Keesa: Hello, everyone. Thank you for joining the Climate Money Work podcast. I'm Keesa Schreane.

Today, we have Philip Morris International's Chief Sustainability Officer, Jennifer Motles. Before joining Philip Morris International, Jennifer was an international and human rights attorney and has worked with the UN and the World Trade Organization. Welcome, Jennifer.

Jenny: Hello, and thank you so much for having me. I'm really excited to be here.

Keesa: Absolutely. You have such an interesting background, going from being an international human rights attorney to becoming the CSO of Philip Morris International, PMI. We're going to talk more about that transition in a bit, but first, I want to talk about a recent article that was in the Financial Times where PMI’s CEO said that he thinks the company could be classified as an ESG stock. The question was asked: “Could PMI ever be an ESG stock?” His response was, “I think so.”

Could you unpack that for us, Jennifer, given PMI’s reputation, right now, known as selling cigarettes? I know about one-third of PMI’s revenue currently comes from smoke-free product sales. So how is that going to happen? How will PMI eventually become an ESG Stock? What does that mean?

Jenny: Thank you so much for asking that. Indeed, I think it's a good way to present what our company is because I believe that PMI Philip Morris International has been known traditionally for being a cigarette company and attached to being a cigarette company, naturally, the reputation, or the bad reputation, that it has had because of its history. Now, a lot has happened in the past years, and I think that my CEO, obviously I cannot speak for him, but what I imagined he intended to say with that statement was that our company is no longer the company it used to be. It's no longer a cigarette company.

We're changing, and we're changing so fast to become something else. A company that no longer bases its success on making or selling cigarettes, and what does that mean? That means that many years ago, the company started investing in R&D to understand, first and foremost, where the harms of smoking come from.

How is it that it could develop better products and better alternatives to cigarettes? The purpose of those products is to completely replace cigarettes and make cigarettes obsolete so that smoking can disappear completely. In doing that, investing in technology, acquiring companies, and recruiting different talent, scientists, and health experts, the company has started to change to become something else. In doing that, we can see already that the first horizon will be to completely replace cigarettes and sell better alternatives, but it doesn't really end there. We can look further and see a future where we can become a wellness and healthcare company, and that is by monetizing the skills and the assets that we have accrued and developed over the years.

It's about being open enough to understand a company that is undergoing a radical transformation. Yes, it's true, you mentioned there's still a portion of our revenues that come from cigarette sales, but that is changing, and it's changing rapidly. Our transformation started in 2016 when we announced it, and in less than ten years already more than a third of our revenues are coming from our new product sales.

Keesa: So you mentioned becoming a healthcare and wellness company. Tell us what the conversations with your shareholders have been like. I know that shareholders who have been investing in you in the past likely have had some conversations that have helped you come to this conclusion. What have those conversations been like, and what would you want to say to shareholders about your progress so far?

Jenny: I think that the shareholders are looking at how, in general, I would say, not just particularly to PMI, but also how a company's performing today. We all know that there is something very perverse about the market that is asking companies to report on a quarterly basis.

So there is something to say about not only the short term but the immediate term, but also how a company is building preparedness and resilience for the long term. How is it seeing the future how is it thinking about profitability and remaining competitive, and what is the advantage? Savvy investors will have conversations around those areas. That's where assessing and understanding what are your environmental and social risks is very important because these are matters that will not necessarily materialize today. Understanding them and building and putting programs in place to address them and meet and minimize the unintended or negative effects speaks about a company that understands and thinks about the future.

So, for me, it has been very interesting to see how engagements are not just about what is happening today, but really what is happening tomorrow and how our company is changing to really become something else.

Keesa: So in making this shift in this transition, as you mentioned, becoming something else, what will PMI focus on? If you're saying that the focus will shift from smoking products to smoke-free products, where do you see your product focus in the next, say, three years, five years, or even ten years out?

Jenny: In 2020, our board of directors issued our statement of purpose. So I know that purpose and statement of purpose have become a little bit of a buzzword, and nobody really knows what it means.

