WE ARE

Achieving our
climate goals
PHILIP MORRIS INTERNATIONAL
LOW- CARBON TR ANSITION PL AN
OC TOBER 2021

Contents
Understanding PMI’s Low-Carbon Transition Plan...

WHY

W H AT

H OW

Ambition andvalues supporting
climate goals

PMI’s main
climate goals

Achieving our
climate goals by...

07 Ambition and values supporting
climate goals

12 PMI’s main climate goals

18	Understanding megatrends
and assessing risks andopportunities

48	Fostering engagement,
promoting global climate
action23	Measuring emissions andsetting reduction targets

52	Putting people andecosystems’
well-being center stage

27	Reducing emissions
34	Pricing carbon
37	Getting to zero42	Engaging supply chains45 	Integrating sustainability
considerations into our
products
Cover photo: An employee at PMI’s Indonesian affiliate, Sampoerna, solar panel farm in Karawang, Indonesia

Philip Morris International Low-Carbon Transition Plan 2021

55

Climate proofing thebusiness and disclosing
climate information

59	Building effective climate
governance63	Glossary

01

TECHNICAL CONTENTS FOR PMI’S LOW- CARBON TR ANSITION PL AN (LC TP)

Concrete climate action aligned to decarbonization needs
Executive summary

As a major multinational
corporation with thousandsof stakeholders round theworld, we at Philip MorrisInternational (PMI) have been
increasingly engaged withaspects of sustainability in
our products and processes.
Our company is transforming
into a science- and technologypowered business withthe aim of delivering asmoke-free future—a future
without cigarettes.

Philip Morris International Low-Carbon Transition Plan 2021

We are focused on our most material impacts
on society, including product health impacts.
Addressing the environmental footprint of ouroperations is a critical component of this andof developing technologies and practices todecarbonize our business and safeguard thelong-term interests of all our stakeholders.
As the urgency of the climate crisis becomes morepressing, we are increasing the pace of our initiatives,bringing forward target dates for carbon neutrality.
To achieve these targets, we have a detailed
practical plan to decarbonize our value chain.
This executive summary is drawn from our2021 Low-Carbon Transition Plan (LCTP).
The LCTP provides technical details on how
we are working within the company and withothers to cut greenhouse gasses aggressively,
especially carbon emissions, and achieve theclimate goals we have set for our company.
We closely follow the guidelines of the ScienceBased Targets initiative (SBTi) partnership to set
meaningful emissions reduction targets. In 2020,
the SBTi assessed and approved that our targets
aligned with a 1.5°C global temperature scenario
as outlined in the Paris Climate Agreement.
To help us achieve this we are now introducing a newgoal–for PMI critical suppliers to adopt science-basedtargets in line with the SBTs that the company has
committed to, as aligned with the 1.5°C pathway
necessary to meet the goals of the Paris Agreement.
We are certain that by including and engaging with
our supply partners we can accelerate the transition
toward a net-zero sustainable economy. Supplierengagement will be essential for us to meet our new
carbon neutrality target date of 2040 for scopes
1+2+3 (entire value chain). This advancement by

10 years reflects our commitment to combatingclimate change.

annually, accounting for all relevant emissions
generated across the entire value chain.

Decarbonizing fast to create
long-term value for all

Initially, in 2019, we had aimed to be carbon
neutral on scopes 1+2 (direct emissions) by 2030,
but in view of the growing urgency of climatechange, we now expect to reach this target five
years ahead of schedule—2025. For the morecomprehensive scopes 1+2+3 (entire value
chain), we are now targeting carbon neutrality
by 2040. This restated date is 10 years earlier
than originally planned in 2019, underlining PMI’s
firm ambitions. Our company is making progress
to reach these targets, having already lowered
emissions by more than half against the 2010
baseline. We forecast that in 2021 our directemissions of CO2e will be less than 400,000 tons.

PMI is pursuing its business transformation todeliver a smoke-free future. We are targetingat least 50% of total net revenues to come fromsmoke-free products by 2025, compared to zeroin 2015. We are equally ambitious in addressing
the climate change crisis with our many initiatives
tackling reduction of our GHG emissions, climatechange mitigation, and adaptation measures.
Driven by the imperative of sustainability, we
are working to minimize carbon emissions fromour products and processes. This is proving
to be an important driver of opportunities forinnovation, growth, and long-term value creation.
Our sustainability strategy is founded on theprinciple that companies today must deliver
more than shareholder value. Long-term successrequires creating value and sharing it throughsustainable approaches and practices for the full
diversity of stakeholders, including employees,
customers, suppliers, and communities.

We have tightened our timelines
for systematic decarbonization
Carbon emissions are a major contributor to theclimate crisis and one of the principal threats
to our planet. This is why reducing carbon
emissions is a high priority for PMI. We haveadopted international standards that enable us
to benchmark against sustainability leaders andto identify areas for improvement. Hence, withthird-party verification according to ISO standard
14064-3, we calculate our GHG footprint

Reduce consumption, switch torenewable energy, and compensate
unavoidable emissions
For the practicalities of achieving our emissions
targets, we have a threefold approach. We
reduce energy consumption and optimize
efficiency to cut emissions. We minimize theuse of fossil fuels and promote switching to
renewable energy. And, recognizing thatsome emissions will be unavoidable, we
compensate for them by prioritizing insetting
projects (nature-based solutions) and bypurchasing high-quality carbon credits.
In our operations, we are reducing emissions
and increasing efficiency with two main programs:
Zero Carbon Technology (ZCT) and Drive4Zero(D4Zero). ZCT involves initiatives such as biomass
burners combined with thermal storage and solar
photovoltaics for carbon emissions reduction
and carbon capture and storage.

02

TECHNICAL CONTENTS FOR PMI’S LOW- CARBON TR ANSITION PL AN (LC TP)

With D4Zero, every worker in operations
looks out for points in processes where energy,
water, or materials are being lost. Workers are
empowered to recommend and implement
solutions and to promote efficiency improvements
not only across the factories but also throughout
the company. D4Zero is one of the ways thatthe company encourages workers, suppliers,
farmers, and new employees at every level to be
actively engaged in more sustainable actions inline with the company’s climate action targets.
To provide a financial lever for climate
action, both governments and businesses
think that carbon pricing can be an effective
incentive to reduce carbon emissions
and purposefully allocate resources.
Accordingly, in 2020 we adopted a shadow carbon
price of USD 65 per ton of CO2e and a carbon levyof USD 8 per ton of CO2e. Our shadow carbon
price is a theoretical cost that must be integrated
into the financial evaluation and preparationof business cases and decisions to ensure thatenvironmental costs are internalized and given
due consideration. This functions as a powerfultool to build stronger internal alignment on climate
action. The carbon levy is an internal tax that is
virtually charged to a selection of our business units
as an incentive to reduce emissions and to fundcompensation solutions for unavoidable emissions.

Philip Morris International Low-Carbon Transition Plan 2021

To guide this, we have created a Portfolio of Climate
Investments guided by an advisory committeethat is responsible for managing and allocating
budget along three main lines. First comesshort-term investments that involve “offsetting”
unavoidable emissions through the purchase ofhigh-quality carbon credits. Alongside this, ourlonger-term net-zero ambitions require investment
in “insetting” projects throughout the value chain
to remove CO2 from the atmosphere while (re-)
establishing natural carbon sinks and generating
positive impacts on biodiversity and people’s
livelihoods in our local communities. Thirdly
are investments in innovative technologies topermanently remove carbon from the atmospherewith solutions that can be progressively scaled up
to the magnitude needed to halt climate change.
We believe that our sustainability strategy
must be reflected in the company at senior andexecutive levels, which is why, since October
2020, our Chief Sustainability Officer hasreported directly to our Chief Financial Officer.
The company’s executive compensation program
reflects commitments to put sustainability at
the core of our corporate strategy. Additionally,in 2020, the company’s Board of Directors
released a Statement of Purpose that reaffirms
PMI’s commitment to deliver a smoke-free
future and lays out our unique business modeland value proposition: To relentlessly focus
our resources to replace cigarettes with better
alternatives. The statement explains how weare 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.

Appreciation of our transparency,
recognition of our progress
What we describe here are the first steps on what
is likely to be a long road ahead. The more wework on climate mitigation and climate adaptation
measures, the more we realize that we don’t
have all the answers and the more we value
working with peers and partners. Nevertheless,
we are encouraged by external recognition
that indicates we are on the right track. For the
first time, our score in the 2020 S&P Global
Corporate Sustainability Assessment earned ourcompany inclusion in the Dow Jones Sustainability
Index (DJSI) North America. We achieved thehighest score of 100 in the climate strategy,
environmental reporting, and environmental
policy and management systems categories.
With CDP, a not-for-profit charity that runs
the global environmental disclosure system, we
achieved a “triple A” score for environmental
sustainability leadership in 2020. We also
maintained our position on the A List for Climate
Change for the seventh year in a row. CDP
also placed PMI on its Supplier Engagement
Leaderboard for the fourth consecutive year.
We are making every effort to ensure that
our environmental performance reportingin years to come will contain still moreencouraging information to share with our
stakeholders, our peers, and the wider world.

“We believe that oursustainability strategy
must be reflected in
the company at senior
and executive levels.”03

W H Y O U R A M B I T I O N A N D VA LU E S

What has become apparent is the opaquenessof how to achieve these desired goals. With
enough transparency, however, pledging
can enable implementation, accountability,and eventually significant change. This is thefundamental reason underlying our Low-Carbon
Transition Plan (LCTP). We see it as timely due
to the dramatic increase in net-zero and lowcarbon corporate targets and commitments.
We recognize that climate change is not only about
impact on the environment but also on people’s
livelihoods. Building on our 10-year experienceof developing and implementing programs,
especially in our agriculture supply chain, we havewitnessed how climate change has exacerbatedhuman rights issues, including social inequalities,

Philip Morris International Low-Carbon Transition Plan 2021

disproportionately affecting the most vulnerable.
The climate crisis concretely impacts humanmigration, access to water, global health, agriculture
productivity, and food security, among manyother issues affecting our collective livelihood.
At PMI, doing our part to address the climate
crisis is a key priority of our sustainability
strategy. Yet, our efforts to combat climatechange are not limited to working toward carbon
neutrality in our operations and across ourentire value chain. We also work to adapt to
the impact of climate change and increase theresilience of our business and the communities
where we operate. We are acutely aware of the
impact our company has on both society andthe environment, and we have been actively
putting in place actions that can create a positive
impact that is both measurable and verifiable.
Our LCTP is part of our overall sustainability
strategy, pulling together the entire climate
and carbon work that our company has done,
outlining our strategy, as well as the baseline forachieving our restated ambitious carbon targets,
namely, to become carbon neutral in all our direct
operations by 2025, and across our entire value
chain by 2040. Concretely, this plan shows how
our company will operate in the future, in a worldin which a functional low-carbon economy exists.

reduce theirs. It also links these considerable
ambitions to our even greater fundamental
ambition of ridding the world of cigarettes,
while further seeking a net-positive impact.
By presenting our low-carbon transformation
strategy, we hope to encourage change andfoster engagement with investors and otherstakeholders who will be able to evaluate whether
our company is appropriately adapting its businessmodel for success in a net-zero carbon economy.
We are also explicitly stating that the success ofour business depends on our ability to adapt andrespect social and environmental boundaries.
The LCTP showcases how our targets areunderpinned by detailed operational measuresand a solid business strategy, which are vital totranslate ambition into action, achievement, andimpact, and most important, the only way tosafeguard the sustainability of our business andto help contribute to wider societal action.

Jennifer Motles
Chief Sustainability Officer

The plan combines both what has been
done to date, as well as the strategy moving
forward, including science-based targets andinterim goals. It also recognizes the impact
of carbon emissions on the environment andidentifies ways in which we can reduce ourown carbon emissions and help others to04

Achieving our climate goals

As a millennial, I often think about the fact that I
will only be a middle-aged person in 2050, and theoverwhelming complexity and sheer magnitudeof climate change becomes paralyzing. What can
one individual do to create change that can alter
the seeming inevitability of the path humanity
is on? As a society, we have protested, raised
awareness, talked openly about its consequences,and many have pledged and committed to alignwith lofty goals that promise a change that would
hopefully see our planet warm up at a slower
pace. Sadly, making pledges has emerged as apopular and flexible way to attempt to govern
the environment. Companies have promised
to do what makes sense within their capacities,
putting forward commitments or aspirations
toward a shared goal and hoping that the sum ofthese pledges will safeguard the environment.

Establishing our climate goals

Our world is under threat and facing
one of the biggest environmental
challenges in our history. We are thefirst generation to be conscious andaware of the destruction we are waging
on our planet and its ecosystems, and,at the same time, the last one that can
do anything about it.

Our ambition and values

Climate action is built with strategy,transparency, and engagement

W H Y O U R A M B I T I O N A N D VA LU E S

consumption and carbon emissions is indeed
embedded in our PMI Environmental Commitment,
our Guidebook for Success (PMI’s Code of Conduct),
our Responsible Sourcing Principles, and ourGood Agricultural Practices program. Our Zero
Deforestation Manifesto specifies our efforts toprotect forests, which play a fundamental role forclimate regulation and carbon sequestration. I am
proud to now be able to share our Low-Carbon
Transition Plan (LCTP), which provides a transparent
and detailed view on how we plan to achieve ourclimate ambitions, how we will measure success, andhow we will report on the progress we will make.

For a business like ours—with an agricultural
supply chain sensitive to climate changes—
abrupt climate variations can have a profound
impact on the secure supply of our raw
materials. It may also threaten facilities andoperations, supply and distribution chains, aswell as access to power networks and water.

While we consider the improvement of theenvironmental performance of our manufacturing
operations as vital, most of our ecologicalfootprint arises elsewhere in our value chain,with upstream emissions typically being 10
times greater than those from our direct
operations. We therefore believe that working
collectively with tobacco growers, suppliers,
retailers, NGOs, and governments is crucial
for reaching our environmental goals.

We are working hard to strengthen our resilience
to climate risks, implementing adaptation andmitigation measures across our value chain. We useinternal carbon pricing to structurally incentivize
and drive a reduction in CO2 emissions. A recent
review of our approach led us to implement a
shadow price to internalize environmental costs
and factor them in investment decision-making,and an internal carbon levy as an incentive to
reduce CO2 emissions and to generate funding forcompensation solutions for unavoidable emissions.
Like other sustainability leaders, our ambitious CO2
emissions reductions are assessed and validated
by the Science-Based Targets initiative (SBTi), andwe have also enacted several corporate policies
that guide our approach to decarbonizing ouroperations and value chain. The reduction of energy

Philip Morris International Low-Carbon Transition Plan 2021

The progress we’ve made so far encourages methat we are on the right track toward a low-carbon
economy. I am delighted that we are now able toexpand our global climate ambition: to achieve netzero greenhouse gas emissions across our operations
and supply chain by 2040, 10 years earlier thaninitially anticipated. We have also set two interimscience-based targets for 2030 on our way to net
zero: reducing emissions across both our operationsand value chain by 50% each. We are confident wewill achieve these reductions by accelerating our useof renewable energy, increasing the efficiency of ourmanufacturing processes and fleet, and advancing
technologies to decarbonize our supply chain.

We are also introducing a new target: for
PMI’s critical suppliers to reduce their carbon
emissions, adopting science-based targets thatare aligned with the ones PMI will follow. By
engaging our suppliers, we aim to contribute totheir transition toward a net-zero economy. Inturn, this will over time support PMI’s own carbon
emissions reduction targets for our value chain.
In addition to our internal measures, weconsistently support national and global climate
policies that promote a smooth transition to a
low-carbon economy and help us plan for businessgrowth. It’s our strong belief that effective climate
policies provide us with more certainty for shortand long-term planning and investment, as wellas help us to better anticipate regulatory trends/
changes and seize economic opportunities.
PMI has been recognized as a climate leader, andwe are determined to remain at the forefront of theclimate-neutral agenda. It is my hope that our LowCarbon Transition Plan will become much morethan a testament of our climate actions—that it canspark a debate and serve as inspiration to others.
The road toward a low-carbon economy and abetter planet is one we all need to travel together.

Massimo Andolina
Senior Vice President, Operations

05

Achieving our climate goals

Tackling it cannot be done individually; thisurgent and monumental task ahead of us requires
the input and collaboration of all partners
across the public and private sectors. Reachingnecessary greenhouse gas (GHG) emission
reduction targets requires action from all partsof society. As a company with a multinational
environmental footprint, we have a role to play inprotecting our planet. We will do so by defining
and executing strategies and initiatives that
help us to reduce the environmental impact
across our value chain and allow us to achieve
our mid- and long-term climate-related goals.

Establishing our climate goals

Runaway climate change affects
everyone and every aspect oflife, and it is now well establishedthat this is one of the mostsignificant crises of our lifetime.

Our ambition and values

Harnessing the power of new technologies
and nature-based solutions

W H Y O U R A M B I T I O N A N D VA LU E SWithin companies, finance and sustainability
professionals communicated separately and in adifferent manner to their respective stakeholders—and in addition, did not necessarily talk to eachother. But it has become clear that the sustainability
performance of a company can no longer be asecondary concern. It is universally expected thatESG factors are integrated into the overall businessstrategy. A failure to do so can put the long-termcompetitiveness and success of a company at risk.

Addressing ESG issues does not only bear costs
for a company, it can also become a driver for
growth and innovation. At PMI, we are investing ininnovative technologies and take a multidisciplinary
approach to reducing the environmental impactof our products, operations, and value chain.
We are convinced that reaching our carbonneutrality targets will contribute to making ourcompany more resilient and more profitable.

Philip Morris International Low-Carbon Transition Plan 2021

At PMI, we reviewed our carbon pricing policy in2020 and took a pioneer approach by developing
two complementary internal carbon prices: ashadow price and a carbon levy. Our shadow
carbon price is integrated into the financial
evaluation and preparation of business cases thatwill impact our carbon emissions either favorablyor unfavorably. This has been instrumental in theapproval of additional carbon emissions reduction
projects as part of our energy savings initiatives,
for example. Our carbon levy is designed tointernalize costs and support behavioral change.
This internal tax is virtually charged to selectedbusiness units for their GHG emissions, withthe aim of using calculated virtual revenue
to size and fund investments that contributeto the decarbonization of our business.
While the shadow price helps us to prioritize
business cases for investment in activities
aimed at structurally reducing our carbon
emissions, the carbon levy helps to size theinvestments required today to compensate ourunavoidable CO2 emissions through a portfolioof climate investments including offsetting (e.g.,
by purchasing carbon reduction/avoidance
certificates) or insetting initiatives (e.g., throughagroforestry projects that remove carbon fromthe atmosphere in our tobacco supply chain).

We will review both the shadow price and thecarbon levy annually to take changes in our risks
and emissions profiles into account. We strongly
believe that incorporating the cost of carbon
emissions into investment decisions will help us
become more efficient and accelerate the shift to
low-carbon activities. Furthermore, it will allow
us to communicate to stakeholders, including
investors, how we are making decisions.
For PMI, sustainability is not only part of ourbusiness strategy. ESG is core to our performanceand success. Sustainability and a strong businessperformance do not contradict each other. They
are fully interrelated and mutually reinforcing,
and therefore should be organized and presented
to all stakeholders alike in an integrated way. We
believe that delivering on our purpose by creating
a smoke-free future without cigarettes will benefit
both shareholders and other stakeholders and areaiming to complete this journey while also taking
strong actions to reduce the risk of climate change
impacts and stop the destruction of nature.

Emmanuel Babeau
Chief Financial Officer

06

Achieving our climate goals

The impacts of climate change, biodiversity loss,
and water insecurity—among others—threaten
more than physical infrastructure and supply
chains. They endanger progress and businessgrowth by exacerbating systems-level disruptions
for customers, investors, employees, andcommunities. It is crucial that business leaders view
environmental risks in a new way, as it will require adrastic reduction of global greenhouse gas (GHG)
emissions to limit global warming to no more than
1.5°C to avert catastrophic climate impacts.

