Tobacco
Our core business is tobacco, which generates nearly 90% of our consolidated revenue. Ourconventional tobacco products are manufactured in over 30 factories around the world and are
distributed in more than 130 countries. In addition to conventional tobacco, we have a Reduced-Risk
Product (Reduced-Risk Products are products with the potential to reduce the risks associated withsmoking.) portfolio which includes e-cigarettes and tobacco vapor products.
We recognize that cigarettes are a legal but controversial product. People smoke for pleasure but
there are real risks that come with that pleasure. That’s why we are as clear and transparent about
our positions on smoking and health as possible, and we have policies that define our attitude tosmoking and responsible marketing.

Our tobacco principles

Smoking and health

For more details on our approach to responsible marketing, please refer to ourGlobal Tobacco Marketing Principles.
In the following four strategic focus areas, we cover our approach to sustainability across ourtobacco business.

Our tobacco business value chain

The four strategic focus areas of our sustainability
strategy

Products and services (RRP)
Products and services (Environment)

Supply chain

Optimizing the regulatory environment

Investing in people

Tackling the illegal trade

You might also like...
TobaccoInformation by

Reduced-Riskbusinesssegment

Products (RRP)

Supply chain

Copyright© Japan Tobacco Inc. All rights reserved.

Smoking and health
People smoke for pleasure, but there are real risks that come with that pleasure. Smoking is a cause
of serious diseases, including lung cancer, coronary heart disease, emphysema, and chronic
bronchitis. These risks distinguish tobacco from most consumer goods and place a particularresponsibility upon us, our industry, and public authorities.
The JT Group is committed to being transparent about the health risks of smoking. We do this byproviding consumers with scientific information to help them make informed decisions aboutsmoking. We also subject all of our ingredients to toxicological assessments, in line with stipulated
requirements.
Our positions on smoking and health are available on our websites, as are the lists of ingredients we
use in our products.
Ingredients list of JT products (in Japanese)
Ingredients list of JTI products
Our attitude to smoking
Our attitude to smoking (in Japanese)

Related links
TobaccoReduced-Risk

Products andProducts (RRP)

services(Environment)

Tackling illegal
trade

Investing inpeopleSupply chain

Optimizing theregulatoryenvironment

Smoking andhealthCopyright© Japan Tobacco Inc. All rights reserved.

Products and services(RRP)
Exceeding expectations with products and services

Aspirational goal
We will be a total tobacco company offering consumers an even greater choice of products
by focusing on quality, innovation, and reduced-risk potential.

TargetWe will lead in providing the widest range of consumer choice in the RRP category.

Progress
At the end of 2020, we offered a choice of 6 tobacco vapor offerings (T-Vapor) and/or 5
types of e-cigarettes (E-Vapor) in 27 countries
Read more about our latest progress on the JT Group's
tobacco business sustainability strategy.

Our approach
As alternatives to traditional combustible products, tobacco vapor products (T-Vapor) and ecigarettes (E-Vapor) are gaining popularity with consumers around the world. Although the industry

is changing, our commitment to consumer choice remains.
We also believe that it is vital to focus on innovation and listen to consumers’ needs. We havepartnered with startups and incubators to give emerging technologies and ideas the opportunity toreach our R&D centers.
While we believe that vaping products have reduced-risk potential compared to smoking cigarettes,
they should only be used by adult consumers who are informed of the associated risks, including
nicotine addiction.
Between 2018 and 2020, we invested 100 billion yen in Reduced-Risk ProductsProducts with thepotential to reduce the risks associated with smoking., and we plan to invest further in the coming
years.

Putting consumers first
For products to have the potential to reduce the risks associated with smoking, consumers mustfirst understand and appreciate their value. We therefore take a consumer-centric approach toresearch and development, and focus on four major factors that motivate consumers to consider
Reduced-Risk Products:■

The potential for a product to reduce the risks associated with smoking■

Affordability and value for money■

Social considerations – seeking products with low smell, so as not to disturb others■

The convenience of being able to use a product in a wide variety of locations and situations

This approach to our Reduced-Risk Product research and development reflects the Harm Reduction
Equation shown below. It also helps us to concentrate on exceeding the expectations of all of our
key stakeholders: consumers, shareholders, employees, and the wider society.
The success of any harm reduction intervention is dependent on two factors: its potential to reduce
the risks associated with a particular activity and the number of people who adopt the intervention.
Their potential value is lost when consumers do not accept these alternative propositions.

Empowering consumer choice
We support consumers to make informed choices, by providing information acquired through thescientific assessment of the products they may wish to use.
In 2020, our Reduced-Risk Product portfolio was present in 27 countries, with a choice of six
tobacco vapor offerings (T-Vapor) and five types of e-cigarettes (E-Vapor).

What is T-Vapor?

What is E-Vapor?

T-Vapor products contain tobacco that is

Also known as electronic cigarettes, E-Vapor

heated (but not burnt) to create an inhalable

products heat a liquid that usually contains

vapor. Consumers particularly enjoy the wider

nicotine, but no tobacco. They create ansocial freedoms that these bring, comparedinhalable vapor by electrically heating a liquidto conventional products. Our T-Vapor(known as ‘e-liquid’) contained within the

category currently consists of Heateddevice or a replaceable cartridge.

Tobacco and Tobacco-Infused Vapor
products:

These products offer optimum levels ofsocial consideration, convenience, and›› Heated Tobacco delivers the satisfaction ofaffordability.

a tobacco experience›› Tobacco-Infused Vapor addresses theconsumer needs of social consideration andconvenience, while continuing to deliver atrue tobacco taste experience

JT Science: an online resource for all
There are currently no globally agreed standards for assessing the risk-reduction of the alternatives
to combustible tobacco products. Our team of scientists is developing methods and applying themin research contributing to the increasing scientific evidence on Reduced-Risk Products. We willcontinue with these studies and share progress updates on our science website, JT Science.

JT Science is a valuable online resource for both scientists and non-scientists. Our mission is toinform, educate, and collaborate with anyone who is interested in learning about the science behindthe products – from consumers and scientists to the regulatory community.
The aim of JT Science is to provide an open, balanced, and fair platform, where we can share
factual scientific data and assessments in a transparent way. The results of ourscientific studies

evaluating our Reduced-Risk Products are publicly available.

Realizing the full potential of Reduced-Risk
Products
Our next-generation products will be defined by their potential to reduce the health risks associatedwith smoking and their ability to provide an acceptable user experience for consumers. We’recommitted to bringing new and innovative Reduced-Risk Products to market, and are continuallydeveloping and testing them using scientifically-rigorous methods.
While it is still too early to understand the long-term health effects of Reduced-Risk Products, –factors including the elimination of combustion and the fewer toxicants found in the vapor, suggest
there is potential for them to reduce the risks associated with smoking. That’s why we’re committed
to ensuring that all our Reduced-Risk Products fulfill this potential.

To realize the full potential of Reduced-Risk Products, we follow the research process below.

RRP Development and assessment: A six-stepjourney

Read more about our research on the JT Science

Our product portfolio

website.

(As of December 2020)

Successful launch of Ploom in Russia■

We launched a second-generation Heated Tobacco product, Ploom Model S, in one of our mostimportant international markets, Russia, in March 2020.

■

The product offers intuitive design, convenience, and authentic tobacco taste. It is an excellent
choice for adult consumers looking for alternatives to conventional tobacco products.

■

Despite the challenges of COVID-19, the launch was successful and results have beenencouraging, showing high consumer satisfaction and acquisition rates.

■

Following this positive start in Russia, we launched the product in the U.K. and Italy in November
2020.

Where are our Reduced-Risk Products available?
(As of December 2020)

Reduced-Risk Products supply chain(As of December 2020)

We have established a dedicated supply chain for our Reduced-Risk Products, building strong
supplier partnerships that support business expansion and meet the demands of our increasingly
sophisticated portfolio. In addition to our in-house production capabilities, we source frommanufacturers across Asia and Europe.
In 2018, we opened an e-liquids (E-Vapor) production facility at our manufacturing site in Gostkow,
Poland. We then further boosted our in-house production in 2019 by bringing into service a new
Ploom product (T-Vapor) plant in the same location. These new facilities enable us to keep up withthe demand for e-liquids containing nicotine, tobacco capsules, and tobacco sticks in expanding
markets across the world.

Where are our Reduced-Risk Products produced?

Responsible recycling and disposal schemes for
Reduced-Risk Products
Read about the Environment and our products.

Our view on Reduced-Risk Product regulation
Read about our perspective on Reduced-Risk Product regulation.

Notes: This section is intended only to explain the business operations of the JT Group, not to promotesales of tobacco or vaping products or encourage smoking or vaping among consumers.

Related links
TobaccoProducts andProducts andservices (RRP)

services(Environment)

Tackling illegal
trade

Investing inpeopleSupply chain

Optimizing theregulatoryenvironment

Smoking andhealthCopyright© Japan Tobacco Inc. All rights reserved.

Products and services(Environment)

Aspirational goal
We will be a total tobacco company offering consumers an even greater choice of products
by focusing on quality, innovation, and reduced-risk potential.