At the same time, I think that when the highest authority of an organization, which in our case is our board of directors, issues a statement of purpose that is published on a proxy statement, which is a document a company produces, it really serves to inform not only external stakeholders, including investors, but also your own organization and your own employees about what the company is trying to achieve, where resources going to be allocated, and what are our priorities are.

In that statement of purpose, the board speaks not only about our focus being to phase out cigarettes and make cigarettes obsolete but also about the different horizons. As I mentioned to you before going to reduce risk products or smoke-free products in wellness and healthcare, but then importantly, and I think that this is really paramount, who are the stakeholders that are key for us to achieve our purpose? I say this because normally boards will talk to shareholders. Naturally, they are a very important stakeholder, but many other stakeholders are really key to creating the kind of change that we're seeking. I'm talking about government regulators, public health, the scientific community, consumers, and our supply chain.

When you think about what we're trying to achieve here, which is really a kind of change that is systemic, very much like climate change or very much like inequality, you have more than a billion people smoking around the world. To make cigarettes obsolete, it's not just about one company deciding to do it. It's really about working together in a multi-stakeholder effort to achieve that.

Keesa: So, Jennifer, could you let us know if there are specific products, say, are you looking at moving into food and beverage? Are you looking at moving into what specific products aside from cigarettes? You can speak broadly. What is the company looking at the future? What's your future direction? If it's not with cigarettes, then what products?

Jenny: So we have a broad portfolio in our smoke-free product category.

So our smoke-free product category is products that contain nicotine, but don't contain combustion. So they are not burned. We understand that the harms of smoking derive from combustion, which is where you generate harmful or potentially harmful constituents. So, the thesis of the company has been to remove combustion from the equation and deliver nicotine in a way that is less harmful to the consumer.

That is our biggest avenue of growth, and this is the future of our company for the foreseeable future. These are the technologies, the products that are making cigarettes obsolete. In this portfolio, we have different categories. We have heated tobacco technology that is proprietary to PMI. It's a very controlled way to heat tobacco in a way that will release nicotine without combustion, so removing combustion from the equation. We recently acquired Swedish Match, a company that is a leader in oral nicotine, which also doesn't have combustion. Then we have e-vape or electronic cigarettes. So this is liquid nicotine, which also doesn't have combustion and also delivers nicotine in a less harmful way.

Keesa: So it sounds like products will still have nicotine, and they'll still be vaping, but just not the heat combustion element. Is that fair?

Jenny: Yes, that's semi-correct.

So, you're right. These are still nicotine-containing products, and as I imagine you're alluding to, nicotine is not risk-free. Yet, we know that the harms of smoking do not come from nicotine consumption, but they are really coming from combustion. Combustion is burning. So, all these nicotine-containing products, they don't have combustion. They don't burn.

Keesa: So, one of the things you talked about, which definitely plays a role, is the supply chain. Your suppliers, you mentioned them in the context of the stakeholders.

I know that PMI has made the statement that you all are committed to eradicating systemic child labor in the tobacco supply chain. So, according to your sustainability report, you have over 200,000 farmers across about 20 countries providing you with tobacco, a huge supply chain there. Could you let us know how you're going to ensure this particular component with child labor?

Jenny: Thank you for that question. This is a very important topic that is definitely very close to our hearts. Indeed, our farm base is quite big, and we have been working with the farming communities for many years since 2011, actually. So, before transformation and before we actually started reporting on sustainability.

It is not a secret that many human rights issues are more pervasive, or exist more in agriculture in general. So, any company that has agriculture in their supply chain will know this is true. This includes child labor, forced labor, issues related to migrant workers, inequities, and gender.

So understanding what are the issues at hand not only having the right kind of policies, but putting programs in place and, importantly, having the ability to monitor the effectiveness of those programs. Something that we have been doing since 2011 is that we created our agricultural labor practices, and what is particular about these agricultural labor practices is that they have a way of working with external third parties to implement the agricultural labor practices in order to monitor how our initiatives are working, and with the data that we have collected for more than 10 years, that has allowed us to understand the progress that we're making and put in place ambitious targets.