An increasing number of organizations andsustainability leaders agree on the benefits ofusing internal carbon pricing to structurally drivea reduction in CO2 emissions. Assigning a price—and hence a theoretical cost—to the emissions
generated not only makes an intangible concrete,
but also further incentivizes actions to reduce
the emissions that contribute to global warming.

Establishing our climate goals

For the longest time, it seemedthat environmental, social, andgovernance (ESG) factors weremere afterthoughts on the mindsof business leaders and investors.

Our ambition and values

Driving business growth forward
by integrating ESG

Our ambition and values
Establishing our climate goals

WHY

Philip Morris International Low-Carbon Transition Plan 2021

Achieving our climate goals

Ambition andvalues supporting
climate goals

07

W H Y A M B I T I O N A N D VA LU E S S U P P O R T I N G C L I M AT E G OA L S

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 usthat it is not too late to limit the warming to the 1.5°Cthat is considered the limit beyond which impacts

Philip Morris International Low-Carbon Transition Plan 2021

will be catastrophic. This will require fundamental
transformations in all aspects of society—how wegrow food crops, use land, transport goods, and power
our economies. As a business with a multinational
environmental footprint, PMI will continue to playa role in contributing to addressing this crisis.
Climate transition at PMI is already afoot, withactions that strengthen resilience to climate impacts,
reduce GHG emissions, apply innovative low-carbon
technologies, and support policies enabling a smoothtransition to a low-carbon economy. PMI addresses
the climate crisis actively, building resilience andseizing opportunities to maintain business profitability.
The target of achieving carbon neutrality by 2025
and net zero for the entire value chain by 2040
(see WHAT: PMI’s main climate goals and p. 12) willcontribute to making PMI’s business more resilientand profitable. CO2 reduction at PMI goes hand inhand with increased efficiency and energy saving,
resulting in less inputs used over outputs and better
profitability. Although climate-smart technologies
may require higher investments upfront, current
projects of energy saving in manufacturing are alreadyaligned with PMI’s usual and expected payback times.
This is one of the reasons PMI is dedicating significant
resources to energy-efficiency projects in factories,
improving technologies, and transferring provensolutions through a wide behavioral change
program that includes all manufacturing plants.
The aim is to move it upstream in the supply chain.
Within our decarbonization strategy, PMI tooka pioneer approach to carbon pricing, including ashadow carbon price and a carbon levy. Both aregoing to be regularly reviewed to reduce the riskof stranded assets and to accelerate the shift to
low-carbon activities by incorporating the costof carbon emissions in investment decisions.

Strengthening resilience also means working withlocal communities on climate change adaptation
measures such as water cycle improvements andinfrastructural investments to reduce negative
impacts. Engagement efforts strengthen theadaptation of partners and interested communities
to unavoidable impacts caused by climate change.
PMI has a science-driven decarbonization roadmap
including science-based targets aligned with the 1.5°C
scenario set by the Paris Agreement. To continuously
track overall progress, PMI set quantitative mid-termtargets such as entirely phasing out coal both fromour factories (already achieved in 2020) and our
tobacco supply chain (by 2023) together with 100%
renewable electricity use by 2025 and stretchingefficiency improvements in our manufacturing
sites. The robustness of PMI’s commitments isreflected in the achievement of an A score in the last
seven years of CDP Climate Change disclosure, arecognition of PMI’s action to combat climate change.
PMI will continue to implement new technologies
in our operations to optimize the use of inputs(e.g., energy-efficiency initiatives) and to increase
greener energies usage applied to multiple
business areas (e.g., hybrid and electric car fleet
or zero-carbon technologies in manufacturing
and sustainable biomass in the tobacco-curing
process). PMI will invest in carbon removal,
insetting, and high-quality offsetting to further
move forward to the decarbonization of our value
chain by compensating unavoidable emissions.

08

Achieving our climate goals

In synergy with PMI’s purpose of delivering asmoke-free future, the low-carbon transition
plan is part of the company’s sustainability efforts.
PMI’s first sustainability-related disclosure(UNGC Communication on Progress 2015) was
published in 2016, to communicate externally
how PMI intended to create a future in whichcigarettes would be replaced by less harmful,science-based alternatives. Sustainability iscore to PMI’s transformation, which is basedon a deep sense of purpose to create value
for shareholders and other stakeholders. PMI
understands that companies must deliver morethan just shareholder value alone. While theBoard must exercise its fiduciary duties as they
relate to the oversight of the company’s financial
performance, we also recognize the importance of
creating value for a diverse group of stakeholders,
including employees, customers, suppliers, andcommunities. PMI addresses the environmental
and social implications of our products andoperations, where climate protection is for PMI
a part of a bigger picture that includes the goalsof innovation for better smoke-free alternatives,operating with the lowest possible risk rate in theentire value chain, and respecting human rights.

Establishing our climate goals

With the publication of thislow-carbon transition plan,
Philip Morris International (PMI)
wishes to explain ow we intend toachieve our climate goals and to present
PMI’s position on key areas of future
development. Sustainability efforts
entail complexity, due to the extent ofvariables involved and the variability of
the impacts. To navigate through thecomplex landscape of climate change
action, PMI wants to provide a clear
accounting and display of the activities
that contribute to climate mitigation
and adaptation. PMI believes theclimate emergency is a shared issue
and action to combat it needs to be
inclusive, allowing for cross-fertilizationof ideas, concepts, and solutions.

Our ambition and values

Achieving our climate goals

W H Y A M B I T I O N A N D VA LU E S S U P P O R T I N G C L I M AT E G OA L S

Delivering on our mid-term targets

2020

2023

2025

Phased out
coal from ourfactories

Phased out coalfrom our tobacco
supply chain

100% renewableelectricity use in ourfactories

Achieving our climate goals

Philip Morris International Low-Carbon Transition Plan 2021

Consistently with the climate action we promoteinternally and within our supply chain andleveraging on results and recognition we havereceived as a proactive and reliable climate actor,
we voice support for national and global climate
policies that put society on track toward a lowcarbon economy, sustainable and beneficial for

ecosystems and society. PMI’s actions in that area
are publicly recognized by external stakeholders
such as CDP or S&P Global Corporate
Sustainability Assessment that rated the maturity
and results of its programs, as further presented
in chapter 12 of this document. Effective climate
policies also help us plan for business growth, as
we believe that clear frameworks give us morecertainty for short- and long-term planning andinvestments, as well as help us better anticipate
regulatory risks and seize economic opportunities.

Establishing our climate goals

Consumers are increasingly interested in
knowing the social and environmental impactsof the products they buy and are changing theirconsumption patterns accordingly. During
2020, PMI carried out four large-scale surveys
with over 13,500 consumers of our products.
Beyond offering adult smokers a less harmful
alternative to cigarettes, 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 our capabilities to collect andrecover used devices and consumables. Results
indicated that environmental and social initiatives
were highly appreciated (including device repair,eco-certified devices made from sustainable
materials, used consumables proper disposal,
packaging minimization as well as carbon-neutral,
manufacturing and effective waste management)
denoting a good understanding of causal relations
between efficiency in the value chain and reductionof the carbon footprint of the company.

Understanding consumers’ needs helps PMI raise
standards to pursue and provide comprehensive
information. PMI trusts in a fair communication
with consumers, based on transparency andvisibility of sustainability results, empowering
them to make more sustainable choices.

Our ambition and values

PMI responds to the growing
consumer demand related to theenvironment and sustainability.

09

W H Y A M B I T I O N A N D VA LU E S S U P P O R T I N G C L I M AT E G OA L S

In support of the primacy of scienceRead PMI’s Statement of Purpose

Philip Morris International Low-Carbon Transition Plan 2021

PMI is completing a crucial transformation intoa science- and technology-powered company
with the aim of delivering a smoke-free future—afuture without cigarettes. PMI believes scienceis essential to making informed decisions and tounderstanding what the connection between
society and science is. In summer 2020, we
commissioned an online survey in Europe, Asia,
the Americas, and Africa. Main findings highlightthat the majority of people strongly rely on science
to find a solution to 21st-century challenges, andthat they prioritize businesses with data-driven
decisions and programs. Most people feel curious
about new inventions and research and have highexpectations of science, yet only half of thosesurveyed state to have access to clear information.
They “believe” in science, just as most people inprevious eras believed in higher powers. There is a
widespread expectation that science will find a way
to effectively solve global problems. On the other
hand, most of those interviewed think governments
should do more to meet the expectation of basing
decisions on scientific approaches. As a company
that is undergoing a disruptive change toward asmoke-free future, we root our strategy in scienceand providing alternative products that can
reduce our impact on the environment. As part ofour mission, PMI strives to ensure that accurate
information about tobacco harm and better
products are delivered to those smokers whootherwise would not stop smoking.

“We are proud toannounce that we
now expect to reachour 2030 scope 1+2
carbon neutrality
target five years
ahead of schedule.”
Jacek Olczak
Chief Executive Officer, June 2021

Achieving our climate goals

Our vision of a smoke-free future is strongly reaffirmed
in PMI’s Statement of Purpose: We are committed torelentlessly focus resources to replace cigarettes with
better alternatives. This statement explains how PMI
continues to transform our business and organizationfrom the inside, leading the industry toward a future
without cigarettes. More concretely, PMI believes thatwith the right regulatory encouragement and support forsmoke-free products from governments and civil society,cigarette sales can end within 10 to 15 years in many
countries. PMI understands that maximizing shareholder
value is no longer acceptable as a company’s sole purpose;
this should also be accompanied by clarity of purpose
for both external stakeholders and internal alignment.

Establishing our climate goals

ONLINE SURVEY/ WHITE PAPER

Our ambition and values

PMI’S STATEMENT OF PURPOSE

10

W H Y A M B I T I O N A N D VA LU E S S U P P O R T I N G C L I M AT E G OA L S

Our ambition and values

Pioneer climate program at PMI:The perfect shift

Our journey to carbon neutrality played a
key role in reaching relevant results, lowering
PMI’s emissions by more than half against the2010 baseline. We forecast emitting less than
400,000 tons absolute CO2e emissions in 2021.

Achieving our climate goals

We compare progress every year, defining
our goal as the “perfect shift,” the moment
when our manufacturing processes will run
free of issues, avoiding downtime, and thus
fully optimizing production outputs, with nosafety or quality incidents. Perfect shift will
support our carbon neutrality by 2025, in
a commitment for our operations, including
the certification of all our manufacturing
sites as carbon neutral. This is a collective
effort brought forward by the approximately
20,000 colleagues in PMI Operations.

Establishing our climate goals

Efficiency is a journey with a starting point that is often referred
to as “the baseline” and a goal that in some cases can be difficult
to define. In PMI’s manufacturing carbon neutrality program,the journey started in 2010 when PMI’s direct emissions
accounted for over 900,000 tons of CO2e.

We have already achieved some aspects ofa perfect shift and aim to reach the perfectshift in all our manufacturing plants, making
even more exciting the journey to minimize
our environmental impact and support theambitious goals of PMI’s climate strategy.

An employee in PMI’s manufacturing facility in Neuchâtel, Switzerland

Our journey to carbon neutrality

2010

900,000

2021

2025

Carbon neutral

tons of CO2e

<400,000
IQOS device recycling hub in Japan

Philip Morris International Low-Carbon Transition Plan 2021

tons of CO2e

11For PMI, climate protection means mitigating climate change by reducing energy
consumption and greenhouse gas (GHG) emissions while adapting to climatechange by improving resilience across our value chain.

reduction of waste. Our new goals can be reachedthrough intermediate targets such as the one
PMI has set for all our factories that will be certified
as  by 2025. PMI’s first carbon-neutral-factory,.
Klaipeda, in Lithuania, defined the best practice forthe remaining plants to achieve the certification.
To deliver on these ambitions, we are guided
by SBT targets and take a three-step approach:reducing consumption and optimizing
efficiency; minimizing the use of fossil fuels andpromoting the switch to renewable energy;
and compensating unavoidable emissions
with instruments and activities in line withthe best international practices aiming to fully
incorporate environmental and social integrityin the approach. PMI is evolving as a climateresilient business by identifying, accounting for,and managing climate risk and opportunities.

Establishing our climate goals

PMI’s main
climate goals

PMI’s 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, PMI
relies on robust carbon footprint accounting,analysis of climate change–related risks andopportunities, ambitious targets, clear
management and governance structures, andkey enablers such as internal carbon pricing.
Led by climate change awareness, PMI is targeting
to reduce emissions and deliver carbon-neutral
operations by 2025 and net-zero emissions acrossthe entire value chain by 2040. To meet thesegoals, a broad range of climate and energy targets
have been set, including emission reduction alignedwith the goals of the Paris Agreement, transition
to renewable energy, forest protection throughsustainable management, product eco-design,
manufacturing process improvements, and the

Our ambition and values

W H AT

Achieving our climate goals

Tobacco harvesting in Salta, Argentina

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W H AT P M I ’ S M A I N C L I M AT E G OA L S

To guide the work in the years to come, we revised our absolute CO2eemission reduction targets in 2020 to align with a scenario of an increasein global temperatures of no more than 1.5°C above pre-industrial levels.

PMI is already working to limit our impact on theenvironment and climate by reducing packaging
and by addressing plastic litter from products.
We are committed to a plastic litter reduction
target of 50% by 2025 and aim for 0% waste tolandfill by 2022 for our manufacturing plants.

PMI has launched a 2025 eco-design and circularity
ambition applicable especially for electronic
devices and has set a goal of ensuring 100% of
packaging materials to be recyclable and 95% of
packaging inputs to come from renewables.

W H E R E D O W E S TA N D W I T H O U R TA R G E T S

Our ambition and values

PMI’s main climate goals

Climate protection

1. Achieving carbon neutrality for directemissions (scopes 1+2) in 2025 (five years
earlier than previously announced), and all
factories certified as carbon neutral by 2025
2. Reaching net-zero emissions for the entire PMI
value chain (scopes 1+2+3) by 2040
(10 years earlier than previously announced)
Furthermore, in 2020 the Science-Based Targets
initiative (SBTi) assessed and approved PMI’semission reduction targets aligned with a 1.5°C
scenario (see 1.5°C Scenario on p. 16): 1) reduction ofabsolute scopes 1+2 GHG emissions by 50% by 2030
from a 2019 base year and 2) reduction of absolute
scope 3 GHG emissions by 50% within the same timeframe. Additionally, PMI commits to 100% electricity
used in our factories to come from renewable sourcesby 2025, phasing out coal in manufacturing by
2020 (a result PMI already achieved and is planningto maintain), and completely phasing out coal in
the tobacco supply chain by the end of 2023.
Philip Morris International Low-Carbon Transition Plan 2021

Beyond tobacco sourcing, the other categories
of direct materials with the greatest impact on
PMI’s CO2 footprint are cellulose acetate tow
for filters and wood pulp-based materials for
packaging and fine papers. PMI engages with our
suppliers to develop and implement emissions
reduction strategies in line with our emissions
reduction objectives. PMI intends to definetargets aligned with SBTi with our suppliers
to monitor progress in full alignment with the
supply chain and the SBTi. Our relationshipover sustainability action with our suppliers
is at a mature stage, and the data exchangetransparent and reciprocal; we will be using
these attributes as a starting base to develop
and monitor the SBT agenda for our suppliers.

Mitigateclimate change
by decarbonizing
our operationsand value
chain, while
increasing ourresilienceNet zero

We achieved significant absolute CO2e emission
reductions in 2020: Emissions across our value
chain (scopes 1+2+3) contracted by 18%, andthose in our direct operations (scopes 1+2) by 26%.
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 our carbon neutrality
target in our operations (scopes 1+2) before 2025.

Achievement of carbon
neutrality of PMI’s direct
operations (scopes 1+2)
by 2025

Net zero
Achievement of carbon
neutrality of PMI’s value
chain (scopes 1+2+3)
by 2040

Achieving our climate goals

The main goals are:

PMI developed new targets specific for the tobacco
supply chain, which represented 23% of our total
carbon footprint in 2020. PMI aims to achieve
an absolute carbon emissions reduction for our
tobacco supply chain of 35% by 2025 and of 50%
by 2030 versus the 2019 baseline. The target
will be reached acting on the six categories forwhich GHG emissions are measured (tobaccocuring fuels, fertilizers, mechanization, seedling
production, crop protection products, andtransport). The aim of phasing out coal is supportedby the adoption of sustainable biomass (suchas firewood, wood pellets, woodchips, or otheragricultural waste products) and the improvementof efficiency in the curing process. PMI continues
to work on improving the efficiency of tobaccocuring barns by upgrading thermal efficiency
and insulation, among other interventions.

Scope 1

Global greenhouse gas emissions scopes 1+2+3 (‘000 tons CO2e)

Scope 2

5,298

Scope 3

4,865

4,003

89.0%
88.6%
89.6%

3.3%
7.7%

3.3%
8.1%

8.1%

2018

2019
Baseline

2020

Establishing our climate goals

In doing so, PMI aligned with the recommendationsof the Intergovernmental Panel on Climate Change(IPCC) Special Report (2018). We are currently
integrating the latest information from IPCC Sixth
Assessment Report (2021) to further improvescope and direction of our climate action. Anotherrelevant step has been to update the baseline of
the accounting, moving it from 2010 to 2019, to
include changes in footprint and business model(see HOW: Achieving climate goals by measuring
emissions and setting reduction targets on p. 23).

2.3%

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W H AT P M I ’ S M A I N C L I M AT E G OA L S

Driving energy efficiency is an ongoing
journey at PMI to enhance productivity while
minimizing climate change transition risks suchas, e.g., taxation, as several of our factories
are in countries subjected to ETS schemes.

Combustible cigarettes

-55%
914

-25%

$70m

2010

Total investment
413

$30m

2020

Reduced-risk products

Annual savings

-20%
Mix

Efficiency
gains

Green
electricity

Fleet

2020

2018

Achieving our climate goals

2010

2020

Source: “ESG webcast”—June 2021

Total energy consumption rate (GJ/Mio Cig)
PMI global manufacturing (not including ARLF {MASSALIN LRM}, PKLF {PMPK Mard}, IT {PM MTB RRP ZP} and MY {Seremban}
8.73
7.74

7.09

Progress to date—CO2 emissions scopes 1+2
The journey started in 2010 when PMI’s directemissions accounted for over 900,000 tons ofCO2e. The efficiency journey has already reachedrelevant results—together with other initiatives, it
has contributed to lowering our emissions by morethan half against the 2010 baseline and achieving aforecasted less than 400,000 tons absolute CO2e in
2021. This is a tangible result—especially considering
the increased energy required to produce theconsumables for our smoke-free products, which isapproximately four times greater than for cigarettes.

Energy efficiency (GJ/M sticks)

Establishing our climate goals

PMI’s activities in improving efficiency are categorizedin our Drive 4 Zero program (see D4Zero programon p. 31), which aims to eliminate economic losses
caused by inefficient energy use. Under the program,
we look for industrial and manufacturing solutions
such as heat recovery and manufacturing-processoptimization. We also promote behavioral change
through our Zero Loss Mindset program (seeHOW: Achieving climate goals by… Reducing
emissions on p. 27). In PMI’s factory in Russia,
for example, it was necessary to drain around 1%of the steam our boiler produced to maintain thedesired water-quality parameters. This meant heatloss. We found a way to recover the wasted heatby installing a heat exchanger, which used the heatto generate steam. In that same factory, the waterused for domestic purposes and radiators washeated by inefficient electric heaters, leading to
avoidable losses. We installed a thermal pump thatwas five times more efficient, leading to a reductionof 210 tons of CO2 equivalent (CO2e) per year.

CO2 reduction of direct emissions (k tons scopes 1+2)

Our ambition and values

How are we performing?

