Working with our key
suppliers, we began replacing the packaging
board across all of our brands portfolio with a
10 percent lighter alternative that offers thesame pack strength and, therefore, a similar
consumer experience. The shift to this alternative
will allow us to save approximately 25,000
tons of board over a four years period. We
expect to complete a full rollout of this initiativeacross all our consumables—both combustible
cigarettes and heated tobacco units—by 2024.

Acting on our commitment to eliminate nonrecyclable materials and increase renewablematerial use to 95 percent by 2025, we set
up a program to replace aluminum inner liners
with paper versions, and we are exploringalternatives to plastic overwraps.

We also achieved significant progress in the
packaging of the devices and accessories forour smoke-free products. We developed a new
IQOS mobility kit (which contains the device andnecessary accessories) and accessories packaging,which we plan to launch in 2021. The removalof shrink film in the mobility kit and plastic
windows in the accessories packaging will allow
us to meet our target of having 95 percent of
packaging materials made from renewable sourcesby 2025. In addition, we were able to reduce
the packaging weight of our new mobility kit by
17 percent and our accessories packaging by
approximately 35 percent, which will contributesignificantly to reaching our target of a 15 percent
reduction in material used in our packaging by
2025. As a next step, we aim to replace plastic
laminated board in our packaging by mid-2022 toachieve full recyclability of the packaging of ourdevices and accessories in the paper stream.
We are also exploring further improvements,
including the potential replacement of rigid
boxes by lighter packaging designs. This would
further reduce the use of packaging materials
and optimize our transportation CO2 footprint.

Protecting theenvironment

Eliminating aluminum
Our combustible cigarettes and HTUs areencased in an inner liner inside the pack. Theseliners typically are made of non-recyclable
aluminum foil or recyclable alternatives
such as metalized paper or white paper.
Already, around 74 percent of the inner
liners in our packaging are recyclable inpaper stream. In 2020, the proportion ofpacks sold with aluminum inner liners was
26 percent, down from 34 percent in 2019.
We aim to eliminate the use of nonrecyclable aluminum foil by the end of 2022,
by deploying substitution programs.
In a few markets, we will have to continue using
recyclable metalized inner liner to comply with local
regulatory requirements. In order to contain theenvironmental and social impact it may represent,
we aim to source certified aluminum from ourtier 1 suppliers. In 2020, 84.2 percent of thealuminum used in our packaging was Aluminium
Stewardship Initiative (ASI) certified, either under
the Performance Standard or the Chain of Custody.
Replacing non-recyclable plastic packaging
Currently, the polypropylene wrap around ourpacks of consumables is recyclable but is not madefrom renewable sources and requires consumers
to separate plastic wraps from the pack forrecycling. We are exploring the use of alternative
bio-based materials to make overwraps easierto recycle. We have received positive feedback
from consumer panels and plan to pilot the new
packaging solution in selected markets in 2022.
IQOS device recycling hub in Japan

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Philip Morris International Integrated Report 2020

Performance
metrics

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product eco-design and circularity continued
Next steps

2020 performance highlights
a small number of market pilots to test this new
operating model. As we continue to refine our
products, we expect iterations at the design stage,
to leverage our eco-design principles, further
supporting our repair program ambitions.

One such initiative is developing accessories
from recycled plastic materials collected at our
CIRCLE hubs. We aim to develop and launcha commercial line of accessories made fromthese materials within the next 18 months.

Research will continue on device, accessory,
consumables, and packaging design to identify
technologies and materials that could enhance theoverall sustainability of our smoke-free productportfolio. Cross-functional teams already are hard
at work establishing these innovation pipelines.

We will continue to roll out our CIRCLE program
across the markets where our smoke-free
products are commercialized; this includes
the establishment of a new centralized hub
in Russia, amplifying our reach to additional
markets, and addressing upcoming new
product and technology introductions.

We will continue to evaluate and expand
our offerings regarding the take-back ofdevices and consumables, such as HTUs
and e-vapor cartridges, with pilot programsfor consumables planned in 2021.

We plan to pilot our second-hand life program in
2021, focusing on the newest versions of our IQOS
heat-not-burn device. We expect to conduct

In addition to open-loop recycling systems, we
continue to actively pursue closed-loop models
for the recycling of our returned devices.

We will continue the systematic implementationof our sustainable design principles throughout
our product and packaging development. This will
include continued internal training to increaseawareness and ensure uptake of our programs
across PMI.

As we move forward, we are embedding ourdesign principles to establish robust sustainability
requirements in our consumable development
process to identify opportunities which will lead to
optimal performance while lowering CO2 emissions
and material consumption to the extent possible.
We expect continued progress in 2021 on ouroverall packaging weight reduction, driven by afull-scale implementation of our board-reduction
initiative across all our consumables brands.
And we foresee major headway in our efforts toeliminate aluminum inner liners, as we will focus
our efforts on Indonesia, one of the top markets inwhich the new practice is yet to be implemented.
Currently, PMI’s use of recycled content materials
is limited to shipping cases and represented
only 12 percent of the total weight of our
packaging materials in 2020. To further increase
packaging material circularity and recycledcontent in our packaging, our technical experts
are assessing the feasibility of using recycledcontent board in primary and secondary
packaging, which would require solving a technicalchallenge related to mineral oil migration.

IQOS device recycling hub in Japan

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Philip Morris International Integrated Report 2020

As commercialization channels evolve, so does therole of packaging. For instance, the shift from retailtoward e-commerce has prompted us to rethink
our packaging strategy for online sales. Also, we
seek to better understand how to reduce packaging
at our flagship stores. We plan to gather learnings
and consumer insights to explore solutions fitting
the realities of the various retail channels.

See our performance metrics

Recycling rate of IQOS devices at the
CIRCLE hubs
%
100

84%

80
60
40

74%

Target level

45%

20
0
2018

2019

80%

2020

94.7%
of our packaging
material recyclable

89.8%
of our packaging
material is fromrenewable source

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

TIER 2

Forest conservation

Biodiversity

A significant portion of our environmental
management effort is devoted to protecting
forests. To PMI, this means preventing
deforestation linked to our operations andsourcing activities. To accomplish this, we seek
to use sustainable and traceable curing fuelsin our tobacco supply chain and responsibly
source paper and pulp-based products.

For PMI, biodiversity is about reducing thenegative impacts of our operations and sourcing
activities on habitats and ecosystems and looking
for contributions we can make to biodiversity.
This includes the careful management of landuse, protection of soil quality, and prevention ofpollution. Post-consumer waste resulting fromthe use of our products is described separately.

Read more online

Read more online

Water stewardship

Waste reduction

Water stewardship at PMI is about reducing
water use, promoting water recycling, protecting
watersheds, preventing water pollution, enhancing
recharge, and promoting sustainable water
management in collaboration with stakeholders.

The resources we use at PMI to manufacture
our products are valuable, so we aim to ensure
they are used effectively, avoiding waste whenpossible. To us, waste reduction means minimizing
the waste generated by our manufacturing
facilities and offices, promoting materials reuse
and recycling, and striving for responsible disposal.

Read more online

126

Philip Morris International Integrated Report 2020

Read more online

Overview

Innovating for
better products

Integrating
financial andnonfinancial
performance

Operatingwith excellence

Caring for thepeople we work with

Closing remarks from the
Chief Financial Officer
There is currently an expectation by bothcompanies and investors that material
environmental, social, and governance (ESG)
factors should be completely integrated
into a company’s business strategy.
Historically, finance professionals have spoken
one language for shareholders while sustainability
professionals have spoken another language for
ESG stakeholders. To maximize the benefits ofsustainability for financial performance, eachprofession needs to learn the language of theother. And both must be able to explain (toboth audiences) how sustainability and financial
performance are mutually reinforcing.
A major barrier to this integration is that the
Finance and Sustainability functions have been—and largely remain—wholly separate parts oforganizations. With Sustainability reporting to the
CFO, thereby integrating Sustainability into the
Finance function, PMI’s organizational structure hastaken yet another necessary step toward delivering
on its purpose: a smoke-free future that will benefit
both shareholders and other stakeholders.

“At PMI, we are committed
to continuously improving
the way we track andreport on our company’s
performance, taking aholistic approach that not
only covers our inputs
and activities but also
focuses on where we
can have the greatest
impact: our products.”
127

Philip Morris International Integrated Report 2020

Protecting theenvironment

Performance
metrics

This move underscores that ESG is core to
PMI’s performance and success, and further
demonstrates the company’s leadership insustainability and corporate purpose. It is our
firm belief that sustainability and businessperformance do not follow separate paths
and narratives. They are fully interrelated andmutually reinforcing and should be organizedand presented to all stakeholders, including
shareholders, in an integrated way.

Following the introduction of our 2025 Roadmap
last year, our Chief Sustainability Officer now
leads the work to strengthen the developmentof ESG-related key performance indicators linked
to our sustainability targets. With these KPIs, weseek to clarify and standardize the approach wetake with our nonfinancial performance data tocontinue building sophistication and expertiseas they are also a key driver of PMI’s corporate
strategy, capital allocation, and operations.

The biggest remaining challenge is ensuringthat ESG information and data are managed
and reported with appropriate rigor. Unlike
financial accounting standards, and despite
evolving practices, there are no industry norms
or globally recognized established practices
for measuring and evaluating a company’s
performance on ESG factors, sometimes
referred to as nonfinancial performance.

We expect this work to further enable us toaccount for both tangible and intangible assets,
understand how to minimize negative externalities
and maximize positive ones, and, by extension,
better manage our company’s performance.
We are exploring better ways to comprehendand measure our impacts, including through ourmembership of the Value Balancing Alliance.
This work will inform our next sustainability
materiality assessment, which will take placein 2021. The findings of this analysis will help
ensure we continue to focus on the areas thatare most relevant to us while also contributing to
the global agenda for sustainable development.