TargetWe will reduce the environmental impact of our products and packaging through design
solutions, facilitating responsible collection and disposal, and consumer awareness andeducation. More specifically, we will reduce our packaging (including plastic) and ensurethat the remaining is 85% reusable or recyclable by 2025, rising to 100% by 2030. In total,
recycled content will account for 20% of our tobacco business packaging by 2025.

Our investment in product sustainability takes into account the type of materials and packaging weuse. In 2020, our international tobacco business set up a cross-functional team to embedsustainability in product development and minimize our environmental impact across our portfolio.
For specific initiatives, Read more about Environment and Our Products

Related links
TobaccoReduced-Risk

Products andProducts (RRP)

services(Environment)

Tackling illegal
trade

Investing inpeopleSupply chain

Optimizing theregulatoryenvironment

Smoking andhealthCopyright© Japan Tobacco Inc. All rights reserved.

Supply chain
Building sustainable supply chains
Maintaining a well-managed supply chain is essential for our business sustainability. We work
closely with all of the stakeholders involved to reduce negative social and environmental impacts.
Our factories produce ready-made cigarettes, other tobacco products, and some of our ReducedRisk Products. We purchase approximately half of our tobacco leaf from directly contracted
growers, and the other half from tobacco leaf merchants.
To ensure the highest levels of sustainability and integrity across the supply chain, all of our
suppliers are required to comply with our supply chain policies and standards.

Aspirational goal
We will reduce environmental and social risks, and enable transparent and responsible
practices across our supply chain.

Targets and Progress
AGRICULTURAL LABOR PRACTICES
TargetWe will implement our Agricultural Labor Practices (ALP) program in all sourcing countries
by 2025.

Progress

In 2020, 87% of our supplying entities reported against ALP.
[58% of our directly contracted growers and 92%*1 of our leaf merchants' growers werecovered by ALP; leaf merchants data come from reporting entities only and excluding India
and China.]
76% of our volumes were covered by ALP.

SUPPLIER SCREENING
TargetWe will screen all key suppliers against environmental, social, and governance criteria by
2023.

Progress
At the end of 2020, 64%*2 of our key suppliers were screened against ESG criteria.

GREENHOUSE GAS EMISSIONS
TargetWe will reduce greenhouse gas emissions from our own operations by 35% and from ourdirect leaf supply chain by 40%, between 2015 and 2030.

Progress
Since 2015, we have reduced greenhouse gas emissions from our own operations by 28.6%
and greenhouse gas emissions from our direct leaf supply chain by 6.0%.

WATER AND WASTE
TargetWe will reduce water withdrawal by 15% and waste by 20%, in relation to our own operations,
between 2015 and 2030.

Progress
Since 2015, we have reduced water withdrawal by 14.9% and waste by 13.8%, in relations toour own operations.

FORESTRY
TargetWe will replace all wood from natural forests used in the tobacco curing process of ourdirectly contracted growers with renewable fuel sources by 2030.

Progress
Based on our 2020 sustainable tree planting activities in Tanzania, Zambia and Brazil, we
estimate that we are on a path to achieve consolidated 41% renewable wood sourcing by
2027.*3*1 The decrease from 98% in 2019 to 92% in 2020 is due to new suppliers reporting, whohave not implemented ALP yet.
*2 The decrease from 67% in 2019 is due to “key supplier” definition change, resulting inincreased number of key suppliers, however total number of suppliers screened has
increased.

*3 Reduction from 59% in 2019 to 41% in 2020 can be attributed to lower tree planting andsurvival rates versus planned. Efforts and dedicated programs are in place to achieve 100%
renewable wood supply by 2030.

Leaf supply chain - Raw material sourcing

Non-tobacco materials, other products, and services

Reducing our environmental impact in the tobaccovalue chain
Read more about our targets on 'Greenhouse gas emissions', 'Water and Waste', and 'Forestry'.
Read more about our programs and initiatives in our international tobacco business.

Related links
TobaccoReduced-Risk

Products andProducts (RRP)

services(Environment)

Tackling illegal
trade

Investing inpeopleSupply chain

Optimizing theregulatoryenvironment

Smoking andhealthCopyright© Japan Tobacco Inc. All rights reserved.

Supply chain policies andstandards
All of our suppliers* are required to comply with our JT Group Supplier Standards. We selectsuppliers based on quality, service, and cost, which is reflected in our JT Group Responsible
Procurement Policy. Our contracted tobacco leaf growers and merchants must also adhere to the
JT Group Principles in Leaf Tobacco Production.
Although we work with many different suppliers, our leaf supply chain due diligence processprovides us with a 360° view of the entire supply chain at farm level. This process includes:■

Supply Chain Impact Assessments■

Our Agricultural Labor Practices (ALP) program■

Our ARISE (Achieving Reduction of Child Labor in Support of Education) program■

Grower Support Programs* includes tobacco suppliers.

The JT Group
Responsible
Procurement
PolicyThe JT Group
Supplier
Standards

The JT Group
Principles inAgricultural

Leaf Tobacco

Labor Practices

Production

The JT Group Responsible Procurement Policy

The mission of the JT Group is to create,develop and nurture its unique brands to win
consumer trust, while understanding andrespecting the environment, and the diversityof societies and individuals. To achieve themission of the JT Group, the JT Group
operates procurement in the manner asstated in the JT Group Responsible
Procurement Policy.

1. Implementation of compliance■Acting in a manner to comply with the legislation and regulations relating to procurement as well
as social norms.

■

Providing appropriate measures to protect all information provided to us by our suppliers for
procurement activities.

■

Operating procurement activities in appropriate and sincere manner that follows the JT Group
Code of Conduct.

2. Environment
The JT Group operates procurement in a manner to pay due consideration to the environment inaccordance with the basic principle of the JT Group Environment Policy.

3. Supplier selection
Our supplier selection is based upon our review of a supplier’s quality, price and service. In
particular, the JT Group will consider the supplier’s historical success with respect to the delivery of
goods and services to be supplied to the JT Group, as well as the supplier’s capability to ensureongoing delivery of these requested goods and services. In addition to these criteria, the JT Groupwill consider the following:■

The supplier’s compliance with relevant laws and regulations for each country and region.

■

The supplier’s policies that respect human rights and social norms.

■

Whether the supplier has appropriate measures to pay due consideration to the environment.

■

Whether the supplier has appropriate measures to protect confidential information, trade secrets
and any other information provided by business partners.

■

Whether the supplier has appropriate measures that ensure business continuity, free from any
operational and financial instability.

Reporting Concerns

The JT Group Supplier Standards
Wherever we operate, we expect our business partners to share our commitment to the highest
standards of business integrity, legal compliance, and responsible business practice. At the Grouplevel, our Responsible Procurement Policy sets this expectation. It clarifies that when selecting
suppliers, we take account of candidates’ compliance with relevant laws and regulations, andrequires that we consider human rights, the environment, and other social responsibilities.
The JT Group Supplier Standards

NOTE
Japan Tobacco International (JTI), which is the international operation of the JT Group, has specificsuppliers' selection criteria which are consistent with those of the JT Group. For more information,please refer to JTI's policy.
JTI Supplier Standards

The JT Group Principles in Leaf Tobacco Production
JT Group conducts business following ourManagement Principles, the 4S model, underwhich “we strive to fulfill our responsibilities
to our valued consumers, shareholders,
employees and the wider society, carefully
considering the respective interests of thesefour key stakeholder groups, and exceeding
their expectations wherever we can.”JT Group secures a stable supply of quality
tobacco that meets required standards at

best cost through direct-procurement of leaf
from growers and processes this leaf
tobacco*1 at our designated factory(hereinafter the “leaf tobacco production”).

To pursue our above mentioned Management Principles in the leaf tobacco production, we haveestablished, and abide by, the following “JT Group Principles in Leaf Tobacco Production” in Origins
where we do business.
■

Sustainable leaf tobacco production following the JT Group’s Code of Conduct.

■

Adherence to the JT Group Environment Policy, which aims to reduce environmental impacts
and ensure efficient use of natural resources while striving to conserve biodiversity.

■

Endeavor to produce leaf tobacco that satisfies consumers’ requirements.

■

Strive to improve quality and integrity of leaf tobacco production through promotion of Good
Agricultural Practice (GAP)*2.

The JT Group, together with our contracted growers, will promote:1 Compliance with applicable national and local legislations;
2 Respectful treatment without applying any unlawful discrimination, abuse, or harassment of any
kind to workers and prohibition of use of child labor and/or use any form of forced orcompulsory labor to workers;
3 Reasonable measures to create and maintain a safe and healthy working environment;
4 Proper management of seed and varieties;
5 Consideration for the environment in leaf tobacco production through conservation of forestry,soil, water resources, biodiversity and ongoing improvement of energy efficiency;
6 Adoption of techniques including Integrated Pest Management (IPM)*3 practices, aiming at
reduced use of CPA's in the control of diseases, infestation of harmful insects and weed control;
7 Management practices which contribute to avoiding Non Tobacco Related Material (NTRM) or
any other contaminants;
8 Sustainable grower incomes through responsible pricing principles and practices; and9 Management of transportation and storage practices that ensure quality and integrity of leaf
tobacco is maintained.

