SUSTAINABILITYREPORT2018

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

About PMI1
Philip Morris International (PMI) is a leading international
tobacco company engaged in the manufacture and saleof cigarettes, smoke-free products and associatedelectronic devices and accessories, and other nicotinecontaining products in markets outside the U.S. PMI
became a free-standing publicly traded company (NYSE:
PM) in March 2008, following a spin-off from Altria
Group, the parent company of Philip Morris USA.
PMI is building a future on smoke-free products
that, while not risk-free, are a much better choicethan continuing to smoke. Through multidisciplinary
capabilities in product development, state-of-the-art
facilities, and scientific substantiation, PMI aims toensure that its smoke-free products meet adult smoker
preferences and rigorous regulatory requirements.
Our smoke-free product portfolio, IQOS, consists ofheated tobacco and nicotine-containing vapor products.
We estimate that some 6.6 million adult smokers aroundthe world have already stopped smoking and switched to
IQOS, which is currently available for sale in 44 markets.
Our ambition is to completely replace cigarettes withsmoke-free products, to the benefit of consumers,society, the company, and our shareholders.

Sustainability at a glance
For us, sustainability is about creating long-term value
while minimizing the negative externalities associatedwith our products, operations, and value chain.
PMI’s Board of Directors understands our special
responsibility as a tobacco company and expects
us to continuously improve the sustainability of ourbusiness and value chain and to contribute to theglobal sustainability agenda.
This report sets out our sustainability material
topics, our approach to managing them, and how
we are progressing.
We provide detailed updates on our commitments,
achievements and challenges in the relevant sectionsof this report, along with many case studies. Our Chief
Executive Officer and Chief Sustainability Officer also
review the year and invite you to start a conversation
with us.

“PMI’s transformation brings opportunities for wider
societal value for consumers, shareholders and society.
Sustainability stands at its core and helps address someof the challenges resulting from this transition, while
securing long-term success. I am pleased with the role
the Nominating and Corporate Governance Committeeof the Board can play in this field.”
Kalpana Morparia
Member of the PMI Board of Directors, and Chair of the Nominating
and Corporate Governance Committee

Overview

Transforming
our business

Contents

Driving operational
excellenceb

PILL AR 1

Transforming
our business

Managing oursocial impact

Reducing ourenvironmental footprint

Addressing product health impacts
Providing access to smoke-free products
Product addictivenessResponsible R&D

Reporting onsustainability

21
29
37
38

Overview
Letter from the Chief Executive Officer
Interview with the Chief Sustainability Officer
Our approach to sustainability
Working towards the UN Sustainable
Development Goals (SDGs)
Creating value at PMI in 2018

2
3
4
5
6

Our businessOur business environment
Our products and brands
Our global footprint
Sustainability, a core strategy for our business

9
15
16
19

PILL AR 2

Driving
operational
excellenceb

Reporting on sustainability
Engaging with our stakeholders
Focusing on what matters
Sustainability governance and management
Next steps
Our performance
Forward-looking and cautionary statements
Independent assurance report
Glossary and acronyms
About this report

111
113
116
117
118
128
129
130
132

PILL AR 3

Managing oursocial impactb

PILL AR 4

Reducing ourenvironmental
footprint

Recognitions:

SUPPLIERENGAGEMENTLEADER

2019

Responsible commercialization,and youth access and usage prevention
Maintaining a strong ethics andcompliance culture
Delivering on our commitment
to human rights
Sourcing raw materials and othersupplies responsibly
Maintaining data privacy
Tackling the illicit tobacco trade

40
43
47
52
59
60

Eliminating child labor and improving
labor conditions on tobacco farms

65

Supporting fair working conditions
Promoting health, safety, and well-being
Furthering diversity and inclusion
Engaging with our communities

74
79
83
86

Reducing our energy usage andcarbon emissions
Conserving biodiversity andcombating deforestation
Minimizing waste and littering
Managing water

88
93
99
106

Philip Morris International
Sustainability Report 20181

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Letter from the Chief Executive Officer
Dear Reader,Can a tobacco company be sustainable?

“To us, sustainability is about
replacing cigarettes with
better alternatives, addressing
sustainability challenges acrossour value chain, and seizing
opportunities to add value
to society.”

Smoking cigarettes causes serious disease,and the best way to avoid the harm of smoking
is never to start, or to quit. Governments aroundthe world heavily regulate and tax cigarettes todiscourage smoking – and rightly so. The reality
today is that roughly one in five adults aroundthe world smokes. The World HealthOrganization (WHO) projects that the total
number of smokers remains relatively stable
at about 1.1 billion people. In this context, can
PMI truly add value, not only to shareholders,
but also to society?
We know that quitting is the best option, but
we want to provide less harmful alternatives
to smoking for those who don’t quit. Many
years of research and various commercialization
attempts eventually led to the launch of IQOS
at the end of 2014. This product was very wellreceived by adult smokers, exceeding all our
expectations. The early success of IQOS gaveme the confidence to set out a new course forthe company in 2016: to replace cigarettes withless harmful products as fast as possible. Our
vision has been, step by step, turning into reality
ever since.
In 2018, smoke-free products represented
13.8% of our total net revenues. In three
countries, such revenues exceeded those of our
combustible products. I am proud to say that, injust four years, an estimated 6.6 million adultsmokers have stopped smoking and switched
to IQOS. We continue to shift company
resources towards achieving our ambition:
92% of our investment in research anddevelopment (R&D) and 60% of our global
commercial expenditure were dedicated tosmoke-free products in 2018. Seven of our
44 factories around the world currently
produce the consumables for these products.

Our sustainability ambition extends to the way
we operate, manage our social impact, andreduce our environmental footprint. Society’s
expectations of businesses are changing,
and we must play our part in addressing global
challenges. To make sure we focus our efforts
where we should, we conducted a sustainability
materiality analysis in 2018 which will serve as
the basis for the development of our 2025
sustainability strategy.
We are proud of the progress made in 2018,
thanks to the hard work and dedication of ouremployees and partners across the world. Our
pilot human rights impact assessment took placein Mexico, and our Agricultural Labor Practices
program was strengthened to better address
the recurring issues in our tobacco supply chain.
Also, worldwide representation of women in ourmanagement rose to 35.2%, on track to reachour goal of 40% by 2022. Our environmental
efforts were recognized in the Carbon
Disclosure Project (CDP) Climate A List for
the fifth consecutive year, and we achieved
our CO2e emissions reduction target for
scope 1 and 2 ahead of time. Our factory inBrazil was certified by the Alliance for Water
Stewardship (AWS), a first for any company
in Latin America. We have set the direction
for a more robust supplier due-diligenceapproach and further embedded sustainability
throughout functions and markets.
Big challenges remain. To make our vision
truly global and inclusive, we need a morediverse product portfolio and innovativeroutes to market. We also face a lack ofawareness of smoke-free products amongsmokers. Governments play a crucial role
here. They can influence the pace and scaleof switching away from cigarettes by adopting
risk-proportionate regulations and providing
smokers with accurate information.

We share stakeholder concerns about youth
initiation. The benefits that smoke-free products
bring to adult smokers should not come at thecost of an increase in youth use of nicotine
products. Our marketing code is strong andenforced globally. Two recent independentstudies in Japan and Switzerland show that theuse of heated tobacco products among middleschool and high-school students is extremely
low. But I recognize that skepticism remains.
We are carefully reviewing and where necessary
improving the steps PMI takes across all of
its business activities to ensure youth are
not targeted or encouraged to use any ofour products.
Let’s come back to my initial question: can atobacco company be sustainable? Absolutely,
by taking every step possible to completely
replace cigarettes with better alternatives,addressing its sustainability challenges acrossits value chain, and seizing opportunities to add
value to society. This is what PMI is committed
to doing, and our Sustainability Report 2018 isa means for you to assess our progress.
I cordially invite you to comment, challenge, andguide us as we transform our company towards
a more sustainable smoke-free future.

André Calantzopoulos
Chief Executive Officer2Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Interview with the Chief Sustainability Officer
Huub Savelkouls, you are the first Chief
Sustainability Officer (CSO) at PMI.
What does it mean for the company?

“Transformation cannot succeed
without sustainability, andsustainability would not be
achieved without transformation.”b

As a company, we have been working for many
years to make our business more sustainable,
focused on very specific challenges that we facein parts of our business. Over the last years, thenumber of sustainability initiatives became morewidespread across different functions.bTo takea truly holistic and proactive perspective on
sustainability, across all aspects of our business,
thebcompany decided the moment had come toinstitute the CSO position. It is a sign of PMI’scommitment to take our company’ssustainability to the next level.
This comes at the right time, as the company
progresses on its transformation and opens
up further to the outside world. An external
focus enables us to learn from others
as well as to share our experience with them,ultimately helping us all improve oursustainability efforts.
It is also a strong message to employees andpeople interested in joining our company about
the seriousness of our sustainability endeavor.

Your company’s focus is ontransforming its business. How do you
see the connection to sustainability?
It is much more than just a connection: bothlay at the foundation of our ambition towards
a smoke-free future. Transformation cannot
succeed without sustainability, and sustainability
would not be achieved without transformation.

The shift the company has taken by replacing
cigarettes with less harmful alternatives isat the core of addressing our main sustainability
impact. This was highlighted again in thesustainability materiality analysis we carriedout last year.
We need to be coherent, which means
excelling in all four pillars of our sustainability
strategy. This is even more important as thetransformation brings about its own challenges
from a social and environmental perspective.

How do external stakeholders react
when you introduce yourself andexplain your role?
As a tobacco company, some stakeholders mayquestion our motives. Part of my job is to makeour work and ambition known to the many
stakeholders who actually don’t know muchabout PMI. Very often, I am confronted withnegative generalizations. People believe that
all tobacco companies are the same. But, ofcourse, this is not the case, just as companies
in other sectors differ from each other.
In my experience, we can overcome this lackof awareness and trust through dialogue anddisclosure: we need to diligently explain andshow what we do. Our business transformation
metrics on page 118 are one example of relevant
disclosure; they allow people to see how we areshifting our company’s resources to achieve asmoke-free future.
And last but not least: we need to listen andrespond to feedback. No company is perfect,
and PMI certainly can improve. Dialogue
enables us to learn and change the way
we operate, where needed.

What are your main priorities
going forward?
As you will see in this report, we set targets ina number of areas, but we would like to develop
a more comprehensive set of 2025 objectives.
That will be one of our priorities for 2019.
We can be proud of a number of long-standing
ambitious programs, such as our sustainableagriculture work, or our programs to address
climate change. A second priority is to replicate
such successes in other sustainability areas
across the company, particularly in those thatare new to us, such as the recycling of IQOS
devices electronics.
I also want to make sure that we have thesustainability fundamentals in place acrossthe company, for instance by systematizing
our non-financial data management and making
progress on impact valuation to explain our workin the language of the financial community.
In brief, I want to bring sustainability leadershipto PMI.

3

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our approach to sustainability
Genuine sustainability for a tobacco company starts with addressing thenegative health impacts of its products. This means, first and foremost,developing and commercializing less harmful alternatives to cigarettes
while managing our social and environmental impacts across ouroperations and value chain.

We know it is the right thing to do. We arecommitted to setting ambitious goals, working
hard to reach them, and communicatingtransparently on our progress.
To ensure that our sustainability work aligns
with societal expectations and focuses where
we can have the greatest impact, we conducted
a new sustainability materiality analysis in 2018(see page 113) to set priorities across the fourpillars of our strategy. As we write, we arecrafting our new 2025 sustainability strategy
based on the results of that analysis.
We are prioritizing the tier 1 topics of ourstrategy (see chart on the left), for which
we will set ambitious objectives, and will
publicly report our progress annually:

TIER 3

TIER 2TIER 1

Smoke-free future

Transforming
our businessDriving
operational
excellenceManaging
our social
impactReducing ourenvironmental
footprint• Product healthimpacts• Access to smoke-free
products• Responsiblecommercialization• Child labor• Emissions and energy• Biodiversity anddeforestation• Waste and littering• Product addictiveness• Responsible R&D• Other human rights• Economic performance• Raw materials andother supplies• Data privacy• Fair working conditions• Health, safety,
and well-being• Diversity and inclusion• Water• Fiscal practices• Illicit tobacco trade• Policy influence• Bribery, corruption,
and anti-competition• Community engagement• Talent attraction
and retention• Developing less harmful alternatives tocigarettes and providing global and inclusive
access to them is imperative for our
consumers and society at large, and isfundamental to our long-term success;• Considering the harmful nature andaddictiveness of our products, we mustensure that they are commercialized
responsibly, aiming to prevent youth fromaccessing and using them;• We do not condone child labor in our supply
chain, and we continue to focus considerable
resources to prevent and address this issue;and• Climate change poses a threat to our planetand could have consequences on our work.
We address it through our efforts onemissions reduction. Other top
environmental priorities are waste andlittering management, and preservationof biodiversity, land, and forest.
We continue to manage and measureprogress on our tier 2 and tier 3 topics,
but we do not report on them ascomprehensively as on tier 1 topics.

4Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Working towards the UN Sustainable Development Goals (SDGs)
Our business strategy aims to contribute to making the SDGs a reality.
Our SDG prioritization is the result of a four-step process we undertook
as part of our sustainability materiality analysis in 2018, which took thefollowing approach:
1 We mapped our sustainability work to the 17 SDGs and 169 targets;
2 We identified the SDGs where we believe we can have the greatest
positive impact;
3 These SDGs were aligned to our sustainability strategy; and4 The SDG wheel was developed based on the tiered structure of ourstrategy. Considering the health impact of our products, SDG 3 was
identified as the goal we can contribute most to, whereas human rights
is an encompassing concept relevant to all SDGs.

Taking decisive actions where we can have the greatest impact:
Primary SDGs
PRIMARY
SDGs

SECONDARY
SDGs

Human Rights

SDG 3 Cigarette smoking causes serious disease. By replacing
cigarettes with less harmful alternatives we can significantly
reduce the negative impact of our products on individuals
and society.
SDG 8 We ensure good working conditions for all our
employees and expect our suppliers to do the same for the
benefit of over one million workers throughout our value chain.
SDG 12 We improve the life-cycle impacts of our products –from reducing the environmental impacts of tobacco growing,
to efficient low-carbon manufacturing, litter prevention andrecycling programs.
SDG 13 Our energy-efficiency programs in our operations andour alternative curing fuels program in our tobacco leaf supply
chain contribute to mitigating the risk of climate change.
SDG 14 Our Environmental Commitment (our Policy) governs
our management approach to waste and water to ensure that
all effluents released are within, or better than, levels requiredby regulations in the countries where we operate.
SDG 15 We are committed to protecting biodiversity, especiallyforested areas affected by our operations, particularly in the
supply chain of tobacco leaf and paper-based packaging.

LEARN MOREON OURAPPROACH TOSUSTAINABILIT Y

PMI’s sustainability
materiality analysis
on page 113
How we engage
with stakeholders
on page 111
PMI’s sustainability
governance andmanagementon page 116
Our Global Reporting
Initiative cross-reference
index on www.pmi.com

5Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Creating value at PMI in 2018
OUR MISSIONINPUTS

Unsmoke the world
WHAT WE DO

Replace cigarettes withless harmful tobaccoand nicotine products
for the benefit of adults
who would otherwise
continue to smoke

HUMAN

INTELLECTUAL

MANUFACTURING

77,400

$383m

44

42.1%

92%

26

>100

2

7

R&D centers

Of PMI-owned manufacturing facilities
producing smoke-free products>400$1.4bnNATURALFINANCIALSOCIAL>330,000 tons

$10bn

>36,000

9.1m

A

5.9m

Employees

Women employees

Employee nationalities>350,000

Farmers contracted by PMI and
our suppliers in 27 countries

Packed tobacco sourced

Gigajoules energy consumed
in PMI facilities

4.4m

Water use (in m³)

3

Mostbsignificantbdirect materials
purchased: printed paperbboardb
usedbin packaging, acetate tow
used in filter making and finebpaper

Above: Tobacco seedlings in Brazil

All data as of December 31, 2018

Total R&D expenditure

Of our total R&D expenditure related
to smoke-free products

Scientists, engineers, and technicians

Annual spend on supply chain
beyond tobaccoLong-term credit rating by Standard& Poors, Fitch, and A2 by Moody’s$31.8bn
Total debt

1stLargest publicly traded tobaccocompany by market capitalization

Owned manufacturing facilities

Third-party manufacturers

Capital expenditure

Suppliers

Retailers selling PMI products>230

Partners implementing ourcharitable contributions programs

31

PMI IMPACT projects selected
for funding in 20186

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

TR ANSFORMATION ACROSS THE VALUE CHAIN

Sourcing

Manufacturing

Commercialization

Our research and development
work is the catalyst for ourtransformation. The harm
reduction potential of smokefree products must be
scientifically substantiated.

The sourcing of raw materials
and other supplies evolves
and is increasingly diversified
as we transform our company.
We engage with our new
partners in electronics toimplement our Responsible
Sourcing Principles.

Manufacturing of smoke-free
products requires different
processes and equipment.
Such a transition also impacts
our environmental footprint,
which we seek to reduce.

A different regulatory
framework is key to makesmoke-free products known
and available to adultconsumers.

Our portfolio now includes
electronic devices, which need
to be designed to fit into thecircular economy.

We are working with tobacco
farmers to transition to othercrops as we expect a gradualdecrease in our tobacco leaf
requirements over time.

As we convert our traditional
cigarette factories to produce
smoke-free products, we arealso equipping our employeeswith new skills.

A new commercialization
approach is required towards
more consumer centricity.
Additional specialists to engage
with adult smokers, retail spaces
including flagship stores,
customer care infrastructureand digital platforms, andrecycling options are
essential to our success.

150m

People consuming
our products

4,600

Patents granted
worldwide related tosmoke-free products

90%

Tobacco purchased at
no risk of deforestationof old growth forest

36%

Reduction in scope 1+2CO2e emissions since 2010

86.9%

Employees trained on
PMI Guidebook for Success(our Code of Conduct)

119

Illegal tobacco
manufacturing
factories closed

Read more on page 89

Read more on page 34

IQOS users, out of which
6.6m users who havestopped smoking andswitched to IQOS

44

Markets in which IQOS
is available for sale

89%

Prompt actions resolved
relating to child labor
incidences in our tobacco
supply chain

84%

Waste recycled in
our factories

0.13

Lost Time Incident Rateper 200,000 hours worked>300,000

People reached throughour charitable contributions$29.6bn$2.4bn$7.9bnCorporate income taxes

Read more on page 52

9.6m$74.2bn
Excise taxes on
PMI products

Read more on page 38

Philip Morris International
Sustainability Report 2018

OUTPUTS

R&D

Our product portfolio needs
to meet adult consumer
expectations and allow
more inclusive access.

Reporting onsustainability

Net revenues, outof which 13.8% fromsmoke-free products

Net earnings attributable
to PMI

7

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Our businessIn our transformative journey towards a smoke-free future,
we rely on our expertise in building great brands, in innovating
and inventing, and in surpassing adult consumer expectations.

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

IN THIS SECTION

Our business environment

9• Overview of the global tobacco value chain

9• Consumers

10• Market dynamics

11• Regulation and taxation of tobacco and nicotine products

12• Illicit trade

12• Competition

13• Megatrends

14

Our products and brands

15

Our global footprint

16

Sustainability, a core strategy for our business

19

8

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our business environment
Overview of the global tobacco value chain2$400bnTaxation
Excise taxes and value-added tax(VAT) on tobacco products generate
an estimated USD 400 billion forgovernments annually

15 million
Tobacco growing
15 million growers cultivate
5.8 million tons of green
tobacco on 3.2 million
hectares1,000sProcessing
Thousands of people
work in the curing andprocessing of tobacco
leaves>1 million
Manufacturing
Over a million people manufacture
more than five trillion cigarettes
and heated tobacco units, and40 billion cigars and cigarillos
per year10%
Illicit trade
Accounts for as much as
10% of global cigarette
consumption

14 million
RetailTobacco and nicotine
products are sold in 14 million
points of sale

1.1 billion
Consumers
1.1 billion people smoke tobacco products.
In addition, approximately 38 million people use
smoke-free products (excluding China and the U.S.),
and over 350 million people use smokeless tobacco
products such as chewing tobacco

9Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our business environment continued

Consumers
Today an estimated 1.1 billion men and womenaround the world smoke cigarettes or othercombustible tobacco products. The latest WHO
projections indicate a fall in smoking prevalence(age 15+) from 22.1% in 2010 to an estimated
17.3% by 2025. At the same time, the global
population is growing by around 70 million
people per year. The combined effect of a
growing population and a declining smoking
prevalence results in a virtually unchanged
total number of smokers by 2025.

Projected smoking prevalence
Importantly, WHO member states want
faster change by encouraging cessation anddiscouraging initiation – targeting a reductionin prevalence of tobacco use of 30% by 2025
(2010 baseline). Even if the WHO prevalencetarget is achieved, there will still be around 980
million smokers by 2025. It is these hundreds ofmillions of men and women who stand to gain
the most from less harmful alternatives.

22.1%

17.3%

2010

2025

Projected number of smokers
6135m

5080m

1123m

1095m

2010

2025

These projections are based on WHO/UN data and refer to age 15+
Above: An IQOS store in Athens, Greece

Globalpopulation
Projected
numberof smokers

10Overview

Transforming
our businessDriving operational
excellenceb

Market dynamics
The tobacco and nicotine market is characterized by a rangeof products, including combustible tobacco products (cigarettes,
fine-cut tobacco, pipe tobacco, cigars and cigarillos), smokelesstobacco products (snus, chewing tobacco, moist snuff), andsmoke-free products (electronic cigarettes and heated
tobacco products).
While the number of consumers of tobacco and nicotine products
around the world remains largely unchanged, the total tobacco
industry volume trend in the international market, which excludes
China and the U.S., has been declining by an average 2.3% peryear over the last five years. Cigarette retail price increases, often
as a result of tax increases, and restrictions on where people areallowed to smoke, are reducing the average daily consumptionof cigarettes among smokers. In addition, illicit trade also affects
the legitimate industry’s sales volumes.
The total value of the global tobacco market continues to grow asvolume declines are more than offset by tax and price increases.
PMI’s average combustible tobacco pricing variance over the lastten years has been approximately 6.5%.
The emergence of smoke-free products is also contributing to
the decline in combustible products. In 2018, the international
retail value for heated tobacco and nicotine-containing e-vapor
products was estimated at around USD 18 billion, reflecting yearon-year growth of around 70%, driven by higher volume. Heated
tobacco products accounted for more than two-thirds of this total
value, and were the main driver of the growth.
Over recent years, some governments have started legalizing
marijuana for medical and/or recreational purposes. Significant
growth in this market is expected, and some tobacco companies
have started looking into this space. PMI does not sell marijuana
products and has no plans to enter this business.

Above: An IQOS 3 device

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 201811

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our business environment continued

Regulation and taxation of tobacco and nicotine products
The risks of smoking have led regulators
to impose rigorous restrictions and highexcise taxes on cigarettes. Such restrictions
are comprehensive, covering packaging andhealth warnings, use of ingredients, advertising,marketing, promotions and sponsorships, andsmoking in public spaces.
Much of the regulation that shapes the businessenvironment in which the tobacco industry
operates is driven by WHO’s Framework
Convention on Tobacco Control (FCTC),

which entered into force in 2005. To date,
180 countries and the European Union (EU)are parties to the FCTC, which requires a suiteof measures.
The regulation of smoke-free products is in
its early stage, as the category is still emerging.
There is no global consensus among regulators
on how to regulate or tax smoke-free products.
Some aim to encourage them as productspresenting less risk for smokers and an
opportunity for public health, while others
severely restrict or ban such products fromthe marketplace.

Our perspective
We view government regulationof tobacco and nicotine products
as essential and support
effective measures to reducesmoking prevalence. The mostharmful tobacco products,
such as cigarettes and othercombustible products, should
be subject to the most restrictive
measures. Regulation should
also ensure that adults who
would otherwise continue tosmoke have access to alternative
products, and to truthful andnon-misleading information.
See more on page 34

Illicit trade
The illicit tobacco trade provides a cheap
and unregulated supply of tobacco products.
It undermines efforts to reduce smoking
prevalence, damages legitimate businesses,
stimulates organized crime, increases corruption,and reduces government tax revenue. It isestimated that illicit trade accounts for as muchas 10% of global cigarette consumption and thatgovernments are losing USD 40 billion in tax
revenues each year as a result.
Many countries have introduced or are
considering actions to prevent illicit trade.
In 2012, the FCTC adopted the Protocol to
Eliminate Illicit Trade in Tobacco Products(the “Protocol”), which includes supply chain
control measures, enforcement in free tradezones, controls on duty free and internet sales,
and tracking and tracing technologies. With54 signatories and 48 party ratifications,the Protocol came into force in September
2018 and its measures will now start to be
implemented via national legislation. In October
2018, in their first meeting, the parties to theProtocol decided to produce a comprehensive
report on good practices for tracking andtracing systems, and to prepare a conceptual
framework for global information-sharing tocombat illicit tobacco trade.

Our perspective
The illicit tobacco trade is large anddemands integrated action. From our side,
we focus on controlling our supply chainsto prevent the diversion of our products.
For 15 years, we have been operating
a global tracking and tracing systemfor our products, covering all markets.
We also work with governments
and other partners in the public andprivate sectors to combat illicit trade.
See more on page 60
Above: A production technician in Bahia, Brazil

12

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Competition
The tobacco sector includes two companies thatare focused on their home country – the China
National Tobacco Company (CNTC) in China
and Altria Group, Inc. in the U.S. – and four large
international tobacco manufacturers: British
American Tobacco (BAT), Japan Tobacco (JT),
Imperial Brands (IMB) and PMI. Together, thesesix companies account for over 85% of global
cigarette sales. Regional and local companies,
including state-owned enterprises, count for
the remaining 15%.
As in other consumer goods sectors,
manufacturers compete primarily on the basis ofproduct quality, brand recognition, brand loyalty,
taste, R&D, innovation, packaging, customer
service, marketing, advertising, and retail price.
Increasingly, competition also focuses on
the development and commercialization ofsmoke-free tobacco and nicotine products.
Tobacco manufacturers are shifting their focus
to different degrees towards the developmentof such products, in particular e-cigarettes
and heated tobacco products.

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our global market share 2018, including cigarettes and heated tobacco units
The e-cigarette was invented in 2003 in
China and has become increasingly popularover the last decade, in particular in the U.S. andEurope. Initially, there were numerous start-up
companies active in the category, followed byestablished tobacco companies. The first heated
tobacco products were launched by various
manufacturers, including PMI, in the late 1990s,
without commercial success. The launch of
IQOS at the end of 2014 marked the first real
breakthrough for a heated tobacco product,with 1.5 million smokers having switched to
IQOS by the end of 2016. Soon, othermanufacturers started to launch their own
heated tobacco products, such as BAT’s Glo. In
addition, hybrid products that combine aspectsof e-cigarettes and heated tobacco products,
were launched, such as Ploom TECH by JT.

Other

Al
tri
aG
ro
up
, In
c
IMB

CNTC

JT

BAT

Our perspective
Starting in 2016, we focused on transforming our business towards smoke-free products.
At the end of 2018, we held a 57% retail value share in the smoke-free product category outsideof China and the U.S., and around 6.6 million people have stopped smoking and switched to IQOS.
In that geography, our volume share for cigarettes and heated tobacco products combined
climbed from 27.9% in 2017 to 28.4% in 2018. A 0.8% market share growth for heated
tobacco products more than compensated for a 0.3% decline in cigarette share.

PMI

14.7%

13

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our business environment continued

Megatrends
Our long-term success requires us tomonitor and take into account majorsocial, environmental, economic, political,
or technological changes. We see sevenmegatrends particularly relevant to ourwork within the wider context ofsustainable development, representing
an opportunity for PMI to lead change.

TECHNOLOGICALPROGRESSCHANGING CONSUMERE XPEC TATIONSCLIMATE CHANGE

New technologies are rapidly emerging,including in robotics, artificial intelligence,and virtual reality. Coupled with rapid
digitalization, these advances allow for
productivity enhancements and new
ways of engaging with consumers. It
also comes with risks related to new
employment patterns, data privacy,
brand safety, and also human rights.

Consumers’ preferences and behaviors
are evolving, requiring companies
to constantly adapt their products
and commercialization mechanisms.
Consumers are changing their purchasing
habits, often combining both offline andonline channels. In today’s connectedworld, they can provide immediate
feedback on products and experiences,enabling direct interaction with
manufacturers. Well-informed consumers
are also increasingly concerned about theirhealth, and are changing their consumption
patterns accordingly.

Climate change is one of the most pressing
issues of our time. As its impacts are
becoming more and more visible,
participating nations to the Paris
Agreement within the United Nations
Framework Convention on Climate
Change committed to keep global
temperature increases this century well
below 2° Celsius above pre-industrial
levels. Governments are consideringvarious regulatory and market-based
mechanisms to lower carbon emissions.
Many of those are directed at businesses,
which must enhance their efforts in
reducing greenhouse gas emissions
and improving energy efficiency.

SUSTAINABILIT Y

DEMOGR APHIC CHANGEEROSION OF TRUSTINEQUALIT Y

Consumers, governments and otherstakeholders expect businesses to operate
responsibly and transparently. Regulatory
and reporting requirements are increasing,requiring higher due diligence and moreactions from businesses along theirvalue chain.

Demographic trajectories and pace ofchange vary greatly among countries andregions. Along with migration flows, thosechanges carry important impacts, notablyon the workforce. Integrating the newgenerations of employees into theworkplace brings challenges andopportunities, especially forcompanies seeking to transform.

In a context marked by a loss offaith in traditional institutions andoverwhelming amounts of sometimes
unreliable information, it is becoming
increasingly difficult for people to makesound decisions. To secure the trust of
their consumers, corporations need totransparently disclose relevant informationand communicate responsibly through theright channels.

Income inequality is on the rise nearly
everywhere around the globe. Growth has
disproportionally benefited higher income
groups while lower income households
have been left behind. This threatens social
cohesion and economic growth. In many
countries, smoking is more common among
lower income adults, exacerbating healthinequalities. Smoke-free products present
an opportunity to reduce such inequalities,
as we further develop our productportfolio and new business models
to address pricing barriers.

14

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our products and brands
We have built our company on a portfolioof leading cigarette brands that are thechoice of 150 million consumers worldwide.
Our cigarettes are sold in more than 180
markets and, in many of these markets, theyhold the number one or number two market
share position.
We have a wide range of premium, mid-priceand low-price cigarette brands, including
Marlboro, L&M, Chesterfield, Philip Morris,
Parliament and Bond Street, that are amongthe 15 most popular cigarette brands outsideof China and the U.S. Marlboro is the world’s
best-selling international cigarette, which in2018 accounted for approximately 36% of
our total cigarette shipment volume and held a
9.7% share of the international cigarette market.
Our smoke-free product development is basedon the elimination of combustion, which we
believe is the most promising path to providing
a better consumer choice for those who would
otherwise continue to smoke. We recognize thatno single smoke-free product will appeal to all
adult smokers. This is why we have adopted
a portfolio approach, including both heated
tobacco products and nicotine-containing
vapor products that are intended to appeal to avariety of distinct adult consumer preferences.
Our current smoke-free product portfolio
contains four platforms – all under the umbrella
brand name IQOS – in various stages ofdevelopment and commercialization.

Our smoke-free product platforms
The science

Brand

IQOS HeatControl
Technology
HE ATED TOBACCO PRODUC TSNICOTINE- CONTAINING E-VAPOR PRODUC TS

Platform 1

Platform 2

Platform 3

Platform 4

Our leading smoke-free platform
is a precisely controlled heating
device into which a speciallydesigned tobacco unit is inserted
and heated to generate aflavorful nicotine-containing
aerosol. We market our heated
tobacco units under brandnames such as HEETS and
Marlboro HeatSticks. IQOS was
first introduced in Nagoya, Japanand Milan, Italy in 2014, and, asof December 31, 2018, IQOS
is available for sale in 44 markets,
including Duty Free. In 2018,
our IQOS heated tobacco unit
consumables would havequalified as a top-15 international
tobacco brand by market share,
an unprecedented achievement
for a new tobacco brand.

Our second heated tobacco
platform, TEEPS, uses a pressedcarbon heat source which, whenignited, generates a nicotinecontaining aerosol by heating
tobacco. The patented designof TEEPS prevents the tobacco
from burning. The consumer
puffs on TEEPS to inhale aflavorful nicotine-containing
vapor until the end of theexperience. We completed asmall-scale city test of TEEPS,
which we had initiated in
December 2017 in Santo
Domingo, the Dominican
Republic, and are working
on improving this product andincorporating our learning into
our future plans.

We are also developing products
inspired by technology that we
acquired in 2011 from Professor
Jed Rose of Duke University –one of the world’s leading
experts on nicotine and smoking– and his co-inventors. Ourscientists continue to develop
this technology to replicate thefeel and ritual of smoking without
tobacco and without burning.
One of the products underdevelopment is called STEEM.
Unlike an e-cigarette, thisproduct generates an aerosolof nicotine salt formed by thechemical reaction of nicotinewith a weak organic acid.

Our fourth platform consistsof e-vapor products that use
nicotine extracted from tobacco
leaves. These battery-powered
devices – commonly known ase-cigarettes – vaporize a liquid
solution containing nicotine andflavors. In 2018, we successfully
introduced our first IQOS MESH
product in the U.K. on a limited
scale. We are making further
investments to support oure-vapor manufacturing capacity,and plan to meaningfully enter
the e-vapor category later in2019 and expand in 2020 as
we build capacity.

15

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our global footprint 3

s
nd
sla
yI

Cr
oa
tia

Cy
pr
Cz
us
ech
Re
pu
blic
De
nm
ark

Markets where IQOS is available

44

nia
Arme

GreeceIsraelKazakhstan

Hungary
EUROPEAN
UNION

Italy

EASTERNEUROPE

Moldova

LatviaRussiaia
LithuanSerbia

aco
Mon

Ukra
ine

Markets where
IQOS is available

27

Countries where farmers
contracted by PMI and our
suppliers are located>350,000Germ
any

Farms from which PMI and our suppliers source tobacco

nds
herla
Net
and
Pol

gal
rtu
Po

nia
ma
Ro

c
bli
pu
e
kR
va
Slo

Sp
ain
Sw
itz
e
rla
Un
nd
ite
dK
ing
do
m

Markets where we sell our products

Fran
ce

Sl
ov
en
ia

>180

ria
lga
Bu

r
na
Ca

Tobacco sourcing
Manufacturing facilities:
Combustible products only
Smoke-free products partially or exclusively

rra
do
An

Key

Operations Center
Lausanne, Switzerland

16

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Ch
in
a

Headquarters
New York, USA

n
pa
Ja

a
ysi
ala
M

nd
ala
Ze
w
Ne
a
ore
th K
Sou

Arg
ent
ina
Bra
zil

Cana
da

India

Colombia
Curacaosia
IndoneEAST ASIA &AUSTR ALIA

L ATINAMERICA &CANADA

Pakistan
Philippines

Dominican Republic

Ecuadorala
Guatem
o
Mexic
la
ezue
Ven

Thailand

MIDDLE EAST
& AFRICA

Jordan

SOUTH &
SOUTH EAST
ASIA

Leb
ano
n

Ma
law
i

Mo
zam
biq
ue
Re
un
ion

tes
Sta
d
e
it
Un

y
rke
e
Tu
Fre
uty
ID
PM

ca
fri
hA
ut
So
ia
an
nz
Ta

Se
ne
ga
l

44

PMI-owned manufacturing
facilities and 26 third-party
manufacturing facilities

7

PMI-owned manufacturing
facilities partially or fully dedicatedto smoke-free products49%
Net revenues fromdeveloped markets4

51%
Net revenues fromemerging markets 417Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our global footprint continued

Our workforce

Our workforce by gender

77,400>100

Employees worldwide

Employee nationalities

9.2%
24.5%

Men

Women

57.9%

42.1%

EasternEuropeOur workforce by age group

European
Union

6.0%
East Asia& Australia

13.0%

9.8%

18.6%
below 30 years old

above 50 years old

Latin America& Canada, and U.S.

