For the longest time, it seemed that material environmental, social, and governance (ESG) factors were mere afterthoughts on the minds of business leaders and investors. Within companies, finance and sustainability professionals communicated separately and in a different manner to their respective stakeholders—and in addition, did not necessarily talk to each other. But it has become clear that the sustainability performance of a company can no longer be a secondary concern. It is universally expected that ESG factors are integrated into the overall business strategy. A failure to do so can put the long-term competitiveness and success of a company at risk.
The impacts of climate change, biodiversity loss, and water insecurity—among others—threaten more than physical infrastructure and supply chains. They endanger progress and business growth by exacerbating systems-level disruptions for customers, investors, employees, and communities. It is crucial that business leaders view environmental risks in a new way, as it will require a drastic reduction of global greenhouse gas (GHG) emissions to limit global warming to no more than 1.5°C to avert catastrophic climate impacts.
Sustainability and a strong business performance do not contradict each other. They are fully interrelated and mutually reinforcing, and therefore should be organized and presented to all stakeholders alike in an integrated way.
Addressing ESG issues does not only bear costs for a company, it can also become a driver for growth and innovation. At PMI, we are investing in innovative technologies and take a multidisciplinary approach to reducing the environmental impact of our products, operations, and value chain. We are convinced that reaching our carbon-neutrality targets will contribute to making our company more resilient and more profitable.
An increasing number of organizations and sustainability leaders agree on the benefits of using internal carbon pricing to structurally drive a reduction in CO2 emissions. Assigning a price—and hence a theoretical cost—to the emissions generated not only makes an intangible concrete, but also further incentivizes actions to reduce the emissions that contribute to global warming.
At PMI, we reviewed our carbon pricing policy in 2020 and took a pioneer approach by developing two complementary internal carbon prices: a shadow price and a carbon levy. Our shadow carbon price is integrated into the financial evaluation and preparation of business cases that will impact our carbon emissions either favorably or unfavorably. This has been instrumental in the approval of additional carbon emission reduction projects as part of our energy savings initiatives, for example. Our carbon levy is designed to internalize costs and support behavioral change. This internal tax is virtually charged to selected business units for their GHG emissions, with the aim of using calculated virtual revenue to size and fund investments that contribute to the decarbonization of our business.
While the shadow price helps us to prioritize business cases for investment in activities aimed at structurally reducing our carbon emissions, the carbon levy helps to size the investments required today to compensate our unavoidable CO2 emissions through a portfolio of climate investments including offsetting (e.g., by purchasing carbon reduction/avoidance certificates) or insetting initiatives (e.g., through agroforestry projects that remove carbon from the atmosphere in our tobacco supply chain). We will review both the shadow price and the carbon levy annually to take changes in our risks and emissions profiles into account. We strongly believe that incorporating the cost of carbon emissions into investment decisions will help us become more efficient and accelerate the shift to low-carbon activities. Furthermore, it will allow us to communicate to stakeholders, including investors, how we are making decisions.
For PMI, sustainability is not only part of our business strategy. ESG is core to our performance and success. Sustainability and a strong business performance do not contradict each other. They are fully interrelated and mutually reinforcing, and therefore should be organized and presented to all stakeholders alike in an integrated way. We believe that delivering on our purpose by creating a smoke-free future without cigarettes will benefit both shareholders and other stakeholders and are committed to completing this journey while also taking strong actions to reduce the risk of climate change impacts and stop the destruction of nature.