In order to achieve these objectives, we educate and train relevant employees in the JT Group, ourcontracted growers and any people involved in our leaf tobacco production on an ongoing basis.
In addition to leaf procured directly from contracted growers, we also purchase leaf tobacco fromthird party suppliers*4. In this leaf tobacco procurement process through third party suppliers, we
conduct business in accordance with “JT Group Responsible Procurement Policy” and we will also
encourage such suppliers to follow “JT Group Principles in Leaf Tobacco Production”.

NOTE*1 Leaf tobacco processing:
To separate the lamina portion of tobacco from the stem and pack tobacco for storage andtransportation.
*2 Good Agricultural Practice (GAP):
Agricultural practices which produce a quality crop while protecting, sustaining or enhancing theenvironment with regard to soil, water, air, animal and plant life, and which aim at ensuring sustainable,
economically viable production of usable tobacco.
*3 Integrated Pest Management (IPM):
A sustainable approach to managing pests, diseases and weeds by combining biological, cultural,
physical and chemical tools in a way that minimizes health and environment risks.
*4 Third party supplier:A supplier who supplies processed packed tobacco to manufactures or any non-tobacco producer who
produces green leaf for onward sale to a tobacco manufacture.

For further information on our initiatives to end child labor in communities where we procure
tobacco, please refer to the link below.
Working to end child labor(JTI)

Agricultural Labor Practices
Our Agricultural Labor Practices (ALP), launched in 2013, define the standards we expect of ourcontracted tobacco growers for safe working conditions, fair treatment, working hours, provision
against forced labor, and freedom of association. They also describe our stance against child laborand measures to eliminate it. Our farming experts, who are all fully trained on ALP, observe labor
practices during farm visits, report on their findings, give advice to growers and agree improvement
programs. We have continued implementing ALP with our directly contracted growers as well aswith indirectly contracted growers through our tobacco merchants.
Agricultural Labor Practices 2017

Related links
Supply chain

Supply chain

Leaf supply chain

Non-tobacco

policies andstandards- Raw material
sourcing

materials, otherproducts, andservices
Copyright© Japan Tobacco Inc. All rights reserved.

Leaf supply chain - Raw material
sourcing
Tobacco leaf sourcing
Tobacco leaf sourcing is a key part of our supply chain, and a critical component of future businessgrowth. We work closely with our directly contracted growers and third-party leaf merchants toenhance security of supply and leaf provenance. This provides greater flexibility when responding tochanging market requirements.
In 2020, we worked with more than 76,000 directly contracted tobacco leaf growers in Bangladesh,
Brazil, Ethiopia, Japan, Malawi, Serbia, Tanzania, Turkey, the U.S., and Zambia. Contracting leaf
growers directly enables us to produce a customized crop, while improving growers’ productivity,
leaf quality and leaf integrity. The direct contracting model also allows us to maintain verifiable
provenance and traceability of leaf supply.

How do we work with leaf merchants?
Every year, we purchase approximately 50% of our planned leaf requirements from leaf merchants.
The volume of leaf sourced from each established sourcing country varies from year to year,
depending on the quality and volumes required. In most cases, our leaf merchants source thetobacco leaf directly from contracted growers. This means that there is a direct contract between
the leaf merchants and the growers, and that the grower receives advice on crop management andgood labor practices from the leaf merchant.
In some countries, leaf can be sourced in a different way, for example at auction. This can make itchallenging to determine the provenance of the leaf and implement Agricultural Labor Practices. In
these cases, we work with the leaf merchants and other stakeholders (e.g. the Indian Tobacco
Board in India) to find a way to implement a robust and relevant supply chain due diligence process.
Although we source leaf from more than 30 countries, the vast majority still comes from eight key
global suppliers. We work closely with these suppliers to ensure good practices.

Sustainable agricultureAs well as securing the long-term supply of quality tobacco leaf for our business, we want to createshared value for both our growers and our business. We do this by providing extension services,
including crop inputs in specific origins aimed at increasing grower productivity, while trying to
improve our social and environmental impact. By enabling growers to become more productive andefficient in the way they grow, harvest, and cure tobacco leaf, we support them in becoming more
profitable and to use resources in a more responsible way.
All of our leaf suppliers are expected to follow Good Agricultural Practices (GAP). The concept of
GAP is to produce a quality crop while protecting, sustaining, or enhancing the environment withregard to soil, water, air, and animal and plant life.
In addition to GAP, the majority of our directly contracted growers are also required to follow our
Minimum Agronomic Standards (MAS). These growers are contracted to grow tobacco under our
stewardship. In return, they receive credit for prescribed crop inputs as well as dedicated extension
service provision from our Agronomy Technicians. This support includes recommendationsdelivered through a scheduled visitation program for the duration of the crop cycle. Contracted
large-scale commercial growers do not require dedicated extension service provision from us.
These farming practices are not limited to tobacco. We encourage growers to use seasonal crop
rotations, i.e. growing complimentary crops such as maize, groundnuts, or soya on the same land inalternate seasons. The benefits of this are extra income, improved food security, and soil
conservation.
We continually look to improve our understanding and methods of tobacco farming and have madesignificant investments in this regard. We have Agronomy Development & Extension Training(ADET) facilities in Brazil and Zambia that explore ways of improving productivity and leaf quality intobacco farming. Both provide relevant, applied research and development activities, such as trials
on topics like crop management, soil fertility, improvements in curing barn efficiency, production
cost savings, mechanization, and agroforestry. Validated trial outcomes are passed on to growers
through our extension service provision. ADET facilitates the provision of training and extension
services for our growers in order to promote optimal grower productivity, quality, and leaf
production integrity. Our investment in research and development also involves partnering withleading international academic institutions to develop innovative new ways of producing tobacco.

Agricultural Labor Practices (ALP) and Leaf Supply
Chain Due Diligence (SCDD)Our Agricultural Labor Practices (ALP) are based on the International Labour Organization’s
conventions and recommendations. The program consists of three pillars: tackling child labor,
respect for the rights of workers, and ensuring workplace health and safety.

As part of our continuous improvement approach, the ALP program allows us and our suppliers to
identify potential labor challenges on tobacco farms and help improve labor practices on the
tobacco farm. Being an integral part of the supply chain due diligence process, it also contributes tothe social aspects of grower communities and supports sustainable agriculture overall. Whether wesource tobacco directly from growers or through tobacco leaf merchants, our contracted suppliers
are committed to implementing our ALP.
Our Leaf Supply Chain Due Diligence process (SCDD) is based on a five-step framework - Identify,
Prioritize, Respond, Measure, and Communicate and Report, while our ALP program helps us to
identify issues on tobacco farms on a daily basis. This process follows the Guidance on
Responsible Agricultural Supply Chains provided by the Organization for Economic Co-operation
and Development (OECD) and the Food and Agriculture Organization (FAO), as well asrecommendations by the International Labour Organization. It also follows the UN Guiding
Principles for Business and Human Rights.

Although 2020 was a very challenging year,
we continued to roll out our leaf supply chain
due diligence program. For example, we
undertook a grower livelihoods assessment inZambia; continued working with our suppliersin India who have formed a sustainability
committee to drive industry change; andonboarded new suppliers to our online
reporting platform. At a global sectorial level,
we redeveloped a due diligence platform withother manufacturers, leaf merchants, subject
matter experts and service providers. This
allowed us to create a revised Sustainable
Tobacco Program based on a five-stepframework – Identify, Prioritize, Respond,
Measure, and Communicate and Report. We
strongly believe that this will drive positive
industry change and better protect
rightsholders.

Vuk Pribic,
Director, Leaf Supply Chain Due Diligence, JT International

ALP forms part of Agronomy Technicians’ farm visits. The
technicians visit the farm of every single contracted grower
several times per year, according to clear visitation plans withassigned farms. For example, during the last crop season, ourAgronomy Technicians made more than 340,000 visits to ourdirectly contracted growers.

During these visits, the Agronomy Technicians provide technical advice on crop management anddiscuss good labor practices. In cases where they identify labor-related issues, they report theirobservations directly into our dedicated ERP system. Depending on the nature of the issue, theAgronomy Technicians may also provide recommendations to the grower.
These observations are then analyzed and prioritized by the local country management. This
enables the selection of the right improvement measures to address root causes and respond to
the adverse impacts in the most appropriate way. We track the effectiveness of the response using
KPIs, internal evaluation, assessments, and on-site investigations. We also consult relevant
stakeholders, such as government authorities, civil society, members of affected communities,
workers’ organizations and workers.
Our main objective at present is to align all our processes with the five-step framework. To ensure a
streamlined and consistent approach, we aim to find synergies between our supply chain due
diligence and the ALP program with the Sustainable Tobacco Program (STP).
We are facing a number of complex challenges. These include issues that are difficult for Agronomy
Technicians to observe, such as how to identify discrimination in smallholder farming, or how to
optimize our process to deal with an extreme breach (if one is found) to ensure that both potential
victims and rapporteurs are protected.
Extreme breaches include the worst violations of workers’ rights, such as slavery, forced labor,human trafficking, violence, or severe physical, mental, or sexual abuse. These can be difficult for an
Agronomy Technician to identify and address – especially if the issue is associated with criminal
activity. Responding to extreme breaches therefore requires care and, in many cases, support fromthe police and/or other authorities or non-governmental organizations.
It is essential to have a management process setting out how to respond to an extreme breach, toensure that action is taken promptly and appropriately when indicators are observed. We expect
each supplier to have a management process incorporating three elements: protection for thevictim and rapporteur, a clear escalation route, timeline, and remediation plan, as well as access to
specialist support.
Read more on ALP in our booklet

Achieving Reduction of Child Labor in Support of
Education (ARISE)
Our flagship program ARISE – Achieving Reduction of Child Labor in Support of Education – hasbeen committed to tackling child labor in our tobacco growing communities since 2011. The
program is forging real sustainable change by implementing robust solutions to prevent child labor.