4.8%

42.5%
South &Southeast Asia

Middle East
& Africa

71.6%
30-50 years old

18Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Sustainability, a core strategy for our businessAt the heart of our business strategy is ourambition to lead the transformation of ourcompany, and eventually the tobacco industry,
towards the replacement of cigarettes withhigh-quality scientifically substantiated smokefree products for adult consumers.
In 1847, Mr. Philip Morris opened a shop on
London’s Bond Street. Ever since, we havebuilt our business success on products thatmeet the preferences of adult smokers. Today,
we are building our future on smoke-free
products that are a much better choice thancontinued smoking. In our transformative
journey, we will rely on our expertise in building
great brands, in innovating and inventing, andin surpassing adult consumer expectations.
Our sustainability strategy, which covers our
products, operations and value chain, is an
integral part of PMI’s vision of a smoke-free
future. It has four pillars:• Transforming our business;• Driving operational excellence;• Managing our social impact; and• Reducing our environmental footprint.
Read more on page 4

LEARN MORE ON
OUR BUSINESS:

Our ambition towards a smoke-free future is supported by seven core strategies:

Smoke-free

Develop, market, and sell smoke-free alternatives
to which adult smokers who would otherwise
continue to smoke will switch

Transition

Transition our resources from cigarettes
to smoke-free alternatives

Regulation

Propose regulatory policies that encourage the people who
smoke to replace cigarettes with smoke-free alternatives

TalentBe the employer of choice for our global workforce
and work tirelessly to attract and retain the best talentTransparency

Share our progress, and invite dialogue and independent
verification of our science

GrowthProvide superior returns for our shareholders

Sustainability

Drive world-class sustainability programs acrossour entire value chain

Our Tobacco and Nicotine Database2018 Philip Morris International Inc.
Annual Report
PMI’s Investor Information book2018 PMI Form 10-K
on www.pmi.com

Philip Morris International
Sustainability Report 201819

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

PILLAR 1

Transforming
our business92%
Of our total R&D expenditure
related to smoke-free products
in 2018

We aim to minimize the negative impact of cigaretteuse on public health, by replacing cigarettes with lessharmful alternatives.
To this end, we have developed a portfolio of smoke-free
products under the IQOS brand name and are assessing
their impact on the individual smoker and the overall
effect on public health with rigorous scientific methods.
Our research and development work aligns with international
standards, and we are committed to transparently sharing
our results as we progress.
Seeking to provide men and women who will not quit withaccess to smoke-free products, we are re-allocating company
resources from our cigarette business to the manufacturing
and sales of smoke-free products.
Our smoke-free products are not risk-free. They contain
nicotine and are addictive.

IN THIS SECTION

Addressing product health impacts

21

Providing access to smoke-free products

29

Case study
Early adopter market – how is it going in Japan?

32

Product addictiveness37

Responsible R&D

38

Image: Employees in PMI’s manufacturing facility in Crespellano, Italy

6.6m
Adult men and women
have stopped smoking andswitched to IQOS
as of December 31, 201820

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Addressing product health impacts
Foreword
For around 20 years, PMI has been working
on better alternatives to cigarettes. Experts
and many regulatory bodies, such as the
U.S. FDA, agree that the primary causeof smoking-related diseases is not nicotine,
but the inhalation of harmful and potentiallyharmful constituents (HPHCs) formed asa result of burning tobacco.
Cigarette smoking is a well-established ritualand switching to an alternative method of
nicotine consumption takes time. While
reduced risk product development basedon technological innovation and scientificsubstantiation is key, consumer acceptancefor such new products is also necessary toachieve a smoke-free future. PMI’s portfolioof alternative products shows how we canleave combustion behind, globally.

Above: Scientists in PMI’s R&D center in Neuchâtel, Switzerland

21

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Addressing product health impacts continued

Progress in 2018

Step 1

Product design andaerosol chemistry

Assessment of a smoke-free product’s risk-reduction potential relies on the qualityof the initial product design and on strict manufacturing controls to ensure thatthe product delivers a consistent aerosol. We design our products to generate anaerosol without combustion of tobacco. We then test our products to ensure thatthe design leads to an overall and significant reduction in harmful and potentiallyharmful constituents (HPHCs) in the aerosol, in comparison with cigarette smoke.
In this initial phase of developing a product, we verify that the product’s design does
not pose any additional risks to those already known for cigarettes. Only then can
we begin to conduct further research.

Step 2

Toxicologicalassessment

Our next step is to verify the potential of a smoke-free product’s aerosol to reducerisk compared with cigarette smoke by measuring a reduction in toxicity as well asa reduction in risk using laboratory models. If risks are reduced significantly, we moveon to clinical studies. We employ standard toxicology as well as advanced systems
toxicology methods to assess whether the reduction in HPHCs leads to a reduced
impact of our product aerosol on the biological mechanisms underlying smokingrelated diseases.

Step 3Clinicalassessment

Once we have completed our laboratory research, we conduct clinical studies withadult smokers to understand whether switching to smoke-free products reduces their
exposure to harmful compounds. We also determine whether this leads to a favorable
change in clinical risk markers associated with smoking-related diseases. The effects
measured in smokers who switch to a smoke-free product are compared with thosein smokers who continue to smoke cigarettes. These results are then assessed againstsmoking cessation as reported in the scientific literature.

Step 4

Perception andbehavior assessment

We conduct extensive studies to understand a smoke-free product’s potential
to benefit public health, including understanding how different groups of people
perceive the risk profile of a given smoke-free product and the likelihood they
will adopt and use the product instead of cigarettes. The program also attempts
to assess the risk of unintended consequences (e.g. initiation or relapse). We canuse this information to make predictions of the likely effect of commercializing
a smoke-free product on population harm.

Step 5Long-term
assessment

We monitor and research the use of our smoke-free products once they are on themarket in order to assess the product’s contribution to harm reduction. This is doneby collecting a set of qualitative and quantitative data on the use of the smoke-free
product in real-world conditions.

Scientific assessment of our smoke-free products
Our scientific assessment across all our product platforms follows thesame five-stage approach. It is a step-by-step program that covers initialdevelopment, assessment, perception, and impacts over the long term.
Here is a summary of the scientific assessment program. For further
details, please visit PMI Science website.

Overview of our scientific assessment program

Step 5

Step 4

Step 3

Step 2

Step 1

22

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

The IQOS aerosol is not smoke
The term aerosol is commonly used in chemistry to describe a gaseous
suspension of fine solid particles and/or liquid droplets. Unlike burningcigarettes, the IQOS device heats a specially formulated tobacco blend
using an electronically controlled heater to temperatures well below thatnecessary to initiate combustion. This heating releases nicotine and flavors,
generating an aerosol that is not smoke. Experiments performed under
specific nitrogen and air conditions confirm the absence of combustionin the IQOS device. The absence of combustion and smoke has beenvalidated by experts in countries such as the U.S., U.K., Italy, Japan,
New Zealand, and Poland.5

Smoke and aerosol were collected on a Cambridge filter pad using
Health Canada Intense smoking regime; this showed the following:

50%
Water andglycerin form
50% ofaerosol mass

90%

Water andglycerin form 90%
of aerosol mass

Toxicants

Contains solid
particles

Toxicants
reduced by>90%
NO solid particles
Above: A laboratory analyst in PMI’s Greek affiliate, Papastratos manufacturing facility

Philip Morris International
Sustainability Report 201823

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Addressing product health impacts continued

We have numerous scientific studies on
Platform 1, our main smoke-free product.
They conclude that IQOS does not generatesmoke and that its tobacco vapor has on
average 95% lower levels of HPHCs thancigarette smoke.6 This does not necessarilyequal a 95% reduction in risk, which can
only be fully quantified based on long-term
epidemiological studies.
The clinical studies conducted to datealso conclude that smokers who completely
switched to IQOS significantly reduced their
exposure to 15 key toxicants, approachinglevels observed in the cessation groups.
The totality of the evidence to date showsthat, while not risk-free, switching to IQOS
presents less risk than continuing to smoke.
An overview of the progress across all
our platforms as of December 31, 2018is presented here.
After we receive the results of our scientificstudies mentioned here, in accordance withstandard scientific practices, we intend toshare the conclusions in scientific forums
and to submit them for inclusion in peerreviewed publications.

Heated tobacco products7

Products without tobacco

Platform 1

Platform 2

Platform 3

Platform 4Electrically HeatedTobacco System8

Carbon-Heated Tobacco
Product (CHTP)9

E-vapor product using
nicotine salt

E-vapor products(commercialized undervarious trademarks)

Assessment progress
We have conducted a series of clinicalstudies for this platform, the results ofwhich were included in our submission to
the U.S. Food and Drug Administration(FDA). The results of the first six-monthterm of the 6+6 month exposure response
study were received at the end of 2017,
and the related report was completed
and submitted to the FDA in the second
quarter of 2018. The study showedthat all eight of the co-primary clinicalrisk endpoints moved in the same
direction in the group that switched
to IQOS as observed for smoking
cessation, with statistically significant
changes in five of the eight endpoints
compared with ongoing smoking. The
results of the second six-month termof the 6+6 month exposure response
study were received for analysis in thesecond quarter of 2018; the related
report is under preparation. In addition,
as set out in our submission to the FDA
referenced above, we completed an
18-month combined chronic toxicity
and carcinogenicity study in mice,
which was ongoing at the time of our
FDA submission. We shared the resultswith the FDA in August 2018.

The results of our pharmacokinetic
study (that measured the nicotine
pharmacokinetic profile as well as
subjective effects) and of our five-day
reduced exposure study indicate that
this platform could be an acceptable
substitute for adult smokers whoseek an alternative to cigarettes.
The reduced exposure study results
showed a substantial reduction in
relevant biomarkers of exposure
to the measured HPHCs in those
who switched to Platform 2 comparedwith those who continued to smoke
cigarettes over a five-day period. The
sustainability of this reduction as well
as changes in clinical risk markers wereassessed in a three-month reduced
exposure study. The results of thisstudy were received at the end of
2017, and the related report was
finalized in the second quarter of 2018.

We have explored two routes for thisplatform, one with electronics andone without, and conducted nicotine
pharmacokinetic studies with bothversions. The results of thepharmacokinetic study related to
the version without electronics werereceived, and the related report was
finalized in the fourth quarter of 2018.
The results indicate this product’s
potential as an acceptable alternative
to continued cigarette smoking interms of product satisfaction. We
will also initiate a clinical productuse and adaptation study.

We conducted a nicotine
pharmacokinetic study in 2017. The
results of this study were received
in the second quarter of 2018 foranalysis, and the related report was
finalized in the fourth quarter of 2018.
The results of this study indicate that
IQOS MESH products are an effectivemeans of nicotine delivery while beinga satisfying alternative for e-cigarette
users. We will also initiate a clinicalreduced exposure study to measureselected biomarkers of exposure to
HPHCs and assess changes in clinicalrisk markers.

24

Overview

Transforming
our businessDriving operational
excellenceb

Peer reviews and independent
reviews of our science
We are confident in the quality of our research and wewelcome high-quality independent research on our smokefree products. We are committed to act on any reliable
information that can improve our methods or that challenges
our findings. A growing number of peer-reviewed
publications can be found on the PMI Science website.
Our scientific results are also being supported byindependent research. Several government agencies aretaking an interest in validating the available evidence on
IQOS or conducting research of their own. Overall, thesereports so far conclude that IQOS aerosol contains lower
levels of harmful and potentially harmful compounds thancigarette smoke, and some of the reports go on to say that
this reduction in toxicants is likely to lead to reduced riskof harm from IQOS compared with cigarettes.

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

United Kingdom

Netherlands

Germany

The U.K. Committee on Toxicity
conducted a review of available
evidence on two heated tobacco
products, one of which is
IQOS, and concluded that theseproducts “are likely to reducerisks for smokers.” Public Health
England relied on this review in
its subsequent report, concludingthat “the available evidence
suggests that heated-tobacco
products may be considerably
less harmful than tobacco
cigarettes and more harmful
than e-cigarettes.”

The Dutch National Institutefor Public Health and theEnvironment, a member ofthe WHO Tobacco Laboratory
Network, published a “Factsheet
on novel tobacco products thatare heated,” concluding that “theuse of HeatSticks with the IQOS
is harmful to health, but probably
less harmful than smoking tobacco
cigarettes,” based on its aerosol
chemistry measurements, whichare “of the same order of magnitude
as in the data of Philip Morris.”

The German Federal Institutefor Risk Assessment, a branchof the Federal Ministry for Foodand Agriculture and a memberof the WHO Tobacco Laboratory
Network, conducted a laboratory
study on IQOS. The study foundthat reductions in selected
toxicants measured by theInstitute “are likely to reduce
toxicant exposure.” The resultsof the aerosol chemistrymeasurements in this study
were overall in line with our own.

We provide here an overview of independent,
government agency studies until year-end 2018.

Korea

United States
The U.S. Food and Drug
Administration (FDA) published a
Briefing Document in preparation
for its Tobacco Product Scientific
Advisory Committee (TPSAC)
meeting on IQOS as part of its
review of PMI’s Modified Risk
Tobacco Product Application(MRTPA). The document, which
offered a balanced view of thetotality of evidence available on
IQOS, included a section explaining
the results of the FDA’s IQOS
aerosol chemistry measurements.

It mentioned that “Theindependent testing performedby FDA’s Southeast Tobacco
Laboratory confirmed the lower
levels of selected HPHCs in theaerosol from the Heatsticks
compared to mainstream cigarettesmoke.” TPSAC confirmed that theevidence supported the statementthat switching completely to IQOS
significantly reduces exposure toharmful chemicals.
On April 30, 2019, the FDA
confirmed that IQOS isappropriate for the protection of
public health and authorized it forsale in the U.S. FDA’s decision
followed its comprehensive
assessment of PMI’s premarket
tobacco product applications filedwith the Agency in 2017. The ordersets out clear commercialization
guidelines, including marketing
requirements, that maximize theopportunity for adults to switchfrom cigarettes, while minimizing
unintended use.

Data from the Korea Ministryof Food and Drug Safety (MFDS),a member of the WHO Tobacco
Laboratory Network, confirm lower
levels of harmful chemicals in threeheated tobacco products, finding over
90% average reduction in the levelsof nine harmful chemicals in theaerosol compared with levels foundin the smoke of the top five cigarettebrands in Korea.10 However, instead of
focusing on the significant reductionsin harmful chemicals compared withcigarette smoke, MFDS points to “tar”
measurements to judge the relativerisk of tobacco products. But major
public health organizations, including
the WHO, agree that “tar” is not anappropriate measure for comparing
the harmfulness of different tobacco
products. They also agree that whencomparing tobacco products, whether
they are cigarettes or heated tobacco
products, it is much more importantto analyze the levels of individual
toxicants in the smoke or aerosol.
In fact, the WHO said, in 2015, that“tar need not be measured, as it is nota sound basis for regulation, and thelevels can be misleading.”25

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Addressing product health impacts continued

PM Equity Partner (PMEP) –Solutions for a better world
PM Equity Partner, PMI’s Corporate Venture
Capital Fund, actively invests in technologies
and businesses that support PMI’s vision fora smoke-free future and that promote a better
life for underprivileged communities, responding
to today’s evolving consumer and societal
expectations.
Through these investments, we expand our global
effort to improve the quality of life of society, andlearn to better integrate new technologies andmore agile operating models into PMI’s business.
Our portfolio companies are able to tap into
PMI’s extensive R&D capabilities, operationaland marketing excellence, and deep involvementin the agricultural supply chain.
PMEP invests in early and growth stage companies
that share the vision for healthier consumer goods,
improved human health, and sustainable
environment.
Biognosys is an example of an investment madeby PMEP, enhancing the impact of our science,
based on a disruptive solution that enables full
proteomic profiling. By comparing the proteinspresent in affected samples with the ones present
in normal samples, Biognosys’ technology canidentify changes in expression of proteins thatare related to organ toxicity. Therefore, aproteomic profile (or protein signature) canbe used to diagnose a specific condition andto check how well the body responds to certain
treatments or exposure. By quantifying proteins
with extraordinary precision and depth, Biognosys
enables PMI to identify biomarkers in scientificstudies and understand the biological impactof switching to IQOS through the monitoringof key biomarkers.

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

26

Overview

Transforming
our business

Post-market surveillance
IQOS has now been commercialized formore than four years, and our understandingof actual consumer use of the product acrossa broad range of countries has improved.
We have established IQOS adult owner panels
in 15 countries. Those dynamic longitudinalstudies, which involve approximately 95,000
participants across 15 countries, allow us tomeasure the usage patterns of IQOS adultowners over time. Data from these IQOS
owner panels show that the large majority of
IQOS adult owners have converted to IQOS
(IQOS being more than 95% of their tobacco
consumption). Converted IQOS adult owners
range from 58% in Japan to 82% in Greece(as of August 2018).
Among IQOS adult owners who have converted,
the number of heated tobacco units consumed
per day is in general similar to the average daily
consumption of cigarettes among adult smokers.
In Japan, Germany, and Italy, we have also
initiated repeated cross-sectional studies in
the adult general population and in IQOS
owners, with the main objective of describing
current and past use of tobacco and nicotinecontaining products. During the first year of
the Japanese cross-sectional post-market
study, we have surveyed a representative
sample of approximately 5,000 participantsfrom the adult general population and a sample

Driving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprintof 2,000 IQOS owners. The data confirm that
IQOS is reaching the intended audience, adultsmokers, and is of very limited interest to adults
who have never used nicotine products before,or adults who had already completely stopped
using nicotine products.
According to a study commissioned by theJapanese Ministry of Health, conducted
between December 2017 and February 2018,
among 22,275 middle-school and 42,142 highschool Japanese students, the use of heated
tobacco products is extremely low and lower
than smoking cigarettes.¹¹ The proportion of
students who have ever used heated tobacco
products was 1.1% for middle-school students(2.6% for cigarettes) and 2.2% for high-school
students (5.1% for cigarettes). The proportionof monthly users was respectively 0.5% among
middle-school students (0.6% for cigarettes)
and 0.9% among high-school students (1.5%for cigarettes). Finally, the percentage of dailyusers was 0.1% for both middle-school andhigh-school students (respectively 0.1% and0.5% for cigarettes).
A study conducted in Switzerland in 2018 by
the independent foundation Addiction Suisse¹²
found that regular use of heated tobacco
products among 14 and 15-year-old boys andgirls is practically negligible, and essentiallylimited to cigarette smokers.

Above: Employees in PMI’s office in Tokyo, Japan

Reporting onsustainability

Philip Morris International
Sustainability Report 201827

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Addressing product health impacts continued

PERFORMANCEAND NE X T STEPSIn 2018, 92% of our total R&D expenditure related to smokefree products. These expenditures include the costs related
to clinical studies, the development of new machinery,
prototypes, and product acceptability testing. The R&D
expenditure for our combustible tobacco products islargely related to legal compliance requirements, such as
the measurement and reporting of tar, nicotine, and carbon
monoxide for cigarettes, and adaptation to regulatory changes.
Our R&D work, and its associated innovations, has resulted in
4,600 patents granted for smoke-free technologies as of theend of 2018. We are the 45th largest patent filer of European
patent applications, making us the only tobacco company in theEuropean Patent Office’s list of top 50 applicants. In Switzerland,
where most of our research is conducted, we are the second
largest patent filer of international patent applications.
We will continue to engage with the scientific community
to verify the public health benefits of our products. Diseaserisk-reduction studies are ongoing as part of the long-termwork on IQOS. In short, PMI is continuing and expanding
the scope of its program of work and allocating significant
investments accordingly.
2016

2017

2018

R&D expenditure (smoke-free/total)
72%
74% 92%
Patents granted relating to smoke-free
products (cumulative)
1,800 2,900 4,600

Above: A laboratory analyst in PMI’s Greek affiliate, Papastratos manufacturing facility

Reporting onsustainability

Philip Morris International
Sustainability Report 201828

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Providing access to smoke-free products
ASPIR ATIONS13

40

>30%

Million adult smokers who
would have otherwise
continued to smoke will haveswitched to smoke-free
products by 2025

Shipment ratio of smoke-free
products by 2025
(smoke-free/total)

Foreword
Developing scientifically substantiated smoke-free productsthat are an acceptable alternative to cigarettes is only the firststep. The next big step is to make them available to all men andwomen smoking cigarettes or other combustible products. For
more than five years, we have been ramping up production
capacity for smoke-free products. We are also shifting people
and resources in marketing and sales towards these products,
while at the same time rethinking our approach as we movefrom the business-to-business model of cigarette sales towards
a business-to-consumer commercial approach necessary forsmoke-free products.
Our aspirational target for our business transformation
was formulated using WHO “base case” projections as thecounterfactual scenario. Based on these projections, which do
not include the effect of smoke-free products, and assuming nochanges in market shares, there would be 145 million smokers
buying PMI cigarettes by 2025. The WHO aims to further
reduce smoking prevalence by strengthening traditional
tobacco control measures such as tax increases. The WHO2025 target in this respect, translated to our consumer base,
implies a 15 million reduction to 130 million smokers of PMI
products by 2025.
Our smoke-free strategy supplements these efforts
by the WHO. Our aspiration is that, by 2025, at least
40 million people who would otherwise have smokedcigarettes will have switched to our smoke-free products(up from 6.6 million people at the end of 2018), reducing
the number of PMI cigarette smokers by a total 55 million
by 2025. In other words, our aspiration is to reduce smoking
almost four times faster than the target set by WHO.

Above: A customer in an IQOS store in Athens, Greece29Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Providing access to smoke-free products continued

Progress in 2018

IQOS device progression

Converting manufacturing facilities
from cigarettes to smoke-free products
As we are expanding the sales of smoke-free
products to more countries, we needed tosignificantly invest in converting existingcigarette factories. This includes capital
expenditure, as for instance new machinery
is required for the production and packaging ofheated tobacco units. Our colleagues working inthese factories were extensively trained to beready for the new production environment.
In 2018, our factories in South Korea, Russia,
Greece, and Poland all started to produce
heated tobacco units or other nicotinecontaining products, bringing the totalof factories partially or fully converted
to smoke-free products to seven.

Launching IQOS 3
A second major milestone in 2018 was thelaunch of our next generation IQOS device,
IQOS 3 and IQOS 3 MULTI in mid-November.
These new devices integrate extensive
consumer insights and feedback to improve
design and user experience while maintaining
taste, sensory attributes, and ritual – allunderpinned by strong scientific substantiation.
Specifically, the new devices are more robust,more intuitive in use, and are faster charging.
When launching IQOS 3, we maintained theprevious version (IQOS 2.4) on the market
at a reduced price, thereby making the switch
away from cigarettes more affordable.

2014: IQOS 2.2• Base device

Pilots in Nagoya, Japanand Milan, Italy

2016: IQOS 2.4
Product reliability
and improvements• Aesthetics• Automatic blade cleaning• Easier holder insertion

Consumers of PMI products – projection 2025
(assuming constant PMI market share)

15m

15m

40m

145m
Smokersof PMI
products

130m
90m

Smokers of PMI products

2017: IQOS 2.4+

People who switch to PMI
smoke-free products, as
per PMI’s aspiration

Product reliability
and improvements

People who quit or lesspeople starting, in linewith reduction aimed forby WHO with additional
tobacco control measures

2018: IQOS 3
and IQOS 3 Multi
Continued innovation

2025 estimatebased on WHO
prevalence projection

2025 estimatebased on WHO
prevalence target

2025 estimatebased on WHO
prevalence target and
PMI smoke-free aspirations• Aesthetics• Reinforced opening• Faster charging of holder• Bluetooth connectivity• Improved user interface• Utility accessories• Mobile app• New design language• More robust (ProtectPlus™)• Faster charging of holder• Sequential heating• More intuitive• Portfolio of accessories• Compact• Personalization

30

Overview

Transforming
our business

Allocating more than half of ourglobal commercial expenditure
to smoke-free products

Driving operational
excellenceb

Managing oursocial impact

Philip Morris International
Sustainability Report 2018

9.6
8.8

8.3

Total IQOS users*

7.6
6.9

A smoke-free future means greater scale anddiversity of up-front investments than thoserequired for launching a cigarette brand.

We adapt and learn: since our launch inJapan and Italy over four years ago, we havefor instance fine-tuned our capacity, inventory,
and distribution in order to avoid productshortages that could work against switching.
We have already significantly re-allocatedbudgets and people from our cigarettebusiness. Smoke-free products represent
5.1% of our sales volume, but 60% of ourglobal commercial expenditure is dedicatedto their commercialization.

Reporting onsustainability

Continued IQOS user growth LQPLOOLRQVHistorically, we ran a relatively simple businessin a strict regulatory environment. Today, we aremoving to an innovative product in an evolving
and complex regulatory environment, with ahigh-tech consumer relationship and a morediverse supply chain.

We are shifting from a business-to-businessmodel to a consumer-centric model to assist
smokers with the transition to smoke-free
products. Our efforts are aimed at overcoming
previously unseen challenges: increased time
to communicate product benefits, consumer
acceptance of a different ritual, and their
willingness to stay with the product throughout
the conversion process. It means additional
specialists to engage with adult smokers,
customized retail spaces including flagshipstores, consumer care infrastructure, anddigital platforms.

Reducing ourenvironmental footprint

5.2
4.1

67%

68%

2.9

67%

67%

69%
Estimated users who
have stopped smoking
and switched to IQOS*

71%

71%
70%
Q1

Q2

Q3

Q4

Q1

2017

Q2

Q3
2018

Q4

6HH*ORVVDU\IRUGHĆQLWLRQV6RXUFH30,)LQDQFLDOVRUHVWLPDWHVDQGIQOS
XVHUSDQHOVDQG30,0DUNHW5HVHDUFKSmoke-free products: increasing interactions with adult consumers
From

Wholesaleand retail“Business-tobusiness”

To“Business-toconsumer”

Learn

Experience
E

Live
L

Discover

Try

UseConsiderBuy

ConvertEvaluate
Find

Bond

Advocate31

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CA SE S TUDY

Early adopter market –how is it going in Japan?

Above: Customers in an IQOS store in Ginza, Japan

>50%

600

Of PM Japan’s net revenues fromsmoke-free products in 2018

Total workforce at our customer
call center in Japan

32

Overview

Transforming
our businessDriving operational
excellenceManaging oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CA S E S TUDY

Early adopter market – how is it going in Japan?
Japan is a tangible and powerful example of
how we are living our transformation journey.
In 2014, the revenue from smoke-free products
sales for PM Japan stood close to 0%. In 2018, it
was more than half of total sales. We have beenable to pioneer an entirely differentiated market
category allowing adult smokers to switch to lessharmful alternatives.
In parallel with the commercialization of heated
tobacco products, which commenced in 2014,
smoking prevalence has fallen to 19.4% in 2018(versus 20.8% in 2014). As the market leader ofthis new category, PM Japan increased its total
tobacco market share, as many IQOS users
have switched from competitive brands of
combustible cigarettes.
In Japan, we intensify our focus on the “wholeuser experience,” how to meet adult consumer
expectations as they evolve, and ensuring that
our teams deliver on our ambition.

The year 2018 saw some challenges in theJapanese market for smoke-free products
where we witnessed more reluctance inswitching away from cigarettes beyond theinnovator and early adopter adult smoker
segments, despite the increased availability ofcompetitive offerings. PMI continues to bringinnovation and superior experience to thecategory. To address the needs of suchconsumers, we began to implement a numberof initiatives such as shortening the registration
process or enhancing the product to suit user
styles. Most importantly, we launched IQOS 3
and IQOS 3 MULTI, and increased the numberof consumer touchpoints.
Inside PM Japan, our organizationtransformation continues with significant
developments in compensation, benefits,work–life balance, and childcare support,
and an open office environment. We havesignificantly improved gender diversity;of new hires in 2018, 48% were women.

Total market – in market sales volume,annual 2012-18 (in billions)
200

197
167

150

133
100
50

2012

2013

2014

2015

2016

2017

2018

Cigarettes
Cigarettes and heated tobacco units
Source: Tobacco Institute of Japan IMS and PMJ Estimate/smokefree products includes competitive smoke-free products IMS

PM Japan share of market,
annnual 2012-18 (in %)
35
30

34.0
27.7

Importantly for the transformation and forthe consumer, we have further shifted resources
to support the smoke-free product category
growth. We have invested in our digital teams,
bringing in people from outside our industry
with the skills necessary to measure andenhance the quality of the consumer experience
across all channels at each stage of theconsumer journey.
To widen the appeal to new target segments
among current adult smokers who would
otherwise not quit cigarettes, we now have a
14-day, no-obligation product loan program,an option to have an extra device holder, andhave also introduced HEETS consumables ata more affordable price point and with a newtaste to complement the existing Marlboro
HeatSticks available at a premium price. Ourcall center has a workforce of 600 and is basedin Japan, so new customers can reach for help
online or by phone.
Stakeholder engagement in Japan is positive:
industry and society are accepting IQOS more
readily; an example is Fuji Transport, which
has endorsed the concept of “smoke-free”
in its operations and only allows use of heated
tobacco products inside the cabin of its trucks.

25
20

18.4

15
10
5
2012

2013

2014

2015

2016

2017

2018

PMI cigarettes
PMI cigarettes and heated tobacco units
Source: Tobacco Institute of Japan IMS and PMJ Estimate/Note:
Denominator = Cigarettes + Smoke-free products including JT’s
PloomTECH and BAT’s Glo consumables IMS

Above: Shea Lih Goh, President, PM Japan

Below: A call center employee in Fukuoka, Japan

33

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Providing access to smoke-free products continued

Regulation of smoke-free products
People often ask when we will stop sellingcigarettes. Our objective is to reach this moment
as soon as possible by replacing cigarettes withsmoke-free products. But this clearly depends
on a number of factors out of our control, inparticular the action from regulatory and publichealth authorities. In the most extreme cases,
such as in Australia and Singapore, smoke-free
products are banned, while cigarettes remain
legal. We find it difficult to understand thatgovernments would only allow the mostdangerous tobacco product for sale, and prevent
their citizens from accessing better alternatives.

Above: An IQOS store in Ginza, JapanThe large majority of countries allow the saleof smoke-free products, but the regulatoryenvironment varies substantially. As a result,
it is easier in some countries than others tomake people who smoke aware of alternatives
to cigarettes and how they should use them.
A recent survey14 shows that nearly all (94%)
respondents share the belief that consumers
should have the right to know if such better
alternatives exist.
Until recently, no country had any specificproduct standards for heated tobacco products.
However, Russia, Ukraine, and Kazakhstan have
now adopted quality and safety standards forthe consumables, and in Kazakhstan for thedevices, and defined methods for demonstrating
the absence of combustion.
In Europe, all EU member states have transposed
the EU Tobacco Products Directive, including
the provisions on novel tobacco products, suchas heated tobacco products and e-cigarettes.
Most EU member states require a notification
submitted six months before the intended
commercialization of a novel tobacco product,and some require pre-market authorizations
for the introduction of such products.
In some markets, regulators and public healthbodies are developing new frameworks for
smoke-free products. For example, in the
U.K., a report published in 2018 by the Scienceand Technology Committee of the House ofCommons concluded that e-cigarettes are
significantly less harmful to health than smoking
tobacco and that heated tobacco products may
also offer a public health benefit despite theirrelative risk.15 The report called for a riskproportionate regulatory environment for bothe-cigarettes and heated tobacco products andnoted that e-cigarettes should remain the least
taxed, cigarettes the most taxed, with heated
tobacco products falling between the two.
Furthermore, the U.K. Committee onAdvertising Practice announced the removal ofa prohibition on health claims in the advertisingof e-cigarettes in the U.K., effective November
2018, with a review of this decision on market
practices after 12 months.

Recently, the New Zealand government
announced plans to introduce riskproportionate regulation covering
all tobacco and nicotine products.
At the end of 2018, following a rise in the useof e-cigarettes among minors in the U.S., the
FDA announced a policy framework that
restricts the sales of flavored e-cigarettes(other than tobacco and menthol flavors).
It also announced its intention to remove
from the market certain e-cigarettes that areappealing to or marketed at youth. PMI fully
agrees that youth should not consume any typeof tobacco and nicotine product. Our marketing
code strictly prohibits any activity that targets
youth and we support regulatory measures thatwill make it less likely that youth start consuming
tobacco and nicotine products.
More generally, PMI supports and advocatesfor risk-proportionate regulation, whereby
cigarettes are subject to the most restrictive
regulation, and smoke-free products are
subject to regulation that encourages
smokers to switch completely. In addition,
we recommend that governments ensure thatsmokers who want to continue using tobacco
or nicotine products have truthful and nonmisleading information and are encouraged
to switch to less harmful alternatives.
Longer term, we can envisage a time when
demand measures that encourage smokers
to switch can be supplemented with supply
measures on a country-by-country basis.
We are committed to continue leading theindustry in this massive transformation,
and will be ready to support industry-wide
supply-side measures as soon as scientifically
substantiated smoke-free products havebecome widely acceptable and a large majorityof smokers in a country have switched to them.

34

Overview

Transforming
our business

Inclusive access to
smoke-free products
Our goal to replace cigarettes with smoke-free
products extends to adult smokers of all
income levels and to all countries worldwide.
We are only at the beginning of commercializing
a fully fledged portfolio of smoke-free products
and realize that additional efforts are necessary
to find products that are affordable andacceptable to consumers in different
parts of the world.

Driving operational
excellenceb

Managing oursocial impact

Of course, we continue to work on developing
different product platforms that can help
achieve this goal. We are also experimenting
with other solutions to reduce the financial
barrier of switching to smoke-free products,
such as the temporary lending of IQOS devices,
combined with promotional offers wherepermitted by local legislation.
Today, IQOS is sold in a few upper-middleincome countries, including Guatemala, South
Africa, and Kazakhstan, and we have put in placea team to focus specifically on low and middle
income countries (LMICs as defined by theWorld Bank classification) and how to include
them in our vision for a smoke-free future.

Reducing ourenvironmental footprint

Reporting onsustainability

Question to Goekhan Aladag, Director for
Smoke-Free Products in LMICs
PMI is successfully commercializing IQOS in numerous developed
countries with higher levels of income and health awareness, butwhat about developing countries? How is the issue of access tobetter alternatives considered for LMICs?
We started our transformation journey a
few years ago with the aim of offering a better
choice for all 1.1 billion smokers, regardlessof where they live or what segment of the
population they represent.
I am currently working with dedicatedteams to provide affordable and innovative
alternatives, as well as tailored businessmodels for LMICs. These efforts are focusedon providing a sustainable model for adultsmokers living in these countries.
Our goal is to accelerate the end of smoking
worldwide, including in developing countries,
by making sure that all smokers that would
otherwise continue to smoke have the rightkind of access, awareness, and ability to afford
better products.
In addition to developing and commercializing
innovative solutions, my role is also to finda way to make sure consumers in thesecountries can be made aware that there
are better alternatives to cigarettes.

Above: An IQOS store in Bogotá, Colombia

Philip Morris International
Sustainability Report 2018

In that regard, and without a doubt,
governments play a key role in appropriately
creating frameworks that encourage thepromotion of less harmful alternatives for
smokers. For me, the key learning here is thatthe more awareness is built in collaboration
with authorities and civil society, the fastercigarettes will be replaced.
Working in this role, I often get asked whether
our smoke-free vision and reduced-risk
product proposition is a solution reserved
for the developed world and what we aredoing to help smokers in LMICs.
Clearly, every smoker in the world deserves
access to better products. We are committed
to do our part and come up with products
and business models that make scientifically
substantiated smoke-free products
affordable and accessible to consumers
in LMICs. It is part of the disruption weare driving and there is no blueprint – so
we are building everything from scratch.

