Sustainability
ReportCommunication on Progress 2016
United Nations Global Compact

Key facts about
Philip Morris International Inc. (PMI)
Company footprint

180

48

Countries where
PMI operates

Production facilitiesin 32 countries

2

Research facilities –one in Neuchâtel (Switzerland)and one in Singapore.

Consumers

150m
Combustible
products(2015)>3m

Smoke–freeproducts(August 2017)

Financial

8,000

Smokers switch to
IQOS every day(June 2017)

$7bn

$70bn

Net profit(2016)

Excise taxes on
PMI products(2016)

Employees

80,000

Employees worldwide+400

Scientists and experts
hired since 2008 to workon smoke-free products

32.8%
Women inmanagement
positions

Suppliers

380,000

Farmers contracted by PMI and
our suppliers in 28 countries

68%of employees coveredby collective labor
agreements

Distribution

50,000
Suppliers worldwide

77,000Distributors andwholesalers

5.9m

Retailers selling
PMI products

Contents

Our business transformation
Our products
Key developments since 2000
Our ambition for a smoke-free futureOur global progress overview

2
4
5
7

10
12
18
22

Our approach to sustainability
Find out more on page 5

Our ambition for a smoke-free future
Find out more on page 10

Our business transformation

Strengthening our sustainability
fundamentals
Acting with integrity
30
The guiding principles on
business and human rights
38
Our people
40
Our supply chain
47
Managing our environmental footprint  56
Next steps
66

68
69
70
73
75

Acting with integrity
Find out more on page 30

Strengthening our sustainability fundamentals

Additional information
Forward-Looking andCautionary Statements
Annex 1: Business Transformation
Metrics – Independent
Assurance Report
Annex 2: Overview of marketing
principles for combustible products Annex 3: Overview ofengagement principles 
Annex 4: Cross reference to UNGC
Principles and relevant SDGs

Introduction

Introduction
Letter from the CEOThe role of PMI’s Board of Directors
Our approach to sustainability
External perspectives on our business
transformation and smoke-free vision

Additional information1

Letter from the CEO—
Philip Morris International Inc. joined the United Nations Global
Compact (UNGC) in 2015. By doing so we committed to embed
its Ten Principles into the strategy, culture and daily work of ourcompany, and I am pleased to renew this commitment.

2

>3m

People have stopped
smoking cigarettes andswitched to IQOS
(August 2017)

Metrics

Publication of metrics
to make our business
transformation
verifiable>30%

Part of PMI shipment
volume taken bysmoke-free products(ambition 2025)

A-listIn CDP Climate Survey
for 3rd year in a row

USD 100m
Pledged for programs
to fight illicit trade(PMI IMPACT)

Smoking cigarettes causes serious disease, andthe best way to avoid the harms of smoking isnever to start, or to quit. But much more can bedone to reduce the health risks for the world’s
1.1 billion smokers. While nicotine is addictive, itis the smoke generated by burning tobacco that isthe principal problem. Through groundbreaking
research, we have developed a range ofsmoke-free products that are enjoyable forsmokers and have the potential to significantly
reduce health risks when compared to smoking.
In last year’s UNGC report we announced ourambition to replace cigarettes with less harmful,smoke-free products as soon as possible. We
intensified our work and are now focusing ourefforts to transform our company from acigarette maker to a smoke-free technology
leader. We have re-allocated a very significant
part of our company’s resources to make ourvision of a smoke-free world a reality. We
announced plans to invest in four factories inGermany, Greece, Italy and Romania to
manufacture heated tobacco units for IQOS, ourmain smoke-free product. Today, the product isavailable in key cities or nationally in more than
25 countries. Already over three million people
have stopped smoking cigarettes and switched to
IQOS, and 8,000 more are switching every day.
Starting with this report, we will regularly
publish key metrics for investments, resource
allocation and results to make our business
transformation verifiable by the outside world.
Furthermore, we plan to support theestablishment of an independent foundation toaccelerate progress in achieving a smoke-freeworld by focusing on science-based approaches.
The foundation will operate independently of
PMI, scrutinizing the progress of PMI and othercompanies in the sector, and ensuring that the
public health interests of society are met
through the foundation’s Board of Directors.
I am fully aware that many people are skeptical
about our company and our products. I am
frequently asked when we will stop sellingcigarettes. Our objective is to reach this moment
as soon as possible and we will spare no effort
to convince smokers to switch to smoke-freealternatives. However, we cannot achieve thisalone. It also depends on a number of factors
out of our direct control, mainly support from
regulatory and public health authorities, that will
influence the pace and scale of switching.
Whether or not PMI alone stops sellingcigarettes is in any case irrelevant from a publichealth perspective. As long as there is smoker
demand for cigarettes there will be supply.
3

Our minimum ambition is that by 2025 at least
30% of our volume comes from smoke-free
products. It could be higher with the right demandside measures. Longer term, PMI will be ready tosupport industry-wide supply side measures assoon as scientifically substantiated smoke-free
products become widely accepted and a large
majority of smokers have switched to them.
Other points of concern raised by our critics
relate to our marketing and lobbying practices.
We have strong policies in place, and in thisreport you will find an overview of ourmarketing principles and engagement principles
on which we welcome feedback.
As this report shows, we continue to makeprogress in embedding the UNGC Principles into
our thinking and activities. Highlights include ourcomprehensive action on climate change, which is,in my view, one of the biggest challenges facing
humanity today. I’m particularly proud that PMI
has received recognition on CDP’s Climate A-Listfor the third year in a row. The environmental
challenges related to tobacco go beyond CO₂
emissions. We particularly recognize the need andopportunity to improve the prevention of litterand the recycling of waste, including new
programs for our smoke-free products.
Our Agricultural Labor Practices (ALP) program
continues to raise the bar on corporate efforts toimprove labor conditions in agriculture. I believe
the scale and transparency of our ALP program
are unique, and the extensive data collectedshows both significant progress and many
complex challenges we still need to overcome.
Another focus area is the fight against illicit
cigarette trade, which fuels broad-ranging crimeand deprives governments of essential revenue.
In 2016, we launched PMI IMPACT, a global
initiative governed by independent experts tosponsor third-party initiatives to prevent tobacco
smuggling and related crimes – an area ofcontinued concern for our business and society.
We are pleased to share with you this reportoutlining our work to transform our company.
We aim to successfully prevent and manage thenegative externalities associated first and foremost
with our products, our own operations and ourvalue chain, inspired by the UNGC Principles andframework. We are committed to continue
operating responsibly, while successfully deliveringsolutions not only to our consumers, employees
and shareholders, but also to society in general.
I cordially invite you to comment, challenge, andguide us as we continuously seek to improve thesustainability of our business and to contributeto the UN Sustainable Development Goals.

ANDRÉ CALANTZOPOULOS
CHIEF EXECUTIVE OFFICER

Introduction

8,000

Smokers switch to
IQOS every day(June 2017)

There is no doubt that thegreatest contribution PMI canmake to society is to replacecigarettes with less harmful
alternatives.

The role of PMI’s Board of Directors

PMI Operations Center, Lausaunne, Switzerland

The global businessenvironment is being
reshaped by technologicalbreakthroughs, climatechange, resource scarcity,
rapid urbanization anddemographic change.
In the context of a fast-changing world,
PMI’s Board of Directors (the “Board”)
understands that environmental, social,and governance (ESG) factors relevantto the company’s business are criticalto PMI’s long-term success. At the coreof the Board’s oversight framework isa focus on management’s efforts toenhance shareholder value responsibly
and sustainably.

The Board understands PMI’s
responsibility as a global tobacco company.
Over the last decade, the Board has spentan increasing portion of its timeoverseeing the company’s progress indeveloping smoke-free products and is
now closely following the steps tocommercialize them, as well as all
management efforts to ensure that thecompany and its employees are prepared
to meet the new and substantial
challenges of its business transformation.
The Board has also monitored thedevelopment of business transformation
metrics, which are presented in this report,so that PMI can track and publicly disclose
its transformation progress.

4

With the Board’s encouragement, PMI
became a signatory to the UNGC in 2015.
Over the years, the Board has encouraged
the company’s efforts in relation to the
topics covered by the UNGC’s Principles.
Specifically, the Board strives to link pay to
performance in areas ranging from PMI’s
business ethics and compliance culture, toagricultural labor practices, climate change,
and the ongoing efforts to train anddevelop the workforce and promote
diversity and inclusion. Sustainability
performance is built into the equation that
determines the level of incentive awards
earned by the company’s executives.
PMI’s commitment to publicly report on
how it operates in relation to the UNGC’s
Principles is a real opportunity to show
progress, efforts and challenges, while
continuing to take a systematic andtransparent approach to all its work in
relation to these principles.

Our approach to sustainability

We seek to embed the UNGC Principles
into our day-to-day work and tocontinuously improve our understanding,management and performance regarding
our environmental and social impacts.

Defining our focus
In our last report, we highlighted the needfor a systematic approach to assess andprioritize the most significant sustainability
areas to our business. We did so in 2016.
Working with Business for Social
Responsibility (BSR), we identified theareas that are most significant to ourbusiness sustainability and to ourstakeholders and prioritized them. That
analysis also highlighted for us the areasof opportunity and risk, emerging themes,
and gaps for management action. The
analysis consisted of a structured review
and engagement process, carried out by
BSR, involving PMI’s functional leadersor subject matter experts and external
stakeholders. It considered both ourcurrent business and the change driven by
our vision of a smoke-free future. In many
areas described below we already havestrong programs in place on which we canbuild; in other areas new approaches may
be needed. The results were sorted into
four categories as follows.
Fundamental to our business strategy
Three key areas are fundamental to thesustainability of PMI’s business strategy:——Product Innovation for Harm Reduction:
Our continued recognition of the healthimpacts of our products and theprioritization and investment in reducing
or eliminating those impacts throughinnovation and development of
products that can substantially reduce
individual risk and population harmwhen compared to cigarettes.

——Public Health Policy and Research:
Our role and proactive approach insupporting public health and harm
reduction policies and research.
——Respect for Human Rights:
Our understanding, due diligence andactions to respect human rights
throughout our global operations andvalue chain.
Credibility and responsibility
The analysis also identified a number of
aspects that are critical to building thecredibility and engagement required forour business transformation, particularly
the need to substantiate ourcommitments, demonstrate transparency
and consistency in our approach, andmaintain the highest standards in ourpolicies, practices and actions. This also
includes ensuring that we continue tomarket all of our products in a responsible
way, and only to adult consumers, andbeing even more transparent in how weadvocate on policy issues related to our
products, including taxation andregulation.
——Corporate Governance and Ethics:
Promotion of the highest standards ofcompliance and integrity across ourglobal operations and value chain.
	Clear alignment of our public policy
advocacy with our core strategy andcommitment to stakeholders.
——Responsible Marketing and Youth
Tobacco Prevention: Actions to ensurethat we continue to market our products
responsibly and only to adult consumers.
——Transparency and Reporting:Disclosure of our significant sustainability
performance risks and opportunities in aclear, comparable and accessible manner.
Turning strategic risks into opportunities
A number of other areas were identified as
strategic priorities from a risk management
perspective, including good agricultural andlabor practices in tobacco farming, and theneed for climate change mitigation andadaptation action throughout the value
chain. We also need to anticipate andmanage the supply chain risks related to our
non-tobacco materials, especially as our
product portfolio shifts to electronic devices.
Our ambition is to turn these strategic risks
into opportunities to add value.

5——Responsible Sourcing of Non-Tobacco
Materials: Actions to identify and trace
non-tobacco materials to origin andsource those materials in a responsible
and sustainable manner (including
electronics and considering conflictminerals);——Agricultural Labor Practices: Actions toeliminate all forms of labor abuses andachieve safe and fair working conditions
on tobacco farms;——Good Agricultural Practices: Actions toensure tobacco farmers have access tothe information, systems and tools
needed to be successful businessowners who minimize the environmental
impacts of their activities and provide
good working conditions on their farms;——Climate Change Mitigation and
Adaptation: Efforts to reducegreenhouse gas emissions and prepare
for the effects of climate change in ouroperations and supply chain, including
water stewardship actions;——Post-Consumer Waste: Actions tominimize impacts through productdesign, waste management programs andrecycling where possible. Littering
prevention through consumer education.
Underpinning our approach
Finally, a number of governance, product,environmental and employee-related
aspects were identified as being importantfor our continuous improvement efforts.
Many of these aspects are described inthis report and include:——Employee engagement and well-being,labor relations, workplace health andsafety, diversity and inclusion, and talent
recruitment and management;——Our efforts to fight illicit trade;——Good laboratory and clinical practices in
our R&D efforts;——The good environmental management of
our operations.
The outcome of this analysis has helped
us to focus on where we need to prioritize
and allocate resources to mitigate negative
impacts and create opportunities for wider
societal value, keeping product harm
reduction as the fundamental premiseof our new business strategy, now andin the future.

Introduction

For PMI, sustainability is
about seeking opportunities
to create value while
minimizing the negative
externalities associatedwith our products, ourown operations, and ourvalue chain.

How our work relates to the UN Sustainable Development Goals (SDGs)
The SDGs represent the future we all want. PMI has welcomed the adoption of theSDGs and is committed to play its part in making them become a reality. This means:
Taking decisive action where we have the greatest impact
Smoking cigarettes causes serious disease.
By replacing cigarettes with less harmful
alternatives we can significantly reduce thenegative impact of our products on society.
This report’s section on “Our business
transformation” describes in detail how ourbusiness vision aligns with this SDG.

Taking ownership where we can provide a substantial contribution

Through good agricultural
practices and crop
diversification we can help toimprove the productivity andfood security of smallholder
farmers.

We improve the life cycle
impacts of our products. Fromthe environmental impacts of
tobacco growing, to efficient,
low carbon, manufacturing, andlitter prevention and recycling
programs.

We ensure good working
conditions for all our
employees and can play a rolein promoting good working
conditions for millions ofworkers in our supply chain.

Aligning our practices with the overall goals, even when we have less impact

We care about all SDGs, and on some of these – such as Climate Action – we consider
ourselves leaders. Nevertheless, given the related impacts of our business we can only
make a relatively modest contribution to these global objectives.

6

Our efforts to combat illicit
trade in tobacco products are
particularly relevant for thisgoal, because illicit trade fuels
broader criminal activity andcorruption.

As we assessed the most significant sustainability issues, we alsosought the perspectives and questions stakeholders have about ourbusiness transformation and ambition to create a smoke-free world.
We have aggregated and captured themain questions stakeholders ask about
our transformation. We attempt toaddress these concerns in this report
as we outline the different aspects ofthis transformation.

Businessrationale“How does PMI plan to transform its
existing cigarette business (market volumes
and timescale)? When will you stop
selling cigarettes?” See pages 26-27.
“ What’s driving PMI’s business transformation
and why now? Do investors really support
this move away from cigarettes? Is the launchof these new products simply an opportunity
for PMI to expand its commercial footprintin places with declining cigarettes volumes?”
See page 21.
“PMI’s new products contain nicotine andare still addictive. This means householdincome is diverted from other items. Is thisa new business strategy to get more people
addicted to nicotine and boost sales ofboth smoke-free products and cigarettes?”
See pages 16, 19, 21.

Affordability“Are these new products aimed at wealthierconsumers? Are they being funded bycigarette sales from lower income smokers,
in developed and developing markets?”
See page 24.

Responsible
marketing andadvocacy“ Is PMI being consistent in upholding
stringent marketing standards across all
countries where it operates, irrespectiveof local regulation and enforcement?
How can we trust PMI to market thesenew products responsibly and in an
ethical way?” See pages 24, 30 andAnnex 2.
“How can we be sure that PMI is being
honest and transparent with regulators,
smokers and the general public when
they advocate for smoke-free products?
How is PMI proactively advocating fora smoke-free future when its cigarette
portfolio makes up 99% of its sales?
Why is PMI still fighting against tax
and regulation of cigarettes?”
See page 20 and Annex 3.

7“ How is PMI supporting youth smoking
prevention measures for its cigarettebusiness today? How will PMI ensure its
smoke-free products won’t lead youth tostart smoking or former smokers to relapse?”
See pages 17, 24, 30 and Annex 2.

Independent
verification of thescience behindsmoke-free
products“ PMI’s smoke-free products are not risk free.
Is PMI being transparent in communicating
about the risks of these new products to
consumers? How can we trust the sciencebehind these smoke-free products? Similarly,
is PMI proactively talking about the healthrisks of cigarettes to consumers?”
See pages 16, 17, 24, 30 and Annex 2.

Transparency
and collective
action for asmoke-free
future“ Is PMI’s new business vision simply a way
to distract from the negative impact of its
core business? Is PMI really serious about
creating a smoke-free future? If so, how is
it leading and bringing its tobacco industry
peers towards the same vision?”
See pages 21, 26, 27.

Introduction

External perspectives on our business
transformation and smoke-free vision—Our business
transformation

8

Key developments
since 2000

Our ambition for asmoke‑free future

Our global progress
overview

See page 12

See page 18

See page 22

Our business transformation

9

Our products

In 2016, PMI manufactured
and sold over 800bn
cigarettes to approximately
150m adult consumers inmore than 180 countries
Smoking cigarettes causes serious
disease. Smokers are far more likely thannon-smokers to get heart disease, lungcancer, emphysema and other diseases.
In addition, smoking is addictive, and it
can be very difficult to stop.
The best way to avoid the harms ofsmoking is never to start, or to quit.
But much more can be done to improve
the health and quality of life of those
who continue to use tobacco and nicotine
products, through science and innovation.

For over a century the basic design
and use of cigarettes have not changed.
A smoker lights the cigarette, shredded
tobacco leaves are burned, and thesmoker inhales nicotine, flavors andvarious other substances present in thesmoke. While nicotine is addictive and notrisk-free, experts agree that the primarycause of smoking-related diseases is foundin a number of toxicants generated by
combustion and inhaled in cigarette smoke.
While several past attempts have been
made to develop better alternatives tosmoking, drawbacks in the technologicalcapability of these products and a lackof consumer acceptance rendered them
unsuccessful. Recent advances in scienceand technology have made it possible
to develop innovative products that
consumers accept and that are lessharmful alternatives to continued smoking.¹

10

PMI has developed a portfolio of smokefree products, including heated tobacco
products and products without tobacco,that have the potential to significantly
reduce individual risk and population harmcompared to cigarettes. We currently
commercialize Platform 1 under the brandname IQOS and a range of e-cigarettes(Platform 4) under brand names such as
Solaris and Vivid.
The timeline on the next pages shows the
key product innovations since the year
2000 in the context of policy developments.

1 Source: UK Royal College of Physicians,“Harm Reduction in Nicotine Addiction,” 2007.

Replacing cigarettes with smoke-free products

845bn

Combustible products
shipped in 2016

Many stakeholders have asked us about the role of these innovative smoke-free
products in the context of our business vision. Are these products an extensionof our cigarette product portfolio? Are they intended for developed countries only?
Are they aimed at compensating a decline in cigarette sales? In 2016, we madea bold announcement: our business vision is to replace cigarettes with less harmful,smoke-free products as soon as possible.

Smoke-free products – our product platforms
Heated tobacco products

7.7bn

Platform 1

Platform 2

IQOS, using the heated tobacco
consumables (heated tobacco units),features an electric holder thatheats tobacco rather than burning it,
thereby creating a nicotine-containing
vapor with significantly fewer harmful
toxicants compared to cigarette smoke.

TEEPS uses a pressed carbon heat source
that, once ignited, heats the tobacco
without burning it, to generate a nicotinecontaining vapor with a reduction in
harmful toxicants similar to IQOS. A city
launch of the product is planned in 2017.

Smoke-free products
shipped in 2016

USD 1.7bn
Planned further
investments in smoke-free
production capacity

Products without tobacco
Platform 3

Platform 4

Platform 3 is based on acquired
technology that uses a chemical process tocreate a nicotine-containing vapor. We are
exploring two routes for this platform: one
with electronics and one without. A city
launch of the product is planned in 2017.

Products under this platform are e-vapor
products – battery-powered devices
that produce an aerosol by vaporizing anicotine solution. One of these – MESH –uses new proprietary vaporization
technology.

11

Our business transformation+USD 3bn

Investments in smoke-free
products since 2008

Key developments since 2000

The first
e-cigarettes
commercialized
in China

Late 1980s: PM USA
commercialized Next,
a nicotine-free cigarette

US Institute ofMedicine publishes“Clearing the Smoke”

It failed to satisfy consumers
and was later withdrawn

It concludes that “reducing riskof disease by reducing exposure
to tobacco toxicants is feasible”

Pre
2000s

2001

PMI expands
R&D on smokefree products

2003

2004

1996: Launch of Eclipse in
the USA by RJ Reynolds
The first attempt at a heated
tobacco product, using a carbon
tip. Consumer acceptance was low,
and the product was withdrawn

1998-9: PM USA andPMI launch the firstelectronically heated
tobacco product,
called Accord in
the USA andOasis in Japan
Consumer acceptance
was low, and the
product was
subsequently
withdrawn

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

12

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

The Cube R&D facility
in Neuchâtel, Switzerland

Our business transformation

2006

2007

2009

2006-7: Launch of
Heatbar by PMI in
Switzerland and Australia

US Family Smoking
Prevention and Tobacco
Control Act

Heatbar is the second generationof electronically heated tobacco
products; consumer acceptance
was low due to the bulky
device and sub-optimal
taste, and the productwas withdrawn

Provides authority to US Foodand Drug Administration (FDA)
to regulate tobacco products andcreates a regulatory framework
for the commercialization of“Modified Risk Tobacco Products’

UK Royal College ofPhysicians publishes
a report on tobacco
harm reduction
It states that “nicotine itself is
not especially hazardous” andthat “if nicotine could be provided
in a form that is acceptable andeffective as a cigarette substitute,
millions of lives could be saved.”