In 2020, we restructured ARISE and set up a new advisory committee to ensure the smooth
implementation of the program around the world.
Representatives in the countries where we grow our tobacco leaves are now responsible formanaging local partnerships, assessing projects, and implementing local activities. This approachallows us to maximize efficiency, strengthen our relationship with growers, and harmonize theprogram with other relevant community projects.
The ARISE Advisory Committee consists of relevant stakeholders in our international tobacco
business, external partners, and other experts. Its purpose is to ensure the implementation anddevelopment of the program, by identifying issues relating to child labor in the leaf supply chain andother operations.
Moving forward, we will embed the ARISE program within the ‘Respond’ element of our SCDD
process Identify, Prioritize, Respond, Measure, Communicate and Report. We will also integrate datarequirements for child labor into our existing leaf monitoring system, Leaf Point.
Read more about the ARISE program.

External recognition
We were categorized as a ‘leader’ by the Global Child Forum in their latest study, conducted incollaboration with the Boston Consulting Group. This benchmark report analyzes just under 700 of
the world’s largest companies and how they are safeguarding children’s rights as part of theirbusiness value chain.
We are proud that the study recognizes the concrete actions we have taken to embed respect forchildren’s rights in our supply chain, notably through our flagship child labor elimination program
ARISE.

ALP progress update
Target
AGRICULTURAL LABOR PRACTICES
We will implement our Agricultural Labor Practices (ALP) program in all sourcing countries
by 2025.

Progress

Towards the 2025 ALP target

100% of our supplying entities to report on ALP

2020 Progress

87% of our supplying entities reported against
ALP

58% of our directly contracted growers and 92%
100% of our growers to be covered by ALP

of our leaf merchants' growers were covered by
ALP

100% of tobacco leaf volumes to be covered by
ALP

76% of our volumes were covered by ALP

We made significant progress over the last few years. Here are a few examples of how we
did it:■Reporting improvements
In 2020, we launched a new online reporting platform for ALP. This enables us toprocess data faster and with greater accuracy.

■

More suppliers reporting
We have onboarded more leaf merchants to ALP reports. Together with ouractivities in countries such as Bangladesh, Ethiopia, India, and Indonesia, thisbrings us closer to reaching our ALP target: to implement ALP in all sourcing
countries by 2025.

■

Sustainable Tobacco Program (STP)
Our international tobacco business is one of seven global manufacturers
participating in the STP Steering Committee. STP is a risk-based program, acollaborative platform to enable continuous improvement in relation to supply
chain due diligence. It is also an impact driven program. The aim is to improve thesectors environmental and social footprints, to contribute towards the United
Nations Sustainable Development Goals (SDGs) and to enable transparent

communication of responsible practices across the supply chain. Since 2019, we
have been working with leaf merchants, external subject matter experts, andvarious organizations and service providers to further develop STP. One of the key
themes is “Human and Labor Rights”. We completed pilot self-assessments on
this subject in 2020. In 2021, STP is planning its first on-site reviews.
■

Progress in Indonesia
By 2017, all of the leaf merchants we were purchasing leaf from in Indonesia werereporting on ALP, with almost 100% of our grower base included in our leaf
merchants ALP observations.
In 2018, we acquired new business in Indonesia and extended our supplier base,not only for leaf but also for Rajangan tobacco and cloves. We are planning tocarry out a leaf supply chain impact assessment in 2021. This was initiallyscheduled for September 2020 and has been postponed due to COVID-19. We
have also onboarded new suppliers who historically have not reported data to us.

■

Progress in India
Following a Human Rights impact assessment in India, where more than 500
people in the tobacco sector were interviewed (led by consultancy company“twentyfifty Ltd.” ), leaf merchants have established a Sustainability Committee,
under the Indian Tobacco Association, to drive change on a sectorial level against
mapped priorities. We are working in collaboration with our leaf merchants andother manufacturers in this process.

■

ALP roll-out in Ethiopia and Bangladesh
Next, we are planning to implement ALP in Ethiopia and Bangladesh. In
Bangladesh, we have already begun the impact assessment that will lead to an
ALP pilot in 2021.

Historical data
Our target is to implement ALP in all sourcing countries by 2025. In this journey, the sourcing baseis changing year on year due to new acquisitions or closures, demand to supply impact, climatechange, etc. In spite of these changes, we have made progress in 2020, and we have a clear plan tofurther continue the progress in 2021: we will continue onboarding new suppliers, start
implementing ALP in the newly acquired businesses in Ethiopia and Bangladesh, continue supply

chain due diligence process in India… A credible, impactful implementation of our programs andprocesses requires time and efforts, and we accept no compromises.

Find out more about how we plan to achieve this target, below.

100% of our supplying entities to report on ALP
Progress so far: of all the entities that provided us with tobacco leaf, either directly or through leaf
merchants, 87% reported against ALP in 2020.

100% of our growers to be covered by ALP
Progress so far: in 2020, 58% of our directly contracted growers and 92% of the growers supplying
through our leaf merchants were covered by ALP. The decrease for the growers supplying throughour leaf merchants from 98% in 2019 to 92% in 2020 is due to new suppliers reporting, who have not
implemented ALP yet.

100% of tobacco leaf volumes to be covered by
ALP
Progress so far: In 2020, 76% of our volumes were covered by ALP.
We have made several new acquisitions in recent years, including in Ethiopia, Bangladesh,Indonesia, and the Philippines. These will be approached on a case-by-case basis, as we need tounderstand the local market, culture, and challenges before putting in place the necessary
programs.
We will implement our ALP program in both Bangladesh and Ethiopia towards the end of 2021,

following the completion of a supply chain impact assessment in 2019 (Ethiopia) and 2020
(Bangladesh) as a part of our supply chain due diligence process.
In 2020 we also onboarded to ALP reporting new suppliers in Indonesia.

Implementation of Agricultural Labor Practices inJapanWe have a long-standing relationship with growers in Japan. Following a 2017 pilot study, theAgricultural Labor Practices program was fully implemented in 2018. As a result, we carried out
farm visits and questionnaires to address labor issues on tobacco farms. Throughout 2019, our JT
Agronomy Technicians continued to meet growers to provide feedback and offer advice.
In 2020, we also carried out customized surveys for different production regions. Based on ourfindings and observations, we will continue to make improvements.

Our farm practices in Japan
JT Farm

Enhanced curing and baling

The purpose of the JT Farm is to increase

We are implementing a new curing process

growers' productivity by developing new,for burley tobacco at present, which canmore efficient cultivation methods, or by

reduce working hours by 15%. This method

establishing cultivation methods for new

also helps to prevent the contamination ofvarieties.

non-tobacco related materials during green
leaf baling. By the end of 2020, 6% of burley

Since 2019, we have also been developing atobacco growers had adopted this new

driverless trial vehicle to support growers inprocess. We will continue to scale up thisapplying Crop Protection Agent andpractice in 2021 and beyond.

transporting tobacco leaf in the field.
JT Farm is currently assessing the
productivity of our cultivation methods for
new varieties in Japan’s climatic conditions
and gathering samples for testing purposes.
We hope to expand the new varieties to
production areas as soon as possible.

Collaboration with growers for sustainable leaf
production in Japan
In Japan, the number of tobacco growers and the land dedicated to tobacco cultivation have been
shrinking. There are various reasons for this, including older generations going into retirement,
younger generations choosing to pursue less physically demanding jobs, and a lack of progress infarming methods. As a result, many growers feel anxious about the future of their agriculturalactivities and are investing less in tobacco leaf production.
In 2019, Japan Tobacco and Japan Tobacco Growers’ Association discussed various new initiatives
to ensure the sustainability of tobacco leaf sourcing and meet the market’s needs. Launched in
2020, these initiatives included the provision of tailor-made support for individual farms, andgathering and sharing the best practices of more experienced growers.
We hope that these activities will help growers to implement more efficient production methods,

which in turn will strengthen the foundations of their operations and secure a more sustainable
future for tobacco leaf production in Japan.

Supporting and communicating with growers in
2020
When COVID-19 struck in 2020, we quickly had to find alternatives to our usual practice of visiting
growers at regular intervals. Here are a few examples of how we adapted:■

Where practical, our field Agronomy Technicians provided growers with technical support via
phone or video call, instead of face-to-face.

■

Our Agronomy Technicians also helped to raise awareness among growers of COVID-19 secure
working practices, such as self-isolation, hand washing, and social distancing.

