Jennifer Motles, Chief Sustainability Officer, PMI; Marie Corger, Head of Sustainability Materiality & Reporting, PMI; and Robert G. Eccles, Visiting Professor of Management Practice, Saïd Business School, University of Oxford explain how they approached PMI’s first integrated report
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. Accompanying the integrated report is a summary ESG Highlights from the Integrated Report and an online supplement which provides additional information on PMI’s approach to sustainability. Materiality is obviously a foundational concept in integrated reporting. PMI explains the process to determine its most material sustainability issues, and ultimately define its sustainability strategy in a standalone Materiality Report, published earlier in year.
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.”
At the core of this report is a set of KPIs the company defines as ‘Business Transformation Metrics’. This set of bespoke metrics aim to allow stakeholders to measure and verify the company’s business transformation. For example, the company aspires to have 38-42% of its net revenues (excluding excise taxes) to come from reduced risk products instead of cigarette sales, and its ambition is that at least 40 million smokers switch to its smoke-free products and stop smoking by 2025. The report also contains a detailed explanation of how it constructed its sustainability materiality matrix, how it engages with its full range of stakeholders, and connectivity diagrams showing how various environmental, social, and governance issues are related to each other.
External validation of the quality of PMI’s integrated report comes from an analysis by integrated reporting expert Mike Krzus. He regards the report as “as high as that of the best reports published by companies in Germany, the Netherlands, and South Africa,” the three countries where his research indicates integrated reporting is most advanced. Moreover, Krzus states that:
The PMI Integrated Report 2019 is a wellspring of ideas for creating a high- quality integrated report. It is an excellent reference for all companies: however, it should be of special interest to companies domiciled in the United States.
PMI’s integrated report followed only its fourth sustainability report. 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. This triggered an enormous business transformation which is best explained through sustainability and then integrated reporting.
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. In 2018, it conducted a gap assessment of current reporting practices versus the <IR> Framework and developed a roadmap towards integrated reporting. PMI’s 2018 Sustainability Report laid the groundwork towards alignment with the <IR> Framework, for instance by incorporating the six capitals approach and further describing the context in which the company operates. In 2019, following an updated sustainability materiality assessment, the decision was taken to leverage on the annual sustainability report and convert it to an integrated report in order to present financial and pre-financial information in a holistic manner.
Producing the integrated report was a deeply collaborative process that spanned over several months. Gathering the content and metrics involved around 100 highly dedicated topic experts from different business units across the company including commercial, human resources, procurement, R&D, and finance – to name just a few. Of utmost importance was the strong support of PMI’s senior management and Board of Directors, whose reviews and comments helped strengthen the report.
This entire process further embedded integrated thinking within the company. It fostered greater internal alignment by highlighting the connectivity of priority issues managed by different departments. The approach was also valuable in translating PMI’s Statement of Purpose, released in March 2020, into the various undertakings and daily project management in the company.
Work is already in progress to develop PMI’s 2020 integrated report, which will mark another step in the journey to align the company’s reporting with the <IR> Framework and to further embed integrated thinking. The 2020 report plans to provide a first account of the progress made by PMI against the ambitious 2025 goals published in its last report for each of its priority ESG topics. It will also describe how the company faced the challenges caused by the outbreak of the COVID-19 pandemic and adapted some of its work to mitigate its impact. Integrated reporting is regarded as a key process and discipline for enabling the company to achieve its purpose of creating a “Smoke-Free” future.
Understanding that an integrated report as a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term is key. For PMI, a good integrated report starts by defining a company’s purpose with clarity, having a solid materiality analysis with metrics, enacting cross-functional collaboration, and having strong senior management and Board support.
 In this publication and in related communications, the term “materiality,” “material,” and similar terms, when used in the context of economic, environmental and social topics, are defined in the referenced sustainability standards, and are not meant to correspond to the concept of materiality under the U.S. securities laws and/or disclosures required by the U.S. Securities and Exchange Commission.