5.90

6.68
6.05

2018

2019

2020

2021
Jan

2021
Feb

5.65

2021
Mar

5.72

2021
Apr

5.04

5.30

5.37

2021
May

2021
Jun

2021
Jul

5.80

2021
Aug

5.21

2021
Sep

5.24

4.98

4.73

2022

2023

2024

5.63

2021
Oct

2021
Nov

2021
Dec

2021
YTD

2021

Presentation of past projects on CO2 reduction, efficiency achieved in the last 10 years with a projection 2020-2025, minimize transition risks on ETS

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W H AT P M I ’ S M A I N C L I M AT E G OA L S

Progress to dateCore drivers to get to zero emissions

CO2 reduction (k tons)
CO2 impact
reduction and
Investment compensation

-55%
Green
electricity

-99
-293

413
REDUCE

Mix

23

Reduction &Compensation
372

$10m

15%

7

71

Fleet

$70m

$30m

Total investment

Annual savings

$120m

D40

$77m

17%

Fleet

$7m

9%

213

$5m

8%

19

233

Zero
2020

Energy efficiency (GJ/M sticks)

105

18%

2020

Office
WHS

11

2021

2022

2025

2023

Achieving our climate goals

Efficiency Green
gains electricity

Zerocarbon
tech

Emissions K tons
Negative impact from
portfolio change / fleet

64

308
-63

2010

413

D40
REDUCE-46

Early on impact from D40; green electricity and offset;
zero carbon tech to be implemented by 2025

Zero-Carbon tech

Incremental change YoY structure(ktons)Green electricity
Fleet

2010
Reduced-risk
products

2020

-20%

PMI
ClimatePortfolio

$11m

$230m

33%

100%

C O M P E N S AT E

-25%

C O M P E N S AT E

Office WHS
Combustible
cigarettes

6420Philip Morris International Low-Carbon Transition Plan 2021

19

18
4
9

26

9
29

233
13
81

16
9
12

4
11

20
6

44

104

14

2020

Fleet CO2 reduction is not driven by structured program
directed at CO, rather by logistics optimization

105

1

4

2018

71

OffsetZero-carbon tech example: Biomass or electrificationof heat generation, carbon capture technologies

Establishing our climate goals

914

Emissions reduction and compensation plan

Our ambition and values

Plan to achieve CO2 neutrality by 2025 (scopes 1+2)

Yearly offset: 14K tons by 2021; 43K tons by 2022; 87K tons by 2023; 137K tons by 2024; 191K tons by 2025

15

W H AT P M I ’ S M A I N C L I M AT E G OA L S

Our ambition and values

Definition of net zero and carbon neutrality
PMI’s plant research facility in Onnens, Switzerland

1 . 5° C S C E N A R I O

According to current definitions, individual
actors such as companies or public entities
are considered to have reached a state of net
zero when: an actor reduces its emissions
following science-based pathways, with any
remaining GHG emissions attributable tothat actor being fully neutralized by like-forlike removals (e.g., permanent removals forfossil carbon emissions) exclusively claimedby that actor, either within the value chainor through purchase of valid offset credits.

Individual actors are carbon neutral when
CO2 emissions attributable to an actor are
fully compensated by CO2 reductions or
removals exclusively claimed by the actor,
such that the actor’s net contribution
to global CO2 emissions is zero. Carbon
neutrality can be applied also to products orevents. Carbon neutrality is an intermediatestep toward net zero, as it happens before
the net-zero emission state, and it canbe reached using valid carbon credits(offsetting) or with mitigation activities
within the value chain (insetting).
The concept of carbon neutrality is sometimes
used as a synonym for climate neutrality,from which it differs for the range ofclimate-changing factors considered: only
carbon dioxide (CO2) in the case of carbon
neutrality, all GHG and other relevant
bio-geophysical changes due to humanactivities in the case of climate neutrality.

The 1.5°C scenario means that the planet hasa remaining carbon budget that is shrinking. In
practice, this target requires a scenario where
GHG emissions reach a peak in the next few years
and then decline, mainly through the technology
of capturing carbon from the atmosphere andstoring it. This scenario would require a reductionof emissions in all sectors, a steep increase in energy
efficiency, and major technological development.
The panel of scientists at IPCC, responsible forpublishing information on the state of the climate
and future projections of climate change, haverecently (2021) published the Sixth Assessment
Report that shows the 1.5°C scenario will very likely
be exceeded, and in some areas of the world thishas already happened, leading to climate change
negative impacts for society.

Source: SBTi, UNFCCC Race to Zero, et al.

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Achieving our climate goals

The Intergovernmental Panel on
Climate Change (IPCC) defines net
zero as that point when “anthropogenic
emissions of greenhouse gases tothe atmosphere are balanced byanthropogenic removals over a specified
period.” The Paris Agreement sets
out the need to achieve this balanceby the second half of this century.

Establishing our climate goals

Net zero, carbon neutrality

Limiting global warming to 1.5°C before the preindustrial level would allow society to avoid theintensity and the danger of the impact of ongoingclimate change. This value has been set with wide
agreement among scientists, and it is the resultof models that integrate the climate physics andanthropogenic rebound effects of human activities
in the climate system. During the Paris Agreement(UNFCC) in 2015, 190 countries pledged to keep
global temperatures “well below” 2°C above preindustrial levels and to “pursue efforts to limit thetemperature increase even further, to 1.5°C.”

IN THIS SEC TION
18	Understanding megatrends
and assessing risks and opportunities
Our ambition and values

23	Measuring emissions andsetting reduction targets
27

Reducing emissions

34

Pricing carbon

37

Getting to zero42

Engaging supply chains45	Integrating sustainability considerations
into our products
Establishing our climate goals

48	Fostering engagement, promoting global
climate action
Putting people and ecosystems’52	
well-being center stage55

 limate proofing the business andCdisclosing climate information

59

Building effective climate governance

H OW

Achieving our climate goals

Achieving our
climate goals

Philip Morris International Low-Carbon Transition Plan 2021

17

Our ambition and values

H OW

PMI regularly conducts sustainability materiality assessments to ensure
we focus our efforts and resources where they have the greatest impact.
PMI’s materiality assessments consider perspectives of both internal andexternal stakeholders and includes an evaluation of impact on sustainable
development and insights to identify emerging trends.

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Our two-tiered grouping of topics is based on thesustainability materiality analysis we conducted
in 2018 and refreshed in 2019. That analysis
identified 10 areas of priority focus—or “tier1 topics”—across PMI’s four pillars of action.
Under “Protecting the environment,” climate
protection is one of the 10 tier 1 topics and where
we strongly commit to robust and transparent
approaches. In PMI’s 2025 Roadmap, informedby the materiality matrix, we commit to “mitigate
climate change by decarbonizing our operations
and supply chain, while increasing our resilience.”
As we conduct our new sustainability materiality
refresh in 2021, we anticipate no changes interms of the relevance or importance climatechange—an ESG topic—will have in our strategy,
as the importance stakeholders attribute tothis issue, and the impact our company canhave to address it, have not decreased.
PMI’s climate strategy aims to address pertinentclimate change risks and build resilience while

Throughout the risk management process, PMI
mapped two key transition risks: the first one
is linked to the fact that PMI operations acrossthe globe are subject to various climate-related
regulations evolving over time. The second risk
concerns the increased production costs forfarmers in the supply chain due to changing input
prices, specifically diesel fuel costs. For PMI, thismay have an impact on procurement expenditure
on tobacco from third-party leaf suppliers anddirectly contracted farmers in the long term.

Achieving our climate goals

Among the pillars of action to become an ever moresustainable company, PMI committed to replacecigarettes with better, smoke-free alternatives (seeHOW: Achieving climate goals by… Integrating
sustainability considerations into our products
on p. 45). Innovating for better products is therefore
at the core of our strategy. PMI’s other strategicpillars include effective management of operational
topics, social issues, and environmental matters.

seizing opportunities presented by a low-carbon
future. In conjunction with the integrated risk
management process, PMI periodically conductsa climate change risks and opportunities
assessment to fully understand impacts acrossthe entire value chain. The next assessment isplanned for 2022 to align to the latest available
scenario predictions, as well as international
expectations such as those of the Paris Agreement
and the recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD).

Establishing our climate goals

Understanding
megatrends andassessing risks
and opportunities

Our approach to sustainability is structured
around four pillars of action and two tiers of topics,
providing the framework through which we respondto sustainability challenges and opportunities.

With the high-level goal of recognizing the risks
related to our operation, PMI is strongly committed tomaking the UN Agenda for Sustainable Development(UN SDGs) a reality (see HOW: Achieving climate
goals by… Fostering engagement, promoting
global climate action on p. 48 and HOW:
Achieving climate goals by… Putting people andecosystems’ well-being center stage on p. 52).
In 2019, building on our refreshed sustainability
materiality assessment, PMI reviewed ourcontribution to the SDGs to identify areas where
we have an opportunity to make the greatest
difference, in line with our sustainability priorities.

Employees in PMI’s manufacturing facility in Batangas, Philippines

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H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Alongside physical impacts such as rising sea
levels and changing weather patterns, there aresustainability-related megatrends, transition
risks, new carbon-related regulations andtaxes, changes in manufacturing technology,
and evolving consumer preferences, which canaffect business units or the organization due tostakeholder or customer concerns. Being at theforefront of addressing the global challenge ofclimate change also presents opportunities. To
realize these opportunities, PMI, alongside manyof our suppliers, is working within a context ofstabilizing the global temperature rise to below
the internationally agreed 1.5°C scenario. We
understand the potential impacts of climatechange across all areas of our operations,particularly upstream in our supply chain.

Achieving our climate goals

For PMI, costs of raw materials such as tobacco leaf
and cloves may rise, and both consumers and our
employees are becoming increasingly sensitized
to the environmental impact of corporate actions.
Upfront expenditures with longer-term returns
are required. At the same time, PMI’s efforts
to reduce GHG emissions, such as throughincreased energy efficiency, could alleviate
potential costs and create a competitive advantage
by meeting or exceeding the expectations ofconsumers, employees, and other stakeholders.

Establishing our climate goals

Climate change poses both ubiquitousand differentiated risks threatening
ecosystems, livelihoods, and themost vulnerable people around theworld. Beyond these repercussions,climate change can also threaten
business continuity. This is especiallytrue for businesses such as PMI,
involving agricultural supply chain.
Moreover, although PMI’s industry
is not considered a hard-to-abate
one—and may be less affected thanothers—climate change is material
to society. It is a megatrend; as such,companies, investors, and institutions
are progressively addressing it.

Our ambition and values

Understanding megatrends andassessing risks and opportunities

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

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H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

For instance, PMI is subject to risks related tomarket changes, such as shifts in supply anddemand for certain commodities, products, andservices. These include risks of increasing costsof sourcing (including materials such as waterand diesel) and increasing costs for suppliers.
Climate-related reputational risk is also
included in PMI’s risk assessment, consideringthat stakeholders’ interests and expectationsin climate change policies are increasing andsociety is asking businesses to become partof the solution by changing their practices.

Establishing our climate goals

Finally, PMI has also considered acute andchronic physical risks, which means that wehave considered the extreme weather events
due to climate change that have the potential
to significantly impact our operations, buildings,
and suppliers, therefore having a substantive
impact on our supply chain and business
continuity plan.

Achieving our climate goals

PMI has an interconnected three-step assessment
process in place to identify, assess, and manage
risks and opportunities that can have a substantive
financial or strategic impact on our operations.
The impacts reported as substantive strategic or
financial impacts are defined as those identified
and prioritized by management in our value
chain, through key enterprise risks based on four
risk dimensions: the impact a risk could haveon the organization if it occurs, the likelihood
a risk will occur, the velocity with which a risk
will affect the organization if it occurs, and theinterconnectivity of a risk with other risks, thatexceed defined thresholds at the corporate level.

In 2019, the evaluation of climate changerisks aligned on TCFD recommendations.
It identified mid- and long-term transition
risks for PMI’s business.

Our ambition and values

A substantive financial or strategic impact
can occur depending on which of the above
aspects of the business are impacted and thepotential combination of them. PMI evaluatesa “substantive impact” based on a variety offactors and quantitative indicators including but
not limited to the potential impact on financial
performance as well as other strategic factorsthat may affect PMI’s efforts and/or delivery
toward a smoke-free future, ultimately replacing
cigarettes with smoke-free products for adults
who would otherwise continue to smoke.

This process takes place every year, covering
short-, medium- and long-term time horizons.
Through its climate change risk assessment, PMI
mapped different categories of climate-relatedrisks that can be relevant for our business.
Considering that PMI is subject to international,
national, local environmental, and climate-related
laws and regulations in the countries where we
operate, regulations are considered in PMI’s
climate-related risk/opportunity assessment
process. Moreover, there is a clear international
trend toward stricter climate-related regulations
that could increase PMI’s operational costs.

Philip Morris International Low-Carbon Transition Plan 2021

2019
The evaluation of climate change risks
aligned on TCFD recommendations
identified mid- and long-term transition
risks for PMI business20

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Establishing our climate goals

Technologicalprogress

Sustainablefinance ead more on megatrendsRin our Integrated ReportSocialinequality

The impact of
COVID-19 on ourmegatrends

Consumer values
and expectations

Achieving our climate goals

The COVID-19 pandemic has heightened awarenessof a central tenet of sustainability-related megatrends:
That disruption does not come from technologies andbusiness models alone; it can also be unleashed bypolitical events, climate disruption, or a far-reachinghealth crisis. As a company operating on a global
scale in a fast-paced world, PMI’s long-term successrequires that we continuously monitor and adapt tosignificant social, environmental, economic, political,
and technological changes. New technologies are
emerging rapidly, including in robotics, artificial
intelligence, and virtual reality, and taking a mindfuland proactive approach to shaping the future ofwork will enable companies to respond to people’s
need and desire for income security, well-being,
empowerment, and purpose, ensuring lives areenriched by advancing technology and that people
across society can prosper from equal access to
new opportunities. Moreover, consumers are
increasingly interested in knowing the social andenvironmental impacts of the products they buy andare changing their consumption patterns accordingly.

Because of these reasons, nowadays there is moreenvironmental pressure, and business leaders
should look at environmental risks in a new way.
The impacts of climate change, biodiversity loss,
and water insecurity—among others—threaten
more than supply chains and physical infrastructure;they endanger progress and business growth by
exacerbating systems-level disruption to customers,
investors, employees, and communities. An increasing
number of stakeholders are demanding that capital
markets shift from perceived short-term, siloed, andsometimes extractive behavior to a model of longterm, inclusive, and sustainable capitalism. Investors
are increasingly moving beyond a traditional riskreturn model to ask how they can deploy capital as alever for change. Investment decisions increasingly
integrate environmental, social, and governance (ESG)
criteria, which are growing in sophistication frominitial undifferentiated approaches, and are expected
to ramp up dramatically over the next decade.

Our ambition and values

Megatrends highlighted by COVID-19

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

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HIGH

Responsible marketingand sales practices

Climate protection
Respect forhuman rights

Access to smoke-free
products

Forest conservation

Product eco-designand circularity

Fair working conditions

Littering
prevention

Health, safety, andwell-being at work

Responsible andtransparent R&D
Water stewardship

Socioeconomic well-being of
tobacco farming communities

Product addictivenessSustainable supply
chain management

Diverse and inclusive
working environment
Waste reduction

Biodiversity

Materiality means analyzing
which issues are the most important
to be addressed by businesses

Data privacy
and protection

Business integrity

TIER 1 TOPICS

Illicit tobacco
trade prevention

In other words, a materiality analysis is amethodology a company can use to identify
and estimate possible environmental, social,and governance (ESG) issues that might
impact the business and its stakeholders.

Achieving our climate goals

Materiality means analyzing which issues are themost important to be addressed by businesses.
After the identification of potential sustainability
issues determined to be directly relevant toan organization’s value chain, these issues areanalyzed considering the potential of each issue
to impact organizational growth, cost, or trust
positively or negatively and how important eachissue is to stakeholders. The ultimate result is a
visual representation of which issues should beprioritized according to their importance to thecompany’s success and stakeholders’ expectations.

Product health impacts

Establishing our climate goals

Sustainability materiality is a process throughwhich PMI identifies, assesses, and prioritizes
issues by collecting feedback from a range ofsources. These sources vary in complexity
and include both financial and nonfinancial
quantitative and qualitative information.
A rigorous materiality assessment ensures thatthe strategy, work, and reporting cover the right
topics in the right way; this allows us to measureprogress against the sustainability roadmap.

Relevance for stakeholders

According to the GRI G4 guidelines, “material
topics” are “those topics that have a direct orindirect impact on an organization’s ability
to create, preserve, or erode economic,
environmental, and social value for itself,
its stakeholders, and society at large.”

Our ambition and values

Materiality matrix

Product reliability
Community
supportTalent attraction, retention,and development
Fair fiscal practices

Key:
Innovating for better products

Responsible advocacy

Operating with excellence
Caring for the people we work with
LOW

Protecting the environment
Topics gaining momentum
LOW

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Significance of PMI’s impacts on society

HIGH

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scopes 1+2+3 (see scopes 1+2+3 emissions on
p. 26) by 2030, with respect to 2019 baseline.
To achieve the goal, PMI has a full value chain
carbon footprint model in place, aligned with
the GHG Protocol international guidelines.
Third-party verification of the entire value chain
emissions follows ISO 14064-3 standard.

50%

ISO 14064-3

Halve greenhouse gas
emissions across scopes 1+2+3
by 2030

Third-party verification of theentire value chain emissions follows
ISO 14064-3 standard

Achieving our climate goals

We calculate our GHG footprint annually,
accounting for all relevant emissions generated
across the entire value chain. The robust
data set coming from a thorough measurementof the GHG footprint allowed for a strong
emissions reduction target, validated by
the Science Based Targets initiative (seeScience Based Targets initiative on p. 26):
to halve greenhouse gas emissions acrossEstablishing our climate goals

Measuringemissions andsetting reduction
targets

Our ambition and values

H OW

Accurate measurement and transparent reporting of PMI’s
carbon footprint are the first steps required to act on climatechange: They allow PMI to shape strategy, set targets, andmeasure progress. PMI acts in accordance with solid accounting
methods, science-based practices for target setting, and has
defined a wide range of organizational and operational programs
to be accurate in measuring and reducing its GHG emissions.

Employees in PMI’s manufacturing facility in Guadalajara, Mexico

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In 2020, PMI established more ambitious targets
to drive our decarbonization journey with areduction in absolute CO2e emissions consistent
with science-based targets for a 1.5°C scenario
and to guide the achievement of carbon neutrality
across our entire value chain (scopes 1+2+3), which
we now target by 2040—10 years earlier thanour original projection. PMI is targeting a 50%
reduction of greenhouse gas (GHG) emissions(scopes 1+2) by 2030 with respect to 2019 baseline
and 50% reduction GHG emissions (scope 3) by
2030 with respect to 2019 baseline. These targets
are validated by Science Based Targets initiative.

Philip Morris International Low-Carbon Transition Plan 2021

PMI relies on robust primary data collection andplans to extend supplier engagement and datacollection efforts in 2021 to cover additional
product categories. For this reason, a tobacco

In relation to PMI’s tobacco leaf supply chain,digitalization is possible through a tailor-madedigital platform that allows PMI to collectdisaggregated data uploaded and reported bysuppliers. This new system is a powerful tool to
track, account, and analyze CO2 emissions in the
tobacco supply chain and on-the-ground impact
for each carbon emission reduction activity.

A field technician in Salta, Argentina

The value chain model calculates carbon
emissions for each relevant scope 3 category
and combines these with the scope 1+2 results.
The value chain model is calculated to align with theaccepted international standard for greenhousegas (GHG) value chain modelling Corporate
Value Chain (scope 3) Accounting and ReportingStandard published by the GHG Protocol. The
model is built in line with PMI’s reporting period,
which is calendar year, and captures all activities
associated with GHG emissions of PMI’s owned
and operated enterprises, as well as activities from
PMI’s licensees, franchises, and joint ventures.
Activities covered include the entire scope of PMI’soperations: from purchased materials, including raw
materials, production, distribution, consumption,and disposal of our products, as well as overhead
activities such as marketing and business travel.

Achieving our climate goals

PMI has collected GHG emissions data overmany years as part of our efforts to improve
performance and achieve our climate targets.