13

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

R&D facility in Singapore

PMI opens R&D facility in
Singapore dedicated toassessing smoke-free
products

2010

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

2012

Launch of PMIScience.com
to share PMI's researchmethods and findings

2014
PMI launches IQOS city
tests in Italy and Japan
PMI acquires Nicocigs Ltd.
and enters the e-cigarette market

PMI announces its first new
factory dedicated to heated
tobacco unit production
PMI invests USD 680m in its first
purpose-built factory for heated
tobacco units in Bologna, Italy

EU Tobacco Products
Directive II adopted
establishing specific rules formarketing “novel tobacco products”
and electronic cigarettes

14

PMI launches an e-vapor
product, Solaris, in Spainand Israel

PMI’s CEO announces
ambition to convince all
adult smokers who intend
to continue using tobacco
products to switch tosmoke-free products assoon as possible
JT launches PloomTECH
in Japana hybrid e-vapor product

PMI city test of MESH
in Birmingham, UK
an innovative e-vapor product

2016

2017

IQOS available in
19 countries

launches in key cities in Portugal,
Romania, Russia and Switzerland

launches in key cities in Canada,
Denmark, Germany, Greece,
Israel, Kazakhstan, Monaco, theNetherlands, New Zealand, South
Africa, Spain, the United Kingdom
and Ukraine

in the US and Japan on IQOS,
confirming results from the earlier
five-day study

welcoming innovative technologies
that minimize the risk of harmfor smokers

recognizing that innovation canlead to less harmful products

IQOS available insix countries

PMI completes two
three‑month clinical studies

UK Department of Healthpublishes five-year tobacco
control plan

FDA announces
comprehensive plan tosignificantly reduce
tobacco-related disease

The report concludes thate-cigarettes are significantly
less harmful than cigarettes

2015

PMI reaches 200 peerreviewed publications
and book chapters on thescience around its smokefree research to date

BAT launches Glo in Japana heated tobacco product

PMI submits an MRTPA
for IQOS to the US FDA
More than 1m people
have stopped smoking by
switching completely to
IQOS (December 2016)

15

IQOS available in morethan 25 countries

launches in key cities in Colombia,
Czech Republic, France, Lithuania,
Poland, Serbia and South Korea

More than 3m people
have stopped smoking by
switching completely to
IQOS (August 2017)

Our business transformation

Public Health England
publishes report onelectronic cigarettes

In Japan, HeatSticks for
IQOS achieve a 10%
market share in Q2, 2017

Scientific assessment of
our smoke-free products
We knew from the outset that our sciencewould be met with skepticism. Since 2008,
we have hired over 400 scientists andexperts who are working in state-of-theart facilities and using cutting-edge
technologies to develop and assess our
smoke-free products. Our scientificassessment programs align with leading
pharmaceutical industry standards andguidance issued by the US Food and Drug
Administration’s (FDA) Center for Tobacco
Products. Our research includes
laboratory and clinical studies based oninternationally accepted Good Laboratory
Practices and Good Clinical Practices.
We follow a thorough and systematic
approach to smoke-free productdevelopment and assessment, including
clinical and behavioral studies to assess
individual risk and population harm.
Take IQOS, our main smoke-free productso far, as an illustrative example of ourscientific research. Findings to date showthat switching completely to IQOS is likely
to present less risk of harm than continued
smoking. Specifically, the results show that:——IQOS does not generate combustion or
smoke;¹——IQOS vapor contains on average 90-95%
lower levels of toxicants compared tothe smoke from a reference cigarette
designed for scientific research, with
nicotine at similar levels to cigarettesmoke;²——Laboratory studies conducted in animalmodels of disease confirm that theselower levels of toxicants result in IQOS
vapor being significantly less toxic thancigarette smoke;²——Laboratory studies confirm thatswitching to IQOS, conducted in animalmodel of diseases, led to a reduction in
key smoking-related diseases and theirassociated mechanisms. These
reductions approached those observedin the cessation group;²——Clinical studies conducted to dateconfirm the results of our laboratory
studies. Smokers who switchedcompletely to IQOS in two one-week
and two three-month clinical studies
significantly reduced their exposure
to 15 toxicants. These reductions
approached levels observed in the
cessation groups;²——IQOS use does not adversely affectindoor air quality and is not a source of
second-hand smoke;³ and——Smokers indicate a strong intention touse IQOS while people who have neversmoked or who quit smoking do not.⁴
These results give us confidence thatswitching fully to IQOS is likely to present
less risk of harm than continuing tosmoke. We also believe its introduction
will benefit public health. On this basis, in
December 2016 we submitted evidence
to the US FDA in the form of an
application for IQOS as a modified risk
tobacco product (MRTP) – the first everfor a heated tobacco product.⁵
Our research efforts will continue to seek
ways to further reduce the risk of harmand to broaden our smoke-free productportfolio such that we have productsthat are acceptable and affordable toall smokers. We fully recognize that there
is concern about the addictiveness of
nicotine products, however nicotinedelivery is an important factor in helping
to ensure rapid and complete switching ofcigarette smokers to smoke-free productsin the short- to mid-term.

1 https://www.pmiscience.com/news/absencecombustion-pmi%E2%80%99s-heated-tobaccoproduct-platform-1; and https://www.pmiscience.
com/system/files/publications/gfn_2017_mcgrath_what_is_combustion_and_why_the_absence_of_
combustion_is_important_in_heated_tobacco_products.pdf
2 http://www.sciencedirect.com/science/article/pii/
S0273230016301891
3 https://www.pmiscience.com/system/files/
publications/jsfec_2017_ggoujon_air_quality_
assessment_during_indoor_use_of_ths_2.2.pdf

16

Engaging the scientificcommunity and encouraging
scrutiny of our science
Sharing our science, gathering feedback
and participating in robust scientificdebate help answer important questions
we receive about our innovative products
from the public, scientific experts, andregulators. In 2016, our scientists
presented research results at 79 leading
scientific conferences and publishedover 50 book chapters and articles inpeer-reviewed journals.
Our systems biology program uses large
datasets to build an understanding of
disease mechanisms, predict the extent ofdamage to the body from exposure to toxic
substances, and estimate improvements if
those exposures are reduced. In 2011, welaunched our SBVImprover platform, acrowd-sourcing initiative developed with
IBM, to enable independent scientificexperts to review and validate our scientificmethods and conclusions. It does sothrough the publication of Challenges anddefined criteria by which scientificinstitutions can independently develop
methodologies and draw their own
conclusions. Through this robust, 21st
century approach to peer review andscientific verification, we can gauge theextent to which our own research is in linewith these crowd-sourced results. Since
the inception of the SBVImporter platform,
nearly 200 institutions across the globe
have taken part in the program, and theChallenges have verified our research.
The Challenges and all publications andnews articles related to this platform areavailable online.⁶
In addition, we recently launched theInvestigator-Initiated-Studies (IIS) program
to encourage others to review our scienceand conduct additional studies to confirm,
improve or challenge our findings.⁷

4 https://www.fda.gov/TobaccoProducts/Labeling/
MarketingandAdvertising/ucm546281.htm
5 Read more here: http://pmiscienceusa.com/
wp-content/uploads/2017/06/Brief-Summary-ofPMIs-MRTP-Application-May-2017.pdf
6 https://www.sbvimprover.com/sbv-improver/publications
7 https://www.pmiscience.com/our-goals/
investigator-initiated-studies-program/supportedinvestigator-initiated-studies

79

Scientific conferenceswhere our scientists
presented research
results

50

Book chapters andarticles in peerreviewed journals

SBVImprover

200

Institutions across theglobe have taken part incrowdsourcing initiative

At PMI we use various print and online
communication tools to share our scienceand encourage further debate andunderstanding about our smoke-free
products. We have a dedicated website(www.PMIscience.com) to share the latest
information about our ongoing research,peer-reviewed publications, and we issue
a regular ‘Scientific Update for SmokeFree Products.’
We have also opened the doors of our
R&D center in Neuchâtel, Switzerland, tothose interested in learning more about
our science.

Product design and control principles
The first step of the assessment is designed
to ensure that a given smoke-free productis manufactured to appropriate quality
standards and is sufficiently characterized
to document product performanceparameters. This product characterization
enables the establishment of a productspecification, which all products entering
the subsequent assessment steps must
meet, as must the products that are
introduced to the market. In this initial
phase, PMI verifies that the product’s
design is likely to result in a significant
reduction in risk for smokers who switch toit and that it does not pose any additionalrisks to those already known for cigarettes.
Realizing the risk reduction potential of asmoke-free product relies on the quality ofthe product design and on strict
manufacturing controls to ensure that the
product operates consistently and reliably.
Aerosol chemistry and physics
We analyze the chemical composition of
the aerosol generated by the smoke-free
product to quantify the reduction information of harmful and potentiallyharmful constituents in comparison with acigarette. We also evaluate whether new
potentially harmful constituents are
generated by the smoke-free product andconfirm the absence of combustion inaerosol generation.
Standard toxicology assessment
Once a product has been developed, we
use robust laboratory techniques toevaluate whether a product is less toxic
than cigarette smoke. We do this byassessing whether it causes less damage tocells and organs using in vitro and in vivo
techniques.
Systems toxicology assessment
We use highly sophisticated laboratory
techniques to assess the effect ofswitching to a smoke-free product on thedevelopment of smoking-related disease17

in comparison with smoking and cessation.
Our systems toxicology program allows us
to compare the effects of switching withthose of cessation on the molecular-level
disease mechanisms caused by smoking.
This is achieved by measuring the changes
in gene, protein and metabolite levels
caused by switching and cessation incomparison with continued smoke
exposure and analyzing this data using
advanced computational methods.
Clinical studies
We conduct clinical studies with adultsmokers according to the principles ofGood Clinical Practice. These studies help
us understand whether switching to asmoke-free alternative reduces a smoker’s
exposure to toxicants compared with
on-going smoking. We also determine
whether this leads to a reversal of clinicalrisk markers linked to smoking-relateddiseases. These studies compare theeffects in continued smoking, switchingand quitting cigarettes for the duration of
the studies. This phase is fundamental tohelp substantiate claims.
Perception and behavior studies
Our program of Perception and Behavior
Assessment studies is aimed at developing
understandable and scientifically accurate
consumer messages; assessing thecomprehension of these messages and therisk perception of the smoke-free productamong various adult consumer groups; andassessing the suitability of the smoke-free
product as a substitute for cigarettes
among adult smokers.
Post-market studies and surveillance
Once a smoke-free product is on themarket, we conduct post-market studies
to understand how the product is used
and by whom. Our aim is to ensure thatthe product does not attract significant
numbers of never and former smokers, butdoes lead to a significant portion of current
adult smokers switching to it completely.
Additional clinical studies are conducted
to determine the health outcomes ofswitching to the product compared withongoing smoking and to cessation.

Our business transformation

Transparency inour science at PMI

Our seven-step approach toassess individual risk andpopulation harmOur ambition for a smoke-free future
Projection of smoking prevalence

Projected smoking prevalence

Today, an estimated 1.1 billion people around theworld smoke cigarettes or other combustible tobacco
products such as cigars, bidis and pipe tobacco.
Smoking prevalence, which was estimated at 22.1%
in 2010 (age 15+), has been in constant decline forseveral decades, and the World Health Organisation(WHO) projects it will continue declining by 0.21
percentage points per year.1 At the current pace, it willtake almost 100 years until the world is smoke-free.
At the same time, global population is growing byaround 70 million people per year. The combined
effect of a growing population and a declining
smoking prevalence is a projected number of1159 million smokers by 2025. Slowly declining
numbers of smokers in OECD countries, China andIndia are offset by growth in the rest of the world.
These WHO projections assume current tobacco
control policies and do not consider the potentialof smoke-free products.

22.1%

18.9%

2010

2025

Projected number of smokers
5080m

6130m

1123m

1159m

2010

2025

WHO target
The member states of the WHO are rightly dissatisfied
with the slow pace at which smoking is declining
and have established a 2025 target to reduce theprevalence of tobacco use by 30% compared to2010.2 As population growth partially offsets theimpact of this prevalence target, there will still beapproximately 950 million smokers by the year 2025
if the WHO achieves its objective.

Global population increase
Projected number of smokers
These projections are based on WHO/UN data and refer to age 15+

1 Data and projections are based on WHO global report on trends inprevalence of tobacco smoking, 2015 and UN Population Prospects.
These official projections refer to age 15+.
2 WHO Budget 2016-2017.

18

PMI’s ambition
We believe smoking prevalence can be reduced
much faster by supplementing the measures thatgovernments take to discourage smoking initiationand encourage cessation, with efforts to encourage
smokers who would otherwise continue smoking
to switch to smoke-free products. To illustrate theopportunity for public health, we project the numberof consumers of PMI products for the year 2025.
These calculations are consistent with the WHO
projections, the PMI business transformation metrics
shown on page 26, and assume a constant global
market share for PMI.

It is our ambition that at least 30% of our consumers
who would otherwise continue smoking switch to
our smoke-free products by 2025. We project thatby 2025, at least 40 million PMI cigarette smokers
will have switched to smoke-free products.

These are illustrative calculations. We left out thepossibility for PMI to grow market share by switchingconsumers of competing cigarette brands to oursmoke-free products. This would further amplify
the opportunity for public health.
Of course we cannot achieve a smoke-free future
by ourselves. Government and civil society, especiallyleading scientists and public health professionals,
and ideally the WHO, can play a decisive role inencouraging smoke-free products to replace cigarettes
for people who would otherwise keep smoking.
Our competitors are also increasing their efforts todevelop and commercialize their own smoke-free
products. As a result, we expect a positive accelerationof innovation, competition and consumer adoptionthat could reduce global smoking prevalence at a pacesignificantly beyond past reductions and future goals
set by the WHO.

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

19m
>40m

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

152m

Smokers of
PMI products<95m

2025 estimate based on
WHO prevalence projection

2025 estimate based on WHO prevalencetarget and PMI smoke-free aspiration
19

Our business transformation

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

The combination of measures to discourage tobacco
initiation and encourage cessation, and our full-scale
effort to replace cigarettes with smoke-free products
could reduce smoking of PMI products by 40%
within a decade – a major acceleration towards asmoke-free world.

Our view on tobacco
regulation
The well-known risks of smoking have led
regulators to impose more restrictions andhigher excise taxes on cigarettes thanapply to any other consumer product– while allowing cigarettes to remain
available to adults. There’s absolutely no
doubt that tobacco products should be
subject to strict rules and enforcement.
At times, we have forcefully objected toregulations, such as those that remove
branding from our cigarette packages.
We still believe that plain packaging
inappropriately treats adult smokers as
unable to make their own decisions. And
we don’t agree that banning legal salesof cigarettes makes sense for smokers
or for society at large.
With comprehensive requirements inplace to control nearly every aspect of
the cigarette business, the question
becomes: what’s the plan to address theneeds of more than one billion people
who still smoke?
The answer, in our view, is innovation – inproducts and in policies. As we work todesign a smoke-free future, our priorities
are changing. Technology that we andothers have developed makes it possible
to shift the tobacco and nicotine market
towards a future in which cigarettes are
replaced by less harmful, yet satisfying,smoke-free alternatives.
In this context, sensible, science- andrisk-based regulation regulation ofsmoke-free, combined with further
restrictions on cigarettes, can help
address the harm caused by smoking
more effectively – and faster – than any
other traditional regulatory measure.
To be clear, regulations should continue
to dissuade people from starting to smokeand encourage cessation. But it’s equallyclear that millions of men and women willcontinue to smoke, and they should havethe opportunity and information to switch
to better alternatives.

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

The rationale forour business vision
We understand that our vision of replacing
cigarettes with smoke-free products is
unprecedented for a tobacco company.
Some will question our motives, andothers will question why PMI would seek
to transform a very profitable market for
cigarettes. The answer is simple: our goalof developing and commercializing lessharmful products to replace cigarettes iscompletely aligned with the expectationsof smokers, society and our shareholders.

20

Our success as a business was primarily
built on offering the best smoking
experience through our top quality
cigarette brands, including Marlboro,
L&M and Chesterfield. We are convincedthat our continued success will depend,
above all, on our ability to offer men andwomen who smoke less harmful alternative
products.
Our business case is straightforward.
PMI leads the smoke-free category thanks
to sustained R&D investments. We are
therefore in an excellent position to not
only switch consumers who smoke PMI
cigarettes, but also those who smoke
competing cigarette brands.

We are observing this in Japan, where
the majority of IQOS users previously
smoked cigarettes made by our competitors.
We thus have the opportunity to increase
market share which would enhancebusiness results. In addition, the profit
margins of smoke-free products are similar
to or exceed those of cigarettes as a resultof differentiated excise tax.
A smoke-free world can be achieved faster
if the industry as a whole, including new
entrants, accelerates its efforts in thisdirection. A wide variety of companies– from small start-ups to multinational
tobacco companies – is increasingly activein the smoke-free category. Virtually all
multinational companies commercialize atleast one smoke-free product, and thecategory is undergoing rapid change.

We are also often asked about our
willingness to license our technology toother tobacco companies. PMI has granted
Altria an exclusive license to sell IQOS in
the United States, and we are in principle
open to other partnerships where it makes
business sense and helps to advance asmoke-free world.

21

Our company’s shift toward a smoke-free
future means going beyond developing
the products and science. It also means
supplying the demand. The case of IQOS
in Japan illustrates the need to anticipate
demand. Despite optimistic projections
for a nationwide roll-out of IQOS in Japan,
in 2016, consumer demand greatly
exceeded our expectations. We were
surprised by the rapid pace of adult smoker
conversion to the product once we hit a
critical mass of 2-3% market share nationwide. By June 2016 we had to ration thenumber of IQOS devices sold across thecountry to avoid smokers who had
switched to IQOS not being able to findheated tobacco units. At the same time,
we accelerated investment in IQOS heated
tobacco units manufacturing capacity.
Our factory in Neuchâtel, Switzerland,
was the first to produce the heated
tobacco units used with the IQOS device.
In 2015, our factory in Bologna became
the first site fully dedicated to heated
tobacco unit production. To keep pacewith demand, we are rapidly building new
manufacturing facilities and converting
existing factories. In the next pages we
describe the substantial investment in
our manufacturing transformation.

Our business transformation

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

Investing in production
capacity for smoke-free
products

Our global progress overview
IQOS launches in key cities or nationwide: 2014 – to date

By the end of 2017, we expect IQOS
to be in key cities or nationwide in
30 to 35 countries, subject to capacity.

2014

2015

2016

2017*

Italy
Japan

Portugal
Romania
RussiaSwitzerland

CanadaDenmark
Germany
GreeceIsraelKazakhstan
MonacoNetherlands
New ZealandSouth Africa
Spain
UK
UkraineColombia
Czech Republic
FranceLithuania
PolandSerbiaSouth Korea

22*As of July 2017.

Milestones and investments+USD 3bn+400 scientists

30 locations

Since 2008, we have invested morethan USD 3bn in fundamental research,
product and commercial development,
production capacity, scientificsubstantiation and studies on adultsmoker understanding.

Since 2008, we have hired over
400 scientists and experts to work on
our portfolio of smoke-free products
in two R&D facilities – one in Neuchâtel(Switzerland) and one in Singapore.

PMI scientists also work with a networkof research and technology partners
in over 30 locations worldwide.

Germany

Italy

Romania

USD 320m
Plan to invest USD 320m in a new facility
for heated tobacco units in Dresden,
expected to create approximately 500
new jobs and be operational in 2019.

USD 550m
Following the inauguration of our new
facility in Bologna in 2016, a further
investment of approximately USD 550m
is foreseen to expand its capacity to meetgrowing demand, bringing total investment
to USD 1230m, creating an additional
estimated 600 new jobs.

USD 550m
Plan to invest approximately USD 550m totransform our cigarette production factoryin Otopeni into a heated tobacco
manufacturing facility, creating about
300 additional jobs.

GreeceUSD 320m
Plan to invest USD 320m to convert
our cigarette factory in Aspropygros toheated tobacco unit production andcreate 400 new jobs.

Production capacity
Around 100bn
heated tobacco units
By end 2018, PMI anticipatesa total manufacturing capacity of around100 billion heated tobacco units per year.

23

Our business transformation

Plans for further investment in heated tobacco manufacturing (total USD 1.7bn)

Our commercialization
efforts behindsmoke-free products
Developing and manufacturing
scientifically substantiated smoke-free
products is only the start: the nextchallenge is to convince smokers to switch.
We learned a great deal about theconsumer conversion journey since ourcity tests of IQOS in Milan, Italy, andNagoya, Japan, in late 2014. Smokers
need time to fully switch (usually one to
two weeks), and they need information
about how these novel products work.
The regulatory environment in which wecommercialize our smoke-free products
varies substantially around the world. As
a result, it is easier in some countries thanothers to make smokers aware of smokefree products and how they should use
them. The differences in the regulatoryenvironment explain, to a large extent,
why switching to smoke-free products
varies from one geography to another.
Smoke-free products contain nicotine, are
addictive, and not risk-free. We understandthat any communication with adult smokers
about these products must be carriedout responsibly, attuned to the local
environment and observing regulatory
obligations. Our employees and third
parties acting on our behalf must follow
strict principles in the commercialization ofsmoke-free products, which are formalizedin our “Good Conversion Practices” (GCPs)
which are being implemented as smokefree products are launched.