One of these targets is to eradicate child labor in our tobacco supply chain, meaning zero child labor. We are technically already there, so child labor prevalence for the last two years has been less than one percent. Our intention is really to remove it completely, and the way that we're doing that now is that we understand that human rights issues like child labor are a symptom of a bigger problem, which is poverty. It's not like we think that we can eradicate poverty, but there's something to say about the role that we can play in terms of alleviating poverty. To do that, what we're doing is we're benchmarking the different countries where we operate to understand what is the income level of every farm and every farmer and the place where they are operating, be it Argentina, Malawi, Mozambique, or Indonesia. What is the living income? Not only by country but by region.

In understanding what is their living income, what is the gap that exists between the current income of the farmer and what would be required for them to make a living income? When making a living income, the chances of having forced labor on the farm, child labor, and other human rights abuses not only decrease significantly but actually disappear.

So, related to that, we also have the goal that 100 percent of the farmers that are supplying tobacco to PMI today will make a living income by 2025.

Keesa: Okay, great. 2025 living income, and you see that as having a tremendous impact on reducing child labor as well as helping, if not totally eradicating, helping the poverty issue within the areas where you do work.

Let's move over to executive compensation. 30 percent of executive compensation was linked to the Internal Sustainability Index. I want you to talk a bit about that. First, I wanted to get a sense of has linking executive compensation to the work that you were doing. Is it working? If so, let us know what systems you've put in place because many firms are trying to do this. Is this an example of it working? If so, how is it working?

Jenny: I think that sustainability has become more important and more regulated, and investors have more interest in understanding how companies are addressing environmental, social, and governance issues. A question that will come up often would be: To what extent is your sustainability performance linked to executive pay? So what we did is, we created a bespoke index, and it's bespoke because it is the metrics that are included in the index have a correlation to the results of our materiality.

Materiality is an exercise that is done to calibrate what are your priorities on sustainability, and it is on those priorities where PMI can have the biggest impact. Where we have actually linked to long-term executive compensation, it represents 30 percent of our long-term compensation.

The way that it works is that it's touching our entire value chain, different areas, including emissions, decarbonization, deforestation, child labor, and human rights, and importantly, it is overweighted in those KPIs that are talking about transformation. So, the core of our sustainability strategy is to transform our company.

The core of our sustainability strategy is to move away from cigarettes completely. Therefore, if you look at the index that contains 19 KPIs, the weight of each KPI is different, and it is overweighted on those KPIs that are measuring progress towards making our companies smoke-free.

How has it worked? I think it works well because it embeds sustainability from a governance perspective better in the organization. The fact that it's a bespoke instrument that is structured to really represent the priorities of PMI and the areas where PMI has the biggest impact makes it more coherent.

So there are fewer trade-offs. I say this because many companies look at external indexes instead and externally, this is not necessarily following materiality. In our case, there is an exercise that is very intentional in really looking at areas where we have a good impact, areas that are strategic for the organization. Because they're strategic, then it makes sense. It's coherent to actually link it to pay without necessarily having to compromise. The last thing that I think is very important in terms of credibility is that sustainability performance tends to be very qualitative, so linking it to pay has been something controversial at times because how does the board decide or assess if the company's performing good or bad with sustainability so qualitative.

In creating an index that has Metrics that are very concrete, and standards that are very well defined, what we're doing here is making our performance very objective in doing that, quantifiable, measurable, verifiable and eventually externally assured to make sure that there is no doubt in terms of calibrating and awarding performance in a way that is not discretionary, but actually quite objective.

Keesa: So it sounds like I know that you all use the Global Reporting Initiative, GRI, and SASB, Sustainability Accounting Standards Board. It sounds like you're really looking at key stakeholders as being not just shareholders, but the external environment, the communities where you're doing work, and other external stakeholders.