To achieve these targets, PMI developed a fullvalue chain carbon footprint model, to help
measure emissions reductions, conduct productlife-cycle analysis, and support decision-making
on investment in low-carbon technologies. Theseemissions are reported publicly on an annual
basis in PMI’s integrated report and our website,
and are used to respond to investors and public
disclosures such as CDP Climate Change.

PMI undertakes third-party verification of scope
1+2+3 emissions aligning to ISO 14064-3 standard.
PMI uses primary data, collected directly from thesources or process concerned or obtained throughsuppliers and third-party partners when possible;
when not available, we extrapolate emissions
from international databases such as Ecoinvent.

leaf digitalization program has been specificallylaunched with the aim to drive CO2 data
management via a digital solution developedby PMI and available to our suppliers, and a
procurement digital platform covering multiple
supplier categories is under evaluation.

Establishing our climate goals

PMI’s value chain is evolving rapidly
due to the steady development of new
products. It is becoming more complex
because of the use of multiple materials(e.g., electronic components) and ourconstant revision of material sourcing
and manufacturing processes andstandards based on scientific progress.

To be always at the forefront of this global
challenge, we update our GHG accounting
methodology every year (methodology summary).

Our ambition and values

Measuring emissions andsetting reduction targets

All scope 3 categories have been assessed forinclusion within the model, to understand what
is important, applying a materiality thresholddefined as 10% of total scope 3 emissions, andin accordance with the Corporate Value Chain(scope 3) Accounting and Reporting Standard.

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UPSTREUPSTRE AM
AM VALUE
VALUE CHAIN
CHAIN
Scope 3: 84.5%
SCOPE 3: 8 4. 5%

Business travel andemployee commuting

DOWNSTREDOWNSTRE AM
AM VALUE
VALUE CHAIN
CHAIN

Scope 1: 8.1%
SCOPE 1: 8.1%

Scope 3: 5.1%
SCOPE 3: 5.1%

2.5%
Use of our
products

Offices andwarehouses

Tobacco growing

Establishing our climate goals

19.0%

1.4%

OUR
OUR DIRECDIREC T
T OPER
OPER ATIONSATIONS

Our ambition and values

Carbon emissions along our value chain in 2020

2.0%

1.3%

Fuel consumption fromour vehicles and aircraft

Transport anddistribution

51.1%

13.0%

Materials and services
purchased, and related
activities

Transportation anddistribution

2025

Fuel consumption
in our offices, factories,
and warehouses

Scope 2: 2.3%

2.3%

1.3%

Indirect emissions from the generationof purchased or acquired electricity,
steam, heat, or cooling consumed by PMI

Products
end-of-life

CARBON-NEUTR AL OPER ATIONS BY 2025

2040

Achieving our climate goals

6.1%

PATH TODECARBONIZATION

NET-ZERO VALUE CHAIN BY 20 40
Source: PMI Integrated Report 2020

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Changefrom 2019

SBTi is a partnership between CDP, the United
Nations Global Compact, World Resources Institute(WRI), and the World Wide Fund for Nature(WWF). The initiative supports companies toward
the successful meeting of their emissions reduction
targets. SBTi defines and promotes best practicein emissions reductions and net-zero targets in linewith climate science; a target is defined as sciencebased only if it is in line with what the latest climate
science deems necessary to meet the goals of theParis Agreement—limiting global warming to well
below 2°C above pre-industrial levels and pursuingefforts to limit warming to 1.5°C. To this extent,
SBTi provides assistance, resources, and tools tocompanies that are setting a target. After engaging
in SBTi, actors will commit their intent, develop
targets, submit them for official validation, and thencommunicate to stakeholders. Finally, they need todisclose and keep track of progress.

Philip Morris International Low-Carbon Transition Plan 2021

Rank

Source1

1a. DIM materials

Acetate tow

8.99%

2

1a. Product-related—agriculture

Fertilizers

8.45%

3

1b. Purchased goods and services—non-product relatedMarketing & sales

7.44%

4

Scope 1

Manufacturing S1

6.01%

5

1a. Product-related—agriculture

Curing fuels

6.01%

6

4. Upstream transportation and distribution

In-market distribution

4.70%

7

1a. DIM materials

Pack board

4.31%

8

1a. Product-related—agriculture

Mechanised activities

4.07%

9

1a. DIM materials

Flexibles

4.00%

10

1a. DIM materials

Fine paper

2.83%

11

1a. Product-related—other direct materials

RRP devices

2.68%

12

1a. DIM materials

Ingredients

2.65%

13

1b. Purchased goods and services—non-product related

Facility services & supplies

2.42%

14

4. Upstream transportation and distribution

Aircraft

2.21%

15

3. Fuel- and energy-related activities

Fuel- and energy-related

2.18%

16

11. Use of sold productsLighters

2.10%

17

Scope 1

Fleet S1

1.96%

18

1a. Third-party facilities

TP stemmeries

1.73%

19

4. Upstream transportation and distribution

Land

1.70%

20

Scope 2—market based

Manufacturing S2 (M)

1.63%

21

1b. Purchased goods and services—non-product relatedInformation services

1.55%

22

1a. DIM materials

PLA

1.45%

23

4. Upstream transportation and distribution

Mixed transportation

1.43%

24

1b. Purchased goods and services—non-product related

R&D

1.27%

25

9. Downstream transportation and distribution

Transport—not paid by PMI

1.25%

26

1b. Purchased goods and services—non-product related

Couriers/customs/fees+nonprod air

1.22%

27

2. Capital goods

Other

1.20%

28

4. Upstream transportation and distribution

Ocean

1.10%

29

1a. DIM materials

Filtration materials

0.99%

30

12. End-of-life treatment of sold products

Packs

0.95%

Leaf

Procurement IMS

Logistics

Commercial

Procurement DIM

Manufacturing

Finance

Product*

Achieving our climate goals

Science Based Target initiative (SBTi)% total
value
chain

Establishing our climate goals

The GHG Protocol splits companies’ emissions
sources into three main macro-groups to facilitate
their accounting. Scope 1 emissions represent direct
GHG emissions occurring from sources owned orcontrolled by the company (e.g., emissions fromcombustion in boilers, furnaces, vehicles; emissions
from chemical production). The control of thecompany over the emissions can be either financial
or operational. Scope 2 emissions account for the
GHG emissions from the generation of purchased
electricity consumed by the company. Purchased
electricity is defined as electricity that is purchased
or otherwise brought into the organizationalboundary of the company. Scope 2 emissions occur
at the facility where electricity is generated. Scope 3
includes indirect emissions that are a consequenceof the activities of the company; these activities are
not owned or controlled by the company.

Top 30 contributors to 2020 value chain footprint: (scopes 1+2+3)

Our ambition and values

Scopes 1+2+3 emissions* S&I and PPMD that design products

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Our ambition and values

H OW

Transition to a low-carbon economy implies efforts to account for
and reduce emissions across the value chain. While the accounting
is based on the methodology explained in the previous chapter
and followed by the targets set, the achievement of the goals needs
concrete actions, which are presented in this section.

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The commitment to reaching net-zerocarbon by 2040 across the entire value chain
encompasses also reducing scope 3 emissions
that occur mainly in tobacco growing andcuring, sourcing raw materials (e.g., acetate
tow, paper, and cardboard), upstream anddownstream logistics, and other minor impacts
like business travel and end of life of products.
PMI addresses scope 3 emissions throughmultiple initiatives including the Good Agriculture
Practices program, the Zero Deforestation
Manifesto, and the eco-design and circularity
program, which applies circular economy
concepts and product life-time optimization.

Achieving our climate goals

This is the first focus of PMI’s strategy forthe low-carbon transition, relying on two
efficiency programs, Zero Carbon Technology(ZCT) and Drive for Zero (D4Zero), anda carbon neutral fleet program.

Establishing our climate goals

Reducing
emissions

The goal of carbon neutrality of direct operations
by 2025 requires extensive emission reduction
efforts in factories, offices, and fleet.

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

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Overall, the efficiency initiatives and behavioral
changes made possible a 10% reduction in carbon
emissions across PMI’s manufacturing facilities
in 2020 (with respect to 2019 baseline).

ZCT program supports PMI’s commitment
to carbon neutrality and renewable energies
while presenting both environmental andcost-saving benefits for the business. Witha dynamic tool, ZCT explores alternativetechnological solutions to achieving the carbon
neutrality goal, such as innovative renewables
and carbon capture technologies (see ZeroCarbon Technology (ZCT) program on p. 30).

• Decreasing carbon emissions

Philip Morris International Low-Carbon Transition Plan 2021

• Improving employee’s safety
and overall experienceby six agricultural input categories (fertilizers,
curing fuels, mechanization, seedling production,
crop protection agents, and transport). The useof fertilizer (especially nitrogen-based) and theprocess of curing tobacco are the most relevant
sources of carbon emissions in the tobacco
agricultural supply chain (see Reducing emissions
in tobacco flue curing on p. 32).

An employee in PMI’s manufacturing facility in Izmir, Turkey• Decreasing total cost of ownership• Optimizing fuel consumption andimproving operational efficiency
PMI is switching to alternative eco-powertrains—such as hybrid and electric vehicles (see Fleet
Policy on p. 32). Employees driving a company car
at PMI are offered eco-driving courses to improvetheir driving skills, increasing fuel saving, andconsequently reducing CO2 emissions.

Achieving our climate goals

D4Zero (see D4Zero program fleet policy on
p. 32) is designed to drive energy efficiency at
the core of PMI’s carbon neutrality strategy
in manufacturing and beyond, to deliver a
step-change in performance and productivity.
Within D4Zero, PMI looks for industrial andmanufacturing solutions such as heat recovery
and manufacturing-process optimization. We
promote a common way of working across all
PMI factories implementing concepts such as
the Zero Loss Mindset, a behavioral change
program that facilitates new ideas of eliminatingprocess losses (e.g., energy, materials, and water).
Every manufacturing employee is equippedwith tools and trainings to propose and work
at solutions to reduce losses and increase
efficiency at any level. Within this program, PMI
is implementing energy-saving initiatives acrossall factories. To support D4Zero, an energy
saving initiatives (ESIs) program was launchedin 2019, triggering more than 500 projects.

In 2020, we updated our car fleet policy underthe message “moving first toward a safer,smoke-free fleet.” The goals are multiple:

The tobacco agricultural supply chain represented
25% of PMI’s total carbon footprint in 2019baseline. Agriculture is also a sector among thoseat high risk of climate change effects. Because ofthis, PMI set new targets with the aim of achieving
an absolute carbon emissions reduction of 35%
by 2025 and 50% by 2030 versus the 2019baseline for the overall emissions generated

Establishing our climate goals

The emissions reduction journeyin PMI’s direct operations isdriven by two main programs:
Zero Carbon Technology (ZCT)
and Drive4Zero (D4Zero).

Our ambition and values

Reducing emissions

In 2020, PMI’s offices and warehouses
represented 7% of carbon emissions in direct
operations (scopes 1+2), and PMI focused on
optimizing energy consumption at those sites,
through lightening and equipment efficiency,
interior temperature optimization, and theswitch to renewable energy sources.
An organization’s upstream emissions are
typically more than 10 times greater than its
direct operations. Therefore, PMI is committed
to engaging with suppliers in working on
solutions and programs to reduce the full carbon
footprint (see HOW: Achieving climate goals
by… Engaging supply chains on p. 42).

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D4Zero program applies beyond our direct
operations where the zero-loss mindset is key
to reduce the use of materials starting from thedesign of our products and benefiting productivity
while reducing overall carbon emissions.

PMI’s innovation gate process supports new
ways of designing manufacturing processes andproducts applying the principles of eco-designand circularity and aims to reduce the carbon
footprint of smoke-free products in line with SBTi.

PMI developed and launched a new andcomprehensive supplier engagement programwith our suppliers to collect primary carbon data
and understand their GHG emissions reduction
programs and targets. We aim at reducing
emissions of our supply chain starting fromquick wins such as larger contributors that will
be addressed in their gaps while performanceof virtuous suppliers with efficient processes
in place will be considered as an element in
the allocation of business and volumes.

As for the upstream emissions reductions,
PMI aims at reducing the emissions frompackaging in collaboration with suppliers
leveraging technological improvements andimproved packaging design to minimize
the use of packaging materials withoutcompromising protection and convenience.

Downstream, emissions generated by thetransport and distribution, use, and end-oflife management of the products represent
5% of PMI’s total footprint. PMI is reducing
the emissions from these sources throughimprovements in the heated tobacco units as wellas the adoption of eco-system design standards.

PMI tackles emissions from upstream
transportation with a strategy to proactively
assess and select lower-carbon transportation
carriers and transport routes. PMI will set
targets to drive a successful roadmap including
engaging with suppliers to promote emissions
reduction strategies in line with carbon
objectives while investigating improved/alternative technologies to transport goods.

Achieving our climate goals

PMI is making efforts to minimize the waste
generated by our manufacturing facilities andoffices, promoting materials reuse and recycling,and striving for responsible disposal. PMI iscommitted to achieving zero waste to landfills
across all our manufacturing operations by 2022.
To sustain the results achieved with further action
and continuously improve our environmental
practices, we are constantly working on projects
to create circularity of materials in the supply chain
to reduce waste generation to the bare minimum.

2022
PMI is committed to achieving zerowaste to landfills across all our
manufacturing operations by 2022

A field technician next to a renewable and sustainable forest in A Peshewar, Pakistan

Philip Morris International Low-Carbon Transition Plan 2021

Establishing our climate goals

Within PMI’s direct material supply chain(i.e., non-tobacco materials used in the
manufacturing of our products), cellulose
acetate tow, pulp, and paper (packaging board)
have the greatest impact on our footprint.

Our ambition and values

PMI is working closely with farmers to
reduce environmental footprints through theGood Agricultural Practices (GAP) program,reforestation initiatives, and strategic initiatives
related to curing barn improvements. GAP includes
environment-friendly agricultural practices forfarmers to adopt, such as the safe use of chemicals,
water and waste management, fertilizer usage
optimization, energy and raw material efficiency,
soil management, and biodiversity conservation.
In addition to the mentioned program, protecting
natural ecosystems and sustainably managing
forests, which are important carbon sinks, are
key drivers in reducing greenhouse gas emissions.
PMI is committed to sourcing wood fuels fromtraceable, sustainable, and legal sources andhas set targets for the tobacco supply chain aspart of the Zero Deforestation Manifesto (seeZero Deforestation Manifesto on p. 54).

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While the world faces the impact of rising sea
levels and changing weather patterns, businesses
face transitional risk from new regulations andtaxes, changes in manufacturing technologies,
and evolving consumer preferences. The ZeroCarbon Technology (ZCT) program affirms PMI’scommitment to carbon neutrality and renewableenergies, while presenting both environmental andcost-saving benefits for the business. ZCT focuses
both on reduction through the use of renewables
and on carbon removal. Projects are ongoing inArgentina, Indonesia, Italy, Mexico, Philippines,
Poland, Romania, Russia, Serbia, and Turkey.
The most relevant technologies to be tested andimplemented, identified so far by the dynamic
tool ZCT, include biomass burners combined withthermal/heat storage and solar photovoltaics,
with standard and/or thermal storage, and carbon
capture and tri-generation processes (combining
cooling, heat, and power). The main target of
ZCT is enabling PMI to master the complicateddomain of energy in manufacturing linked tocarbon emissions capture and to later extend theknowledge and approach to our main suppliers.

Our ambition and values

Romania

Zero-Carbon Technology (ZCT) program

RussiaPolandTurkeyItaly

Establishing our climate goals
Achieving our climate goals

Philippines

MexicoSerbiaArgentina

Indonesia

Source: “ZCT in a nutshell”—PMI, 2021

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C A S E S T U DY

Carbon-neutral factories
In 2019, PMI reached the first milestone toward
carbon neutrality in our factories—through energysaving measures, renewable energies, and carbon.
offsets in Klaipeda, Lithuania. PMI has been runningenergy-efficiency projects at the site for many
years, upgrading utility equipment, such as chillers
and compressors, and facilitating heat recovery
to optimize fuel use, including installing a biomass
boiler. Combined, these initiatives reduced carbon
emissions by 47% versus the 2010 baseline. As partof the renewable energy strategy, PMI purchased
certified renewable electricity and offset natural
gas carbon emissions with biogas certificates.

These efforts led to a 52% reduction in carbon
emissions versus 2010. To offset the remaining
1% carbon emissions at this factory, PMI invested
in Gold Standard certificates from a climate
protection initiative seeking to switch households
in India from kerosene and firewood to biogas.
In 2020, we installed pyrolysis technology in ourfactory in Neuchâtel, which uses operational
waste instead of fossil energies to produce steam
and hot water. It will be operational in 2021,
and PMI will communicate results in the nextreport. This factory became our second carbonneutral facility, receiving certification from the
Swiss nonprofit organization myclimate.

In 2020, a photovoltaic installation at Bologna factory
in Italy reached its full capacity, generating around 4%of the total energy used on the site in a year. In 2020,
34% of the total energy consumption came fromrenewable sources. We are also on track to achieve
our target of 100% electricity used in our factories
to be from renewable sources by 2025. In total,
78% of the electricity used in our manufacturing
facilities in 2020 came from renewable sources.

Establishing our climate goals

To reduce carbon emissions in manufacturing
sites, PMI promotes efficient energy use throughthe Drive 4 Zero program, which establishes acommon way of working across the company’s
factories. This is the core of an energy efficiency
improvement strategy. To anticipate international
trends toward stricter climate-related regulations
and higher operational costs, PMI aims to eliminate
economic losses caused by inefficient energy use.
Under this program, PMI looks for industrial andmanufacturing solutions such as heat recovery
and manufacturing-process optimization. We
designed the systems to facilitate new ideas aimed
at eliminating process losses (e.g., energy, materials,
and water). This seeks to empower every worker
to look for losses and recommend and implement
solutions, promoting improvements not only acrossthe factories but also throughout the company.

Our ambition and values

D4Zero program

Achieving our climate goals.
Klaipeda: carbon-neutrality journey
Energy-efficiency initiatives: -47%
Renewable energy: -52%

scopes 1+2, carbon neutral

Offsetting: -1%
-43%

100%

Energyefficiency
initiatives

Biomass

Upgradedchillers

-14%

-2%

Green
electricity

-27%

Heat
recovery-2%

Baseline

2010-13

2014

2015

2015

2018

BiogasCarboncredits

-11%

-1%

2018

2018
Employees in PMI’s manufacturing.
facility in Klaipeda, Lithuania

Philip Morris International Low-Carbon Transition Plan 2021

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PMI is undergoing a transformation unprecedented
in our history; the paradigm shift is a greatchallenge. While evolving from a tobacco company
to a technology company, one of PMI’s strengths
is to be able to put people at the center of thisjourney. The wave of novelty and transformation
applies to each and everyone in the company;
from suppliers to employees and customers, thebehavioral change is a key ingredient in increasing
personal well-being, reducing environmental
impact, and taking action to tackle climate change.

Tobacco flue curing is a practice that characterizes
the tobacco type Virginia flue-cured (flue-cured
tobacco), which is an important component of
tobacco blends in tobacco products. Flue curing of
tobacco requires an external source of heat thattypically comes from the combustion of a fuel ina burner to keep the temperature above ambientand controlled inside the curing structure, whichis generally a curing barn of different size andconstruction. This process requires hanging the
tobacco leaves on racks inside curing barns, where
heated air is generated to dry the leaves. As theylose their moisture, leaves develop a distinct aroma,
texture, and color. Thermal efficiency is the firststep in reducing fuel usage in the curing process,mainly through improved combustion efficiencies,
ventilations, heating controls, and insulation. Biomass
is the most common fuel source for heating fluecuring barns, and PMI has committed to ensuringthat this biomass comes from sustainable, traceable
sources to further reduce our impact from thisprocess. Through the Renewable Curing Program,
PMI will achieve the goal of 70% of the purchased
flue-cured tobacco to be cured with renewables by
2021, one year after the initial target date of 2020.