External engagement is critical to progress inthis area, and I am proud to have joined otherson the World Business Council for Sustainable
Development’s CFO Network to encourage
the standardization and mainstreaming of ESG
disclosure; incentivize investor engagement;
sponsor, support, and drive business practice
toward stakeholder capitalism; and continue
leading in the implementation of ESG into business
management and decision-making processes.
We are also hopeful that the Trustees of the
IFRS Foundation will create their proposed
Sustainability Standards Board (SSB). This will
provide the basis for measuring and reportingon sustainability performance in a way that is
as robust, relevant, and reliable as reporting on
financial performance. PMI plans to be an early
adopter of these standards as they are produced.
At PMI, we are committed to continuously
improving the way we track and report on
our company’s performance, taking a holistic
approach that not only covers our inputs andactivities but also focuses on where we canhave the greatest impact: our products.

We recognize that these ambitious steps do
not complete our journey in reporting on oursustainable corporate strategy. ESG performanceis about a company’s inputs and operations;
it does not address the positive and negative
externalities of a company’s products andservices—the missing “P” (for “product”) in
ESG. While scientific evidence that smoke-free
products represent much better alternatives than
combusted cigarettes to health, PMI will continue
stepping up its efforts on all fronts to contribute
positively to people’s lives. We can only accomplish
this by keeping our approach to sustainability
at the heart of the way we do business.

Emmanuel Babeau
Chief Financial Officer

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

PMI’s performance in ESG ratings,
indices, and rankings
At PMI, we understand the value of participatingin ESG ratings; it helps us assess our sustainability
performance, benchmark ourselves against
our peers, and, most importantly, identify areas
for improvement.
We prioritize our participation in ratings that are
most useful to us and our stakeholders, based on:• The credibility of the methodology and ourability to interpret and use its results• Recognition of the rating among theinvestor community, as well as participation
by our competitors and peers so we
can benchmark our performance
ESG ratings can spur greater transparency andincentivize us to improve our performance. Not
surprisingly, however, our company—like manyothers—tends to rank differently dependingon the ESG ratings agency assessing our
performance. It is because each ESG rating
agency uses a proprietary methodology, withdifferent data inputs and calculations.
Regardless of their measurement methods, all
ESG ratings focus on evaluating a company’s
activities and inputs. They largely focus on how acompany produces its products and services, i.e.,
the environmental (E) and social (S) aspects of
its manufacturing process and supply chain, andgovernance (G) of the company. While these areimportant topics, we would recommend startingwith a more fundamental question: What are
the most material topics related to a specificbusiness, i.e., what drives long-term businesssuccess? For many companies, the most material
topics relate to the product (P) and its impact on
the consumer.
What a company makes is as important as how it
makes it. Companies’ products and services have128

• Value as a learning opportunity, witha sufficient feedback loop to allow
us to improve over time
• Resources required, which should
not undermine our company’s focus
on performance improvement• Openness to dialogue (we want tobe able to understand expectations andresults, share knowledge, correct
factual inaccuracies, and provide
input on ratings enhancements

an impact on consumers and society, and thisis something ESG ratings often fail to evaluate
as comprehensively as they assess operational
aspects of the business.
Regrettably, this is especially important inrelation to the tobacco industry, where ESG
ratings fail to appropriately consider the
strategies deployed to address the producthealth impacts.
By incorporating P considerations into ESG(ESG-P), rating agencies can look deeper into a
company’s value proposition. Operational impact
is important, but the impact of a company’s
products is equally, if not more, significant.
By factoring in and giving greater visibility to
a company’s products, ESG-P ratings would
help companies improve not only how they
produce, but also what they produce. This would
encourage business model transformations that
could lead to a more sustainable economy—anda better future. In the case of our industry, thismeans successfully phasing out cigarettes toaccelerate the end of smoking.

Philip Morris International Integrated Report 2020

Rating agencies

PMI’s performance in 2020

Score

Bloomberg
Gender-Equality
Index

Named to the Bloomberg
Gender-Equality Index

CDP Climate,
Forest,Water Security

Awarded “Triple A” score for our efforts tocombat climate change, protect forests, and water
security. This marks the seventh consecutive yearthat PMI has ranked on CDP’s A List for Climate
Change and the second consecutive year thatthe company earned a position on the Water
Security A List

Triple A

CDP Supplier
Engagement

Placed on Supplier Engagement Leaderboard forthe fourth consecutive year

LeaderISS-oekom“C” score, achieving industry leadership (2019score; assessment is updated every two years)

MSCI

Maintained BBB score

S&P Global
Corporate
Sustainability
Assessment

Included in the Dow Jones Sustainability Index(DJSI) North America; ranked third in the industry;leading the industry for the third year in a row in
DJSI’s innovation management category74

S&P ESG
Evaluation

Scored 60/100, based on ESG Profile Score(57/100) and Preparedness Opinion (“Adequate”).
PMI’s ESG Profile Score is assessed based on
entity-specific scores and sector/region scores(see report)

60

Sustainalytics

Ranked third within the tobacco subindustry ESG
Risk Rating, with medium exposure score andstrong management score

24.4

State Street
R-Factor Score

Outperformer within the tobacco industry;
industry average score of 47

TobaccoTransformation
Index

Ranked 2 out of 15 tobacco companies
assessed; leading the industry for “Strategy andManagement” category

Included in the
index

C
BBB

56
2.36

Innovating for
better products

Overview

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

PerformancetablesFinancials

Innovating for better products

Operating with excellence

Caring for the people we work withFinancials (in millions USD, except per share data)1

2018

2019

2020

Revenues including excise taxes

79,82377,921

76,047

Excise taxes on products

50,198

48,11647,353

Net revenues3

29,62529,80528,694

Operating income

11,377

10,531

11,668Net earnings attributable to PMI

7,911

7,185

8,056

Earnings per share (EPS)

5.08

4.61

5.16

Operating cash flow

9,478

10,0909,812

Total assets

39,80142,87544,815

Total liabilities

50,54052,47455,446

Capital expenditures

1,436

852

602

R&D expenditure

383

465

495

4

Protecting the environment

2

1 The information is a summary and is qualified in its entirety by reference to the full texts of PMI’s Annual Reports for the years ended 2018 through 2020, available on PMI.com.
2 This indicator refers to the amount paid by PMI entities, and excludes excise tax paid in several markets where third-party operators collected taxes on PMI products.
The total amount of excise tax paid by consumers on PMI products amounted to USD 72.4 billion in 2020.
3 The decline in 2020 full-year net revenues was partly driven by unfavorable currency and the impact of the deconsolidation of PMI’s Canadian subsidiary, Rothmans, Benson & Hedges, Inc. (RBH), effective March 22, 2019.
4 Net cash provided by operating activities.

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Philip Morris International Integrated Report 2020

Innovating for
better products

Overview

Operatingwith excellence

Pillar 1

Protecting theenvironment

Performance
metrics

Business Transformation Metrics

R&D

Innovating for
better products* The 2020 metrics marked with an asterisk (*) are subject
to PwC’s Assurance Report (see page 146).
1 Smoke-free products include heated tobacco units, devices, ande-cigarettes. Total products include smoke-free products, cigarettes,
and other combustible products.
2 R&D positions include scientists, engineers, technicians, and support
staff. Comparable data for years prior to 2018 are not available, as thescope of R&D positions changed following company organizationalchanges.
3 IP5 jurisdictions are Europe (patents granted by the European Patent
Office), China, South Korea, Japan, and the U.S.
4 Data related to perception and behavior studies were restated to include
both premarket and post-market studies.
5 Direct spend focuses on materials used in the manufacture of our
products; it includes tobacco leaf, direct materials, and electronic devices
and accessories.
6 Investments reflect research, product and commercial development,
production capacity, scientific substantiation, and studies onadult smoker understanding. Figure does not include commercial
deployment costs.
7 Production temporarily stopped at one of our factories in Germany
in December 2019 and resumed early 2020.
8 “SKUs” stands for stock-keeping units. References to number of SKUs
are based on the latest available data from a number of internal sources,and exclude People’s Republic of China and the U.S.
9 Excluding PMI Duty Free. Data are based on 2020 OECD country list.
10 Includes flagship stores, and small, large, and temporary boutiques.
11 The smoke-free product shipment ratio is compiled based on
millions of units.
12 Excluding PMI Duty Free; see glossary.
13 Net of excise taxes.
14 Excluding PMI Duty Free and the U.S.

Sourcing
Operations
Commercialization

Protecting the environment

2019

2020

429

453

383

465

495

74%

92%

98%

99%

Number of R&D positions (FTEs)2

n/a

n/a

764

942

934

Patents granted in IP5 jurisdictions relating to smoke-free products (cumulative) 3

170

300

480

740

1,300

36

57

82

109

146

19

22

Number of studies completed by PMI on smoke-free products (cumulative, since 2015)
11

12

19

– Perception and behavior (premarket and post-market)4

7 (7+0)8 (7+1)12 (9+3)

Supply chain direct spend expenditure (smoke-free/total)5

n/a

n/a

n/a

35%

33%

Cumulative investments behind smoke-free products (since 2008, in billions USD)6

3.2

4.6

6.2

7.2

8.1

Number of factories producing smoke-free products out of total number of factories7 *

-6.5%

-6.1%

-5.5%

-4.1%

78.2%

9.9%

37.1%

24.9%

38.2%

4.7%

5.5%

7.8%

10.1%

13.9%

-1.7%

Year-on-year change in number of SKUs—smoke-free products
SKUs (smoke-free/total)
Number of markets where IQOS is available for sale*
Proportion of markets where IQOS is available for sale that are outside the OECD9 *

13 (9+4) 30 (15+15)

3 out of 48 4 out of 46 8 out of 44 8 out of 38 8 out of 39

Year-on-year change in number of SKUs—combustible products8

20

38

44

52

64

32%

41%

44%

45%

52%

Number of IQOS stores10

26

63

81

199

259

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

90

292

488

679

749

15%

39%

60%

71%

76%

8

36

42

60

76

Commercial expenditure (marketing) (smoke-free/total)*
Combustible product shipment volume (billion units)*