An IQOS flagshipstore in JapanA substantial part of our marketing andsales budget in countries where we havelaunched IQOS has been re-allocated fromcigarettes to IQOS. Clearly, to promote
our smoke-free vision we must allocate
our budget and headcount accordingly.

Good Conversion Practices(GCPs) for smoke-free products

Our goal to replace cigarettes withsmoke-free products extends to all
countries where we operate, regardlessof development status. We are only atthe beginning of commercializing a fully
fledged portfolio of smoke-free products
and realize that additional efforts arenecessary in finding products that are
affordable and acceptable for consumers
in different parts of the world. We
acknowledge the need to continue working
to develop different product platforms
that can achieve this goal. We are also
experimenting with other solutions to
reduce the financial barrier to switch
to smoke-free products, such as the
temporary lending of IQOS devices,
combined with promotional offers if
permitted by local legislation.

2. We do not offer smoke-free products topeople who have never smoked or who
have quit smoking.

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

3. Our goal is to switch every adult smoker
who would otherwise keep smoking
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 analternative to quitting. The best choicefor consumers concerned about thehealth risks of smoking is to quit tobacco
altogether.
5. To experience the benefit of smoke-free
products, adult smokers should switch
completely and abandon smoking
permanently.
6. Smoke-free products are not risk free ora safe alternative to cigarettes, but they
are a much better choice for smokers
who wish to continue to use tobaccoand nicotine.

24

Equipping our people
to successfully transform
our business

Managing significant
changes in ourvalue chain

Our transformation goes beyond the
product itself. Training and employee
engagement have taken on a new levelof significance across our organization toensure employees are involved in and help
achieve PMI’s transformation. We haveintroduced three key initiatives in the past
year to support us on this journey:

Our transformation will have implications
for our value chain. We are committed
to managing these consistently with
the UNGC Principles, and contributing
to the SDGs where we can make apositive difference.

Our post-purchaseconsumer care approachto support switching“Product understanding, postpurchase support andencouragement, and consumer
care through a helpline, are allimportant elements in the smoker
switching journey, especiallyduring the critical initial 2-3 weeks
to avoid relapse to cigarettes.”
CEMHAN OZGUVEN
DIRECTOR, CUSTOMER CARE AND
E-COMMERCE, SMOKE-FREE
PRODUCTS——A new methodology to improve theperformance of our Operations: Overthe last year we have introduced an
integrated way of working called
OPEN+. This uses new standardized
routines, processes and tools, deployed
sequentially to develop the capabilities ofour people. This is aimed at permanently
eliminating non-value-added activities,
increasing effectiveness and reducing
waste in a systematic way; and——A new training program to equipManagement Teams for ourtransformation: We have developed
a 12-week training program for all
Management Teams worldwide known
as our Transformation Academy. The
program aims to build the foundational
knowledge, alignment and mindset
needed to help us achieve our businessvision of a smoke-free future. The program
includes a module on sustainability, andin 2017 a first wave of management
teams of over 30 countries arescheduled to complete this training.

25

The commercialization of our smoke-free
products also means a whole new sector is
gaining increasing relevance in our supply
chain – electronics – which presents its
own challenges and risks. We expand on
how we plan to responsibly manage thesechallenges and our progress to date in thechapter on Our supply chain (page 47).
Another issue we are addressing is
post-consumer waste of our smoke-free
products, both the consumables and theelectronics. Read more about our workand commitments in this area in thechapter on Managing our environmental
footprint (page 56).

Our business transformation——An entrepreneurial way of working.
Learning from the disruptive innovationof other companies and start-ups, wehave taken elements of approaches suchas Lean, Agile and Design Thinking andcomplemented them with existing PMI
methodologies. Known as Fast-Forward(FFwd), this new way of working has
a strong customer-centric approach –putting the customer at the heart ofeverything we do – and embeds a newexperimental approach to how we work
to help unleash new ideas and pilot
test what works (and what doesn’t) ina short period of time so that we canthen scale-up and execute those thatare successful as quickly as possible.
As of July 2017, over 2,000 employees
across the globe had participated inintensive FFwd workshops to instill thisnew way of working and mindset across
our organization;

Our current smoke-free products use
less tobacco than cigarettes; they also
have specific requirements in terms ofthe variety and quality of the tobacco.
We recognize that this will eventually
impact tobacco farmers and are putting
plans in place to help support farmers
throughout this transition, including
ongoing efforts to promote crop
diversification.

Business Transformation – Metrics
Actuals
2014

R&D expenditure² (Smoke-free/Total)

Estimate Aspiration¹

2015

2016

2017

2025

70%

72%

>70%

2%

8%

15%

>30%

0.0%

0.2%

2.7%

>10%

Smoke-free product⁴ shipment volume (billion units)

0.2

0.8

7.7

>30

>250

Combustible product⁵ shipment volume (billion units)

890

881

845

<800

<550

Commercial expenditure (Smoke-free/Total)
Net Revenues³ (Smoke-free/Total)

1 Assuming constant PMI market share. We do not set aspirational targets for R&D and commercial expenditure but we expect both ratios to continue increasing toenable the stated outcome in terms of shipment volume
2 R&D expenditures for smoke-free products were tracked separately as of 2015; the related metric was therefore left blank for 2014
3 Excluding excise taxes
4 Includes heated tobacco units and e-cigarettes
5 Includes cigarettes and other combustible tobacco products
The 2014, 2015 and 2016 metrics are subject to PwC’s Assurance Report included in Annex 3

Our first purpose-built factory for heated
tobacco unit manufacturing near Bologna, Italy

26

Business Transformation Metrics
We are introducing a set of five BusinessTransformation Metrics to make the actions
we are taking to pursue our smoke-freevision measurable and verifiable. The firsttwo metrics show our resource allocation
between combustible products andsmoke-free products, while the following
three show progress in making smoke-free
products the core of our business. We will
publish updates on these metrics on aregular basis.

The first metric – R&D expenditure –shows how much of our total spent on
research and development is dedicated tosmoke-free products. It includes the costs
related to clinical studies, the developmentof new machinery, prototype and productacceptability testing. The R&D expenditure
for our combustible tobacco products
are largely related to legal compliancerequirements, such as the measurement
and reporting of tar, nicotine and carbon
monoxide for cigarettes, and adaptation toregulatory changes.

It is our ambition that by 2025 at least
30% of our volume comes from smokefree products.

The second metric – commercial
expenditure – shows how much of our
total spend on the commercialization of
our products is dedicated to smoke-free
products. Commercial expenditure includes
costs for marketing, consumer engagement,
and trade promotions. As with the othermetrics these refer to our global businessand therefore include commercial
expenditures related to cigarettes in the
many countries where we have not yet
launched smoke-free products. For
countries where we are commercializing
our new products, this percentage is andwill be significantly higher.

This section outlined our major activities
to advance a smoke-free world: significant
investments in research and development,
ramping up production capacity, substantial
reallocation from cigarettes to smoke-free
products and increases in commercial
expenditure, equipping our people andfacilitating the transformation for thewhole value chain.

Finally, the last two metrics show oursmoke-free product shipment volumes(including both heated tobacco units
and e-cigarettes) and our combustible
tobacco product shipment volume(mainly cigarettes).

27

But we recognize that achieving asmoke-free future does not only dependon us. Many challenges lie ahead of us,
and a collaborative approach with manydifferent stakeholders is essential for
success. To further accelerate progressin achieving a smoke-free world, weplan to support the establishment of an
independent foundation that will focus on
strengthening science-based approaches.
The foundation will operate independentlyof PMI, scrutinizing the progress of PMI
and other companies in the sector, andensuring that the public health interests ofsociety are met through the foundation’s
Board of Directors.

Our business transformation

The third metric – net revenues – shows
the portion of our revenues that is
generated by the sales of smoke-free
products (including electronic devices andaccessories). Excise taxes are excluded
from the net revenue figures.

Of course, we hope that even fasterprogress can be achieved, and ourexperience in individual countries showsthat this is feasible. In the second quarterof 2017, less than three years after our
test launch of IQOS in Japan, smoke-free
products already represent over 40%
of our nationwide shipment volume in
the market.

Strengthening oursustainability fundamentals

PMI R&D facility, Neuchâtel, Switzerland

28

Acting withintegrity
See page 30

The guiding
principles on
business andhuman rights

Our people

Our supply
chain

See page 40

See page 47

Managing ourenvironmental
footprint

Next steps
See page 66

See page 56

See page 38

Strengthening our sustainability fundamentals

29

Acting with integrity
We believe that doing
business with integrityand preventing unlawful
and unethical behavior isessential to our long-term
success; that includes how
we advocate on issues
related to our products,
and our efforts to tackle
the illicit tobacco trade.
Our Compliance program and our cultureof ethical business conduct provide astrong foundation for our commitments as
we transform our business.
In this section we provide an update on
key developments in 2016 under ourCompliance program, including training
our own employees and third parties
working on our behalf to prevent
misconduct. We also share our ongoingwork to address the illicit tobacco tradeand report on one of our key initiatives inthis area, PMI IMPACT. Lastly, we look atsome of the main challenges we anticipate
as our business changes, namely in:——ensuring our Compliance systems
provide support and guidance for our
employees on how to handle new risk
areas related to smoke-free products;——further improving the transparency of
our advocacy efforts; and——efforts to combat the illicit tobacco
trade, both of cigarettes and oursmoke-free products.

Our Compliance program
Honesty, respect and fairness are core values
which unite and guide us at PMI. They are an
integral part of our company culture and are
the basis of our Code of Conduct (known as
our “Guidebook for Success”).
We believe that a strong complianceculture is achieved through a combinationof the right Code of Conduct andPrinciples & Practices, the required level ofawareness, training and commitment toour values from all employees, a working
environment that fosters and facilitates
appropriate conduct, an understanding on
how and why people behave in certain
ways, followed by a diligent and fair
investigation process for suspected
misconduct and humane, proportionate
disciplinary action.
The Guidebook for Success, together with
its supporting Principles and Practices,
covers the following core risk areas:
competition law, conflicts of interest,
environment, health, safety and security(EHSS), fiscal and trade (including anti-illicit
trade), protection of information,marketing and sales, and workplace andlabor practices. It also covers a range ofanti-bribery topics, including giving andreceiving gifts and entertainment,
facilitating payments (prohibited),
contributions involving or connected withgovernment officials, third parties whointeract with government officials on ourbehalf, membership of organizations,advocacy activities and reporting andrecord keeping.
Awareness of, and commitment to, ourGuidebook for Success is implemented
through training for all employees andrelevant third-parties (in the form ofclassroom and online training, town halls,leadership communications and teamdiscussions), and the promotion of aworking environment where employees
feel comfortable and safe speaking up
when things don’t seem right or can be
improved. We have a Compliance Helpline
available 24 hours a day, seven days aweek, in all languages spoken at PMI.
In 2016, we increased the number ofCompliance-related trainings provided
through different channels to employees
and relevant third parties.
30

In 2016, Compliance received 792 reportsof suspected misconduct (vs. 744 in 2015).
82% of the people that decided to help
PMI by reporting suspected misconduct
trust the Compliance Program enough to
be comfortable giving their name whenreporting. 292 of those reports (54%)
resulted in substantiated misconduct(vs. 52% in 2015).

A pack of Marlboro
with a graphic
health warningin Germany

Marketing
One area where many of our critics
express concern relates to our marketing
principles and practices. Some of theconcerns raised include whether ourcommunications to adult consumers areappropriate, whether we target nonsmokers or minors, and whether we havelower marketing standards in developing
countries than in developed countries.
Our Marketing Code for cigarettes isbased on these key principles which areapplied across the world without any
exceptions:
1. We market and sell our cigarettes toadult smokers (not to minors or nonsmokers);
2. We warn consumers about the healtheffects of cigarettes;
3. Our marketing must be honest, accurate
and transparent; and4. We respect the law and our high standards.
In order to proactively invite discussion
with stakeholders about opportunities
to improve our approach, we areproviding a complete overview of ourmarketing principles for combustible
products together with this report.
See Annex 2.

Compliance Training
2015

2016

Compliance Law

7,784

5,831

Compliance Overview

51,001

111,588

Environment, Health & Safety

7,565

9,393

Employment/Privacy

11,52010,516

Fiscal & Trade

22,705

13,882Government Relations

18,994

11,771

Information Security

8,956

7,562

Intellectual Property

10,2594,402

Marketing

44,26437,832

Records Management

9,611

15,226

Regulatory Affairs

473

298

Taxation
Total Trainings

346

540

193,478

228,841

77%

23%

Employees

Third Parties

53%

47%

Live

OnlineOur Chief Compliance Officer oversees
the application of our Compliance
Program, and adherence to our Principles
and Practices is monitored by our Internal
Controls function along with our
independent Corporate Audit department,
which reports directly to the Audit
Committee of the Board of Directors.
In 2016, Compliance, together with theInternal Controls and Corporate Audit
functions, integrated our risk assessment
into one single process leading to a more
holistic view of risks both at corporate
level and in the affiliates.

Our commitment to continue to uphold astrong culture of ethical business conduct,
including anti-corruption, is essential. In
particular, we plan:——A comprehensive, third-party assessmentof our Compliance Program in 2018;——A company-wide employee survey on ourcompliance culture in 2018 to gain insights
into areas for further improvement;——A revision to our Code of Conduct andrelated Compliance Principles &Practices in 2017 to address newchallenges and ensure ethical behaviour
on fields such as scientific integrity.

Our culture of Compliance:
new challenges as our company
transforms
These include engaging with a wider rangeof stakeholders (government officials,
scientists and the public healthcommunity), explaining our smoke-free
products and the science behind them,
deploying new methods ofcommercialization to make adult smokers
aware of them, their attributes and how to
use them, and the implementation of apost-purchase consumer care approach tosupport the switching journey.

31

Our interactions
with government
Some of our critics have voiced concerns
about the way in which we interact withgovernments. Our Code of Conduct andspecific Compliance Principles & Practices
govern these interactions, which areconducted transparently, with integrity,and in adherence to local laws. We comply
with rules for advocacy, report on our
activities as required in several jurisdictions,and we are transparent when others
engage on our behalf. We also publicly
disclose the limited political contributions
we make (www.pmi.com/transparency).
While confident about our practices, wewant to be more proactive in addressing
concerns raised. Together with thisreport we are making available andinviting feedback on our principles forengagement with governments and publicorganizations. See Annex 3.

Strengthening our sustainability fundamentals

Looking ahead: maintaining a strong
compliance culture
As our company transforms, we must also
be mindful of new challenges.

Strengthening efforts totackle the illicit tobacco
trade and related crimes
Preventing the illicit tobacco trade is oneof PMI’s core business strategies. Recent
studies by the OECD,¹ Transcrime,²and others show that illicit tobacco is ahighly-profitable trade for organized crimegroups and is linked to corruption andmany related crimes, such as terrorism andtrafficking of other illicit goods or evenhuman trafficking. Global illicit tobacco
trade deprives governments of tax revenue
and undermines the effectiveness of excise
tax policy to reduce smoking. Given its
sheer scale, it is clear that coordinated,
integrated action is needed to tackle thisproblem. For us this means continuing toinvest time, effort and resources inmaintaining the integrity of our supply
chain and working with governments andother partners to improve lawenforcement measures to tackle theproblem’s systemic causes.

Effective measures to secure
our supply chain and preventthe illegal diversion of ourown products
Our commitment and governanceOur commitment is to ensure our products
are legally sold in the market for which
they are intended. In 2015, we created an
Anti-Diversion Governance Committee(ADGC), comprising senior management
team members, to help ensure our Policies
and Practices are applied systematically
across PMI. The Committee adopts arisk-based approach, mapping smuggling
hotspots of PMI legal products,
implementing tools and processes toaddress root causes. A stand-alone
Progress and Outlook report on the statusof our efforts will be available in
September 2017.

Our tools
Principles and Practices:
Our “3 Knows” (Know Your Customer,
Know Your Payment, Know Your Vendor)
provide a system of due diligence toensure we know to whom we sell our
products. They include checks to ensure
our customers have the legal right to tradein or purchase tobacco products.
Given the fast-evolving nature of criminal
activity in this area, our tools andprocesses are continuously refined andupdated to help address new areas of risk.³
Tracking and tracing
Tracking and tracing is a process to follow
and keep track of product shipments.
It helps determining where products
have been diverted from their legitimate
supply chain. In our business environment,
we are continuously implementing
tracking and tracing at the master case
(10,000 cigarettes), carton (200 cigarettes,
10 packs) and pack level.

Our efforts focus on three main
objectives:——effective measures to secure our supply
chain and prevent the illegal diversion of
our own products;——support for regulation and multistakeholder public-private partnerships
to stop illicit trade; and——investing in research to improveunderstanding of the size and drivers of
the problem, alongside education andtraining for public officers in charge oftackling the issue.

1 OECD, Reviews of Risk Management Policies, “Illicit
Trade, Converging Criminal Networks”, April 2016:
http://www.oecd.org/gov/risk/charting-illicittrade-9789264251847-en.htm
2 Transcrime, “European Outlook on the Illicit Tradein Tobacco Products”, January 2015, p. 47
3 Our Anti-Diversion Toolkit provides detailed
information about these tools and is available here:
https://www.stopillegalcigarettes.com/anti_
diversion_toolkit.pdf

A customs official and member of the European Anti-Fraud Office (OLAF)
check the authenticity of a shipment of cigarette master cases© European Communities, 2003; Source: EC – Audiovisual Service

32

Tracking and tracing to preventthe illegal diversion of our productsin the supply chain

95%

Tracking and tracing of our products occurs
across our global supply chain. Today we havemore than 700 tracking locations in morethan 130 countries, which required aninvestment of more than USD 100 million.

of our mastercases weretracked.¹

Tracking

Manufacturing

PMI warehouse

1st externalcustomer

2nd external customer

RetailTracing

Greek police officers participate in a training
program to learn how to authenticate PMI brands

Volume monitoring

Support for regulation and cooperation
with governments and third parties
PMI welcomes regulation and partnerships
to help address illicit trade. In addition to
supporting country ratification of theWorld Health Organization’s FCTC
Protocol to Eliminate Illicit Trade in
Tobacco Products, which we expect will
introduce new controls in tracking andtracing, licensing, and due diligenceprocesses, we also support regulations
which extend beyond national borders
covering trading blocs, such as in theEuropean Union (EU). With much of theillicit tobacco trade entering the EU fromoutside its borders, we know that concerted
action is needed to have a real impact.
Last year, a joint agreement between theEuropean Commission and PMI to tackle
illicit trade of our brands in the EU expired.
Despite its expiration, PMI remains
committed to the same anti-diversion
practices through bilateral cooperationagreements with governments and local
customs authorities in the EU (in the formof “Memoranda of Understanding” – or
“MoUs”). These MoUs have resulted in thecontinued exchange of information andtechnical training for law enforcement
officers who act on this issue. In 2016,
PMI signed 5 MoUs with 15 countries
bringing the total to more than 50 MoUs
with governments in 40 countries.

1 We do not apply tracking and tracing tokretek cigarettes due to negligible risk ofinternational diversion.

33

Strengthening our sustainability fundamentals

In addition to standard controls of Know
your Customer, we need to be alert to any
unusual activity or trend in our volumes
sold. As part of our Fiscal Complianceprograms, on a regular basis, all markets
analyze the sales trends to our direct
customers. In hot spots for illicit trade,
we extend our monitoring further into
the supply chain by examining not only
monthly volumes to our direct customers,
but also volumes sold to our indirect
customers.

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

PMI IMPACT: A uniqueinitiative to tackle illicit trade
PMI IMPACT was established in 2016 as
the first-of-its-kind global initiative tosupport public, private, andnongovernmental organizations to develop
and implement projects against illegal
trade and related crimes, such as
corruption, money laundering, andorganized crime. PMI has pledged
USD 100 million for three funding rounds.
The centerpiece of PMI IMPACT is anindependent Expert Council,1 whose
members evaluate and select project
proposals to be awarded the grants andreview the progress of the projects during
their implementation.
The PMI IMPACT Expert Council selected
32 projects for funding in the initiative’s
first round, which focused on tackling
illegal trade and related crimes in theEuropean Union.
The selected projects have real potential
to advance global efforts against illegal
trade. Many of them go beyond tacklingthe illegal tobacco trade and will explore
the nexus with organized crime, terrorism,
online and offline trafficking, and theinterdependencies with illegal trade ofother goods.
Overview
The projects are expected to becompleted over the next two years andinclude:——Research from public universities andindependent think-tanks exploring thescope and drivers of illegal trade to
develop recommendations tackling theissue from different perspectives,
including consumer demand, legislativeand judicial frameworks, stakeholder
action;——Projects building technical solutions andequipment to support law enforcement
operations and strengthen the control
over illegal activities;

PMI IMPACTFirst funding round32——Activities to enhance the capacity andproficiency of law enforcement andcustoms officers, relevant public
institutions, and the expert community;——Educational and awareness programs for
opinion leaders and the broader public,
including forums for greater crosssectoral collaboration.