35

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Providing access to smoke-free products continued

PERFORMANCEAND NE X T STEPS
Two years ago, we introduced a set ofbusiness transformation metrics to makethe actions we are taking to pursue oursmoke-free vision measurable and verifiable.
This year, we have expanded the number of
metrics to better illustrate the massivechanges taking place at PMI.
In 2015, only two of our manufacturing
facilities produced smoke-free products
for commercialization purposes. In 2018,seven manufacturing facilities were
producing IQOS heated tobacco units
and other nicotine-containing products,
up from three factories in 2017.

Our commercial expenditure ratio shows how
much of our total global spend on marketing,consumer engagement, and trade activities isdedicated to smoke-free products. Last year,
more than half of our global commercial
expenditure was dedicated to smoke-free
products, which is remarkable consideringthat we have not yet launched smoke-free
products in the majority of our markets.
The net revenue ratio refers to the proportionof our net revenues (operating revenues
net of sales and promotional incentives)that is generated by the sales of smoke-free
products (including electronic devices andaccessories). Excise taxes are excluded fromthe net revenue figures.
Compared with last year, we have added two
metrics to better illustrate the rapidity of ourprogress at individual market level. These new
metrics show the number of our markets inwhich net revenues of smoke-free products

exceeded 10% or 50% of our total net
revenues. In three markets already,smoke-free products have become
the biggest part of our business.
The last three metrics show our smoke-free
product shipment volumes (including bothheated tobacco units and e-cigarettes) andour combustible tobacco product shipment
volume (mainly cigarettes), as well as smokefree product volumes as a percentage of total
volume. It is our ambition that, by 2025, atleast 30% of our shipment volume will comefrom smoke-free products.
Last, but most importantly, the table shows
the number of people who are using IQOS
and how many of them have stopped smoking
completely. By the end of 2018, there were 6.6
million adult men and women who had stopped
smoking and switched to IQOS.

As we developed and started to commercialize
Platform 1, we have not been idle on the otherplatforms. Following the pilot of Platform 4
in the U.K., we will be ready in 2019 to enter
more markets with e-vapor products at scale.
We will continue engaging with external
stakeholders to build support for theopportunity that a smoke-free future provides
for consumers and society more broadly. We
recognize that societal support is an essential
step to enable the introduction of regulatory
frameworks that can end cigarette smoking
rapidly by encouraging smokers to consider
smoke-free products.
And finally, we will continue to build our internal
capabilities so that our organization is always
fit-for-purpose and at the leading edge oftechnology, science, and user experience.

In terms of next steps, we will continue
executing our strategy to provide all smokers
with access to the best smoke-free products.

Business transformation metrics16

2015

2016

2017

2018

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

2 out
of 48

2 out
of 48

3 out
of 46

7 out
of 44

8%

15%

39%

60%

Commercial expenditure (smoke-free/total)
Net revenues (smoke-free/total)

0.2%

2.7%

12.7%

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

0

1

5

19

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

0

0

1

3

0.8

7.7

36

42

18

Smoke-free product19 shipment volume (billion units)

Aspirations17

13.8% 38–42% by 2025

90–100 by 202120>250 by 2025

Combustible product21 shipment volume (billion units)

881

845

791

767

<550 by 2025

Smoke-free product shipment ratio²² (smoke-free/total)

0.1%

0.9%

4.4%

5.1%

>30% by 2025

Total IQOS users (in millions)23

0.2

2.1

6.9

9.6

Estimated users who have stopped smoking and switched to IQOS (in millions)24

n/a

1.5

4.7

6.6

>40 by 2025

36

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Product addictivenessNicotine is the substance in cigarette smokethat stimulates the brain and affects themood, creating an effect that smokers willoften describe as helping them to relax andconcentrate at the same time, but it is also
nicotine that causes the addiction andmakes it so hard to quit.
Our smoke-free products allow adultconsumers to enjoy tobacco in a way lessharmful than cigarette smoking, delivering
nicotine without smoke. They are designed
to significantly reduce or eliminate theformation of HPHCs, while approachingas much as possible the taste, nicotine delivery,
and ritual characteristics of cigarettes in orderfor people who smoke to switch to thealternative product.
Let’s be clear on the scientific facts about
nicotine. As FDA Commissioner Gottlieb has
stated: “The nicotine in cigarettes is not directly
responsible for the cancer, lung disease, andheart disease”. 25 Decades of scientific researchshow that the primary cause of smokingrelated disease is the HPHCs formed by
the combustion of tobacco. But nicotine is
addictive and it is not risk-free. It can increasea person’s heart rate and blood pressure, which
can be problematic for those with pre-existingheart disease or severe high blood pressure.
Pregnant or breastfeeding women should
refrain from nicotine use altogether. Nicotinecontaining products should not be used by,or sold to, minors (see more on page 41.)
All this being said, without nicotine delivery
and the overall sensory experience, it islikely that smoke-free products would not
be viable alternatives for current adultsmokers, making nicotine necessary
to achieving tobacco-harm reduction.

Above: A customer in an IQOS store in Bogotá, Colombia

We are working hard to achieve a future
without cigarettes. As society progresses
towards the elimination of the most harmful
form of nicotine delivery, there needs tobe a societal debate on the risks andpotential benefits of long-term nicotine
use, comparing it objectively with a wide rangeof other mood-changing substances such as
caffeine, alcohol, or THC in certain countries.
Nicotine is used by over 1 billion people
every day. And with the right delivery method,
nicotine use does not need to harm others. The
world will definitely be a better place without
cigarettes, but it is very difficult to see how
this can be achieved without alternatives
that deliver an acceptable sensory experienceand nicotine.
Our responsibility in this domain has three
aspects. First, we need to do our utmost
to ensure that all our products arecommercialized in a responsible way, helping
to prevent youth nicotine initiation. Second,
we monitor the use of our smoke-free
products after launch on the market. This
post-market surveillance will help us assess
potential changes in prevalence, relapse,
and complete quit rates towards nicotine
abstinence, comparing cigarettes and smokefree products. And third, we will continue
to share our science and our post-market
surveillance data relating to the risks andpotential benefits of nicotine use to encouragea science-based and objective debate on thisimportant societal question.

37

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Responsible R&D
We have recruited more than 400 scientists,
engineers, and technicians over the years.
The way we work emulates pharmaceuticalindustry standards and the draft guidanceon MRTPA issued by the FDA’s Center for
Tobacco Products in 2012. Our researchaligns with international standards andpractices that assure the quality andintegrity of clinical and non-clinical laboratory
processes and include the Good Laboratory
Practice, Good Clinical Practice, and Good
Epidemiological Practice standards.
We restrict animal studies to situations where
no alternatives are available, and perform allactivities in accordance with applicable laws
and regulations, as well as internationallyestablished best practices in laboratoryanimal care. We always follow the widely

recognized principles known as the “3Rs” ofanimal research: Replace, Reduce, and Refine.26
We hope that in time we will be able to replacemuch or all animal testing with non-animalalternatives. In 2018, PMI and 24 otherorganizations collaborated on non-animalassessment of acute inhalation toxicity.27
We recognize that scientific assertions fromtobacco companies may be met with skepticism.
Sharing our science and listening to feedback are
therefore fundamental parts of encouraging
debate with scientific experts, regulators, andthe public on important questions about ourinnovative products.
Since 2008, we have published over 340 papers
on smoke-free products in peer-reviewed
publications. In 2018, we presented our results
at an additional 150 scientific conferences(2017: 76). Since 2018, the data from our
non-clinical and clinical studies about oursmoke-free products has become opensource, freely available to the public.

LEARN MORE ON
TR ANSFORMINGOUR BUSINESS:

Further, we open our systems biology
methods and processes for quality
verification via a scientific crowd-sourced
platform called sbvIMPROVER. This state-ofthe-art approach allows us to peer-review
and scientifically verify our results. Since
2011, around 200 institutions have taken
part in the program; they have developed
parallel methods to effectively challenge us,
but ultimately they verified our research.
The results are publicly available.

Peer-reviewed publications

Additionally, to secure trust with specialist
stakeholders, we share detailed productdata on a specialist platform called Intervals
to facilitate dialogue and reproduction of thescience. By the end of 2018, 20 studies, 57
protocols and 144 data sets were published.
Our own dedicated science website (PMI
Science) provides a wealth of information
which feeds our regular bulletin.
In an additional step to promote independent
research in the domain of tobacco harm
reduction, we made a commitment in 2017
to contribute USD 80 million per year to theFoundation for a Smoke-Free World, up to2030, on terms specified in the agreement.
The Foundation has U.S. non-profit status
and is an independent body governed byits own board of directors. It operates
completely independently from PMI. The
Foundation’s role, as set out in its corporate
charter, includes funding research in thefield of tobacco harm reduction, encouraging
measures that reduce the harm causedby smoking, and assessing the effect of
reduced cigarette consumption on theindustry value chain.

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

The Tobacco and Nicotine Database
PMI’s views on regulation
PMI’s views on the health effectsof smoking
PMI’s standards for animal testingon www.pmi.com
and www.pmiscience.com
ADDITIONAL RESOURCES ON:

www.sbvimprover.com
www.intervals.science38Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

PILLAR 2

Driving
operational
excellence
Our efforts to drive operational excellence are reflected
through established programs on ethics and compliance,
responsible marketing, and prevention of illicit tobacco trade.
As we progress on our transformation, we are strengthening
risk management in our supply chain and further developing
human rights due diligence activities.
In this section, we provide an update on our performanceand key developments in 2018 for each of these topics.

IN THIS SECTION

Responsible commercialization, and youth access andusage prevention

40

Maintaining a strong ethics and compliance culture

43

Delivering on our commitment to human rights

47

Case study
Human rights due diligence in Mexico

49

Sourcing raw materials and other supplies responsibly

52

Case study
Addressing social impacts in our electronics supply chain

54

Maintaining data privacy

59

Tackling the illicit tobacco trade60

Our human rights efforts
cover all SDGs, please see page 5

Image: An employee in PMI’s office in Bogotá, Colombia

86.9%

1st

Of employees participated intraining sessions pertaining to our
Guidebook for Success in 2018

Pilot human rights impact
assessment conducted
in 201839

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Responsible commercialization, and youth access and usage prevention
Foreword

Progress in 2018

Tobacco product marketing is subject toextensive restrictions, including outrightbans, throughout the world. We have robustinternal policies and procedures in placeintended to ensure that our marketing
and advertising are directed only towards
adult smokers. In some countries, ourown standards are stricter than local
laws and regulations.

The well-known health risks of smoking have led
regulators to impose significant restrictions on
cigarette marketing. We are clear that nicotinecontaining products should be subject to strict
regulations and robust enforcement to dissuadenon-smokers from starting to smoke and toencourage smokers to quit. But it is equallyclear that the millions of men and women
who wish to continue to smoke should havethe choice and appropriate information toswitch to better alternatives.

We aim to market our products responsibly
while providing adult consumers withmeaningful information on the risks relating
to our products. Our four core principles,
which are applicable across the world
without exception, are:
• We only market and sell our products
to adult smokers;• We warn consumers about the healtheffects of our products;• Our marketing is honest, transparent,
and accurate; and• We respect the law and our high standards.
Responsible commercialization is an area
where many stakeholders have expressed
concerns, especially about how we communicate
to adult consumers; whether we target nonsmokers or minors; and whether we apply
lower marketing standards in developing
countries. The above four core principles
drive our approach in all the countries
where we sell our products and we welcome
opportunities to discuss and improve thisapproach as part of our commitment tomarket our products responsibly.

Above: A customer in an IQOS store in Bologna, Italy

Conventional and smoke-free tobacco
products are fundamentally different.
While our four basic marketing principles
apply to all products, this difference meansthat we apply some specific rules and processes
to conventional and smoke-free products.
An overview of our marketing principles for
combustible products is available online.
The Good Conversion Practices serve as
the bedrock for our engagement with adultsmokers to support them in switching to smokefree products while discouraging unintended
use; these products are not for people whohave never smoked or for those who have quit
smoking. We are also clear that smoke-free
products are not risk-free nor are they asafe alternative to cigarettes.

40

Overview

Transforming
our business

Underpinning our marketing practices is
PMI’s Guidebook for Success – our Codeof Conduct (see page 43 for more). In 2018,
we provided approximately 23,440 training
sessions on our Marketing Code throughdifferent channels to employees and relevant
third parties. Marketing initiatives acrossmarkets are subject to reviews and approvals
as required by our strict standards. Our
Senior VP, Commercial, is the owner of theMarketing Code and our VP and Chief Ethics
and Compliance Officer oversees our Ethics& Compliance (E&C) program. Adherence to
our Marketing Code and to all our Principles &Practices is monitored by the Internal Controls
function along with the independent Corporate
Audit department, which reports directly to theBoard’s Audit Committee.

Youth access prevention
We know that great care must be taken whenit comes to preventing youth access to andusage of our products. Nicotine is addictive.
It is not risk-free, and it poses particular risks
for adolescents: youth should not use any
nicotine-containing product.
We took this aspect into consideration rightfrom the start, as we were developing our new
products, and continue to do so as we expand
our portfolio. We do not conduct studies on
youth; however, studies that we have conductedamong young adult never smokers between
legal smoking age and 25 years of age suggestthat our smoke-free products are not attractive
to them, as evidenced by the very low levels ofintention to try and intention to use reported
when they were exposed to various forms of
IQOS branded communications. In particular,
young adult never smokers between legalsmoking age and 25 years of age expressed
particularly low levels of positive intention

Driving operational
excellenceb

Managing oursocial impact

to use IQOS, which varied between 0% and1.1%. These results are consistent with two
recent independent studies in Japan and
Switzerland that show that the use of heated
tobacco products among middle- and highschool students is extremely low (see page 27).
Our marketing must be honest, accurate,
and transparent, and our principles must be
understood and properly implemented. All
our marketing and sales activities must respectapplicable laws, global standards of decency,
and the local culture and practices prevailingin the country where the activities will be
conducted. To ensure that our Marketing Codeis implemented as intended, each PMI affiliate
head aims to ensure that the affiliate uses arobust and substantive review and approval
process, such as a brand marketing review,
coupled with an auditable documentation trail.

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our Good Conversion Practices – a summary
1. Smoke-free products are for adult smokers who want to continue enjoying tobacco or nicotine;
2. We do not offer smoke-free products to people who have never smoked or who havequit smoking;
3. Our goal is to switch every adult smoker who would otherwise keep smoking combustible
products to smoke-free products, such as IQOS. We are committed to supporting adultsmokers in their switching journey through education and guidance;
4. Smoke-free products are not an alternative to quitting. The best choice for consumers
concerned about the health risks of smoking is to quit altogether;
5. To experience the benefit of smoke-free products, adult smokers should switch completely
and abandon smoking permanently; and6. Smoke-free products are not risk-free or a safe alternative to cigarettes, but they are a muchbetter consumer choice for smokers who wish to continue to use tobacco and nicotine.

In addition to principles requiring compliancewith all applicable laws and regulations, we also
have internal policies and procedures in place
to ensure that all marketing and advertising aredirected only towards adult smokers or users of
nicotine-containing products. Examples of thisin action are: the complete absence of cartoons,
youth-oriented celebrities, or models who are orappear to be under the age of 25; and no names
or logos of our brands on any promotional items
likely to be used or seen by minors.
We support regulation that ensures that only
adults can buy tobacco and other nicotinecontaining products as well as the strict
enforcement of minimum-age laws andpenalties for adults who provide tobacco
products to minors. We also provide guidance
to retailers to ensure that they are aware ofunderage regulations and that they understandtheir role, even in the absence of relevant
regulations, in preventing sales of tobacco andother nicotine-containing products to minors.

Above: A customer in an IQOS store in Ginza, Japan

41

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Responsible commercialization, and youth access and usage prevention continued

PERFORMANCEAND NE X T STEPSPMI has a heightened level of openness
as our transformation expands. We
monitor stakeholder feedback andtrack any complaints.
Our Marketing Code is strong and enforced
globally. Nevertheless, responding tostakeholders’ concerns, we are reviewing
our business activities to ensure that youth
are not targeted or encouraged to use anyof our products. We will publicly report theresults of that review by the end of 2019.
This will further inform our work on
responsible commercialization, which
is one of the priority outcomes of our2018 sustainability materiality analysis.
We comply with all legal requirements for
product and service information, labellingand marketing communications. We reporton label-related class actions and individual
cases in our 10-K disclosure, which can befound on the U.S. Securities and Exchange
Commission website, www.sec.gov.

23,438Training sessions on our Marketing Code completed
by employees and relevant third parties in 2018

Above: An IQOS store in Ginza, Japan

Reporting onsustainability

Philip Morris International
Sustainability Report 201842

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Maintaining a strong ethics and compliance culture
Foreword
The business transformation necessary toachieve a smoke-free future depends on astrong foundation of principles and valuesdelivered through actions on the ground.
We want to demonstrate seriousness
and professionalism through transparent
communications, coherent regulatory
engagement, and a culture of respect,honesty, and fairness.
The ethics and compliance (E&C) programat PMI is the foundation for these elementsof our transformation. At the core is our
Guidebook for Success, which is our Codeof Conduct. We strive to maintain a strong
ethics and compliance culture through a
combination of elements: Principles &Practices, which provide specific guidanceon key topics; training and communications,which build understanding and commitment;
and a diligent and fair investigation process
for suspected misconduct combined withproportionate disciplinary action, which
together reinforce a speaking-up culture
and confidence in organizational justice.
We have developed and continue to improveeach of these elements, informed by empiricalresearch and insights gained from our own
cases on how and why people behave as
they do.
The E&C program aims to enable employees
to take courageous decisions on difficult
questions, and to help PMI achievecommercial success and operational
excellence while adhering to responsible
business practices.

Above: Employees in PMI’s office in Bogotá, Colombia

43Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Maintaining a strong ethics and compliance culture continued

Progress in 2018
A stronger compliance culture
every dayOur Guidebook for Success, together with
its supporting Principles & Practices, covers
the following core risk areas: anti-competitive
behavior; marketing and sales; conflicts ofinterest; workplace and labor practices;
environment; health, safety and security; trade;
and information security. It also covers a rangeof risk areas: prohibiting bribery and corruption,
regulating gifts and entertainment, prohibiting
facilitating payments, and regulating politicalcontributions and advocacy activities. The
Guidebook is available in 45 languages on
the PMI website and employees can accessit at all times on their company mobile devices.
In times of transformation, when legal
frameworks are often still developing to take
into account rapid change, using good ethicaljudgement is critical. While codes and training
help promote the culture and behaviors desired,
we aim to build and reinforce a culture in which
employees “own” the sense of corporate
integrity, where they are accountable (and holdothers to account), and where PMI values guide
everyday business decisions. We promote a way
of working where we pause before taking action,
we ask for help when we need it, and we speak
up about things that do not seem quite right.
Our VP and Chief Ethics and Compliance
Officer, who has a reporting line to PMI’s
President, External Affairs, and GeneralCounsel, and reports regularly to the Boardand its Audit Committee, oversees our E&C
program. Adherence to our Guidebook for
Success is monitored by the Internal Controls
function and the independent Corporate
Audit department, which reports directly to theBoard’s Audit Committee. Suspected violationsof the Guidebook or other misconduct areinvestigated by the E&C department.

Preventing bribery, corruption, and anti-competitive practices
Corruption, bribery, influence trafficking, misleading
information, secrecy about issues that are material toa decision, and dishonesty in general are not acceptable
forms of doing business at PMI. Our Guidebook for
Success, together with its supporting Principles &Practices, govern our interactions with government
officials, which are conducted transparently, withintegrity, and in adherence to local laws.
In particular, our Guidebook for Success andPrinciples & Practices cover a range of anti-bribery
topics, including giving and receiving gifts andentertainment, facilitating payments (prohibited),
contributions involving or connected with government
officials, third parties who interact with government
officials on our behalf, membership of organizations,advocacy activities, and reporting and record keeping.
We also publicly disclose the limited political contributions
we make on our corporate website.
We comply with advocacy rules, report on our activities
as required in several jurisdictions, and are transparent
when others engage on our behalf. We also prohibit
third parties from interacting with governments, public
institutions, or other audiences on our behalf fromengaging in bribery or in other forms of inappropriate
influence. We make our internal standards known
to them, integrate such standards in our agreementswith them and monitor their compliance.
In addition, leveraging our values, cross-functional
knowledge, and experience, we connect withinternational organizations and global experts, such
as Transparency International, Business 20 (B20),
Business at OECD, the Basel Institute on Governance,
and the International Anti-Corruption Academy, tocontribute to the fight against corruption, seek broad
public–private cooperation, and support collective
action in building effective, accountable institutions
at all levels.

Above: Employees at PMI’s Operations Center in Lausanne, Switzerland

Reporting onsustainability

Philip Morris International
Sustainability Report 201844

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Workplace integrity

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Risk management at PMIOur Guidebook for Success and the related
Principles & Practices establish our standards
for a work environment that is respectful,inclusive, and safe. We are committed tomaintaining an environment in which all
PMI employees have an equal chance
to contribute and succeed based on
the merits of their work. We strive toeliminate discrimination, harassment,
and unsafe conditions in the workplace.

Our governance and technical procedures
for risk management align with the
Sarbanes-Oxley Act. Our Chief Strategy
Officer reports to our CEO directly
on strategic group risk. Strategic andoperational risks are managed in an
integrated way that accounts forfunctional, market, and product risks.
PMI’s integrated risk assessment process,in place since 2015, brings together thefunctions of Corporate Audit, Internal
Controls, and Ethics & Compliance.
These groups collaborate to understand,assess, and advise on risk and its potential
consequences for PMI. The work is basedon feedback from the markets as well as
on top-down strategic analysis. When arisk assessment requires a formal followup, PMI nominates an accountable person
who follows up with an action plan andreports up to Board level.

We perform an ethics and compliance “healthcheck” of our organization every few years
using a global ethics and compliance census.
We completed the last one in December 2018,
in order to “check the pulse” of employees
during this time of fundamental change
and transformation. We provided the online
assessment tool to nearly 40,000 employees
and achieved a 70% response rate.
The results of our 2018 ethics and compliancecensus confirmed that the fundamentals of our
E&C program remain strong. More than 90% of
respondents agreed that PMI, the head of theirbusiness affiliate, and the CEO of PMI are eachcommitted to doing business ethically. Morethan 90% of respondents also confirmed thatthey are aware of the E&C department and their
duty to speak up about suspected misconduct,
and that an investigation would take place if they
were to speak up about a potential ethics andcompliance violation.

Operational and strategic risks, suchas safety, leaf supply, climate change,electronic waste, or labor conditions,
are well covered by our risk teams andmanagement processes through which,increasingly, more complex sustainability
and human rights risks and opportunities
are being embraced at PMI. This is being
done in parallel to the challenging work
to transform to a smoke-free future: forexample, by assessing diverse risks relating
to the shift from a business-to-businessmodel to a business-to-consumer model.

Nevertheless, we saw early warnings that some
employees may be increasingly concerned about
retaliation, even though 70% of respondents
still agreed that they would not face retaliationin any form for speaking up about potential
misconduct. This represents a six-point dropon previous research completed in 2015. To
address this and some other points raised by
the census results, we are currently working
to develop action plans that we will execute
during 2019.
Above: Employees in PMI’s manufacturing facility in Dakar, Senegal

45

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Maintaining a strong ethics and compliance culture continued

PERFORMANCEAND NE X T STEPSIn 2018, 86.9% of employees participated in training sessions
pertaining to our Guidebook for Success. A total of 193,000
training sessions were completed across PMI, all of which
helped our employees and relevant third parties to build theirawareness about risks to the business, good ethical judgement,
and how to speak up should they notice something wrong or
something that could be improved.
We received 872 reports of suspected misconduct in 2018,of which approximately 40% were substantiated (2017: 714
received, 40% substantiated). None of the substantiatedmisconduct resulted in a material consequence for PMI.
A third-party-operated Compliance Helpline is available
24 hours a day, seven days a week, in all languages spoken at
PMI. Although anonymous reporting is available, approximately
four out of five people who used one of the many channels
available to report suspected misconduct gave their name.
The principal categories of reported misconduct were
“Theft and Fraud” and “Workplace Integrity,” accounting for
approximately 60% of the cases. Over half of the employees
whose misconduct was substantiated left the company, while
the other half received written or verbal warnings, sometimes
with financial penalties.
Despite our high ethical standards and rigorous control andcompliance procedures aimed at detecting and preventing
misconduct, given the breadth and scope of our international
operations, we may not be able to detect all potential improperor unlawful conduct by our employees and partners.

86.9%
Of employees participated in training
sessions pertaining to our Guidebook
for Success in 2018

Above: Employees in PMI’s office in Tokyo, Japan

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 201846

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Delivering on our commitment to human rights
Foreword
Respect for human rights is fundamental tooperating a sustainable global business. At
PMI, we embed respect for human rights in
our culture, so that human rights principles
govern the way we work with employees,
suppliers, consumers, and the communities
where we operate.
Different policy instruments set out how wewant to achieve this aim: our Commitment to
Human Rights, our Guidebook for Success,our Responsible Sourcing Principles, and
our Agricultural Labor Practices Code. Theyalign with our core values, and commit us to
managing our human rights impacts in asystematic way, in accordance with theUnited Nations Guiding Principles on
Business and Human Rights (UNGPs).
To ensure that we uphold our corporate
responsibility to respect human rights
in line with the UNGPs, in the diverse andchallenging environments where we operate
and from which we supply, we must focus onwhere we have the greatest potential humanrights risk. We are continuously striving
to improve our practices with respect toidentifying risks to “rights holders” and weare strengthening our due diligence processes
helping to drive continuous improvement
and raise standards across our value chain.

Above: Hand rollers of kretek cigarettes in PMI’s Indonesian affiliate, Sampoerna

47

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Delivering on our commitment to human rights continued

Progress in 2018

Embedding a culture of respect

Human rights due diligence

Our human rights commitment is deliveredby practical actions across our operations, andour supply chain. Our Human Rights Roadmap
directs the actions across functions which aretargeted to be delivered by the end of 2020.
Actions fall under four broad aims, and typicallyrange from capacity building and due diligenceprocesses to grievance mechanisms andclear reporting.

Top-down senior commitment counts.
That PMI’s senior management is instilling aculture of respect for human rights throughout
our operations provides fertile ground formeaningful actions down the road. Thissends an important message to employees andbusiness partners about the need for a practicalunderstanding of human rights risks and of
PMI’s commitment.

Human rights due diligence is the cornerstoneof our human rights program. Over the lastyears, we have developed due diligenceprocesses for labor rights in our tobacco supply
chain: environmental, health, safety, and security
risks throughout our operations; and businessintegrity risks across our value chain.

The Roadmap one year on
The Roadmap is built on extensive internal
engagement and consultation with experts
in human rights, business partners, and otherstakeholders. Its development included ahigh-level, company-wide human rights
risk mapping, data collection and analysis
of PMI’s group-level policies, procedures,and practices. Periodically, we will share
our progress in implementing the Roadmap.

Embedding an ethos in a corporate culture
starts with awareness raising and training.
We have provided tailored training programs to
our corporate auditors and the regional security
personnel, and specific training on modern
slavery and human trafficking for relevant
supply chain employees. We also started raisingawareness on the foundations of human rights
for new employees in our External Affairs
department and at our Operations Center.
In parallel, we continue engaging with our
suppliers to build their understanding of PMI’s
Responsible Sourcing Principles (RSP) andcomprehensive Implementation Guidelines.
As per our commitment in the Human Rights
Roadmap, we started benchmarking andreviewing key Principles & Practices toinclude, where needed, relevant humanrights considerations, starting with the
PMI Marketing Code, and the employment(including all relevant labor rights) and antibribery policies. We also worked on a new
security policy and a human rights guideline,
to reinforce our security service suppliers
due diligence process, especially for those
who carry weapons to fulfil their duty;
both documents will be rolled out in 2019.

Building on our early work, we continue
undertaking due diligence activities in line with
the UNGPs to identify, prevent, and mitigate
adverse human rights impacts of our global
operations and supply chain. In 2018, we
performed a corporate human rights risk
assessment to identify our potential humanrights risks at a global level, confirming that weare focusing on the right issues in line with our
Human Rights Roadmap. We also integrated
sustainability and human rights considerations
in our ethics and compliance risk briefs includedin PMI’s integrated risk assessment.

ask our suppliers to provide their workers
with easily accessible ways to raise concerns,
free from any retaliation. An effective grievancemechanism is a strong element of due diligenceand remediation.
In our tobacco supply chain, our Agricultural
Labor Practices (ALP) Code states that“Workers should have access to a fair,transparent and anonymous grievancemechanism.” Such mechanisms are available
in several countries where we source tobacco.
The most common form is a free helpline thatis supported by working with local authorities,
professional agents, and NGOs. Concerns canalso be raised with field technicians at any time.
As we move forward, we will continue looking
into ways to provide better access to grievancemechanisms throughout our operations andsupply chain.

!

Reporting on our progress
Human rights grievance mechanisms
Providing access to effective grievancemechanisms in our operations and acrossour supply chain is a key requirement of the
UNGPs and a core element of our due diligenceapproach. Internally, we have clear policies, run
regular training and ensure robust processes
are in place to encourage employees to speak
up if things don’t seem right or can be improved.
The same applies to our supply chain where webelieve that everyone should be able to have avoice and seek help. In our RSP, we specificallyThis report serves as a means to share
our progress and challenges as we advanceon our Human Rights Roadmap.

48

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CASE STUDY

Human rights
due diligencein Mexico

1
Action plan to address thefindings of the pilot human rights
impact assessment conducted
in 2018

Image: Employees in PMI’s manufacturing facility in Guadalajara, Mexico49

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CASE STUDY

Human rights due diligence in Mexico
In accordance with the commitment in ourlast report, we reinforced our due diligenceprocesses by conducting a pilot human rights
impact assessment in 2018 with the support ofArticle One, a specialist human rights consultant.
Its scope was limited to our manufacturing
operations, non-tobacco leaf supply chain,security operators, and communities impacted
by our operations in the country. Our tobacco
supply chain and marketing practices were notin scope of this first pilot exercise. The former
is largely covered by our Agricultural Labor
Practices (ALP) program and will be includedin the 2019 impact assessment, which will also
include our marketing activities and related
internal reviews and control processes. In parallel,a cross-functional working group will conduct
a comprehensive review of the steps PMI takes
across its business activities to market its
products responsibly.
Our pilot assessment comprised five steps:
1. Preparation
Review by the consultant of PMI policies,
procedures, and controls, including interviews
with functional heads at the Operations Center(including People & Culture, Health and Safety,
Supply Chain, Security, E&C, Procurement andExternal Affairs).
2. Methodology and research
Definition of the method and scope of theassessment, based on country risk briefs andscoping questionnaires, to identify the “rights
holders” to be interviewed, the PMI facilities
to visit, and the external stakeholders withwhom to engage.

3. Assessment
In-country interviews and visits by the
consultant with PMI local management
and several “rights holders,” such as factory
workers, contracted employees, trade union
representatives, suppliers, third-party staff,
as well as external stakeholders, such as nongovernmental organizations (NGOs), local
authorities, trade associations, and international
human rights organizations.
4. Integration
Based on the findings, recommendations
and a corresponding action plan, timeline
and accountability program were developed
for the Mexico-based team to implement.
The corporate human rights team monitors
the follow-up of the actions at the country
operation level.

• Long shifts for certain vendor-employed
drivers and security guards in retail delivery
may pose a risk of road safety related
accidents among PMI suppliers’ drivers;• Risk to personal security and life of truck
drivers and guards from robberies;• Risk of wages below living wage
level for some suppliers’ staff; and• Risk of substandard working conditions
for some suppliers’ workers in low-skill
manufacturing and services. Identifying

and addressing human rights impacts on
the ground is a complex task involving manydifferent issues, functions, and segments ofthe value chain. Even though limited in scope,
this exercise raised awareness of humanrights at the country level and further
developed employee competencies andskills to address human rights issues.
From a corporate perspective, we aim
to use local learnings to enhance our
global understanding and managementof human rights impacts.

5. Reporting
Reporting on the action plan and learningfrom this exercise.
The pilot assessment in Mexico revealed
strengths in safety, employee loyalty, diversity
and inclusion policies and practices, and parental
leave, and a high awareness of the internalgrievance process. In parallel, it substantially
improved awareness of human rights impacts
in PMI Mexico. It also led to an action plan toaddress the following areas:• Working time: even though in compliancewith Mexican labor law, some PMI workers
in Mexico sometimes work excessive
overtime especially during peak season.
This may pose a potential human rights
risk related to factory workers’ safety;• Although evening and night transport
is provided for all factory workers toand from the workplace, some workers
expressed the need to review the city
areas covered by this service;

Above: An employee in PMI’s manufacturing facility in Guadalajara, Mexico50

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprintPERFORMANCEAND NE X T STEPSIn 2019, all relevant functions will continue
implementing their action plan as per our
Human Rights Roadmap. A key focus will
still be raising awareness of human rights
across the organization. To go further, andto reach our employees in all markets, wewill be reviewing our human rights e-learning
tool to ensure that practical training content
is accessible and relevant to all employees.
We will further review and integrate humanrights considerations into our Principles &Practices, our integrated risk assessments
and our Corporate Audit protocols.
Following the pilot assessment in Mexico,
we will focus on implementing its findings
and will conduct a second human rights
impact assessment in 2019 elsewhere. We
expect to gain an even better understandingof the actual and potential human rights
impacts at site level and to use feedback
through our due diligence program. We
will report the findings in next year’s
Sustainability Report.

2nd
Human rights impact assessment
to be conducted in 2019

Above: Hand rollers of kretek cigarettes in PMI’s Indonesian affiliate, Sampoerna

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

51

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Sourcing raw materials and other supplies responsibly
TARGET

2,000
Suppliers assessed though the supplier due diligenceplatform (STEP – Sustainable Transformation Enables
Performance) by the end of 2020

Foreword
A central pillar to becoming a leader in sustainable businesspractices is engaging with our suppliers to achieve responsible,
sustainable supply chain practices.
Our business has a significant, global supply chain. We have alarge agricultural supply chain, ranging from tobacco growers
to producers of other agricultural raw materials, such as clove,
menthol, and guar gum. Another part of the supply chain
consists of manufacturers of direct materials used to produce
cigarettes and other tobacco products, such as acetate tow(for filters) and paper (both cigarette paper and packaging
materials). Also key to our business are the manufacturersof machines for our cigarette and heated tobacco products
factories, a highly specialized industry. A recently added part ofour supply chain includes manufacturers of electronic devices
for heated tobacco products and e-cigarettes. Finally, we workwith thousands of suppliers of goods and services that are notspecific to the tobacco business, but essential to any business,such as office equipment, company cars, and consultancy.
In our tobacco leaf supply chain, PMI has direct contracts
with approximately 21,000 tobacco farmers and directcontractual relationships with more than 20 third-party
suppliers contracting over 329,000 tobacco farmers(excluding China). Beyond tobacco, our supply chain
comprises more than 36,000 suppliers across 180
markets with an annual spend of around USD 10 billion.
Our total supply chain has a significant environmental, social,and economic footprint that calls for comprehensive programs
to address risks and achieve improvements.
PMI’s approach to sustainable supply chain management
includes a set of Responsible Sourcing Principles (RSP)
which define the expectations for our suppliers, and their
suppliers too. Our supply chain due diligence system aligns
with the UNGPs. The specific sustainability risks of ouragricultural supply chain are addressed through our Good
Agricultural Practices (GAP) and the Agricultural Labor
Practices (ALP) program.
We aim to anticipate and respond to sustainability issues arisingin our supply chains through our management approach andby working with our suppliers and other stakeholders.

