Solving the Cigarette Problem

Exclusion and Engagement in the Tobacco Industry

On May 31, 2019 I published a piece in Barron’s titled “Getting Big Tobacco to Quit Cigarettes”. In it, I make the case that exclusion alone will not bring the full power of the capital markets to bear in addressing a major global health problem of 1.1 billion smokers, seven million of whom will die each year from smoking cigarettes. 

On the contrary, it is my opinion that engagement by investors who hold tobacco stock, or could potentially invest in tobacco shares, can better influence change than those who decide to exclude tobacco from their portfolios entirely. In my piece, I call on investors to engage with these companies to pressure and support them in transforming their business models by cannibalizing their cigarette sales and replacing them with less harmful products. I also disclose that I am advising Philip Morris International (PMI) on sustainability, social impact, and investor engagement.

For those who know me, I am sure this has raised a few eyebrows. I am pleased to say that most of the feedback I have received has been positive, although admittedly some are more optimistic than others that PMI and I can accomplish what we are trying to do: garner support from existing and new investors to accelerate the company’s corporate transformation. PMI has written about this extensively, such as in its Sustainability Report 2018. Others have as well, such as a piece by Sustainable Brands titled “A Sustainable Tobacco Company? Philip Morris International Thinks It Possible”.

When I was first approached by PMI, I was skeptical, yet curiosity led me to be open to talking to them. It took a long period of soul searching, examining whether my personal values could be compatible with those of PMI, a comprehensive due diligence process, and extensive discussions with Huub Savelkouls and Jennifer Motles to finally conclude this made sense. As part of my that due diligence, I had the opportunity to sit down and have discussions with almost all of PMI's Senior Management. I spent a significant amount of time with PMI's CEO in Lausanne, and was impressed with both his candor and willingness to provide answers to even the most difficult of questions. This attitude and approach were reflected in all staff members I talked to at PMI. 

Over the past six months I have undertaken substantial research on the tobacco industry. Like most of you, I know that the industry has a well-deserved negative reputation for decades of stonewalling and obfuscation. But there were many things I did not know. I was unaware, for example, that it is the nicotine in cigarettes that is addictive, but that it is the burning of tobacco that actually kills people. I also did not know about the efforts made towards alternative and less harmful mechanisms for delivering nicotine to smokers, such as heated tobacco products and vaping. Perhaps most surprisingly, I did not know that PMI would support the banning of cigarettes, in favor of responsible and appropriate regulation for less harmful products.

Indeed, PMI is the only tobacco company that has made a public commitment to eliminate smoking, is taking action, and reporting on it periodically. Today 92% of PMI’s R&D expenditure is spent on smoke-free products. In its 2018 Sustainability Report PMI aspires to achieve some very aggressive targets by 2025: (1) that 40 million of their customers will have quit or switched to smoke-free products; (2) at least 30% of their product shipments will be smoke free; (3) that 38-42% of their revenues will come from smoke free products; (4) that smoke free product volume will increase from 800 million units in 2015 to at least 250 billion; and (5) that cigarette product volume will decrease from 881 billion units in 2015 to 550 billion or less. 

This is why I am pleased to be working with them. All of the other tobacco companies are taking the stance of expanding their portfolios to offer “adult consumer choice.” They are sticking with their existing business model and not aggressively working to wean their customers off of cigarettes.

No other cigarette company has made a public commitment to eliminate cigarette smoking by cannibalizing their product line as fast as they can with less harmful products. 

PMI is rapidly undertaking a major transformation in its business model. This transformation requires innovations in many areas, major investments, and fundamental changes to the company’s complete value chain. Let’s be honest, given the history of the tobacco industry, this is about as dramatic a transformation as you can imagine. But it is a transformation that is absolutely necessary if we are to eliminate cigarette smoking. I hope other tobacco companies follow suit, although right now they show no inclination to committing to this kind of transformation. 

What do I hope to achieve? The thesis is a simple one: I believe that investors who understand the dramatic transformation taking place at PMI, and who engage with them to accelerate it, will create the right kind of nudge in the industry forcing the rest to follow PMI's lead, and rid the world of cigarettes as soon as possible. In countries where they compete, I believe PMI can gain market share through their smoke-free products, increasing the number of people who stop smoking cigarettes. In doing so, their stock will rise faster than their competition, who continue to see value in expanding and growing their cigarette business.

This will put pressure on other tobacco companies to be more proactive, and follow a transformation that is already well-underway at PMI. While it will be hard for the rest of the industry to catch up, over the medium and long-term this will be a good thing for the world. 

I am sure some will read this and remain skeptical, and I respect that. All I ask is that you keep an open mind. Let’s see what progress can be made over the next couple of years, recognizing that this is a decades-long battle. I remain open to what I haven’t been able to find so far: a theory of change for how the exclusion of all companies in the tobacco industry is the best way for the capital markets to create the required change in this industry’s business model to solve one of the world’s greatest health problems.

Robert G. Eccles

Robert G. Eccles Robert is the world's foremost expert on integrated reporting and a leader on how companies and investors can create sustainable strategies, by integrating environmental, social, and governance (ESG) factors in resource allocation decisions by companies and investors. He was previously a tenured Professor and Professor of Management Practice at Harvard Business School, and is the Founding Chairman of the Sustainability Accounting Standards Board (SASB) and one of the founders of the International Integrated Reporting Council (IIRC). He has recently joined the board of Mistra Centre for Sustainable Markets (MISUM) in Sweden, and is also on the Advisory Board of the JANA Impact Capital Fund.