1 See: http://www.pmi-impact.com/Apply/Expert

34

Projects selected with activities
in more than 20 countries$

USD 28m

Total amount of grants allocatedfor the projects’ implementation

The x-scanner donated by our Greek affiliate, Papastratos,
to customs to help combat the illicit tobacco trade

X-ray scanner helps fight illicit
trade in tobacco
In Greece the illicit tobacco trade issignificant, with one in every five cigarettes
consumed being illegal.² In December 2016,
our Greek affiliate, Papastratos, donatedan x-ray scanner valued at EUR 2m tocustoms’ authorities to help combat theillicit tobacco trade. The impact in thefirst few months has been significant.
It resulted in 68,420,000 cigarettes seized,
corresponding to avoided duties and taxes
of around EUR 13m.³

Research, education and training tocombat the illicit tobacco trade
A key element of our strategy includes
increasing awareness of the illicit trade
problem and its drivers. By assessing these
aspects, PMI and others can provide
insights to government and local
authorities to inform future actions andcombat illicit trade more effectively.

1 For more details please read https://iccwbo.org/
media-wall/news-speeches/brand-transportleaders-sign-historic-declaration-stop-maritimeshipping-counterfeit-goods/
2 https://assets.kpmg.com/content/dam/kpmg/uk/
pdf/2017/07/project-sun-2017-report.pdf
3 Data at mid-June 201735

ALVISE GIUSTINIANI,
VICE PRESIDENT, ILLICIT TRADESTRATEGIES & PREVENTION

Strengthening our sustainability fundamentals

Partnering with others
Working with other private sector
companies is essential to combat the illicit
trade in tobacco products and othergoods. In 2016, PMI signed a joint
Declaration of Intent to Prevent the
Maritime Transportation of Counterfeit
Goods together with eight other global
brand owners and five of the world’s
largest shipping companies – the first of its
kind. The intent of this commitment is tostrengthen and improve supply chain
controls by developing operational toolsthat can be applied as best practices in theindustry (such as Know Your Customer
programs).¹“Progress against illegal
trade requires ideas,
resources, and actions– and that’s why we’re
excited to launch PMIIMPACT. We’re especiallygrateful that distinguishedexperts have agreed to
guide this effort, and weare encouraged by the
positive response from civilsociety. In parallel, PMI iscontinuing to control its
own supply chain and tosupport international
protocols against illicit
trade.”

Research: A tool to guide us in improving
our strategy
A standard research methodology
introduced in the mid-2000s (known as
Empty Pack Surveys or “EPS”) helps us
gain a better understanding of the size,
nature, trends and wrongdoers typifying
the illicit tobacco trade. In 2016, 126 EPS
were conducted in 82 countries, and 79
of these were done jointly with othercigarette manufacturers. EPS surveys arealso widely used in independent research
conducted by KPMG, Oxford Economics
and UK-based think-tank, Royal UnitedServices Institute (RUSI).

SUN Report 2016
The SUN Report¹ is an annual study of theillicit cigarette market in the EU, Norway
and Switzerland. The research is based
primarily on the analysis of legal or
duty-paid sales of cigarettes and cigarettepack surveys (EPS methodology).
The latest report for 2016 shows that thejoint efforts of governments, law
enforcement agencies, manufacturers andretailers are working to slow the illegal
flows of cigarettes in the region, but it isstill a huge problem which underscores theneed for more joint action, effective
policies, and broader awareness tocontinue to address its increasing
complexity.
Illicit trade flows of cigarettes decreasedby 8.8% versus 2015. Despite thisprogress, one in every ten cigarettes
consumed in the EU is still illegal (that’s anestimated 48.3bn illegal cigarettes,
amounting to EUR 10.2bn in lost tax
revenue in 2016).

Education and training to authenticate
PMI legal products
PMI works in partnership with law
enforcement agencies in countries
worldwide, investing in education andtechnical training as another key part ofour anti-illicit strategy. In 2016, we trained
more than 2,000 members of law
enforcement agencies in 13 countries on
how to authenticate tobacco products
bearing PMI trademarks and todifferentiate between counterfeit andauthentic packs of PMI cigarettes.
Looking forward
The realities of globalization and a booming
online economy provide an environment
which is vulnerable to counterfeiters andillicit traders, allowing them to sell goods
directly to customers worldwide with
virtually no barriers to entry, lowoverheads, easier distribution and fewer
risks of being caught. Add to this thestrong propensity for the manufactureand distribution of fake and smuggled
electronic devices and consumables, we
see new risks for PMI as we commercialize
smoke-free products. Assuring the
integrity of products with scientifically
substantiated claims is critical to the healthoutcomes of consumers. To respond tothese challenges, alongside our continued
efforts to combat illicit trade of PMI
brands, we are:——Registering and maintaining trademarks,
patents and other intellectual property
rights (IPR) to provide legal remedies
against counterfeiters;

1 https://assets.kpmg.com/content/dam/kpmg/uk/
pdf/2017/07/project-sun-2017-report.pdf

36——Setting up online controls to detect theparallel distribution of our electronic
devices and their consumables,
removing platforms which violate our
IPRs and reinforcing controls of suppliersof key product components and logistics
operators;——Developing anti-counterfeit andanti-diversion policies to secure our
supply chain and the integrity of oursmoke-free products;——Applying unique serial numbers andother security features to PMI devices
and heated tobacco units forauthentication and tracking and tracing
purposes;——Cooperating with authorities to enhancetheir knowledge about our products andour supply chain which helps law
enforcement to increase theireffectiveness to tackle fraud;——Enhancing intelligence and researchtools to monitor illicit trade;——Using best practices from our
combustible tobacco business and the
medical and electronic device industries.
Read more about our efforts on
www.stopillegalcigarettes.com

Customs officers in Ecuador attend a training session tounderstand how to identify illicit trade of tobacco products

Preventing illicit trade – Metrics
Goal for 2017

Goal for 2018

Tracking and tracing – master case level¹

Full coverage² in more than 130 countries

Full coverage in more than 130 countries

Tracking and tracing – % of sold packs withunique code applied²

75%

85%

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

Five additional

At least three additional

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

25%

27.5%

Training for law enforcement agencies tomonitor diversion of PMI products – numberof law enforcement officers trained

At least 500 across ten countries

At least 500 across ten countries

1 Box with 500 cigarette packs (10,000 cigarettes).
2 For PMI, full coverage equates to 95% tracking and tracing in our supply chain. There are 5% of master cases not covered – these are destined to countries which are
not identified as a source of potential diversion or where PMI sells to a single customer in the country.

37

Strengthening our sustainability fundamentals

Metrics

The guiding principles on
business and human rights
Overview of our progress

Our commitment

Following our commitment to the UNGC
Principles, we have been working to alignour business practices with the United
Nations Guiding Principles on Businessand Human Rights (“Guiding Principles”).
We continuously strive to ensure thatour policies highlight and foster respectof human rights of all rights-holders,
including consumers, employees, workers
in our supply chain and our downstream
value chain, and the communities inwhich we operate.

The foundation of PMI’s human rights
program is our Commitment to Human
Rights.1 Approved by our CEO, theCommitment is the result of internalcross-functional consultations and external
stakeholder dialogue. The final text
reflects the breadth of this engagement by
setting out PMI’s fundamental principles
and the practical steps we will take torespect the rights of all stakeholders:In our last Communication on Progress,
we highlighted the many existing policies
and procedures we have in place toaddress human rights risks throughout
our value chain. We also committed to
improving those “with our foremost focus
on risks to rights-holders.” Over the lastyear, we engaged internally and externallyto identify the strengths and weaknessesof our existing framework from a Guiding
Principles perspective. We are drawing
on this broad-based engagement andresearch to develop a detailed action plan
to inform concrete and practical measures
we will take to ensure we respect thehuman rights of stakeholders throughout
our operations.
This section seeks to provide a candid
account of the steps taken to respect
our commitment.

“Honesty, respect and fairness are the corevalues that embody our commitment tosociety. Every day, we interact with millionsof men and women: consumers, employees,
workers in our supply chain, shareholders,
and the communities in which we live andoperate. We care about their dignity andhuman rights.
We are committed to business practices that
respect internationally recognized humanrights in line with the United Nations Guiding
Principles on Business and Human Rights.
We base our commitment on the International
Bill of Human Rights and the International
Labor Organization’s 1998 Declaration on
Fundamental Principles and Rights at Work.
We will talk with and listen to people whose
human rights we might affect. We will lookclosely at our practices, continuously strive
to improve them, and operate systems to
implement this commitment from supplier
to consumer.”

1 https://www.pmi.com/sustainability/ourcommitment-and-ongoing-focus

38

At the heart of our Commitment is
a structured governance process forongoing human rights due diligence:——Capacity building for our employees
and business partners to understandand implement our human rights
commitment;——Assessments to identify human rights
risks and adverse impacts, which we
may request third parties to conduct,either on a stand-alone basis or as partof the company's overall integrated risk
assessment;——Effective action in response toassessment findings in our operations
and, to the extent possible, throughout
our value chain. Actions may include
practical guidance, process improvements,
revised commercial terms and othermeasures;——Monitoring effectiveness of measures,
including through third-parties asappropriate, to mitigate or address humanrights risks and adverse impacts; and——External communication about our workon human rights and the key indicators
we are using to assess performance.
Further to our United Nations Global
Compact commitments, we will formallyreport on progress at least once a year,
or by other appropriate means.

Human rights core teamTraining and capacity building

To ensure continuous oversight andimprovement of our human rights
program, we have established a crossfunctional Human Rights Core Team of
specialists from our various business
functions, including Operations, Human
Resources, Law, Corporate Affairs,
Marketing & Sales, Sustainability, andCompliance. The Human Rights CoreTeam is supported by the functional
leaders who report to our CEO and iscoordinated by the Sustainability Team
reporting to our Senior Vice President ofCorporate Affairs. The Human Rights CoreTeam also engages externally for advice
and expertise on human rights.

Practical knowledge on human rights is
critical for our objective of embedding ourcommitment in the organization and our
80,000 employees. We have developed ageneral e-learning on human rights for all
employees, rolled out at the same time of
the release of our Commitment to Human
Rights. In addition, we are developing
tailored functional training to ensure amore in-depth understanding of what
human rights mean for individual functions
and to PMI as a whole, as well as theconcrete steps and actions expected fromthe different functional areas.

Company-wide gap and risk
analysis and human rights
action plan
In 2016, PMI engaged the Danish Institutefor Human Rights (DIHR) to conduct ahigh-level, company-wide human rights
risk mapping and gap analysis. Over aseven-month period, the DIHR teamreviewed PMI’s group-level policies,
procedures and practices. Though this was
an informative and group-level assessment,
the research process was wide-ranging,incorporating document review, interviews
with managers and senior-level employees
from across the central organization, twocross-functional workshops, andconsultation with external stakeholders
with whom PMI has engaged regarding
labor and human rights.
The Human Rights Core Team is now
drawing on the DIHR’s analysis and ourbroader engagement with experts andstakeholders to develop a detailed humanrights action plan. We will report on thiswork separately before the end of 2017.
We remain committed to do our best tocontinuously improve our processes andwork with our business partners andsuppliers to support our commitment.

Strengthening our sustainability fundamentals

A hand-roller of kretek
cigarettes in Indonesia

39Our people
We are a multigenerational,
diverse community ofaround 80,000 employees
worldwide, speaking over
80 languages and working
together in a culture ofhonesty, respect andfairness.
Our priority is to be a top employer
and to attract, support, and retain
people from every part of the globe –regardless of race, ethnicity, age, gender,
gender expression, sexual orientation,
religion, national origin, citizenship, marital
status, physical ability, or similar status.
Our differences foster innovation andsupport our company’s transformation.

In this section we look at employment
at PMI and our company culture, ourapproach to diversity and inclusion,
our labor relations as a foundation ofsustainable business, and ongoing efforts
in the area of employee safety, health andwell-being. We also look to the future
and the steps we are taking to equip our
people to adapt and thrive as our company
shifts towards smoke-free products.
Strong governance as a foundationfor our culture
Our Human Resources (HR) Leadership
Team is accountable for establishing andimplementing the Principles and Practices
to shape employee behavior as part ofmaintaining a workplace of honesty,
respect and fairness. Together withmanagement across different functions,our company-wide HR organization is
responsible for creating and implementing40

the relevant processes and tools to nurturea workplace that is inclusive, safe andprofessional. With this in mind, we haveadopted a suite of Principles and Practices
to meet the expectations set out in our
Guidebook for Success and implemented
specific programs to advance its integration.
Diversity and inclusion
We operate in many countries and as
we move forward in a rapidly changing
business environment, our people continue
to come from and represent a wide
spectrum of backgrounds and perspectives.
We continue to promote an inclusive
workplace that is safe and professionaland free from discrimination. We also knowthat this is key to improving our creativity
and performance in the future, and we aremaking progress in a number of areas.

80,000
Employees
worldwide80

Languages
spoken32.8%

Women inmanagement
positions48

68%

Employees coveredby collective labor
agreements

79Collective labor
agreements
globally——Through a series of workshops, we
continued to educate our management
on inclusive leadership and constantly
increase opportunities to stimulate
diverse perspectives. Workshops were
held in 24 countries and in two of
our Shared Service Centers. We also
launched an Unconscious Bias e-learning
tool, available to all employees
worldwide, and we integrated into ourstandard PMI training curriculum key
learnings about the benefits of diversity
and how to be more inclusive.

Our employment principles
and practices
We make employment decisions on merit.
We do not engage in or condone forced or
child labor anywhere we operate. We do
not employ persons below the age of 15,
or the local minimum employment age or
mandatory schooling age, whichever ishigher, except for official apprenticeshipprograms authorized under local laws andregulations. We do not employ persons
below the age of 18 for any hazardous
work. Our Labor Relations Principles
recognize our employees’ right to freedomof association and to collective bargaining.
We do not accept any form of discriminationor harassment. We make safety of all our
employees and those who might beaffected by our operations a priority.

——We received external recognition for
our work in a number of countries:——In Australia, we received the Employer
of Choice for Gender Equality Awardby the Government’s Workplace
Gender Equality Agency; and——In Switzerland, we achieved theInnovation Excellence in Diversity
and Inclusion Award from the Profiles
in Diversity Journal for our strong
advocacy in closing the gender pay
gap worldwide.
——The Equal-Salary Foundation examined
and certified another of our affiliates –Japan – for equal compensation
practices among men and women.
Following this key milestone, ouraspiration is to attain a global EqualSalary certification by 2019 as theassessor develops their organizational
capacity.
——We are also working to better support
our people in balancing business andpersonal priorities. PMI has now
implemented flexible work arrangements
under our FleXability program in 48
countries where we operate. The
program gives employees various options
including flexible start and finish times,
working from home one day a weekor working a shorter working week bycompressing their normal working hours.

41

Employer certification program
The Top Employer certification program isdesigned to recognize the best employers
around the world. It is awarded by the Top
Employer Institute following an assessment
validated by an external auditing companyof the companies’ practices in several
areas including compensation andemployee benefits, career development,
working conditions and training anddevelopment. PMI has been certified inEurope for five years, the Middle East for
two, and Africa for the first time in 2016.

Strengthening our sustainability fundamentals

Countries withflexible working
arrangements

Progress in 2016——We are on track to reach our 2022 goalof increasing the representation of
female employees in management
positions to 40%, with the percentageof women hired and promoted by PMI
increasing in 2016. By the end of 2016,
32.8% of management positions were
held by women and 43.1% of PMI’s
new hires at the managerial level
were women.

Good labor relations – finding
common ground is not always
easy: The case of Pakistan
Although we do our best to foster positiveand meaningful dialogue, at times thisproves challenging, and issues often ensue
from necessary changes in our operations.
One such instance occurred with thereorganization of our affiliate in Pakistan in
2015-2016. PMI seeks to avoid job losses
wherever possible, but this reorganization
was necessary because of reduced leaf
purchase and processing requirements
and affected a total of 186 employees.
Even though the reorganization processcomplied with all legal requirements inthe country, one of the trade unions took
the view that our consultation had been
inadequate and filed petitions before the
National Industrial Relations Commissionin Pakistan. The petitions were later
dismissed however, this instance wasunfortunately described in the International
Trade Union Confederation report of2016, as a violation of union rights.
This event reinforced our resolve tocontinuously and proactively promote
constructive dialogue and positive
relations with employee representatives
to ensure that we are able to cooperate
on matters of mutual concern and observehigh standards of labor relations.

Leading the way inequal-salary certification
In 2015, we were the first multinational
company to receive the equal-salarycertification in Switzerland. Following this,
we embarked on a certification procedure
in Japan which consisted of statisticalanalysis of all Japanese employees’ salaries
followed by a thorough onsite audit. Our
Japanese affiliate was officially certified in
September 2016.

Labor relations
Our approach to labor relations reflects
the vision, culture and identity of ourcompany. We believe that dialogue with
employees and their representatives isa cornerstone of strong businessperformance. Our Global Employment
Policy, which all PMI employees are
expected to know and follow, speaks ofour commitment to fundamental rights
and principles at work. We respect theright of our employees to join tradeunions and representative organizationsof their own choice, and we encourage
engagement and dialogue with our
employees. We recognize workers’ rightto bargain collectively through workers’
representatives, who may communicate
openly and without fear of retaliation. We
promote cooperation on matters of mutual
concern and observe high standards of
employment and labor relations.
Progress in 2016
Collective Labor Agreements with tradeunions and employee representatives
illustrate our genuine labor relations
engagement. They govern many of ouremployees’ terms and conditions atwork and may include working hours,
occupational health and safety, holidays,
wages, and procedures for dispute
resolution. Our status in 2016 included:——79 collective labor agreements in 35
countries covering 68% of our employees;——The development of a set ofcomprehensive labor relations
principles aimed at establishing the
crucial elements to advance and sustain
successful engagement and collaboration
between management, employees andtheir representatives; and——The continuous strengthening of thelabor relations capability within our
HR function. After deploying a labor
relations assessment toolkit in 2015,
we developed an e-learning tool for HR
employees who lead our labor relations
work at the country level, which we plan
to roll out to all HR staff in our affiliates
in 2017.

Currently, we are focused on the equalsalary certification project that will giveus the possibility of receiving a global
equal-salary certification for PMI, with
the Equal-Salary Foundation working in
partnership with PricewaterhouseCoopers(PwC) for the 18-month audit andcertification procedure.

42

Logistics worker in our manufacturing
facility in Neuchâtel, Switzerland

Compensation
We are convinced that motivated andengaged employees drive individual and,ultimately, business performance. This is
why in every country we operate we offer
career and development opportunities
through diverse and inspiring professional
experiences, including international
assignments. Compensation and benefits
are also important, and PMI’s policies inthis area in every country are at or above
the market median. Alongside these
efforts, we are looking at ways to educate
and enable our employees to reduce
short- and long-term financial impact
inherent to changes in employment or
retirement.

We encourage the establishment of local
H&WB committees in our affiliates.
Composed of cross-functional teammembers and employee representatives,
they foster the collaboration and dialogue
necessary to tailor the activities according
the specific needs of local employees.
To date, we have H&WB committees inthe EU, where the program was piloted,
and our ambition is to expand to theremaining regions.
As part of continuously improving ourefforts, we are studying best practices
in other companies and looking at ways
to define and embed evidence-based
employee H&WB metrics into our broader
corporate reporting framework, which weenvision to include data in line with themost recent Global Reporting Initiative(GRI) standard.

‘Balanced You’
program key areas

We want to define living wage rates,
identify where we can improve andestablish adjustment actions if needed
for those employees whose wages might
be below these rates. We are in theprocess of identifying the first countries
to be part of this exercise.

Health and well-being
The health and well-being (H&WB) of
our employees, both inside and outside
the workplace, is a key part of ourpeople management and is something
we continuously seek to improve.
H&WB is a multifaceted topic touchingon the physical, emotional and behavioral
aspects of living. H&WB is understooddifferently from country to country and is
influenced by personal preferences, local
culture, behaviors, and demographics.
With this in mind, we continue to roll out
our framework and minimum requirements
on promoting H&WB initiatives throughour “Balanced You” program across ouraffiliates worldwide. This covers fourmain areas:——Illness and disease prevention;——Encouraging physical activity;——Promoting healthy eating; and——Support in stress management andwork-life balance.

43

Encouraging
physical activity

Promotinghealthy eating

Support in stressmanagement andwork-life balanceStrengthening our sustainability fundamentals

Living wage
According to surveys conducted byunions, academia and the International
Labor Organization (ILO) on the conceptof living wage, in some countries minimum
legal wage levels may not fulfil the needsof employees and their families to have adecent life. In 2016, we started a projectwith Business for Social Responsibility(BSR) to assess whether the lowest-paidpeople in our organization are able tomaintain an adequate standard of living.
Together with BSR we have defined theconcept and methodology, and after
conducting initial desk research, wehave decided to run a living wage survey
in countries where we have more than
50 employees.