845

791

767

732

654

Smoke-free product shipment ratio (smoke-free/total)11 *

0.9%

4.4%

5.1%

7.6%

10.4%

Total IQOS users (in millions)12 *

2.1

6.9

9.6

13.5

17.5

Estimated users who have switched to IQOS and stopped smoking (in millions)12 *

1.5

4.7

6.6

9.6

12.7

Estimated users outside the OECD countries who have switched to IQOS and stopped
smoking (in millions)9 *

0.0

0.2

1.1

2.9

4.3

2.7%

12.7%

13.8%

18.7%

23.8%

Number of markets where net revenues from smoke-free products exceed
10% of total net revenues14 *

1

5

19

31

38

Number of markets where net revenues from smoke-free products exceed
50% of total net revenues14 *

0

1

3

4

6

Net revenues (smoke-free/total)13 *Philip Morris International Integrated Report 2020

2018

72%

Smoke-free product shipment volume (billion units)*

Consumers

Caring for the people we work with

Revenues

Operating with excellence

2017

R&D expenditure (smoke-free/total)1 *– Clinical assessment

Innovating for better products

2016

R&D expenditure (in millions USD)*– Toxicological assessment

Financials

130

Caring for thepeople we work with

New metrics

Metrics linked to 2025 aspirations

Innovating for
better products

Overview

Pillar 2

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Responsible marketing and sales practices

Operating withexcellence
Financials

Innovating for better products

Indicators

2018

Total number of compliance training sessions conducted on PMI’s Marketing Code(employees/third parties)
Number of violations of the Marketing Code or Good Conversion Practices resulting
in substantiated cases of misconduct
Markets with youth access prevention programs in place (out of PMI’s total shipment volume)1

Total number of suppliers

2

Protecting the environment

131

8

42

29

n/a

n/a

94%

2018

2019

2020

>36,000>33,200>28,000

11.7

11.4

10.1

n/a

35%

33%

Percentage of critical supplier spend from whom PMI sources sustainably5

n/a

n/a

67%

Total procurement spend (in billions USD)6

10.0

9.9

8.9

Number of critical suppliers

n/a

95

154

Critical suppliers, as a proportion of total procurement spend

n/a

35%

35%

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

n/a

84%

95%

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

n/a

73%

93%

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

n/a

100%

100%

Critical suppliers of direct materials assessed in STEP that demonstrated compliance with PMI’s
Responsible Sourcing Principles

n/a

50%

45%

Number of suppliers assessed for environmental and social impacts8

n/a

154

217

Number of suppliers identified as having significant actual and potential negative environmental
impacts9

n/a

25

55

Number of suppliers identified as having significant actual and potential negative social impacts9

n/a

44

72

3

Our nontobacco supply chain:

7

1 Total shipment volume includes cigarettes, heated tobacco
units, other tobacco products, and e-cigarettes.
2 Suppliers refer to tier 1 suppliers, parent companies.
3 Total supply chain spend includes procurement spend andtobacco leaf sourcing spend.
4 Direct spend focuses on materials used in the manufactureof our products, it includes tobacco leaf, direct materials,
electronic devices and accessories, and advanced
procurement. This indicator was introduced in 2020.
5 Indicator introduced in 2020. Suppliers’ criticality isevaluated considering spend segmentation and nature ofcomponent, as well as supply flexibility (single-source/not
easily substitutable) as relevant. 2020 figure includes tier
1 suppliers of direct materials and electronics, and tobacco
leaf suppliers.
6 Procurement spend excludes tobacco leaf sourcing.
7 In 2020, we expanded scope of our reporting to coverglobal and regional tier 1 suppliers of direct materials andelectronics.
8 Including tier 1 and tier 2 critical and non-critical suppliers.
9 Indicator based on results of self-assessment questionnaires
and desktop audit results, where relevant.

Goals

14,40028,569(49%/51%) (64%/36%)

Supply chain direct spend expenditure (smoke-free/total)4

Total supply chain spend (in billions USD)
Caring for the people we work with

2020

Sustainable supply chain management
Indicators

Operating with excellence

23,4382019

Philip Morris International Integrated Report 2020

Goals

100% by 2025

Innovating for
better products

Overview

Pillar 2

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Sustainable supply chain management continued

Operating withexcellence

Our tobacco supply chain:

Number of tobacco farmers contracted by PMI and PMI tobacco suppliers
Number of third-party tobacco suppliers with whom PMI has a direct contractual relationship1

Number of PMI leaf operations that contract tobacco farmers directly
Financials

Innovating for better products

Operating with excellence
Caring for the people we work with

2019

2020

>350,000

335,000

285,900

15

13

14

8

8

6

Number of field technicians providing support to contracted farmers and monitoring theimplementation of PMI’s Good Agricultural Practices (GAP) and Agricultural Labor Practices (ALP)

2,610

2,875

2,675

Proportion of tobacco purchased through direct contracts by PMI and PMI tobacco suppliers

93%

96%

99%

50

641

1,794

Number of contracts terminated due to ALP violations

2≥95% (ongoing)

Respect for human rights
2018

2019

2020

Goals

1

2

4

10 by 2025

Indicators

2018

2019

2020

Cumulative number of scientific publications by PMI since 2008

340

365

418

Cumulative number of institutions which have taken part in sbv IMPROVER since 2011

450

500

520

Cumulative number of countries where institutions which have taken part in sbv IMPROVER since2011 are located

63

65

65

Cumulative number of peer-reviewed publications issued as a result of sbv IMPROVER challenges
since 20111

16

16

16

Cumulative number of studies published on INTERVALS platform since 2018

9

40

66

Cumulative number of protocols published on INTERVALS platform since 2018

57

103

122

Cumulative number of data sets published on INTERVALS platform since 2018

144

354

556

Cumulative number of human rights impact assessments conductedResponsible and transparent R&D

1 Peer-reviewed publications issued as a result of sbv IMPROVER challenges conducted in the past three years are currently under preparation or validation, and are expected to be published in 2021.

132

Goals

1 Data refers to parent companies.
2 The increase can be attributed to the introduction (in 2019) of standardized guidelines related to our due diligence, consequence management, and rewards (read more about our ALP program here).

Indicators

Protecting the environment

2018

Philip Morris International Integrated Report 2020

Innovating for
better products

Overview

Pillar 2

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Business integrity

Operating withexcellence

Indicators

Proportion of employees participating in training sessions pertaining to PMI’s Guidebook for
Success
Total number of compliance training sessions on PMI’s Guidebook for Success completed(employees/third parties)

2018

2019

2020

86.9%

86.6%

77.7%

193,063
253,763
198,170(82%/18%) (88%/12%) (88%/12%)
872

978

756

Number of closed cases involving compliance allegations (number of unsubstantiated cases/
number of substantiated cases)

582(245/337)

652(283/369)

431(198/233)

Innovating for better products

Proportion of substantiated cases, out of all closed cases involving compliance allegations

57.9%

56.6%

54.1%

283

325

330

Operating with excellence

Note: Training and cases are updated based on new information available, so a slight shift in previous years data was reflected.

2018

2019

2020

Goals

100%

100%

100%

100% (ongoing)

85%

100%

100%

100% (ongoing)

5

2

11

5 by 2021

Regional studies and country analysis to improve awareness of illicit trade—proportion of global
consumption covered4

27%

20%

19%

15 by 2025

Number of law enforcement officers trained on how to authenticate PMI products5

500

6,617

4,981

500 by 2021

Number of countries with law enforcement agencies trained on how to authenticate PMI products

10

23

22

>10 per year

Anti-Counterfeiting Cooperation Agreements signed with our suppliers

n/a

n/a

57

100% by 2025

29

0

0

90 in total by 2025

Number of countries from which PMI IMPACT projects were selected per funding round

22

0

0

n/a

PMI IMPACT grants allocated in USD million (cumulative, since 2017)

48

48

48

100

Financials

Total number of reports received, involving compliance allegations and other concerns

Number of reports that did not involve a compliance allegation

Caring for the people we work with

Illicit tobacco trade prevention1
Indicators

Protecting the environment

Coverage for tracking and tracing—master case level2

Tracking and tracing—proportion of packs sold with unique code applied

3

Additional Framework Cooperation Agreements signed with law enforcement agencies/
governments in a given year—number of countries

6

Number of PMI IMPACT projects selected per funding round7
8

1 Data cover PMI combustible tobacco products and smoke-free product consumables and devices.
2 Full coverage equates to 95 percent tracking and tracing in our supply chain (excluding kretek business). 5 percent of master cases are not covered; these are destined for countries that are not identified as a source of potential diversion
or where PMI sells to a single customer in the country.
3 Excludes kretek business. While our internal rules mandate a unique code on every pack (hence 100% mentioned), some exceptions remain, which are managed and reviewed with the impacted markets on a yearly basis.
4 In 2020, we did not reach our target of 35 percent: PMI commissions regional studies and country analysis in order to improve awareness of illicit trade. In a number of regions and markets, the frequency of studies has changed fromannual to bi-annual or every three years, reflecting the market dynamics and the existing level of awareness.
5 The number of training sessions delivered each year depends on specific needs and requests raised locally by law enforcement agencies. The significant increase in 2019 was mainly driven by additional training sessions delivered in Latin
America & Canada to better tackle the nature of illicit trade in the region. In 2020, physical training sessions were offset by online sessions due to lockdown measures and mobility restrictions as a result of the COVID-19 pandemic.
6 Signed Anti-Counterfeiting Cooperation Agreements based on current scope.
7 There were no funding rounds of PMI IMPACT in 2018–2020. Data for 2018 were restated. Other data related to PMI IMPACT were restated accordingly.
8 PMI pledged USD 100 million to PMI IMPACT. Goals related to PMI IMPACT are stated for the period 2016–2025.