Is that accurate? Are you really considering stakeholders that come from your shareholder base as well as your community base?

Jenny: Yes, absolutely, we're considering all stakeholders, and this is consistent with our statement of purpose. If you read PMI’s statement of purpose that is in the proxy, which is also on our website, you will see that there is a dedicated paragraph to each stakeholder that is key for a company's purpose, for a company's success.

We're addressing directly, not just our shareholders, not just our investors, but also our employees, our supply chain, our consumers, and public health regulators, to really understand what role they play in the success of an organization. How is it that we engage with them? Why do we engage with them? For what purpose and in what capacity?

I think that overall, that's transparency in terms of explaining in general, but also in particular, why we are engaging with a specific stakeholder group with what intention, what capacity, and for what purpose, which is usually something that companies tend to be criticized in terms of the opaqueness of their engagements.

Keesa: Great. So, I want to just take focus on you for a second and just the interesting path that you traveled in terms of your career journey. You were an international and human rights attorney with an impressive background working with the UN, and the World Trade Organization. What drew you not only to PMI but what drew you to the role of Chief Sustainability Officer with a company that has an interesting reputation if you are looking at it from a sustainability, environmental, climate, and social perspective? What drew you to this?

Jenny: So, well, first, I should say, I didn't leave the UN to come work as Chief Sustainability Officer. Actually, I've been at PMI for eight years, and I had been at PMI for five years when I was offered this role. I joined PMI originally when the company didn't report or didn't have a sustainability strategy per se to start forming it from scratch.

This coincides with the time when the company adopted its transformation strategy and its new corporate strategy to move away from cigarettes, which, for me, was coherent. It made sense. I think that to the question that you asked me it is true, obviously, it's not an intuitive or obvious move, but at the same time, something that moves me is about how to go about change.

I think that we tend to, and I will be the first one to put my hand up, to be very opinionated, especially about the things that we don't like or that we disagree with. In being very opinionated, sometimes we stop protesting and do not really do anything else about it. If you ask me, when I think about what is the best way to go about change, it's really going into the root of the problem, into the root cause of the issue, especially if you're being invited to change it. I was hired with that invitation, and fast forward eight years, and here we are, and the company is indeed changing.

I hear you, and I agree with you, it is not a secret that our company and the sector, in general, don't enjoy the best reputation, but at the same time, there’s a silver lining to that in the sense that because it doesn't have a good reputation, the degree of scrutiny is so fierce that the work that we do and the degree of transparency compared to no other company. I mean, the quality of our data and the lengths that we go to in terms of our reporting, in terms of the initiatives that we put in place, in terms of the KPIs that we use, and how we articulate and establish our measurement units, everything is done so carefully and so rigorously. In order to ensure transparency and integrity in everything that we do, we're all very fully aware of our past. I think that the only way for things to change is to have people go in and feel uncomfortable with the status quo, so uncomfortable that they need to change it. In the end, that's how it happens.

Keesa: With that said, not only is this a very interesting place. It’s an interesting philosophy on how to make a change, not just criticizing it, but going in, making a difference, and also being a part of the CFO's organization as the officer. That must really support you leaning into revenue generation.

So when you talk about R&D, and when you talk about where the majority of the revenue comes what division it comes in now, do you feel that you have a greater say? Do you feel that you have greater capabilities because you were in the CFO's organization? What does that look like for CSO who's a part of the chief financial officers division?

Jenny: That's a good question. I definitely agree with what you stated. Indeed, I think it makes a huge difference. You will see that most sustainability teams tend to sit in the corporate affairs organization, communications, or marketing, and that says a lot about what is the ultimate value that an organization sees for sustainability.