Illness anddisease prevention

The PM EU Works Council
celebrates 20 years ofsustained, meaningful dialogue“I have the pleasure of participatingin the EU Works Council of PMI as
its Vice-Chairman. The EWC is a highlevel dialogue body that discusses
topics relevant to the social partners– business performance, employee
health and well-being,
reorganizations – and shares
successes and challenges, goodpractices, projects and initiatives
taking place in the PMI EU region.
In 2016 we celebrated the 20th
anniversary of sustained
collaboration in EWC. Despite
sometimes challenging topics,
discussions are always constructive;
we have meaningful dialogue to findthe best solution for everyone
concerned. This is something we canall be proud of.”
HARALD WIEDENHOFER
GENERAL SECRETARY OF THE
EUROPEAN FEDERATION OF FOOD,
AGRICULTURE AND TOURISM TRADEUNIONS (EFFAT)

Safety in the workplace
PMI has 48 production facilities in 32
different countries. We have developedand implemented a leading environmental
and occupational health, safety andsecurity management system, which
involves policies, standard practices andprocedures at all of our manufacturing
centers.
We set minimum requirements based on
PMI best practices and local regulations
and embed these requirements into every
level of our organization. Training andawareness programs support our
ambitions, globally and at the affiliate level.
In 2016 we revised our Mission Zero
program to reinforce the importance ofsafety beyond compliance (now called
Mission Zero “Because We Care”). We
have rolled out a Safety Climate Survey inall our manufacturing sites to get feedback
from 20,000 employees.
In 2016, our Lost Time Injury (LTI) rate,
the most widely used benchmark toassess prevalence of serious work-related
injuries, was the best in our industry andone of the lowest among our Fast-Moving
Consumer Goods peer group. In 2016 the
LTI rate across the whole of PMI was 0.12
(injuries per 200,000 hours worked) andin our factories it stood at 0.05. Thirty fiveof our factories have achieved zero LTI for
more than a year and several sites havereached up to five years without LTIs.
We also conduct regular safetyassessments at our offices, warehouses
and car fleet organizations. Additionally,
we have engaged Bureau Veritas, anexternal certification body, to assess the
management systems at our manufacturing
centers around the world in accordancewith internationally recognized standards
for safety and environmental management.
In 2016, 93% of our factories werecertified to the international safety
management standard OHSAS 18001,
and two additional factories were in theprocess of gaining certification.
Despite good results and low injury
rates, we are committed to explore moreinnovative and engaging ways to keep
our performance world-class. Managing
change with safety in mind is essential as
we convert existing factories or build new
production sites for smoke-free products.
From 2017 onwards, we are implementing
our Mission Zero “Because We Care”
program beyond our manufacturing
operations to reach our country sales andmarketing organizations.

44

An engineer operating a make-pack cigarettemachine at our facility in Neuchâtel, Switzerland

Engaging our people through training
and learning as our company evolves
The ability to learn and adapt quickly andeffectively is of particular importance inlight of the major changes that come withour business transformation. In addition tonovel initiatives to equip employees toadapt and thrive, we are also implementing
the following tools to support ourcollective learning effort:——We have created a Learning Council,
which is a decision-making body withoversight of all global, regional andfunctional training programs covering
general employee learning anddevelopment. Its main accountabilities
are twofold: first, strategic governance,
setting global and regional priorities forlearning; and, second, operational
governance, related to efficiency andeffectiveness factors.

——Our company culture is also key to our
future success. In 2017, we launcheda Shape our Culture and Leadershipinitiative (SHAPE) focused on gathering
feedback from employees about theculture and leadership behaviors weneed to succeed in our business
transformation and will report backon our progress in 2018.

Safety across our fleet
With a fleet of more than 25,000 vehicles
in more than 100 countries, road safety
is a key concern. We manage our vehicle
fleet with an integrated approach basedon nine elements: leadership, baseline
assessment, risk assessment, hiringof drivers and placement, training,
performance recognition, vehicle selection
and maintenance, incident reporting andinvestigation, management reviews andcommunication.

——We created Fleet Safety Teams/
Committees in the largest countries
where we operate to help reduce therisk of workplace injuries and illnesses
and maintain compliance with safety
regulations;——We launched a fleet safety e-learning
tool in 79 countries, with 15,000 drivers
enrolling each year and reaching a
training completion rate of 90% across
our organization worldwide;

Progress in 2016
We are making good progress across allnine areas of our Fleet Safety program:——We also established a PMI Fleet
Safety Award, which receives 50-60
submissions each year and senior
management attention; and——We implemented our Fleet Safety
program in all countries where we
operate and involved our sales force
organization;——We have gained better understandingof safety dynamics in our fleet basedon employee feedback and reporting(5,000 individual reports per year).

——While our overall crash rate (which
includes cosmetic damage) has
increased, reflecting better internalreporting, our preferred indicator –collision rate (collisions per million km
driven), which covers higher severity
road accidents, has declined to 1.22
(from 1.24 last year);
45

Strengthening our sustainability fundamentals——We developed a 360⁰ learning platform
which is a simple, web-based tool for
employees. The platform can beaccessed on multiple devices andaccommodates different affiliates’ needs
with local content where staff canaccess the same training tools.

Looking ahead
Our business vision to create a smokefree future entails an organizationaltransformation which calls for a newmindset and perspective. Employee
centricity, greater inclusiveness anddiversity are key enablers to achieve this.
In the next couple of years, we willcontinue to work on our goal of increasing
the representation of female employees inmanagement positions to 40% by 2022, andwe will pursue our goal to reach a global
equal-salary certification by 2019 with
the Equal-Salary Foundation working in
partnership with PricewaterhouseCoopers(PwC) for the 18-month audit andcertification procedure.

An employee in our heated tobacco
manufacturing facility in Bologna, Italy

We will maintain safety as one of thepillars of our new way of working
across operations, known as OPEN+(see page 25). This will serve to further
drive sustainable safety performance andour safety culture evolution. Operational
discipline, continuous health checks(gap assessments) and scorecards will
help accelerate progress.

Environment, Health and Safety Award
to recognize those functions that havealready started applying the Mission Zerophilosophy to their day-to-day work, theobjective being to encourage their further
commitment to sustaining PMI’s safety
culture, environmental commitments andin identifying best practices that can beshared and applied globally.

We will expand our Mission Zero
“Because We Care” program beyond ourmanufacturing facilities. Starting in 2017,
we will launch new safety leadershipworkshops and tools, upgrade minimum
requirements and undertake employee
engagement activities across our affiliates.
We will also launch a country-level

In 2017 and specifically in respect toour fleet of vehicles, we will focus on
innovative technology solutions(gamification/telematics) to facilitate safe
driving and accident prevention. We arealso implementing safe route planningsystems, driving style and safe driving
simulators.

Metrics

Coverage

2014

2015

2016

Total number of employees

All PMI

82,50080,20079,500We are looking ahead with confidence thatsound labor relations and a constructive
dialogue with our employees and theirrepresentatives will help us to respond tothe challenges and opportunities arisingfrom our company transformation. We willcontinue building and reinforcing our labor
relations capabilities across the globe.
We want to define living wage rates
and identify where we can improve andestablish adjustment actions where
needed. As part of continuously improving
our efforts, we are studying best practices
and looking at ways to define and embed
evidence-based employee H&WB metrics
into our broader corporate reporting
framework.

Our people – Metrics
Goals

Status CheckOn Track% of management positions held by women

All PMI

29.5

31

32.8

40 by 2022

Equal-Salary certification

All PMI

N/A

Switzerland

Switzerland
and Japan

Global by 2019 On Track% of employees covered byCollective Labor Agreements

All PMI

67.7

67.0

68.0

Lost Time Injury (LTI) Rate –LTIs per 200,000 hours worked

All PMI

0.14

0.11

0.12

<0.1

Note 1

Fleet Crash rate –Vehicle crashes per million km driven

PMI vehicles

5.9

5.3

6.8

<4

Note 2Fleet Collision rate –Vehicle collisions per million km driven

PMI vehicles

2.4

1.24

1.22

<3

Note 2% of manufacturing facilities withOHSAS 18001 certiﬁcation

PMI factories 91

93

93

100

Note 3Note 1 – Safety comes first at PMI so despite our LTI rate being the best in our industry and one of the lowest among our Fast-Moving Consumer Goods peer group,
we continue to seek improvement. By extending Mission Zero “Because We Care” program beyond our manufacturing facilities we believe we can beat our LTI rate goal.
Note 2 – Our overall crash rate (which includes cosmetic damage) has increased, reflecting better internal reporting; our preferred indicator – collision rate (collisions per
million km driven), which covers higher severity road accidents, has continued to decrease – we will focus on this indicator going forward.
Note 3 – Newly acquired or built factories have begun the certification process. Because there might be new factories we may not reach 100%, but that remains our goal.

46

Our supply chain
With a complex global
supply chain comes anumber of significant
sustainability issues that
we need to understand,manage and continuously
address.

Ensuring our responsible
sourcing program starts
on the right footAs a preliminary step, we informed PMI’s
suppliers of our commitment to the
UNGC’s Principles and of our intention
to develop a comprehensive responsible
sourcing program with a view to sourcing
our products and services from suppliers
who themselves are committed to thesame principles. Our communication, in
25 languages covering more than 90%
of our supply chain spend and acrossall procurement categories, emphasized
the importance of working together onthese topics as a way to strengthen ourbusiness relationship.

These range from climate change andenvironmental impacts (discussed in theenvironment chapter on page 56), to thepotential for labor and human rights
abuses or corruption.
We take our role seriously and are working
with our business partners to proactively
identify, manage and reduce risks, create
mutual value and have a positive impact
on the wider communities from which wesource. We see this as a fundamental partof upholding our commitment to the
UNGC and embedding its Principles into
our daily work.

In this section, we cover the framework
and programs we have put in place tomove us forward, our progress so far, andwhere we are concentrating our efforts
to both overcome existing challenges
and anticipate future ones.

Looking ahead
In 2017, we will roll out the implementationof the RSP starting with our global andstrategic partners, supported by acomprehensive training program for our
procurement organization. Our intention
is to reach over 90% of our suppliers(weighted by total spending) by mid-2018.

Building a framework forsustainable supply chain
management
During 2016 we set the foundations fora more comprehensive and systematic
approach to addressing supply chain
sustainability through the development ofa set of Responsible Sourcing Principles(RSP) and Implementation Guidelines.¹
These establish our expectations in theareas of Human Rights, Labor Rights,
the Environment and Business Integrity,
and apply to all suppliers doing businesswith PMI.

1 https://www.pmi.com/resources/docs/defaultsource/pmi-sustainability/responsible-sourcingprinciples.pdf?sfvrsn=15c19ab5_12

47Managing risk as we develop
our electronics supply chain
We will be increasingly reliant on a newand complex supply chain that includes
electronics manufacturing. Electronics
suppliers are new business partners to
PMI, often in geographies where PMI
has not previously done significant
procurement of direct materials (mainly
China and Southeast Asia) and where
human rights issues have been flagged in
the recent past. Further, the fast-growing
nature of this novel part of our businessmeans that new suppliers are continuously
being added to our electronics supply
chain, particularly for suppliers at tier two
and below.

Strengthening our sustainability fundamentals

To date, our efforts have concentrated
largely on our agricultural supply chain toaddress labor and other risks in the places
where we source tobacco. Our priority
as we continue this work is to establish
a comprehensive approach to sustainablesupply chain management for a broader
and more complex supply chain.

The RSP were developed in consultation
with external expert stakeholders on
human rights and sustainability and with aselect group of our key suppliers. The RSP
operationalize our commitment to the
UNGC’s Principles across our supply chain.
They complement our existing programsin our agricultural supply chain (our Good
Agricultural Practices (GAP) and Agricultural
Labor Practices (ALP) programs) and set
process and performance requirements
for all suppliers doing business with PMI.

The feedback from our suppliers wasvery positive, with many expressing theirsupport and readiness to work with PMI
in the area. As a next step, we actively
engaged with some of our key suppliers tobetter understand their existing programs,
discuss our expectations in different areas,and consolidate our views regarding thedue diligence processes we need to havein place so that we can make progress.

Assessment and selection of electronics
manufacturing services (EMS) suppliers
Our focus so far has been on our mainsmoke-free product IQOS. In 2016,
PMI engaged a leading not-for-profit
organization, Verité,¹ specializing in laborand human rights issues (and which is also
our strategic partner on the Agricultural
Labor Practices (ALP) program) to carryout a comprehensive assessment of thelabor management systems starting with
our main EMS supplier. The purpose of
the assessment was to identify strengths
and gaps in the supplier’s systems andto understand the living and working
conditions of workers, particularly foreign
migrant workers that make up a significant
percentage of the supplier’s labor force.
PMI is working with the supplier and Veritéon the management action plan which will
be implemented during 2017 and 2018.
In addition, we started to map out the IQOS
supply chain to identify human rights risks
down to fourth tier suppliers. We haveidentified all suppliers (totaling more than140) and have engaged Verité to conduct
the risk assessment. We aim to complete
this work during 2017 with action plans toaddress the prioritized risks, scheduled for
implementation in 2018.

Our overall goal

During 2016 we strengthened our conflictminerals due diligence process related to
3TG minerals (tungsten, tantalum, tin, andgold) that are mined in the Democratic
Republic of the Congo and neighboring
countries.

We are also taking steps to integratesustainability criteria into the assessmentof new EMS suppliers for PMI.
To select PMI’s second EMS supplier,
we established specific qualifying criteria(e.g., regarding labor/human rights risks,preference to suppliers contracting andmanaging workers directly), and conducteda one-day assessment with an on-site visit
and management interviews for each of
the three finalists in the bidding process.
We have conducted a full sustainability
review of the selected supplier to gain amore in-depth understanding of theirstatus and seek alignment with our RSP
early on, and we plan to conduct such
reviews with all future EMS suppliers.
Looking ahead
Increasing our visibility over the IQOS
supply chain will be paramount in helping
us to better identify and manage risks.
We intend to establish a monitoring andauditing system for specific groups of
suppliers in this part of our supply chain,including manufacturers and suppliers of
IQOS accessories. Mapping our IQOS
supply chain will also enable us to identify
a priority list of sub-tier suppliers forfurther due diligence.

Conflict minerals due diligence“PMI’s supply chain strategy forsustainability is based on three key
pillars: first, the identification andmitigation of risk; second, integration
into the business; and third, thecreation of value. During 2016,
we set the foundations for thisstrategy with the RSP and our firstcomprehensive analysis of the maincategories of risk in our supply chain.
In the coming years we will work tocommunicate our expectations, andmake continuous progress in its
implementation. Our ultimate goal
is to create value for PMI, for our
suppliers and for society.”——We engaged with our direct suppliers ofPlatform 1 and Platform 4 products tocommunicate our expectation that theyshould increasingly source minerals fromsmelters or refiners that are certified as“conflict-free” by the available thirdparty sources.² In 2016, all but two
smelters or refiners in our supply chain
were reported as “conflict-free” in ourconflict minerals report.
——We included conflict minerals due
diligence in the Management Systemsof our main supplier.
——We engaged Verité to help us provide
a conflict minerals due diligence
training for PMI staff involved in
the procurement of electronics.

HAFED BELHADJ
VICE PRESIDENT, SUPPLY CHAIN

1 https://www.verite.org/
2 http://www.lbma.org.uk/refiners-gold-current(London Bullion Market Association- Good
Delivery list)
http://www.conflictfreesourcing.org/conflict-freesmelter-refiner-lists/ (CFSI- conflict free smelters)48

Agricultural supply chain
We take our role in promoting sustainableagricultural production very seriously,
and our Good Agricultural Practices(GAP)1 program is mandatory for farmers
contracting with PMI or our suppliers.
In 2016, PMI and our suppliers contractedwith approximately 380,000 tobacco
farms worldwide.
A unique business model underpins
our work with farmers: The Integrated
Production System (IPS)
We source the vast majority of ourtobacco (approximately 88%) throughdirect contractual relations (established by
us or by our suppliers) with independent
farmers across nearly 30 countries
worldwide. This is critical to enable us(or our suppliers) to work collaboratively
with farmers and to drive the systematic
implementation and monitoring of ourstandards. Direct contractual relations also
benefit the farmer in a number of ways:——Ahead of the growing season, thecontractual agreement on the volume
and price of the tobacco protects thefarmer from market fluctuations andensures there is a buyer for the crop;——Farmers can access crop inputs(e.g., fertilizer) at a lower cost;——Removing middlemen reducestransportation costs or other nonvalue‑added fees charged to farmers;——The contract can be used by thefarmer as collateral for credit or otherfinancing arrangements;

Our GAP program defines the principles
and standards we expect to be met by all
farmers and suppliers of tobacco for PMI.
It includes three focus areas:——How to make tobacco farming more
profitable and sustainable. Promoting
practices to improve farmers’ yields andcrop quality, maximizing their production
to use less land for tobacco and reducelabor requirements. This helps togenerate a higher income for the farmer,
frees up land for alternative crops for
local food security, and with surplus
crops, helps to create an alternative
source of income;——How to minimize the impact of tobacco
farming on the environment. Promoting
environmentally sustainable practices,
including curing barn improvements,
the use of more sustainable tobacco
curing fuel sources, CPA reduction,
reforestation, as well as water andwaste management; and——How to improve working conditions
on the farm. Promoting and monitoring
good labor practices, including healthand safety conditions, and preventionof child or forced labor (the Agricultural
Labor Practices program).
The GAP program encompasses a wide
range of initiatives to support farmers
in the implementation of best practices,
ranging from farmer training programson sustainable land stewardship ormanagement and entrepreneurial skills,
to the provision of personal protective
equipment to safely apply chemicals
for crop protection and on the use of
new technologies.

1 https://www.pmi.com/sustainability/goodagricultural-practices

Farm economics, mechanizationand innovation
Tobacco is a valuable crop that allows
farmers to generate significant income,particularly in the case of smallholder
farms. However, tobacco growing is also
labor intensive, and as such efficiency
improvements are crucial for the optimal
outcome of the production. Initiatives
to reduce the number of working hours
required to grow the crop range frompacking simplification, to mechanization,or curing preparation.
While this is a global effort, the specificinitiatives depend on the particularcharacteristics of the crop and the farms
in each country. For example, in Indonesia,
preparing the land for cultivation is mostly
done manually, and farmers increasingly
face difficulty in finding workers during thecrop season. PMI’s Indonesian affiliate (HMSampoerna), together with three tobacco
leaf suppliers, Alliance One, Universal Leafand Sadhana, has been helping to makemechanical handheld cultivators available
to groups of five to six farmers in regionsof light soils since 2014. These machines
are used for ridging, soil tillage and weedingand help farmers save 13 labor days/hectare
in tobacco. Half of the farmers also use
these mechanical handheld cultivatorsfor other crops such as corn, rice andonions. In 2016, 289 handheld cultivators
were made available, reaching a total of
493 cultivators being used by more than
3,000 farmers since the beginning of thisinitiative. For 2017, our plan is to make
300 to 400 new cultivators available.
Another example comes from Turkey.
In Turkey’s oriental tobacco growing,labor is not only the main cost, but it isalso the bottleneck limiting the volume
that each farmer can produce, due to thelabor-intensive preparation of the small
Oriental leaves for curing. The “vento”
machine technology allows farmers toharvest Oriental tobacco leaves in bulk
by enabling the curing preparation in a
cotton net tube instead of the traditional
practices whereby tobacco leaves need
to be carefully aligned during harvestingso they can be individually sown on astring for curing.
These machines enable the farmer tomake an estimated labor saving of 25 labordays/hectare and allows farmers to harvest
larger volumes, thereby significantly
increasing income. With PMI’s technicaland financial support, around 1,700
farmers, representing 27% of PMI’s
volume sourced in Turkey, were using“vento” machines by the end of 2016.
In 2017, we expect to source over 40%
of our tobacco in Turkey to be cured
using this technology.

Tobacco farmer in Brazil© Sarah Hazlegrove, Tobacco People

49

Strengthening our sustainability fundamentals——Trained agronomists provide support
to contracted farmers throughout the
tobacco growing season to improveoverall conditions and production.

Our Good Agricultural
Practices (GAP) program

Continued support to farmers
to grow alternative crops
For several years, we have been supporting
smallholder farmers to grow food crops
alongside tobacco. In Africa (Mozambique,
Malawi and Tanzania) these efforts
encompass technical assistance andfinancing for food crop inputs (fertilizer
and seeds for mainly maize). In 2016
the total tonnage of food production
supported by PMI in these countries(over 260,000 tons) already surpassed the
production of tobacco, with the program
reaching 60.000 farmers.

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

Farmer testimonial

Tobacco farmer operating
hand-held cultivator in rice crop
© Sarah Hazlegrove, Tobacco People

Looking ahead
Smoke-free products require less tobaccocompared to cigarettes. When large
numbers of consumers eventually switch
to smoke-free products, we do expect
a gradual decrease in tobacco leaf
requirements, which will free up land andcapacity for other uses. We are actively
working with the relevant stakeholders
and other potential business partners to
explore new opportunities and to prepare
and manage potential mid- to long-term
impacts. We already encourage andsupport crop diversification efforts as away to improve farm outcomes, manage
environmental impacts and strengthen theresilience of tobacco growing communities.
These efforts will continue as they
become even more important in a context
of change, and we will continuously adapt
our programs to the local realities. We
envision that the foundation referred to on
page 27 will also focus on addressing theconsequences of declining demand for
tobacco alongside its efforts to accelerate
this decline.