133

Philip Morris International Integrated Report 2020

Innovating for
better products

Overview

Pillar 3

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Socioeconomic well-being of tobacco-farming communities

Caring for thepeople we work with

Indicators

Number of tobacco farmers contracted by PMI and PMI tobacco suppliers
Number of countries where farmers contracted by PMI and PMI tobacco suppliers are locatedNumber of farmers with whom PMI has direct contracts

Financials
Innovating for better products

Operating with excellence

2018

2019

2020

>350,000

335,000

285,900

27

24

23

21,00016,50013,600>329,000

318,500

272,300

Number of third-party tobacco suppliers with whom PMI has a direct contractual relationship1

15

13

14

Number of PMI leaf operations that contract tobacco farmers directly

8

8

6

88%

92%

93%

Number of contracts terminated due to ALP violations (per crop season)

50

641

1,794

Number of farmers who have direct contracts with PMI tobacco suppliers

Proportion of contracted tobacco farms for which labor practices have been systematicallymonitored (adherence to PMI’s ALP)
Number of tobacco supplier locations (countries) assessed by Control Union on ALP topics2

3

3

1

Caring for the people we work with

Cumulative number of tobacco supplier locations (countries) assessed by Control Union since 2013
on ALP topics2

21

22

22

Protecting the environment

Percentage of contracted farmers who make a living income3

n/a

n/a

48%

Total number of ALP prompt actions recorded by field technicians

18,543

14,44014,751

Proportion of ALP prompt actions recorded by field technicians:• Safe working environment• Child labor4• Income working hours• Other

74%
25%
1%
<1%

73%
19%
8%
<1%

73%
16%
11%
<1%

Total number of ALP prompt actions resolved

13,687

8,137

10,772

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

13,78010,51910,816

n/a

1,158

1,541

4,587

2,712

2,352

1.3%

0.8%

0.8%

Note: The farm-level data related to our tobacco supply chain reported
in this report cover 21 out of the 23 countries we source from.
It excludes Lebanon and Switzerland.
1 Data refer to parent companies.
2 Control Union assessment in Argentina was performed before
COVID-19; others were postponed to 2021.
3 As we progress with the external independent analysis, thepercentage of farmers achieving a living income is currently basedon a combination of external living income benchmarks, farmer
income studies, and PMI internal data.
4 2020 onward, we report on all types of child labor (hazardous work
performed by children, light work performed by children below 13,
and children below 15 hired).
5 We introduced this category of prompt actions in 2019.
6 2020 onward, we report on all types of child labor (hazardous work
performed by children, light work performed by children below 13,
and children below 15 hired).
7 2020 onward, we report on all types of child labor. This indicator
refers to incidents of child labor that were recorded by fieldtechnicians as prompt actions during the crop season.
8 This indicator was introduced in 2020, based on a new
methodology giving us improved visibility on child labor across oursourcing markets. The 2020 data include all prompt actions raised
and non-conformities reported for all contracted farms monitored
for child labor. It also extends beyond hazardous tasks performedby children to cover all types of child labor (i.e., including light work
performed by children below 13 and children below 15 hired).
Furthermore, in the identified priority markets, the methodology
combines internal monitoring data with external data (includingfrom third party assessments) to calculate prevalence of child labor.
As of 2021, we intend to use and report on this indicator, and stop
reporting the proportion of farms monitored found with incidents
of child labor.
9 We introduced this category of prompt actions in 2019. Scopeis limited to farmers providing accommodation to workers(approximately 8 percent of the total farmer base).
10 We introduced this category of prompt actions in 2019.

134

Number of ALP prompt actions recorded by field technicians relating to nonpayment of theminimum wage to farmworkers5
Number of ALP prompt actions recorded by field technicians relating to child labor6
Proportion of farms monitored found with incidents of child labor

7

n/a

n/a

3.5%

Proportion of ALP prompt actions recorded by field technicians relating to incidents of hazardous
work performed by children that were resolved

89%

88%

75%

Proportion of tobacco farmworkers provided with safe and adequate accommodation9

n/a

80%

100%

Proportion of farmers and farmworkers having access to personal protective equipment for CPA
application and GTS prevention10

n/a

99%

100%

Prevalence of child labor among farms contracted by PMI directly or by PMI’s tobacco suppliers

Philip Morris International Integrated Report 2020

8

Goals

>90% (ongoing)

100% by 2025

100% (ongoing)Innovating for
better products

Overview

Pillar 3

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Health, safety, and well-being at work

Caring for thepeople we work with

Indicators

2018

2019

2020

Lost time incident (LTI) rate per 200,000 hours worked—PMI employees, contracted employees,
and contractors1

n/a

0.14

0.08

LTI rate per 200,000 hours worked—PMI employees

0.13

0.12

0.07

LTI rate per 200,000 hours worked—contracted employees

0.08

0.10

0.03

Financials

LTI rate per 200,000 hours worked—contractors

n/a

0.23

0.12

Integrated total recordable incidents rate (iTRIR) per 200,000 hours worked—PMI employees,
contracted employees, and contractors2

n/a

0.22

0.12

Innovating for better products

TRIR per 200,000 hours worked—PMI employees

0.22

0.20

0.11

TRIR per 200,000 hours worked—contracted employees

0.30

0.17

0.06

TRIR per 200,000 hours worked—contractors

n/a

0.32

0.16

Number of fatalities—PMI and contracted employees

2

1

1

Number of fatalities—contractors

1

0

1

Number of fatalities—members of the public

3

10

5

0.001300Collision rate within PMI’s fleet of vehicles per year (collisions per million km driven)

0.91

0.87

0.53

<0.65 by end of2022

Proportion of PMI fleet equipped with telematics3

n/a

n/a

35%

100% by end of2023

Proportion of manufacturing facilities with OHSAS 18001 and ISO 14001 certification4

97%

98%

100%

Number of markets with health and well-being committees

>40

55

53

Employee self-assessment psychological well-being measure5

n/a

n/a

58

Operating with excellence

Caring for the people we work withProtecting the environment

Occupational illness frequency rate (OIFR) per 200,000 hours worked—PMI and contracted
employees

Goals<0.30 by 2025

63 by 2021

The 2020 metrics for our health & safety indicators are subject to external verification by SGS (see the External Verification Statements here and here).
1 We define a contracted employee as an employee who is under the direct supervision of PMI employees but employed by a temporary employment agency. We define a contractor as a person employed or working on behalf of a thirdparty company contracted by PMI, who remains under the direct supervision of their employer rather than PMI and are often involved in project-specific or outsourcing arrangements.
The scope of our reporting on contractors in 2020 excludes our site in South Korea (representing less than 1 percent of the total contractor population), where local legislation does not permit this monitoring.
2 Integrated total recordable incident rate (iTRIR) covers PMI employees, contracted employees, and contractors.
3 Indicator introduced in 2020. Scope covers PMI’s working tool cars (representing 75 percent of PMI’s total fleet).
4 Scope: Manufacturing facilities producing more than three billion cigarette equivalents annually.
5 Indicator introduced in 2020. Based on answers from employees as part of our regular employee listening survey. The indicator represents the percentage of employees who responded “good” or “very good” to the question “How would
you rate your current psychological or emotional well-being at present?” in our regular employee listening survey.

135

Philip Morris International Integrated Report 2020

Innovating for
better products

Overview

Pillar 3

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Diverse and inclusive working environment

Caring for thepeople we work with

Indicators

2018

2019

2020

42.1%

41.7%

41.7%

Proportion of management positions held by women

35.1%

36.1%

37.2%

Financials

Proportion of female employees at different managerial levels:1• Managers• Directors• Senior leaders

36.6%
29.4%
15.2%

37.5%
31.2%
17.4%

38.8%
30.9%
20.3%

Innovating for better products

Proportion of women in senior roles2

27.5%

29.2%

29.4%

32% by 2023

40.6%

40.7%

38.8%

50%

40.4%

43.8%

42.2%

50%

n/a

41.6%

40.7%

37.8%

37.4%

38.9%

Proportion of female employees
1

Proportion of new hires in management positions that are women
Operating with excellence

Proportion of new hires at junior levels that are women

1

1

Proportion of new hires that are women

1

Caring for the people we work with

Proportion of promotions in management positions that are women

1

Number of women on PMI’s Company Management 2
Protecting the environment

Proportion of women on PMI’s Company Management 2
Number of women on PMI’s Board of Directors

2 (out of 22) 2 (out of 25) 4 (out of 25)
9%

8%

16%

3 (out of 12) 3 (out of 12) 2 (out of 13)

3

25%

25%

15%

n/a

34.6

33.0

Proportion of employees at different age groups:• Below 25• Between 25 and 34• Between 35 and 54• Above 55

n/a
n/a
n/a
n/a

3%
31%
61%
4%

3%
31%
62%
4%

Number of nationalities among PMI’s employees 5

>100

126

131

25

27

28

Proportion of women on PMI’s Board of Directors
Mean gender pay gap

34

Number of countries with affiliates with LGBTQ+ initiatives or networks

Fair working conditions
1 Our gender diversity data cover around 95 percent of PMI’s
total workforce.
2 See glossary.
2 Based on PMI’s Company Management composition as ofMarch 16, 2021.
3 Based on PMI’s Board of Directors composition as of May
5, 2021.
4 The mean gender pay gap calculation is the sum of annual
base salary, bonus, and stock options. See PMI.com forfurther detail on our gender pay gap, including breakdownby pay quartile.
5 In 2020, we expanded the scope of our reporting on
employee nationalities to cover 100% of our workforce.

