Philip Morris’ integrated report, or: lighting up!

I happened upon an article on the Integrated Reporting website, on producing Philip Morris International Inc.’s first integrated report

Co-authored by the company’s chief sustainability officer, it starts off like this:

  • On June 30, 2020 Philip Morris International, Inc. (PMI) published its first integrated report titled  “Delivering a Smoke-Free Future: Progress toward a world without cigarettes.” The report includes a “Statement of Purpose” signed by the board of directors. ..
  • PMI’s integrated report communicates the company’s progress in fulfilling its purpose to deliver a smoke-free future by focusing its resources on developing, scientifically substantiating and responsibly commercializing smoke-free products that are less harmful than smoking, with the aim of completely replacing cigarettes as soon as possible. These innovative alternative products do not burn tobacco, do not create cigarette smoke and therefore generate significantly lower levels of carcinogens and other toxic substances compared to cigarettes.”

I have to admit that at this point I was somewhat skeptical and dismissive, primed to see PMI’s efforts as little more than a (so to speak) smoke screen of virtue, obscuring an inherently irredeemable core identity. And yet, reading on, the article had a forthright quality that placed this assessment in some doubt:

  • The company considered any approach to sustainability would be moot, or disingenuous, should it not be able to address and offer an approach to dealing with its most material issue— the health impacts of its product. Significant investments in R&D, followed by the commercial success of its reduced risk heated tobacco product, IQOS, was the basis to reconsider the purpose of the company, and how can it could be part of the solution to deliver a future without cigarettes. 

The authors indicate that from early on “PMI understood that integrated reporting provided an opportunity to describe PMI’s purpose and actions in a comprehensive yet flexible way to its key stakeholders” and that putting the report together “involved around 100 highly dedicated topic experts from different business units across the company including commercial, human resources, procurement, R&D, and finance.” The resulting report is a more than worthwhile resource and reference point for anyone interested in evolving financial reporting, spanning its complex present and its work toward the envisaged future. Near the front for instance, the “integrated overview of PMI’s performance” sets out, in standard fashion, four years of summarized information for such key items as revenues, net income, total assets, and total liabilities. But it also provides with equal prominence a table of “business transformation” measures, indicating for instance that the percentage of total revenues derived from smoke-free sources rose from 2.7% in 2016 to 18.7% in 2019, with “2025 aspirations” of 38-42% (in 2019, we’re informed, 98% of R&D expenditures related to smoke-free products).

Over 192 pages, the report digs into PMI’s business from a dizzying array of angles and perspectives, from informing us that ten members of the public died in road traffic accidents (these “occurred in six countries in Asia and South America, involving challenging circumstances related to distracted driving and disrespect of basic defensive-driving techniques, such as traffic anticipation and maintaining safe speeds for the road conditions”) to acknowledging the ongoing use of child labor by some of the 335,000 farmers from whom the company directly or indirectly sources tobacco – “a total of 2,712 prompt actions were recorded by field technicians relating to hazardous work performed by 5,820 children, with 94 percent of these being the farmer’s own children” (the company aims to have zero child labor in its supply chain by 2025).

Despite all this transparency and apparent progressiveness, one might still be inclined to argue that the company lies forever beyond the pale – that its contribution to accumulated death and disease constitutes a past that eradicates any possibility of future virtue. Not just a past either, but a sizeable present:

  • …cigarettes and other combustible products remain at this stage the largest part of our business, representing 92.4 percent of our volume and 81.7 percent of our revenues.
  • Perhaps counterintuitively, our objective to completely replace cigarettes with smoke-free alternatives is best served by maintaining our competitive position in the declining cigarette market. This has allowed us to generate the cash flows needed to continue investing in scientific research, product development, manufacturing, and the commercialization of smoke-free products. The extensive commercial and distribution infrastructure from the traditional tobacco business also provides an effective platform for launching smoke-free products at scale. Maintaining leadership within the cigarette segment furthermore enables us to engage more smokers regarding the benefits of switching, especially where we can communicate directly with our consumers, for instance through cigarette pack inserts.
  • One of our key transformational challenges regards deciding how to compete within the cigarette market, while simultaneously disrupting it with our smoke-free products. How should we react to product innovation by our competitors within the cigarette segment? What to do when competitors lower cigarette prices to gain market share? While seeking to remain competitive in the cigarette segment in an efficient way, we give careful consideration to the coherence of the commercial activities needed to do so…

The report (which is beautifully designed, by the way) doesn’t illuminate this particular area of consideration as fully as it does various others. Still, if nothing else, even by acknowledging such ambiguities, it provides a strong basis for not only commercial but moral reflection on the part of a reader…

The opinions expressed are solely those of the author

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