■

In our international tobacco business, we launched a new online tool for processing grower
contracts remotely, and supported growers with marketing.

■

We helped to print and distribute COVID-19 educational materials in tobacco-growing
communities.

Where appropriate, we did continue to visit our growers in person, following all of the relevant healthand safety guidelines set out by the World Health Organization (WHO) – for example by wearing
masks, using hand sanitizer, and keeping a safe social distance. We also took additional safetymeasures, such as installing partitions and checking visitors’ temperatures at our leaf buying
stations in Japan, and strictly managing grower movement and attendance at all our buying
stations.
Protecting our employees and their families, our tobacco growers and their communities will always
be one of our top priorities We will continue to make every effort to sensitize communities to
COVID-19 preventive measures, working in partnership with local governments and otherorganizations.
We engaged with our leaf merchants throughout 2020 to better understand how they are addressing
COVID-19 related challenges, and how they are supporting their growers, communities andemployees. We held online meetings with our key suppliers and received their feedback on concrete
actions and plans. In our regular ALP/SCDD reporting we included a separate section dedicatedsolely to COVID-19 challenges and efforts, and we shared a summary of best practices with all of
our leaf merchants.

Engaging with our stakeholders

Working in collaboration with internal and external stakeholders has been key to the progress andsuccess of the Agricultural Labor Practices program.
Our relationships with directly contracted growers produce tangible results, thanks to regular farm
visits, dialogue, and training. Local and global meetings with leaf merchants enable us to identify
where additional training, mechanisms, and processes are needed to manage labor risks. Engaging
with local government agencies in the countries where we operate enables us to address fair andsafe labor conditions in specific locations. For example, we have been successfully engaging with
the Indian Tobacco Board to make progress in the area of labor rights in India.
Our international tobacco business is an active member of the Sustainable Tobacco Program (STP)
and chair of the STP Steering Committee, consisting of industry peers. STP is an industry-wide
platform enabling businesses to collaborate on human rights, environmental issues, and othersustainability challenges, and to drive sustainable agriculture through a continuous improvement
process. 2019 was a year of reform for STP, as it was restructured around the five-step framework:
Identify, Prioritize, Respond, Measure, and Communicate and Report. The aim of this change is to
put in place a robust supply chain due diligence process with a focus on impact.
In 2018, we became part of the pilot project on Guidance for Responsible Agricultural Supply
Chains. This initiative was run by the Organization for Economic Co-operation and Development(OECD) in conjunction with the Food and Agriculture Organization of the United Nations (FAO). By
participating in this project, we have been able to share our own experiences, broaden our
understanding, and benchmark against others. The
OECD-FAO Guidance for Responsible Agricultural Supply Chains, published in 2019, presents

the key findings of the pilot, lessons learned, good practices, and challenges in implementing supply
chain due diligence shared by the participants. It also sets out recommendations and next steps forcompanies and policymakers to follow in the agricultural sector.

Case study

Crop Protection Agent management
We have adopted Integrated Pest Management (IPM) principles in all of the origins in which we
directly contract tobacco growers, this allows us to better manage pests and diseases. Crop
Protection Agents (CPAs) are only ever used as a last resort, where bio-pesticides and otheralternative controls have proved ineffective.
A recent example of IPM principles being applied successfully is in Ethiopia, where some of ourgrowers had been suffering yield and quality losses, resulting in a substantial impact on theirincome. This was caused by a virus called “bushy-top” which is transmitted by insects. Our
Agronomy Technicians observed and investigated the issue, which led to a review on the crop
protection practices being applied locally. An alternative solution based on IPM principles wasfound, including the use of carefully selected low hazard CPAs. Once this was applied, the disease
was eradicated in the following crop. This allowed our growers in Ethiopia to realize their crops fullpotential in relation to yield and quality, which also increased their income.
All of our contracted growers and their workers must be trained and demonstrate proficiency in CPA
storage, handling, application, personal protective equipment usage and safe disposal. Whensupplying our contracted growers with CPAs, we always select the lowest toxicity option available
and we do not allow them to use any Highly Hazardous Pesticides (HHPs) Criteria 1 (WHO Hazard
Class 1a and 1b). We have also worked hard to remove HHPs from our entire leaf supply chain, andwe will achieve this by the end of 2021.

Case study

Promoting Good Agricultural Practices

Our Minimum Agronomic Standards(MAS) include practices that contributeto water and soil conservation, such as
mulching to decrease water evaporation,
reservoirs for seedling production, theuse of box ridges to capture rainwater
within the field and reduce runoff anderosion. Also, we encourage growers to
use seasonal crop rotation and practiceminimum tillage.
The Target Crop Calendar that forms partof MAS stipulates that tobacco seedlings
are planted at a preferential period in thecrop year so that the maximum plantwater requirement is most likely tocorrespond with consistent andadequate rainfall, reducing the need forextraction of local water supply for
irrigation.

Case study

Grower clubs in Zambia
In Zambia, we have an established network of approximately 693 grower clubs. Each club is formedof 10 to 20 growers and led by a chairman.
The aim of the clubs is to bring growers closer together and create more effective dialogue. The
clubs allow continuous communication and engagement on a variety of topics such as farmer
finance, Agricultural Labor Practices, Minimum Agronomic Standards, and other best practices.
In 2020, we piloted a training on financial literacy with 500 chairmen and selected model farmers to
help ensure the financial health and stability of contracted growers, their families and communities.
The expectation is that the trained chairmen will take on training and mentorship role for their poolof growers.

Frequently asked questions about how we source
raw materials
Q: Which markets do you source tobacco leaf from? Which markets are the biggest contributors?
A: We source approximately 50% of our tobacco from directly contracted growers in the following
countries: Bangladesh, Brazil, Ethiopia, Japan, Malawi, Serbia, Tanzania, Turkey, the U.S., andZambia. The other 50% is sourced through third-party leaf merchants from a variety of countries
such as India, Indonesia, Italy, Spain, and Zimbabwe, but also from some of the countries where we
directly contract growers. Although the main sourcing base is stable, the volumes and sourcing
countries, and therefore the suppliers, may vary from year to year.
Q: How many Agronomy Technicians do you employ? Are the visits to the farms announced in advance?
How frequently do you visit each grower?
A: In 2020, JT Group employed 647 Agronomy Technicians. The visits to our directly contracted
growers are based on a visitation plan for each country, with assigned farms, and these can be
announced or unannounced. During the visits our Agronomy Technicians provide technical advice
on crop management and discuss and observe against good labor practices. The number of visits
may vary slightly from country to country, but on average our growers are visited 7-9 times eachcrop cycle.

Q: What happens if Agricultural Labor Practices are not observed? Have you experienced cases wherecontracts had to be terminated?
A: If a contracted grower does not show any sign of commitment to meeting the ALP standards, or
continually disregards agreed improvement measures, we may decide not to renew their contract
for the following crop year. Our growers are only re-contracted based on performance – which
includes compliance with contract conditions. For example, in 2020 we achieved a 95% recontracting rate in Malawi, which clearly indicates that our grower base is predominantly made up
of long-term partnerships.
Our approach to sustainable agriculture is to be grower-centric and thus support the grower andgrower communities to apply good agricultural practices in a responsible manner. ALP is not acompliance tool, but a continuous improvement program. As such, the ALP program is an integral
part of our strategy, with a focus on improving labor practices at farm level.
Q: How are you responding to media reports on the problem of child labor on tobacco farms?
A: We follow a five-step continuous improvement cycle: Identify, Prioritize, Respond, Measure, andCommunicate and Report. If child labor is highlighted within the identification and prioritization
stages of this process, then appropriate response programs are developed in that particularcountry/region in order to address the issue. We have implemented a number of programs toaddress the root causes of child labor in a variety of countries in which child labor is a particularrisk, such as our flagship child labor eradication program ARISE (Achieving Reduction of Child Labor
in Support of Education). Our leaf merchants also have a number of their own programs in place toaddress child labor.
We do not wait for media reports to make us aware that child labor is a particular problem in a given
country or region. If the issue is identified as a priority, then targeted response programs should
already have been put in place as per our five-step framework. In the past, we have shared these
responses and any outcomes arising from them with media outlets or NGOs who raised concernsof child labor in a particular country. This has been done many times before and any dialogue we
had with such parties has been made available on our web site.

Related links
Supply chain

Supply chain

Leaf supply chain

Non-tobacco

policies andstandards- Raw material
sourcing

materials, otherproducts, andservices
Copyright© Japan Tobacco Inc. All rights reserved.

Non-tobacco materials, otherproducts, and services
Non-tobacco materials include packaging, filters, and cigarette-related materials. We also have anumber of suppliers for factory machinery and logistics, including freight. We manage the sourcingof these centrally. Other products and services that flow through our supply chain include
marketing-related services, facility management, IT, and other professional services, which aresourced globally, regionally, and locally.
We develop strong partnerships with our key suppliers in order to achieve mutual long-term
success. Our strategic relationships are built on shared values and objectives. This allows us to findsustainable solutions together, ensure a stable supply in a dynamic environment, and adapt toinnovative technologies.