136

Indicators

2018

2019

2020

Number of PMI employees

77,43573,542

70,849Number of PMI full-time equivalent (FTE) positions

77,03971,79570,560

65%

63%

62%

Total number of Collective Labor Agreements

81

80

79

Total number of countries with Collective Labor Agreements

35

35

34

Proportion of employees covered by Collective Labor Agreements

Philip Morris International Integrated Report 2020

Goals

At least 40% by2022

Innovating for
better products

Overview

Pillar 3

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

PMI’s workforce at year-end 2020

Caring for thepeople we work withFinancials
Innovating for better products

Operating with excellence

Caring for the people we work withProtecting the environment

Number of employees by employment contract (permanent and temporary), by gender

Women employed on a permanent contract

28,401

Women employed on a temporary contract

1,109

Men employed on a permanent contract

39,835Men employed on a temporary contract

1,504

Number of employees by employment contract (permanent and temporary), by region

Employees on a permanent contract in European Union region

18,292

Employees on a temporary contract in European Union region

1,637

Employees on a permanent contract in Middle East & Africa region, including PMI Duty Free

3,165

Employees on a temporary contract in Middle East & Africa region, including PMI Duty Free

145

Employees on a permanent contract in South & Southeast Asia region

28,294

Employees on a temporary contract in South & Southeast Asia region

128

Employees on a permanent contract in Eastern Europe region

6,743

Employees on a temporary contract in Eastern Europe region

196

Employees on a permanent contract in East Asia & Australia region

4,242

Employees on a temporary contract in East Asia & Australia region

99

Employees on a permanent contract in Latin America & Canada region, and U.S.

7,500

Employees on a temporary contract in Latin America & Canada region, and U.S.

408

Number of employees by employment type (full-time and part-time), by gender

Women employed on a full-time contract

28,925

Women employed on a part-time contract585

Men employed on a full-time contract

41,087

Men employed on a part-time contract

252

All data as of December 31, 2020. Presentation of information and data aligns with guidance of GRI standard 102-8 (2016).

137

Philip Morris International Integrated Report 2020

Innovating for
better products

Overview

Pillar 3

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Community support

Caring for thepeople we work withFinancials

Indicators

2018

2019

2020

Number of social contributions supported by PMI (charitable donations/community investments)

280

170
(145/25)702(681/21)

Number of partner organizations supported by PMI’s social contributions

239

147

600

Number of countries where projects supported by PMI’s social contributions were implemented

63

43

78

Number of direct beneficiaries of projects supported by PMI’s social contributions>300,000

Value of cash contributions (in millions USD) (charitable donations/community investments)

28.3

17.0
(14.8/2.2)

47.8(46.0/1.8)

Approximate value of in-kind donations (in ’000 USD)

260

205

12,190Approximate value of management costs of PMI’s social contributions (in ’000 USD)

n/a

650

769

18,00016,70015,272

500

430

440

Innovating for better products

Operating with excellence

Approximate total number of volunteer hours by PMI employees
Caring for the people we work with

>467,000 >2,700,000

Approximate value of employee time spent on volunteering (in ’000 USD)

Note: In 2020, when the COVID-19 pandemic emerged as a major crisis, we reassessed our priorities and shifted our focus toward providing support in a quick and effective manner, setting a global corporate donation fund.

Protecting the environment

Talent attraction, retention, and employability
Indicators

2018

2019

2020

Employee overall turnover rate

11.51%

14.10%

9.80%

Women employee overall turnover rate

10.80%

15.54%

9.90%

Employee voluntary turnover rate

4.12%

4.53%

3.13%

n/a

513

551

12.1

15.5

11.2

77.0%

79.4%

90%

n/a

+16

+33

Spend for learning per FTE (in USD) total
Average hours of training spend per FTE

1

Proportion of employees covered by performance review

2

Employee Net Promoter Score3

Goals

At least +30
by 2025

1 In 2020, we experienced a decrease in the average hours per FTE of training due to the time required to shift many face-to-face learning to virtual learning (in adaptation to COVID-19 circumstances), and the consequent increase in virtual
learning sessions that are typically shorter than live sessions.
2 2020 data based on a total of 55,393 employees in salaried grades.
3 We measure the engagement of our workforce using the employee Net Promoter Score (eNPS), following a methodology similar to that we use to measure consumer engagement. The score can range from -100 to +100.

138

Philip Morris International Integrated Report 2020

Innovating for
better products

Overview

Pillar 4

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Climate protection

Protecting theenvironment
Financials
Innovating for better products

Operating with excellence

Caring for the people we work withProtecting the environment

2018

2019
(baseline)

2020

1

408,162

397,210322,633

PMI factories, offices,2and fleetCO2e scope 2 (metric tons)1

175,785

158,672

90,366

PMI factories andofficesCO2e scope 1+2 (metric tons)1

583,947

555,882

412,999CO2e scope 1 from fleet (metric tons)

114,936

111,400

79,457

PMI fleet

221

222

216

PMI fleet

Indicators

CO2e scope 1 (metric tons)

CO2e emissions from fleet (kg CO2e per km driven)

Goals

Carbon neutrality
by 2030

Scope

PMI factories, offices,and fleetCO2e absolute reduction in PMI fleet versus 2019 baseline

n/a

n/a

29%

PMI fleet

Proportion of hybrid or electrical vehicles in our fleet

n/a

n/a

4.7%

PMI fleetCO2e scope 3 (’000 metric tons)

4,714

4,309

3,590

CO2e scope 1+2+3 (’000 metric tons)

5,298

4,865

4,003

Carbon offsetting certificates (metric tons)3

956

1,242

3,297

CO2e scope 1+2 absolute reduction versus 2019 baseline

n/a

n/a

26%

50% by 2030
(SBT)

PMI factories, offices,and fleetCO2e scope 3 absolute reduction versus 2019 baseline4

n/a

n/a

17%

50% by 2030
(SBT)

PMI value chain

0

1

2

All by 2030

PMI factories

6,552

6,148

5,482

PMI value chain

722

702

556

PMI factories, offices,and fleet

3,442

2,419

2,139

PMI value chain

n/a

n/a

18%

PMI value chain

Number of carbon-neutral factories
CO2e scope 1+2+3 intensity (kg per million cigarettes equivalent)

5CO2e scope 1+2 intensity (kg per million cigarettes equivalent)5CO2e scope 3 biogenic emissions (’000 metric tons)
CO2e scope 1+2+3 absolute reduction versus 2019 baseline

PMI value chain
Carbon neutrality
by 2050

PMI value chain
PMI factories, offices,and fleetCO2e scope 1+2+3 intensity reduction versus 2019 baseline

n/a

n/a

11%

CO2e absolute emissions reduction in PMI tobacco supply chain versus
2019 baseline

n/a

n/a

28%

35% by 2025
50% by 2030

PMI tobacco supply
chain

CO2e intensity reduction in tobacco curing versus 2019 baseline

n/a

n/a

44%

75% by 2025

PMI tobacco supplychain

46% (33% +
13%)

51% (36%+15%)

67% (45%+22%)

70% by 2021

PMI tobacco supply
chain

15%

16%

11%

PMI tobacco supply
chain

76,00080,80082,500

PMI tobacco supply
chain

Proportion of flue-cured tobacco purchased cured with renewable fuelsources (self-sufficient firewood and biomass adoption)
Proportion of Virginia tobacco purchased cured with coal
Approximate total number of curing barns upgraded since 2014
(cumulative)
139

Performance
metrics

Philip Morris International Integrated Report 2020

PMI value chainInnovating for
better products

Overview

Pillar 4

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Climate protection continued

Protecting theenvironment
Financials
Innovating for better products

2018

2019
(baseline)

2020

9,353,222

9,456,576

7,909,157

PMI factories, offices,and fleet

Proportion of total energy consumed that is from renewable sources

23%

27%

29%

PMI factories, offices,and fleet

Energy intensity (gigajoules per million cigarettes equivalent)

11.57

11.95

10.83

PMI factories, offices,and fleet

5,988,022

5,819,072

4,719,647

PMI factories, offices,and fleet

Fuel consumption from renewable sources (gigajoules)

61,163

128,967

91,680

PMI factories, offices,and fleet

Total electricity consumed (MWh)899,706

959,723

832,292

PMI factories andoffices

Total electricity consumed that is from renewable sources (MWh)546,944623,940

621,620

PMI factories andoffices

Proportion of electricity used and purchased that is from renewablesources

61%

65%

75%

PMI factories andoffices

Proportion of electricity used and purchased that is from renewablesources

65%

72%

78%

100% by 2025

A

A

A

A

Indicators

Total energy consumption (gigajoules)

Fuel consumption from nonrenewable sources (gigajoules)

Goals

Operating with excellence

Caring for the people we work withProtecting the environment

CDP Climate Change rating

Scope

PMI factories

Note: Our inventory of GHG emissions (scope 1, 2, and 3) in 2020 is subject to external verification by SGS. In 2020, we achieved significant reductions in emissions, partially driven by COVID-19 impact (read more on page 102) but also
by accelerated efforts toward our carbon neutrality ambition.
1 Emissions from PMI operated IQOS stores are excluded from scope 1 and 2 emissions, as de minimis.
2 We include warehouses in PMI offices.
3 2020 figure includes carbon off-setting certificates purchased in our factories in Lithuania and Switzerland, as well as our Operations Center in Switzerland.
4 In 2020, we reviewed our carbon footprint model, taking into account more primary data from suppliers and updating our methodology, leading to more accurate figures for our scope 3 emissions. We have restated our 2019 dataaccording to the new model. Other figures that include scope 3 emissions have also been restated.
5 Intensity is measured in CO2e per million shipped cigarette equivalent.

Littering prevention
Indicators

2019

2020

Number of anti-littering initiatives conducted54

33

Number of affiliates with an anti-littering strategy

3147

Number of affiliates participating in litter cleanup initiatives

1

Number of participants in litter cleanup initiatives (PMI employees and other volunteers)1
Number of cigarette butts collected during litter cleanup initiatives

1

31

n/a

3,962

n/a

827,160n/a

Note: These indicators were introduced in 2019.
1 In 2020, due to the COVID-19 restrictions, we did not initiate a global mobilization among our employees to participate in cleanup events and did not track this data even though some affiliates wereable to conduct some targeted activities.