I think that for PMI again, in a very consistent and coherent way, putting sustainability as part of finance. By the way, our company’s CFO, my boss, is not only the boss of sustainability and finance, but also strategy, which, again, makes a lot of sense because there's such a harmonious synergy between finance, strategy, and sustainability that I'm surprised more companies aren’t doing it. Perhaps this is the direction where we're heading. I think what is very nice is the synergies that can be formed by working closely with finance colleagues and leveraging systems, especially in companies that are big companies like PMI. Systems that exist to manage financial performance financial data, and stretch those systems so that they can serve to hold non-financial data and measure non-financial performance.

So, in a way, what has happened is that sustainability has become more sophisticated. PMI becomes more strategic, and with that, it acquires a different tone, more gravitas, and the ability to have conversations that are better linked not only to revenue but to business in general. So it's no longer just about this being the right thing to do, but also, what is the business case of doing all of that? Which I think is the future anyway. It's the only way for sustainability to exist in a strategic way in an organization.

Keesa: Finally, Jennifer, thinking about where you are seated, as you mentioned, and thinking about the future of risk and what risk may look like in terms of the context of the various stakeholders that you told us you serve, tell us something that we did not know about risk as it relates to this particular industry. Particularly as you are transitioning and transforming your brand, your reputation, and your product suite, tell us something we did not know about risk in the future.

Jenny: Well, we should have an entirely new podcast just on that question, then we would spend an hour on that. I think that for me, this is fascinating, and we have a chief risk and assurance officer in our organization. She was recently appointed and I enjoy so much working with her and her team because we are integrating and creating non-financial performance into enterprise risk management together.

I think that this is a result of the maturity of sustainability at PMI, but frankly speaking, it's also a result of how the external environment is changing. I mean, the fact that what used to be voluntary disclosures that companies used to make now is shifting rapidly into mandatory disclosures. The EU with the CSRD and a big package of requirements, is asking companies to report in a very specific way that what is reported needs to be externally assured.

That immediately changes the entire tone, the entire color of everything that a sustainability team is doing. The requirements related to rigor, risk management, and auditability of the performance and what is reported need to be treated in a different way. That's why we're working with with the risk functions in an organization becomes paramount.

What can I tell you that you didn't know? Well, I think that what is particular about PMI when it comes to sustainability and risk is that we're simultaneously managing the risks and the impacts of two value chains. So we're managing the impacts of the cigarette value chain, the one that we're leaving behind, and we're managing the one in a proactive way, the value chain we're moving towards.

So if you think about it, we talked a little bit about our tobacco supply chain and farmers. We know that as we move away from cigarettes into new products, we're going to need less and less tobacco. We're also going to have a supply chain that is going to have a big component of electronics.

Cigar companies don’t have any supply chain electronics at all. Electronics in itself, the supply chain of electronics presents a different kind of challenge, a different kind of risk. So entering that means that our organization needs to have that ability to manage, what we were talking about before, human rights risks that exist in the tobacco supply chain, in the agriculture supply chain, while also understanding what are the risks and preventing the extent possible the risks that exist in an electronic supply chain.

That's just for the supply chain, but it really doesn't change throughout. So if you think about the end of life, the end of life of a cigarette is drastically different from the end of life for new technologies that, again, with electronics, have different components, have different circularity, have different challenges in terms of design and sourcing materials.

So keeping that balance in the right kind of way, managing the value chain that was and that is going away at the same time, managing that the one that we're going towards is is the biggest risk, the biggest challenge, but also the most exciting opportunity.

Keesa: So risk encompasses a lot here, enterprise risk management, as well as understanding regulations that are coming down the pipeline in various regions in the EU, as you mentioned, already exists. Some things might be seen with the SEC in the US in the future, as well as which is key leaning into understanding the risks of the supply chain that you're leaving behind, as well as the supply chain of what is ahead of you in terms of your product suite, in terms what you're offering. Fantastic information. Jennifer Motles, Chief Sustainability Officer with Phillip Morris International, thank you so much for your time, Jennifer.

Jenny: Thank you and so nice to meet you. I really appreciate our conversation, and I appreciate so much for your thoughtful questions. I really enjoyed it. Thank you.