TargetSUPPLIER SCREENING
We will screen all key suppliers against environmental, social, and governance criteria by
2023.

Progress
At the end of 2020, 64% of our key suppliers were screened against ESG criteria.
Read more about our latest progress on the JT Group's
tobacco business sustainability strategy.

Working with the right suppliers
We aim to achieve high standards of integrity across our business operations and supply chain. We
can only achieve this through close cooperation with our suppliers. We are just as committed tofollowing social and environmental due diligence in our non-leaf supply chain. All of our suppliers
are required to comply with our Supplier Standards.
Our Group-wide supplier screening process ensures that we apply enhanced due diligence. Prior toentering into a commercial relationship, our key suppliers*1 go through a detailed qualification andselection process including screening and onboarding. This process allows us to learn more about
the supplier and understand any gaps versus our standards and requirements. In particular, ithighlights any potential risks relating to compliance, human rights, environment, and health andsafety.
If any risks are identified through this process, we offer support and collaboration on how to
mitigate the risks and make necessary improvements. We follow progress on a yearly basis and, if
there is no improvement after an agreed duration, we may consider terminating our relationship withthe supplier.
In 2020, we revised the JT Group Supplier Standards into a global, Group-wide Supplier Standards,
reflecting an increase in transactions with overseas suppliers. We have been embedding thesestandards into all requests for proposals and contracts, to ensure that all of our suppliers are awareof our requirements.
In our international tobacco business, we are currently working on enhancing the reporting andmonitoring tool, in order to have a more robust system in place by 2021.
In our Japanese operations, we also launched a new supplier database listing suppliers’ D-U-N-S
Numbers*2 for efficiency purposes.
*1 Key suppliers are defined as suppliers with an actual or planned annual spend greater than 500,000 U.S.
dollars (50,000,000 JPY), suppliers who either handle, store and/or transport JT Group finishedproducts and contract manufacturing. In addition, our international tobacco business classifies as key
suppliers the leaf merchants, the suppliers representing JTI before government, and the licensees.
*2 D-U-N-S® Number is a unique nine-digit identifier for businesses. This number identifies a company as
being unique from any other in the Dun & Bradstreet Data Cloud.

Case study

Reducing the environmental impact of packaging
We take pride in the quality of our products. To make sure that our cigarettes reach consumers in
optimal condition, they are delivered in packaging that utilizes cardboard and plastic film. To reduce
the environmental impact of this packaging, we are running several initiatives across our operations
to use less of these materials, or to replace them with more environmentally friendly alternatives.
For example, we are working with our suppliers to optimize the use of cardboard and plastic film inour packaging, without compromising on quality. As a result, we reduced our plastic film
consumption by approximately 200 tons in 2020. In 2021, we plan to reduce our paper andcardboard-related consumption by approximately 2,100 tons compared to 2020.
We set a new target relating to the appropriate use and responsible disposal of materials, including
plastics, used in our products and packaging. Read more about activities in 'Products and services (Environment)'

Related links
Supply chain

Supply chain

Leaf supply chain

Non-tobacco

policies andstandards- Raw material
sourcing

materials, otherproducts, andservices
Copyright© Japan Tobacco Inc. All rights reserved.

Optimizing the regulatoryenvironment
Championing better regulation for informed choice
We value and support the freedom for adults to make informed choices. We play our part by beingtransparent about our products, and ensuring that all consumers understand the associated risks
when deciding whether to use our products or not. That’s why we are transparent about our
positions on smoking and health.

It is also why, no matter what we do, we adhere to the five core principles that define our attitude tosmoking. We also work in a highly regulated operating environment, and we monitor regulatory
trends in order to anticipate future changes in regulation and prepare for the implementation of
those changes well in advance. This is done in line with our tobacco principles, so that we go aboveand beyond our obligations.
Read more about our views on specific regulatory topics.

Aspirational goal
We will ensure the Company is included in policymaking leading to fair and balanced
regulation, and enhance our cooperation with governments to combat illegal trade.

TargetWe will always protect our ability to participate in public policy debate with the aim toachieve balanced regulation that meets societal concern and supports business growth.

ProgressDuring 2020, we engaged openly and transparently in public policy debate and made ourviews known to regulators, NGOs, and other relevant stakeholders in the countries where we
operate.
Read more about our latest progress on the JT Group's
tobacco business sustainability strategy.

Supporting ‘better Regulation‘
Smoking carries risks to health, and appropriate and proportionate regulation of the tobacco sector
is both necessary and right. To meet public policy goals, while respecting the rights of all
stakeholders, it is important that regulation is evidence-based, practical, enforceable, andcompetitively neutral.
To help lawmakers develop better regulation, the OECD has endorsed the internationally recognized‘Guiding Principles for Regulatory Quality and Performance’, which we support. These can besummarized as:■

Coherence■

Openness■

Proportionality■

Participation■

Effectiveness■Accountability

A key aspect of better regulation is a transparent legislative process, one that involves all interested
and affected parties.
With regulation affecting our products and our industry, we exercise our right to make our views
known, by engaging openly and transparently with government stakeholders (including regulators),
non-governmental organizations, and all other relevant stakeholders. We seek to ensure that theregulatory environment encourages innovation, business growth, and freedom of consumer choiceso that we may better serve the needs of consumers, society, and our business.

We engage openly in regulatory processes at all stages, and take part in public consultations byproviding arguments supported by evidence and alternative solutions.
We support public discussions on the topics of good governance, better regulation, andtransparency.

Our views on Reduced-Risk Product regulation
The tobacco industry is currently undergoing a transformation as Reduced-Risk Product (ReducedRisk Products (RRP) are products with the potential to reduce the risks associated with smoking.)
are gaining popularity in many countries. We believe that these products have the potential to offer
real benefits to consumers and society, and that consumers should be free to choose them.
Governments and regulators should avoid restrictive regulation which suppresses innovation and/or
prevents adult consumers from selecting these products.
However, not only do legislative approaches to Reduced-Risk Products vary widely across the world,
but they also continue to change rapidly. Certain countries ban these products outright; others try to
regulate them to different degrees, while others lift bans altogether.
That’s why we are committed to working with regulatory authorities, public health bodies, and thescientific community to create an effective yet proportionate regulatory framework for theseproducts. Our aim is for Reduced-Risk Products to reach their full potential by meeting consumer
expectations and providing a greater choice for adult consumers.

Latest regulatory developments
It is in the public interest for regulation to be evidence-based, proportionate, and effective. We
support the principles of better regulation, which argue for measures that preserve consumer
choice and market freedom. Regulation is fast-moving and we monitor developments closely. The
following are just a few examples of some key regulatory developments around the world in 2019and 2020.
U.S. – Premarket tobacco product applications (PMTA): the September deadline
Following several changes, endorsed by the Food and Drug Administration (FDA), the submission
deadline for the Premarket Tobacco Product Application (PMTA) review of tobacco products(including e-cigarettes) was extended. From September 9, 2020, all products must have submitted
their PMTA to remain on the U.S. market.

In August 2019, Logic Technology Development LLC (a subsidiary of the JT Group) submitted
PMTAs for a number of products in its e-cigarette and tobacco vapor portfolio.
U.K. – Public Health England reiterates the strong risk-reduction potential in e-cigarettes
In 2020, Public Health England reassured users about the risk reduction potential of e-cigarettes
currently marketed in the U.K. saying, “PHE and the Royal College of Physicians estimate the risk
reduction to be at least 95%.”
Read more from Public Health England
EU – Directive on single-use plastics
The EU Directive “on the reduction of the impact of certain plastic products on the environment”
entered into force on July 5, 2019. Member states have two years to transpose the legislation into
their national law.
Tobacco filters are included in the scope of the Directive, and we are proactively working withstakeholders to prepare for these regulatory changes, to ensure compliance with laws andmaximize the positive impact that these developments might have on our customers and ourbusiness.
EU – Ban on characterizing flavors
A partial exemption to the ban on characterizing flavors, part of the EU’s revised Tobacco Products
Directive, came to an end across the Union on May 20, 2020. From this date, it became illegal to
distribute cigarettes and fine cut tobacco with sales volumes greater than 3% of their respective
categories if they have a clearly noticeable smell or taste other than one of tobacco. There is someconcern, based on published consumer research conducted in Poland and the U.S. by third parties,
that smokers who have previously chosen to smoke products with, for example, a characterizing
flavor of menthol, may now seek similar products from the illegal trade instead.
Plain Packaging
In June 2020, the WTO Appellate Body ruled in favor of Australia in the plain packaging dispute. The
ruling is a major step backwards for the protection of intellectual property rights internationally.
Although this outcome only applies to Australia, it sets a worrying precedent that could encourage
governments to ban branding on other products. Furthermore, the Appellate Body did not have theopportunity to take into account the most recent data from the Australian Government, whichshows that the smoking rate has not markedly declined, indicating that plain packaging has notworked as anticipated.