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Innovating for
better products

Overview

Pillar 4

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Product eco-design and circularity

Protecting theenvironment
Financials

Indicators

2018

2019

2020

Goals

30%

29%

40%

70% by 2023
80% by 2025

Proportion of IQOS device sales volume covered by the CIRCLE program2

66%

39%

48%

100% by 2025

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

45%

74%

84%

>80% (ongoing)

n/a

153

191

94.9%

94.9%

94.7%

100% by 2025

Proportion of packaging material that is from renewable source4

90.0%

89.6%

89.8%

95% by 2025

Reduction of packaging materials weight versus 2018 baseline

Baseline-1%-5%-15% by 2025

Effective recycling rate of IQOS devices

1

3

Total volume of materials recycled at the CIRCLE hubs (in tons)
Proportion of packaging material that is recyclable4

Innovating for better products

Operating with excellence

Caring for the people we work withProtecting the environment

5

1 The effective recycling rate is calculated based on the proportion of IQOS device sales volume covered by the CIRCLE program multiplied by the recycling rate of IQOS devices at the CIRCLE hubs (weighted average).
2 Recycling rate: Percentage of the weight of each device that is recycled, weighted-average depending on device type and processing facility (figures provided for PMI-developed products processed
through CIRCLE hubs, varied by device type, zero landfill, remainder to energy recovery or material loss).
3 We established our two recycling CIRCLE hubs in 2018. We expanded the number of markets covered by CIRCLE in 2019 and 2020, the decrease in coverage of sales volume is explained by IQOS
growth in markets not yet covered by the program.
4 2018–2020 volume has been restated to include shipping cases.
5 Includes portfolio/volume mix and inventory movement. Includes shipping cases. 2019 figure restated due to revised actual figures on amounts of board purchased.

Forest conservation
Indicators

2018

2019

2020

Proportion of tobacco purchased cured at no risk of deforestation of primary andprotected forests1

90%

97%

100%

Proportion of flue-cured tobacco purchased cured with renewable sources(self-sufficient firewood and biomass adoption)
Approximate cumulative number of curing barns upgraded since 2014
CDP forest rating

46%
51%
67%
(33% + 13%) (36%+15%) (45% + 22%)76,00080,80082,500

B

A-

A

Goals

70% by 2021

1 To align to most-widely accepted definitions and metrics on measuring forest protection impacts, we decided to adopt the definition of “high conservation value” forests coming from the Accountability Framework Initiative.
Please see our Zero Deforestation Manifesto for definitions.

Biodiversity
Indicators

2017

2018

2019

Proportion of tobacco purchased without detection of residues attributable to the use of WHO
Toxicity Class 1 crop protection agents1

99%

100%

100%

88%

89%

97%

Proportion of tobacco purchased without detection of residues attributable to the use of HHPs,
as defined by FAO and WHO guidelines in 20161
1 The 2020 crop season data were not available at the time of the publication of this report.

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Goals

100% by crop year
2020

Innovating for
better products

Overview

Pillar 4

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Water stewardshipProtecting theenvironment
Financials

2010
baseline

2018

2019

2020

Total amount of water withdrawn (’000 m )

4,998

4,371

4,008

3,375

PMI factories

Total amount of water consumed (withdrawn minus
discharged) (’000 m3)

2,449

1,958

1,883

1,619

PMI factories

Water ratio (water withdrawn in m3 per million cigarettes
equivalent)1

5.35

5.14

4.74

4.20

Indicators
3

Goals

3.1 by 2022

Scope

PMI factories

Number of fines2

0

1

1

Innovating for better products

Cumulative number of local water risk assessments
performed

8

15

23

Operating with excellence

Quantity of blue water used per ton of tobacco produced
(m3)3

266

330

307

Tobacco supply chain

119,600

138,200

115,000

Tobacco supply chain

B

A

A

Caring for the people we work withProtecting the environment

Total amount of water used (’000 m3)
CDP water security rating

1 Water intensity is measured in m3 per million cigarettes produced equivalent.
2 Fines above USD 10,000 (or equivalent in converted currency). 2020 fine pertained to sewage water contamination exceeding national limitations in our factory in Ukraine.
3 Blue water refers to water used for irrigation.

Waste reduction
Indicators

2010
baseline

2018

2019

2020

Total amount of waste generated (metric tons)

143,596

134,367

131,104

119,750

Proportion of total waste generated that is recycled

n/a

84%

84%

85%

Proportion of total waste generated that is incinerated withenergy recovery

n/a

12%

12%

11%

Proportion of total waste generated that is disposed to landfill

n/a

4%

4%

3%

Proportion of total waste generated that is incinerated
without energy recovery

n/a

<1%

<1%

<1%

Amount of hazardous waste generated (metric tons)

n/a

1,423

1,486

1,266

Proportion of hazardous waste generated that is recycled

n/a

41%

33%

38%

Proportion of hazardous waste generated that is incinerated
with energy recovery

n/a

44%

49%

43%

Proportion of hazardous waste generated that is disposed tolandfill

n/a

6%

8%

7%

n/a

9%

10%

13%

Proportion of hazardous waste generated that is incinerated
without energy recovery
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Philip Morris International Integrated Report 2020

PMI factories
100% coverage

A

Tobacco supply chain

PMIOverview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Glossary and acronyms
Aerosol – Gaseous suspension of finesolid particles and/or liquid droplets
ALP – Agricultural Labor Practices
AWS – Alliance for Water Stewardship
BOS – Behavioral Observation Systems
CDP – Carbon Disclosure Project
CHTP – Carbon-Heated Tobacco Product
CLAs – Collective Labor Agreements
Combusted tobacco product – A manufactured
consumable product that combusts tobacco and/or generates smoke inhaled directly by the userwhen it is used as intended. Combusted tobacco
products include, for example, cigarettes, cigarillos,
cigars, “roll your own”, and pipe tobacco
Combustible products – The term PMI uses
to refer to cigarettes and OTP, combined
Combustion – The process of burning a substancein oxygen, producing heat and often light
Company management – The term we use
to refer to the senior management of thecompany, as presented on our PMI.com site
(also referred to as “our leadership team”)
Contracted employee – We define a contracted
employee as an employee who is under the directsupervision of PMI employees but employed
by a temporary employment agency
Contractor – We define a contractor as a person
employed or working on behalf of a third-party
company contracted by PMI, who remains under
the direct supervision of their employer rather
than PMI and are often involved in projectspecific or outsourcing arrangements
CPA – Crop protective agent
Downstream supply chain – Downstream operations
are those stages in the supply chain in which materials(mostly in the form of finished products) flow awayfrom the organization to the customers/consumers.
Directors – The term we use to refer to
employees in salary grade 14 to 16
EHTS – Electrically Heated Tobacco System143

E-liquids – Refers to a liquid solution that is used in/with e-cigarettes. E-liquids contain different levelsof nicotine in a propylene glycol and/or vegetable
glycerin-based solution with various flavors
EPR – Extended Producer Responsibility
Estimated users who have switched to IQOS andstopped smoking – For markets where IQOS is the
only heat-not-burn product, this is defined as the daily
individual consumption of PMI HTUs representing
the totality of their daily tobacco consumption in
the past seven days. For markets where IQOS is one
among other heat-not-burn products, this is thedaily individual consumption of HTUs representing
the totality of their daily tobacco consumption in
the past seven days, of which at least 70% are PMI
HTUs. PMI HTUs include licensed KT&G HTUs
EVA – Economic value added
E-vapor product – Electrical product thatgenerates an aerosol by heating a nicotine
or non-nicotine containing liquid, such as
electronic cigarettes (or “e-cigarettes”)
FAO – Food and Agriculture Organizationof the United Nations
FCTC – Framework Convention on Tobacco Control
FDA – U.S. Food and Drug Administration
FTs – Field technicians monitoring theimplementation of PMI’s Good Agricultural Practices
and Agricultural Labor Practices programs
GAP – Good Agricultural Practices
GDPR – General Data Protection Regulation
Gender pay gap – The gender pay gap
is the difference in average gross hourly
earnings between women and men
GHG – Greenhouse gas
GPP – Global Privacy Program
GTS – Green tobacco sickness
HCV – High conservation value
Heated tobacco product or HTP – A
manufactured tobacco product that delivers
a nicotine-containing vapor (aerosol), without
combustion of the tobacco mixture