“Vento changed a lot our life. Before
Vento we were manually stringing
tobacco from noon time to the lateevenings and we did not have any
spare time for resting and for ourother farm activities. I was producing
one ton of tobacco. Now I managed
to double my production with thesame labor force. I have also more
comfort in my life so I can also deal
with my livestock and other crops.
My near future plan is to produce
three to four tons of tobacco.”
MEHMET DEMIR(TOBACCO FARMER)ADIYAMAN, TURKEY
AdiyamanTurkey
Syria
Iraq

50

In 2017, we expect that direct support
for food crop production will reachapproximately 150,000 smallholder farmers
across the three countries. We have seen
significant improvements in food crop
yields, up by nearly fourfold in the caseof maize, which are strengthening foodsecurity and oftentimes generate a surplus
for sale at local markets. Together with our
suppliers, we are currently exploring withother international food crop buyers thepossibilities to create a route to market forsurplus food crops produced by tobacco
growers in these countries, leveraging on
the infrastructure and logistics already inplace for tobacco production.
In Brazil, farmers contracting with PMI’s
affiliate (Philip Morris Brazil – PMB) usuallygrow maize as a rotation crop after tobacco,
as fertilizer remains available in the soil
after tobacco harvest. Since 2016, througha collaboration with DuPont Pioneer (aleading seed company) PMB started toprovide farmers with certified maize seed,enough for 1 hectare per farmer. Yield
improvements applying certified seed andbest practices in corn can increase average
productivity by 30%. DuPont Pioneer
trained PMB field technicians on maize
good agricultural practices, to support
over 1,500 contracted farmers enrolled inthis project in the southern area of thecountry. PMB is now considering alternative
avenues for the farmers to commercialize
their surplus corn production. Although
the proportion of farmers growing foodcrops for their own consumption remained
stable globally (approximately 70%), thenumber of farmers growing and selling
food crops as an additional source ofincome rose from 35% in 2015 to 41%
in 2016.

A field technician discusses the
ALP Code with a farmer in Malawi

ALP includes a farm-by-farm monitoring
system (conducted by us or our suppliers)
and third-party assessments conductedby Control Union Certifications (CU).²
While the internal systematic monitoringis implemented by approximately 2,800
trained field technicians who support
farmers on a day-to-day basis, thethird-party work consists of country andsupplier-specific assessments. The resultsof these CU assessments are disclosed
publicly in a detailed report, which also
includes the action plans of our affiliates
and suppliers to address identified issues.

The third-party assessment process,including assessor training, was specificallydesigned for this program, leveraging on
Verité’s experience with in-depth supply
chain social assessments. Verité continues
to play a quality control role in the wholeprocess, but does not participate in theactual assessments themselves, in orderto safeguard the third-party autonomy ofControl Union. The selection of countries
where a third-party assessment isconducted takes into consideration therelative volumes of tobacco sourced andaims to represent the geographic andsocio-economic diversity of PMI’s tobacco
supply chain. The external assessments
are conducted once PMI’s affiliates or
suppliers have rolled out the ALP program,looking at how it has been set-up and taking
stock of the quality of implementation.
In each third-party assessment, CU
evaluates the implementation of the ALP
program, including knowledge of the ALP
Code, the internal training andorganizational capacity of our affiliate or
supplier, how the ALP program is being
communicated on farms, the processes
being used to monitor labor practices,
whether issues are being addressed, andthe working and living conditions offarmers and farm workers.

Assessors from CU collect information on
individual farm practices for each of the
ALP Code Measurable Standards, review
all relevant program documentation of
PMI’s affiliate or supplier and interview
the staff involved in the program’s
implementation, including senior
management. Unannounced farm visits
and interviews with farmers, family
members and workers are also conducted
for a random sample of farms.
This information enables PMI’s affiliates
and suppliers to evaluate and enhancetheir implementation of the program.
As a requirement following each
assessment, they are expected to develop
comprehensive plans to change conditions
on farms in light of the CU assessment
findings and reflect improvement needs
and priorities. These action plans areincluded as an addendum to each CU
assessment report.

1 https://www.pmi.com/sustainability/goodagricultural-practices/upholding-labor-rights-onthe-farms
2 https://certifications.controlunion.com/en

51

Strengthening our sustainability fundamentals

Monitoring progress with the Agricultural
Labor Practices (ALP) program
The ALP program¹ aims to eliminate childlabor and other labor abuses in tobacco
growing. Verité is our strategic global
partner in this program, which reachedapproximately 380,000 contracted farmers
in 2016. Since its inception, we havecommitted to full transparency regarding
the evolution and status of the program,
publishing standalone regular updates andexternal assessments of implementation
status on a country-by-country or supplierbasis. The next stand-alone complete
update is due in early 2018, but we takethe opportunity in this report to highlightsome key developments in 2016,
particularly as they relate to the program’s
monitoring.

Tobacco field of PMI contracted farmer in Indonesia© Sarah Hazlegrove, Tobacco People

Illustrative example of Control Union(CU) Assessments and action plans
disclosed in 2016:
In 2016, we released the reports fromthe CU assessments conducted during the2015 crop season in two different regionsin Turkey (Tavas and Mugla, where twodifferent suppliers source tobacco for
PMI). These assessments found that childlabor remains present, confirming thefindings of our internal monitoring system,
which identified stringing and harvesting
as two hazardous activities in whichchildren are involved in these regions.
In light of these findings, our suppliers
have developed an action plan which
also includes the introduction of “vento”

machines, as these replace the use ofstringing and require much less labor,
thereby reducing the risk of child labor.
According to our internal data collection,
the number of child labor issues related tostringing has declined from 480 in 2015
to only one instance in 2016. To mitigate
the risk of children potentially shifting toother hazardous tasks on the farm (andreplacing one problem with child labor withanother), the existing community program
offering after-school activities was expanded
to reach three cities and six villages in the
Aegean region. This has seen school
enrollment figures rising substantially inthe past year, increasing from 82 children
in 2015 to 526 children in 2016.1

1 https://www.pmi.com/resources/docs/defaultsource/pmi-sustainability/cu_third_party_
assessment_aot_turkey.pdf?sfvrsn=a766b3b5_4

52

Since the beginning of the program, CU
has conducted 21 ALP assessments in 15
countries covering nearly 67,000 farms
and interviewing farmers, workers, andfamily members on over 1,000 contracted
farms. Although we are fully aware that
we face many complex challenges in our
tobacco supply chain around the world,
we hope that our efforts and transparency
can help to improve cooperation among
stakeholders in this sector and act as acatalyst for change in raising the bar onlabor standards in agriculture.

Human Rights Watch (HRW) researchon Child Labor in Indonesia
Our first Communication on Progress to
the UNGC included information on HRW’s
research and report released in May 20161
highlighting the issue of children’s
exposure to hazardous work in smallholder
tobacco farming in Indonesia. Since then,we have continued open and constructive
dialogue with HRW and other relevant
stakeholders as part of our efforts totackle this systemic issue. In February 2016,
we published a third-party assessment
report on the implementation of our ALP
program in Indonesia (Lombok region),including detailed information about the
progress made and challenges we faced inaddressing child labor, as well as our local
supplier’s action plan to address issues
identified in the report.

Eight reports published covering six
countries:
1. Colombia
2. Indonesia
3. Mozambique
4. Poland
5. Tanzania (2 suppliers)
6. Turkey (2 suppliers)

1 Human Rights Watch report, “The Harvest is in My
Blood: Hazardous Child Labor in Tobacco Farmingin Indonesia. May 24th, 2016: https://www.hrw.
org/report/2016/05/24/harvest-my-blood/
hazardous-child-labor-tobacco-farming-indonesia

53

In 2016, our suppliers hired an additional
15 trained agronomists and fieldtechnicians (FTs) in Indonesia to support
farmers in the day-to-day implementationof the ALP program, bringing the total
number of FTs to 237 in the country.
These FTs regularly monitor farms andtake action to address problematic
practices, such as children helping withtasks on the farm considered to be
hazardous work. One example is the
distribution of approximately 220,000“clip sticks” (194,000 in 2015), which area more efficient way of preparing the
tobacco leaves for curing replacing a task
oftentimes performed by farmers’ children.
This initiative is being coupled with
off-farm programs for school-aged
children during the harvest season. Fromthe 2,348 children enrolled in 25 schools
in 2015, these programs reached 4,800
children enrolling in 50 schools in 2016.

Strengthening our sustainability fundamentals

CU third-party assessments of
ALP program implementation(2016):In Indonesia there are around 550,000
tobacco farmers in diverse locations in the
country, and our suppliers have signed
direct contracts with approximately
28,000 farmers (2016). Given the sizeof the country and fragmented nature of
production units, another typical featureof tobacco production in Indonesia is themulti-layered supply chain. After the farm,tobacco goes through a number of“poolers,” “intermediaries” and “middlemen”
before reaching the final buyer, making it
virtually impossible for suppliers to gain
visibility into conditions of production.
We believe that the single most important
aspect creating a positive impact in reducing
child labor has been to progressively moveaway from the multi-layered supply chain
and to implement the Integrated
Production System (IPS) in Indonesia,
where our suppliers contract farmers (orfarmer groups) directly. This is the only
way to gain visibility into farm practices
and make tangible and sustainableimprovements to the production
conditions on farms, while

mitigating risks and addressing issues
through the implementation of our ALP
program. Expansion of our IPS approachis a complex process that requires major
investments in resources and infrastructure, entails a significant financial
risk (due to “side-selling” into traditional
channels and the difficulty of enforcing
contracts), and is conditioned by ourlimited leverage with stakeholders (in2016, tobacco sourced through IPS
represented less than one quarter of thetotal crop in the country). Notwithstanding,
our local affiliate (HM Sampoerna) has
continued working with our suppliers to
expand the proportion of our tobaccopurchases made through the IPS in
Indonesia, which we envision will reach
76% and 86% of our volumes in 2017and 2018, respectively. In 2016, our IPS
purchases remained at approximately
60% (similar to 2015), affected by severe
weather events that negatively impacted
yields of contracted farmers.

A survey conducted before and after the
implementation of the program gathered
feedback directly from the participants
and reduced by approximately 43% the
involvement of children in tobacco
growing.
Other programs aimed at eliminating childlabor include high school scholarships intobacco-growing communities, which haveincreased from 953 students in 2015 to
1,535 students in 2016, and vocational
training for more than 1,000 people on
income-generating activities, a child’s rightto education and safe working and living
conditions on farms.

Our suppliers also provided personal
protective equipment (mask, gloves,long-sleeved shirt and boots) and training
to contracted farmers in Indonesia andpromoted an ALP roadshow in six tobaccogrowing regions to raise awareness about
the program and deliver training. From
1,421 participants in 2015, the initiative
reached more than 3,000 participants in
2016, which includes 1,196 farmers, 993
farmers’ wives, and 880 workers.
Due to the geographical spread of ourtobacco-growing supply chain in Indonesia,
we commissioned CU to conduct asecond assessment for our suppliersourcing tobacco in a different location, inLumajang. Preliminary information showed

Tobacco growers in Brazil© Sarah Hazlegrove, Tobacco People

54

that levels of awareness about the ALP
program are 96% among farmers and 86%
among family members, and only 43%
among hired workers. Although CU did
not find any children hired by contracted
farmers or child family members helping
out on contracted farms, the supplier’s
internal monitoring data continue toshow this is an area of risk. This finding
reinforces our belief that combining andcross-checking data from both our internalmonitoring systems and external audits
enable us to overcome blind spots in our
ALP program approach. We plan to release
the CU assessment report for this regionand our supplier’s action plan before theend of 2017 once the supplier action planis finalized.

Our supply chain – Metrics
Metrics

Coverage

2014

2015

2016

Goals

Status Check

Coverage of supplier communication
on Sustainability (% of total spend)¹

Non-tobacco materials
and services

N/A

N/A

93

>90

On Track% of tobacco purchased by direct contract(by our aﬃliates or our suppliers)²

Tobacco supply chain —total purchases

87

88

88

>90

On Track

Systematic monitoring of labor practices(% coverage)²

Tobacco farmers supplying
PMI aﬃliates or our suppliers
via direct contract

N/A

32.5

72

100

On Track

Number of contracted farms within thescope of external assessments by year³

Tobacco supply chain

23,87011,043

7,508

Number of supplier locations assessed

Tobacco supply chain

5

6

5

>5

On Track

1 In the remaining 10%, no individual supplier represents more than 0.1% of the total annual spend.
2 Data relates to crop seasons which may span more than one calendar year.
3 The number of farms within the scope of assessment varies according to the crop-size and number of contracts in a given supplier location. The initial focus of thisprogram was on countries with larger crops and locations where PMI or our suppliers had a bigger number of contracts, which explains the relatively lower numberof farms under the scope of assessments conducted in 2016.

Freedom of Association
for migrant workers in our
tobacco growing supply chain

55

Strengthening our sustainability fundamentals

In the United States of America andspecifically in North Carolina – the largest
tobacco-growing state – there have been
expressions of concern from stakeholders
regarding farm worker intimidation as it
relates to the right to associate and organize.
The Farm Labor Organizing Committee(FLOC), along with other stakeholders,have raised such concerns at our annual
meetings of shareholders, noting theprospect of worker intimidation by farmlabor contractors. In our ALP Code, wehave made an unequivocal commitment
to Freedom of Association rights, and wetake these allegations seriously. We havetaken action to ensure specific allegations
are investigated and resolved, incooperation with our suppliers and in
dialogue with worker's representatives.
Further, we have launched concrete
initiatives to advance fair and humane
working conditions for migrant workers.
While 75% of the farms contracted byour suppliers are abridged by a collective
bargaining agreement between FLOC andthe North Carolina Growers Association(NCGA) that includes a grievancemechanism, more needs to be done
to ensure all workers fully enjoy theirrights. We remain in dialogue with all
stakeholders to achieve this goal.

Managing ourenvironmental footprint
The world’s changing climate
more than ever calls forrespect of the environment,
and this is something all our
employees and business
partners can help with.
From the farms where tobacco is grown,
to our production facilities, distribution
networks, retail trade, and the roughly
150 million consumers of our products,
environmental sustainability is key for
our long-term business success.
Effective environmental management
across our operations and value chain goesbeyond compliance with the applicablelaws and regulations; it is central to thesecurity of raw material supplies, promotes
efficiency and savings, and minimizes
environmental impacts.
Our environmental management strategy
follows a two-pronged approach:
1. Minimizing our impact on theenvironment through carbon footprint
and water use reduction, waste
minimization and other mitigation
initiatives.
2. Understanding and adapting to potential
future business impacts of major
environmental trends, such as climatechange and water scarcity. We
undertake risk assessments to quantify
the impacts of these trends along ourvalue chain. Based on the results,
we develop management andadaptation strategies.
Through life-cycle and other assessments
along our value chain we understand ourmain areas of impact and therefore where
to set priorities. These main areas include
tobacco farming for carbon footprint
reduction and water stewardship action
and product end-of-use for action onlitter and waste. We also need to manage
new areas of impact due to the increasinguse of electronics and batteries in our
products. We have established global
improvement programs that currently
cover:——Environmental management and related
standards for our factories and facilities;——Value chain carbon reduction, climatechange impacts and CDP reporting;——Energy and water management;——Agricultural environmental practices;
and——Product and post-consumer waste.
In this section, we provide an update on
our activities in 2016 related to these key
areas. These efforts demonstrate how weare embedding the UNGC’s Principles 7, 8
and 9 into our sustainability strategy andhow these activities contribute towards
advancing the SDGs, notably SDG12 on
Responsible Consumption and Production.

Climate change –a science-based approach
Climate change, one of the biggest
challenges facing humanity today, requires
global collective action. Following the
adoption of the Paris Climate Agreementin 2015, there is widespread understandingof what needs to be done to protect theplanet. PMI supported the Agreement
and we are playing our part in deliveringon the necessary action.
In 2016, we made progress in reducing
our environmental impact across our value
chain - in our factories (where our carbon
footprint is relatively small compared toother industries), as well as beyond thefactory gates. That includes looking at
both our upstream supply chain activities(currently focusing on tobacco farming)and downstream, following our productand packaging environmental impacts to
end-of-use. We also developed a set of
ambitious targets based on climate scienceto guide and inform our climate change
programs as part of our culture ofcontinuous improvement.
CDP leadership for the third year in a row
Every year we report on the status of ouractivities and progress to CDP, the leadinginternational not-for-profit organizationassessing companies’ efforts on climatechange. Out of over a thousand of theworld’s largest companies assessed by
CDP last year, PMI’s operational carbon
footprint is nearly 90% lower than the
average, and PMI is listed in the top 9%of companies, recognized in CDP’s“Climate A List” for consistently taking

56

comprehensive action to reducegreenhouse gas (GHG) emissions andmitigate climate change, and for thetransparency of our disclosures.
Science-Based Targets
PMI supported the call for a price on
carbon in the Paris Climate Agreement andcommitted to develop science-basedtargets. Our targets have been recently
recognized by the Science-Based Targets
initiative and demonstrate how PMI cancontribute to keeping global warming
below 2°C based on pre-industrial levels.
We have set our performance baseline as2010. Against that baseline we have alongstanding commitment to reduce ouremissions intensity (GHG emissions per
million cigarettes equivalent) by 30% by
2020 across the whole of our value chain.
In addition, we have now developed
Science-Based Targets. These address ourabsolute emissions reduction. By 2030
we will reduce absolute GHG emissions
by 40% across both our own operationsand value chain, and by 2040 we will
reduce by 60% for our own operations.
We are well underway with a 23%
absolute reduction in GHG emissions
achieved in 2016.
Carbon footprint
Scope 1 and 2 emissions
914,050
666,039-27%

2010 tonnage

2016 tonnage

Total carbon footprint
Scope 1, 2 and 3 emissions
7,401,498
5,690,876-23%

2010 tonnage

2016 tonnage

Scope of our Science–Based Targets-40%

Greenhouse Gas
Emissions by 2030

Upstream
activities
Scope 3 Indirect

PMI
Scope 1
DirectScope 2
Indirect

EmployeecommutingTransportationand distribution

Waste
generated inoperations

Fuel andenergy related
activities

Purchased
goods andservices

Purchased
electricity,
steam, heating
and cooling forown useCompany
facilities

Transportationand distribution

Use of soldproducts

End of life
treatment ofsold products
Strengthening our sustainability fundamentals

Business travel

Downstream
activities
Scope 3 Indirect

Company
vehiclesCapital goods

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

2010

2015

2016

2020

Set our baseline andtargets to 2015 and 2020

Beat our target of
20% reducon infactory GHG intensity

Achieved 27% absolute
reducon. Developed
Science-Based Targets

30% absolute
reducon

57

2030

2040

40% absolute reducon – 60% absolute reducon –Science-Based Target
Science-Based Target

Water: a precious resourcein need of proper stewardship

Marginal Abatement Cost Curve
Projects to be
implemented in 2017-2018
1. High efficiency Cogeneration plant in Mexico
2. Solar Photovoltaic Plant in Senegal
3. Solar Photovoltaic Plant in Philippines
4. Biomass Boiler in Switzerland

Water is fundamental to growing tobaccoand operating our factories; it’s essentialthat we don’t just seek to reduce what
we use but also act as a water steward.
That means responsibly using the water
we need without negatively affecting
the needs of others by:Abatement cost (US$/ton CO₂)40

20——Understanding how much water weneed and using it optimally;

PMI carbon price USD 17/ton——Not negatively impacting the qualityof water resources;——Ensuring access to safe Water,
Sanitation and Hygiene (WASH) in all
our facilities;

0-20——Respecting the vulnerability of water
resources we use and the role of thoseresources in the wider community;

4-40——Seeking partnerships to improve ourwater management practices; and3-60——Continuously improving these practices
through our Good Agricultural Practices
program in our tobacco supply chain.

2

CO₂ abated (ton/yr)

1+70
projects
assessed+USD 8m
to be invested
in 2017-2018

The programs to achieve our targets arecomprehensive – covering initiatives suchas purchasing greener electricity, greener
fuels, eco-design into new facilities, andfuel efficiency in our vehicles as well as inour manufacturing processes. We havetaken an innovative approach to identify
which projects to implement using a
Marginal Abatement Cost Curve (MACC).
Through the MACC, we compare and rank
all of our greenhouse gas reduction
projects globally based on their costeffectiveness in reducing emissions. By
using this approach, we expect to achieve
the optimal emission reductions within a
set global budget to enable meeting ourtargets. We used the MACC work to
calculate the internal price on carbon thatwould be necessary to drive projects
forward in line with our reduction targets
for 2020. For us that price is currently
USD 17 per ton, but it will certainly change
as we progress through our targets. On a
day-to-day basis we continue to focus on
our energy management program and use
the MACC to refresh and enhance our listof initiatives. Going forward, we also
intend to expand such programs toconsider our supply chain.

+11,500
CO₂ tons expected
to be reduced“The adoption of science-basedtargets by PMI is an ambitious
step for our company. I’m reallyproud that my daily work onenergy-saving projects supports
our efforts to reduce ourenvironmental impact andcontributes to achieving
these targets.”
INES SOFIA ROMAOENGINEER, OPERATIONSNEUCHÂTEL, SWITZERLAND

Water is not a major input to tobacco
product manufacturing, but we continue
to look for opportunities to improve ourwater management practices. In 2016,
our factories used less than 4m³ of waterfor every million cigarette equivalent; thisreflects a 26% improvement in water
efficiency since 2010.
During 2016 we undertook a high levelclimate change risk assessment across ourvalue chain and used the Water Resources
Institute (WRI) aqueduct tool1 to identify
our factories located in areas withrelatively high risk water stress or drought.
We then added the total consumption andlocal cost of water to this assessment andprioritized those factories located in higher
water stress areas as well as those that arelarger water users. This resulted in thecreation of a shortlist of 12 sites where
we will focus extra attention to reduce
our water-related impacts, by promoting
water-use reduction activities and looking
at water catchments both upstream anddownstream of our facilities, as part ofwider water stewardship action. Startingin 2017, we will pilot the adoption of astandard for water stewardship in ourfactory in Brazil, using the opportunity tolearn how such standards could also
support our tobacco supply chain work.
We’ll report on our plans to move forwardwith water stewardship next year.