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

Philip Morris International Low-Carbon Transition Plan 2021

32

Achieving our climate goals

Behavioral change at PMI

Reducing emissions in tobacco flue curing

Establishing our climate goals

PMI launched a new car fleet policy in 2021, toprioritize the lease of hybrid and electric cars
instead of more polluting engines and, in general,
to use more efficient modes of transport, thus
reducing CO2 emissions. PMI runs an extensive
fleet of approximately 23,000 vehicles, among
which 80% are working tool cars (WTC). In
2020, PMI decided to invest in renewing lease
contracts by switching to a full hybrid vehicle
fleet and electric drivetrains where possible.
PMI’s investment assessment led to pilot cases
in which market fleet has been converted to full
hybrid. PMI plans to apply the approach to theglobal fleet aiming at a progressive full conversion
to lesser polluting and better cost performing
vehicles not only for WTC but also for benefit
cars based on a standardized catalog, with atarget of having over 30% of all our PMI cars
as fully electric or plug-in hybrid by 2024. Our
effort to quickly move on the modernizationof the fleet by embracing cleaner vehicles has
already resulted in 39% less CO2 emitted in 2021
for every kilometer run by the renewed fleet.

With this clear message in mind, PMI has developed
programs to engage workers in our factories,
suppliers, farmers, and new employees at every
level to be active enablers of this transformation
by addressing their behaviors toward moresustainable actions and approaches in line withthe climate action targets set by the company.

Our ambition and values

Fleet policy

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

In 2020, PMI intensified our efforts to reduce thevolume of board required in heated tobacco units(HTU) and cigarette packaging. Working with key
suppliers, PMI began replacing the packaging board
across all of our brand’s portfolio with a 10% lighter
alternative that offers the same pack strengthand, therefore, a similar consumer experience.
The shift to this alternative will allow PMI to save
approximately 25,000 tons of board over a fouryear period. We expect to complete a full rolloutof this initiative across all our consumables—both
combustible cigarettes and HTU—by 2024. PMI
also achieved significant progress in the packagingof the devices and accessories for our smoke-free
products. We developed a new IQOS mobilitykit (which contains the device and necessary
accessories) and accessories packaging, with alaunch planned in 2021. The removal of shrink
film in the mobility kit and plastic windows in theaccessories packaging will allow PMI to meet ourtarget of having 95% of packaging materials madefrom renewable sources by 2025. In addition, wewere able to reduce the packaging weight of our
new mobility kit by 17% and accessories packaging
by approximately 35%, which will contributesignificantly to reaching PMI’s target of a 15%
reduction in material used in our packaging by
2025. As a next step, PMI aims to replace plastic
laminated board in our packaging by mid-2022
to achieve full recyclability of the packaging ofdevices 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 theuse of packaging materials and optimize PMI’stransportation CO2 footprint.

Eliminating coal by switching to renewablefuels, which implies the conversion of curing
infrastructures, remains a priority for PMI. PMI’s
tobacco supply chain decreased its total carbon
footprint by 28% from 2019 to 2020. Through ourproprietary Monitoring and Verification Framework
for Sustainable Leaf Curing Fuels, PMI systematicallymonitors the sustainability of all fuel types used in
the tobacco supply chain by verifying results on the
ground and fostering improvement in all our tobaccoflue-cured markets. In 2020, PMI achieved a 77%
reduction in GHG emissions per kilogram of fluecured tobacco versus the 2010 baseline, exceeding
the set target of 70%. In 2016, PMI embarked
on a multi-stakeholder initiative led by the China
National Tobacco Corporation and supported by
local governments aimed at converting curing barns
from coal to biomass and creating a fuel pellets
supply chain produced from agricultural waste. By
the end of 2020, more than 71,000 curing barns hadphased out coal and converted to biomass, leading
to a significant reduction in GHG emissions fromtobacco-curing (from 4.62, which is the average
emissions for a curing barn in the provinces of China
where we operate, to 2.84 kg CO2eq per kilogramof cured tobacco), measured and verified throughthe Monitoring and Verification Framework.
Beyond the carbon reduction achieved by the barn
conversions, the project increased farmers’ incomes,
as commercial tobacco grades were lifted between
8.6% and 11.8% for the farmers who switched tobiomass-based curing.

“PMI began replacing the packaging board across allof our brand’s portfolio with a 10% lighter alternativethat offers the same pack strength and, therefore,a similar consumer experience. The shift to thisalternative will allow PMI to save approximately
25,000 tons of board over a four-year period.”

Achieving our climate goals

Led by the China National Tobacco corporation /Monitoring and Verification Framework for Sustainable
Leaf Curing Fuels.

Establishing our climate goals

Reducing packaging

Our ambition and values

Multi-stakeholder initiative

An IQOS Store in Rome, Italy

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Our ambition and values

Carbon pricing means assigning a price and hence a theoretical costto the emissions generated. An increasing number of organizations
and sustainability leaders are using internal carbon pricing as a tool
to structurally drive a reduction in CO2 emissions. In 2020, PMI set a
strategy in this field adopting a shadow carbon price of USD 65 per tonof CO2e and a carbon levy of USD 8 per ton of CO2e.
H OW

Establishing our climate goals

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

While the shadow price helps in the prioritization of business cases
for investment in activities aimed at structurally reducing its carbon
emissions, the carbon levy helps size the investments required today
to abate our emissions through offsetting or insetting initiatives.

Philip Morris International Low-Carbon Transition Plan 2021

Achieving our climate goals

PricingcarbonUSD 65

USD 8

PMI adopted a shadow carbon priceof USD 65 per ton of CO2e

and a carbon levy of
USD 8 per ton of CO2e34

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Integrating carbon pricing in PMI
business decisions will help to:• Mitigate hidden future risks due to climatechange (such as regulations and taxations) byembedding their true impact in the businesscase of a project or investment, and helping
drive and prioritize investments that organicallyreduce mid- and long-term CO2 emissions• Allocate sufficient funds to activities
aimed at decarbonizing the business and/or offsetting/insetting emissions

Multiple carbon pricing mechanisms may coexist
within an organization to achieve the above(see Different instruments of carbon pricing
on p. 36). PMI has evaluated and adopted
two types of internal carbon pricing tools: theshadow carbon price and the carbon levy.
PMI’s shadow carbon price of USD 65 per ton ofCO2e is an internal lever to assign a theoreticalcost per ton of carbon emissions. It is used
to better understand the potential impact ofexternal carbon pricing (e.g., carbon taxes) on
the profitability of a project, a new businessmodel, or an investment and hence drive andprioritize investments that accelerate CO2
emissions reduction to a level that is considered
as unavoidable, i.e., technically or economicallynot further abatable. The introduction of anadequate shadow carbon price helps ensurethat business decisions reflect environmental
costs by putting a price on carbon emissions.

Philip Morris International Low-Carbon Transition Plan 2021

On the other hand, the carbon levy is an internal
tax that is virtually charged to selected business
units for their emissions, with the aim to use
the calculated amount to fund investmentsthat contribute to the decarbonization of thebusiness. While the shadow price helps in theprioritization of business cases for investment
in activities aimed at structurally reducing PMI’s
carbon emissions, the carbon levy helps size theinvestments required today to abate emissions
through offsetting (e.g., acquisition of carbon
credits) or insetting initiatives (e.g., agroforestry
projects, carbon sequestration programs).
PMI has modeled its carbon levy based on the data
calculation of the forecasted voluntary carbon
market prices including PMI’s CO2 compensation
profile (i.e., the number of tons of CO2 to becompensated through offsetting/insetting
investments) and our carbon neutrality time
horizon within the compensation strategy PMI
wants to adopt. PMI’s carbon levy has been fixedat USD 8 per ton of CO2e emitted. A fixed price will
be implemented throughout our business overtime,on direct and indirect emissions beginning withselected business units (e.g., scope 1+2 emissions
and emissions from business travel). The pricewill be recalibrated every year to reflect PMI’semissions profile and reduction forecast in 2030.
By adopting the carbon levy, PMI aims tovirtually charge business units based on theiremissions, to size a budget for a portfolio ofclimate investments that will be dedicated toprojects focused on nature-based solutions.
These projects will be developed in PMI’s supply
chain to generate carbon insets of high quality
and with benefits that will go beyond carbon(e.g., biodiversity, water, community). The carbon
levy approach is considered as a tool to design,
manage, and govern a strategic and long-termview to define the most cost-effective andefficient solutions to compensate the remaining
unavoidable emissions (e.g., the ones remaining
after the implementation of initiatives to abate
our direct emissions in manufacturing sitesthat will become carbon neutral) and achieve
the carbon neutrality targets (see Application
and revenues of the carbon levy on p. 36).
Shadow price and carbon levy will be revisedon an annual basis to allow the integration ofchanges in risk and/or emissions profiles.

“PMI has evaluated andadopted two typesof internal carbon pricing
tools: the shadow carbon
price and the carbon levy.”

35

Achieving our climate goals• Position PMI as a leading company inenvironmental sustainability enhancing our
proposition for investors as they integrate
ESG considerations into portfolio decisions

PMI has modeled what an adequate shadow
carbon price should be through a robust
methodology, best international practices, anda worst-case scenario analysis of transition
risks projected by 2040, and specificities ofthe emissions profile and geographic footprint.
PMI’s shadow carbon price is integrated into
the financial evaluation and preparation ofbusiness cases that will impact the carbon
emissions (favorably or unfavorably); in
2020, it was instrumental in the approval of
13 additional carbon emissions reduction
projects as part of our energy saving
initiatives program in manufacturing sites.

Establishing our climate goals

The underlying concept of carbon
pricing is that the visible and fairquantification of the financial impactof those emissions will incentivize andincrease the viability of actions andinvestments focusing on their reduction.

Our ambition and values

Pricing carbon

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Application and revenuesof the carbon levy (details)

There is a growing consensus among bothgovernments and businesses on the fundamentalrole of carbon pricing in the transition to a
decarbonized economy. For governments, carbon
pricing is a needed tool in a climate policy package
to reduce emissions. In most cases, it is also a sourceof revenue, which is particularly important in an
economic environment of budgetary constraints.
Carbon pricing can take different forms and shapes.

PMI’s Portfolio of Climate Investments advisorycommittee is responsible for managing andallocating budget to climate investment solutions
according to three main lines of intervention.

• An offset mechanism designates the GHG
emissions reductions from project- or programbased activities, which can be sold either
domestically or in other countries. Offset
programs issue carbon credits according to an
accounting protocol and have their own registry.

• Investments in medium-/long-term insetting
projects or in natural removals within PMI’s value
chain to support long-term net-zero ambitions• Investments to unlock innovative climate
solutions (technological removals) to position
PMI as a leader in climate investment and explore
the possibility of climate positive targets
A higher annual budget is expected during
the first years, in line with PMI’s businessemissions profile, to support investments
to implement a long-term climate solution.
Over time, the financial needs of PMI’s Climate
Investments Portfolio are expected to decrease
once medium-/long-term scope 1 carbon
reduction investments become operationaland generate emissions reduction/removals.
At the same time, the levy budget is expected
to reduce in line with the emissions reduction
strategy. Where additional budget will be
required for specific investments (e.g., unlocking
innovative climate solutions and R&D), theadvisory committee will decide on approval.

Achieving our climate goals• A carbon tax directly sets a price on carbon
by defining an explicit tax rate on GHG
emissions or—more commonly—on the carbon
content of fossil fuels, i.e., a price per unit ofCO2e. It is different from an ETS in that theemissions reduction outcome of a carbon tax
is not pre-defined, but the carbon price is.

• Purchase of high-quality carbon
credits (offsetting) to support
short-term neutrality targets

Establishing our climate goals• An emissions trading system (ETS) is a system
where emitters can trade emissions units
to meet their emissions targets. To comply
with their emissions targets at least cost,
regulated entities can either implement internalabatement measures or acquire emissions
units in the carbon market, depending on therelative costs of these options. By creating
supply and demand for emissions units, an ETS
establishes a market price for GHG emissions.

“There is a growing consensus among both governments
and businesses on the fundamental role of carbon
pricing in the transition to a decarbonized economy.”

Our ambition and values

Different instruments of carbon pricing(carbon tax, ETS, shadow carbon price, etc.)• Internal carbon pricing is a tool anorganization uses internally to guide its
decision-making process in relation to climatechange impacts, risks, and opportunities.

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

Philip Morris International Low-Carbon Transition Plan 2021

36

Our ambition and values

To deliver on our decarbonization targets, PMI is targeting to maximize
emissions reduction while developing innovative solutions tocompensate unavoidable emissions and transition to net zero.

H OW

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Philip Morris International Low-Carbon Transition Plan 2021

2. Insetting initiatives (e.g., agroforestry
projects and carbon sequestration programsin the company’s supply chain)
In 2020, PMI developed a targeted study to
map the potential of nature-based solutions(NBS) for insetting in our tobacco supply chain
and evaluated natural carbon sinks in thecontext of our carbon neutrality ambition. In
compensating unavoidable emissions, PMI iscommitted to prioritizing projects within our
supply chain (insetting) and purchasing highquality, certified carbon credits when insetting is
not feasible. PMI will gradually shift from relying
on offsets (emissions avoidance/reduction)
toward developing and making use of emissions
removals, including nature-based and innovativetechnological carbon sequestration projects.

To support decarbonization efforts and net-zerotargets, a Portfolio of Climate Investments (PCI)
was created in line with internationally recognizedpractices, such as International Carbon Reduction
and Offsetting Alliance (ICROA) code of Best
Practice, the report of the Taskforce on Scaling
Voluntary Carbon Markets (TFVCM), and GHG
protocol Land Sector and Removals Initiative. PMI
believes that limiting the use of market approaches(offsetting) in the short term by prioritizing direct
investment in our supply chain in the medium andlong term will support the cost effectiveness of ouractions and will assure transparency, consistency,and quality of our climate investment strategy.

Achieving our climate goals

Getting
to zero1. Offsetting (e.g., acquisition of green
certificates and high-quality carbon credits
from certified projects)

Establishing our climate goals

There are two main strategies to transition
to net-zero emissions.

37

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To support decarbonization efforts
and net-zero targets, PMI created a
Portfolio of Climate Investments (PCI).

Our ambition and values

Getting to zero
PMI’s pathway to net zeroCarbon-neutral operations
2025

Net-zero emissions
2040
Establishing our climate goals

The PCI will play a key role in:• Positioning PMI as a nature-based solution
leader in the medium/long term through insetting
projects that will look at generating benefits forcarbon, water, and biodiversity

totCO2• Further implementing in PMI’s supply chain
sustainable agricultural land management to
reduce emissions while increasing soil organiccarbon, fighting deforestation, and safeguarding
natural ecosystems

Achieving our climate goals• Promoting early investment in projects andtechnologies that are the most difficult tocommercialize, scaling down the cost
With the creation of the PCI, PMI aims to provide
full transparency in our compensation activities
that are ancillary to the carbon-neutral target for
scopes 1+2. PCI standardizes the approach toinvesting in offsets that are used to compensate
unavoidable carbon emissions related to ouroperations. The decision-making process at the
backbone of the PCI strategy relies on a setof mechanisms and rules that will allow PMI toefficiently evaluate and decide which climate
solutions are more in line with the scope of PCI.

SBT 1.5°C trajectory
0

Years

Net emissions

The PCI is built on a set of core carbon principles
and additional attributes that strongly support
the generation of benefits that go beyond carbon
reduction/removal activities, such as ecosystemconservation, ecosystem enhancement, andpositive impacts on local communities involved(see What makes a high-quality carbon credit?
on p. 40).

Net emissions
Neutralization (removals)
Offsetting (transition to net zero)Carbon neutral

Carbon neutral

Source: PMI—Portfolio of Climate Investments, 2021

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Processes and outcomes to achieve the mission of PCI are reported in the below scheme.

PCI framework architecture

VisionOverarching
objectives

MissionNature-based
solutions (NBS)

Supply chain &communities

The PCI is supervised by an advisorycommittee composed by senior management
roles. The advisory committee revises andvalidates the proposals of the project teamthrough the application of the core principles
and additional attributes to the selection ofprojects for investment. It approves allocationof resources to the proposed climate solutions
through an investment strategy that leverages
the budget generated by PMI’s carbon levy
scheme (see HOW: Achieving climate
goals by… Pricing carbon on p. 34).

Establishing our climate goals

Strategic initiatives

Our ambition and values

Applying the principles of climate financeat PMI means to be guided by three main
strategic initiatives: nature-based solutions(NBS), supply chain & communities (SCC), andtechnological climate solutions (TCS). Eachinitiative leads to specific impacts that PMI
wants to generate when financing projects.

Technology
solutions

Achieving our climate goals

Roles/responsibilities
Advisory committee

IN V E S TMENT PROFILE

Process

COR E PR INCIPLE S

A DDITI ON A L AT TR IBUTE S

PCI team

IN V E S TMENT S TR ATEGY & MI X

Outcomes

LIS T OF ELI G IBLE PROJEC TS

SELEC TED PROJEC TS

Source: PMI - Portfolio of Climate Investments, 2021

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Focus on core carbon principles
and additional attributes.

A variety of terms are frequently used to define
quality criteria for carbon offsets, includingthat associated GHG reductions must be:
1. Real—concrete evidence of emissions
avoided as a result of project activities
2. Additional—the project activities must be“project induced” and not “business-as-usual”

Additional attributes better define:
1. Vintage or age of a project
2. Project type
3. Project size
4. Carbon assessment methodologies
5. Geography and business opportunity
Carbon credits can generate co-benefits, ranging
from improved water access, increased biodiversity
and social value, job creation, support for local
communities, and health benefits. In addition, manyof the highest-potential projects are developed
in low-income countries. As a result, a further
benefit is that carbon credits can generate flows
of private capital where it is most needed.

Achieving our climate goals

3. Realistic and credible baselines—
conservative baseline estimate of emissions
4. Measurable—verified by anaccredited third party
5. Permanent—credits should represent
permanent reductions and removals of emissions
6. Leakage accounted—assess any
potential increase in emissions
outside the project boundary
7. Unique—offsets must be archived/withdrawn
in an independent register; credits alreadywithdrawn are not sold back on the market
8. Do not harm—crediting program must havethe requirements to address and mitigate all
potential environmental and social risks

Crop diversification in Gunung Kidul, Indonesia

Philip Morris International Low-Carbon Transition Plan 2021

Establishing our climate goals

The central idea behind a carbon offset is thatit can substitute for GHG emission reductions
that an organization would have made on its own.
For this to be true, the world must be at least as
well off when you use a carbon offset credit as
it would have been if you had reduced your own
carbon footprint. “Quality” of a carbon offset
credit is the level of confidence one can have thatthe use of the credit will fulfil this basic principle.

PMI defines a list of additional attributes to alignour Portfolio of Climate Investments to thedefinition of a quality offset to further add value tothe eligibility criteria stated by the Core Principles.

Our ambition and values

What makes a high-quality carbon credit?

“Carbon credits can generateco-benefits, ranging from
improved water access,increased biodiversity andsocial value, job creation,
support for local communities,
and health benefits.”40

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

The European Commission defines
nature-based solutions as:

PMI is aware of the importance of nature-based
solutions (NBS) to complement our climate strategy
and to ensure that impact is delivered holisticallyon the environment beyond carbon sequestration.
For this reason, PMI engages with WBCSD
and GHG Protocol to actively participate in
the testing of the forthcoming standard on
accounting for scope 3 emissions and removals.
We believe action on NBS needs to be accurately
planned and coordinated between the main
players of the private sector. Results and figures
also need to be compared and validated before
being used to communicate progress andachievements. The pilot testing of the standard
will allow companies to set their approaches onparameters validated by stakeholders such as
GHG Protocol and WBCSD with the backing of
CDP and WWF, representing the highest levelof expertise and competence on the subject.

Establishing our climate goals
Achieving our climate goals“Solutions that are inspired
and supported by nature,
which are cost-effective,
simultaneously provide
environmental, social, andeconomic benefits andhelp build resilience. Suchsolutions bring more, andmore diverse, nature andnatural features and processes
into cities, landscapes, andseascapes, through locally
adapted, resource-efficientand systemic interventions.”