Philip Morris International Integrated Report 2020

Heated tobacco units or HTUs – The term PMI
uses refer to heated tobacco consumables, which
include the company’s HEETS, HEETS Creations,HEETS Dimensions, HEETS Marlboro and HEETSFROM MARLBORO (defined collectively as
HEETS), Marlboro Dimensions, Marlboro HeatSticks
and Parliament HeatSticks, as well as the KT&Glicensed brands, Fiit and Miix (outside of Korea)
HHPs – Highly hazardous pesticides
HPHCs – The harmful or potentially harmful
constituents which have been identified as
likely causes of tobacco-related diseases
Human rights impact assessment(HRIA) – Assessments to identify humanrights risks and adverse impacts
Illicit trade – Refers to domestic non-tax paid products
In-setting – The act of generating a carbon credit
within the corporate’s sphere of influence andretiring the unit on behalf of 1 ton of carbon
that has been emitted by the corporate (source:International Carbon Reduction and Offset Alliance)
IPM – Integrated Pest Management
IPS – Integrated Production System
KPIs – Key performance indicators
LMICs – Low- and middle-income countries
LTI – Lost Time Injury
Management positions – The term wegenerically use to refer to all positions in adefined salary grade (10) and above
Managers – The term we use to refer to
employees in salary grade 10 to 13
MRTP – Modified Risk Tobacco Product, theterm used by the U.S. FDA to refer to RRPs
MRTPA – Modified Risk Tobacco ProductApplication under section 911 of theFederal Food, Drug, and Cosmetic Act
NGOs – Non-governmental organizations
Non-Combusted Alternatives (or NCA) – A
manufactured consumable product (whether madefrom tobacco or not) that provides a nicotinecontaining aerosol without combusting tobacco andthat does not generate smoke inhaled directly by

the user when it is used as intended. NCAs include
any NCA device necessary for the consumption of
the tobacco or nicotine-containing substance. In
this report, referred to as “smoke-free products”
or “reduced-risk products” indistinctively
OECD – Organisation for Economic Cooperation and Development
Offsetting – The act of purchasing a carbon credit
generated outside the corporate’s sphere of influence
and retiring the unit on behalf of 1 ton of carbon
that has been emitted by the corporate (source:International Carbon Reduction and Offset Alliance)
OTP – Defined as “other tobacco products,”
primarily roll-your-own and make-your-own
cigarettes, pipe tobacco, cigars, and cigarillos,
and does not include reduced-risk products
P&C – People and Culture
PMI Regions – Effective January 1, 2018, PMI
began managing its business in six reporting
segments as follows: the European Union Region(EU); the Eastern Europe Region (EE); the Middle
East & Africa Region (ME&A), which includes PMI
Duty Free; the South & Southeast Asia Region(S&SA); the East Asia & Australia Region (EA&A);
and the Latin America & Canada Region (LA&C)
PPE – Personal protective equipment
Reduced-risk products (RRPs) or smoke-free
products – Products that present, are likely topresent, or have the potential to present less riskof harm to smokers who switch to these products
versus continued smoking. PMI has a range of RRPs invarious stages of development, scientific assessment,
and commercialization. PMI’s RRPs are smoke-free
products that produce an aerosol that contains far
lower quantities of harmful and potentially harmful
constituents than found in cigarette smoke
R&D – Research and development
RSP – Responsible Sourcing Principles
SDGs – Sustainable Development Goals
Senior leaders – The term we use to refer to
employees in senior leadership roles; it includes
all employees in salary grade 17 and above

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Glossary and acronyms continued
Senior roles – The term we generically use to refer toall positions in a defined salary grade (14) and above
Smoke – A visible suspension of solid
particles, liquid droplets, and gases inair, emitted when a material burns
Smoke-free product consumables – The term PMI
uses to refer to heated tobacco units used with
the IQOS heat-not-burn product, and cartridges
containing e-liquids that are used for e-vapor products
STP – Sustainable Tobacco Program
SUP – Single-use plastics
THS – Tobacco Heating System
Tier 1 suppliers – Tier 1 suppliers are suppliers that
directly supply goods, materials or services to PMI
Tier 2 suppliers – Tier 2 suppliers aresuppliers that provide their products andservices to the Tier 1 suppliers
Tons – “Tons” equates to “metrictons” throughout this report
Total IQOS users – The estimated number oflegal age (minimum 18 years) IQOS users thatused PMI HTUs for at least 5% of their daily
tobacco consumption over the past seven days.
PMI HTUs include licensed KT&G HTUs
Total shipment volume – The combined total ofcigarette shipment volume and HTU shipment volume
TPSAC – Tobacco Products Scientific
Advisory Committee
TRIR – Total recordable incident rate
UNGPs – United Nations Guiding Principles
on Business and Human Rights
Upstream supply chain – Upstream operations
are those in which the materials flow into
the organization (i.e., it mainly refers to
procurement activities and inbound logistics).
WASH – Water access, sanitation, and hygiene
WHO – World Health Organization

Key definitions related to our work to
improve tobacco farmer livelihoods
A living income and living wage are both about
achieving a decent standard of living. A living
income is the net annual income required for ahousehold to afford a decent standard of living for
all its members and applies to, for example, selfemployed farmers. A living wage is applied in thecontext of hired workers (e.g., in factories or on
farms). (Source: The Global Living Wage Coalition)
A minimum legal wage, as defined in PMI’s
ALP Code, is a wage for all workers (including
temporary, piece-rate, seasonal, and migrant)
that meets, at a minimum, the national legal
standard or formalized agricultural benchmark
standard. An agricultural benchmark may beformalized where a minimum legal wage is notavailable or applicable to a specific context.
Child labor, as defined by the ILO, is work thatdeprives children of their childhood, their potential
and their dignity, and that is harmful to physicaland mental development. Under PMI’s ALP Code,the minimum age for admission to work is notless than the age at which compulsory schoolingis completed and, in any case, is not less than
15 years or the minimum age accepted by thecountry’s laws, whichever age limit affords greater
protection. No person below age 18 should be
involved in any type of hazardous work. In the caseof family farms, a child may only help on the farm
provided that the work is non-hazardous, and thechild is at least 13 years old or above the minimum
age for such work as defined by the country’slaws, whichever affords greater protection.

Hazardous work means work that, by its natureor by virtue of when or where it is carried out,
is likely to harm the health, safety, or moralsof children or others. The following can, forexample, be hazardous, particularly without theproper PPE: applying crop protection agents(CPA); stalk cutting; stringing; carrying heavyloads; working with sharp tools; working in
extreme temperatures; and working after dark.

Anker Living Income Reference Values3 represent
a living income for typical families in rural (orurban) areas of low-income and middle-income
countries. Reference Values provide a credible
estimate of living wage or income at a country
level, for rural and urban areas. They offer aninsightful reference beyond the currently available
indicators for many countries, which are mostly
limited to poverty lines and minimum wages.

Green tobacco sickness (GTS) is a type of nicotine
poisoning caused by the absorption of nicotine
from the surface of wet, fresh, green tobacco
leaves through the skin. The characteristic
symptoms of GTS include nausea, vomiting,weakness, dizziness, stomach cramps, difficulty
breathing, excessive sweating, headache,and fluctuations in blood pressure and heartrate. They can last from 12 to 48 hours.1

Farmer income studies are conducted, throughthird party service providers, to assess all
income sources of contracted farmers within
PMI’s tobacco supply chain, including tobacco,complementary crops and off-farm income.

Personal protective equipment (PPE) in
tobacco farming refers to any clothes, materials,
or devices that provide protection fromexposure to CPA and GTS during specificactivities throughout the crop cycle.2
Living income benchmark studies are studies
conducted in specific regions or areas to estimate
the net annual income required for a household toafford a decent standard of living for all membersof that household. PMI has partnered with Social
Accountability International, which in conjunction
with the Anker Research Network will be
conducting these studies in PMI sourcing markets.

1 Schep LJ, Slaughter RJ, Beasley DM (September-October 2009).
“Nicotinic plant poisoning.” Clinical Toxicology.
2 Adapted from the FAO/WHO (2014) International Code of Conduct on
Pesticide Management.
3 Reference values are built on data and knowledge gained from 40
complete Anker methodology benchmark studies. Since they are basedon a statistical analysis, they have a margin of error for typical rural (orurban) areas of a country, which is generally around +/– 10% using
a 95% confidence interval. Sources: Living Income Reference Values| livingincome (living-income.com) and Anker Living Wage and Living
Income Reference Values | Global Living Wage Coalition.

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Overview

Innovating for
better products

Forwardlooking andcautionary
statements

Operatingwith excellence

Caring for thepeople we work withThis report and related discussion containprojections of future results and other forwardlooking 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 vary materiallyfrom those contained in such forward-looking
statements. Pursuant to the “safe harbor”
provisions of the Private Securities Litigation
Reform Act of 1995, PMI is identifying importantfactors that, individually or in the aggregate,
could cause actual results and outcomes todiffer materially from those contained in any
forward-looking statements made by PMI.
PMI’s business risks include: excise tax increases
and discriminatory tax structures; increasing
marketing and regulatory restrictions that could
reduce our competitiveness, eliminate our ability tocommunicate with adult consumers, or ban certainof our products; health concerns relating to the useof tobacco and other nicotine-containing products
and exposure to environmental tobacco smoke;
litigation related to tobacco use and intellectual
property; intense competition; the effects ofglobal and individual country economic, regulatory
and political developments, natural disasters andconflicts; changes in adult smoker behavior; lost
revenues as a result of counterfeiting, contraband
and cross-border purchases; governmental
investigations; unfavorable currency exchange
rates and currency devaluations, and limitations
on the ability to repatriate funds; adversechanges in applicable corporate tax laws; adversechanges in the cost, availability, and quality of
tobacco and other agricultural products and raw
materials, as well as components and materials
for our electronic devices; and the integrity of its
information systems and effectiveness of its data
privacy policies. PMI’s future profitability may also
be adversely affected should it be unsuccessful