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

52

Overview

Transforming
our business

Progress in 2018
We formally assess where our supply chain risks
are and how to manage them. We do this byconsidering the risks (social, environmental,
and governance) of the material or service
supplied, as well as the country in which thematerial is produced or the service is delivered.
The materials with the most significant
sustainability risks in our supply chain are:• Tobacco leaf;• Other agricultural products such as clove,
menthol, and guar gum;• Acetate tow (filters);• Wood-based products used in packaging; and• Electronic devices and components (forproducts such as IQOS).

Driving operational
excellenceb

Managing oursocial impact

Assessing suppliers against our
Responsible Sourcing Principles (RSP)
We published our RSP in 2017 along with
the RSP Implementation Guidelines to set
the requirements for a responsible approachto the sourcing of our materials and services.
The RSP has been translated into 26 languages
and covers environmental, social, andgovernance topics. We provide suppliers withinformation and engage with them on the need,over time, to align their business practices with
our RSP. A major focus in 2018 was delivering
training and workshops for PMI procurement
teams as part of the capacity-building processwith suppliers.
In parallel, we have designed a SupplierDue Diligence Framework which is currently
being developed in line with international
best practices.
The Framework aims to regularly evaluate
suppliers’ status in social, environmental, andbusiness integrity compliance and to address
gaps within our RSP or other commitments. This

Our Supplier Due Diligence Framework
Approach

Objectives• Risk-based• Assess performance of suppliers against
the Responsible Sourcing Principles• Data-driven• Define corrective action plans to address gaps

• Systematic

Reporting onsustainability

We plan to expand the assessment andengagement work over the next two years. To
push sustainability in the smoke-free productsupply chain in 2018, we launched initiatives
with tier 1 and tier 2 electronic component
suppliers, for example:

Our objective is, of course, to support suppliersin a continuous improvement approach to aligntheir practices with our requirements, improving
the overall working and living conditions in our
supply chain. An integral part of the SupplierDue Diligence Framework is a process to ensurethat suppliers have established action plansfor potential gaps and that they rigorously andtimely implement them. Tracking and reportingon our suppliers’ performance, both internallyand externally, will drive transparency. In
addition, we will continue to look for further
opportunities to collaborate with our suppliersin specific projects to improve social andenvironmental sustainability.

• Written commitment to the RSP by all tier 1
and tier 2 suppliers directly managed by PMI;

We are setting up an online supplier platform(based on information collection and dataexchange) to deliver the Supplier Due
Diligence Framework in practice.
During 2019, we intend to invite the first waveof suppliers to join the platform as the core partof their assessment against our RSP. The target
is to assess 100% of global suppliers of directmaterials and devices using the platform.
Suppliers of technical and indirect materials
will be the next target group.

Engaging with direct materials
and electronics suppliers• Report

Risk
screening

Performanceassessment

Mitigation

Tracking &reportingPhilip Morris International
Sustainability Report 2018means an initial screening of suppliers according
to geography and industry. This screening will
identify the suppliers that need to be moreclosely monitored and assessed. Monitoring
may range from self-assessments, to desktop
reviews, and up to suppliers’ on-site audits.

• Monitor progress against plans• Scalable

Suppliers
engagement

Reducing ourenvironmental footprint

In 2018, we specifically looked at risks in
our IQOS supply chain. As illustrated by thecase study on the next page, the way we work
comprises on-site engagement, assessments,
establishment of action plans, and improvement
tracking. Where required, we also conduct
conflict minerals reporting.

• Audits with Verité, our supply chain assessment
partner, of the key tier 1 suppliers in Asia;• Pilot project to promote better recruitment
and employment practices for foreign
workers in Asia; and• A review of tier 2 electronics suppliers
directly managed by PMI, including
visits and preliminary risk mapping.
The 2018 conflict minerals submission to
the U.S. Securities and Exchange Commission(fiscal year 2017) reported that all 259 smelters,
except one, in our electronics supply chain
covered in that report are certified “conflictfree.”28 To continue to build internal capabilities,
we introduced a conflict minerals e-learning forprocurement employees.
Additionally, part of our procurement work in2018 was to focus on the strategy for carbon
emissions and deforestation in our non-leaf
direct materials supply chains. We engaged
a specialist organization to collect and analyze
data on the carbon emissions of our paper,
board, and acetate tow supply chains, in order
to better understand the opportunities andset targets for suppliers during 2019.
We also worked with our principal paperand board suppliers on deforestation andtraceability of wood-based products. An
initial analysis of the deforestation risk
identified acetate tow as a top priority
area for engagement in 2019, followed byboard and paper. Our strategy for assessing
deforestation risk is described on page 97.

53

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CA SE STUDY

Addressing
social impacts in
our electronics
supply chain$2.7m
Reimbursed by the supplier
to workers after the establishmentof an average recruitment cost
per country of origin

Image: IQOS device manufacturing in Asia

>1,000b
Workers surveyed by our supplier
to better understand issues in the
recruitment process

54

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CASE STUDY

Addressing social impacts in our electronics supply chain
We are still new to the world of electronics
supply chains but we are not new to engaging
with stakeholders to promote high standards
for work conditions in our supply chains. Since
2010, we have partnered with an international
fair labor NGO, Verité, to improve labor
practices on the farms from which we source
tobacco. Since 2016, our collaboration has
embraced efforts to improve human rights
in our electronics supply chain too.
Our work so far has focused on understanding
our exposure to social sustainability risk.
Our due diligence work started with formal
assessments of our tier 1 suppliers. We foundthat most suppliers aligned with our RSP,
although some had issues that needed tobe resolved, primarily recruitment practices
and the living and working conditions of
migrant workers.

With one of our major electronics suppliersin Asia, our journey started in late 2016,
where PMI worked with Verité to carryout a comprehensive assessment of the labor
management systems to understand the living
and working conditions of workers, particularly
migrant workers, who make up a significant
percentage of the supplier’s labor force. During
2017, we worked with this supplier to establish alabor management system at the manufacturingsite and to eliminate some of the more serious
issues, like retention of passports and excessive
working hours.
In 2018, we undertook a full follow-up audit
that included interviews with 40 workers intheir native languages, as well as interviews withmanagement and third-party service providers.
We cross-checked our findings against the
supplier’s policies and procedures and our RSP.

Health and safety management was good,working hours were within the RSP limits, andworkers were in possession of their passports.
However, the interviews, the review of internal
documents such as worker contracts, and theanalysis of supplier agreements identified
important gaps. Recruitment fees were being
charged to migrant workers, the living conditions
needed improvement, deductions from wages
were unclear, and the grievance mechanism was
not effective. A prompt response was neededto address these findings.
With support from senior management at the
supplier, we established an ambitious action
plan that required the supplier to close themajor gaps swiftly. We also undertook abenchmarking exercise to understandbetter how other manufacturers in
the region have managed similar issues.
At the end of 2018, the supplier surveyed over
1,000 workers at the site to better understandissues in the recruitment process. As a result,the supplier established an average recruitment
cost per country of origin, and then reimbursed
all workers at the site, not only those working on

Above and right: IQOS device manufacturing in Asia

our products. Total reimbursements amounted
to the equivalent of more than USD 2.7 million.
The supplier also decided to stop outsourcing
its worker recruitment process and to develop
a training and audit process for its own
recruitment service providers. Additionally,
the supplier informed PMI that it would nolonger recruit from those countries of origin
where there is known to be a very high riskof worker exploitation. The supplier further
committed to improve grievance mechanisms,
factory manager training, and communication
with candidate workers in their home countries
before they migrate. Moreover, the workers will
move to new dormitories in 2019.
Following our recommendations, the supplierjoined a program that aims to promote ethicalrecruitment practices. The program includes
an external worker helpline, multiple rounds
of in-depth worker surveys to help improve
working conditions, worker–management
communication training, and effective predeparture orientation training, along withother measures. The program should extend
until early 2020.

55

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Sourcing raw materials and other supplies responsibly continued

Implementing Good Agricultural
Practices (GAP) for tobacco suppliers
and farmers
Sustainable tobacco production is the efficientand competitive production of quality tobacco
in conditions that limit as much as possible
the impact on the natural environment, andthat improves the socio-economic conditionsof the people and communities involved in its
production. Sustainable tobacco productionis the desirable outcome when GAP isproperly applied.
GAP has been in place since 2002, and since2016 we have been assessing conformityof tobacco suppliers and farmers with our
GAP standards through the industry-wide
Sustainable Tobacco Program (STP) managed
by AB Sustain, an independent supply chain
management specialist. One of the outcomes of
the assessment is an independent performance
rating against all STP criteria. AB Sustain
conducted STP assessments in all suppliers’
locations over the last three years; in 2018, theyassessed suppliers in 11 countries (2017: 8).
The STP process includes:

GAP at PMI: a mature system with demanding requirements
Our GAP program is structured around four
key pillars: Governance, Crop, Environment
and People. Under each one of them areprinciples and measurable standards that
we expect all those who grow and supply
tobacco to PMI to meet.

• Crop: GAP promotes the adoption of
growing practices that result in tobacco
produced with the right quality, styleand integrity, and meeting regulatory
requirements. It includes considerations
such as seed variety integrity, sound plant
nutrition, integrated pest management,
and crop profitability.

• Environment: GAP enables PMI to help
farmers minimize negative impacts on
the environment by an appropriate usageof the natural resources such as waterand energy; conserving ecosystems andbiodiversity; ensuring soil fertility in thelong term; and managing waste properly.
• People: PMI is committed to eliminate childlabor and other labor abuses and to achievesafe and fair working conditions on all farms
from which we source tobacco. This pillarof GAP is supported by PMI’s Agricultural
Labor Practices (ALP) program (see page
65 for more).

GAP implementation by PMI and our tobacco suppliers• 8 PMI leaf operations• Annual self-assessments completed by
tobacco suppliers (reviewed by AB Sustain);

GAP• On-site audits conducted by AB Sustain
to a sample of contracted farmers; and• Comprehensive review of tobacco suppliers’
policies, procedures, and documentation;and demonstrating the level of STP/GAP
implementation.

• Governance: PMI expects leaf suppliers
to embed the necessary processes in theirbusiness practices to ensure its successful
implementation. Good business practices
may include contracting arrangementswith farmers, sufficient field technicians foran effective GAP implementation, regular
visits and training for farmers.

• 24% volume of tobaccopurchased

PMI

21,000>2,600>350,000

Field technicians
support and monitor
GAP implementation

Tobacco farmers
committed toapplying GAP• 23 third-party leaf suppliers
GAP & RSP

• 76% volume of tobaccopurchased

Farmers

GAP>329,000GAP

PMI has direct contracts with 21,000 farmers via our PMI leaf operations. We also contract over 20 third-party leaf suppliers
who themselves have direct contracts with more than 329,000 farmers in the countries where we source tobacco.

Farmers56

Overview

Transforming
our business

PMI adopts an inclusive farming approachcalled Integrated Production System (IPS) that
requires leaf suppliers to be in a commercial
partnership with farmers, enabling directlevels of support, such as the provision ofrecommended crop inputs, knowledge andtechnology transfer, financial loans or otherextension services, aligning with the goals of
the GAP standards. IPS farmers are provided
with market information from suppliers that,alongside the contract, helps to protect themfrom market uncertainty to achieve a fair pricefor their crop, and to guarantee the sale oftobacco. IPS involves all farming practices,from crop planning until the tobacco isprocessed and packed.

Driving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Additionally, an important aspect of our GAP
program is the systematic intervention andmonitoring by field technicians. These men
and women know the farmers they support
and their community. They facilitate GAP
implementation on the ground, and work toensure good labor practices are upheld at thefarm level. It is often a daunting task: in many
countries most farms are small-scale family
farms of less than two hectares, with perhaps
no business procedures, and located in rural
areas where basic infrastructure is poor orabsent. Field technicians’ visits are importantfor GAP and ALP monitoring, training, andprocedural support. They build trust with
farmers to resolve issues together sensibly
and overcome barriers to progress. They
are vital to the whole monitoring system.
Above: A field technician and a tobacco farm worker in MozambiqueRole of field technicians

Provideagronomical
assistance

Identify andaddress labor
issues

Mint: first steps towards responsible sourcing
Mint is used in heated tobacco units and conventional cigarettes. It is sourced mainly from small
farmers in the Uttar Pradesh region of India. We recognize the potential for sustainability risks
due to the long supply chain, with many intermediaries, no direct contracting, and challenging
socio-economic conditions.
In 2018, with a key supplier, we surveyed 1,100 households in the region to evaluate howmenthol mint farming is organized. Potential risks identified include safety, child labor, accessto drinking water, and the use of firewood for cooking. A first step in 2019 is to establish 40
women’s self-help groups as the backbone of a sustainability program (including approximately
400 women in 10 villages). The aim is to improve sustainability performance, increasehousehold profitability, develop agricultural practices, and boost economic empowerment.

Delivertraining tofarmers

Monitor GAP
implementation

Field
technicians

Connect
farmers and leaf
suppliers

Ensureimplementationof improvement
plans

57

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Sourcing raw materials and other supplies responsibly continued

PERFORMANCEAND NE X T STEPSWe report steady progress in enforcing
the requirements of our RSP, GAP andassociated guidelines to source tobacco andother categories in a responsible manner.
Across our entire supply chain, the supplierdue diligence platform, to be launched in
2019, will provide the data on the status ofkey suppliers on performance improvements.
Our initial focus will be on 400 suppliers of
raw materials, electronics, and selectedcategories of indirect materials. Through2020, we plan to include an additional
1,600 suppliers, using a risk-based approach.
All our tier 1 electronics suppliers for smokefree products aligned with our RSP andachieved performance improvements.
Over the next two years, we will extend ourmonitoring to tier 2 suppliers and we willfurther develop a process for monitoring tier
3 suppliers. We are integrating sustainability
criteria and more detailed guidance in ourcontract tendering process, for further
development in 2019.
Our RSP was signed by 100% of our tobacco
leaf suppliers in 2018. The conformity of
tobacco suppliers and farmers to our GAP
standards has been audited in all countries
from which we source by AB Sustain throughthe STP, between 2016 and 2018.

All
Our tobacco leaf suppliers
signed our RSP in 2018
Above: Production technicians in Bahia, Brazil

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

58

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Maintaining data privacy
In recent years, there has been increasing publicawareness of privacy issues and greater scrutiny
by stakeholders of how companies approachdata privacy. Global data protection laws havebecome more prevalent and rigorously enforced.
Even before the EU General Data Protection
Regulation (GDPR) became effective in May
2018, PMI had developed, and will maintain,
its Global Privacy Program (GPP) to establish a
new global standard for data privacy across ourmarkets and functions. The GPP was developed
and deployed using an internationally recognizedprivacy management system. The program isdesigned to support PMI functions and affiliates
within the EU to achieve and demonstrate GDPR
compliance and to embed policies and practices
that facilitate data privacy compliance. Outside
the EU, the GPP sets the GDPR as PMI’s global
standard, ensuring that the whole PMI
organization is aligned to a high standardof privacy practice.
Core to GPP is greater central governance fordata privacy, whereby specific people lead on
data privacy for markets and functions. Our
External Affairs and Information Protection
and Governance group have come together
to run a central privacy office. Meanwhile, ourData Protection Governance Board also reports
twice per year to the Corporate Risk GovernanceCommittee. The GPP also mandates practices
that the GDPR introduces or enhances, inareas such as data privacy impact assessments,
awareness and training, privacy complianceassessments, personal data inventories, anddata subject rights. Additionally, many existingdata protection approaches have been reviewed
and strengthened, such as the principle oftransparency and the management of
third-party risks.

Above: An employee in PMI’s office in Athens, Greece59

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Tackling the illicit tobacco trade
Foreword
It is estimated that one in every ten cigarettes
smoked globally is illicitly traded.29
The illicit tobacco trade has a sustainability
impact as it is often associated with organizedcrime and corruption, and can lead to abuses ofhuman rights, labor rights, and environmental
standards. It is a major economic problem forgovernments, which are losing a potential USD
40 billion in tax revenue each year.30
We have long-standing preventive and protective
measures to secure our supply chain. Tackling
illicit trade requires cooperation from allaffected parties; stakeholder engagement
and cooperation with law enforcement
agencies are therefore key.
PMI strongly supports the objectives and theprinciples of the WHO Framework Convention
on Tobacco Control (FCTC) Protocol to Eliminate
Illicit Trade in Tobacco Products and we aredelighted to see a growing number of parties
joining this international treaty. We support
many countries through bilateral cooperationagreements in their fight against illicit trade.

Above: Training on prevention of illicit tobacco trade in Medellin, Colombia

60

Overview

Transforming
our business

Progress in 2018
We channel our efforts to:
1. Fight the diversion of our products bycontinuously improving measures to secure
the supply chain with all stakeholders;
2. Share our knowledge with the impacted
parties through continuous research,
analysis, and communication of illicit tradeissues and consequences; and3. Pre-empt attempts to illegally divert oursmoke-free products by assessing potential
risks and by equipping our organization forthis new challenge.

Fighting the diversion of our products
Work continued in 2018 on tools that preventthe illegal diversion of our products. Under
PMI’s Anti-Diversion Governance Committee,
which oversees the continuous refinement
process, and the update of our Principles& Practices, we implemented a risk-based
approach with positive results that allowed

Driving operational
excellenceb

Managing oursocial impact

us to focus resources where needed, improving
efficiency. Information on security and antidiversion measures taken by our key markets
can be found in the Anti-Diversion GovernanceCommittee’s Progress and Outlook Report2018 available on our stop illegal website.
In 27 higher-risk markets for combustible
products, we enhanced our Anti-Diversion
tools such as “Know Your Customer”,
volume monitoring, and tracking and tracing
technologies, to ensure that our products
are sold legally in the markets for which
they are intended.
As an example, following a large increase inexcise taxes levied on tobacco products in Saudi
Arabia in 2017, Kuwait witnessed a significant
increase in demand from Saudi adult smokers.
PMI and its distributors closely monitored
sales in Kuwait across all trade channels down
to retailers to ensure legal product availability
for Kuwaiti consumers while mitigating theoutflow to Saudi Arabia.

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Supply chain controls: our risk-based approach

COUNTRY A

COUNTRY B

Low risk

High risk• Simple distribution
network• Complex distribution
network• High retail price• Low retail price• Limited incentive
to smuggle• Profit opportunities
to smuggle

We adapt tools to suit risk profile

Volumemonitoring

Above: Operation to prevent illicit tobacco trade in Medellin, Colombia

Ordercontrols

Anti-diversion
plans

Tracking
and tracing

61

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Tackling the illicit tobacco trade continued

Taking strong action
with second- and third-level
tracking and tracing
In Ukraine, cigarette taxes and prices
reflect local economic conditions.
Their price attractiveness, by European
standards, makes them an attractive object
for smuggling to other countries. For many
years, PM Ukraine has acted to prevent
such smuggling by utilizing a comprehensive
set of actions including volume monitoring
and awareness raising. PMI operates a
global tracking and tracing system, allowing
us to monitor and retrace product flows as
they make their way down the supply chain.
In a nutshell, it enables us to identify andaddress any supply chain “leaks,” suchas wholesalers selling our products toillegitimate retailers in the intended
market, or to criminals smuggling our
products into higher tax countries. In
2018, PM Ukraine expanded the tracking
and tracing system to the third layerfor selected customers, improving the
precision with which we can identify
and resolve problems in our supply chain.

Sharing our knowledge with
the impacted parties
PMI IMPACT is our global initiative to support
projects dedicated to fighting illicit trade andrelated crime. We invite public organizations,law enforcers, private entities, and NGOs
from around the world to submit their project
proposals for funding. Projects are selected
through an open and defined evaluation
process, led by a council of independent experts.
PMI has committed USD 100 million for thisprogram. Established in 2016, PMI IMPACT
has, to date, launched two funding rounds andreceived around 390 applications, with over 60
projects from 40 countries selected for funding.
Projects include research, the development oftechnical solutions, the funding of equipment tosupport law enforcement operations, activities
to enhance the capacity and proficiency of law
enforcement agencies, awareness platforms,
and communication initiatives to foster crosssector and public–private collaboration.

Securing our supply chain from raw materials
to consumer and from consumer to productrecycling and disposal is very important toprevent diversion of critical components andproducts. During the second half of 2018,
we established a cross-functional team to deal
with this matter. We currently focus on supplies
distribution and reverse logistics processes.
We are also setting up new operating standards
with our partners at the beginning and the endof the life cycle of our products. At the sametime, we continue to enhance our standards
on product tracking requirements with a
special focus on the tracking requirements
for electronics in our supply chain.

Cooperating with law
enforcement agencies inColombia and Ecuador
Over the years, our teams in Colombia
and Ecuador have established concrete
information-sharing with law enforcement
agencies and provided regular training
sessions on illicit tobacco products
prevention. With the launch of smoke-free
products in Colombia in 2017, PMI teams
have increased their efforts and trained
735 law enforcement officials in 2018, up
by 160 attendees from the previous year.

Substantially all grants under the second
funding round were awarded in 2018.
In addition to PMI IMPACT, we have acomprehensive research program in placelooking into all types of illicit trade of tobacco
products. Our base approach to assess theprevalence of illicit trade includes “Empty Packs”
surveys, which help us monitor the nature,
trends, and challenges in over 80 countries. This
provides crucial data alongside other technicalstudies which we share with stakeholders withwhom we align our priorities.

Pre-empting attempts to illegally
divert our smoke-free products
It is paramount that we do everything we
can to protect the integrity of our new productportfolio supply chain and to ensure that ourconsumers have access to products ofuncompromised quality.
Above: Operation to prevent illicit tobacco trade in Medellin, Colombia

62

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprintPERFORMANCEAND NE X T STEPSPhilip Morris International
Sustainability Report 2018

LEARN MORE ON
DRIVING OPER ATIONAL
EXCELLENCE:

As of 2018, PMI has Memoranda ofUnderstanding with customs authorities
and governments in 49 countries as partof concerted efforts to take action against
illicit trade.

Our Guidebook for Success(PMI’s Code of Conduct)
An overview of PMI’s marketing
principles for combustible products

In Poland, successful cooperation withlaw enforcement agencies led to theclosure of 119 illegal factories in 2018.

PMI’s Good Conversion Practices
An overview of PMI’s engagement
principles

We support enforcement actions ledby authorities to destroy confiscatedmanufacturing equipment, materials
used to make cigarettes, and illegal
tobacco products. This is essential
in order to prevent these items fromfinding their way back into the illicit trade.

PMI’s Commitment to Human Rights
PMI’s Human Rights Roadmap
PMI’s Responsible Sourcing Principles(RSP) and RSP Implementation Guidelines
PMI’s Agricultural Labor Practices(ALP) CodeIn 2018, we worked continuously withlaw enforcement agencies and authorities
worldwide and provided Anti-Illicit Trade
Awareness and PMI Forensics TechnicalTraining to more than 900 recipientsduring 41 sessions in 14 countries,
helping them to understand illicit tradeissues, consequences, and technicalknowledge on PMI product authentication.

PMI’s Good Agricultural Practices(GAP)bPrinciples and Measurable
Standards
on www.pmi.com
or www.pmi.com/transparency
ADDITIONAL RESOURCES ON:

We continue to secure our supply chainsand prevent the illegal diversion of products
by investing our resources and aligning ourorganization towards our goal.

www.stopillegal.com
www.pmi-impact.com+900
Recipients of Anti-Illicit Trade Awarenessand PMI Forensics Technical Training in 2018

Reporting onsustainability

Above: An employee at PMI’s Operations Center in Lausanne, Switzerland

63

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

PILLAR 3

Managing oursocial impact
Continuously improving PMI’s social impact within
our operations and beyond is essential to our long-term
success. This starts with how we attract and retain people
and extends to the labor standards we expect from farmers
and suppliers.
In this section, we provide an overview of what it is liketo work at or with PMI, focusing on the main topics thatemerged from our sustainability materiality assessment:
our efforts to tackle child labor in tobacco growing; how wepromote fair working conditions; our programs to promotehealth, safety, and well-being; our approach to diversity andinclusion; and our community engagement efforts.

IN THIS SECTION

Eliminating child labor and improving
labor conditions on tobacco farms

65

Case study
Working with tobacco farmers towards crop diversification

71

Supporting fair working conditions

74

Case study
Transformers in Greece

75

Promoting health, safety, and well-being

79

Furthering diversity and inclusion

83

Engaging with our communities

86

89%
Of prompt actions relating tochild labor incidences in our tobacco
supply chain were resolved in 2018>70
Of our affiliates around theworld have adopted flexible working
arrangements
Image: A field technician and a tobacco farm worker in Mozambique64

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Eliminating child labor and improving labor conditions on tobacco farms
Foreword32

TARGETS 31

Zero

100%

100%

100%

Child labor in our tobacco
supply chain by 2025

Workers paid
at least the minimum wage
by 2022

Workers provided withsafe and adequate
accommodation by 2020

Farmers and workers haveaccess to personal protective
equipment (PPE) for
application of crop protection
agents (CPAs) and preventionof green tobacco sickness(GTS) by 2020

The informal, seasonal, and transactional nature of agricultural
work makes farm workers vulnerable. Most child labor occurs
in agriculture33 and results from complex socio-economic
challenges. Overcoming these challenges cannot be
accomplished overnight, or by a single company, but weare committed to playing our part and making a difference.
Since 2011, PMI has been implementing the Agricultural Labor
Practices (ALP) program to eliminate child labor and to achievesafe and fair working conditions and a decent livelihood for all
farmers contracted to supply tobacco. We co-developed the
ALP program with Verité, our strategic partner and a leading
global NGO in responsible supply chains. The ALP program
comprises five elements:
1. The ALP Code, based on International Labour Organization(ILO) conventions, with seven principles and 33 measurable
standards, to be followed by over 350,000 farmers whom wesource tobacco from. The seven principles of the Code are: nochild labor, no forced labor or human trafficking, fair treatment,
safe work environment, fair income and work hours, freedomof association, and terms of employment.
2. Training for PMI’s Leaf Sustainable Agriculture teams,
suppliers, farmers, and workers about the Code and how
to address any gaps when applying it.
3. Internal monitoring by over 2,600 field technicians,
the human face of monitoring, solving problems andcommunicating PMI’s expectations during their regular
visits to farms.
4. External country-specific assessments by Control Union,a specialist supply chain auditor, to independently evaluate theimplementation of the ALP program.
5. Collaboration with civil society organizations, governments,
and the private sector on initiatives to address systemic issues
and to empower communities through new participatory
processes, such as local ALP Committees.
In order to take the ALP program to the next level, we initiateda “Step Change” approach in 2018, to address the root causesof the main issues that keep surfacing year-on-year and toprovide long-term solutions to prevent them. As part of thisapproach we have defined ambitious targets in key risk areas.

Above: A tobacco farm worker in Mozambique65

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Eliminating child labor and improving labor conditions on tobacco farms continued

Progress in 2018
In 2018, we accounted for developments inthe field of human rights, by amending our
ALP Code to better reflect the tenets of theUnited Nations Guiding Principles on Businessand Human Rights and to align it with our
Responsible Sourcing Principles. The key
changes relate to human trafficking risks,
broadening the scope of a safe work
environment, and precisions on terms of
employment and compliance with the law.

In 2018, we continued to invest in improving andexpanding the farm-by-farm ALP monitoring by
updating and implementing our Prompt Action(PA) Guidelines as a standardized process ineach country. Globally, we have expanded thegeographic coverage of our monitoring from
77% in 2017 to 88% in 2018 and we have
improved our data quality through better
reporting guidance, further training for fieldtechnicians, and more farm visits, both planned
and unannounced.

In 2018, a total of 18,543 prompt actions wererecorded by field technicians, 74% of which wererelated to an unsafe work environment and 25%
to child labor.
The data gathered paint a more accurate pictureof what is going on in each farm and allows thepeople involved with the ALP program managementin each country to continue to develop theirunderstanding of the challenges faced by tobacco
farmers and workers. The global data consolidation
enables a more thorough analysis and a better
understanding of trends and patterns where
the most prevalent and persistent issues occur
in order to deploy targeted initiatives to solvethese issues.

Overview of prompt actions recorded
E\ĆHOGWHFKQLFLDQV 
1%
2018
25%

2017
2%

63%

74%

Above: Childcare center in Nayarit, Mexico

Leveraging on efforts made so far, and having
gained a more accurate sense of the program’s
overall performance, we took the decision in2018 to deploy a “Step Change” approach toachieve significant improvements in areas withintensive and targeted needs.
Through 2018–2022, as part of a new “StepChange” approach, we will give additional focus
to our work in Argentina, Indonesia, Malawi,
Mozambique, South Africa, and Turkey.
The focus areas in each country differ but
include at least one of the most recurrent
and difficult issues listed here:• Elimination of child labor. Currently, we
identify and address over 4,000 child labor
incidents every year. While we have seen
a general decrease over the years, by 2025
we want to achieve a situation where no
child labor occurs; if isolated incidents are
identified, they will be addressed immediately;• Payment of at least the legal minimum
wage for workers. Informal, traditional
agreements in the agricultural sector
mean that remuneration rates may fall below
national minimum standards. By 2022, wewant to ensure that all workers are receiving
at least the minimum wage, regardless of
local practices;

35%

Safe work environment issues
Hazardous work performed by children
Other

A “Step Change” approach for
our ALP program• Availability and usage of personal protective
equipment (PPE) for the application of crop
protection agents (CPAs) and the preventionof green tobacco sickness (GTS). By 2020,
we want to ensure that everybody working
on the farm has access to the appropriate
PPE; and• Adequate accommodation for workers.
We have identified a few countries where
the accommodation provided to workers
was inappropriate. We are making thenecessary investments to help farmers
to fully address this issue by 2020.

66

Overview

Transforming
our businessWorking with Verité, we are intensifying
partnerships and engagement with local NGOs,
governments and other stakeholders to tackle
the social and economic root causes of childlabor and other unacceptable labor practices.
Over the next few years our action plans willconsist of the following:• More effective due diligence before
contracting, and stronger consequence
management in case of persistent ALP
Code violations;• Projects with farmers and suppliers to
improve crop yields and quality and farmmanagement aiming to achieve at leasta living income;• Systematic sharing of best practicesolutions between field technicians; and• Wider collaboration with other companies
to explore solutions to complex social
problems, such as child labor, for the
benefit of the entire industry, farmers’
families and farming communities.

Driving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Taking action to prevent andeliminate child labor

Prompt actions step-by-step process
Prompt actions arise from situations where somebody on the farm may face a risk or a danger
and immediate action is required. Any incident of children carrying out age-inappropriate tasks
or hazardous work is reported as a prompt action and addressed immediately.
The vast majority of child labor-related prompt actions arise in a family context on small-scale
farms with two hectares or less. Typically, children are carrying out farming tasks alongside
their parents who may not see this work as detrimental to the child because of local traditions
and experience.
In any case, whenever a field technician witnesses a child labor incident they are obliged tostop it and raise a prompt action. The next step is to agree with farmers on a corrective action.
An unannounced follow-up visit will check whether the situation has been resolved. If not, thematter is escalated and sanctions can lead up to contract termination.
What happens if a field technician (FT) identifies a situation
requiring a prompt action during a regular farm visit?
Action 1

These action plans are currently being
implemented and will be a fundamental
part of our program in the coming years.

Action 2

Action 3

Action 4

Maximum 6 weeks

The FT immediately
stops the occurring
situation and raises theissue with the farmer.

The FT discusses withthe farmer to agree
on an action plan,and records boththe prompt action andthe action plan in themonitoring database.

If the FT faces challenges
with the farmer inacknowledging the issue
and agreeing on anaction plan, he or she
escalates the issue.
Appropriate action istaken on a case-by-casebasis, ranging from awarning to contract
termination.

Philip Morris International
Sustainability Report 2018

The FT makes anunannounced visit to
the farm (or during thefollowing crop season
if it is not possible
for the FT to re-assess
the issue undersimilar conditions).

The FT closes theprompt action if:> no recurrence
is observed> the action has
been implemented> the circumstances
have changed, making
the issue unlikely tooccur again

If the prompt action
is not solved, the FT
escalates the issue.
Appropriate action istaken on a case-by-casebasis, ranging from awarning to contract
termination.

Based on our comprehensive and regularmonitoring of tobacco farms (including throughexternal third parties), we are confident that thevast majority of contracted farms supplying PMI
do not use child labor. Our monitoring data
(covering 88% of contracted farms) show that,out of the over 300,000 farms visited by fieldtechnicians, 98% were meeting the standards
in this respect by the end of the crop season.
While this number is a positive sign of theefforts on the ground, we remain cautious as we
acknowledge the limitations of our monitoring
system (e.g. field technicians are present on thefarms for a limited amount of time at various
crop stages) and of course the seriousness
and the complexity of the issues we face.
In 2018, the total number of child labor related
prompt actions amounted to 4,587, a slightincrease from 4,417 in 2017. The vast majorityof child labor cases identified (92%) werechildren working with their own families.
While there was a general decrease in mostgeographies and by most suppliers, this wasoffset by significant increases in Turkey andMalawi. Our analysis shows that the increasein these two countries does not necessarilyreflect a higher prevalence of child labor on
the ground, but rather an enhanced visibility
at farm level attributed to better monitoringwith increased coverage.
In 2018, we addressed 4,082 of these incidents,
representing 89% of the prompt actions
identified, up from 67% in 2017.

67

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Eliminating child labor and improving labor conditions on tobacco farms continued

Detailed analysis of our 2018 data shows fewer
incidents of children below 18 handling andstringing tobacco leaves for curing and harvesting.
However, the data show a higher incidenceof children carrying heavy loads and working
with sharp tools. A stricter and more thoroughapplication of our guidelines in Malawi has meant
increased detection of such prompt actions.
In the geographies where the incidents persist,
we are focusing on developing a better insightand understanding of the root causes. We areenhancing the remediation initiatives available
and adapting them to the local socio-economic
environment, so that we can work with farmers
to directly address the root causes of each
incidence. We will monitor the remediation
efforts and undertake external verification tovalidate the effectiveness of these initiatives.
In parallel, we plan to intensify awareness raisingand training to farmers and workers, including
local communities when possible. In addition,
we support community initiatives that provide
alternative educational opportunities forchildren or basic literacy and numeracy skills
for mothers. We are also strengthening ourdue diligence and consequence management
processes to address persistent non-compliancecases to ensure our efforts are effective.

Tackling child labor in Indonesia
The same scene plays out across rural
Indonesia: the children finish school at around
one o’clock, sometimes three. Typically, thehead of the family expects the children to help
out after school in some way because this is
the common practice. The family farm is small,farm workers are not available, or may be too
expensive for the household economics, andmechanized equipment is rare.

school and working on stringing, harvesting,or handling green tobacco. Our strategy todraw children away from the fields involves
monitoring by the field technicians, training
and awareness for parents regarding
hazardous work in tobacco, removing
the need for children to help on the farm(by mechanizing the stringing process for
instance) and offering after-school initiatives.

Against this general backdrop, child laborhas been a persistent issue in tobacco-growing
areas in Indonesia. PMI’s monitoring data
show that children are most likely to workin the tobacco fields during the peak season(August–November), starting straight after

In addition to the above actions, in 2016, a
community-based initiative known as Rumah
Pintar (“Smart House”) was introduced in
Lombok and Java by PMI’s Indonesian affiliate,
its suppliers and local NGOs. Rumah Pintar
are community facilities offering after-school

recreational and educational activities to thechildren of contracted farmers and workers.
By 2018, the program had expanded to 34
villages and 14,561 children aged 7–18 years.
In 2019, the plan is to expand to 73 units. Twoexternal surveys undertaken by the local NGOs
involved indicated a significant reduction
in child labor as a result of the Rumah Pintar.
Children removed from child labor increasedon average from 47% before the programto 82% in 2018. This initiative has achieved
widespread recognition, including fromthe government.