Nature-based solution mapping and pilot
scoping for GHG Protocol standard

Our ambition and values

Nature-based solutions definition

Nature-based solutions must therefore
benefit biodiversity and support the delivery
of a range of ecosystem services.

Reforestation program in Malawi

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Our ambition and values

PMI’s suppliers play a major role in the transformation journey towarda low-carbon world. The tobacco supply chain alone represented
25% of our total carbon footprint in 2019. The role of suppliers in the
decarbonization of PMI’s business becomes very relevant.

H OW

PMI considers it fundamental to recognize
suppliers’ excellent performance andcontribution to PMI’s business goals, fostering
long-term partnerships and value creation.

In 2020, PMI developed and launched a newand comprehensive supplier engagement
program to collect primary carbon data of thedirect materials used in our products—cellulose
acetate tow, pulp, and paper—and understandthe suppliers’ GHG emission reduction programsand targets. In 2020, PMI achieved a 14%
reduction in absolute emissions from the nontobacco direct materials supply chain (suchas cellulose acetate tow, pulp and paper, andsmoke-free electronic devices) versus 2019. To
support our low-carbon transition goals, PMI
will further expand this supplier engagement
to other supply chain material categories.

Achieving our climate goals

Engaging
supply chains

Establishing our climate goals

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

To make this happen, we provide our
suppliers with guidance and support to
reduce environmental impacts related
to tobacco growing, and especially GHG
emissions. Actions include training on
best practices on fuel efficiency, barn
maintenance, and ecosystem protection.

R ead more about our methodology summary

14%
Reduction in absolute emissions
from the non-tobacco direct materials
supply chain

PMI’s Greek affiliate manufacturing facility in Papastratos, Greece

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Since 2002, PMI’s GAP programsets and delivers on standards forgood practices in the supply chainof tobacco especially at farm level

In 2020 alone, through the renewable curing
fuel program to improve the flue-cured tobaccocuring process, PMI contributed to increasing
the efficiency of 2,146 barns, mainly in China,
Malawi, the Philippines, Pakistan, and Brazil, for a
cumulative total of around 82,500 barns upgradedsince 2014. The program has a global outreachand covers farmers in more than 10 countries.

PMI encourages and supports suppliers to startor accelerate their transition toward a low-carbon
economy. The publicly available Responsible

PMI will define targets aligned with SBTi withall critical suppliers to monitor progress in fullalignment with PMI’s SBTs, and we will measureperformance of our supply chain against our SBTs
assessing and scaling-up climate ambition. We
will use SBTi to drive supplier-based temperaturealignment, assessing where our supply chain stands
in the SBTi temperature scorecard and defining
a roadmap for suppliers to meet the temperaturetarget in line with what we have committed to.
The strength of PMI’s engagement in the supply
chain is also proven by the fact that in 2020, forthe fourth consecutive year, CDP placed PMI on
the CDP Supplier Engagement Leaderboard inrecognition of our efforts and progress on supplierengagement on climate change. PMI’s Supplier
Engagement Rating (SER) positions PMI in the
top 7% of companies that disclosed for CDP’s fullclimate questionnaire. By engaging the supplierson climate change, the aim is to contribute to theirtransition toward the net-zero sustainable economy.

In the provinces of Yunnan and Guizhou in China,
PMI partnered with CNTC, our suppliers, andlocal communities to promote the switch fromcoal to renewable fuels for tobacco-curing in
our flue-cured tobacco supply chain. In addition
to the much-needed contribution to limiting
climate change, biofuels can trigger technologicalinnovation and benefit local communities. In
Yunnan and Guizhou, China, PMI, CNTC, andrelevant stakeholders helped local farmers switch
to wood pellets as a primary energy source.

The newly required pellet production facilities
benefited local communities through additional
employment and reduced dependency on imported
fuels. One enabler for bioenergy to gain more
importance in the global energy mix is the shift
toward second- and third-generation biofuelsthat rely on food waste and residues. These input
materials decrease the requirement for land use
improving the resiliency of rural communities
to climate change and providing at the sametime more opportunities for adaptation to it.

Achieving our climate goals

To accelerate developments for direct materials (i.e.,
outside the tobacco supply chain), PMI launched a
supplier engagement program to collect primarycarbon data and understand suppliers’ GHG
emission reduction programs and targets. The
supplier engagement program allows PMI to haveaccess to supply chain primary data to constructtargets, calculate the CO2 impact on productivity,and develop programs for action. In 2020, PMI
found that 41 suppliers across the direct materials
category represented 80% of the category’s total
carbon footprint, proving once more that supplierengagement is a crucial part of the more complex
roadmap to accelerate the decarbonization of
the supply chain. The engagement and the datacollected supported PMI to significantly improve theaccuracy level of the calculated carbon emissions.

Sourcing Principles is the entry point to sustainability
each supplier of PMI is required to follow.

China fuel switch influe-cured tobacco

One enabler for bioenergy to gain more
importance in the global energy mix
is the shift toward second- and thirdgeneration biofuels that rely on foodwaste and residues

Tobacco curing

Philip Morris International Low-Carbon Transition Plan 2021

Establishing our climate goals(see Good Agricultural Practice (GAP),
Good Agricultural Practice/ALP on p. 44).

C A S E S T U DY

Our ambition and values

Engaging supply chains43

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Since 2002, PMI has in place the Good Agricultural
Practice (GAP) program to drive sustainability andambition with suppliers and contracted tobacco
farmers. GAP also represents a way through which
PMI tries to foster Agricultural Labor Practice (ALP),
which aims to identify issues related to inadequate
working and life conditions, especially for tobacco leaf
suppliers’ farmers. At PMI, there have been multiple
initiatives developed to support contracted farmers in
improving their income levels and thus the livelihoodsof their households; among others, the Living Income
Project, which aims to assess actual farmers’ income
versus the living income benchmark of a given area.
Another direction of PMI’s effort to foster ALP is
the diversification of growing crops: Supporting
farmers in diversifying their crops has become aneven more important focus area. Growing a range ofcomplementary and diversified crops and engaging
in other income-generating activities could improve
farm income and make farmers more resilient against
climate change and economic uncertainty. We also
act with a wider focus on the entire environment,
working at the landscape level, such as implementing
holistic strategies and actions through our flagshipprograms in renewable curing, Good Agricultural
Practices, and forest protection. In Malawi, forexample, our diversification program is supporting
local communities by interconnecting the economy,society, and the environment. This approach allows
PMI to work more closely with farmers and suppliers
and, where appropriate, in partnership with external
stakeholders that support crop diversification.

PMI

GAP &
RS P

GAP &
RS P

6 PMI leaf
operations

14 third-party
leaf suppliers

25% of volume
purchased

75% of volume
purchased

GAP

2,675

Achieving our climate goals

In PMI’s tobacco supply chain, production is
managed in accordance with the Good Agricultural
Practices (GAP). GAP was first introduced in
2002. Since then, it is continuously updated toreflect feedback received from farmers, suppliers,
and stakeholders and to keep up with ever moredemanding expectations and technologicaldevelopments. One major improvement is theAgricultural Labor Practices Code in 2011. All
the measures and standards framing the GAP areorganized in four main areas: governance, crop,
environment, and people. GAP is mandatory for
all suppliers and their affiliates. To ensure theeffective implementation of GAP, PMI relies also
on the Integrated Production System (IPS), thatconnects leaf suppliers and farmers beyond thecustomary boundaries of a commercial relationshipand enables direct technical support, agronomic
advice, financial loans, and various other services.
The program is supported by a large number of fieldtechnicians (approx. 2,000) who are fully dedicatedto tobacco agriculture that through the applicationof the best practices in training, monitoring,
traceability, and data management drive impact
in line with our decarbonization strategy for our
tobacco supply chain.

Our tobacco supply chain in 2020

Establishing our climate goals

Good Agricultural Practice/ALPOur ambition and values

Good Agricultural Practice (GAP)GAP

Field technicians
support and monitor
GAP implementation

13,600272,300

Farmers
contracted
by PMI

Farmers
via third-party
suppliers

285,900
Total tobacco farmers
committed to applying
GAP

Source: PMI Integrated Report 2020

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Our ambition and values

Net positive strategies are built on the concept that a company must
give back more than it takes from society and the environment.
Sustainability offers the opportunity for growth through investments
in scientific research to continue innovating for better products.

H OW

A smoke-free future is attainable, and thebenefits it can bring to the people who would
otherwise continue to smoke, and hence
to global public health, are enormous.
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.
We are working to close the gap between
combustible and smoke-free products
through improved manufacturing processes,
extending the usable life of our electronic
devices, and decreasing the total CO2
footprint through smart material selection
and sustainable design practices. This isachievable through the application of ecodesign and circularity principles, reducing
costs of returns, obsolescence, and disposal.

Achieving our climate goals

Integrating
sustainability
considerations
into our products

Establishing our climate goals

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Building on the Board’s Letter to Shareholders
in PMI’s 2017 Proxy Statement, PMI reaffirmed
our purpose in 2020 and acknowledged that,
as we continue to transform our businessand organization, our purpose remains
to provide smoke–free alternatives thatappeal to today’s adult smokers. In addition,
we continue to work toward earning thetrust and active cooperation of a host of
stakeholders, from our supply chain partners
to regulators and public health authorities.

An IQOS store in Lausanne, Switzerland

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H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

To close the gap between cigarettes and smokefree products, over the past two years PMI has
reduced the overall CO2 impact of smoke-free
products through improvements in manufacturing
processes and in the tobacco supply chain. One ofthese initiatives has been to look at the density of
tobacco within the product, both to reduce CO2
impacts and provide a better consumer experience.
By modifying the design of the heated tobacco
plug slightly, PMI succeeded in reducing CO2
impact per stick by 4% while enabling a smootherinsertion of the heated tobacco unit (HTU) in theholder and generating a more consistent aerosoldelivery, addressing one common consumer
pain point. In 2020, PMI finalized the results
for the new e-vapor product IQOS VEEV.

Another field of operation beyond tobacco thatis a key enabler for the net positive goal is ouranti-littering policy. Cigarette butts are among
the most frequently littered items. To address
this problem, we have an anti-littering policy inplace, which is sustained by three main pillars.

Eco-design principles and circularity in a nutshell
Five fundamental eco-design principles guide our progress

1. Reduce litter on the ground throughefficient and cost-effective collection
schemes and clean-up campaigns
2. Encourage behavioral change (that isthe driver of PMI’s transformation)

1

2

3

Effective use of sustainable(such as renewable,
recyclable, or recycled)materials

Minimization ofcarbon footprint related
to energy consumption
and transport

Product lifetime
optimization

Achieving our climate goals

So far, PMI has analyzed IQOS devices, heated
tobacco units, and packaging. IQOS currently
has a higher carbon footprint than combusted
cigarettes. This is primarily due to the useof an electronic device, which involves newcomponents and requires electricity to charge.
This element accounts for 13% of the total carbon
footprint of the IQOS 3 system. Additionally, theprocess to manufacture heated tobacco units
is more energy-intensive than for cigarettes,
due to the production of cast leaf tobacco.

This new version has a lower carbon footprint
thanks to efforts to reduce the overall productsize and decrease material use. Eco-designand circularity are therefore key to making
the shift consistent with net-zero targets.

Establishing our climate goals

Eco-design principles are strong
pillars for PMI operations: They
inform how PMI uses life-cycle
analysis (LCA) to assess the carbon
footprint of our products.

Design and engineering teams have been trainedby internal and third-party experts to embedeco-design standards. This applies to devices,
consumables, and accessories, as well as packaging.
By integrating sustainability into the products
from development to end-of-use, PMI can lower
the risk of environmental and social impacts,
and associated costs. Benefits are extensive andinclude energy savings, reduced consumption ofnatural resources, waste minimization, and a longer
product life span—most of these outcomes havea positive impact on mitigating climate change.

Our ambition and values

Integrating sustainability considerations
into our products

3. Design for circularity
Through these three simultaneous strategies,
PMI aims to reduce by 50% the amount ofplastic litter from all products by 2025.
To support efforts to build a more circular businessmodel for reduced-risk products, PMI actively
seeks to engage with external stakeholders andlearn from industry leaders. In 2020, PMI engaged
in a project with the World Business Council for
Sustainable Development (WBCSD), on identifying
best practices in circular electronics, including
business model development and product design.
In 2018, PMI launched CIRCLE (Central Inspection
and Recycling for a Closed Loop Economy) (seeCIRCLE on p. 47), which is a service that provides
centralized hubs that inspect, process, and separate
materials from electronic devices for recycling.

4

5

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

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

Source: PMI Integrated Report 2020

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H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

In that regard, in 2020 the deployment of Marlboro
limited-edition “Leave No Trace” pack continued,
which communicates anti-littering messages toadult smokers. Developed in 2019, the pack wassold in nine markets in 2020.

CIRCLECIRCLE (Central Inspection and Recycling fora Closed Loop Economy) is a PMI service thatprovides centralized hubs that inspect, process,and separate materials from electronic devices
for recycling. In 2019, a third-party audit of the
facility in Europe showed that PMI recycled at
rates between 70% and 79% by weight based on
device version; the remainder of materials went
to energy recovery. Materials sent for energy
recovery include some elements of the batteries
and printed circuit board assemblies, which pose
unique challenges. CIRCLE is a centralized service
that ensures recycling is completed to the highest
standards. To the extent possible, PMI is rolling
out CIRCLE globally; however, it currently is notpossible to implement the service in all markets
due to legislative restrictions related to wastetransport. In markets where CIRCLE has not yet
been implemented, IQOS users can, nonetheless,return their devices to specified locations.

Establishing our climate goals
Achieving our climate goals

In 2020, we continued with relentless focus on
our business transformation, dedicating 99% of
our research and development and 76% of ourcommercial expenditure to smoke-free products.
Five years since PMI publicly announced its
vision to replace cigarettes with less harmful
alternatives, our efforts and investments aredelivering strong results. In 2021 Q3, smokefree products represented close to almost 30%
of our total net revenues, and an estimated 14.9
million adults have 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. PMI is committed toserving as an agent of change and an advocate of
positive values. We understand that our businessmust become a provider of effective solutions.
Innovation and inclusiveness are key to solving
our challenges, whether related to tobacco
harm reduction, environmental sustainability,or equity. To accelerate our progress, 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.

Our ambition and values

Making progress to achieve our purpose

Read PMI’s Statement of Purpose

Our World Is Not an Ashtray (2020)
In July 2020, PMI launched Our World Is Not
an Ashtray, a web-based corporate platform toeducate, inspire, and engage the public on the issueof littering. Through this awareness campaign, we
share facts and figures, testimonials, and calls toaction. Besides leveraging our brands to encourage
adult smokers to change behavior and switch tobetter alternatives, PMI also aims to promote postconsumption behaviors related to proper disposal.

14.9m
Adults have already switched to
PMI’s leading smoke-free alternatives
and stopped smoking

Recycling of IQOS devises in a hub, Japan

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HOW

PMI aims to play our part in supporting society to achieve the
UN Sustainable Development Goals (SDGs), by supporting andimplementing climate-aligned public policy and participating in
multi-stakeholder initiatives fostering climate change actions andsustainability efforts.

Establishing our climate goals

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Our ambition and values

Transition to a low-carbon economy requires engaging in multilateral,
global initiatives to help push the climate agenda forward, mainly
through cross-sector sharing of best practices. Addressing climatechange requires urgent policy action to drive an unprecedented global
infrastructure and technological transformation.

Achieving our climate goals

Fostering
engagement,
promoting global
climate action
Addressing climate change requires
urgent policy action to drive an unprecedented
global infrastructure and technologicaltransformation

Philip Morris International Low-Carbon Transition Plan 2021

PMI aims to play our partin supporting society to achieve the
UN Sustainable Development Goals(SDGs)48

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

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

The climate crisis, as acknowledged by
the international community, threatens
livelihoods, particularly those of theworld’s most vulnerable people.

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49

Achieving our climate goals“PMI works with notfor-profit organizations
and governments to
support communities onenvironmental sustainability
topics including sustainable
forestry, reforestation,
controlled use of pesticides
PMI continues to support multi-stakeholderin agriculture, sustainable
initiatives on environmental topics by, for example,
signing on to the Brazilian Business Commitment
rural living conditions,to Water Security in 2019, a coalition of companies
led by the Brazilian branch of the World Businessand education.”
PMI works with not-for-profit organizations
and governments to support communities onenvironmental sustainability topics including
sustainable forestry, reforestation, controlled
use of pesticides in agriculture, sustainable rural
living conditions, and education—all of these canhave an influence on climate change improvement,
adaptation, and mitigation. PMI supports projects
to protect and enhance natural resources,
implement conservation agriculture, provide cleanwater, cater for food security, and improve thelivelihoods of people living in rural communities.

Establishing our climate goals

While science tells us that climate change isirrefutable and unavoidable, it also tells us that
it is not too late to limit the warming to the
1.5°C that is considered the limit beyond which
impacts will be catastrophic. This will require
fundamental transformations in all aspectsof society—for PMI, this means how we growcrops, use land, transport goods, and participate
in supply chain operations. As a businesswith a multinational environmental footprint,
PMI will continue to support climate-aligned
public policy and commit to multi-stakeholder
initiatives such as Business Ambition for 1.5°C(see Business Ambition for 1.5°C on p. 51).

Council for Sustainable Development (WBCSD).
PMI’s commitment includes the implementationof the Alliance for Water Stewardship (AWS)Standard and a partnership with tobacco growers
to restore degraded riverbanks through theWater Guardian Project. Moreover, with theintention to advance progress in achieving SDG
13 (take urgent action to combat climate change
and its impacts), we are a member of multiple
sustainability organizations, including the World
Business Council for Sustainable Development,
Sustainable Brands (SB), and the We Mean
Business Coalition. These organizations havehelped harness the power of collaboration to
implement solutions at scale and at greater speed.
PMI affiliates are also members of other national
business associations that are engaging withgovernments to advance progress on SDG 13.

Our ambition and values

Fostering engagement, promoting global climate action

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

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?

Source: PMI Integrated Report 2020

“In 2020, PMI was included in the Dow Jones Sustainability
Index (DJSI) North America, achieving the highest score of
100 in the climate strategy, environmental reporting, andenvironmental policy and management systems categories.”
Philip Morris International Low-Carbon Transition Plan 2021

In 2020, PMI was included in the Dow Jones
Sustainability Index (DJSI) North America,
achieving the highest score of 100 in the
climate strategy, environmental reporting, andenvironmental policy and management systems
categories. PMI discloses its efforts to the CDP,
and in 2020 we achieved a “triple A” score forenvironmental sustainability leadership andmaintained our position on the A List for Climate
Change for the seventh year in a row. CDP
also placed PMI on its Supplier Engagement
Leaderboard for the fourth consecutive year.

To support the creation of a global impact
measurement and valuation standard formonetizing and disclosing impacts of corporate
activity, in 2019 PMI joined other companies tosupport the Value Balancing Alliance (VBA), a
nonprofit organization to better evaluate impacts
on nature. Impact valuation is a method bywhich companies identify, understand, improve,and demonstrate the benefits and costs of
their activities on society and the environment,
translated into monetary terms. This helps
integrate environmental, social, and humanaspects into decision-making and disclosures.

Achieving our climate goals

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

We have received external recognition forour efforts to tackle environmental issues.

We are confident that our annual responses
to investors’ call via CDP disclosure canprovide valuable insights and information to
inform investment decisions, increase market
transparency on environmental risks andopportunities, and foster risk management andresilience toward the alarming climate crisis.

Establishing our climate goals$

In 2020, our CEO joined CEOs from over 170
businesses, investors, and business and investor
networks, in a letter to call on EU policymakers to
support an EU 2030 GHG emissions reduction
target of at least 55%. Following the establishmentof PMI’s new science-based emissions reduction
targets consistent with keeping global warming
to 1.5°C above pre-industrial levels, PMI signed
the Business Ambition for 1.5°C commitment—
responding to the call to actions for companies
to step up their ambition for the best chanceof tackling the climate crisis (see Business
Ambition for 1.5°C on p. 51). PMI affiliates also
belong to national business associations thatare engaging with governments to advance
progress on climate protection at the local level.