1 http://www.wri.org/our-work/project/aqueduct

58

Water reduction
efficiency in our factories
We seek continual reductionin our water use across
manufacturing facilities and focus
on achieving improvements inwater efficiency, conservation
and reusing or recycling waterwhere possible.
In 2016, PMI implemented a number ofother initiatives to reduce water use andincrease water recovery, allowing us to save
260,000m³ of water and approximately
USD 975,000 compared to 2015.
For example, in our Quebec facility, we
have decreased water consumption by
over 81% since 2010. The implementationof closed-loop cooling systems were
instrumental in achieving these results.
In our Berlin factory, we implemented
a comprehensive awareness-raising
campaign to encourage water-saving
initiatives, helping us to save 32,000m³
of water in 2016, equivalent to a 15%
reduction versus 2015.

Water efficiency

600
Olympic
pools

We improved water efficiency
by 26% since 2010, saving theequivalent of 600 olympic sizedswimming pools.

4m3

Our factories use lessthan 4m3 of water for
every million cigarettes
we produce.

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

Water use in tobacco growing
More than half of global tobacco crops
around the world are rain fed, do not
require supplementary irrigation other thanat the seedling stage, their overall waterrequirements are similar to other crops.

2017 is the foundation year for our water
stewardship strategy. Between 2018 and2020 we will assess local water-relatedrisks and build knowledge of best practices
through pilot projects.

TobaccoTea

Chocolate

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

Principles guiding our water stewardshipapproach in our tobacco supply chain

Preservation
Preserve water resources
by sustainably managing
consumption andpreventing pollution

Engagement

Innovation

Engage with farmers andcommunities to provide
access to safe watersupply, sanitation andhygiene (WASH)

Support the development
and cultivation ofclimate‑resilient
varieties of tobacco andalternative crops

59

Strengthening our sustainability fundamentals

Building on our overall water stewardshipstrategy, we have identified principles forwater stewardship specifically for our
tobacco supply chain, which cover threepillars: (i) Preservation, (ii) Engagement and(iii) Innovation; these principles will be
implemented through our GAP program.

Managing our environmental
footprint on the farm
The environmental pillar of our Good
Agricultural Practices (GAP) programsupports farmers in applying bestpractices, from training programs onland stewardship and management, tothe safe and responsible application of
agrochemicals, water stewardship, waste
management, and use of novel techniques,
such as biomass fuels for more carbon
efficient tobacco curing on farms.
As part of mitigating our environmental
impacts, we have set ourselves ambitious
targets to continuously improve andaddress the farm level impact of thetobacco we buy. To meet our science-basedtargets, we committed to reduce ourabsolute GHG emissions across ourvalue chain, which includes tobacco
growing. In fact, reductions of the on-farm
footprint are the largest contribution tomeeting our value chain targets.
One of the main tobacco types used in
our products is Virginia flue-cured tobacco(hereafter, referred to as Virginia), which
is cured in heated barns and thus requires
an energy source. Our target is to lower
GHG emission intensity of this curing

process by 70% (per kg of cured tobacco)by 2020, compared to a 2010 baseline.
In 2016, the GHG emissions related toour purchases of Virginia tobacco were
14% less than 2010. To achieve our 2020
target, strategic initiatives are being
implemented to;

we source Virginia tobacco, we will also
increase the use of sustainable curing
fuel sources by developing reforestation
programs for firewood and switching tobiomass fuels such as olive pits, forest
and wood by-products and sustainablepalm oil kernel shells.

——Improve curing barn efficiency: weplan to improve combustion efficiency,
ventilation or controls of 30,000
flue-cured barns by 2020, resulting ina further 10% GHG emissions reductionof the targeted 70%. In 2016,
approximately 15,000 barns were
improved in Mozambique, Pakistan,Philippines and Tanzania.

In 2016, PMI affiliates and suppliers planted
approximately 29 million trees in Brazil,
Indonesia, Pakistan, Philippines, Malawi,
Mozambique and Tanzania. In 2017and 2018, our GHG emissions related
to tobacco flue-curing are expected todecrease rapidly through a significant
increase in usage of renewable andtraceable firewood coming fromsustainably managed tree plantations(140 million trees planted between 2000
and 2015). As part of our precautionary
approach, we do not assume thatfuelwood is from sustainable sources
unless we have proof – and we calculate
our carbon footprint accordingly, using a“full carbon” emission factor for fuel woodthat we are not sure is renewable.

——Increase the use of renewable andtraceable curing fuel sources, such as
wood and other biomass sources, andeliminate coal usage for tobacco fluecuring. Based on current plans, 70% of
our flue-cured tobacco purchases should
be cured with renewable fuel sources by
2020. In 2016, approximately 21% of our
Virginia purchases were still cured withcoal. Plans have been developed toreplace coal with agricultural wastepellets, green electricity produced byhydro-power plants and sustainablefirewood in China, Colombia and Poland.
In the other main countries from which

PMI targets for 2020 to improve environmental
performance in our tobacco supply chain

CO₂ reduction*

Coal usage for
tobacco curing

Tobacco purchased at
no risk of deforestationof old growth forest

Target 2020

Target 2020

Target 2020

70%

0%

100%

Actual 2016

Actual 2016

Actual 2016

14%

21%

88%

*CO₂ emissions intensity reduction from tobacco-curing process compared to 2010 baseline.

60

Responsible management ofchemicals for crop protection
We have established an Integrated Pest
Management (IPM) program to help us
achieve responsible management ofchemicals for crop protection and to
reduce risks to the health and safety offarmers and farm workers alongsideminimizing our environmental impact. Thisaims to reduce the use of chemicals forcrop protection (Crop Protection Agents(CPAs)) and eliminate those that are mosthazardous. We partner with a leadinginternational not-for-profit organization,
the Centre for Agriculture and Biosciences
International (CABI), which applies its
scientific expertise to help us implement
this approach. In 2014 and 2015, we
worked with CABI to establish the baseline
for our global program and implemented
country-specific action plans for eight pilot
countries. In addition, we made significant
progress toward our goal to eliminate theuse of WHO TOX1 CPAs1 in the
production of all the tobacco we purchaseby crop year 2018 and met our goal toeliminate all CPAs listed in the Montreal
protocol or Stockholm Convention. We
have also made substantial progress in
reducing Highly Hazardous Pesticides(HHP) residues as per 2016 FAO/WHO
guidelines towards achieving our target toeliminate the use of all HHPs by crop year
2020 through promoting alternative andless toxic CPAs and biopesticides.

1 http://www.who.int/ipcs/publications/pesticides_
hazard_2009.pdf

Progress on Integrated
Pest Management in 2016

Identifying and promoting use of natural agentsto combat pests in tobacco plants——8,700 farmers and 450 field technicians
were trained in the eight pilot countries.
——An online application (Tobacco IPM
toolbox APP, available for iOS andAndroid), a dedicated website² and an
online training manual³ were developed
and are freely available for anyone
involved in integrated pest management
in tobacco.

748

Semiochemicals(pheromones)

Micro-organisms(bacteria, fungi,
oomycetes, virus)

120——A biopesticide database of 120 active
substances has been created based ona market survey of 20 countries where
tobacco is grown. It identifies biopesticide
active substances that target tobacco
pests and lists the commercialized
products currently available that containthem. This database helps our affiliates
and suppliers to identify the mostpromising biopesticides and test theirsubstitution over synthetic substances.

active substances
identified

51

14

Botanicals

Macro-organisms(beneficial nematodes,
lacewings, ladybird beetles,
parasitoid wasps, predatory
bugs and mites)© CABI

Putting the usage of crop protection agents (CPA)in tobacco into context
In Brazil, the second-largest producer of tobacco worldwide, a comparative
analysis¹ found the usage of CPA in tobacco to be the lowest among thecountry’s main crops (Brazil is also one of the world’s biggest exporter ofagricultural products).
Kg of CPA per hectare
70

Apple
32

PotatoCoon

22

Citrus

21

Grape

21

Strengthening our sustainability fundamentals

29

Tomato14

Peanut
Onion

8

Soya

7

Coffee5Garlic5Banana3

Sugarcane

3

Maize

3

Wheat

3

Rice

3

Tobacco2
1 Translated and adapted from Sinditabaco (Brazil’s
Interstate Tobacco Industry Union). Available here:
http://sinditabaco.com.br/en/socio-environmentalprograms/gestao-ambiental/reducao-uso-deagrotoxicos/
2 https://www.tobaccoipm.com
3 http://www.cabi.org/cabebooks/

61

Product waste
We have a waste management program in
our factories to reduce, reuse, and recycle
before any disposal of waste in landfill.
In 2016 we continued to achieve an 87%
recycling rate in our factories and are
now focusing on reducing waste which issent to landfill or for incineration without
energy recovery. Currently, over 95%
of our total factory waste is recycled,
composted or sent for energy recovery.
However, a bigger challenge lies in
the waste resulting from the use of
our products.
Littering
Littering of consumer goods is an issue ofconcern to society in many parts of theworld and is linked to two main drivers:
consumer behavior and the availability of
waste disposal infrastructure.
Cigarette butts are among the mostfrequently littered items. In naturalenvironments, cigarette butts decompose
slowly, leach smoke residues and risk being
accidentally ingested by animals. Smokers
should avoid littering and dispose of theircigarette butts responsibly. At this point,
we believe that after stubbing, disposal
with general waste is the most efficient
way of dealing with cigarette butts, and inmany countries this results in energy being
recovered from the waste.

We can play an important role in raisingawareness and encouraging consumers
not to litter and have done so over many
years in different countries around theworld, including both information
campaigns and the distribution of portable
ashtrays. However, in 2016 we assessed
the littering situation in different countries
and recognized that there is an
opportunity to be more consistent in ourwork over the long-term and that littering
is an increasingly important topic in many
places. We also recognized that
understanding behavioral drivers forlittering and the triggers that can change
those behaviors is key to solving the issue.
These drivers and “behavioral nudges”
vary by country, culture and demographic,
and an adaptable approach is needed.
We can achieve more by working withothers – industry peers, anti-litteringorganizations and authorities - and realizethat there is a need to share best practices
across cultures and geographies to make areal difference. We have revised ourstrategy to guide our efforts and will scale
up anti-littering activities with a toolbox ofbest practices for our affiliates to use
when developing and supporting local
anti-littering campaigns. We also believethat more should be done to monitor
littering and consumer behavior and tomeasure the results of different antilittering campaigns so that theireffectiveness is better understood.

Possible applications for recycled material fromIQOS heated tobacco units
Components of IQOS heated tobacco units include cellulose acetate (CA), a biobased polymer produced from wood pulp; polylactic acid (PLA), a bio-based polymer
mainly produced from corn starch; tobacco and the wrapping paper. The CA and PLA
polymers can be extracted from the used units to pure recycled material that canpotentially be used in several applications. PMI will use these recycled materials in
our future IQOS retail fixtures, and we are also exploring other options for their use,such as eyewear, fabrics and textiles, 3D printing, and other solutions to create
potential new markets for this type of post-consumer waste.

Frames forsunglasses

Fabrics andtextilesMaterial for IQOS
retail fixtures

3D printing

Accessories

62

A prototype machine for purchase and recycling ofheated tobacco units; fixtures in background madewith materials recycled from heated tobacco units

Recycling after consumer use
With the growth of smoke-free products
such as IQOS, we want to ensure that theentire life-cycle of these products is
managed sustainably. Heated tobacco
units for IQOS do not burn and carry lessodor than cigarette butts. First observations
suggest that these consumables havea lower propensity to be littered thanconventional cigarettes and furthermore
a sustainable recycling approach canbe envisioned.

However, our objectives go beyond
regulatory compliance. We aim to recovermaterials with second use potential,
educate consumers on their responsibilities
for proper disposal, and provide better
options to our consumers for recycling anddevice disposal. Recovery schemes arebeing developed and will be deployed inevery country to ensure that consumers
can return their device for sustainabledisposal at end of use. For example, thissystem is already implemented in ourlargest market for IQOS, Japan, wherereturned devices are recycled to recovervaluable metals, nickel and cobalt.
In addition to supporting the recoveryof our devices, we believe it is essential
to evaluate the environmental impact ofthe product. To achieve this, we conduct
life-cycle assessments on the environmental
impact of IQOS, including both the device
and consumables. Preliminary results showthat 1) the use of less tobacco for heated
tobacco units, and 2) the new electronic
devices, are the two main drivers of theirdifference in environmental impact
compared to cigarettes. These assessmentsallow us to prioritize programs to address
the most relevant steps in our value-chain,from innovation and product development
to end-of-use and disposal.

In 2016, we developed a pilot awarenessand recycling campaign for heated tobacco
units in our Operations Center, Factoryand R&D facility in Switzerland. In the first
10 weeks from April 2017, we collected
100,000 IQOS heated tobacco units –estimated 50% of consumption – to berecycled into fixtures for our retail
environment.
We will analyze the results from this pilot
and report next year on our recyclingplans for heated tobacco units in thosecountries where IQOS is available.

Electronic waste
The heated tobacco units for IQOS areused with an electronic device, composedof a holder and a pocket charger. Wherever
IQOS devices are sold, they can also be
returned. Returned devices are thendisposed of responsibly. The disposal andtreatment of electronic waste has legal
requirements which vary from market
to market. Before the launch of IQOS inany given market, a thorough regulatory
assessment of the landscape of electronic
waste disposal and treatment is performed
and shared with our local teams. In eachcase, regulations regarding electronic
waste are strictly followed.

63

Strengthening our sustainability fundamentals

Logistics center for recovery andrecycling of used devices in Japan© Sarah Hazlegrove, Tobacco People

Looking ahead
Our business transformation brings newchallenges but also significant opportunities
for environmental sustainability. Our longterm targets on environment, including ourscience-based targets, have been developed
taking into account the changes in ourbusiness (including both new productmanufacturing and market place factors).
The areas of particular importance are:
Changes in factories and manufacturing
processes – while we embed newprocesses, the efficiency of our energy
and water use may worsen until bothknowledge and economies of scale improve.
——We will measure and understand theenvironmental impact of our new
product manufacturing processes atour site in Bologna, Italy, including
implementing our energy metering andtargeting program. We already knowthat our new processes may use morewater. For this reason, we are initiating
projects to reduce energy and water
consumption in this factory.

——With new factory processes comes theopportunity to design-in efficiency andlow environmental impact from thestart. We are developing new designplans for utilities and renewable energy
supply for our new sites where we will
manufacture heated tobacco units,
integrating the learnings from ourexperiences in Bologna.
A new electronics supply chain – with theuse of batteries, plastics and printed circuits.
——We are identifying potential partners tomake the production process for ourelectronic devices more efficient.
——We are focusing on incorporating theenvironment into product design, using
components that can be recovered or
recycled, and working with experts todevelop the best technologies to reusematerials.

64

Implementing the Social andNatural Capital Protocols into
our decision-making
As part of our work as a member of theWorld Business Council for Sustainable
Development (WBCSD), we are
implementing the natural capital concept
into our management decision-making
processes. We began work in 2016 todevelop a methodology that fits withboth the Social and Natural Capital
Protocols and are already seeing potential
application in our project selection
for energy efficient processes inmanufacturing. Our adoption of a priceon carbon is part of that work. We will
also review the potential application of
the Social and Natural Capital Protocols
in our agricultural supply chain as well as
how the Social Capital Protocol can beapplied to the implications of smoking,and will report back on our overall
progress in next year’s report.

For the first time our products consume
electricity, so building in design for energy
efficiency is important.
——We are investigating more efficientbatteries and improving the efficiency ofcomponents, for example, increasing thenumber of recharging cycles.

New post-consumer waste – where
possible, electronics and consumableproducts need to be designed forrecycling. Disposal programs need tobe put in place, along with consumerawareness initiatives.
——We will continue to use life-cycle
assessment to prioritize, guide andinform our activities. In the long-term,
our goal is to design products that
contribute to “closing the loop” wherever
it makes sense. We aim to minimize
inputs and to recycle, reuse and evenupcycle waste into other products, aspart of the circular economy.

Managing our environmental footprint – Metrics
Metrics

Coverage

2014

2015

2016

Goals

Status Check% of manufacturing facilities certiﬁed to
ISO 14001

PMI factories

91

93

93

100

Note 1CO₂ (Scope 1 and 2) – metric tons

All PMI facilities

746,286

691,044666,039

CO₂ (Scope 1 and 2) –% reduction since 2010

All PMI facilities

18

24

27

30 by 2020
40 by 2030
60 by 2040

On track

Total (Scope 1, 2 and 3) –% reduction since 2010

PMI Value Chain

N/A

N/A

23

40 by 2030

On track

CO₂ from factory operations – kg per
million units of product equivalent

PMI factories

661

603

614

Water use – thousand m³

PMI factories

3,886

3,654

3,394

Water use m³ per million units ofcigarette equivalent

PMI factories

4.35

4.05

3.95

Total Waste – metric tons

PMI factories

133,488

127,361

130,077% of Waste that is recycled

PMI factories

85

87

87

Target of 85%
achieved

Complete% of Waste that is disposed to landfill or
incineration without energy recovery

PMI factories

6.5

5.6

4.8

<5%

Note 4

Vehicle CO₂ emissions(gCO₂ per km driven)

PMI ﬂeet

230

215

227

% of purchased tobacco without
detection of any WHO TOX1 Crop
Protection Agents (CPAs)*

Tobacco supplied
to PMI – from ouraffiliates or our
suppliers

93

94

96

100% by crop
year 2018

On track% of purchased tobacco withoutany≈detection of other identified
HHP residues†

Tobacco supplied
to PMI – from ouraffiliates or our
suppliers

65

69

78

100% by crop
year 2020

On track

Note 2

Note 3* 2016 data is provisional.
†2016 data is provisional. HHPs are Highly Hazardous Pesticides, classified as per FAO/WHO Guidelines published in 2016 (http://www.fao.org/3/a-i5566e.pdf).
Note 1 – Newly acquired or built factories have began the certification process. Due to the potential for new factories to be developed we may not reach 100% but thatremains our goal.
Note 2 – In 2016 there was a slight increase in the amount of CO₂ emitted per unit of product manufactured; this was due to process changes resulting in a temporary
increase in manufacturing complexity.
Note 3 – At the end of 2015 we beat our target to improve our water use efficiency by 20% compared to 2010. We are now developing a broader water stewardshipstrategy and will communicate new water-related targets in due course; in the meantime we aim to continue improving our water use efficiency year on year.
Note 4 – On achievement of our target to recycle at least 85% of our factory waste in 2015, we have switched our focus to minimizing the amount of waste that goes tolandfill or incineration without energy recovery – "Disposal Ratio".
Note 5 – In 2016 there was a slight increase in the amount of CO₂ emitted per km driven by our fleet. This was due to a change in emission factors used for previously
reported biodiesel and inclusion of some vehicles that had not been captured in prior years.

65

Strengthening our sustainability fundamentals

Note 5

Next steps
In our first UNGC
Communication on
Progress (CoP), June 2016,
we provided an insight into
our business in the context
of the UNGC Principles
and briefly described
our ambition to replacecigarettes with smokefree products.

The report was received with muchinterest, but also with skepticism. Manyof our critics wanted more details on ourplans to understand whether we arealigning actions with words.
We therefore decided to focus a
substantial part of this second UNGC CoP
on our ongoing business transformation
and report on the concrete steps we havetaken to make our vision of a smoke-free
future a reality. In addition, we provided
more detail on our social and environmental
sustainability programs and sharedprogram updates. Over the last year,
we published our Responsible Sourcing
Principles, which regard our non-tobacco
supply chain, and our Good Conversion
Practices, which codify our marketing andsales principles when commercializing
smoke-free products. Furthermore, we
published our human rights commitment.
In our next UNGC CoP report, we will
include updates on the following topics:——Our number one priority is clear:succeed in switching adult consumers
who would otherwise continue smoking
to our smoke-free product portfolio.
We will provide an update on thebusiness transformation metrics, while
highlighting progress and challenges
to achieve our smoke-free vision.
——In the present report, we publish an
overview of our marketing principles
for combustible tobacco products andour Good Conversion Practices for
smoke-free products. We look forward
to stakeholder feedback.

66——Open and transparent dialogue with all
stakeholders is fundamental to achievea smoke-free future as soon as possible
and in a responsible way. As mentioned
in this report, some critics haveexpressed concerns about our lobbying
practices, and we are looking for
feedback on the principles forengagement with government andpublic organisations.
——We are at the initial stages of developing
a comprehensive human rights action
plan. This is another focus area on which
we seek to work with external
stakeholders.
——We began work on the application of
the Social and Natural Capital Protocol
in our project selection for energy
efficient processes. Our adoption ofa price on carbon is part of that work.
We will also provide an update on theapplication of the Social Capital Protocol
to the implications of smoking.
We look forward to hearing from you
as we work to improve the sustainabilityof our business and contribute to the
UN Sustainable Development Goals.
As highlighted by our CEO, we invite
you to help guide us.
Please provide your feedback to:sustainability@pmi.com

Additional information
Forward-Looking
and Cautionary
Statements
See page 68

Business
Transformation
Metrics –Independent
Assurance Report

Overview ofmarketingprinciples for
combustible
products

See page 69

See page 70

Overview ofengagement
principles

Cross reference to
UNGC Principles
and relevant SDGs

See page 73

See page 75

Additional information

67

Forward-Looking andCautionary Statements
This report contains
projections of future results
and other forward-looking
statements. Achievementof future results is subject
to risks, uncertainties andinaccurate assumptions.
In the event that risks or
uncertainties materialize,
or underlying assumptions
prove inaccurate, actual
results could vary materiallyfrom those contained insuch forward-looking
statements.