Child labor prompt actions reported, per type of activity (2017-2018)
2018
2017

39%
35%

In sum, child labor has no place in our supply
chain. We have put in place the mechanisms
to identify it and we are systematicallyaddressing the cases that surface. Despite
complex challenges, we want to reach a point
where these issues are no longer happening.

26%

27%

17%
13%
10%
7%
3%
Harvesting or
handling
green tobacco

Stringing

Carrying
heavy loads

Working withsharp tools

5%

Handling or
applying
fertilizer

2%

3%

Driving a tractor
or operatingmachinery2%2%

Handling or
applying CPA

1%

3%

Working in
extremetemperatures

2%

4%

Other

68

Overview

Transforming
our business

Focusing on safe working conditions
In 2018, among the over 300,000 farms visitedby field technicians, a total of 13,780 prompt
actions were related to an unsafe work
environment, compared with 8,087 in 2017.
Almost two-thirds of those were linked toinadequate CPA storage practices, CPA
application, and handling of green tobacco
without appropriate PPE. Unsafe or insufficient
worker accommodation accounted for thesecond category of our prompt actions reported
and represented by far the biggest increase in
the reported prompt actions since 2017. Thiswas particularly the case in Malawi, Mexico,and South Africa, where we strengthened
our focus and monitoring of this issue. We
have set ambitious plans to resolve theaccommodation problems.

Driving operational
excellenceb

Managing oursocial impact

An example of this is the large-scale renovationof workers’ accommodation in South Africa.
The project covers all contracted tobacco farms
in two areas: Limpopo, and the Eastern andWestern Cape. In 2018, 174 houses werecompleted in Limpopo with the remaining 45
to be completed together with the 24 housesin the Eastern and Western Cape in 2019.
Upon completion in 2019, we expect a totalof 243 new rooms, 326 renovated rooms,
408 window replacements and 83 toilets
to be built, benefiting over 560 workers.

46%

32%

19%

17%

Unsafe or
LQVXIĆFLHQWZRUN
accommodation

In our 2017 report, we shared our intensive
efforts to address the poor living and working
conditions of migrant workers in tobaccogrowing areas in Nayarit, Mexico. Every year,
these migrant workers come from Mexico’s
highlands and settle in tobacco-growing
areas for the season. One year on, thisprovides a good illustration of our “StepChange” approach.

2%
Exposure to GTS
due to not wearing
proper PPE

Exposure to CPA
due to not wearing
proper PPE• Prevent night work in the fields;• Provide adequate accommodation
to all migrant workers; andOther• Cost compensation for farmers
that successfully provide adequate
accommodation, transportation,
as well as sanitation and clean water;• No renewal of contracts with farmers
that do not join the effort; and• An extension of the opening hours andcapacity of the five childcare centersproviding education, nutrition, andmedical services for the children of
the migrant families.
By the end of the season, these measures
benefitted over 6,000 people (workers
and their families). Only six farmers did not
make an effort to align with our objectives
and their contract was terminated at the endof the season. Additionally, the monitoringand external verification of the program
undertaken by Fundación Mexicana deApoyo Infantil in July 2018 showed significant
progress had been made on the objectives:• Provide workers with access to shade
areas for rest and lunch, and to sanitation.

• 93% of workers no longer lived on the
tobacco fields or worked into the night;

To address the root causes of the issues
in an effective and sustainable manner, PMI
introduced a series of measures to reorganizelabor schedules and activities and to prohibit
field work after sunset to be implemented by
TPN, including:• 85% worked in adequate field conditions,and 94% were provided with rest
areas and toilet facilities, and 98%
with drinking water.

• A sensitization campaign in the workers’communities of origin;

5%

3%
CPA stored in a waythat could cause ahealth and risk accident

Addressing poor living conditions of migrant workers in Mexico• A 25% increase on the piece-rate paid
to workers;

14%

Philip Morris International
Sustainability Report 2018

OUR “STEP CHANGE” APPROACH IN ACTION:• Prevent workers from living on the
tobacco fields;
2018
2017

30%

Reporting onsustainability

In the last quarter of 2017, PMI
and its supplier Tabaco del Pacífico
Norte (TPN – subsidiary of Universal
Corporation) conducted an in-depth
analysis of this complex and deep-rooted
problem and developed a plan with thefollowing objectives:

Safe work environment prompt actions reported, per type (2017–2018)32%

Reducing ourenvironmental footprint• 87% of migrant workers had accessto adequate accommodation; and69

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Eliminating child labor and improving labor conditions on tobacco farms continued

Ensuring fair working conditions
One of PMI’s seven Principles outlined in
the ALP Code is “income and work hours” –ensuring farm workers are treated fairly and arepaid at least the minimum wage by the farmers
from whom we buy tobacco. In 2018, roughly
one-third of contracted farmers hired workers
at some point during the season. Contractual
employment relations are typically informal andtemporary – spanning from a few days to delivera particular task to an entire growing season.
Remuneration is often agreed either by piecework (workers get paid a certain amount for agiven output, e.g. amount of leaves preparedfor curing) or in the form of a lump sum for theservices provided across the season. While wehave been building awareness about national
minimum wages as part of our ALP Coderequirements, very often both farmers andworkers do not know how to apply thesenational standards to their agreements(e.g. converting traditional piece-work rates
to a daily rate equivalent if benchmarked against
the national minimum wages). In addition, theseasonal agreements on small-scale farms do
not encompass in practice a full-time,

continuous occupation for the whole season(simply because there is not enough work). In
this case, it is difficult to benchmark against thenational minimum wage rates without a recordof the number of days actually worked.
In addition to the informal nature of theemployment agreements and the challenges
described, in some geographies, particularly
in Indonesia and the Philippines, there are
traditional community organizations (involving
farmers and workers) that agree on the season’s
remuneration rates without taking into accountthe national minimum wages. Although tobacco
workers are paid typically at or above theprevailing agricultural rates, given the specialized
nature and complexity of the work involved, ourmonitoring data showed that in 13% of thecases, workers were paid below the national
minimum wage rates. These issues havebeen identified in Malawi, Mozambique, thePhilippines, and in one region in Argentina andone region in Indonesia.
In 2018, as part of our “Step Change”
approach, the above-mentioned markets
undertook more in-depth surveys to better
understand the issues and their root causes,and began developing ambitious plans to close
the wage gap by changing practices in relation
to the types of agreements established,including formalization of contracts
and record keeping for work rendered.

Above: A tobacco farm worker in Nayarit, Mexico

An example of PMI’s commitment to theadoption of minimum wage standards is thecompany’s position on the tenancy system
in Malawi. Tenant farming is an agricultural
production system in which landowners
contribute their land, while tenant farmers
contribute their labor. Tenancy agreements
can take multiple forms but typically, in Malawi,
landowners pay tenant farmers an agreed cash
amount for each kilogram of tobacco deliveredat the end of the season (a percentage of theselling price to the final buyer) and provide
the crop inputs, subsistence goods andaccommodation. Historically, we havediscouraged the tenancy practice because
we cannot properly ensure the respect of our
ALP Code. This tenancy system in Malawi has
long been contentious among stakeholders andremains an unresolved issue. While the industry
has taken some measures, this year PMI has
gone a step further by asking our suppliersin Malawi that the tobacco supplied to us
should not originate from farms withtenancy agreements.
We expect that our position will drive thegeneral adoption and implementation in the
country of the minimum wage, as well as othermeasures to mitigate the risks of exploitationof vulnerable tenant farmers.

70

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CA SE S TUDY

Working withtobacco farmers
towards crop
diversification73%
Of contracted tobacco farmers
grow food crops for theirown consumption, out of all farmers
growing alternative crops

400,000b
Tons of food produced by contracted
farmers through our crop
diversification and suppliers’ foodprograms in Malawi and Mozambique
Image: A farm worker growing alternative crops in Mozambique

71

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CA SE S TUDY

Working with tobacco farmers towards crop diversification
Transforming our business can lead to newchallenges for farmers in certain geographies
as we foresee a gradual decrease in our tobacco
leaf requirements, smoke-free products
requiring half the quantity of tobacco or less,compared with cigarettes. Consequently, we are
expanding the support we provide to farmers.
While we have focused on Malawi in ourprevious reports, we have also been busyin Brazil, Colombia, Mozambique, Pakistan,and the Philippines.
Colombia

BrazilMalawiPakistan

Philippines

Mozambique

In Malawi, a priority country for our
diversification program, we signed a
Memorandum of Understanding with PalladiumInternational LLC (Palladium) to work together
on selected initiatives. Palladium is a global
impact firm implementing USAID’s “Feedthe Future” program in Malawi. The aim is tocreate opportunities for smallholder farmers
to diversify production away from tobaccoand into other food crops, such as soybean or
groundnuts. During 2018, we trialed various
irrigation methods, including drips, sprinklers,and pivot systems fed from different water
sources, such as dams, weirs, rivers, andboreholes pumped using solar or diesel pumps,
to identify efficient, cost-effective solutions
for farmers. To reduce post-harvest losses,
147,000 crop storage bags were distributed to
all farmers in our food crop program to improve
crop storage as a simple, low-cost way to reduce
losses and insecticide use.

In Mozambique in late 2018, we, together
with our supplier, initiated pilots of alternative
crops with an international NGO, Business forDevelopment, whose experience lies in assisting
communities to rise out of poverty. In addition,
400 treadle pumps were distributed tosmallholder farmers, providing them with ameans to pump water from existing water
sources to use on seedbeds and vegetablegardens. In addition, we distributed 6,000
crop storage bags.
In 2018, we launched our new Pakistan
Diversification Program, where we initiatedthe Corn Support Program, providing hybrid
corn seed and fertilizer to 200 farmers under
our Integrated Production System (IPS). We
expect yields of around 3,000 kg of corn on
a 0.5-hectare plot, earning approximately USD
500 of additional income. In addition, Pea
Support Program provides pea seeds to 64
farmers. A similar project is planned to help
75 farmers grow mushrooms. PMI will provide
raw materials and training, and the marketing
will be sponsored by the Hashoo Foundation.

banana/plantain seeds to 256 farmers andprovided 375 home garden vegetable seedkits. Additionally, we have assisted 50 farmers
in setting up micro-fisheries and 100 farmers insetting up chicken cooperatives as an alternative
source of income.
In Brazil, PMI has helped to set up homeallotment gardens for rural families in 201
municipalities to grow native and exotic fruits.
The project in partnership with Embrapa (theBrazilian Agricultural Research Corporation)
provides each beneficiary with fruit tree saplings
and farming inputs while the beneficiaryprovides land and labor for implementationand maintenance of the gardens. The project
aims to expand, reaching new beneficiaries
including not only farmers supplying to PMI,

Our Philippines “Tobacco Roadmap” aims
to improve the competitiveness of farming
communities by reducing poverty, promoting
sustainability and improving farmers’
profitability and livelihood throughdiversified crops while enhancing the quality
and competitiveness of Philippine tobacco.
PMI is strengthening the Corn Support
Program, launched in 2015 and annually
supporting around 175 farmers. We are
running a pilot to analyze the supply chain andidentify inefficiencies related to transportationand post-harvest activities. Mobile threshers
and grain dryers will be lent to farmers topotentially reduce post-harvest costs andgenerate additional income.
In Colombia, farmers are benefiting fromdiversification programs with food crops such as
banana/plantain, corn, and garden vegetables.
Approximately one-third of farmers inter-crop
corn with tobacco, while we have distributed

Above: A farm worker growing alternative crops in Mozambique

but also vulnerable communities. The projectincreases diversification activities, improves
biodiversity in small farms through the plantingof trees, improves family health by promoting
healthier eating habits and generates additional
income to the farmers, due to the possibility ofselling surplus production.
As we expand our diversification efforts,monitoring and evaluation will allow us to assess
the impact of the various initiatives on farmers
and their families. We have compiled a household
welfare survey, which was piloted in Malawi atthe end of 2018 with a small sample of farmers.
Rolling out this survey to a larger population
will allow us to measure, on an annual basis, theimpacts on household income, food security,and nutritional diversity.

72Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

PERFORMANCE AND NE X T STEPSThe systematic monitoring of the ALP program
implementation in 2018 increased to 88% (2017: 77%)of the 350,000 farmers from whom PMI or our leaf
suppliers source tobacco, against a 2020 goal of 100%.
Overall, our analyses show that child labor is decreasing
in most geographies despite a higher number of recorded
incidents in some countries, mainly attributable toimproved monitoring.
In 2018, we resolved 13,687 issues raised through prompt
actions representing 74% of the total prompt actions
raised by field technicians. Of the prompt actions relating
to child labor, 89% were resolved, up from 67% in 2017.
In the 2017–2018 crop season, 50 contracts with farmers
were not renewed or terminated for lack of compliancewith our ALP program.
Our external verification partner Control Union further
assessed four countries in 2018, bringing the cumulative
total to 21, against a 2020 target of 24. The reports are
published on PMI website.
Our biggest achievement in 2018 is that, together with
our suppliers, we developed comprehensive and ambitious
action plans taking into account the local, social, andeconomic drivers of the priority problems that we aim
to eradicate. We are taking a strong stance and haveambitious targets, and will measure our progress andreport it transparently. These plans are currently being
implemented and will be a fundamental part of ourprogram in the coming years.
In 2019, we will pilot a new business model in Malawi
and other countries to better assess our approach toa living income for farmers.

89%
Of prompt actions relating tochild labor incidences were resolved in 2018

Above: A field technician with farm workers in Mozambique

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 201873

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Supporting fair working conditions
Foreword
PMI’s vision of creating a smoke-free future
requires a full transformation of many otheraspects of our company – the way we areorganized, the way work is defined andallocated, and the way leaders are assessed
and their performance is measured. That’s
a momentous challenge and to accomplish
it we need the full array of skills and talents
available to us.
Our intention is to strengthen our inclusive
culture and boost how everyone cancontribute their personal best throughattitudes, behaviors, and employment
practices that value, respect, andaccommodate differences, that promote
listening and learning from others, and thatcreate space for constructive disagreement.
The era of transformation at PMI has
ushered in new people, new skills, and new
ways of working. We aim to harness theway transformation inspires and motivates
our colleagues while mitigating the naturalanxiety and stress that business
transformation brings.

Above: Employees in PMI’s office in Dakar, Senegal

Progress in 2018
Attracting and retaining talent
Our new operating model, the way weorganize ourselves, was a focus in 2018, andvital to realizing our business transformation.
Essentially, it means we are blending old andnew ways of working at PMI. The learnings
from IQOS growth in Japan and the digital skills
for a “consumer-centric” approach are examplesof the new ways. New employee training isprovided about smoke-free products,
responsible marketing and sustainability.
Going smoke-free means a new leadershipapproach where openness, constant learning,collaboration, and stakeholder engagement
are demanded from our leaders.
We equip our teams with the right skills andencourage their development through ourThrive program, which helps connect people
to the company purpose, stimulate behavior
change and encourage leadership. In orderto make learning and development accessible
to all employees globally we have upgraded
our learning platform in 2018 to make it moreinteractive with better content.

74

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

400
Jobs being created in Greecein the smoke-free category€157m
Economic value added (EVA)
to the Greek economy by
Papastratos in 2017

CA SE S TUDY

Transformers
in Greece
Image: An employee in PMI’s Greek affiliate, Papastratos manufacturing facility

75

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

CA SE S TUDY

Transformers in Greece
Imagine for a moment that you are a machine
operator in PMI’s factory in Greece, it is 2016
and you are told the factory is converting todeliver new products that will contribute to asmoke-free future. Fast-forward to 2018 –transformation is happening everywhere.
Not just in factories but also in communications,commercial, and external affairs functions, forexample. We are proud to face the challenges,
and Papastratos, our Greek affiliate, is an
exemplary story.
“The only constant is our values, which havebeen our guiding light since Papastratos wasfounded some 87 years ago,” says the managing
director Christos Harpantidis. So, once we had
explained to employees why a transformation istaking place, most understood it to be a logicalstep forward. And, while change is not free ofchallenge, Papastratos recorded no serious
negative economic impact for staff through2016–2018. Ultimately, staff motivation was
secured because PMI is intensifying the social
dimension of its corporate purpose.
Our staff “get it.” And there is a domino effect asneighboring teams, in Bulgaria for example, gearup for growth in IQOS sales. But what caught

our attention was that our agility at work
was further primed by the long-standing
government-debt crisis. People are willing toadapt. And while trust in business during thetough times has faded, Papastratos is recognized
as a role model for rebuilding it. As Christos says,“People here see the transformation as anamazing period of their lives, and othercompanies in Greece can’t believe
how fast we are moving.”
IQOS in Greece is already used by 150,000
people and 400 jobs are being created there
in the smoke-free category. Core internal tasks
for us in Greece have included achieving culturaland behavioral change, installing crossfunctional “enabler” teams, training over
500 people on new standards and machinery.
Alongside that, we are installing new customer
care and digital services, operating retail IQOS
stores and e-commerce, expanding the sales
car fleet, amending supply chain management
processes, and engaging on our transformation
vision with new external stakeholders, such as
scientists and physicians.
Against this backdrop, we have assessedin 2017 the socio-economic impact of ourbusiness in Greece. Our findings showed that
Papastratos contributed 2.2% to the Greek
state revenues, with an economic value added(EVA) of EUR 157 million (0.1% of Greek GDP).
For every EUR 1 of EVA by Papastratos, EUR
2.30 is added to the Greek economy, an increaseof 66.7% on 2016. Additionally, every job at
Papastratos indirectly supports 2.5 jobs inthe overall Greek economy, thus supporting
the income of 7,130 Greek citizens. Equallysignificant is the social impact of the Corporate
Responsibility Plan, which invested more than
EUR 2.2 million during 2009–2017 and aims toprovide the most vulnerable social groups withrelief from the economic crisis, while creating
new economic prospects, empowering women,
facilitating access to education, and supporting
Greek tobacco growers.

Above: Christos Harpantidis, Managing Director, PMI EU South East cluster

Above: Call center employees in Athens, Greece

Reporting onsustainability

Philip Morris International
Sustainability Report 201876

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Rewarding employees

Upholding the living wage

We reward our employees in a way thathelps attract and motivate the people whowork on successfully achieving our businessstrategy. Our total reward package comprises
compensation programs and benefits.

We are serious about our efforts to ensure thatthe lowest-paid people in our organization areable to maintain a fair standard of living, andthat none of our employees gets paid below
the living wage rate.

Our policy is to pay at or above market
median in all countries where we do business,while ensuring a living wage standard for all
employees. Our compensation structuresand principles promote equitable treatmentof everyone.

A living wage is distinct from a minimum wage
and is defined as a wage earned within normal
working hours that provides the means topurchase goods and services necessary to attaina basic standard of living and to accumulate aminimum level of savings. It also aligns with thesocial and cultural standards of the community
and/or relevant host country.

PMI uses a global performance management
system set up to run an annual process. At
the beginning of the year, employees agree
on objectives with their managers, which isfollowed by an appraisal in November, withfeedback and one-to-one discussions. An
individual performance rating is decided basedon delivery against the business objectives andkey behaviors that are critical to PMI success.
PMI also has a 360-degree feedback tool tocomplement traditional performancemeasurement methods.
We reward superior performance alignedwith our strategy. The short- and long-term
incentives for our managers are based on
objectives that measure both financial
performance and strategic initiatives
in pursuit of our smoke-free vision.
Our benefits can include health insurance, wellbeing support, flexible working arrangements,
retirement plans, life and disability insurance,and many others.

Since 2016, we have worked with Business forSocial Responsibility to assess pay rates globallyand to validate that we pay a living wage acrossthe world. Previous surveys have found thatno permanent employee was paid below theliving wage rate (2017, 58 countries surveyed).
In 2018, our survey was extended to coverstandard temporary and seasonal employees.
The results pointed to less than 20 employees
being paid below the living wage, requiring
minor adjustments. Action plans are establishedto address these findings in 2019.

Reducing ourenvironmental footprint

Reporting onsustainability

We respect our employees’ rights of freedomof association and collective bargaining,whereby they are free to form or join trade
employee representative organizations of theirown choice and bargain collectively throughemployee representatives. We do our utmost
to ensure that they are able to make an informed
decision free from coercion, and to bargain ingood faith and respect the terms of collective
agreements where they exist.
Collective Labor Agreements (CLAs) govern
many of our employees’ terms and conditions
at work and may include several arrangements,
such as working hours, occupational healthand safety, holidays, wages, and proceduresfor dispute resolution. In 2018, we had 81 CLAs

Philip Morris International
Sustainability Report 2018

in 35 countries, covering approximately 65% of
our employees (2017: 80 CLAs, 35 countries,67%). In 2018, the Labor relations assessment
toolkit was shared with local People & Culture
teams across the business to help them build
action plans to maintain this topic high on theagenda and respond where potential labor
relations risk arises.
We have faced difficult discussions with
employee representatives in the context
of collective bargaining or restructuring incertain countries such as Pakistan. However,
we have maintained good contact with
employee representatives and fully
respected employees’ rights.

Follow-up checks will continue to ensure that
we remain a living wage employer globally.

Engaging on labor relations
The year 2018 saw an ongoing focus on
dialogue, along with more engagement with
employee representatives, both in countries
with already well-established practices in thisfield, as well as in those where this was not yet
the case. Dialogue with employees and theirrepresentatives is especially important during
times of business transformation.
PMI has a long history of diligence in recognizing
employee rights and fostering solid andcollaborative labor relations practices.

Above: Employees at PMI’s Operations Center in Lausanne, Switzerland

77

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Supporting fair working conditions continued

PERFORMANCEAND NE X T STEPSOur employee turnover rate is slightly higher
than in previous years. The transformation
process principally accounts for the change.
Our careful monitoring of pay levels in themarkets reveals that only a few employees
received a salary slightly below the definedliving wage level; this is subject to a corrective
plan of action.
We are expanding our work on living wages. In
2019, we will review how employee benefits
relate to living wages, as well as what minimum
amount of life insurance protection could be
provided to employees across our affiliates.

65%
Of employees covered by Collective Labor
Agreements in 2018

Above: Employees in PMI’s Indonesian affiliate Sampoerna’s office in Jakarta

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 201878

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Promoting health, safety, and well-being
Foreword

TARGETS

0.10

1.50

0.30

Lost Time Injury (LTI) rate

Fleet collision rate
per million kilometers driven

Total Recordable Incidents Rate
(TRIR)The physical and mental health of employees
is a priority and key to PMI’s success. We
are committed to providing a safe and secure
work environment for all employees, service
providers, and visitors.
Transforming our business to deliver asmoke-free future means changing theway we work, from the factory machinery
we use, to the new ways of working by oursales force, and to the corporate processes
we follow. We strive to ensure that thesechanges do not affect the health and safetyof our workforce.
We do so by implementing organizational
programs, technology, behavioral change
programs, and country-level support
through our BalancedYou platform.
An overriding goal that ripples throughthe markets is a smoke-free workplace,which naturally aligns with our vision
and which signifies our view that the
responsible management of health,safety, and well-being is key to how
a business creates sustainable value.

Above: Papastratos, PMI’s Greek affiliate’s manufacturing facility

79

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Promoting health, safety, and well-being continued

Progress in 2018
Leadership and ownershipgo hand in hand
It is everyone’s right to work safely and it
is everyone’s duty to correct unsafe acts,
practices and conditions, for the protectionof themselves and others.
Our Mission Zero “Because We Care”
program aims to deliver safer behavior,safer culture, and effective incident reporting inour operations and affiliates around the world.
In 2018, PMI saw the emergence of a new“shared” responsibility approach to safety. The
responsibility of PMI to provide its employeeswith awareness raising and training on safety,
safe technical equipment, and appropriate risk
management systems, is coupled with every
employee’s own, personal responsibility to
behave in a safe way in the workplace (office,manufacturing facility, or while driving).
This sense of ownership is complemented bya systematic management approach. Nearly
all our sites are certified or pre-certified to
OHSAS 18001. Any uncertified site is currently
being constructed, renovated, or closed.
In 2018, the aggregated LTI rate at PMI
increased slightly. However, we continue toimprove safety through risk-based programs,
such as in Canada, Dominican Republic, Poland,
Spain, and Turkey.

Ensuring safety in our facilities

Promoting fleet safety

Our Mission Zero “Because We Care” programaims to prevent injuries in the workforce. In
2018, the LTI rate in our manufacturing facilities
was 0.07, a slight increase versus 2017 (0.05)
but still within the level of excellence of 0.10
injuries per 200,000 exposure hours. Thischange is partly due to increased exposure
linked to the conversion of production lines andnew ways of working, and better transparency
as a result of improved tracking and monitoring.
The overall severity rate decreased (numberof lost or restricted days). Our total recordable
incidents rate was 0.22, in line with 2017 andwithin our 0.3 target.

We have close to 25,000 cars and vans in
our fleet and our colleagues collectively drive
more than 500 million kilometers each year in
more than 100 countries. Driving presents thehighest risk to the safety of our employees andcontractors. Our Mission Zero “Because We
Care” program formalizes how we manage
an extensive range of topics, from emergency
preparedness and driver hiring to vehicle
selection and crash incident reporting.
Despite falling collision rates in 2018, weendured five fatalities: two PMI employees(one in Mexico and one in Serbia), and threemembers of the public in Indonesia and thePhilippines. We deeply regret these losses,
investigated the cause of each accident,
and offered support to family and friends.
Even during tough times, we have tolearn from challenges. During the year, we
introduced a new tool in 12 of our markets
and invited 4,500 drivers to evaluate the risk
profile and risk awareness of drivers, especially
new hires. To raise awareness of fleet safety,
our Chief Operating Officer relaunched thefleet safety award, attracting 58 submissions
from the markets.

We regret to report, however, that weendured one fatality at our Pamekasan office inIndonesia. A contractor was electrocuted whilehandling a water pump. We take this seriously,
and have commiserated with the family andfriends of the contractor. We have learned
from what happened and shared our findings
to prevent further occurrence.
It is important that each and every employee
understands how to accomplish a task safely.
We promote the concept of ownership by eachindividual to strengthen their contribution tosafety at work. Of course, our leaders must
uphold a culture of safety at all times. Beyond
providing safe machineries and technologies,
we aim to integrate safety into every process.
Additionally, the message is reinforced by oursafety champions as well as the emergent
safety pillar of our OPEN+ system, which offers
a standardized way to ensure safety on thefactory floor. It draws on leading models ofsafety culture and blends concepts of leanmanufacturing with organizational change.
An emergent initiative is the new safety“climate” survey, run at nine sites in 2018.

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

80

Overview

Transforming
our business

Striking a balance:
health and well-being at PMIBalancedYou, our health and well-being (H&WB)
program, was officially launched a few years ago
and is now accessible worldwide by employees
and contractors through our online dedicatedplatform. The program has four key objectives:
1. Disease: Preventing illness and disease;
2. Movement: Encouraging physical activity;
3. Food: Promoting healthy eating; and4. Balance: Supporting stress management
and work–life balance.

Driving operational
excellenceb

Managing oursocial impact

There are over 40 local H&WB committees
who represent employees’ interests.
Composed of cross-functional team members
and employee representatives, they foster thecollaboration and dialogue necessary to tailor
the activities according to the specific needsof local employees. These committees
contribute to our objective to support ouremployees in all aspects in their lives.
BalancedYou is “owned” by employees andwas set up after detailed research on what
employees valued. Each country, guided byits local H&WB committee, has a tailored
package of support and content to meettheir needs. Employees can ask questions,confident that their privacy is maintained.

Reducing ourenvironmental footprint

Reporting onsustainability

In some markets, H&WB committees direct theshape of the program. In Egypt, for instance, thecommittee has started a Healthy Food Catering
initiative, coupled with a work–life balance
initiative called Flexico. Supporting these is asuite of medical services provided by an external
provider, a financial advice service, and a gym
discount allowance, as well as special events
linked to happenings like International Women’sDay or the 2018 FIFA World Cup.
While doing all this, BalancedYou complements
the existing set of employee benefits, such as
health insurance, nutritious canteen food, andsporting facilities.
To encourage a healthy work–life balance,
more than 70 of our affiliates around the world
have adopted flexible working arrangements
aimed at better supporting women and men
to succeed, both personally and professionally.
These include, for instance, the possibility towork remotely, compress the working week,
work part time or take unpaid leave. In addition,
we want to support our employees to be both
great parents and great professionals, forexample by running pre-maternity, postmaternity, and new father workshops, andby facilitating peer-to-peer support throughthe employee-run network Parents@PMI.

Philip Morris International
Sustainability Report 2018

A smoke-free workplace
In 2018, we formally launched ourcessation and smoke-free advice
program to all employees.
PMI is not able to give medical advice
or offer formal cessation services so
we direct smokers to available resourcesand experts who can provide the support
and advice, as appropriate. On the
BalancedYou platform, the user clicks
on the “I would like to quit” button for
concise information that includes, forexample, PMI’s medical plan, nicotine
replacement tools, and coaching services.
We encourage those who would otherwise
continue to smoke to switch to smoke-free
products. In doing so, we are clear thatsmoke-free products are not a complete
solution to the problems related to tobacco
consumption. They are not risk-free andare addictive. Quitting any tobacco andnicotine product is the best option.
The program is promoted on the
BalancedYou platform accompanied
by workshops, events, apps, andother outreach.

“After my twin boys Tom and Luka were born in 2014(children number three and four!), I took advantage of
FlexAbility at PMI by working 60% for a whole year. It
was an amazing experience, spending much more timewith my family, and I’m proud to work at a company thatgives us such opportunities and forever grateful to all thecolleagues around me who helped make it work.”
Till Olbrich, Deputy General Counsel
Above: Call center employees in Athens, Greece81Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Promoting health, safety, and well-being continued

PERFORMANCEAND NE X T STEPSWe recorded an overall LTI rate of 0.13
in 2018 (2017: 0.10). Our market safety
initiatives continue to be put in place, andour culture assessment will target where
additional action is needed.
Our fleet collision rate has improved to
0.91 down from 1.01 in 2017, meeting
our target to stay below 1.50 collisions per
million kilometers driven. We set challenging
country-level targets to improve global fleet
performance and promote local initiatives to
respond to the different road infrastructureand driving cultures around the world.
Nearly all our sites are certified or precertified to OHSAS 18001.
We aim to achieve best practice in our
H&WB programs and to intensify
performance across its four objectives.
We want to expand the outreach of ourBalancedYou program to further support
our employees in all markets. Importantly,
we look forward to reporting all PMI
workplaces as smoke-free overthe coming years.

>70
Of our affiliates around theworld offer flexible
working arrangements

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

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 201882

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Furthering diversity and inclusion
Foreword

TARGETS40%

1stwomen in management
positions by 202234

international company to achieve
and to maintain the Global
EQUAL-SALARY Certification

We aim to foster behaviors that embrace diversity. Businesses
that are diverse and inclusive are more innovative, consumercentric, and profitable in a fast-paced, complex world. As wetransform our business, we see diversity as a necessity and astrength. An inclusive culture founded on equal opportunity,
fairness and respect for everyone, builds a diverse workplaceof talented people with the full range of skills, ideas,
experiences, and perspectives to deliver positivechange for consumers and society.
Furthermore, healthy dissent and disruption resulting fromdiversity drives innovation and creativity. Only with truly
inclusive and diverse teams can we be confident that weare generating the best ideas and product innovation.
Our challenge – and opportunity – is to enhance the opennessof our workplace culture and organizational structures tofurther support diversity, so that each and every person
feels valued, respected, and included, and has the space
to deliver their best, individually and collectively.

Diversity and inclusion
Diversity is about who’s sitting around that table, who’s
being recruited or promoted, and who’s represented,
and underrepresented. We think about diversity verybroadly at PMI, including gender, gender identity,
ethnicity, nationality, age, sexual orientation, religious
background, physical ability, education, technical skills,
life experiences, and more. Inclusion is the how. Inclusion
is the behaviors that welcome and embrace diversity,
so that each person can bring the full range of theirbackground, experience, and perspective to workwith them – and share that diversity with peers
and in the work they do every day.
Above: A call center employee in Fukuoka, Japan83

Overview

Transforming
our businessDriving operational
excellenceManaging oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Furthering diversity and inclusion continued

Progress in 2018
Achieving gender balance
Given that women make up half the world’s
talent pool and influence 60 to 70% ofconsumer spend, improving gender balance
at PMI is our first inclusion and diversity priority.
At the end of 2018, 42.1% of PMI’s global
workforce were women, and a growing numberof management roles across PMI are being filled
by women, reaching 35.2% – up 6 percentage
points since year-end 2014.
Women accounted for 40.4% of new hires
at managerial levels and 47.1% of new hires
at more junior levels. To support our gender
parity target for all new hires, we have inplace practices to remove potential genderbias from the recruitment process.

Supporting career development of
our women and ensuring equal accessto learning opportunities are also critical.
In 2018, women accounted for 38.3% ofpromotions at managerial level. This is progress
towards our goal to have at least 40% womenin management roles by 2022.
We continued in 2018 to expand our parental
support programs, and to provide opportunities
for women in PMI to access role models,build connections, and develop peer support
and professional relationships throughnetworking events and leadership forums.

Gender split at various managerial levels
Male

Female

64.8%

35.2%

Seniormanagement

84.8%
84.8%

15.2%
15.2%

Directors

70.6%
70.6%

29.4%
29.4%

Managers

63.2%

36.8%

Above: Employees in PMI’s office in Bogotá, Colombia

Philip Morris International
Sustainability Report 201884

Overview

Transforming
our business

Ensuring Equal Pay
At PMI, we see equal pay for equal work
between women and men as the baseline
standard for equality. That’s why we undertook
the Global EQUAL-SALARY certification by
the EQUAL-SALARY Foundation.35 The
certification confirms PMI’s commitment
to equality and is an important building blockon our path to creating an inclusive, genderbalanced workplace.
The EQUAL-SALARY certification methodology
verifies that PMI pays all its male and female
employees equally for work of equal value
everywhere we operate across the world.
The certification process included a statisticalanalysis of salary data and a qualitative auditof PMI affiliates by PricewaterhouseCoopers(PwC), the Foundation’s partner appointed
to audit compliance with the methodology.
The auditors conferred management toconfirm their commitment to gender pay
equality, held focus groups with female
employees to understand their perceptionof that commitment, and reviewed humanresources policies and practices to help uncoverpotential “gender blind spots” that could hinder
equal opportunities for women, recommending
improvements in certain cases. This rigorous
process spanned 18 months, involving input
and commitment from the top down and bottom
up, demonstrating the company’s commitment
to equality.

Driving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Our record on EQUAL-SALARY certification:
PMI was the first international company to obtain the EQUAL-SALARY
label in Switzerland in 2015. In doing so, we set ourselves apart as a
top employer where principles of fairness, diversity, and inclusion are
the foundation for our success.
Philip Morris Japan was the first company outside of Switzerland to obtain
the EQUAL-SALARY certification in November 2016, and maintained it
for the last three years through the annual audit process. By applying theFoundation’s rigorous equal pay methodology in the country, PMI helped
to bring their work to an international level, encouraging other companies
to follow suit.
The Global EQUAL-SALARY certification verifies that PMI pays men
and women equally for equal work everywhere we operate worldwide.
We are proud to be the first company to receive this global certification.

Reaching the Global EQUAL-SALARY certification is a concrete, practical step towards
our commitment to improve our gender balance and close the gender talent gap.

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

PERFORMANCEAND NE X T STEPS
Change does not happen overnight in a
multinational company with a workforce ofaround 77,400 diverse employees speaking
more than 80 languages. But with clear
targets, accountable leaders, and companywide programs, we are making progress.
Women now hold 35.2% of all management
roles at PMI. We achieved the Global EQUALSALARY certification in March 2019.
Work remains to be done, however. A priority
for 2019 is to increase the representation of
women in the senior leadership, among whom
only 15.2% were women in 2018. We will dothis through targeted recruitment of top
talent and personalized career development
plans. Additionally, we will further embed
flexible working practices and support
employees to thrive at work and at home.
Through 2019 and beyond, we will also
continue to go beyond our global priorityof improving our gender balance to progressinclusion of other diversity dimensions indifferent affiliates and geographies –whether that relates to the LGBTQ
community, people with disabilities,
different ethnicities, or across generations.