WHO – Framework Convention on Tobacco Control (FCTC)
We continue to follow the evolution of the WHO FCTC. The Protocol to Eliminate Illicit Trade in
Tobacco Products (the Protocol) came into force on September 25, 2018. The eighth session of the
FCTC Conference of the Parties (COP8) and the first session of the Meeting of the Parties to theProtocol (MOP1) took place in October 2018.
At these FCTC events in 2018, there were no new recommendations or decisions that directly
impacted the JT Group and our products. As the decisions made at these events can have farreaching implications for our consumers, wider society, and our business, we continue to closely
monitor the evolution of the FCTC and the Protocol, and are preparing for COP9 and MOP2 in 2021.
Although we continue to be denied a voice at such events, we will continue to share our views withdecision-makers wherever possible.
Worldwide – Illegal Trade
In addition to the rapid spread of COVID-19, which has damaged global economies and looks
certain to plunge world economies into a deep recession, the ongoing spread of extreme regulatory
measures like plain packaging continues to elevate the risk that smokers will seek out illicit sourcesof tobacco. This threatens to reduce government revenues from tobacco excise at a time when
governments already face a global backdrop of falling tax receipts. It will also divert money to theglobal network of organized criminal groups who produce and supply tobacco to the illegal market.

Case study
During the early stages of the spread of COVID-19, the South African and Indian
governments chose to outlaw the sale of alcohol and tobacco products nationwide.
In South Africa, this disastrous prohibition drove huge growth in illegal tobacco networks.
The South African Revenue Service anticipates that this will take years to dismantle, giventhat the vast majority of smokers continued to buy tobacco illegally during the lockdown
period. The combined alcohol and tobacco ban cost 568 million U.S. dollars in lost
government revenues.

Engaging with our stakeholders
The JT Group remains committed to working with regulatory authorities, public health bodies, andthe scientific community. As part of this engagement, we attend industry events where we are able
to make our voice heard.
In 2020, we took part in the virtual Global Tobacco and Nicotine Forum (GTNF), a key international
conference where experts such as those from public health, academia, government, and membersof the tobacco/nicotine industries gathered to discuss the future of tobacco and nicotine industry.
Our representatives participated in the six sessions and talked about the issues of illegal trade,regulatory environment, sustainability of tobacco industry, as well as diversity and inclusion. We
also set up a virtual exhibition booth that presented in more details the issue of illegal trade, its
underlining causes and consequences to the economy and society at large.

Transparency
Transparency, openness, and accountability during official decision-making processes are essential
to achieving sound public policies and fair regulation for any industry. Since 14 November 2011, JTI
has been a registrant of the EU Transparency Register setting out our fields of interest and costs
related to lobbying activities within the EU decision-making process.

Responsible marketing
We only market our products to adult consumers in order to maintain brand loyalty and toencourage consumers of competitor brands to switch to our products. We do not market our
products to minors, nor do we encourage anyone to start, or discourage anyone from quitting.
We support regulation on the responsible marketing of nicotine and tobacco products, providing it isevidence-based, practical, effective, and proportionate – and that it allows us to communicate withadults who use our products.
We take responsible marketing very seriously, particularly when it comes to preventing youth using
our products. We never market our tobacco products to minors.
This focus is reflected in our Global Tobacco Marketing Principles, a guiding document developed in
2016.
When it comes to our retail partners, we continue to support them by training staff and providing
campaign materials to reinforce the message that underage sales are not allowed.

We provide targeted responsible retailing programs that effectively tackle youth access to our
products, and these are welcomed by retailers. In the U.K. for example, the IDentify program has
been developed to locate retailers who may be at risk. We offer these retailers professional training
and help them to raise standards, so that they will avoid making underage sales.

Related links
TobaccoReduced-Risk

Products andProducts (RRP)

services(Environment)

Tackling illegal
trade

Investing inpeopleSupply chain

Optimizing theregulatoryenvironment

Smoking andhealthCopyright© Japan Tobacco Inc. All rights reserved.

Tackling illegal trade
The illegal cigarette trade fuels modern slavery, organized crime, and terror groups. It causes harm
to society and consumers, as uncontrolled products circumvent regulations and quality controls,
and undermines legitimate tobacco businesses. Tackling illegal trade is a top priority for us, and our
Anti-Illicit Trade team is recognized as the industry leader in combating this problem.

Aspirational goal
We will ensure the Company is included in policymaking leading to fair and balanced
regulation and enhance our cooperation with governments to combat illegal trade.

TargetWe will engage in dialogue with law enforcement agencies, with the goal of exchanging
intelligence regarding illegal tobacco products, in order to support the reduction of illegal
tobacco products.

Progress
In 2020, our Anti-Illicit Trade team provided 1,117 intelligence reports to law enforcement
agencies, and advised 859* law enforcement officers on counterfeit recognition.
Read more about our latest progress on the JT Group's
tobacco business sustainability strategy.
* This figure was impacted by the fact that all trainings had to be undertaken virtually in2020 due to COVID-19

Other key wins in 2020■

Over 3.22 billion illegal cigarettes seized thanks to intelligence reports provided by our team tolaw enforcement.

■

There was a 62% decrease in seizures of our genuine products resulting from our efforts toensure the security of our supply chain.

Our approach
Our global Anti-Illicit Trade team investigates the illegal tobacco trade. This vital work helps toprotect our business reputation as well as consumers and society, from criminal elements. The
team is made up of dedicated professionals with many years of public service in law enforcement,
regulatory bodies, and governments.
As a key part of our business, these experts work with our markets to secure our supply chain andassist law enforcement in removing illegal tobacco from the marketplace. They maintain a robust
dialogue with governments and law enforcement agencies on the threat of illegal tobacco throughpublic-private partnerships and provide counterfeit awareness programs for law enforcement,
globally.
Our Anti-Illicit Trade team also supports other areas of our business with research on illegal
tobacco and raises awareness of the problem among our business partners, consumers, andsociety in general. The team protects the JT Group’s business and reputation, supporting our longterm, sustainable future.
Increasingly, we are examining ways to tackle illegal trade across our entire value chain. This isresulting in a more transparent and collaborative relationship with suppliers of items such as
tobacco leaf and cigarette filters. We have regular meetings with these suppliers and manufacturers
to try to help them prevent their products from falling into the hands of criminal networks andsupport their compliance training initiatives.

Our Anti-Illicit Trade team also supports our own compliance and purchasing departments. It
carries out due diligence checks to ensure we are entering into contracts with trustworthy suppliers,and helps these departments to implement corporate policies and procedures.
We continue to closely monitor changing trends in smuggling, including the way in which organizedcrime groups use shipping routes. We are working with various law enforcement agencies acrossthe world, such as the World Customs Organization, Interpol, and Europol, to help track containers
suspected of transporting illegal goods.

A perfect storm
The current global pandemic is causing turmoil across the world and is affecting all forms ofsociety and commerce in unheard-of ways. Against this backdrop of global social upheaval,organized criminals are planning ways to exploit public anxiety and profit from the trade in illicit
goods and other products, including personal protection equipment. From experience, we know thatany decline in affordability fuels a trade in illicit or counterfeit products, particularly where this runs
parallel to tax increases designed to boost public finances.
Nowhere is this truer than when it comes to the illegal tobacco trade. The trade in illegal tobacco isunderpinned by criminals who want to make money and consumers seeking to save money. The
current pandemic crisis creates conditions forming a ‘perfect storm’, one that will find someconsumers inadvertently, and others willingly, consuming greater amounts of illegal tobacco
product.
The resourcefulness of criminals is such that the flow of illegal product is still viable even when
traditional sales outlets are out of action. Technology has been increasingly deployed throughout
the pandemic to enable sales of illicit product to continue. This is a trend that’s likely to persist.
Organized criminal groups (OCGs) aim to reap more monetary rewards in the economic aftermathof COVID-19 by exploiting an anticipated increase in public demand for cheaper goods amidst
growing economic uncertainty, dwindling consumer confidence, and a decline in disposable income.
This situation would be further exacerbated if governments sought to impose tax increases in orderto restore public finances.
At JTI, we will strive - in partnership with Law Enforcement and Border Agencies - to deliver theintelligence and support needed to help identify and seize illegal tobacco.
Read more about 'The gathering storm'

Emerging global trends■Criminal groups are prepared to ‘wait and see’ instead of ‘running scared’ into other forms ofillicit trade activities■

Traditional production and supply of illegal product has been blunted rather than extinguished■Social media and phone apps have been increasingly deployed to enable sales of illicit products
between consumers and supplier■

Differing law enforcement priorities and border restrictions have been variable in limiting supply
and the availability of illegal products

Case study

Public private partnerships in support ofsustainable businessOur global anti-illicit trade programs create the opportunity for public-private partnerships tocombat highly organized criminality. They are also designed to support our business performanceby fulfilling all legal requirements, securing our supply chain, safeguarding and creating
opportunities for volume and profit growth, while protecting our Company’s reputation.
We measure their effectiveness against the following KPIs:■

The number of seizures based on information we share with law enforcement■

The level of illicit trade in our top markets through analysis of empty pack surveys, and the
reduction we help achieve■

Implementation of our compliance programs■

Strengthening partnerships with law enforcement agencies, especially through illegal tobaccoawareness programs

Protecting consumers and government revenue
In 2020, our Anti-Illicit Trade team provided 1,117 intelligence reports to law enforcement agencies,
leading to the seizure of more than 3.22 billion illegal cigarettes. Based on our information, law
enforcement raided more than 62 counterfeit tobacco factories and storage locations.
As a direct result of our work to tackle illegal trade, notified seizures of counterfeit products in the
EU have remained consistently high over the past five years (over 97% of products seized arecounterfeit). During the same period, notified seizures of our own genuine products in the EU
decreased by 88%, thanks to our markets’ efforts in securing our supply chain, with the support of
the Anti-Illicit Trade team. This has been acknowledged by both Europol and many law enforcementagencies including the U.K.’s HM Revenue and Customs, which recognized our international tobacco
business as an industry leader in the fight against illicit trade.