Pursuant to the “safe harbor” provisionsof the Private Securities Litigation ReformAct of 1995, PMI is identifying importantfactors that, individually or in theaggregate, could cause actual results andoutcomes to differ materially from thosecontained in any forward-looking
statements made by PMI. PMI’s businessrisks include: excise tax increases anddiscriminatory tax structures; increasing
marketing and regulatory restrictions that
could reduce our competitiveness,eliminate our ability to communicate withadult consumers, or ban certain of our
products; health concerns relating to theuse of tobacco products and exposure toenvironmental tobacco smoke; litigation
related to tobacco use; intensecompetition; the effects of global andindividual country economic, regulatory
and political developments, natural
disasters and conflicts; changes in adultsmoker behavior; lost revenues as a resultof counterfeiting, contraband andcross-border purchases; governmental
investigations; unfavorable currency
exchange rates and currency devaluations,and limitations on the ability to repatriate
funds; adverse changes in applicablecorporate tax laws; adverse changes in the68

cost and quality of tobacco and otheragricultural products and raw materials;
and the integrity of its information systems.
PMI’s future profitability may also be
adversely affected should it be unsuccessful
in its attempts to produce and commercialize
reduced-risk products or if regulation or
taxation do not differentiate between suchproducts and cigarettes; if it is unable tosuccessfully introduce new products,
promote brand equity, enter new markets
or improve its margins through increased
prices and productivity gains; if it is unable
to expand its brand portfolio internally or
through acquisitions and the developmentof strategic business relationships; or if it
is unable to attract and retain the best
global talent. PMI is further subject toother risks detailed from time to time inits publicly filed documents, including theForm 10-Q for the quarter ended June 30,
2017. PMI cautions that the foregoing listof important factors is not a complete
discussion of all potential risks anduncertainties. PMI does not undertake
to update any forward-looking statementthat it may make from time to time, except
in the normal course of its public
disclosure obligations.

Annex 1:

Business Transformation Metrics –Independent Assurance Report
To the Board of Directorsof Philip MorrisInternational Inc.
We have been engaged to performassurance procedures to provide reasonableassurance on the Business Transformation
Metrics reporting of Philip MorrisInternational Inc. and Subsidiaries (‘PMI’).
Scope and Subject matter
Our reasonable assurance engagement
focused on the Business Transformation
Metrics of PMI for the financial years
ended December 31, 2016, December 31,
2015 and December 31, 2014 included in
the United Nations Global Compact
Communication on Progress 2016 Report:——The application of the internal financial
reporting guidelines for the preparationof the Business Transformation Metrics
described on page 27;——The internal reporting system andprocedures to collect and aggregate
the Business Transformation Metrics
data; and——The data and information in theBusiness Transformation Metrics table,
in all material aspects, on page 26.
The prospective data in the Estimate andAspiration columns for 2017 and 2025
are not subject to this assurance report.
Consequently, we do not express any
conclusion on this data.

Our Responsibility
Our responsibility is to perform areasonable assurance engagement toexpress an opinion on positions in therelated Business Transformation Metrics
table on page 26. We planned andconducted our engagement in accordancewith International Standard on Assurance
Engagements (ISAE 3000) (revised)‘Assurance engagements other than
audits or reviews of historical financial
information’. That standard requires that
we comply with ethical requirements
and plan and perform our procedures toobtain reasonable or limited assurance
whether the related BusinessTransformation Metrics summary was
prepared, in all material aspects, inaccordance with the reporting criteria.
Our Independence and Quality Control
We have complied with the independence
and other ethical requirements of
the Code of Ethics for Professional
Accountants issued by the International
Ethics Standards Board for Accountants,
which is founded on fundamental
principles of integrity, objectivity,
professional competence and due care,confidentiality and professional behavior.
Our firm applies International Standard
on Quality Control 1 and accordingly
maintains a comprehensive system of
quality control including documented
policies and procedures regarding
compliance with ethical requirements,
professional standards and applicablelegal and regulatory requirements.

69

Summary of work performed
Our assurance procedures included thefollowing work but are not limited to:——Reviewing the application of the internalfinancial reporting guidelines.
——Interviewing PMI representatives
responsible for the internal reportingand data collection.
——Test a sample of data from PMI
operations in Switzerland, Japan and the
UK concerning the completeness,accuracy, consistency and classification
as smoke-free products.
——Inspecting relevant documentation ona 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 haveobtained is sufficient and appropriate
to provide a basis for our assurance
conclusions.
Reasonable assurance conclusion
In our opinion,——The internal financial reporting
guidelines are applied in all material
aspects as described on page 27;——The internal reporting systems tocollect and aggregate the BusinessTransformation Metrics data arefunctioning as designed and provide anappropriate basis for the reporting; and——The data and information disclosed
in the Business Transformation Metrics
table on page 26 give a fair picture of
PMI’s smoke-free products’ performance.
Lausanne, September 12, 2017
PricewaterhouseCoopers SA
Richard Thomas

Raphael Rutishauser

Additional information

Criteria
The reporting criteria used by PMI are
described and disclosed on page 27 and in
the internal financial reporting guidelines.
These define those procedures, by which
the Business Transformation Metrics
data are internally gathered, collated
and aggregated.

Board of Directors’ Responsibilities
The Board of Directors of PMI is
responsible for both the subject matterand the reporting criteria as well as
for the entire reporting process of theselected information in accordancewith the criteria. This responsibility
includes the design, implementation andmaintenance of related internal control
relevant to this reporting process that is
free from material misstatement, whether
due to fraud or error.

Annex 2:

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

How we do it
The Marketing Code contains our
minimum global standards that apply to all
sales and marketing activities of PMI
relating to Combustible Tobacco Products.
We apply these standards voluntarily
when there is no applicable law or when
the applicable law is less strict. As
Combustible Tobacco Products represent
the largest part of our business today, theMarketing Code provides a solid
foundation for responsibly selling andcommunicating these products.
The top priority for PMI is to develop andmarket smoke-free products that are abetter choice for smokers than continued
smoking and have the potential to reduce
the risks of smoking-related diseases.
These innovative smoke-free products,
like heat-not-burn, are subject to different
marketing and sales rules, namely the“Good Conversion Practices”.

While we are moving with speed to makeour vision of a smoke-free world a reality,
we must acknowledge that the majority ofour business today is traditional
combustible cigarettes. At PMI, we
operate under Responsible Marketing
Principles. These principles, as defined
below, embody our Company’scommitment to engage in responsible
marketing directed only to Adult Smokers.

Responsible marketing
principles
1. We market and sell our
combustible tobacco products
to adult smokers only
What do we mean?
We sell Combustible Tobacco Products
and compete for market share among
Adult Smokers who have chosen to smoke.
We do not seek to influence any adultconsumer’s decision about whether or not
to smoke.
Our standards——We must not use images that haveparticular appeal to minors, including
youth-oriented celebrities or cartoons.
We must not use models who are or
who clearly appear to be under the ageof 25.
——We must only place Advertising in media
channels, venues or events that are notdirected to minors and whose audience
is reasonably estimated to be at least
75% adults. Advertising on television, inradio broadcasts, or in cinemas should
only appear in the later evening hours.
——We must not place Advertising on thefront or back cover of a printed
publication for general circulation or
general circulation to the trade.

70——We must not use outdoor Advertisingthat exceeds 35 square meters in totalsize, either individually or in deliberatecombination with other Advertising,unless we can do so responsibly in lightof existing local circumstances (e.g.,where most of the billboards available
for placement of Advertising exceed 35
square meters in size).
——We must not place outdoor Advertisingwhere the Advertising is readable fromfacilities attended or frequented
primarily by minors. Outdoor
Advertising should not be placed within
100 meters of such facilities.
——Company activities involving
engagement and interaction with
consumers, whether offline or online via
digital media, such as events or Direct
Communication, must be directed only
to age-verified Adult Smokers, subject tospecific age verification process.
——Premiums must be designed for adults
and must not have particular appeal tominors. We may brand smoking-related
premiums such as ashtrays and lighters.
If premiums are not smoking-related, thebranding, if any, must not be visible toothers when the premium is used.
——We may sell and deliver Combustible
Tobacco Products directly only to
age-verified Adult Smokers residing in
the country of intended sale.
——We may offer free Combustible Tobacco
Products in limited quantities (typicallyno more than one pack) only to ageverified Adult Smokers as part ofproduct trial, switch-selling or swapping
activities. We must not engage in switch
selling until after the initial purchase has
occurred.

2. We warn consumers about
the health effects of our
combustible tobacco
products——PMI employees or contractors whointeract with consumers, including in thecontext of Unbranded platforms or
campaigns, must make it clear that they
are working for a tobacco company.

What do we mean?
Smoking causes serious disease and is
addictive. We warn consumers about thehealth effects of smoking.

——We must not pay to include the use of
Combustible Tobacco Products, aCombustible Tobacco Product brandname or items bearing a Combustible
Tobacco Product brand name in movies,
entertainment programs or theatrical
productions, on television or radio, on
the Internet or in any other production(e.g., video games).

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

3. Our marketing must be honest,
accurate and transparent
What do we mean?
All of our marketing and sales activities
must respect applicable laws, global
standards of decency, and the local culture
and practices prevailing in the country
where the activities will be implemented.
Our standards:——Product or brand-related statements
must be accurate and not misleading,including about the health risks ofsmoking. All product-related claims
require adequate substantiation.

——Standard brand presentation (i.e., brand
name, trademark and/or logo) must
predominate in all Consumer Packaging
designs. We must not use Advertisingvisuals on Consumer Packaging. Any
text placed on the external part ofConsumer Packaging must be factual,brand-related and/or product-specific,
and not Advertising copy.

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

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

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

——All written communications with Trade
Partners must clearly state “For Trade
Only. Not for Distribution to Consumers.”
Advertisements in publications intended
for general circulation to the trademust have health warnings in black
text on a white background, occupying
no less than 10% of the total area of
the advertisement.

Additional information

71

Definitions

Company or PMI – Philip MorrisInternational Inc. and its direct and indirect
subsidiaries.

Smoke-Free Products or Reduced Risk
Products (RRPs) – products that present,
are likely to present, or have the potential
to present less risk of harm to smokers
who switch to these products versus
continued smoking. We have a range of
RRPs in various stages of development,scientific assessment andcommercialization. These products are not
Combustible Tobacco Products andbecause they do not burn tobacco, they
produce far lower quantities of harmful
and potentially harmful compounds thanfound in cigarette smoke.

Consumer Packaging – packaging,wrapping, bundles or any materials inwhich Combustible Tobacco Products areoffered for sale to Adult Smokers.

Trade Partner – any representative of aretail outlet, legal age meeting point(LAMP), or other business that is involved in
the sale of Combustible Tobacco Products.

Combustible Tobacco Products –cigarettes and other combustible tobacco
products, such as “roll your own”, “makeyour own”, pipe tobacco, cigars, cigarillos,
and cigarittos.

Unbranded – without a name, trademark,logo or indicia of a Combustible Tobacco
Product brand.

Advertising – any branded commercial
communication aimed at promoting a PMI
Combustible Tobacco Product to Adult
Smokers, regardless of the medium.
Adult Smoker – a consumer of
Combustible Tobacco Products who is oflegal age to purchase such products and is
at least 18 years old.

Direct Communications – Company
communications to an Adult Smoker thatare not intended for the general public,
including communications via one-to-one
consumer engagement, direct mail,electronic mail, telephone, shortmessaging, and Company consumer
websites.
PMI Marketing Council – the PMI SeniorVice President Marketing and Sales, theSenior Vice President Corporate Affairs
and the Vice President & Associate GeneralCounsel responsible for Brand Building.

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

72

Annex 3:

Overview ofengagement principles
Our framework

What we do

Our Guidebook for Success (Code of
Conduct) and several Principles &Practices set out detailed standards forengaging with governments and publicorganizations or third parties generally,
doing external communications or publicstatements, making contributions orproviding financial support to certain
projects, giving gifts or providing
entertainment to third parties, andrecording and reporting such expenses.

——PMI’s research and development activities
follow rigorous scientific standards. Whenit comes to our Reduced-Risk Products,
PMI makes its findings public and invites
external review.

This document does not replace thosestandards, but it describes their basic
tenets and summarizes their spirit. It also
provides a means for PMI to tell the public
what is important to PMI when interactingwith governments and publicorganizations, and allows PMI to invite
feedback on these fundamental tenets.

——The positions PMI publicly advocatesfor, and the arguments supporting such
positions, are consistent with PMI’s
internal positions and do not overlook any
information that PMI may internally havethat might be material to PMI’s audience.

Key points to remember——Communication and respectfulexchange of informed, substantiated,
and reasoned ideas is the best way toachieve regulatory and fiscal
frameworks beneficial to the societies
they apply to.
——We think it is our responsibility to share
our knowledge and expertise withgovernments, authorities and publicorganizations.

——PMI only communicates to governments
and public organizations productinformation that has been substantiatedby such rigorous scientific methods.

——PMI’s positions on regulation of its
products, taxation, harm-reduction,
employment, safety, and a vast array ofimportant topics result from self-critical,
respectful internal debate that considers
not only business objectives but also,
among other things, PMI’s legal
obligations, societal expectations,human rights, long-term environmental
effects, and consumers’ rights to full andaccurate information.
——We believe that regulation and taxationof tobacco and nicotine products should
be consistent with their different risk
profiles. We make our views known
through our website, the media, andcommunications to governments such as
through public consultations and otheravailable platforms.
——We do not bribe or try to
inappropriately influence other people’s
objectivity.

——Corruption, bribery, influencetrafficking, misleading information,
secrecy about issues that are material toa decision, and dishonesty in general are
not acceptable forms of doing businessat PMI.

73——We have strict rules concerning what
contributions are appropriate, what due
diligence is required before making
them, what disclosures are in order and,
when needed, how to maintain the
independence of those that receive suchcontributions. The same applies to ourmembership in external organizations.
We comply with these rules.
——We require third parties interacting withgovernments, public institutions or otheraudiences on our behalf to refrain fromengaging in bribery or in other forms of
inappropriate influence. We make ourinternal standards known to them andmonitor their compliance therewith.
——We require third parties interacting withothers on our behalf and communicating
about PMI’s positions on topics such as
harm-reduction, product regulation,
taxation and others, to disclose theirrelationship with, and any financial
support they receive from, us so that
their audience has access to theinformation material for them to make adecision or adopt a view.
——We keep accurate and complete
financial records of all expenses incurredin interacting with government officials,
public organizations and any other third
party.
——We communicate honestly andrespectfully, internally and externally.
Additional information——The merit of PMI’s ideas, the rigor andvalidity of its scientific conclusions, theverifiability of its facts and the integrityof its employees should be the onlymeans through which PMI advances its
positions and communicates them togovernments, public organizations andopinion leaders.

——PMI scientists are committed to thoserigorous standards.

——We have strict standards governing how
we provide gifts and entertainment togovernment officials, members of public
institutions and private individuals. We
comply with those standards.

——We market and sell our products
according to the following principles:——We do not market or sell to minors,
non-smokers or non-users of nicotine
products.
——Consumption of combustible tobacco
products is harmful to health.
——Non-combustible products are notrisk-free.
——People concerned about the risks
associated with any of our products,
should quit.
——Any positions or messages
communicated or advocated for withgovernments or public organizations
are consistent with, and respectfulof, these principles.
——We comply with reasonable, legal
governmental requirements to provide
information to authorities.

——We communicate institutionally anddo not allow the use of personal email
accounts, or other means that might bemisleading, for company communicationsor the transmittal of PMI information.
——We do not seek to gain access to, nor
discuss with governments or other third
parties, confidential information of others,
including our competitors. We comply
with anti-trust regulations.
——Our Compliance help-line andDepartment are available to anyone
wanting to report suspected violations of
our Guidebook for Success or Principles& Practices. Reports can be madeanonymously. PMI respects and protects
the identity of those that raise concerns.
PMI does not tolerate retaliation of any
kind against good-faith reporting.

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Annex 4:

Cross reference to UNGC Principles
and relevant SDGs
Theme

UNGC principle/sdg

Section/pages

Comments

Human rights

Principle 1: Businesses should
support and respect the protectionof internationally proclaimed
human rights.

“The guiding principles on businessand human rights” Pages 38-39.

Human Rights topics are covered
generally throughout this report, but
we describe our commitment andoverall approach in this dedicatedsection.

Principle 2: Businesses shouldmake sure that they are notcomplicit in human rights abuses.

As above

As above

Principle 3: Businesses should
uphold the freedom of associationand the effective recognition of
the right to collective bargaining.

“Our people” Pages 40-46.
Specifically, “Labor relations”
Page 42.

This Principle is also covered by thework in our supply chain. It is part of
our Agricultural Labor Practices codeand is also included in our Responsible
Sourcing Principles.

Principle 4: Businesses should
uphold the elimination of all formsof forced and compulsory labor.

“Our people” Pages 40-46.
“Our supply chain” Pages 47-55.

Forced or compulsory labor is notallowed under our Employment
Principles and Practices. We believe
the main area where we can act tosupport this UNGC Principle is in our
supply chain – this forms part of ourAgricultural Labor Practices code andis also included in our Responsible
Sourcing Principles.

Principle 5: Businesses should
uphold the effective abolition ofchild labor.

“Our people” Pages 40-46.
“Our supply chain” Pages 47-55.

Child labor is not allowed under our
Employment Principles and Practices.
We believe the main area where wecan act to support this UNGC
Principle is in our supply chain – thishas been a key focus of ourAgricultural Labor Practices code formany years and is also included in our
Responsible Sourcing Principles.

Principle 6: Businesses should
uphold the elimination of
discrimination in respect of
employment and occupation.

“Our people” Pages 40-46.
Specifically, “Diversity andinclusion” Pages 40-41.

This Principle is also covered by thework in our supply chain. It is part of
our Agricultural Labor Practices codeand is also included in our Responsible
Sourcing Principles.

Labor

Additional information

75

Theme

UNGC principle/sdg

Section/pages

Comments

Environment

Principle 7: Businesses should
support a precautionary approachto environmental challenges.

“Managing our environmental
footprint” Pages 56-65.
Specifically Pages 56 and 62-65.

We highlight our science-basedtargets and carbon price for carbon
footprint reduction, our use of
lifecycle assessment to guide ourwork and our implementation ofconcepts from the Natural Capital
Protocol.

Principle 8: Businesses should
undertake initiatives to promote
greater environmental
responsibility.

“Managing our environmental
footprint” Pages 56-65.

We have implemented initiatives
across our own operations and supply
chain (currently focusing on our
agricultural supply chain), which aredescribed in this dedicated section.

Principle 9: Businesses should
encourage the development anddiffusion of environmentallyfriendly technologies.

“Managing our environmental
footprint” Pages 56-65.
Specifically Pages 58 and 60-65.

We highlight our Marginal Abatement
Cost Curve approach, our progress on
Integrated Pest Management,
including a biopesticides database,and our work to find possible
applications for recycled material
from IQOS heated tobacco units.

Anti-corruption

Principle 10: Businesses should
work against corruption in all its
forms, including extortion andbribery.

“Acting with integrity” Pages 30-37.
“Our supply chain” Pages 47-55.

We highlight our Complianceprogram, our specific safeguards forinteractions with government officials
and our efforts to tackle the illicit
tobacco trade and related crimes. This
Principle is also covered by the workin our supply chain.

Sustainable
development
goals

Overview of SDGs

“Our approach to sustainability”
Pages 5-6.

We describe how our work relates to
the SDGs. While all SDGs are relevant
to us, we have highlighted SDG 3 as
most important and 2, 8, 12 and 16 asother goals where we believe we canmake a substantial contribution.

SDG 3: Ensure healthy lives andpromote well-being for all at all
ages.

“Our business transformation”
Pages 8-27.

Whilst our biggest contribution is in
replacing cigarettes, we also highlight
our work on health and well-being forour employees on pages 43-45.

SDG 2: End hunger, achieve foodsecurity and improved nutrition,and promote sustainableagriculture.

Good Agricultural Practices andcrop diversification, Pages 49-50.

We describe our approach tosustainable agriculture, which canhelp further food security.

SDG 8: Promote sustained,
inclusive and sustainable economic
growth, full and productive
employment and decent work forall.

“Our people” Pages 40-46.
“Our supply chain” Pages 47-55.

We describe our employment
principles, which are also reflectedin our approach to supply chain
sustainability.

SDG 12: Ensure sustainableconsumption and production
patterns.

“Managing our environmental
footprint” Pages 56-65.
“Our business transformation”
Pages 8-27.

We connect our environmental work
together under SDG 12 rather thanseparately linking it to SDG 6 on cleanwater, SDG 7 on energy, SDG13 on
climate action, SDG 14 on life below
water and SDG15 on life on land.

SDG 16: Promote peaceful andinclusive societies for sustainable
development, provide access tojustice for all and build effective,
accountable and inclusive
institutions at all levels.

“Acting with integrity” Pages 30-37.

We describe our efforts to tackle theillicit tobacco trade and related crimes.

76Philip Morris International
Avenue de Rhodanie 50
1007, Lausanne
Switzerland
www.pmi.com