35.2%
Of management roles held
by women in 2018
Above: Employees in PMI’s office in Dakar, Senegal

85

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Engaging with our communities
Our community engagement has always been about
being a good neighbor and partnering with thecommunities around us to help address local needs.
In 2018, we contributed to 280 community projects
in over 60 countries partnering with more than 230
organizations, and it is estimated that these projects
served over 300,000 people. More than 5,000
employees across 18 countries participated incorporate volunteering activities amounting
to close to 18,000 hours in total.
Projects in 2018 varied in scale and subject matter. For
instance, they included computer classes for the elderly,
legal counseling to victims of domestic violence, small
enterprises scaling up support, or access to quality
education for children living in tobacco-growing regions.
In addition, when disaster happens, we help communities
rebuild, delivering both immediate and long-term help. For
example, a significant effort went into a global fundraising
campaign we organized in 2018 in response to thetsunami that affected communities in the region aroundour Palu office in Sulawesi, Indonesia. PMI employees
generously gave over USD 150,000, matched by thecompany. The proceeds paid for the relocation of PMI
colleagues and their families, new accommodation andschools, town planning advice, and the creation of a fundfor children of employees who sadly lost their lives. This
campaign was made through Projects with a Heart, aplatform developed in 2018 by employees for employees,
aimed at fostering volunteering initiatives worldwide.
Building on our long-standing commitment to support
the communities around us, we are currently refining
our approach to intensify how we invest in relevant causes
for positive outcomes. We are aligning our efforts with
our sustainability strategy, with reference to the LBG
Framework, a global standard for measuring corporate
community investment.

280
Projects supported through ourcharitable contributions in 2018
Above: Rumah Pintar (“Smart House”) community initiative in Lombok, Indonesia

LEARN MORE ON
MANAGING OUR
SOCIAL IMPACT:

PMI’s Agricultural Labor Practices(ALP) CodeCountry-specific assessments
by Control Union of the ALP programand action plans bbb
PMI’s Commitment to Human Rights
PMI’s Human Rights Roadmap
PMI’s Responsible Sourcing Principles(RSP) and RSP Implementation
Guidelines
PMI’s 2018 list of charitable
contributions
on www.pmi.com

86Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

PILLAR 4

Reducing ourenvironmental
footprint
Effective environmental management across our operations and value
chain goes beyond compliance with applicable laws and regulations.
We are committed to constantly improve our business activities toachieve the highest standards of environmental sustainability, as
stated in our Environment Commitment published in 2018.
In this report, we focus on the four most relevant areas of ourenvironmental footprint: greenhouse gas (GHG) emissions,biodiversity and deforestation, waste and littering, and water use.
While improving the environmental performance of ourmanufacturing operations is key, the majority of our environmental
footprint arises elsewhere in our value chain, especially in tobacco
growing and curing, and with consumer waste (cigarette butt litter).
Working collaboratively with tobacco growers, suppliers, retailers,NGOs, and governments is key to the success of our environmental
programs and to achieving our targets.

A

IN THIS SECTION

Reducing our energy usage and carbon emissions

88

Conserving biodiversity and combating deforestation

93

Case study
Promoting live barns to prevent deforestation in Malawi andMozambique

95

Minimizing waste and littering

99

Case study
A step towards circularity

103

Managing water

106

Achieved A-List in the CDP Climate
Change for the fifth consecutive year

36%
Absolute CO2e emissions
reduction from our own operations(scope 1 and 2) in 2018 versus
our 2010 baseline

Above: Employees at PMI’s Indonesian affiliate, Sampoerna, solar panel farm in Karawang

87Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Reducing our energy usage and carbon emissions
Foreword

TARGETS

30%

100%

40%

Reduction of absolute CO2eemissions from our own operations(scope 1 and 2) by 2020, 40% by 2030,
and 60% by 2040, versus 2010 baseline

Share of electricity used in
manufacturing from renewables
by 2030, versus 2010 baseline

Reduction of absolute CO2e emissions
from our operations and value
chain (scope 1, 2, and 3) by 2030,
versus 2010 baseline

70%

70%

Zero

Reduction of flue-curing GHG
emissions by 2020, versus
2010 baseline

Share of tobacco leaf purchasedthat is cured using sustainably sourced
fuels by 2020

Coal used in tobacco
curing by 2020

Above: Employees at PMI’s manufacturing facility in Guadalajara, Mexico

Climate change is caused by GHG emissions,mainly from industry and agriculture. Stabilizing
global temperature rise below the internationallyagreed 1.5 degrees Celsius requires rapid change
in all aspects of society, including in our industry.
Our carbon footprint extends across our value
chain, from the supply of tobacco and othermaterials, to the production, packaging, and endof-life. We strive for continuous improvement inline with international agreements: we support
the Paris Climate Agreement and believe urgent
action by all stakeholders is necessary, as was
highlighted again in the October 2018 reportfrom the Intergovernmental Panel on
Climate Change.
Reducing our energy usage and carbon emissions
is embedded in our strategy, our Environmental
Commitment, our Guidebook for Success, our
Responsible Sourcing Principles and our Good
Agricultural Practices program. Our targets alignwith the capacity of the environment to tolerate
impacts – known as science-based targets.

88Overview

Transforming
our business

Progress in 2018

Driving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Share of carbon GHG emissions across our value chain in 2018

Responding to climate change risk
In 2018, we continued and strengthened theimplementation of carbon reduction projects
across our operations and our tobacco supply
chain. For the fifth consecutive year, PMI
achieved the top score (an “A” rating) from
CDP, the global disclosure system thatenables organizations to measure and manage
greenhouse gas emissions and other impacts.

Purchased
goods
and services,
includingtobaccoUpstreamtransportation
anddistribution

BusinesstravelEmployeecommutingFuel-andenergy
relatedactivities

Capital
goods

7.4%

3.2%

Downstream

Upstream

Scope 3

We aim to reduce carbon emission in ouroperations (scope 1 and 2) where we have fullcontrol, but also in our value chain (scope 3).

Scope 2The chart on the right depicts the share ofcarbon emissions throughout the value chain.36
Compared with many other industries, ourfactories have a relatively small impact.

Scope 1More energy and water are required to
produce IQOS heated tobacco units, as
additional manufacturing steps are needed forsmoke-free products compared to cigarettes.
Scope 1 and 2 GHG emissions remained stable
overall. As we evolve more factories to produce
smoke-free products, we will be resetting ourcarbon dioxide equivalent (CO2e) target baseline
level to reflect the new production process andrelative difference in emissions.

85.9%

3.5%

Downstream
transportationand distribution

Use of soldproducts

End-of-life
treatment ofsold products

In 2018, we developed a new carbon footprint model with an external consultancy, with the aim to better prioritize our actions as wellas to track our supplier’s improvements. Our scope 3 figures are now more accurate than previously. We have included more primarydata from our suppliers, an updated methodology, and a better understanding on risks and opportunities to reduce carbon emissions.
Furthermore, a full third party verification brings extra credibility to the results.

89

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Reducing our energy usage and carbon emissions continued

Reducing emissions in our
manufacturing operations
We prioritize carbon reduction projects in ourfactories as follows: we save energy; we switch
to lower-carbon fuels, especially renewables;
and we source renewable electricity.
In 2018, we continued our global program
to implement energy-saving projects at every
factory. We commissioned projects focusedon energy-efficient buildings, fuel control inmanufacturing, and LED lighting. At the sametime, our manufacturing of smoke-free products
is expanding fast. This process requires moreenergy and is currently attenuating the benefitsof our energy-saving projects. With the growthof our smoke-free business, it will be increasingly
challenging to reduce our global energy usage.
We therefore need to globally accelerate ourswitch to renewables, as these have a much
lower carbon footprint than fossil fuels.

We did so in the Philippines in 2018, where we
installed a solar photovoltaic plant to produce
clean electricity, and in Mexico where we built a
new boiler house to use biomass instead of fossil
fuels, which should both lead to an estimatedannual emissions reduction of 5,000 tons ofCO2e annually. More and more PMI factories
buy electricity from renewable sources, now
representing 65% of our consumption globally.
All carbon reduction investment decisions aresupported by “Marginal Abatement Cost Curve”
calculations and our internal carbon price of
USD 17 per ton of CO2e in order to allocate
capital for the best return in terms of carbon
reduction and cost-effectiveness.

Philippines solar plant
In 2018, our factory in Batangas (Philippines) invested in a 2.5 MW power plant converting
solar energy to electricity through photovoltaic modules. The installation is the largest of
its kind for PMI, and follows in the footsteps of PMI affiliates in Pakistan and Indonesia.
The power plant produces 3,500 MWh of electricity annually, with an expected reduction
in CO2e emissions of more than 2,000 tons per year. The project supports the Philippines
government’s Renewable Energy Roadmap 2017–2040.

Disclosing our climate performance
In line with our Environmental Commitment, we disclose our environmental
performance and risks to CDP, the organization which runs the global
disclosure system on climate, water, and forests. Out of the world’s 7,000
largest companies assessed by CDP climate last year, PMI is one of only 138
companies in CDP’s 2018 Climate “A List,” rewarded for consistently taking
comprehensive action to reduce GHG emissions and mitigate climate change
in a transparent manner.37
We are also one of 115 members of the CDP Supply Chain program.
For the second consecutive year, PMI was recognized for its leadershipin supplier engagement. The intent of this program is to increase theimpact up the value chain by encouraging suppliers to put in place
their own environmental programs.
Above: Employees at PMI’s Indonesian affiliate, Sampoerna, solar panel farm in Karawang

90

Overview

Transforming
our business

Lowering carbon emissions
from transport
A fleet of close to 25,000 vehicles is used in ourbusiness for delivery, sales, and other services.
Our fleet emissions account for about 28% of
our direct (scope 1) GHG emissions. In 2018,
we decreased the absolute CO2e emissions fromour fleet by 4% versus 2017. This reduction
results from good vehicle maintenance, ongoingswitch to hybrid and more fuel-efficient vehicles,
and eco-driving behavior. Our fleet comprises
approximately 400 “green” vehicles, which areeither electric, hybrid or that emit less than
80 g/km of CO2 for cars or vans and less than
600 g/km of CO2 for trucks. Following theswitch of our Spanish car fleet to hybrid vehicles,
other affiliates are planning similar investments.
Lastly, eco-driving brings fuel savings, and also
safer driving.

Working with tobacco farmers
to reduce emissions
As most our emissions occur in our supply chain,
we work with tobacco suppliers and farmers to
reduce the environmental impacts from tobacco
growing and curing, which is a priority area in
our upstream value chain. Our GAP program
covers a broad range of topics, including
GHG emission reductions.
We mainly source three types of tobacco:
Virginia, Burley, and Oriental. Virginia tobacco
represents over half of our global needs.
Virginia leaves are flue-cured in barns thatare heated using various fuels, including fossil
fuels and biomass (wood fuels and agro fuels).

Driving operational
excellenceb

Managing oursocial impact

We now run 41 carbon reduction initiatives
across our tobacco supply chain that focus
on three strategic aspects:
1. Supporting the implementation by
our suppliers to plant trees in farmers’communities, and commercial woodlots which are managed sustainably;
2. Improving the fuel efficiency of flue-curingbarns; and3. Switching from high-carbon or unsustainable
fuels, such as coal, to sustainable wood
sources and a range of biomass products(wood pellets, agro-pellets, or otheragricultural waste products.)

Reducing ourenvironmental footprint

Reporting onsustainability

Sustainable and traceable curing fuels
We aim to ensure that, by 2020, 70% of thetobacco leaf we purchase is cured using
renewable fuels that are fully traceable. In 2018,
we reached 46%, up from 36% in 2017. Our
move away from coal by 2020 is clearly underway, with the share of coal used as a curing fueldown to 15% in 2018, from 20% in 2017.
Farmers switch from coal to more sustainable
fuels such as agricultural waste pellets.

More efficient curing
About five kilograms of wood are needed toflue-cure one kilogram of Virginia tobacco,equivalent to about half a kilogramof wood per 200 cigarettes.
While farmers own their curing barns, PMI and
its suppliers provide guidance and support tomake them more fuel-efficient, focusing on
better combustion efficiency, ventilation, andheating control. Building on barn improvements
made in previous years, in 2018 we improved
a further 18,700 flue-curing barns in Brazil,
Indonesia, Italy, Malawi, Mozambique, Pakistan,
the Philippines, and Tanzania. By 2020, we aim
to improve 80,000 barns.

Above: Curing barns in Bahia, Brazil

Philip Morris International
Sustainability Report 2018

As we use more traceable firewood fromsustainably managed tree plantations, ourflue-curing GHG emissions will continue tofall. The way we calculate our carbon footprintaccounts for the “precautionary approach”:
we use a “full carbon” emissions factor until
proof is available that the source is sustainable.
The proportion of tobacco we currently
purchase that is cured at no risk of
deforestation is approaching 90%.
See page 94 on deforestation risk
in our supply chain, including live barns.

91Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Reducing our energy usage and carbon emissions continued

PERFORMANCEAND NE X T STEPSWe are on track to meet our carbon emissions
reduction targets, even as we move to newprocesses required by smoke-free products
in more and more factories.
By the close of 2018, the absolute
CO2e emissions from our own operations
decreased by 36% against our target of
40% by 2030 (GHG emissions scope 1 and 2,
from 2010 baseline) following energy savings,
fuel switching and sourcing of renewableelectricity. In 2018, 65% of electricity usedin our manufacturing operations was fromrenewables, up from 53% in 2017, against ourtarget of 100% by 2030. This resulted mostly
from a switch in the electricity supply in thePhilippines and Argentina. We have met our2020 target to reduce absolute emissions
by 30% in 2017, and are now focusing on
our 2030 target to reduce emissions by
40%. In line with the upcoming guidancefrom the Science Based Targets initiative,38
we will review and strengthen our carbon
targets and evaluate the best approach to
future-proof our operations.
Across our value chain, we achieved a total
reduction of 34% in 2018, against our target
to reduce absolute CO2e emissions by 40%
by 2030 (baseline: 2010).

36%
The absolute CO2e emissions reduction fromour own operations (scopes 1 and 2) in 2018
versus our 2010 baseline

A key element of our value chain emissions
reduction was the improvement made influe-curing: flue-curing GHG emissions
intensity was 47% lower in 2018 than in2010 (2020 target: 70%).

Global greenhouse gas emissions scope 1, 2 and 3 (’000 tons CO2e)

In 2018, 46% of flue-cured leaf we purchased
was cured using renewable and traceable
fuels (2017: 36%), while 33% of the fuelwas sustainably sourced firewood and
13% came from other biomass.

6,315
5,767

89.4%

What’s next? We plan to deliver the 41
flue-curing efficiency initiatives and wewill apply the new Monitoring Framework
in all flue-cured sourcing markets, withaudits to be completed by 2020.

We aim to play our part in accelerating
the transformation of the global energy
market by using more renewables and wewill continue to share and learn best practices
via organizations such as CDP. Our governanceof climate change risks aligns well with theframework proposed by the Task Force on
Climate-related Financial Disclosures; ourCDP submission provides technical input
into an understanding of climate risk andopportunity. In line with CDP’s supply chain
program advocacy, we expect additional action
by our suppliers to benefit from opportunities
to cut emissions and costs.

5,504

89.1%

The gradual switch to renewable sourcesand efficiency gains due to curing barn
improvements has reduced GHG emissions in2018 by 170,000 tons of CO2e versus 2017.

As we grow the production of smoke-free
products, we will review our targets andhow they account for the changing emissions
profile of product use, recycling, and disposal.
As we review environmental policies andcommitments, we will account for new risks
and opportunities facing the business andthe environment.

Scope 1
Scope 2
Scope 3

8,349

5.6%
5.3%
2010
(Baseline)

89.1%

5.0%
5.6%

89.4%

4.2%
6.7%

2016

2017

3.2%
7.4%
2018

Reduction in CO2HHPLVVLRQVIURPWREDFFRćXHFXULQJ(%) – baseline 2010
2020

TARGET

70%

2018

47%

2017

38%

2016

17%

3URSRUWLRQRIćXHFXUHGWREDFFRSXUFKDVHGFXUHGZLWKUHQHZDEOHIXHOVRXUFHV(%)
2020

TARGET

70%

2018
2017
2016
Self-sufficient firewood

33%
29%
27%

13%
7% 36%

5% 32%

Biomass adoption

46%

92

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Conserving biodiversity and combating deforestation
Foreword

TARGETS

Zero

Zero

Zero

Net deforestation of primary andhigh conservation value (HCV)
forests associated with the tobacco
supply chain by 2020

Net deforestation of primary and
HCV forests associated with the supply
chain of paper and board by 2022

Net deforestation of primary and HCV
forests associated with the supply chainof other significant pulp-based products,
including cellulose acetate tow by 2025

Zero

Zero

Net deforestation of natural forestsin the tobacco supply chain by 2025

Net deforestation of natural forestsin the paper and pulp-based products
supply chains by 2030

Net positive
Impact on forests associated withthe tobacco supply chain by 2025

The conservation of flora and fauna is essential because
healthy habitats provide vital ecosystem services, suchas pollination, biological pest control, and the regulationof nutrient cycles. Our day-to-day life, health, and livelihoods
all depend on a stable climate, healthy oceans and rivers, andsoils, land, and forests rich in biodiversity. Agriculture also
depends on a healthy and resilient ecosystem.
While our own manufacturing operations have no significant
impacts on biodiversity or deforestation, some elements ofour supply chain may impact deforestation and biodiversity.
While most of our suppliers of paper and packaging sourcefrom areas free of deforestation, our aim is to improve our
supply chain traceability to provide clarity that all pulp issourced deforestation-free.
The main risks associated with tobacco farming arise fromthe firewood used as curing fuel and, to a lesser extent, fromthe land use change for tobacco growing and the use of timber
for curing barn construction.
PMI’s long-term approach has been based on our GAP
program, in place since 2002, which includes measures
to prevent biodiversity loss. As part of GAP, all PMI tobacco
suppliers are expected to present zero risk to national parks,
designated conservation reserves, or other biologicalconservation areas; indeed, all suppliers are expected toenhance natural habitats and the corridors that connect them.
In 2018, we developed a new zero deforestation ambition
and a set of targets to protect forests in our supply chain.
Our aim is to align with existing international frameworks
and ambitions on deforestation. The priority in forest
protection is to conserve primary, untouched forests, aswell as forests with a high conservation value, as those harborthe highest diversity. We will also extend our ambitions to coverprotection of all natural forests over time. Our targets aim
for zero net deforestation, as we may not be able to achieve
zero deforestation with all suppliers and all locations, andwe may have to compensate elsewhere as a last resort.

Above: A PMI employee with a production technician in Bahia, Brazil

93

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Conserving biodiversity and combating deforestation continued

Progress in 2018
According to the global deforestation risk
assessment we conducted in 2018, tobacco
leaf and pulp and paper are the main categoriesof raw materials posing potential risks to forestsand biodiversity.
In our tobacco supply chain, these risks
pertain to: firewood used for curing, forest
land clearance for tobacco growing, and timberused for curing barn construction. We describe
our respective action plans, as well as our
integrated pest management approach tohelp conserve biodiversity further in this text.

Firewood used for curing
The global deforestation risk assessment
results showed that, while deforestation risks
associated with curing fuel are important, PMI
is currently managing them – via our specificmonitoring arrangements, clear goals, and active
engagement with suppliers and their farmers.

We aim to ensure that, by 2020, 70% of
the tobacco leaf we purchase is cured using
renewable fuels that are fully traceable. Ourdata show that we are two-thirds of the way
towards that target, at 46%.
To prove that firewood is renewable andtraceable, we use our Monitoring Framework,to verify the sustainability attributes of how
our suppliers and their farmers are managing
deforestation risks. The Framework is aninternal standard that aligns with international
best practices and is verified by a third party.
It requires full chain of custody not only fortier 1 suppliers but also for many tier 2
suppliers. The proportion of tobacco wecurrently purchase that is cured at no risk of
deforestation stands at approximately 90%.
Monitoring and supplier engagement go handin hand. To ensure fuel sources are sustainable,
we support suppliers and farmers in planting
trees to supply renewable firewood for curing.

We recommend that tree-planting takes placeon marginal lands where there is no threat toexisting biodiversity, and we acknowledge theimportance of careful management of land usechange due to its effect on carbon sinks. Since
2000, we have supported our contracted
farmers and suppliers to plant more than 220
million trees of different species. Fast-growing
trees provide farmers with firewood, whileother native species may be used for traditional
medicinal cures, and to supply fruits for foodand additional income, and some slowergrowing species provide farmers withhigh-value hardwoods for additional income.
Meanwhile, in Brazil our agronomy team isworking with tobacco suppliers, an external
agency and a local university to validate that
firewood sources are sustainable. As part of acommunity watershed project, we are restoring
145 hectares of riparian areas and forests,
using species that are fast growing and naturallypart of the local ecosystem. The project isimproving water quality to the extent of making
it drinkable, benefiting the local population.

Forest land clearance for
tobacco growing
NEW FRAMEWORK FOR BIOMASS AND BIOFUEL USE:

Know your fuel source, be sustainable, be transparent,and engage with stakeholders
PMI supports the use of low-carbon energies, such as solar and water, but also of sustainably
managed biofuels. There are two main sources of biomass: wood products from natural
woody biomass, and agro-fuels from agricultural biomass.
PMI has developed a new Monitoring Framework to systematically monitor the sustainabilityof all fuel types used in our tobacco supply chain; we will only use biofuel if it does not competewith food production or affect food security.
Our “step-wise approach” to assess fuel types relies on understanding the suitability ofdifferent fuel types and the farmers’ willingness to adopt change. This is used to design
the right approach to fuel supply and farm-level practices within the local context.

Our 2018 global deforestation risk assessment
identified that, nowadays, the risks specificallyassociated with land-use change from tobacco
farming are not significant. Where PMI sources
tobacco, there is no direct deforestation
associated with expansion of tobacco because
tobacco-growing areas are not expanding.

The 2018 Assessment, complemented by thefindings of an additional pilot land-use-change
study from November 2018, concludes thatthe direct impact from land-use change
currently associated with tobacco grown
for PMI products is close to zero.

Timber used for barn construction
Another deforestation risk confirmed by thatassessment is the use of timber for constructionof barns used to cure Burley tobacco leaf, which,unlike Virginia tobacco, is hung and air-dried,rather than flue-cured. Our aim is to ensure thatthe suppliers and farmers we work with plant
more trees for barn construction than they cut
by 2025. We will also work with suppliers onforest land restoration, biodiversity, and natural
habitat, focusing on ecologically valuable andsensitive areas such as HCV areas.
The following case study details the issue
and how we are tackling it in Malawi andMozambique, where the risk of deforestation
is particularly high.

94Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 201885,000Live barns grown by our
suppliers across Malawi andMozambique since 2014

CA SE S TUDY

Promoting live barns toprevent deforestation in
Malawi and Mozambique
Image: A tobacco farm worker in front of a live barn in Mozambique

95

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

CA SE S TUDY

Promoting live barns to prevent deforestation in Malawi and Mozambique
PMI sources significant quantities of tobacco
from Malawi and Mozambique and therefore
has an important role to play in supporting
community and environmental well-being
in those countries. To give an idea of scale,
PMI’s supply of tobacco leaf in Malawi comesfrom 28,000 farms covering approximately
50,000 hectares.

trees which support the curing poles
and remain in place for many years.

Both countries face the challenge of
deforestation driven by population growth,demand for agricultural land expansion, urban
expansion, fuelwood, timber and charcoal
demand, tobacco cultivation, brick-making,and uncontrolled bush fires.

PMI suppliers provide the tree seedlings(from a range of species), advice, andpropagation materials to help ensure high tree
survival rates and optimal growth rates. Bamboo
seedlings are also provided so that bamboo
poles can be used as horizontal supports
and for the barn roof skeleton in the future.

A further specific challenge in Malawi andMozambique is the demand for timber used
to build barns for the air-drying of Burleytobacco – timber poles are used in a simple
thatched roof structure where tobacco
leaves are hung to dry.
As the wooden poles used in the barns areattacked by termites, they need to be replaced
regularly. This issue has been solved with theconcept of the “live barn” – a structure of living

Above: Forestry nursery in Mozambique

Since 2014, PMI suppliers have grown
more than 85,000 such barns across the twocountries. The first 1,000 live barns we planted
are now being used. In 2018, we supported theplanting of ten million trees that in future willgrow to be the poles for some 68,400 barns.

By 2020, all contracted Burley farmers in
Malawi and Mozambique will have live barns
planted. This program will help farmers toconserve the environment and increase
biodiversity, promote efficiency on theirfarms, provide additional wood for theirown use from annual pruning, and effectively
reduce deforestation.

Above: Live barn construction in Mozambique

Reporting onsustainability

Philip Morris International
Sustainability Report 201896

Overview

Transforming
our businessDeforestation risks in pulp, paper,and other supplies
In our non-tobacco supply chains, the main
deforestation risks are those related to pulp
and paper, in which we aim for zero net
deforestation of primary and HCV forests
by 2025 and 2022 respectively, and zero net
deforestation of all natural forests by 2030.
In practice, this means 100% traceability
to the forest source and 100% use ofcertified, or verified, materials by 2022.

Driving operational
excellenceb

Managing oursocial impact

Integrated Pest Management
Crop protection agents are needed to control
the spread of pests and ensure healthy androbust growth of crops, but they also havethe potential to reduce biodiversity. Our aim
is that CPAs are used responsibly on the farms
supplying our tobacco. Implementation of GAP
is mandatory for all our tobacco suppliers (seepage 56) and it includes actions on Integrated
Pest Management (IPM).
The IPM program has three main priorities:

Our approach towards our zero net
deforestation goal is to:

1. Promote the use of less hazardous CPAs;

1. Work with priority suppliers to assess
their risk level and sustainability practices;

3. Ensure that CPAs are managed appropriately.

2. Deepen our assessment of the risk levelfor each supplier and compare suppliers,
using a ratings scorecard;
3. Collect best practices and remediation
actions, such as sustainable sourcing policies,
improved traceability, increased share ofcertified materials, and upstream capacitybuilding; and4. Refine our corporate commitment relating
to deforestation risk and learn from leading
pulp and paper suppliers.

Reducing ourenvironmental footprint

2. Reduce unnecessary use of CPAs; andIPM practices lead to improved yield, production
efficiencies, environmental protection, as wellas health and safety; this contributes to eachof the GAP focus areas.
IPM requires new ways of working towards
a more “ecosystem” approach, combining
different management strategies and practices
to grow healthy crops while minimizing theuse of CPAs. Working in partnership with
our suppliers is key to shared understanding
and success.
We have been providing guidance and support
to suppliers on IPM for around 15 years:
crucially, it is systematically implemented in
all of PMI’s principal tobacco-sourcing areas.

Above: A production technician in Bahia, Brazil

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

97

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Conserving biodiversity and combating deforestation continued

Providing alternatives to highly hazardous
pesticides
PMI is committed to removing highly hazardous pesticides (HHPs)
from its tobacco supply chain globally. For example, PMI Colombia
has started to provide a tea-tree extract to farmers to combat fungal
diseases. Historically, two destructive fungal diseases in Colombia –Frogeye and Brown Spot – have been controlled using carbendazim,
a fungicide classified as an HHP according to guidelines from theFood and Agriculture Organization of the United Nations (FAO) andthe WHO. As part of its IPM program, PMI committed to its complete
removal, which led to the search for an alternative. We searchedmicrobial and botanical bio-pesticides, and found a tea-tree extract,
for which trial results showed an effective level of control in Burleytobacco. Since 2015, the tea-tree extract is provided to the 146
PMI tobacco farmers whose farms are at risk of infection, and othermarkets are now testing it as an alternative for the control of fungal
diseases of tobacco.

In 2018, we expanded our guidance to growers
on the use of bio-pesticides, including accessto a database of over 300 alternatives to HHPs,
advice on PPE, and the safe disposal of empty
CPA containers. Training on this technicalguidance was delivered with the Centre for
Agriculture and Bioscience International (CABI),
our specialist partner. A pest management
website funded by PMI provides open access to
all the guidance, training materials, participatory
approaches, and even puzzles designed to test
knowledge gained.
CPAs should only be used as a last resort.
Our target is zero purchase of tobacco
containing residues attributable to the useof WHO TOX1 by crop 2018, or other HHPs
as defined by WHO and FAO guidelines bycrop 2020. We are currently collecting dataon residues relating to crop 2018 and willreport findings in future reporting.

PERFORMANCEAND NE X T STEPSIn 2018, 90% of the tobacco we purchased was cured
at no risk of deforestation, down from 94% in 2017 due
to sourcing constraints, but still on track to achieve ourtarget of 100% by 2020. In 2018, we supported our
suppliers and farmers to plant an additional 26 million
trees of various species in countries such as Brazil,
Indonesia, Malawi, Mozambique, Pakistan, thePhilippines, and Tanzania.
We continue our work to address deforestation risks
in tobacco leaf curing, particularly in countries exposed
to high deforestation risks, and we are building on theinitial results of our live barns program.
We have in place our Monitoring Framework andthird party audit process to assess our impact annually
and we are using our deforestation risk assessment todevelop additional risk mapping and expand actions to
mitigate deforestation risk in diverse countries.
Crucially, we foresee continued supplier engagement;
after all, it is the relationships with the people on the
ground that delivers results from the Monitoring
Framework and risk mitigation actions.

A farming app
Where there is a lack of knowledge on
Integrated Pest Management (IPM),
there is a risk of gaps in responsible pest
management and CPA use. In response,
we developed the app “Tobacco IPM” thatputs information on IPM and responsible
CPA management at the fingertips of fieldtechnicians and farmers. Its content is
produced by CABI and includes guides,
regulatory updates, country-specificpest management sheets, and technicalinformation on safe and effective methods
for prevention, monitoring, and control.
The app is freely available for download
on mobile phones.
Above: A PMI employee with a production technician in Bahia, Brazil

Transparency is essential when combating deforestation.
We achieved a B score in our first CDP Forest disclosurein 2018. This provides a great first step in deforestation
risk transparency for PMI and it demonstrates ourambition to combat deforestation going forward.
In total, 99% of the tobacco crop grown during the2017 crop was free of any quantifiable level of residues
attributable to the use of WHO TOX1 CPAs, almost
reaching our target of 100% for the 2018 crop.
Furthermore, 88% was free from any other quantifiable
HHP residues, showing further progress against ourtarget to completely eliminate the use of HHPs by
the 2020 crop.

26m
Additional trees planted by our
suppliers and farmers in 201898

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Minimizing waste and littering
TARGETAll
Manufacturing facilities with zero waste
to landfill by 2022

Foreword
At PMI, we recognize the importance for the global
environment of moving from a linear “take-make-waste”
production model to a more circular model. It is imperativethat waste management programs minimize all waste, recycle
as much as possible, and aim to make landfilling obsolete. It isalso crucial to prevent the leakage of waste, especially plastics,
into the environment, and combat the plastic pollution of ourland and seas by reducing litter.
We recognize a responsibility to be stewards of the product,
and are further developing our anti-littering campaign
program. We analyze the causes of littering, the driversof behavior change, equipment for proper disposal, andawareness raising. We are committed to encouraging andenabling smokers to reduce littering globally.
As we expand our portfolio of smoke-free products, we areincorporating sustainability considerations into the designof these products, their packaging, and accessories. Given
the sensitive and often scarce resources required for electronic
components, products need to be designed with easierrecycling in mind.

Above: Rejected cigarettes in PMI’s manufacturing facility in Neuchâtel, Switzerland

99

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Minimizing waste and littering continued

Progress in 2018
Preventing littering
Globally, plastic pollution is worsening every
year: 300 million tons of plastic waste are
generated annually, about 60% of which ends
up in landfill or the natural environment.39
In 2018, PMI global sales of cigarettes andheated tobacco units amounted to 782 billion
units,bresulting in about 0.1 million tons of filter
waste. According to the EU, cigarette filters are
the second most littered, single-use plastic itemin the EU,40 and are usually found among themost littered items in beach clean-ups.
Our goal, enshrined in our Environmental
Commitment, is to make tangible andmeasurable improvements to the problem ofcigarette butt littering. We aim to be recognized
as a reliable and committed partner in delivering
successful anti-littering programs. Our mostimpactful contribution is in the realm of
consumer behavior, enabling smokers to change
their habits from littering to proper disposal.
PMI encourages proper disposal of cigarettebutts and heated tobacco units by raisingawareness and providing equipment, suchas ashtrays and pocket ashtrays. We are
improving our understanding of littering
behavior, of anti-littering approaches, andof ways to directly reach consumers about
this issue. For example, IQOS heated tobacco
units are much less littered than cigarette butts.
This was corroborated in a pilot monitoring
study, see on the right. The heated tobacco
units are not burning or contaminated bysmoke, so consumers find it more convenient
to keep them for proper disposal later.

It is commonly recognized that there arethree drivers to changing the habit of littering:educate, enable, and enforce. We apply thesein our approach to anti-littering:
1. Innovative approaches to promoteawareness: PMI works with local
stakeholders in our markets to promote antilittering, using signs and other communication
tools to encourage proper disposal behavior
in littering “hotspots,” such as urban centers,
beaches, parks, outdoor concerts, and events;
2. Enabling action by consumers: This means
access to adequate waste receptacles suchas ashtrays or bins with stubbing plates, or
portable solutions, such as pocket ashtrays.41
Where adequate municipal collection
equipment is not in place, PMI will work withstakeholders to identify improvements; and3. Enforcing anti-littering laws: Whilea producer cannot enforce regulations,
we can raise consumer awareness on
existing regulations and we can contributeto making littering socially unacceptable,
an approach which can complement thework of authorities.
PMI has developed anti-littering guidance for
its affiliates, to help them run local campaigns
that create an impact. The guidance follows
four steps: (i) identify the local needs; (ii) define
the local strategy and targets; (iii) implement
the campaign; and (iv) monitor the progress.
This guidance is shared with affiliates globally,
and the aim is to support them to develop theircampaigns in 2019.

Anti-littering campaign in Portugal
In Portugal, our affiliate launched a new anti-littering campaign to target cigarette butts andplastic together with the European Blue Flag Association (ABAE). Starting with the campaign
launch in the greater Lisbon area in December 2018, in partnership with the Municipality ofOeiras, and the Portuguese rail and infrastructure organizations, the movement is expected to
grow to national level through 2019. The train stations of Algés and Oeiras hosted the launch,
entitled “Every object at its place and the place for rubbish is not the ocean”/“#Breakthehabit.”
The objective is to raise awareness on this important issue and highlight that if people join in
together with good environmental habits, then their efforts can truly make a difference “for theprotection of the environment as a whole and the oceans in particular.” The campaign explainsthat many people are unaware that about 80% of the rubbish ending up in the oceans actuallycomes from bad inland habits, such as littering and poor waste management.

Intelligent litter monitoring
To evaluate an anti-littering campaign, it is essential to have a replicable method to quantify theamount and type of litter on the ground. We partnered with a technology start-up enterprisethat has an innovative monitoring tool, using high-resolution cameras mounted on an electricbicycle to photograph the ground, coupled with an artificial intelligence software that learns
to recognize litter. This system was tested in the streets of Athens last summer to quantify
cigarette butt littering. The software can distinguish conventional cigarettes from our heated
tobacco units for IQOS. The share of littered heated tobacco units was around half the market
share of our heated tobacco units for IQOS among all sold tobacco products during the study
period, which suggests that they are much less likely to be dropped as litter than cigarette butts.