Fighting the rise of counterfeiting in Europe
Over the last few years, organized crime groups have established numerous illegal factories in
Europe producing counterfeit cigarettes, including the JT Group brands. This has brought illegal
production closer to destination markets, particularly the U.K. and Ireland, which are target markets
for criminals due to high taxation. It marks a shift away from the traditional sourcing of counterfeit
products in China.

In 2020, over 97% of the JT Group branded products seized globally were counterfeit. We hadalready established a Counterfeit Task Force in March 2019 to counter this threat.
The objectives of the task force are to:■

Coordinate our investigations into global counterfeit production■

Ensure that knowledge is shared between different regions■

Pass on meaningful and evidential information that will assist law enforcement

So far, the task force’s work has focused on locating the illegal production facilities used to produce
counterfeit cigarettes. These illegal facilities may comprise of different manufacturing components
including leaf processing, cigarette makers, and packing machines, and often storage of large
quantities of finished illegal product. Our Counterfeit Task Force compiles and assesses various
pieces of information obtained from different sources. The objective is to provide reliable andusable information to law enforcement in order to locate and seize the illegal facilities.
The COVID-19 pandemic has blunted rather than extinguished the production and supply of illegal
products. Some decrease in supply and production has been evident in more strictly controlled
economies during Covid-19. Western markets in particular have seen relatively little reduction in the
production and availability of illegal products. This is despite criminal groups initially finding it
difficult to source technicians and skilled workers to work on illegal production.

Case study

Project VISTA and the growth of counterfeit
production in the EU
The illegal production of cigarettes is mainly controlled by organized crime groups whose sole
objective is financial gain. Many involved are dangerous and ruthless criminals, so ensuring thesafety of all of our employees is a priority. We initiated Project Vista to protect our Trademarks.
A significant new criminal trend, particularly in the EU, is the growth in production and storage ofillegal cigarettes. In many instances, the working environment and conditions can be considered asmodern-day slavery.
Heightened EU border controls and regulations make it more difficult for criminals to bring illegal
cigarettes to their markets of choice – usually those with high taxation policies, such as the U.K.
and Ireland. By moving illegal production and supply chains inside the EU, criminals can avoid
border controls and reduce the risk of seizures or detection.
In addition, combating the illegal production and distribution of cigarettes is often not a high priority
for law enforcement agencies. Historically, if criminals are caught, the penalties are low. To support
law enforcement, JTI is raising awareness of the social and economic consequences of illegal
trade. We are doing this by providing counterfeit awareness programs and quality information on
criminal activities.

In 2020 there were several raids on illegal production and storage sites in countries wherecounterfeit production was, historically, non-existent, including Belgium, Germany, Ireland, theNetherlands, and Spain. Here are just a few examples of cases where JTI contributed information:

Country

Number of illegal factories raided in 2020

Philippines

3

Greece3

Romania

2

Jordan2

Canada

1

Spain

1

Latvia1

RaidMalaga■

An illegal factory seized by the Guardia Civil near Malaga, Spain, on February 12, 2020. Thisfactory was concealed underground beneath purpose-built stables and included basic living
accommodation. When the law enforcement agency officers raided the facility, they liberated six
factory workers from Lithuania and Ukraine, who had been trapped inside and were short of air.

Ensuring anti-illicit trade compliance

Legitimate market demand program
Companies worldwide seek to understand the demand for their products in their markets. But there
is a clear distinction between market demand, and ‘Legitimate’ Market Demand (LMD).
We must comply with our obligations under the European Union Cooperation Agreement signed in2007. This means supplying tobacco products only in volumes that correspond with the legitimate
demand of the intended market of retail sale.
With a commitment to doing the right thing, in the right way, our Anti-Illicit Trade team hasdeveloped a global methodology to assist our international tobacco businesses’ markets with aconsistent and accurate approach to annual LMD calculations. Our markets perform the LMD
exercise in conjunction with their annual plan. This creates a proactive supply chain control
mechanism to make sure that the planned sales volumes are in line with LMD.
The components and parameters of the LMD estimation vary depending on each market’s uniquecharacteristics and our product portfolio in that market, but the global methodology provides alogical and defendable standard.
One common factor among these varying calculations is that our demand estimations comply withall laws and regulations.

Track and trace
Our Track and Trace program has been an important element of our compliance policy for morethan a decade. It helps our global efforts to support law enforcement agencies and has beendeveloped with many of the biggest technology companies across the world, as part of ourobligations within the EU Cooperation Agreement.
A highly technical and complex process, our Track and Trace program requires markings on all
individual and aggregated levels of products. It helps us to track the movements of the products
along the supply chain and supports our supply chain analysis. As a result, when seizures arebrought to our attention, we can identify the source of diversion of the seized products andimplement preventative measures.
Since 2019, Track and Trace has been a legal, mandatory requirement in the following national andregional jurisdictions: United Arab Emirates, Saudi Arabia, Russia, and the whole European Union. In
2020, the authorities of the U.K. announced their intention to implement a new system, as aconsequence of Brexit.
As with all other regulations, we put all our efforts into complying with these obligations, while
limiting any negative impact on our business operations. We also firmly believe that the fightagainst illicit trade can only be effective if measures such as Track and Trace are implemented
along with proper enforcement by authorities and sanctions for those involved in illegal trade.
Governments must also implement further measures to address products which will, by nature,escape those obligations, such as counterfeits or illicit whites*.
* ‘Illicit whites’ refer to tobacco products manufactured legitimately but without any product flow control
measures afterwards, and smuggled and sold in another market.

A global response to illicit trade

The Protocol to Eliminate Illicit Trade in Tobacco Products is the first protocol to the WHO
Framework Convention on Tobacco Control (FCTC). It entered into force on September 25, 2018 andhas so far been ratified by 62 Parties (April 2021).
This international treaty aims to eliminate all forms of illicit trade of tobacco products, throughseveral provisions that are binding on its Parties. We support the Protocol, as it provides a global
response to the global problem of illicit trade.
One of the main requirements is that the Parties must implement a Track and Trace system within 5
years for cigarettes and within 10 years for all other tobacco products respectively after the entry
into force of the Protocol for them. In order for this regime to be effective, we support theimplementation of an architecture based on ‘open standards’ and interoperability for every actor in
the supply chain, while taking into account existing systems such as the new EU-wide Track andTrace system.
The other provisions covered by the Protocol, such as Free Trade Zones oversight or Assistance andCooperation mechanisms, are equally crucial. These represent an area for public-private
cooperation, with the common goal of defeating the illegal trade of tobacco products across theglobe.

Taking the fight to the digital world
The fight against the illegal tobacco trade seems never-ending, as criminals seek to use tried-andtested and innovative new methods of exploiting others. The internet – and social media inparticular – continues to provide opportunities for individuals and organized crime groups to sellillegal tobacco products. During the COVID-19 pandemic, with other sales opportunities unavailable,
the online world has become the environment of choice for criminals to sell illegal tobacco
products. But as criminal gangs become increasingly sophisticated, so do our own efforts to fightthem.
Our projects to tackle internet-based crime are well established and continue to make progress,
through the removal of links and social media posts such as Facebook which illegally advertise our
products.
The scope of our projects to tackle internet-based crime have expanded both in scope and size, toinclude activities in France, Malaysia, Russia, Serbia, Singapore, Spain, Taiwan, the U.K., the U.S., and
CIS+ region. In 2020, we contributed to over 5,169 takedowns.
We also identify criminal gangs using social media sites which offer larger volumes. In addition,
following ‘test purchases’ of the JT Group products, we supply law enforcement with the evidence
needed to take action.

Case study

Project Armor: protecting consumers frompotential danger
Project Armor is an Anti-Illicit Trade initiative tackling online sales of counterfeit Logic products in
the U.S. with a secondary objective to identify online sellers around the world who are selling
genuine or counterfeit Logic products in the U.S. or Canada without proper age verification.
Working in partnership with law enforcement agencies, our Anti-Illicit Trade team helps to remove
these potentially dangerous vapor products from the supply chain. This in turn helps to close down
criminal enterprises and bring offenders to justice.
Having brought this issue to the fore, we are now considered an invaluable partner in the fightagainst counterfeit vapor products in the U.S.

2020 at a glance:■

Total listings or suspicious posts detected and reported: 5,729■

Total number of sites checked for age verification: 893■

Value of the counterfeit items removed from the web: 456,935 U.S. dollars■

Test purchases completed: 9■Investigation reports completed: 66

Read more about how we tackle the illegal tobacco trade online.

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