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Protecting theenvironment

Performance
metrics

in its attempts to produce and commercialize
reduced-risk products or if regulation or taxation
do not differentiate between such products andcigarettes; if it is unable to successfully introduce
new products, promote brand equity, enter newmarkets or improve its margins through increased
prices and productivity gains; if it is unable toexpand its brand portfolio internally or throughacquisitions and the development of strategic
business relationships; or if it is unable to attract
and retain the best global talent. Future results
are also subject to the lower predictability of our
reduced-risk product category’s performance.
The COVID-19 pandemic has created significant
societal and economic disruption, and resulted
in closures of stores, factories and offices, andrestrictions on manufacturing, distribution andtravel, all of which will adversely impact ourbusiness, results of operations, cash flows andfinancial position during the continuation of
the pandemic. Our business continuity plansand other safeguards may not be effective to
mitigate the impact of the pandemic. Currently,
significant risks include our diminished ability toconvert adult smokers to our RRPs, significant
volume declines in our duty-free business andcertain other key markets, disruptions or delaysin our manufacturing and supply chain, increased
currency volatility, and delays in certain cost saving,transformation and restructuring initiatives. Our
business could also be adversely impacted if key
personnel or a significant number of employees
or business partners become unavailable due tothe COVID-19 outbreak. The significant adverse
impact of COVID-19 on the economic or politicalconditions in markets in which we operate could
result in changes to the preferences of our adultconsumers and lower demand for our products,
particularly for our mid-price or premium-pricebrands. Continuation of the pandemic could disrupt
our access to the credit markets or increase ourborrowing costs. Governments may temporarily
be unable to focus on the development ofscience-based regulatory frameworks for thedevelopment and commercialization of RRPs or on
the enforcement or implementation of regulations
that are significant to our business. In addition,
messaging about the potential negative impacts of
the use of our products on COVID-19 risks maylead to increasingly restrictive regulatory measureson the sale and use of our products, negatively
impact demand for our products, the willingnessof adult consumers to switch to our RRPs andour efforts to advocate for the development ofscience-based regulatory frameworks for thedevelopment and commercialization of RRPs.
The impact of these risks also depends on
factors beyond our knowledge or control,
including the duration and severity of thepandemic, its recurrence in our key markets,
actions taken to contain its spread and to
mitigate its public health effects, and theultimate economic consequences thereof.
PMI is further subject to other risks detailed
from time to time in its publicly filed documents,
including the Form 10-Q for the quarter
ended March 31, 2021. PMI cautions thatthe foregoing list of important factors is not acomplete discussion of all potential risks anduncertainties. PMI does not undertake to update
any forward-looking statement that it may
make from time to time, except in the normal
course of its public disclosure obligations.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Independent Assurance Report on theBusiness Transformation Metrics Reporting 2020
To the Board of Directors ofPhilip Morris International Inc.
We have been engaged to perform assurance
procedures to provide limited assurance on theBusiness Transformation Metrics reporting of Philip
Morris International Inc. and Subsidiaries (‘PMI’).

Scope and subject matter
Our limited assurance engagement focusedon selected Business Transformation Metricsof PMI for the financial year ended December
31, 2020 included in the Integrated Report2020 and included the following:a. The following Business Transformation Metrics
as disclosed on pages 15 and 130, respectively.
• R&D expenditure (in millions USD)
• R&D expenditure (smoke-free/total)• Number of factories producing smoke-free
products out of total number of factories• Number of markets where
IQOS is available for sale
• Proportion of markets where IQOS is available
for sale that are outside the OECD
• Commercial expenditure (marketing)(smoke-free/total)• Smoke-free product shipment
volume (billion units)• Combustible product shipment
volume (billion units)• Smoke-free product shipment
ratio (smoke-free/total)• Total IQOS users (in millions)• Estimated users who have switched to
IQOS and stopped smoking (in millions)• Estimated users outside the OECD
countries who have switched to IQOS
and stopped smoking (in millions)• Net revenues (smoke-free/total)• Number of markets where net revenues
from smoke-free products exceed
10% of total net revenues

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Philip Morris International Integrated Report 2020

• Number of markets where net revenues
from smoke-free products exceed
50% of total net revenues
b. The application of the reporting guidelines
for the preparation of the BusinessTransformation Metrics published on
pages 15, 130 and 143 (glossary); andc. The management and reporting processes withrespect to the selected Business Transformation
Metrics as well as the control environment
in relation to the aggregation of the data

Criteria
The reporting criteria used by PMI are describedand disclosed on pages 15, 130 and 143(glossary) and in the internal reporting guidelines.
These define those procedures, by which theBusiness Transformation Metrics data areinternally gathered, collated and aggregated.

Inherent limitations
The accuracy and completeness of BusinessTransformation Metrics are subject to inherent
limitations given their nature and methods fordetermining, calculating and estimating suchdata. Our assurance report should therefore
be read in connection with PMI’s internal
guidelines, definitions and procedures on
Business Transformation Metrics reporting.

PMI management’s responsibility
PMI management is responsible for both thesubject matter and the criteria as well as forselection, preparation and presentation of theinformation in accordance with the criteria. This
responsibility includes the design, implementationand maintenance of related internal control relevantto this reporting process that is free from material
misstatement, whether due to fraud or error.

Our responsibility
Our responsibility is to express a limited assurance
conclusion on the Business Transformation
Metrics based on the procedures we have
performed and the evidence we have obtained.
We conducted our limited assurance engagementin accordance with the International Standard
on Assurance Engagements 3000 (revised),“Assurance Engagements other than Audits or
Reviews of Historical Financial Information” issued
by the International Auditing and AssuranceStandards Board. These standards requirethat we plan and perform this engagement toobtain limited assurance about whether theidentified Business Transformation Metrics
are free from material misstatement.
A limited assurance engagement undertaken inaccordance with ISAE 3000 (revised) involves
assessing the suitability in the circumstances of
PMI’s use of applicable criteria as the basis forthe preparation of the Business Transformation
Metrics, assessing the risks of material
misstatement of the Business Transformation
Metrics whether due to fraud or error,
responding to the assessed risks as necessary
in the circumstances, and evaluating the overall
presentation of Business Transformation Metrics.
A limited assurance engagement is substantially lessin scope than a reasonable assurance engagement
in relation to both the risk assessment procedures,
including an understanding of internal control,
and the procedures performed in response to theassessed risks. The procedures selected dependon the assurance practitioner’s judgement.

Overview

Innovating for
better products

Operatingwith excellence

Caring for thepeople we work withProtecting theenvironment

Performance
metrics

Independent Assurance Report on theBusiness Transformation Metrics Reporting 2020 continued
Our independence and quality controls
We are independent PMI in accordance with
the International Code of Ethics for Professional
Accountants (including International IndependenceStandards) issued by the International Ethics
Standards Board for Accountants (IESBA Code)that are relevant to our audit of the financial
statements and other assurance engagements in
Switzerland. We have fulfilled our other ethicalresponsibilities in accordance with the IESBA Code.
Our firm applies International Standard
on Quality Control 1 and accordingly
maintains a comprehensive system of quality
control including documented policies andprocedures regarding compliance with ethicalrequirements, professional standards andapplicable legal and regulatory requirements.

Summary of the work performed
Our limited assurance procedures included,
but were not limited to the following work:• Reviewing the application of theinternal reporting guidelines

We have not carried out any work on data
other than outlined in the scope and subject
matter section as defined above. We believethat the evidence we have obtained issufficient and appropriate to provide abasis for our assurance conclusions.

Limited assurance conclusion
Based on the procedures we performed,
nothing has come to our attention
that causes us to believe thata. The selected Business Transformation
Metrics as outlined in the scope and subject
matter paragraph and disclosed on page 15
not prepared and disclosed in all material
respects in accordance with PMI’s internal
guidelines and procedures as publishedon pages 15, 130 and 143; and;b. The management and reporting processes
to collect and aggregate the BusinessTransformation Metrics as well as thecontrol environment in relation to the data
aggregation are not functioning as designed.

• Interviewing PMI representatives responsible
for the internal reporting and data collection

PricewaterhouseCoopers SA• Test a sample of data from PMI operations
concerning the completeness, accuracy,
consistency and classification

Chad Mueller• Inspecting relevant documentation on a sample
basis, including PMI policies, management
reporting structures and documentation• Reviewing and assessing the management
reporting processes for BusinessTransformation Metrics data andconsolidation and their related controls

147

Raphael Rutishauser

Lausanne, May 6, 2021

Philip Morris International Integrated Report 2020

Innovating for
better products

Overview

Notes

Operatingwith excellence

Caring for thepeople we work withIn this report, “PMI,” “we,” “us,” and “our” refers toPhilip Morris International Inc. and its subsidiaries.
In this report and in related communications,the term “materiality,” “material,” and similarterms, when used in the context of economic,
environmental and social topics, are definedin the referenced sustainability standards, andare not meant to correspond to the conceptof materiality under the U.S. securities laws
and/or disclosures required by the U.S.
Securities and Exchange Commission.
This report contains references and links to
websites operated by third parties. These
references are provided as a convenience toyou and as an additional avenue of access tothe information contained in those sources;
they should not be viewed as an endorsement
by us of the content of these references andlinked sites or opinions of their authors.
A glossary of terms is posted on our website.
Unless otherwise stated, all references to IQOS
are to our IQOS heat-not-burn devices andconsumables.
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.

Protecting theenvironment

Performance
metrics

Headquarters

Design and production

Philip Morris International Inc.
120 Park Avenue
New York, NY 10017-5579
USA

Friend Studio

www.pmi.com

Throughout an unprecedented and unparalleled
year, COVID-19 presented its own kind ofchallenges for our reporting. While remaining
mindful of the economic, health, and emotional
tolls this pandemic has taken, we wanted toremain connected with our teams on the groundand the local communities where we operate ina way that was both authentic and empowering.
For this reason, most photography contained inthis report–as well as additional visual media in
related communications–was taken in early 2021
by local photographers and production crews.
These local crews from 14 different countries
visited more than 30 locations, ranging from farms,
to fields and factories, from greenhouses to R&D
facilities, to distribution centers to IQOS stores andtobacconists. They filmed and photographed life at
PMI in order to highlight what sustainability looks
like from different viewpoints and perspectives.
The teams followed PMI’s security and safety
guidelines throughout the entire process.

Operations Center
Philip Morris Products S.A.
Avenue de Rhodanie 50
1007 Lausanne
Switzerland
www.pmi.com

www.friendstudio.com

Filming and photography

George Brooks
www.georgebrooks.net
Netherlands
Slovakia
GreeceTurkeySwedenJapan
Switzerland
RussiaMexicoArgentina
Indonesia
MexicoItaly
Pakistan

148

Philip Morris International Integrated Report 2020

Martine Kamara
Welin Nagyová
Orestis Seferoglou
Bradley Secker
Binniam Halid
Nobu Arakawa
Tino Konino and Reto Cortesi
Valeriy Belobeev
Mónica Godefroy
Lucia Dellacha and Andrea Fischer
Ari Riyanto, Agung Lawerissa
and Ronny Santoso
Diego Sierra
Matteo Buonomo
Agha Fawad