100

Overview

Transforming
our business

The EU Single-Use Plastics Directive
In 2018, the European Union developed theSingle-Use Plastics (SUP) Directive aimed at
reducing marine plastic pollution by reducing
the amount of single-use plastic leaking to theenvironment. The SUP Directive foresees anumber of policy instruments, from awarenessraising to outright bans, depending on the
product category, its environmental impact,
and its potential for improvement.
The SUP Directive identifies ten different
product categories falling in the scope of SUP
items. Tobacco product filters are one of them.
For each product category, the SUP Directive
requires certain measures to apply. Tobacco
product filters are subject to Extended Producer
Responsibility (EPR), covering the cost of public
collection systems. This is the first time that EPR
has been applied to an anti-littering objective.
EPR schemes were typically applied either
to create a recycling system or to manage
hazardous waste safely. How EPR is to be

Driving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

implemented nationally will be defined bymember states within the two-year
transposition period following the Directive’s
adoption. PMI supports the concept of EPR,
provided that the schemes put in place areecologically and economically efficient andsocially acceptable, and that they deliver on
the goal of reducing littering.
The SUP Directive also foresees awarenessraising related to tobacco product filters.
This aligns with PMI’s awareness campaigns
that began many years ago and with our new
anti-littering tools for 2019.
Lastly, the SUP Directive will mandate marking
tobacco product packs to make smokers awareof the appropriate waste management options
for the product and of the presence of plastics
in the product. In parallel with that requirement,
we are working to develop with impactful
messages that will encourage our consumers
to properly dispose of our products after use.

What are cigarette filters made of?
The main constituent of cigarette filters is cellulose acetate (CA), a bioplastic made from wood cellulose.
CA biodegrades over several months or several years, depending on the surrounding conditions. While it does
not meet the strict biodegradability standards required for labeling as biodegradable, it will not accumulate in
the environment over time. In contrast, conventional plastics made from petrochemicals take hundreds of years
to degrade, often breaking down to form micro-plastics.
Recycling is a popular way of minimizing the impact of waste and promoting the circular economy, but it can often
face challenges. There have been isolated attempts to recycle cigarette butts. Unfortunately, various factors
make such attempts unviable, including the size of the filters and complex collection and storage logistics. We
believe that incineration with heat recovery, commonly used in waste management in many countries, is currently
the most ecologically and economically efficient solution.
PMI has been researching cigarette filters with higher degradability for many years, but no better alternative
has yet been found. The purpose of the filter is to capture some of the particulates from the smoke and to dilute
substances found in the smoke such as tar, nicotine, and carbon monoxide. It allows better handling and stubbingof the cigarette. Paper filters have been tried but were not successful in the marketplace. We do continue ourresearch for filters with higher degradability, but should develop anti-littering policies on the assumption thatthe cigarette filter in its current form remains an integral part of the product.
Above: Heated tobacco units hollow acetate tubes

Philip Morris International
Sustainability Report 2018101

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Minimizing waste and littering continued

Addressing the waste of smoke-free products

Heated tobacco units

Electronic waste

As we are replacing cigarettes with smoke-free products, new challenges as well
as opportunities arise. A new challenge for us as a company relates to the recyclingof electronics that we started selling in 2014 and that make up an increasingly
important part of our revenues. A new opportunity also relates to the heated
tobacco units, where we do see an opportunity for recycling.

Heated tobacco units are more convenient tokeep for later disposal and, therefore, are more
appropriate for recycling programs thancigarette butts. Our progress so far includes:

The IQOS device comprises an electronic holder
and a pocket charger or, in the case of the IQOS
3 MULTI, a single electronic unit. In the majorityof markets where IQOS is commercialized
there are requirements for properly managing
electronic waste. In addition, to ensurecompliance with all regulatory requirements, ouraim is that each device can be returned after use
and recycled to the highest industry standards
in every country where we market IQOS.

• A successful collection system of heated
tobacco units at our offices in Switzerland;• Testing consumer interest in the Greek
market; this revealed that consumers are
keen to participate when the collection
system is convenient. In 2019, we will pilot thecollection system across the market; and• We have further explored the technicalfeasibility of recycling heated tobacco units
and, given the complexity of the logistics thatwould be involved, we will now investigate theeconomic feasibility of such a scheme.

With regulations governing cross-bordere-waste transportation, we aim to ensure that
our recycling operations comply with those,and that our products contain no substancesthat would contravene rules on the transfrontier shipment of waste.

Composition of a heated tobacco unit

Cellulose Acetate (CA)Mouthpiece filter

Hollow acetate tube

PLA filter

Above: Recycling of IQOS devices hub in Japan

Tobacco plug

102

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 20182
Recycling hubs for ourelectronic devices in Europe
and Asia

CA SE S TUDY

A step towards
circularity

Image: Recycling of IQOS devices hub in Japan103

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

CA SE S TUDY

A step towards circularity
At the end of 2018, there were 9.6 million
IQOS users, each owning one or more IQOS
electronic devices, and this figure is projected
to keep growing. With this in mind, we plan
to play our part in the circular economy. Our
first steps are through an initiative known as
CIRCLE (Central Inspection and Recycling
for a Closed Loop Economy), a substantial
investment by PMI into collecting and recycling
used devices. Our ambition is that each device
can be returned after use and recycled to thehighest industry standards in every country
where we market IQOS.
First, let’s take a look at the components of
IQOS. The holder is made of a heating blade,
powered by a battery and controlled by aprinted circuit board, housed within a polymer
casing. The charger consists of a battery andprinted circuit board, inside a polymer casing.
In the case of our IQOS 3 MULTI version, theseelements are all in a single unit.
If the device breaks, the consumer is able
to return the device through retail storesor postal routes depending on the country.
IQOS customers can contact their care points
for more information on local solutions.

State-of-the-art electronic
waste management

Sustainability benefits froma centralized model

In 2018, we established two recycling hubs,or reverse logistics centers, in Europe andAsia, to ensure that device recycling is done
to best practice standards. Three markets
have so far implemented CIRCLE; the remaining
IQOS markets are expected to be on board
by 2020 (some local conditions may mean aspecific alternative solution may be used incertain markets).

These centralized recycling hubs are a firststep towards a circular economy at PMI andprovide a variety of opportunities to improve
our sustainability performance. We identified
several key benefits so far:

These hubs are state-of-the-art facilities
run by specialist companies that meet ourrequirements for electronic waste processing.
Once devices are received, our contracted
partners first inspect the product, and thendismantle it into the various material types:
plastics, printed circuit boards, batteries,
and metals. The disassembly procedures
go beyond industry standards, with moreexhaustive material separation levels achieved.

What is an IQOS 3 device made of?

Heatedtobaccounit

Heating blade
CasingHolder• Quality: The inspection process allows
us to identify potential manufacturing
improvements, leading to lower returns
and longer product life cycles, reducing
the life-cycle sustainability impacts;• Illicit trade prevention: By taking our devices
back and ensuring materials are processed
and recycled, these materials cannot be
used to manufacture counterfeit productsthat may not have the same reduced-risk
properties as our IQOS devices;• Sustainable economies of scale: Centralized
hubs are more efficient than country-level
programs, allowing PMI to invest strategicallyin recycling program infrastructure andmaximize performance;• Regional investment: Our hubs demonstrate
a commitment to the regions in which they
are placed, not only directly generating jobs
at our recycling centers, but also supporting
local recycling partners as we mutually strive
for industry-leading programs; and• Design enhancement: Our device recycling
process provides valuable insight on how to
improve our products’ sustainability, which
can be directly fed back to our ideation anddevelopment teams.

The key challenges to date are ensuring thecapacity of our hubs is scaled to the volume
anticipated and validating a comprehensive
process for on-boarding new markets within
our ambitious timeline. In 2018, we began toevaluate how to reuse collected materials within
our own supply chain through material studies
and pilot initiatives, with the ambition to create
a truly closed-loop scheme. We will continue
to expand these efforts in 2019.
Ultimately, we see this investment as one
more step away from the “take-make-waste”
production model – particularly when a moreclosed-loop program creates new business
opportunities for our IQOS products,
transforming the way we look at raw
materials in our value chain.

Controlelectronics

Charger
Battery

Above: Recycling of IQOS devices hub in Japan

104

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Life cycle assessment of oursmoke-free products

Reducing manufacturing waste that
ends in landfill through recycling

We want to know where the impacts occur
through the entire life cycle of our products,
and manage them responsibly. For example
the heated tobacco units have a similar carbon
footprint to that of a cigarette, but we must also
account for the added effect of our electronic
devices. Across its life cycle, we assess the
carbon footprint of each new version of the
IQOS device. We have now embedded theseproduct assessments into our development
process with the expectation that we will beable to improve future versions of our smokefree products. During 2019, we will continue
to expand this program and work to further
integrate sustainability into device development
and decision-making requirements.

Our waste management program continues
at every factory in line with local regulations
and often going beyond them. In 2018, 96%
of our factory waste was either recycled orincinerated with energy recovery, up from
93% in 2017. The vast majority of our factory
waste, about 84%, was recycled. In absoluteterms, total waste has decreased by 4% in2018 to 134,367 tons, approximately 1%of which was hazardous waste.

Through our quality and design processes, wehave worked hard to make each subsequentversion of our IQOS devices more robust. This
improved quality leads to longer life cycles,
reducing the carbon footprint impact of ourdevices on the environment. Additionally,
we have doubled the battery life for IQOS 3,
allowing more charging cycles per device,again supporting our efforts to minimize theenvironmental footprint of each device. By
including sustainability considerations rightfrom the design stage of the product, thedevices’ carbon emissions per 1,000 use cycles
were reduced by 40% from previous versions.
We are also focusing on the environmental
impact of our packaging, aiming to use moresustainable packaging for each new productgeneration. For example, IQOS 3 comes inpackaging that uses less plastic in the innertray and which is increasingly wood fiber-based.

Reporting onsustainability

4% >1%2018
2017

PERFORMANCEAND NE X T STEPSIn 2019, we will expand our efforts to discourage
cigarette butt littering, as our affiliates develop
anti-littering campaigns. We will also focus on EPR,
working with stakeholders in the EU to develop efficientand effective EPR schemes.
Our ambition is that IQOS increasingly becomes partof the “circular economy”: we are piloting an inspectionand e-waste reverse logistics program, which, by the end of
2018, served markets covering two-thirds of our total IQOS
device sales volume. We look forward to sharing progress on
the recycling of devices.

Over 95% of the materials used to make our conventional
tobacco products are from renewable resources. Our
packaging sustainability program sets the direction of ourwork to reduce the use of non-recyclable material, such as
multi-layered plastics, in our packaging and replace themwith more sustainable alternatives.

84%
Recycled
Incinerated with energy recovery'LVSRVHGWRODQGĆOO
Incinerated without energy recovery

Philip Morris International
Sustainability Report 2018

We are proud that, with each new smoke-free device
generation, we are improving the sustainability attributesof the packaging. In 2018, we replaced plastic trays withwood pulp trays in our IQOS device packaging, decreasing
the overall plastics content by 93%. Our heated tobacco
unit packs are made of recyclable materials.

Disposal of waste in 2018

12%

Reducing ourenvironmental footprint

93%
Decrease in plastics content of IQOS
device packaging by replacing plastic
trays with wood pulp trays in 2018

105

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Managing water
TARGET100%
All PMI manufacturing facilities will becertified to the Alliance for Water
Stewardship (AWS) Standard by 2025

Foreword
Water is used in our manufacturing facilities, our agricultural
supply chain, and in the production of other raw materials
and supplies, such as cellulose acetate filters, paper, electronic
devices, and packaging materials.
Our water strategy accounts for the risks we face fromwater stress and pollution, their impacts, both in catchments
relevant to operations and in supply chains, and drives action toensure that water is managed sustainably as a shared resource.
As PMI is exposed to moderate water risks in some areas, wecommit to use water more efficiently and sustainably and to
reduce negative impacts in the communities where we operate.
Our goal is to minimize the amount of water used per unit
manufactured (cigarette or heated tobacco unit). Following
a successful pilot in Brazil, we are implementing the AWS
Standard across all our factories, to promote a moresustainable use of water in the communities where we operate.
Also, we run programs to help maintain the quality of water
resources we use; for example, through GAP. Sustainable
water management in agriculture at PMI includes accessto safe water and sanitation for tobacco growing communities.
We assess countries of origin for water risk and take measures
to improve water access and storage if required.
We maintain transparent external reporting regarding
our water use via our CDP Water disclosure, for which
we achieved a B rating in 2018.

Above: Drip irrigation for tobacco seedlings in Nayarit, Mexico106Overview

Transforming
our business

Progress in 2018
Towards water efficiency
in manufacturing
Our water footprinting exercise showed thatwater consumption in our manufacturing
operations was only around 6% of the total water
consumed across our value chain.42 However, thatstill amounts to around 4.4 million cubic meters
and our new smoke-free products are morewater intensive to manufacture. In 2018, initial
data showed that the manufacture of heated
tobacco units required four to five times morewater per unit than that of conventional cigarettes.
Therefore, as we increase production capacity
to meet the demand for smoke-free alternatives,
we also account for local or regional water
scarcity. Indeed, our water risk analysis data
feed into decisions about any structuralchanges at a factory.
For instance, in our factory in Italy, we are
implementing water recycling technology tocompensate for the increase in water typically
expected in the manufacture of smoke-freeDriving operational
excellenceb

Managing oursocial impact

products. In 2018, 73,000 cubic meters ofwater could be recycled internally (13% of thetotal site water use), with a second step plannedfor 2019. The technology that was developed
will be implemented at other sites in the future.
In 2017, we started to pilot the Alliance for Water
Stewardship (AWS) Standard: AWS is a leadingorganization dedicated to better water catchment
management. In March 2018, our pilot factory
became the first factory in Brazil to be AWS
certified, and we are expanding its application
across our global operations. Throughout therest of 2018, we started to implement the AWS
Standard at a further five sites – in Italy, Portugal,
Indonesia, Russia, and Turkey – as part of the
program to certify all factories by 2025, withthe first ten targeted by 2020.
We believe that neighboring communities
near our factories must not experience any
negative impact on water resources due
to our operations. We regularly consult
with communities around the world on
environmental and community issues
and we recognize the importance ofengagement with external stakeholders.

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Water stewardship at and around our manufacturing sites
PMI joined the AWS in 2017. We piloted the implementation of the AWS Standard at ourvertically integrated location in Brazil, where all stages of tobacco cultivation and cigarette
production, from farm to pack, are represented. Our factory already had ISO14001
certification for its good standard of environmental management and, based on thatand strong existing water management processes and great personal engagement, thelocal team succeeded in reaching certification to AWS in only four months. AWS goesbeyond requiring excellence in managing water-related issues within the site, it also requires
deep understanding of the local watershed and extensive engagement on water-related topics
with local communities and stakeholders. We collected our practical experience and learningfrom the project into a toolbox that has been shared with a further five PMI factories acrossthe world, which are planned to be certified in 2019, in line with our commitment to certify
all factories by 2025.
A key learning from the broad approach that the AWS Standard requires is that water issues
are always more complex than anticipated, but that engagement with stakeholders can help
to resolve problems that individually may be viewed as insurmountable.

Water footprint
Tobacco supply chain
Other supply chain
Manufacturing sites

Water scarcity footprint

35%=
Water consumedxWater stress index

56%

Blue water footprint=(Water withdrawal)–(Water release)

64%
42%

Water scarcity
footprint

Blue water
footprint

Above: Wastewater treatment in PMI’s Indonesian affiliate Sampoerna’s manufacturing facility in Sukorejo

107

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Managing water continued

Water use in tobacco agriculture
More than half of the tobacco crops supplied
to PMI globally are rain-fed and do not require
supplementary irrigation other than at theseedling stage.
Water is nevertheless an essential resource forgrowing tobacco and for the farmer household.
The quantity, quality, and timing of water
availability through rainfall and irrigation all havean impact on the successful growth of the plant.
In 2018, we assessed our global water risks
based on the World Resources Institute’sAqueduct tool, and incorporated water
stress, flooding, and drought considerations.
Water Insights, first collected in 2018, provides
additional data to inform our understanding ofwater-related issues and for the developmentof management actions and targets.

We share and discuss with suppliers and their
farmers the relevant findings of our assessment.
All contracted farmers are required to apply
GAP, which includes water-related standards
and procedures. Guided by PMI and its
suppliers, farmers are best able to identify
and mitigate risks where they operate and thento find opportunities for long-term benefits towater access and farmer livelihoods. Going into
deeper detail, in 2018 we supported suppliers
to conduct local water risk assessments in ninepriority areas in Argentina, Brazil, Greece,Indonesia, Italy, Malawi, and the U.S.

Based on this assessment, none of PMI’s
tobacco-growing areas is exposed to the“extremely high” risk category43 for physicalwater risk and only 10% are exposed to“high” risk. On average, drought severity
risks are lower than risks of flooding. Risks ofpollution are identified in the case of potential
uncontrolled usage of CPAs and fertilizers.
Fertilizer leaching from tobacco cultivation
represents 62% of PMI’s modeled waterpollution footprint (the non tobacco supply
chain represents a further 33%).

Above: Tobacco field in Nayarit, Mexico

Regarding water quality, CPAs used inour supply chain can cause pollution in thecatchment areas. Our IPM program provides
resources to our suppliers to mitigate this risk(see page 97).
Collective action with our tobacco suppliers andothers includes watershed management, andthe development of drought-tolerant and floodtolerant seed varieties, as well as access to water,
sanitation, and hygiene (WASH) services forfarmers and their workers.
In early 2018, we piloted the “WASH Action
Plan” for the first time in Malawi, which aims
to address inadequate access to WASH services

in our leaf supply chain and to identify priority
needs and feasible actions. In 2018, PMI
sponsored ten solar-powered boreholes,
the rehabilitation of hand pumps, sanitation
facilities, concrete storage tanks, and rainwater
harvesting systems, and we distributed
household water treatment products andorganized WASH training sessions in 15 villages.
Our projects incorporate international criteria
requiring the availability of improved drinking
water quality within a 30-minute round trip
from the project location, better sanitationin each household, and a handwashing pointwith soap.

108

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

PERFORMANCEAND NE X T STEPS

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

LEARN MORE ON
REDUCING OURENVIRONMENTAL
FOOTPRINT:

The average water consumption in PMI
manufacturing facilities increased to 5.4 cubic
meters per million units of product equivalent(cigarettes and heated tobacco units), comparedwith 5.0 cubic meters in 2017.

PMI’s Environmental Commitment
PMI’s submissions to CDP b
PMI’s Good Agricultural Practices (GAP)As we increase the production capacity
for smoke-free products, so we evolve
our water strategy, with clean technology
investments delivering water recycling
projects, as described above.

on www.pmi.com
ADDITIONAL RESOURCES ON:

The Tobacco Integrated Pest
Management (IPM) Toolbox onwww.tobaccoipm.com

Our global water risk assessment included themodeling of water risk over a 20-year time spanfor the areas where PMI sources tobacco. Overthat period, water stress is projected to increase
to some extent, as water supply is also projected
to decrease. As demand for water is increasing
in many areas across the globe, PMI will support
further local water risk assessments to beundertaken from 2020.

The Alliance for Water Stewardshipon a4ws.org
The Centre for Agriculture and Bioscience
International on www.cabi.org

We believe that the use of PMI’s GAP and otherwater management practices has a mitigating
impact on water risk. For example, we estimatethat more than 70% of the tobacco purchased
by PMI in Italy is produced in water-efficient
drip-irrigated fields (targeting 100% by 2030).
There are tangible results linked to GAP program
areas covering irrigation, fertilizers, and pesticide
application, improving water use as well as yields:
an average 2.5% uplift in yields and a potential
annual water saving of three million cubic
meters over recent years. We will monitor
water reduction progress from PMI’s GAP
and other projects.

1st
PMI factory AWS certified in
Brazil in 2018

Reducing ourenvironmental footprint

Above: Water management community project in Mozambique109

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Reporting onsustainability
In 2018, we strengthened the foundation of our sustainability
efforts. We conducted a new sustainability materiality analysis,
engaging with a broad range of external and internal stakeholders.
We also enhanced our sustainability reporting in line with external
expectations and frameworks.

IN THIS SECTION

Engaging with our stakeholders

111

Focusing on what matters

113

Sustainability governance and management

116

Next steps

117

Our performance

118

Forward-looking and cautionary statements

128

Independent assurance report

129

Glossary and acronyms

130

About this report

132

110

Managing oursocial impact

Reducing ourenvironmental footprint

Engaging with our stakeholders

Our Guidebook for Success (the PMI Codeof Conduct) and several Principles & Practices
set out detailed standards for engaging withgovernments and public organizations or third
parties generally, communicating externally,making contributions, or providing financial
support to certain projects. An overview of
our Engagement Principles is publicly available
on PMI website.
We know who our stakeholders are, we
listen to them, and we map their concerns.
Stakeholders are identified based on the
degree to which they are affected by ouractivities and relationships, as well as by theirability to influence our business objectives.
Engagement helps to enhance a mutual
understanding of interests, concerns andaspirations, especially as we transform.
Our business transformation has brought us
in touch with a growing number of external
parties and partners, including academia,
public health experts, tobacco control
organizations, human rights organizations,sustainability organizations, agribusinesses,
electronics suppliers, and e-waste recyclers.
We are learning from them, and we hope theyalso benefit from the relationship.
The table on the right shows our stakeholder
groups and how we engage with them.

Philip Morris International
Sustainability Report 2018

Consultations

Hotline and callcenters

Reports andpublications

Regular or
ad hoc visits

Memberships andpartnerships

Employees

Corporate
communications

Stakeholder groups

PMI employees and contracted employees

Training

Stakeholders

Surveys andquestionnaires

Means of engagement

Ongoing
dialogue

How we talk with the outside world is guided bycertain principles. Our direct engagement withstakeholders happens in three ways: information
disclosure; dialogue; and participation.

Reporting onsustainability

Contractual
relationships

Driving operational
excellenceb

Forums andeventsTransforming
our business

Formalgatherings

Overview

Other

PMI management
Work councils
Trade unions
Peers and other tobacco companies
Trade associations

Business
community

Chambers of commerce
Tobacco farmers and workers
Farmers associations

Hotlines and accessto field technicians

Farmers andfarm workers

Farmers of other agricultural supplies
Sourcing communities

Community
contributions

Local communities

Operating communities
Providers of goods and services(including raw materials)

Suppliers

Third party operated manufacturers
Contractors
Wholesalers

Distributive trade

Retailers
Adult consumers*

Adult consumers

Intergovernmental organizations

Regulators andgovernments

Regulatory agencies***

Submissions andconsultations

Standard setters
Health authorities
Customs**
Academia

Civil society

Citizens
NGOs
Written press

Media

Social media
Journalists
Researchers
Public health experts

Scientificcommunity

Academia
Analysts
Shareholders* Where appropriate and as per local regulations

Institutional investors** We train customs and law enforcement officers
as part of our efforts to fight illicit tobacco trade

Sustainability ratings agencies
Socially responsible investors

Investors andshareholders

Studies, interviews,
business achievements,
and certifications

111

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Engaging with our stakeholders continued

At the end of 2018, we conducted a sustainability materiality analysis, which further structured
our engagement with a broad range of stakeholders. Feedback from that exercise is addressed
throughout this report, and will help craft our 2025 sustainability strategy.

Overview of feedback from stakeholders gathered during our sustainability materiality assessment:

Transforming
our businessDriving operational excellenceManaging oursocial impact

Reducing ourenvironmental
footprint• Product health impacts
Demonstrate unmistakably that
PMI wants to transform into asmoke-free future.
• Access to smoke-free products
To generate access, include thecontext of different markets
for smoke-free product businessmodels and portfolios.

• Responsible commercialization Be outspoken about
the harmfulness of combustible and new products andbetter address post-consumer waste. Make the products
less attractive to youth, who tend to follow adults’ behavior.

• Child labor Understand drivers
and local context and collaborate
with peers to develop local
solutions.

• Data privacy PMI needs to be transparent on the consumer
data tracked and ensure full data integrity.
• Economic performance Elaborate on economic viabilityof the business transformation and PMI’s determination
towards its vision.
• Other human rights Aim to ensure that human rights areupheld along the whole supply chain and exchange withexternal stakeholders on best practices.
• Raw materials and other suppliers Ensure that new materials
and supply chains are sustainable. Eradicate poverty throughcollaborative actions across the whole tobacco industry.

• Fair working conditions Address
the changing work environment as
the business transforms and leave
no one behind in times of transition.
• Health, safety and well-being
Ensure good training and education
besides providing protective
equipment.
• Diversity and inclusion Work on aculture of inclusion at PMI and along
the value chain to strengthen thetransformation process.

• Emissions and energy Align
reduction targets according
to local context to reachmaximum impact.
• Biodiversity and deforestation
To protect biodiversity, collaborate,
diversify crops, and ensure
traceability.
• Waste and littering Set an exampleof how to manage electronic devices
in a life-cycle approach.

• Bribery, corruption and anti-competition More transparency
and leadership on local, national and international levels to
address corruption.
• Fiscal practices A leader does not just comply with regulations,but does the right thing.
• Illicit tobacco trade More collaboration and awareness-raising
is needed for effective actions.
• Policy influence Take up a clear position to demonstratetransparency. Otherwise PMI is not credible.

• Talent attraction and retention
Assess actual situation internallyand analyze changing needs.
• Community engagement Use
community engagement tounderstand local context asa foundation to solve otherissues successfully.

• Product addictiveness Be
transparent on how PMI
deals with the addictivenessof its products.
• Responsible R&D Enhancecredibility of results throughindependent confirmation
and address animal welfare.

• Water Actions need to be definedon a basin level and integrate local
actors.

112

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Focusing on what mattersdebates, investor requirements, e.g. Morgan
Stanley Capital International or Dow Jones
Sustainability Index, media reports, andsustainability standards and frameworks,
such as the Global Reporting Initiative (GRI)
and the SDGs. It benchmarked the sustainability
practices of multinational peers, while also
considering sustainability megatrends.
The initial list of topics and definitions
can be found on the next page.

PMI’s sustainability materiality
assessment process
The assessment, which fosters transparency
and credibility, enabled us to further embedsustainability across the company. It followed
a five-step process.
We first listed potentially relevant sustainability
topics. Secondly, the topics were discussed witha set of stakeholders and a survey was issued.
The impact of these sustainability topics on
the economy, society, and the environment
were assessed based on a qualitative expert
assessment. Results were then used to prioritize
the topics in a sustainability materiality matrix.
The final step was to allocate relevant topics
to the existing four pillars of our strategic
framework. This was discussed and approved
together with the matrix in a validation
workshop with the members of ourSustainability Committees.

S TEP 2

A. Stakeholder interviews
We wanted to go deep and wide into
conversations with our stakeholders. Ourconsultancy interviewed 48 people, half
external and half internal personnel. The
aim was to understand which sustainability
topics they found most important, and how
they viewed the company’s efforts to manage
them. Interviewees included executives and

1

2

3

4

5

TopicsAssessment

Sustainability
matrixSustainability strategy

Sustainability
reportStakeholder
surveyS TEP 1The long list of topics
The analysis identified a long list of 24 topics
that were potentially relevant for PMI. They
were derived from a review of PMI’s internal
documentation and external regulatory andoperational environments. The external
research included analyses of public healthemployees from across the company, investors,
NGOs, business partners, and other groups
considered relevant to our industry andbusiness. Overall, the interviews confirmed
the topic list. They also generated further
insights into regional differences, as well as
into how sustainability should be governed
at PMI. As a result of the interviews, the topic
of “raw materials and other supplies” was added
to the initial topic list.

Process of the PMI sustainability materiality assessment

Stakeholderinterviews

Impactassessment> Strategy

Stakeholder

A sustainability strategy and report only
have meaning and impact if they focus onwhat matters: the right set of topics. In 2018,
we worked with BSD Consulting, an ELEVATE
company, to carry out a comprehensive
sustainability materiality assessment to dojust that. BSD Consulting is a renowned
international sustainability consultancy within-depth experience of this type of analysis.

> Targets
Impacton sustainable
development> Measures> KPIs113

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Focusing on what matters continued

S TEP 2

Simplified PMI value chain

B. Online stakeholder survey
To add a layer of analysis and refine the topic
prioritization process, we surveyed over
100 stakeholders via an online survey.
The majority of the survey respondents
were PMI employees, but the in-depth
analysis of the results showed that internalviews did not differ substantially from external
ones. The survey results confirmed the overall
pattern of topic importance identified by thequalitative interviews. It further generated
a ranking of sustainability topics and offeredsome insights into what people understandby certain topics.
S TEP 2

C. Desktop impact assessment
To understand which relevant topics impact
most on sustainable development, and therefore
need to be managed with the highest priority, adesktop impact assessment was conducted. Ourconsultancy evaluated the impact on sustainable
development of each relevant topic at thedifferent stages of our simplified value chain (seechart on the right). The likeliness, reversibility,
and severity of the impact were also assessed.
S TEP 3

Sustainability materiality matrix
Using all the inputs gathered throughthe process, we generated a sustainability
materiality matrix as shown on the next page.
From there, we grouped the topics by orderof priority into three tiers. In addition, wehighlighted emerging topics, which interviewees
mentioned will likely become more relevant in
the future.

Key:
High impact

Low impact

Medium impact

Not relevant

Definition

Access to smoke-free
products
Biodiversity, deforestationand land use
Bribery, corruption andanti-competitive practices
Child labor
Community engagement
Data privacy
Diversity and inclusion
Economic performance
Emissions and energy
Fair working conditions
Fiscal practices
Forced labor
Health, safety and well-being
Illicit tobacco trade
Other human rights
Policy influence/politicalaccountability
Product addictivenessProduct health impacts
Responsiblecommercialization
Responsible R&D

Talent attraction and retention
Waste and littering
Water
Youth access and usage
prevention

Availability and pricing of our smoke-free products for adult consumers in bothdeveloped and developing countries.
Preventing deforestation and protecting biodiversity.
Preventing bribery and corruption as well as acting competitively in the markets.
Preventing child labor in our supply chain.
Engaging with the communities around us along our value chain.
Ensuring privacy of data throughout our value chain (consumers, employees, R&D).
Promoting a diverse and inclusive workforce.
Economic value created and distributed.
Reducing our emissions and energy consumption, and adapting to climate change.
Respecting fair wages, working hours, and the right to collective bargaining.
Engaging in responsible corporate and excise tax practices.
Preventing forced labor in our supply chain.
Promoting health, safety and well-being within our operations and supply chain.
Preventing the illicit trade of tobacco products.
Respecting human rights (beyond aspects covered by other listed topics such as childlabor, forced labor, etc.) and access to a grievance mechanism.
Acting in a fair, honest, and respectful way when advocating PMI’s position in politicaland regulatory debates.
Product addictiveness irrespective of potential health risks of the product.
Risks to health associated with the usage of our products.
Developing, commercializing, marketing, and selling our products responsibly to adultconsumers, informing them transparently about the health impact of our products,
including product labeling.
Conducting scientific research, and developing products, while respecting Good
Laboratory and Clinical Practices, and animal welfare. Being transparent about our
research methodology and results.
Attracting new employees and developing, and engaging with our workforce.
Reducing and recycling waste as well as preventing littering.
Reducing water use and preventing water scarcity, managing water qualityand discharge.
Preventing youth from accessing and using our products.

Rawmaterials
and other
PMI
supplies operations Consumers

114

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

The various topics were mapped to the fourpillars of our sustainability strategy according
to their tiering, tier 1 being our most pressing
issues to address. The findings of oursustainability assessment and suggested
strategic framework were presented to the
Sustainability Committees, which validated thematrix and the way forward. It was also decided
to allocate the emerging topics to the next
highest tier to pay special attention to themduring strategy development and monitoringprocess, as well as to cluster certain topics(e.g. responsible commercializationencompasses youth access prevention).
See our sustainability strategy on page 4.

Access to smoke-free productsChild labor

Product health impacts
Fair working conditions
Responsible commercialization

Relevance for stakeholders

Matrix validation and sustainability
strategy

HIGHERS TEP 4Forced labor
Health, safety
and well-being

Bribery and corruption andanti-competitive practices
Community engagementRawmaterials
and other
supplies

Emissions and energy

Youth access and usage prevention

Economic performance

Other human rights
Fiscal practices

Responsible R&D

Policy influence /Political accountability
Data privacy

Way forward

Illicit tobacco trade

Diversity and inclusion

Product addictiveness

TIER 1

Waste and littering

Water

Key:

Talent attraction and retention

TIER 2

Transforming our businessDriving operational excellenceManaging our social impact

LOWER

In 2019, we will further develop oursustainability strategy, goals and key
performance indicators (KPIs) based on
the findings of assessment. We will share
more in our next sustainability report.
To ensure that we continue to address
the right issues and report on themeffectively, we plan to conduct acomprehensive sustainability materiality
analysis regularly, strengthening andadjusting our process at each exercise.

Biodiversity,
deforestationand land use

TIER 3

Reducing our environmental footprint
Emerging topics

LOWER

PMI’s economic, environmental and social impacts on sustainable development

HIGHER

115

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Sustainability governance and management
Clear governance and management
structures enable us to deliver on
our commitments to sustainability.
We strengthened those across ourorganization in 2018.

Board of Directors PMI’s Board of Directors
believes that environmental, social, andgovernance factors are critical to PMI’s longterm success. In 2018, the Nominating andCorporate Governance Committee wasformally given the mandate to oversee thesustainability strategies and performance ofthe company. The Committee is updated onprogress by the Chief Sustainability Officer,
and advises the Board on sustainability matters.
Senior Management Team (SMT) Our SMT,
the company’s management, regularly reviewssustainability matters, strategy, key programs,
and budget. Certain members of the SMT arepart of our Sustainability Committees, which
oversee and validate the company’ssustainability work.
Chief Sustainability Officer The Chief
Sustainability Officer reports to the President
External Affairs and General Counsel, a memberof the SMT. Heading the Sustainability Team, theChief Sustainability Officer leads the integrationof sustainability into our business. He also
coordinates the Sustainability Committees,composed of senior leaders from various
functions (including Operations, People &Culture, External Affairs, Commercial, Science& Innovation, Global Communications, Finance,
Investor Relations, and Corporate Audit).
An increasing number of employees within
the company work on sustainability on a daily
basis. Some functions have dedicated teams
addressing sustainability in their area ofexpertise. All our affiliates have appointed a local
sustainability coordinator. This helps ensure thatour global strategies and programs can be
implemented at the market level, and that local
realities are also reflected in our global efforts.
To further ensure that our sustainability work isembedded at all levels and across all geographiesof the organization, the Sustainability Team acts
as a catalyst. Most of the coordination takes
place in the context of sustainability working
groups and with local market coordinators.

Managing our most relevant topics
Our approach to managing our sustainability
material topics is harmonized across areas. At
the foundation of our work lies our Guidebook
for Success, underpinned by our policies thatcover specific topics or areas of work anddefine responsibilities and accountability.
To meet our objectives, we seek to allocate
resources appropriately, set targets and KPIs tomeasure our progress, and evaluate our efforts.
We support the precautionary approach in
our research and development work: scientificassessment across all our platforms follows
the same approach. We welcome independent
research on our smoke-free products, and a
growing number of peer reviews are completed
every year, which we transparently publish on
the PMI Science website.
Such an approach is equally important to ourenvironmental efforts: we seek to minimize
our impact on the environment as well as tounderstand and adapt to potential futurebusiness impacts of major environmental trends.
Our risk management approach is describedon page 45.

Philip Morris International
Sustainability Report 2018

116

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Next steps
In this fourth Sustainability Report,
we have attempted to provide
a structured overview of ourcompany’s work by focusing on
the topics highlighted as most
relevant to our business by both
external and internal stakeholders.
This report reflects the hard
work and commitment of all our
employees globally. We are on
track to achieve our sustainability
ambition and are well positioned
to address the challenges ahead.