Our ambition and values

Impact valuation

55%
In 2020, our CEO supported an
EU 2030 GHG emissions reduction
target of at least 55%

50

H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Business Ambition for 1.5°C is led by the
Science Based Targets initiative in partnershipwith the UN Global Compact and the We
Mean Business coalition. It is an urgent call toaction from a global coalition of UN agencies,
business and industry leaders, and it is callingon companies to commit to setting ambitious
science-based emissions reduction targets.

In early October 2021, over 900 companies,
representing more than US$13 trillion inmarket cap, have responded to the open
letter from global leaders and signed theBusiness Ambition for 1.5°C commitment.

A better alignment of corporate reporting
schemes within the low-carbon transition bestpractices would require greater harmonizationof ESG reporting and coherence among
scope and risk disclosure on climate-related
information while minimizing bureaucratic
burdens for small and medium-sized enterprises
and avoiding distorting competition.

Achieving our climate goals

To hold off some of the worst climate
impacts, and avoid irreversible damage to oursocieties, economies, and the natural world,
we must hold temperature rise to 1.5°C
above pre-industrial levels. This requires
halving greenhouse gas emissions by 2030
and hitting net-zero emissions by 2050.

If companies could better measure and provide
transparency on their liabilities related to climatechange, it would allow investors to evaluate assets
more accurately, increase social accountability,and facilitate the design of incentives to encourage
climate-friendly behavior. Various elements ofenvironmental, social, and governance (ESG)
disclosure could help lower the vulnerability ofcompanies to climate policy and to climate changerisks (e.g., stranding or actual destruction of assets).

Establishing our climate goals“By setting a net-zero target in line with a
1.5°C future—our only future—businesses
can make their critical contribution to limiting
the worst impacts of climate change.”

Acting with ambition to push a sustainability
agenda forward is not only a commitment
and a responsibility, but also an action thathas positive repercussions on the structure
and performance of a company.

Our ambition and values

Business Ambition for 1.5°C

Strong leadership in ESG and climate action helps
attract talent and retain high-performing andinnovative people. A robust ESG proposition canhelp companies enhance employee motivation
by instilling a sense of purpose and increase
productivity overall. Employee satisfaction ispositively correlated with shareholder returns.

“By setting a net-zero target in line witha 1.5°C future—our only future—businesses
can make their critical contribution tolimiting the worst impacts of climate change.”
Researchers at the Pakistan Forest Institute in Peshewar, Pakistan

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Our ambition and values

H OW

Climate change efforts are part of a broader engagement towardsustainable development, including forest and ecosystem protection,
employees’ and communities’ well-being, and human rights. PMI aims
to address adverse impacts and maximize the opportunities to drive
positive change for people.

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Social inequality between wealthy and poor
nations—and within nations between people ofdifferent ethnicities, classes, genders, generations,work, and health conditions—influence ourrelationships with our shared planet.
The primary asymmetries of climate change thatclimate justice seeks to address are differential:
1. Contributions to climate change

Achieving our climate goals

As PMI transforms to a smoke-free future
and advances decarbonization strategies,
we recognize that these transitions need tobe just and equitable and protect people’s
livelihoods. PMI has been working to identify
and address the social and environmental
risks and impacts resulting from ouroperations and supply chain footprint.

Establishing our climate goals

Putting people
and ecosystems’
well-being
center stage

Climate change is intrinsically linked tohuman rights in terms of food and water
availability, the spread of diseases, extreme
events, and rural communities’ livelihoods.

2. Impacts of climate change
3. Capacity to shape solutions
4. Future response capacity.

Climate justice describes how the gains
and losses of the environment are often
unjustly distributed, not only as regards otherspecies or future generations of humans,
but also among humans living today.

A tobacco farm worker stringing tobacco leafs in Nayarit, Mexico

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H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Our human rights strategy is made of four main pillars:
1. Embedding a culture of respect
2. Human rights due diligence3. Grievance mechanism
4. Monitoring and reporting.

PMI aims at being on the frontline of this transition
to collectively fight against climate change.

PMI believes in the role of the private sector
in climate justice. Governments cannot be left
alone to take effective action on climate change
and meet the Paris Agreement targets.

100%
Tobacco cured with no risk of deforestation
for primary and protected forests

Achieving our climate goals

Protecting natural ecosystems and sustainably
managing forests are key drivers in reducing
greenhouse gas emissions. Two raw material
supply chains represent a risk of deforestation
for PMI: tobacco leaf and paper and pulpbased products. To mitigate this risk, PMI has
developed the Zero Deforestation Manifesto toprotect the forest and improve natural resource
management (see Zero Deforestation Manifesto
on p. 54). In 2020, PMI purchased 100% of
tobacco cured with no risk of deforestation forprimary and protected forests. PMI runs anannual risk assessment on deforestation for
tobacco and paper and pulp-based materials.

We also protect forests through engagementwith suppliers and farmers with the GAP programproviding principles, guidelines, and tools forthe sustainable management of fuel sources,
including sustainable forest management practices,
awareness of the risk associated with forest
losses, and use of alternative renewable biomass.
Within our manifesto, PMI aims for a free, prior,and informed consent (FPIC) when engaging
directly or through commercial partners withindigenous people and local communities. With
the commitments set in the Zero Deforestation
Manifesto, we aim to safeguard primary andprotected forests in our supply chain while
monitoring the sustainable management of
natural managed forests that are at the base of
the wood fiber supply for our products. Since
2020, leveraging suppliers aligned to forest
sustainability standards and collecting further
evidence on supply chain sustainable practices,
PMI could assess as compliant to ZDM for grossdeforestation (primary and protected forests)
61% of board- and paper-based packaging.

Establishing our climate goals

The renewable curing fuel program started in2015 after an analysis of the potential impacts
and risks of the flue-cured curing process,especially across countries more vulnerable todeforestation and climate change. Deforestation
can result in loss of biodiversity and destructionof habitats, compromising ecosystem services
such as erosion and flood control, and water cycle
regulation. These impacts combine to result in
land-use change contributing to feedback loops
of climate change but also inhibiting resiliency
necessary to face extreme climatic events for
local communities. To this extent, the renewablecuring fuel program limits the impact of usingwood fuel for curing but also builds capacity
across farmers and all involved stakeholders.

Regulation of fair and just working conditions,
good agricultural practices, crop diversification,
limiting deforestation, and promoting new andinnovative farm practices are a few examplesof the projects developed to enhance social
responsibility across PMI´s value chain.

It has been recognized that the private sector
can be pivotal in advancing climate justice byrealigning business incentives with international
climate commitments. Businesses that takesteps to protect workers and communities
from climate insecurity, including those across
supply chains, will advance human rights
principles of justice, inclusion, and equity.

Our ambition and values

Putting people and ecosystems’
well-being center stage

PMI’s social impact roadmap is the result of theunderstanding of how the company can continuallyrespect human rights across global businesspractices and supply chains. PMI affects more than285,900 farmers and 130 million adult consumersof our cigarette brands, and close to 18 million
IQOS users (2020).
Workers at our tobacco supplier’s facility in Isabela, Philippines

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H O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

• Zero gross deforestation of primaryand protected forest associated withthe tobacco supply chain by 2020
• Zero net deforestation of managed naturalforest and no conversion of natural ecosystems
in the tobacco supply chain by 2025
• Net positive impact on forests associatedwith the tobacco supply chain by 2025

• Net-zero deforestation of managed
natural forest and no conversion of natural
ecosystems in the paper and pulp-based
products supply chain by 2030
PMI approaches these commitments throughannual risk assessments, supplier and farmer
engagement, and third-party verification.

Find out more:
Briefing paper CLIMATE JUSTICEIN GLOBAL SUPPLY CHAINS:
A perspective from the private sector
written by Article One and commissionedby Philip Morris International

The 2030 Agenda for Sustainable Development is aplan of action for people, the planet, and prosperity:
Exploiting the synergies between Sustainable
Development Goals and the Paris Agreement is
critical. The 17 SDG and 169 targets, including
SDG 13 on climate action, demonstrate the scale
and ambition of this universal agenda. The energy
transitions envisaged in SDG 7 on sustainableenergy will help lower GHG emissions relative tobusiness-as-usual pathways, thereby contributing
to the objectives of the Paris Agreement.
Similarly, more sustainable industrialization
under SDG 9, sustainable food production
systems and resilient agricultural practices under
SDG 2, and changing patterns of consumption
and production in line with SDG 12 can allcontribute toward low-emissions pathways, thecreation of new kinds of jobs, and making longterm progress toward eradicating poverty.

Achieving our climate goals• Zero gross deforestation of primary andprotected forest associated with the supply chainof paper and pulp-based materials by 2025

Climate change interlinkages with otherSustainable Development Goals

Establishing our climate goals

Forests store carbon, and their conversion
to other land use releases greenhouse gas
emissions. Deforestation and the progressive
degradation of forests are global issues; for PMI,
wood fiber is the commodity of relevance. PMI’s
environmental strategy aims to engage with
employees, suppliers, customers, communities,
and other stakeholders to minimize negativeenvironmental impacts. PMI is committed to:

Our ambition and values

Zero Deforestation Manifesto

The period to 2030 is also the window within
which the SDGs are to be achieved to leave noone behind: Progress made toward limiting global
temperature increase would smooth the path toachieving other SDGs, such as those related topoverty, hunger, access to water, terrestrial andocean ecosystems, forests, health, gender equality
and the empowerment of women and girls, among
others. Many of the goals and targets can also
be achieved in ways that would enable adaptive
responses to climate change, for example thoserelated to resilience and disaster risk reduction in
SDGs 1, 9, and 11, respectively relating to poverty
eradication, infrastructure, and urban settlements.

Community project to provide farmers with access to water in Mozambique

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The communicated results both from own
programs and through standardized approaches
regulated by recognized available standards
are the basis for an unbiased rating andranking of companies that commit to drive
sustainability at all levels in their value chain.

• Resources required, which should not undermine
our focus on performance improvement

PMI understands the value of participatingin ESG ratings; it helps to report and assesssustainability performance transparently,
benchmark against leaders in sustainability, and,most importantly, identify areas for improvement.

• The credibility of the methodology and our ability
to interpret and use our results• Recognition of the rating among the investor
community, as well as participation by ourcompetitors and peers so we can benchmark
our performance• Value as a learning opportunity, with a sufficient
feedback loop to allow us to improve over timeAchieving our climate goals

Climate proofing
the business anddisclosing climate
information

We prioritize our participation in ratings that are
most useful to our stakeholders, based on:

Establishing our climate goals

AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Looking ahead and evaluating possible futurescenarios is also key in identifying and seizing theopportunities of a low-carbon future. Transparency
to external stakeholders is a required practicefor the private sector to show alignment to
the global sustainability agenda and proactive/
reactive action on the ground. A number ofinternational sustainability standards and practices
are available for companies to embrace and use
as a robust way to foster progress in the supply
chain while accounting for issues and results
in a standardized and transparent manner.

Our ambition and values

H OW

Reducing greenhouse gas emissions and reaching net zero is the number
one priority for mitigating the risks of climate change. However, we must
prepare ourselves to face the effects on the climate already underway
and the colossal transformations that the low-carbon transition requires
from society and the economy.

• Openness to dialogue
PMI participates and has received high scores inseveral ESG ratings and international initiatives,
such as CDP and Dow Jones Sustainability Index.

A call center employee in Fukuoka, Japan

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Increased environmental pressure
to perform business activities in asustainable way means businessleaders should look at environmental
risks with an improved approach.

PMI’s pathway to carbon neutrality (scopes 1+2) by 2025
and net zero (scopes 1+2+3) by 2040

The impacts of climate change, biodiversity
loss, and water insecurity—among others—
threaten more than supply chains and physicalinfrastructure; they jeopardize businessprogress and growth by exacerbating
systems-level disruption to customers,
investors, employees, and communities.

Co2e metric tons (millions)

Similar to other agricultural sectors, the productionof tobacco is exposed to climate-related risks andopportunities resulting largely from tobacco´sreliance on land and natural resources. Waterand fertilizers, for example, represent key input
resources that are exposed to climate-relatedrisks and opportunities. According to theInter-Governmental Panel on Climate Change(IPCC), agriculture and forestry is responsible
for “just under a quarter of anthropogenic
GHG emissions, mainly from deforestation andagricultural emissions from livestock, soil, andnutrient management.” This scale of impact
means that decarbonization of the sector willbe critical to the transition to a zero-carbon
economy, which is required between 2050 and
2100 if the commitments made under the Paris
Agreement are to be met and global temperature
increases are limited to 1.5°C above pre-industrial
levels, which is the threshold not to be passed
according to IPCC (2018) and that is very likely
in danger of not being respected, according
to the latest IPCC communication (2021).

6m

Our ambition and values

Climate proofing the business and disclosing climate information
Scope 1+2 emissions
Scope 3 emissions
Oﬀsets and carbon removals
Net carbon emissions

Establishing our climate goals

Impact of
COVID-19

Net zero
Scopes 1+2+3

Carbon neutrality
Scopes 1+2

8m

Science-based targets:-50% absolute emissions
reduction by 2030
versus 2019 (scopes 1+2)

Achieving our climate goals-50% absolute emissions
reduction by 2030
versus 2019 (scope 3)
4m

2m

0
2030

2025

2021

2020

2010

-2m
2040

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.
Source: PMI Integrated Report 2020

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PMI’s commitment and results are acknowledgedby different stakeholders at several levels;
their feedback corroborates our actions. Ourcommitments related to climate protection arerecognized to be in line with global standards, and weparticipate in several ESG initiatives where we haveachieved the highest score in their ratings (see table).

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 ensure
water security. This marks the seventh consecutive yearthat PMI has ranked on CDP’s A List for Climate
Change and the second consecutive year that thecompany earned a position on the Water Security A List

Triple A

CDP Supplier
Engagement

Placed on Supplier Engagement Leaderboard
for the fourth consecutive year

LeaderDow Jones
Sustainabiity
Index

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 category

74

ISS-oekom“C” score, achieving industry leadership (2019 score;assessment is updated every two years)

C

MSCI

Maintained BBB score

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 scoresand sector/region scores (see report)

60

Sustainalytics

Ranked third within the tobacco subindustry ESG
Risk Rating, with medium exposure score and strong
management score

24.4

State Street
R-Factor Score

Outperformer within the tobacco industry;
industry average score of 47

TobaccoTransformation
Index

Ranked second out of 15 tobacco companies assessed;
leading the industry for “Strategy and Management”
category

Included in
the index

Achieving our climate goals

For the first time, the score in the 2020 S&P
Global Corporate Sustainability Assessment, anannual evaluation of companies’ sustainability
practices, earned PMI an inclusion in the Dow
Jones Sustainability Index (DJSI) North America.

Rating agencies

Establishing our climate goals

PMI periodically conducts a climate change risks
and opportunities assessment to fully understandour impact across the entire value chain, inform ourclimate strategy, and size the necessary mitigation
and adaptation measures. This work aligns withinternational expectations such as those of the Paris
Agreement to mitigate and adapt to climate impacts,
as well as the recommendations of the Task Force on
Climate-related Financial Disclosures (see TCFD on
p. 58) which aims to foster voluntary climate-related,financial disclosures that provide clear, reliable, anduseful information to the financial community. The
most recent risk assessment was conducted in 2019and reported on in the last integrated report as wellas in the submission to the CDP (see CDP on p. 58).

Our climate ambition is reflected in the ratings
and rankings that include PMI at the forefront ofclimate action for the private sector. We believe
in transparent reporting, and we rely on thescoring and evaluation that is assigned to our
initiatives reported for the entire value chain(scopes 1+2+3). We take comments and reviews asa means to improve our approach year after year,
and we are eager to share as much as possible
with relevant stakeholders both from the private
and public sectors to foster steady progress andsupport the reaching of global climate goals.

Our ambition and values

Carbon neutrality remains a top priority for PMI’s
response to climate and environmental risks.
The efforts extend beyond our own operations
to the entire value chain, and strategies accountfor the interdependencies between multiple
environmental challenges. Based on the evolutionof our programs and our willingness to invest in
climate-smart equipment and systems driving abetter environmental performance, we believe wecan achieve the aim of carbon neutrality in our direct
operations by 2025. To achieve the carbon-neutrality
targets, we focus primarily on reducing absolutecarbon emissions. To guide our work in the years
to come, we revised our absolute CO2e emission
reduction targets in 2020 to align with a scenario of anincrease in global temperatures of no more than 1.5°C
above pre-industrial levels. In doing so, PMI alignedwith the recommendations of the Intergovernmental
Panel on Climate Change (IPCC) 2018 report.

BBB

56
2.36

Source: PMI Integrated Report 2020

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CDP is a not-for-profit charity that runs the global
environmental disclosure system. Each year CDP
supports thousands of companies, cities, states,
and regions to measure and manage their risks andopportunities on climate change, water security,and deforestation, doing so at the request of theirinvestors, purchasers, and city stakeholders.

PMI leads our relatively small peer groupof tobacco companies in the transition tocarbon neutrality. Our recent adoption of a
1.5°C science-based target is unique among
peers. Noting that the largest sources of GHG
emissions-related risk in the tobacco subsector
stem from upstream suppliers, we regard PMI’s
actions to improve the energy efficiency of
curing barns and the promotion of alternative,
more sustainable curing fuels as demonstrating
leadership on this material risk. We also viewfavorably PMI’s planned approach to mitigating
the second biggest source of GHG emissions:cellulose acetate tow. Further, we differentiate
ourself from peers through our adoption of aninternal carbon price, which we use in tandemwith advanced modeling tools, such as a marginalabatement cost curve, to determine prudent
climate-mitigating actions. We have taken
concerted action regarding our direct GHG
emissions, such as through the installation of heatpumps and onsite renewable energy generation
technologies at some of our production facilities.
The use of renewable energy certificates to tackle
scope 2 emissions is common across the sector
and form a fundamental part of PMI’s net-zerostrategy; however, we expect PMI to continue
focusing efforts on self-generation and powerpurchase agreements.

Over the last two decades CDP has createda system that has resulted in unparalleledengagement on environmental issues worldwide.
Each year, CDP takes the information supplied in
its annual reporting process and scores companies
and cities based on their journey through disclosureand toward environmental leadership. Throughits independent scoring methodology, it measures
corporate and city progress and incentivizes action
on climate change and forests and water security.
Founded in 2000, CDP was the first platform tolink environmental integrity and fiduciary duty.
Now with the world’s largest, most comprehensive
data set on environmental action, the insights that
CDP holds empowers investors, companies, cities,
and national and regional governments to makethe right choices today to build a thriving economy
that works for people and planet in the long term.

Philip Morris International Low-Carbon Transition Plan 2021

Environmental profile
Sector/region score

20/50

Greenhouse gas
emissionsLeading

Waste andpollution

StrongWater use

Good

Land use andbiodiversity

StrongGeneral factors(optional)

None

Entity-specific score

42/50

E-profile (30%)

62/100Source: S&P Global ratings 2020

Achieving our climate goals

S&P rating of PMI

Task Force on Climate-related
Financial Disclosures (TCFD)
The Task Force on Climate-related Financial Disclosures(TCFD) is an organization that was established in
December 2015 with the goal of developing a set ofvoluntary climate-related financial risk disclosures thatcan be adopted by companies so that those companies
can inform investors and other members of the public
about the risks they face related to climate change.
The organization was formed by the Financial Stability
Board (FSB) as a means of coordinating disclosuresamong companies impacted by climate change.
The TCFD, chaired by Michael Bloomberg, began
issuing recommendations to companies to aid themin their disclosures of pertinent information related
to climate-related financial risks in 2017. The goal ofthese recommendations is to provide companies astructure and impetus for disclosing this information
so as to better inform financial markets and investors.
These recommendations are voluntary and are inplace as guidelines to assist businesses in identifying
and sharing both risks and opportunities they face asa result of climate change. In turn, investors, lenders,insurers, and other participants in the market will havea more complete picture when assessing the value of
those companies and the risks they face. As reported
by Bloomberg, a goal of the TCFD is to encouragesustainable investments so as to build an economy thatis resilient in the face of climate-related uncertainties.