Starting in 2019, we aim to:• Develop a comprehensive 2025 sustainability
strategy, based on the results of oursustainability materiality assessment,setting a holistic and ambitious set of targets;• Continue to embed sustainability at market
level;• Carry out a second human rights impact
assessment and replicate our learning
across the company;• Conduct an internal assessment of ourmarketing practices and issue a public
report with a specific focus on youth
smoking and nicotine usage prevention;• Further develop our supply chain due
diligence framework;• Refine our approach to charitable
contributions;• Further implement our Environmental
Commitment by intensifying our useof renewable energies;• Develop and implement impactful antilittering campaigns across the world;• Formalize our commitment to forest
conservation and work with our supply chain
partners to further combat deforestation;• Continue to embed good water stewardshipin our operations and the AWS certificationof our factories; and• Further include IQOS devices into the“circular economy.”
We welcome your feedback on this reportand look forward to sharing our progress in
our next report.

Above: Tobacco seedlings in Brazil

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

117

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our performance
PILL AR 1:

Transforming our businessBusiness transformation metrics1

2015

2016

2017

2018

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

70%

72%

74%

92%

Patents granted relating to smoke-free products (cumulative)

600

1,800

2,900

4,600

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

Aspiration2

2 out of 48 2 out of 48 3 out of 46 7 out of 44

Number of markets where IQOS is available

6

20

38

44

Commercial expenditure (smoke-free/total)*

8%

15%

39%

60%

0.2%

2.7%

12.7%

13.8%

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

0

1

5

19

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

0

0

1

3

0.8

7.7

36

42

Net revenues3 (smoke-free/total)*

Smoke-free product4 shipment volume (billion units)*

38–42% by 2025

90–100 by 20215>250 by 2025

Combustible product shipment volume (billion units)*

881

845

791

767

<550 by 2025

Smoke-free product shipment ratio7 (smoke-free/total)*

0.1%

0.9%

4.4%

5.1%

>30% by 2025

Total IQOS users (in millions)8

0.2

2.1

6.9

9.6

Estimated users that have stopped smoking and switched
to IQOS (in millions)9

n/a

1.5

4.7

6.6

6

1 The 2018 metrics marked with a star (*) are subject to PwC’s Assurance Report. See page 129.
2 Assuming constant PMI market share. We do not set aspirational targets for R&D and commercial expenditure
but we expect both ratios to continue increasing to enable the stated outcome in terms of shipment volume.
3 Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions.
4 Includes heated tobacco units and e-cigarettes.
5 The 90–100 billion units’ shipment volume is a target and pertains exclusively to heated tobacco units.
6 Includes cigarettes and other combustible products.
7 The smoke-free product shipment ratio is compiled based on million of units.
8 See glossary on page 130.
9 See glossary on page 130. Metric introduced in 2018.

>40 by 2025

118

Overview

PILL AR 2:

Driving operational excellence

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Maintaining a strong ethics and compliance culture

Proportion of employees participating in training sessions pertaining to our Guidebook for Success (%)

Philip Morris International
Sustainability Report 2018

2016

2017

2018

83

93.5

86.9

Total number of compliance training1

238,351

189,696

193,063

Total number of compliance training on marketing

44,94837,90323,438Proportion of employees who received compliance training versus third parties (%)

76

75

82

Proportion of third parties who received compliance training versus employees (%)

24

25

18

Number of reports of suspected misconduct

792

714

872

Number of substantiated claims

292

317

338

Sourcing raw materials and other supplies responsibly (excluding tobacco supply chain)

2016

2017

2018

50,00050,000>36,000

Number of languages in which PMI’s Responsible Sourcing Principles are available(in addition to English)

Total number of suppliers

n/a

13

26

Sourcing raw materials and other supplies responsibly (tobacco supply chain)

2016

2017

2018

Proportion of tobacco purchased assessed by AB Sustain (%)

2233

43 100% over
3 years(2016–
2018)

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

72

77

88

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

15

19

21 24 by 2020

Proportion of tobacco purchased through direct contracts (by PMI and tobacco suppliers) (%)

88

90

93

1 2016 and 2017 training numbers have been updated to include live training that was conducted during these years but reported late, after the publication of our 2017 report.

Goal

100% by
2019

>90

119

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018120

Our performance continued

PILL AR 2:

Driving operational excellence

Tackling the illicit tobacco trade

2016

2017

2018

2019 goals

Coverage for tracking and tracing – master case level (in %)1

100

100

100

100

Tracking and tracing – percentage of packs sold with unique code applied (in %)

67

75

85

100

Additional Memoranda of Understanding with law enforcement agencies/governments signed in agiven year – number of countries3

5

10

5

5

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

25

25

27

35

2

Number of law enforcement officers trained on how to authenticate PMI products

2,176

717

500

500

Number of countries with law enforcement agencies trained on how to authenticate PMI products

14

15

10

10

Number of PMI IMPACT projects selected per funding round

n/a

32

31 90 by 2021

Number of countries from which PMI IMPACT projects were selected per funding round

n/a

18

23 60 by 2021

Number of applications (project proposals) received by PMI IMPACT per funding round

234

157

n/a

540 by2021

Number of countries from which applications were received by PMI IMPACT per funding round

42

56

n/a

140 by2021

PMI IMPACT grants allocated in USD million4

n/a

28

21

100

1 Full coverage equates to 95% tracking and tracing in our supply chain (excluding Kretek business). There are 5% of master cases not covered – these are destined to countries which are not identified as a sourceof potential diversion or where PMI sells to a single customer in the country.
2 Excludes Kretek business.
3 2016 data includes SELEC, representing 11 countries.
4 PMI pledged USD 100 millions as PMI IMPACT program goal.

Overview

PILL AR 3:

Managing our social impact

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Eliminating child labor and improving labor conditions on tobacco farms

Number of farmers contracted by PMI and PMI tobacco suppliers
Number of countries where farmers contracted by PMI and PMI tobacco suppliers are locatedPhilip Morris International
Sustainability Report 2018

2017

2018

380,000 >350,000

2016>350,000

26

28

27

Number of farmers with whom PMI has direct contracts

26,00023,00021,000

Number of farmers who have direct contracts with PMI tobacco suppliers

354,000

332,000>329,000

>20

>20

23

Number of third party tobacco suppliers with whom PMI has direct contractual relationship
Number of field technicians providing support to contracted tobacco farmers for GAP implementation

2,800

2,790

2,610

Total number of terminated contracts due to ALP violations (per crop season)

n/a

36

50

Total number of ALP prompt actions recorded by field technicians

n/a

12,74918,543

Total number of ALP prompt actions resolved

n/a

10,154

13,687

Supporting fair working conditions

2016

2017

2018

79,50080,60077,400

9.29

9.37

11.51

3.45

3.96

4.12

Approximate total number of employees
Employee overall turnover rate (%)1
Employee voluntary turnover rate (%)

1

Proportion of employees covered by Collective Labor Agreements (%)

68

67

65

Total number of Collective Labor Agreements

79

80

81

Total number of countries with Collective Labor Agreements

35

35

35

1 2016 and 2017 turnover rates have been restated to include 100% of our employees.

121Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018122

Our performance continued

PILL AR 3:

Managing our social impact

Promoting health, safety, and well-being

2016

2017

2018

Goal

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

0.12

0.10

0.13

<0.10
(ongoing)

Total Recordable Incidents Rate (TRIR) per 200,000 hours worked – PMI and contracted employees

0.27

0.22

0.22

0.30

Number of fatalities – PMI and contracted employees

1

2

2

0

Number of fatalities – contractors

1

1

1

0

Number of fatalities – members of the public

2

9

3

0

1.22

1.01

0.91

<1.50
100

Collision rate within PMI’s fleet of vehicles per year (collisions per million km driven)
Percentage of manufacturing facilities with OHSAS 18001 certification

93

91

97

0.00400.00270.0013

Number of markets with health and well-being committees

n/a

36

>40

Furthering diversity and inclusion

2016

2017

2018

Occupational Illness Frequency Rate (OIFR) per 200,000 hours worked – PMI andcontracted employees

Proportion of women employees (%)

41.2

41.6

42.1

Proportion of management positions held by women (%)

32.8

34.4

35.2

Proportion of new hires in management positions that are women (%)

43.1

43.0

40.4

Proportion of new hires at more junior levels that are women (%)

48.1

46.5

47.1

Proportion of promotion at management positions that are women (%)

35.4

38.3

38.3

Number of women in company management (management board)
Proportion of women in company management (management board) (%)
Number of women in Board of Directors
Proportion of women in Board of Directors (%)

1
2
2( out of 17) ( out of 20) (out of 21)
6

10

10

2
2
3
( out of 13) ( out of 13) (out of 12)
15

15

25

Goal

40%
by 2022

Overview

PILL AR 3:

Managing our social impact

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Engaging with our communities

2016

2017

2018

Proportion of charitable contributions out of total philanthropic spend (%)

100

100

100

29,92029,562

28,278

Value of in-kind giving, estimated (’000 USD)

n/a

175

260

Value of time spent on employee volunteering, estimated (’000 USD)1

n/a

n/a

500

Total number of volunteering hours1

n/a

n/a

17,941

Value of cash contributions (’000 USD)

1 Data was initially collected in 2018 and does not cover all our operations.

123Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our performance continued

PILL AR 4:

Reducing ourenvironmental footprint

Reducing our emissions and energy usage

2010 baseline

2016

2017

2018

CO2e scope 1 (metric tons)

443,186

351,990

388,384

408,162

PMI factories, offices, and fleet

CO2e scope 2 (metric tons)

470,864

314,049

241,355

175,785

PMI factories and offices

CO2e scope 1+2 (metric tons)

914,050

666,039629,739

583,947

PMI factories, offices, and fleet

CO2e scope 1 from fleet (metric tons)

143,148

122,434

119,588

114,936

PMI fleet and aircraft

CO2e emissions from vehicles (g CO2e per km
driven)

296

227

226

221

CO2e scope 3 (’000 metric tons)1

7,435

5,649

5,137

4,920

PMI operations and value chain

CO2e scope 1+2+3 (’000 metric tons)

8,349

6,315

5,767

5,504

PMI value chain

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

8,942

7,394

6,932

6,749

PMI value chain

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

27

31

36 30 by 2020 PMI factories, offices, and fleet
40 by 2030
60 by 2040

CO2e scope 1+2+3 absolute reduction versus
2010 baseline (%)124

31

34 40 by 2030 PMI value chain

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

17

22

25 30 by 2020 PMI value chain

1

Total energy consumed (gigajoules)

8,025,559
8.60

10.69

Total electricity consumed (MWh)922,269

Total electricity consumed that is fromrenewable sources (MWh)267,806

CDP Climate Change rating

PMI factories, offices and fleet

11.15

PMI factories, offices and fleet

903,253919,226

PMI factories, offices and fleet

442,739544,845

PMI factories, offices and fleet

29

49

59

PMI factories, offices and fleet

0

32

53

65

n/a

A

A

A

Proportion of electricity used and purchasedthat is from renewable sources (%)
Proportion of electricity used and purchasedthat is from renewable sources (%)

PMI fleet

8,307,941 8,896,274 9,088,301
9.73

Energy intensity (megajoules/million cig. sold)2

Goal Scope

100 by PMI factories
2030
A

1 In 2018, we reviewed our carbon footprint model, taking into account more primary data from suppliers and updating our methodology, leading to a more accurate figures for our scope 3 emissions.
We have restated our baseline and our 2016 and 2017 data according to the new model. Other figures that include scope 3 emissions in their calculations have also been restated.
2 Intensity is measured in CO2e per million sold cigarettes equivalent. From 2018 onwards we are reporting energy intensity based on sold units of cigarettes (versus produced units of cigarettes previously).
Previous years’ data have been restated accordingly.

124Overview

PILL AR 4:

Reducing ourenvironmental footprint

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Conserving biodiversity and combating deforestation

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

125

2016

2017

2018

Goal

Proportion of tobacco purchased without detection of residues attributable to the useof WHO TOX1 group of crop protection agents (%)1

98

99

n/a

100% by crop year 2018

Proportion of tobacco purchased without detection of residues attributable to the useof highly hazardous pesticides (HHPs), as defined by FAO and WHO guidelines in2016 (%)1

84

88

n/a

100% by crop year 2020

CO2 intensity reduction in tobacco curing versus 2010 baseline (%)2

17

38

47

60% by 2019
70% by 2020

Proportion of tobacco purchased at no risk of deforestation of old growth forests (%)3

88

94

90

98% by 2019100% by 2020

36 (29+7) 46 (33+13)

55% by 2019
70% by 2020

Proportion of flue-cured tobacco purchased cured with renewable fuel sources(self-sufficient firewood and biomass adoption) (%)2

32 (27+5)
17

20

15

10 by 20190 by 2020

31,00057,00076,00078,600 by 201980,000 by 2020

Cumulative number of Local Water Risk Assessments performed

n/a

n/a

8

15 by 201922 by 2020

CDP Forest rating

n/a

n/a

B

A

Proportion of Virginia tobacco purchased cured with coal (%)2
Approximate cumulative total number of curing barns upgraded since 20144

1 The 2018 crop season data were not available at the time of the publication of this report.
2 Previous years’ data have been restated based on final crop actual figures.
3 The category “Old growth forests” includes both primary (untouched) forests and secondary high conservation value forests. Old growth forests are living, functional ecosystems which need protection.
The negative trend in Tanzania is due to an unplanned additional volume intake to support our Leaf suppliers in a year of complex market dynamics. We were conscious about that and we collaborate with
our suppliers to minimize risks associated with deforestation of old growth forests in the tobacco growing areas of Tanzania (effort in reforestation activities and curing barn efficiency to reduce firewood
consumption via curing barn improvement program). Despite the slowdown in our progress, we are confident to achieve the 2020 target set of 100% of tobacco with no deforestation risk of old growth forests.
4 In 2018, we show an increase in the figures related to total number of curing barn and total number of curing barn upgraded, also reflected in the 2020 target. This is due to an expansion of the tobacco farmers’
base in the Philippines and related increase in the number of contracted farmers, and consequently of their total curing barns. Excluding China.

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Our performance continued

PILL AR 4:

Reducing ourenvironmental footprint

Minimizing waste and littering 1

Total amount of waste generated (metric tons)

2010 baseline

2016

2017

2018

143,596130,077

140,316

134,367

Proportion of total waste generated that is recycled (%)

79

87

81

84

Proportion of total waste generated that is incinerated with energy recovery (%)

9

8

12

12

Proportion of total waste generated that is disposed to landfill (%)

4

6

4

Proportion of total waste generated that is incinerated without energy recovery (%)

<1

<1

<1

1,275

1,357

1,423

Amount of hazardous waste generated (metric tons)
Proportion of hazardous waste generated that is recycled (%)

48

37

41

Proportion of hazardous waste generated that is incinerated with energy recovery (%)

30

44

44

Proportion of hazardous waste generated that is disposed to landfill (%)

6

9

6

Proportion of hazardous waste generated that is incinerated without energy recovery (%)

16

10

9

1 The scope of waste data covers factory waste, but excludes marketing and project waste.

Goal

85

126

Overview

PILL AR 4:

Reducing ourenvironmental footprint

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Managing water

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 20182010 baseline

2016

2017

2018

Total amount of water withdrawn (’000 m3)

4,998

3,394

4,152

4,371

PMI factories

Total amount of water consumed (withdrawn minus
discharged) (’000 m3)

2,449

1,498

1,672

1,958

PMI factories

Water ratio (water withdrawn in m3 per million units ofcigarettes sold)1

5.35

3.97

4.99

5.36

PMI factories

B

A

B

CDP Water rating

Other environmental metrics

Goal Scope

A

2016

2017

2018

Goal Scope

Manufacturing facilities certified to ISO 14001 (%)

93

91

100

100 PMI factories

CDP Supplier Engagement rating

A-

A

A

1 From 2018 onwards we are reporting water ratio based on sold units of cigarettes (versus produced units of cigarettes previously).

A

127

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Forward-looking and cautionary statements
This report contains projections of future
results and other forward-looking statements.
Achievement of future results is subject to risks,
uncertainties and inaccurate assumptions.
In the event that risks or uncertainties
materialize, or underlying assumptions
prove inaccurate, actual results could
vary materially from those containedin such forward-looking statements.
Pursuant to the “safe harbor” provisionsof the Private Securities Litigation Reform Act
of 1995, PMI is identifying important factors
that, individually or in the aggregate, could cause
actual results and outcomes to differ materiallyfrom those contained in any forward-looking
statements made by PMI.
PMI’s business risks include: excise tax increases
and discriminatory tax structures; increasing
marketing and regulatory restrictions that
could reduce our competitiveness, eliminate
our ability to communicate with adultconsumers, or ban certain of our products;
health concerns relating to the use of tobacco
products and exposure to environmental
tobacco smoke; litigation related to tobaccouse; intense competition; the effects of global
and individual country economic, regulatory,
and political developments, natural disasters
and conflicts; changes in adult smoker behavior;
lost revenues as a result of counterfeiting,contraband, and cross-border purchases;
governmental investigations; unfavorable
currency exchange rates and currency
devaluations, and limitations on the ability torepatriate funds; adverse changes in applicablecorporate tax laws; adverse changes in the costand quality of tobacco and other agricultural
products and raw materials; and the integrityof its information systems and effectivenessof its data privacy policies.

PMI’s future profitability may also be adversely
affected: should it be unsuccessful in its
attempts to produce and commercialize
reduced-risk products or if regulation or
taxation do not differentiate between
such products and cigarettes; if it is unable tosuccessfully introduce new products, promote
brand equity, enter new markets or improve
its margins through increased prices andproductivity gains; if it is unable to expand its
brand portfolio internally or throughacquisitions and the development of strategic
business relationships; or if it is unable to attract
and retain the best global talent. Future results
are also subject to the lower predictability of our
reduced-risk product category’s performance.
PMI is further subject to other risks detailed
from time to time in its publicly filed documents,
including the Form 10-Q for the quarter ended
March 31, 2019. Aspirational targets do notconstitute financial projections. PMI cautions
that the foregoing list of important factors is
not a complete discussion of all potential risks
and uncertainties. PMI does not undertake toupdate any forward-looking statement that it
may make from time to time, except in thenormal course of its public disclosure obligations.

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018128

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Independent Assurance Report on theBusiness Transformation Metrics Reporting 2018
To the Board of Directors ofPhilip Morris International Inc.
Lausanne
We have been engaged to perform assurance
procedures to provide reasonable assurance on
the Business Transformation Metrics reportingof Philip Morris International Inc. andSubsidiaries (‘PMI’).

Scope and subject matter
Our reasonable assurance engagement focusedon selected Business Transformation Metrics of
PMI for the financial year ended December 31,
2018 included in the Sustainability Report 2018:
a. The following Business Transformation
Metrics, in all material aspects, as disclosed
on page 118.
• R&D expenditure (smoke-free/total)• Commercial expenditure (smoke-free/total)• Net revenues (smoke-free/total)• Smoke-free product shipment volume(billion units)• Combustible product shipment volume(billion units)• Smoke-free product shipment ratio(smoke-free/total)b. The application of the internal financial
reporting guidelines for the preparationof the Business Transformation Metrics
published on pages 28 and 36; andc. The internal reporting system and procedures
to collect and aggregate the BusinessTransformation Metrics data
The prospective data in the Aspiration
column is not subject to this assurance report.
Consequently, we do not express any conclusionon this data.

Criteria

Our Independence and Quality Control

Reasonable assurance conclusion

The reporting criteria used by PMI are
described and disclosed on pages 28 and 36
and in the internal financial reporting guidelines.
These define those procedures, by which theBusiness Transformation Metrics data areinternally gathered, collated and aggregated.

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

In our opinion,

PMI’s Management Responsibilities
PMI’s management is responsible for the
preparation of the Business Transformation
Metrics in accordance with the reporting
criteria. This responsibility includes the design,
implementation and maintenance of related
internal control relevant to the preparation of
the Business Transformation Metrics as definedin PMI’s internal control framework for financial
reporting so that they are free from material
misstatement, whether due to fraud or error.
Because of its inherent limitations, internal
control over reporting may not prevent or
detect misstatements.

Our Responsibility
Our responsibility is to perform a reasonableassurance engagement to express a conclusion
on selected Business Transformation Metrics
on page 118. We planned and conducted our
engagement in accordance with International
Standard on Assurance Engagements (ISAE
3000) (Revised) ‘Assurance engagements
other than audits or reviews of historicalfinancial information’. That standard requiresthat we comply with ethical requirements andplan and perform our procedures to obtainreasonable or limited assurance whether theselected Business Transformation Metrics was
prepared, in all material aspects, in accordancewith the reporting criteria.

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

Summary of work performed
Our assurance procedures included
the following work but are not limited to:• Reviewing the application of the internalfinancial reporting guidelines• Interviewing PMI representatives responsible
for the internal reporting and data collection• Test a sample of data from PMI operationsin Switzerland, Japan, South Korea andGermany concerning the completeness,accuracy, consistency and classification
as Smoke-Free Products• Inspecting relevant documentation
on a sample basis, including PMI policies,
management reporting structures anddocumentation• Reviewing and assessing the management
reporting processes for BusinessTransformation Metrics data andconsolidation and their related controls
We believe that the evidence we have obtained
is sufficient and appropriate to provide a basis
for our assurance conclusions.

a. The selected Business Transformation
Metrics as outlined in the scope and subject
matter paragraph and disclosed on page
118 give a fair picture of PMI’s Smoke-Free
Product performance;b. The internal financial reporting guidelines
are applied in all material aspects as publishedon pages 28 and 36; andc. The internal reporting systems to collectand aggregate the Business Transformation
Metrics data are functioning as designed andprovide an appropriate basis for the reporting.
Lausanne, May 3, 2019
PricewaterhouseCoopers SA
Richard Thomas

Raphael Rutishauser

129

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Glossary and acronyms

CLAs – Collective Labor Agreements

FCTC – Framework Convention on Tobacco
Control

IQOS MESH – The brand name that PMI haschosen for one of its Platform 4 reduced-risk
product that leverages new proprietaryvaporization technology. IQOS MESH isa closed-tank system, to be used exclusively
with VEEV flavor caps

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

FDA – U.S. Food and Drug Administration

KPIs – Key performance indicators

FTs – Field technicians monitoring theimplementation of PMI’s Good Agricultural
Practices and Agricultural Labor Practices
programs

LMICs – Low and middle income countries

Reduced-risk products (RRPs) or smoke-free
products – Products that present, are likely
to present, or have the potential to present lessrisk of harm to smokers who switch to theseproducts versus continued smoking. PMI has arange of RRPs in various stages of development,scientific assessment and commercialization.
PMI’s RRPs do not burn tobacco; they produce
an aerosol that contains far lower quantities ofharmful and potentially harmful constituents
than found in cigarette smoke

LTI – Lost Time Injury

R&D – Research and development

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

RSP – Responsible Sourcing Principles

GHG – Greenhouse gas

MRTPA – Modified Risk Tobacco ProductApplication under section 911 of the Federal
Food, Drug, and Cosmetic Act

Smoke – A visible suspension of solid particles,
liquid droplets, and gases in air, emitted whena material burns

Aerosol – Gaseous suspension of finesolid particles and/or liquid droplets
ALP – Agricultural Labor Practices
AWS – Alliance for Water Stewardship
CDP – Carbon Disclosure Project
CHTP – Carbon-Heated Tobacco Product

Combustion – The process of burning asubstance in oxygen, producing heat andoften light

E-vapor product – Electrical product thatgenerates an aerosol by heating a nicotine
or non-nicotine containing liquid, such as
electronic cigarettes (or “e-cigarettes”)
FAO – Food and Agriculture Organizationof the United Nations

IPM – Integrated Pest Management
IPS – Integrated Production System

SDGs – Sustainable Development Goals

Converted IQOS Users – The estimatednumber of legal age (minimum 18 years)
IQOS users that used PMI HTUs for over
95% of their daily tobacco consumption
over the past seven days

GAP – Good Agricultural Practices

GPP – Global Privacy Program

NGOs – Non-governmental organizations

STP – Sustainable Tobacco Program

CPA – Crop protective agent

GTS – Green tobacco sickness

SUP – Single-use plastics

EHTS – Electrically Heated Tobacco System

HCV – High conservation valueOECD – Organisation for Economic
Co-operation and Development

E-liquids – Refers to a liquid solution that isused in/with e-cigarettes. E-liquids containdifferent levels of nicotine in a propylene
glycol and/or vegetable glycerin-based
solution with various flavors

Heated tobacco product or HTP – A
manufactured tobacco product that delivers
a nicotine-containing vapor (aerosol), without
combustion of the tobacco mixture

P&C – People and Culture

Tons – “Tons” equates to “metric tons”
throughout this report

EPR – Extended Producer Responsibility
Estimated users who have stopped smoking
and switched to IQOS – For markets where
IQOS is the only heated tobacco product, this isdefined as the daily individual consumption of
PMI HTUs representing the totality of their daily
tobacco consumption in the past seven days. For
markets where IQOS is one among other heated
tobacco products, this is the daily individual
consumption of HTUs representing the totalityof their daily tobacco consumption in the pastseven days, of which at least 70% are PMI HTUs
EVA – Economic value added

GDPR – General Data Protection Regulation

Heated tobacco units or HTUs – The term PMI
uses to refer to heated tobacco consumables,
which for PMI include the company’s HEETS,HEETS Marlboro and HEETS FROMMARLBORO, defined collectively as HEETS,
as well as Marlboro HeatSticks and Parliament
HeatSticks
HHPs – Highly hazardous pesticides
HPHCs – The harmful or potentially harmful
constituents that have been identified as likely
causes of tobacco-related diseases
Illicit trade – Refers to products that have notpaid domestic tax, other than non-domestic
products that are brought into the country
legally by consumers

PCSD – Policy Coherence for Sustainable
Development
PMI – Philip Morris International Inc.
and its subsidiaries
PMI Regions – Effective January 1, 2018, PMI
began managing its business in six reporting
segments as follows: the European Union
Region (EU); the Eastern Europe Region (EE);the Middle East & Africa Region (ME&A), which
includes PMI Duty Free; the South & Southeast
Asia Region (S&SA); the East Asia & Australia
Region (EA&A); and the Latin America &Canada Region (LA&C)
PPE – Personal protective equipment
Predominant IQOS Users – The estimatednumber of legal age (minimum 18 years)
IQOS users that used PMI HTUs units for
between 70% and 95% of their daily tobacco
consumption over the past seven days

THS – Tobacco Heating System

Total IQOS users – The estimated number oflegal age (minimum 18 years) IQOS users thatused PMI HTUs for at least 5% of their daily
tobacco consumption over the past seven days
Total shipment volume – The combined
total of cigarette shipment volume and HTU
shipment volume
TPSAC – Tobacco Products Scientific Advisory
Committee
UNGPs – United Nations Guiding Principles
on Business and Human Rights
WASH – Water, sanitation, and hygiene
WHO – World Health Organization

In this report, “PMI,” “we,” “us,” and “our” refers to Philip Morris International Inc. and its subsidiaries.
Trademarks: Trademarks and service marks in this report are the registered property of, or licensed by, the subsidiaries of Philip Morris International Inc., and are italicized or shown in their logo form.

130

Overview

Transforming
our businessDriving operational
excellenceb

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Endnotes
1 Data are as of December 31, 2018. The scope of the data inthis report covers all our operations, unless stated otherwise,
for the full calendar year 2018.

19 Includes heated tobacco units and e-cigarettes.

2 Source: Tobacco and Nicotine Database (data as of
September 2018 and includes China and the U.S.) or
PMI Financials or estimates, as of end 2018; or WHO
https://www.who.int/fctc/protocol/anniv_protocol/en/

21 Includes cigarettes and other combustible products.

3 Data as of December 31, 2018.

23 See glossary on page 130.

4 S&P Dow Jones classification. Source: PMI Financials or
estimates and Dow Jones Global Total stock Market Index.

24 See glossary on page 130. Metric introduced in 2018.

36 The Greenhouse Gas (GHG) Protocol Corporate Standard
2015 introduces the “market-based method” which allows
companies to show how different types of electricity
purchases, such as renewables, can count towards emissions
targets. We collect two sets of data for scope 2 emissions: alocation-based total, which represents the GHG intensity of
the grids where our sites operate; and a market-based total,
which takes into account emissions from energy contracts andinstruments (such as renewable energy credits). We publicly
report on market-based emissions.

25 https://www.fda.gov/NewsEvents/Speeches/ucm569024.
htm

37 In 2017, the CDP-A List comprised 25 organizations:
https://www.cdp.net/en/scores

26 https://www.pmi.com/resources/docs/default-source/our_company/product-assessment_v2.pdf?sfvrsn=164e8bb5_2

38 New guidance relates to moving targets from a 2 to 1.5
degrees Celsius scenario: https://sciencebasedtargets.org/

6 Average reductions in levels of a broad range of harmful
chemicals (excluding nicotine) compared with the smokeof a reference cigarette (3R4F).

27 https://www.pmiscience.com/library/publication/pathwaybased-predictive-approaches-for-non-animal-assessment-ofacute-inhalation-toxicity

39 UN Environment, “Our planet is drowning in plastic pollution”:
https://www.unenvironment.org/interactive/beat-plasticpollution/

7 The products depicted are subject to ongoing development,
and therefore the visuals are illustrative and do notnecessarily represent the latest stages of productdevelopment.

28 We refer to conflict minerals in accordance with U.S.
legislation and Securities and Exchange Commission rules;
the definition of responsible sourcing of such minerals is set
out in the Responsible Sourcing Initiative which is used todetermine whether smelters are conformant.

40 European Council, “Single-use plastics: Presidency reaches
provisional agreement with Parliament’” 19 December 2018:https://www.consilium.europa.eu/en/press/pressreleases/2018/12/19/single-use-plastics-presidencyreaches-provisional-agreement-with-parliament/

29 The WHO estimates that the global illicit trade amounts
to approximately 10% of global consumption. Source:
https://www.who.int/fctc/protocol/anniv_protocol/en/

41 Clean Virginia Waterways, “Cigarette Butt Litter Prevention
Tips”: http://www.longwood.edu/cleanva/
cigbuttlitterpreventiontips.htm

30 https://www.stopillegal.com/the_problem/consequences-ofillicit-trade

42 Quantis (2018), Corporate Footprint report.

5 See PMI Science, https://www.pmiscience.com/news/
absence-combustion-pmi%E2%80%99s-heated-tobaccoproduct-platform-1

8 Platform 1 – Electrically Heated Tobacco System (EHTS) is
referred to as Tobacco Heating System (THS) in research.
9 Platform 2 – Carbon-Heated Tobacco Product (CHTP).
10 https://www.pmiscience.com/discover/news/pmiassessment-of-the-kfda-statement
11 Osaki Y, et al. “Field survey on drinking and smoking andthe development of effective alcohol reduction intervention
approaches for the prevention of lifestyle-related diseases.”
Annual Report of MHLW Research Committee, May 2018.
Available at: https://mhlw-grants.niph.go.jp/niph/search/
NIDD00.do?resrchNum=201709021A
12 Health Behaviour in School-aged Children (HSBC): La
consommation de substances psychoactives des 11 à 15
ans en Suisse – Situation en 2018 et évolutions depuis 1986.
13 Assuming current retail selling price and excise tax levels.
Includes devices and consumables (source: PMI Financials
or estimates).
14 https://www.pmi.com/media-center/news/public-supportsalternatives-to-cigarettes
15 https://www.parliament.uk/business/committees/committees-a-z/commons-select/science-and-technologycommittee/
16 As of December 31, 2018.
17 Assuming constant PMI market share. We do not set
aspirational targets for R&D and commercial expenditure
but we expect both ratios to continue increasing to enable
the stated outcome in terms of shipment volume.

20 The 90–100 billion units is a target and pertains exclusively
for heated tobacco units.
22 The smoke-free product shipment ratio is computed
based on millions of units.

31 Targets pertain farmers and workers contracted by
PMI or by PMI suppliers under the Agricultural Labor
Practices (ALP) Code.

43 For context, the Global Risk Assessment shows that 19%
of tobacco-growing areas are in this category worldwide.

32 The numbers provided in this section are approximate
numbers, considering the limitations faced during the datacollection, the large data scope, and the diversity of markets
assessed. The scope of our ALP data excludes China, France,
Hungary, Switzerland, and one of our suppliers in Tanzania.
33 According to the International Labour Organization(ILO), Global Estimates of Child Labor: Results and Trends,
2012–2016, https://www.ilo.org/wcmsp5/groups/public/--dgreports/---dcomm/documents/publication/
wcms_575499.pdf
34 At 40% representation, people stop feeling like they are in theminority. This target is supported by a supplemental target tohire talented men and women at a ratio of 1:1 at entry levels.
35 The certification is conducted against standards set up by the
non-profit EQUAL-SALARY Foundation (www.equalsalary.
org). The audit is conducted by PwC.

18 Excluding excise taxes. For future periods, at today’s pricing
and excise tax assumptions.

In this report and in related communications, the terms “materiality,” “material” and similar terms, when used in the context of economic, environmental, and social topics, are defined in the referenced
sustainability standards, and are not meant to correspond to the concept of materiality under the U.S. securities laws and/or disclosures required by the U.S. Securities and Exchange Commission.

131

Overview

Transforming
our businessDriving operational
excellenceb

About this report
We are pleased to share our fourth Sustainability
Report, which follows the previous reportpublished in May 2018. The report is shaped
around the topics relevant to our business andto our stakeholders.
With the aim of achieving greater transparency, we haveshared more detailed information on our sustainability
materiality assessment, stakeholder engagement, and how
we manage our impacts. We realize that the transformationof our company brings along challenges we need to address,
and we have shared some of them through our case studies.
This report also accounts for feedback received from various
stakeholders on our previous report relating for example
to targets, responding to stakeholders’ concerns, and materiality.
To allow readers to assess our progress, we are trying to be more
systematic in disclosing our targets and commitments and willcontinue improving in the coming year.
The scope of the data in this report embraces all our operations,
unless stated otherwise, for the full calendar year of 2018.
PricewaterhouseCoopers SA (PwC) has assured certain of
the business transformation metrics on page 129 of this report.
The external verification statement of our environmental andhealth and safety data can be found on our PMI website.
This report is signed off by members of PMI’s Senior
Management Team, including our Chief Executive Officer,
Chief Financial Officer, Chief Operating Officer, and President
External Affairs and General Counsel.
This report has been prepared in accordance with the
GRI Standards: Core option. Our GRI cross-reference index
can be found on PMI website. In addition, we align our reportingwith the UN Sustainable Development Goals, the UN Global
Compact principles, and the Sustainability Accounting Standards
Board (SASB) standards.
We report on sustainability annually and always welcome
your feedback. Please contact Esther Bares and Marie Corger
at sustainability@pmi.com.

Managing oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018132

Overview

Transforming
our businessDriving operational
excellenceManaging oursocial impact

Reducing ourenvironmental footprint

Reporting onsustainability

Philip Morris International
Sustainability Report 2018

Design and production
Friend Studio
www.friendstudio.com
Photography
George Brooks
www.georgebrooks.net
Printer
Baudat imprimerie
www.baudat-favj.ch
Cover image: Drone used to map and scout tobacco
fields, generating live data for decision making on crop
management, in Bahia, Brazil

This report is printed with vegetable-based
inks on “Balance Silk®” paper made from 60%
recycled fibers, certified as an FSC® recycled,
European Ecolabel (EU Flower), Elemental
chlorine free (ECF) product.

Headquarters
Philip Morris International Inc.
120 Park Avenue
New York, NY 10017-5579
USA

Operations Center
Philip Morris Products S.A.
Avenue de Rhodanie 50
1007 Lausanne
Switzerland

www.pmi.com

www.pmi.com