Establishing our climate goals

CDP (previously Climate Disclosure Project)

Our ambition and values

In 2020, PMI made the CDP Climate Change A List for the seventh year in a row. In addition, we earned a positionon the Water Security A List for the second year, a recognition of PMI as a global leader in water security. Our efforts
on forest protection earned a rating of A by CDP Forests for the first time. For the fourth year in a row, we were
included by CDP on its Supplier Engagement Leaderboard for our engagement with suppliers on climate-related issues.

PMI’s Business Transformation Metrics
To make progress that is measurable and verifiable,
PMI has developed a set of specific key performanceindicators (KPIs) called Business Transformation
Metrics. These metrics, which are periodicallyreported on by PMI, allow stakeholders to assess
both the pace and the scale of our transformation.
Over the years, based on stakeholders’ feedback, wehave expanded the number of metrics to increasetransparency and provide improved guidance on how
to achieve progress. PMI’s Business Transformation
Metrics also showcase how to mobilize resourcesaway from the traditional cigarette business toward
alternative smoke-free products and their supply
chain, aiming to generate success, leveraging avision where PMI no longer makes cigarettes.

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Additionally, in early 2020, the BoD
released PMI’s Statement of Purpose, which
acknowledges that certain key stakeholders(e.g., employees, investors, customers, civilsociety) are fundamental to our business
transformation toward a smoke-free future.
PMI focuses on protecting the environment
through sustainable practices across ourbusiness and on addressing both existingsocial and environmental challenges
pertaining to our business transformation.

In the area of governance, anchoring PMI’ssustainability priorities in executive accountabilities
helps ensure that the strategy is embedded inour daily operations. Aligned with our purpose,
PMI is working to seamlessly integrate numerous
ESG issues into the corporate culture, businessstrategy, and executive-compensation plans.
We aim to continuously improve performanceand drive transparent, substantial, andmeasurable progress toward our targets
and aspirations—all communicated throughopen and clear reporting and disclosure.

Achieving our climate goals

As companies continue to organize theirapproaches around risk analysis and disclosure
standards and methods, the scope of PMI’s Boardof Directors (BoD) is to continue to enhancethe oversight of these areas. PMI’s BoD viewssustainability as an integral part of the company’sbusiness strategy. PMI’s BoD and its committees
are responsible for fostering the long-term successof the company, setting broad corporate policies,
strategic direction, and overseeing management
responsible for daily operations. The BoD considers
that ESG factors, including climate change, arerelevant to the company’s business and long-term
success. The BoD and its committees receive
updates on the company’s performance andprogress toward the carbon neutrality goal.

Establishing our climate goals

Building
effective climate
governance

Climate change is a key factor to consider in long-term businessstrategies. It is crucial to have rules and processes in place to identify,
assess, and manage the responses to risks and opportunities of climatechange. PMI’s governance and management systems aim to ensurethat climate-related risks and opportunities are considered in relevant
decision-making processes.

Our ambition and values

H OW

There is currently an expectation by bothcompanies and investors that material ESG factors
should be completely integrated into a company’sbusiness strategy. However, the major barrier tothis integration is that the finance and sustainability
functions have been—and largely remain—wholly
separate parts of organizations. Since October
2020, PMI’s Chief Sustainability Officer reports
directly to PMI’s Chief Financial Officer, in line withour belief that fully integrating ESG drivers into
the business strategy can significantly enhanceboth sustainability and financial performance.

PMI’s R&D center in Neuchâtel, Switzerland

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Integrating financial & nonfinancial performance

Investors &stakeholders

Sustainability

In October 2020, PMI announced that the Chief
Sustainability Officer would report directly
to PMI’s Chief Financial Officer, as it is ourbelief that fully integrating ESG drivers into
our business strategy can significantly enhanceboth sustainability and financial performance.
This was the logical next step following
the Board of Director’s adoption of PMI’s
Statement of Purpose in 2020 and the shift
to integrated reporting in 2019. Thosedevelopments underscore that ESG iscore to PMI’s performance and success,and further demonstrate that, at PMI,
sustainability and business performance
do not follow separate paths; they are fullyinterrelated and mutually reinforcing and areorganized and presented to all stakeholders,
including investors, in an integrated way.

As of May 2021, the SVP, Operations reports
directly to and regularly updates PMI’s CEO on
climate issues and has operational responsibility,
including maintaining robust business resilience,risk assessment processes, and strategies tosupport business continuity. He examines andmonitors issues related to climate change,
ensuring that risk assessment and management
are integrated into long-range plans, objectives,budgets, and performance review processes.

Source: Sustainability and Impact in Our Next Growth Phase,
PMI Webcast—June 2, 2021

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Achieving our climate goals

Nonfinancial
performance

Shareholder
returns &social impact

The Nominating and Corporate GovernanceCommittee of PMI’s BoD oversees sustainability
strategies and performance, including climatechange-related issues. The Audit Committeeof the BoD oversees the assessment andmanagement of company risks, including thoserelated to climate 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 is tasked with addressing climatechange risks, including physical and waterrelated risks, across all company activities.
He monitors and reviews progress against
objectives, strategies, and action plans related
to climate change, and reports findings to
the Nominating and Corporate GovernanceCommittee and Audit Committee of the BoD.

Establishing our climate goals

Financialperformance

An increasing number of stakeholders aredemanding that capital markets shift fromperceived short-term, siloed, and sometimes
extractive behavior to a model of long-term,
inclusive, and sustainable capitalism. Investors
are increasingly moving beyond a traditionalrisk-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
undifferentiated approaches, and are expected
to ramp up dramatically over the next decade.
The standardization, measurement, andaggregation of nonfinancial data is needed
to support the financial sector in making
more sustainable investment decisions.

Our ambition and values

Building effective climate governanceH O W AC H I E V I N G O U R C L I M AT E G OA L S BY. . .

Integrating sustainability into ourcompany relies on a formal structurewith clear accountabilities atdifferent levels of the organization.

Company management

Chief Financial Officer

Other
Committees of
the Board

SUS TAINABILIT Y COMMIT TEE• Composed of members of company management• Meets every quarter• Reviews and validates our sustainability materiality analysis,
strategy, commitments, goals, and annual reporting

CHIEF SUS TAINABILIT Y OFFICER• Leads the Sustainability team
• Chairs the Sustainability Coordination Working Group• Reports on progress to the Sustainability
Committee on a quarterly basis

SUS TAINABILIT Y COORDINATION
WORKING GROUP• Updates the Board of Directors at least once a year

Achieving our climate goals

PMI’s compensation and benefits programsupports business and financial objectives.
The executive compensation program
reflects the commitment to put sustainability
at the core of our corporate strategy.

Nominating
and Corporate
GovernanceCommittee

Establishing our climate goals

PMI’s approach to decarbonizing our operationsand value chain is guided by several corporate
policies. Reducing energy consumption and carbon
emissions is embedded in PMI’s Environmental
Commitment, our Guidebook for Success(PMI’s Code of Conduct), Responsible Sourcing
Principles, and the Good Agricultural Practices
program. Efforts to protect forests, a fundamental
climate-regulation mechanism, are in accordancewith the Zero Deforestation Manifesto. PMI’s
well-established environmental management
system, based on international standards suchas ISO 14001, supports the implementation ofenvironmental policies across operations.

Board ofDirectors

Our ambition and values

Sustainability governance and management• Composed of senior representatives from global functions• Meets every month• Ensures alignment and coordination of efforts across thedifferent functions in the company, provides recommendations
for program portfolio, and monitors performance

SUS TAINABILIT Y TE AM
Defines our corporate sustainability materiality and strategy, coordinates program
implementation by working closely with all business functions and with markets across all
geographies, and manages reporting on performance

G LOBAL FUN C TIONS AND MARKE TS
Drive execution of sustainability programs, including
development of policies, procedures, and road maps,
establishment of performance metrics and targets, andmonitoring and reporting on progress within the organization
Source: PMI Integrated Report 2020

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Executive compensation
linked to ESG+P
performance

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GOVERNANCE

ESG+P

Compensation typeTransformation(smoke-free NR/total NR)

Product

PSU 2021-23

Smoke-free (HTU)
shipment volume

Product

Annual incentive metrics

Strategic initiatives

Environment,social & governance+ product

Annual incentive metrics

Carbon footprint reduction

Environmental

PSU 2021-23(a)Environmental leadership(CDP, Triple-A rating)

Environmental

PSU 2021-23(a)Electronics circularity(Recycling rate)

Environmental

PSU 2021-23(a)Diversity, equity & inclusion(% Women in senior roles)

SocialPSU 2021-23(a)Achieving our climate goals

Strengthened
and integrated ESG
governanceMetrics

Establishing our climate goals

Sustainability
reporting to the
CFO

Governance & incentives linked to sustainability

Our ambition and values

The relevant challenge on which climate action
stakeholders are working diligently is to ensurethat ESG information and data are managed andreported 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. Significant action is underway tostandardize reporting and align it to more rigorous
practices by key stakeholders such as the European
Commission and independent agencies such as
GHG protocol and World Resource Institute.
PMI is constantly monitoring the evolution of
ESG reporting, participating wherever possible
in improving data and resources needed for arobust and fully reliable accounting of results.

Source: Sustainability and Impact in Our Next Growth Phase, PMI Webcast—June 2, 2021

62

Glossary
Emissions removal

IPCC

Temperature limit envisaged by the Paris
Agreement (2015). The parties committed
to “holding the increase in the global averagetemperature to well below 2°C above pre-industrial
levels and pursuing efforts to limit the temperature
increase to 1.5°C above pre-industrial levels,
recognizing that this would significantly reduce
the risks and impacts of climate change” (Paris
Agreement, 2015). According to the IPCC, climaterelated risks for natural and human systems arehigher for global warming of 1.5°C than at present,
but lower than at 2°C (IPCC, 2018).
(see p. 17)

Measurable GHG emission reductions, resulting
from actions outside of the value chain of acompany that compensate for emissions thatremain unabated within the value chain of acompany. Compensation measures commonlyused by companies include direct investment inemission reduction activities, purchase of carbon
credits, and avoided emissions through the useof sold products, among others. The scope ofcompensation measures is to accelerate the climate
action outside the value chain (SBTi, 2020).

Actions that remove GHGs from theatmosphere relative to baseline. Examples
include afforestation and reforestation,soil carbon enhancement, bioenergy withcarbon capture and storage (BECCS), direct
air capture, mineralization, or enhanced
weathering (UNFCCC Race to Zero, 2021).

The Intergovernmental Panel on Climate
Change (IPCC) is the United Nations body forassessing the science related to climate change.
The IPCC was created in 1988 by the World
Meteorological Organization (WMO) andthe United Nations Environment Programme(UNEP) to provide policymakers with regularscientific assessments on climate change, its
implications and potential future risks, as well as
to put forward adaptation and mitigation options.
The main activity of the IPCC is the preparationof reports assessing the state of knowledge ofclimate change. These include assessment reports,
special reports, and methodology reports.

Carbon credit

Carbon neutrality
Carbon neutrality is an intermediate step toward
net zero, and it can be reached when attributable
CO2 emissions are fully compensated by CO2
reductions or removals that can be exclusively
claimed, such that the net contribution to
global CO2 emissions is zero. (see p. 16)

Carbon pricing
The price for avoided or released CO2 or CO2equivalent emissions. This may refer to the rateof a carbon tax or the price of emission permits.
In many models that are used to assess the
economic costs of mitigation, carbon prices
are used as a proxy to represent the level ofeffort in mitigation policies (IPCC, 2014).

Philip Morris International Low-Carbon Transition Plan 2021

Justice that links development and humanrights to achieve a human-centered approachto addressing climate change, safeguarding therights of the most vulnerable people and sharing
the burdens and benefits of climate change andits impacts equitably and fairly (IPCC, 2018).

Decarbonization
The process by which countries or otherentities aim to achieve a low-carbon economy,
or by which individuals aim to reduce theirconsumption of carbon (IPCC, 2014).

Emissions reduction
Actions that reduce the quantity of GHGs
attributable to an entity vis-a-vis a baseline.
Examples include replacing fossil-burning powerwith renewable energy, reducing consumptionof emissions-intensive products or inputs,
avoiding damage to ecological carbon sinks,
carbon capture and storage (CCS), avoided
emissions from deployment of renewableenergy, etc. (UNFCCC Race to Zero, 2021).

The term “insetting” has been used to refer to acompany’s efforts to prevent, reduce, or remove
emissions within its own supply chain, but outsideof its operational boundaries. The Science Based
Targets initiative considers such insetting measures
to be distinct from efforts to “neutralize” or“compensate,” instead proposing that insetting
measures are directly accounted for in a company’sefforts to abate all of its supply chain emissions
as it pursues its net-zero target. In 2015, theInternational Carbon Reduction and Offset Alliance(ICROA) defined insetting as “a carbon reduction
project, verified by an offset standard, which occurs
within a company’s supply chain or supply chaincommunities.” ICROA also formulated three bestpractices in the use of insetting as a management
strategy. Firstly, to claim to be insetting and accountfor reduced or removed emissions accordingly, acompany must invest financially in the development
and maintenance of the insetting project. This
project can be developed by the company, its
suppliers, or third-party organizations. Secondly,
the investment project must involve a supplychain activity (i.e., involving the production orsourcing of raw materials, product transformation,or product transportation) and the supply chaincommunity (all stakeholders with a direct link withthe supply chain). Lastly, the activities covered
must generate additional, unique, measurable, andverifiable emissions reductions (VCMI, 2021).

Low-carbon economy
A low-carbon economy is an economy basedon low-carbon sources. The power needs areprimarily derived from less carbon-intensive
energy sources. This economic system should
produce a minimal output of greenhouse gas(GHG) emissions into the atmosphere, specifically
CO2, in order to maintain its concentration within
the limits suggested by the best available climate
science. (Synonym of decarbonized economy).

Low-carbon future
A future pathway derived from a paradigm shift
in the economy, energy production, and supply
systems behavior driven by a deep decarbonization.
It is joint to the concept of low-carbon economy.

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Achieving our climate goals

An emissions unit that is issued by a carbon
crediting program and represents an emission
reduction or removal of greenhouse gases.
Carbon credits are uniquely serialized,
issued, tracked, and canceled by means ofan electronic registry (VCMI, 2021).

Climate justiceInsetting

Establishing our climate goals

Compensation

Our ambition and values

1.5°C

Glossary continued
Transition risks

Nature-based solutions (NBS) are actions
to protect, sustainably manage, and restore
natural and modified ecosystems that address
societal challenges effectively and adaptively,
simultaneously providing human well-being andbiodiversity benefits (VCMI, 2021).
(see p. 42)

Physical risks resulting from climate change canbe event driven (acute) or longer-term shifts(chronic) in climate patterns. Physical risks may
have financial implications for organizations, suchas direct damage to assets and indirect impacts
from supply chain disruption. Organizations’financial performance may also be affected bychanges in water availability, sourcing, and quality;
food security; and extreme temperature changes
affecting organizations’ premises, operations,
supply chain, transport needs, and employee
safety. Acute physical risks refer to those thatare event-driven, including increased severityof extreme weather events, such as cyclones,
hurricanes, or floods. Chronic physical risks refer
to longer-term shifts in climate patterns (e.g.,sustained higher temperatures) that may cause sea
level rise or chronic heat waves (TCFD, 2017).

Transitioning to a lower-carbon economy may
entail extensive policy, legal, technology, andmarket changes to address mitigation andadaptation requirements related to climatechange. Depending on the nature, speed, andfocus of these changes, transition risks may posevarying levels of financial and reputational risk toorganizations (policy and legal risks, technology
risk, market risk, reputation risk). Transition risks
will affect the profitability of businesses and wealthof households, creating financial risks for lenders
and investors. They will also affect the broader
economy through investment, productivity,
and relative price channels, particularly if thetransition leads to stranded assets (NGFS, 2021).

Net zero

Offsetting
The act of compensating or canceling out all, ora portion of, the GHG emissions released to theatmosphere through investments in activities
that reduce or remove an equivalent amount of
GHG emissions and that are located outside theboundaries of the organization or a particular
product system. Such investments are often in theform of purchasing a carbon credit. Offsetting iseffected by purchasing and retiring an amount ofcarbon credits equivalent to the volume of GHG
emissions that is being compensated (VCMI, 2021).

Philip Morris International Low-Carbon Transition Plan 2021

Achieving our climate goals

Net-zero emissions are achieved whenanthropogenic emissions of greenhouse gases tothe atmosphere are balanced by anthropogenic
removals over a specified period. Where multiple
greenhouse gases are involved, the quantificationof net-zero emissions depends on the climate
metric chosen to compare emissions of different
gases (such as global warming potential, global
temperature change potential, and others, as wellas the chosen time horizon) (IPCC, 2018).
(see p. 17)

Establishing our climate goals

Physical risks

Our ambition and values

Nature-based solutions

Science Based Targets initiative (SBTi)
The SBTi is a partnership between CDP, theUnited Nations Global Compact, World Resources
Institute (WRI), and the World Wide Fund for
Nature (WWF). The SBTi call to action is one of
the We Mean Business Coalition commitments.
Science-based targets show companies how
much and how quickly they need to reduce their
GHG emissions to prevent the worst effects ofclimate change. The SBTi defines and promotes
best practice in emissions reductions and netzero targets in line with climate science; provides
technical assistance and expert resources tocompanies that set science-based targets in linewith the latest climate science; brings together
a team of experts to provide companies withindependent assessment and validation oftargets. The SBTi is the lead partner of theBusiness Ambition for 1.5°C campaign—anurgent call to action from a global coalition of
UN agencies, business and industry leaders,mobilizing companies to set net-zero science-basedtargets in line with a 1.5°C future. (see p. 27)

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Glossary references

Read more online

NGFS, 2021
Network for Greening the Financial
System. Climate Scenarios for central
banks and supervisors, 2021.
Read more online

Read more online

Race to Zero, 2021.
“UNFCCC Race to Zero Lexicon.”Read more online

SBT, 2020
Foundations for Science-based Net-zeroTarget Setting in the Corporate Sector(Version 19; September 2020).

Achieving our climate goals

IPCC, 2018:
Annex I: Glossary Matthews, J.B.R. (ed.).
In: Global Warming of 1.5°C. An IPCC Special
Report on the impacts of global warming of
1.5°C above pre-industrial levels and related
global greenhouse gas emission pathways, in thecontext of strengthening the global responseto the threat of climate change, sustainable
development, and efforts to eradicate poverty.

Paris Agreement, 2015
“Paris Agreement.” Report of the Conferenceof the Parties to the United Nations Framework
Convention on Climate Change (21st Session,
2015: Paris). Retrieved December. Vol. 4. 2015.

Establishing our climate goals

Read more online

Our ambition and values

IPCC, 2014:
Annex II: Glossary Mach, K.J., S. Planton and C.
von Stechow (eds.). In: Cli¬mate Change 2014:
Synthesis Report. Contribution of Working Groups
I, II and III to the Fifth Assessment Report of theIntergovernmental Panel on Climate Change Core
Writing Team, R.K. Pachauri and L.A. Meyer(eds.). IPCC, Geneva, Switzerland, pp. 117-130.

Read more online

TCFD, 2017
Recommendations of the Task Force on
Climate related Financial Disclosures,
June 2017 Final Report.
Read more online

VCMI, 2021
Voluntary Carbon Market Initiative,
Accelerating credible net-zero climate action
Aligning Voluntary Carbon Markets withthe 1.5˚C Paris Agreement Ambition.
Read more online

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Philip Morris International Inc.
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New York, NY 10017-5579
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www.pmi.com

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