Last month, Philip Morris International moved its global sustainability team under the leadership of CFO Emmanuel Babeau. It may be one of the first global companies to make this prescient move; but here are three reasons why we believe this trend is only just beginning.
Each year, we increasingly feel the impact of some of the biggest crises inhistory: the calamitous effects of climate change, the depletion of naturalresources and the widening of social inequities. It is clear that ignoring theseissues is no longer an option.
This is why it is now assumed that every sector must play a role, and that theonly way to solve these immense challenges is through multilateral collaborationand partnerships. But what does this mean for businesses?
For much of the current and last centuries, businesses have largely turned ablind eye to their environmental and social impact, but this is increasinglystarting to change. It is now largely understood that having a positive impacton society and the environment is not only the right thing to do, but arequirement for business’ long-termsuccess.
Easier said than done. Developing global, scalable environmental and socialprograms requires enormous resources — sometimes building entire teams. It’seasy to set targets; it’s much harder to make the tough decisions needed toachieve them.
For the world’s largest companies, which answer to shareholders, the ability toprioritize the long term becomes even more challenging. Luckily, it isn’t onlyclimateactivistswho are creating pressure — the investorcommunityand financial sector are also demanding companies to better align theirsustainability and business strategies. While the global pandemic has amplifiedand accelerated the urgency for stronger action, the long-term message is clear:If companies don’t take the action needed around environmental, social, andgovernance (ESG)topics,we will feel the effects for generations to come.
Business has been slow to heed the call to action. But Philip MorrisInternational (PMI), perhaps surprisingly, has takena leadership position in aligning its corporate and sustainability strategies.And while some may not think a tobacco company andsustainabilitycan go hand in hand, PMI acknowledges that its most material topic is itsproduct.In 2016, it publicly committed to actively phase out cigarettes and is workingto deliver on its vision of eradicating smoking altogether. The company has alsospent nearly two decades shifting resources towards developing products that arebetter alternatives to smoking, and placed the transformation of its business atthe core of its sustainability strategy.
Just last month, PMI further reinforced its commitment to sustainability bymoving its global sustainability team under the leadership of Chief FinancialOfficer (CFO) Emmanuel Babeau.
PMI may be one of the first to make this prescient move; but here are threereasons why we believe this trend is only just beginning.
1. Investors are increasingly requesting comparable and reliable non-financial data.
Two truths are now primarily self-evident: 1) mankind cannot continue to extractour planet’s natural resources at an unsustainable pace; and 2) companies thatpay attention to these issues, and invest accordingly, outperform those who donot.Institutional investors are seeing these two realities and are increasing theireffortsin assessing the performance of companies using ESG factors, according to thefifth EY Climate Change and Sustainability Servicessurveyof 298 institutional investors globally. The Art of Alignment: Sustainabilityand FinancialTransparency,published by SustainAbility in November 2019, also identified investors asthe primary audience demanding greater alignment between financial andsustainability transparency.
However, EY’s research shows that investors continue to be concerned about thegap that exists between financial and non-financial performance. The researchfurther shows gaps in data quality and integrity, and inconsistencies inintegrated reporting. Financial performance is managed by finance teams, whereasESG performance is often led by sustainability teams. With investorsincreasingly demanding high-quality, accurate ESG data alongside financial data,bringing these two areas of reporting and expertise together becomes animperative.
In this area, PMI is leading from the front. The appointment of JenniferMotles, PMI’sSocial Impact & Sustainability Lead, to the position of CSO sees the role movefrom External Affairs to Finance; with Motles reporting to the CFO, Babeau. PMIattributes the move to the increased recognition, by both companies andinvestors, that fully integrating ESG drivers into business strategy cansignificantly enhance both the sustainability agenda and financial performance.
“This move outlines that ESG is core to PMI’s performance and success, andfurther demonstrates PMI’s leadership in sustainability and corporate purpose,”Babeausaid,regarding Motles’ appointment. “It is our firm belief that sustainability andbusiness performance do not follow separate paths and narratives. They are fullyinterrelated and mutually reinforcing and should be organized and presented toall stakeholders in an integrated way.”
2. ESG reporting disclosure needs the rigor of financial reporting
According to EY, ESG performance reporting generally lacks the rigorous systemsand controls that characterize financial reporting. Unlike financial reporting,ESG reporting does not have consistent metrics, assurance or reporting formatsthat investors and companies can analyze or compare. This topic was discussed indepth with nearly 400 people at the recent Integrate2021 virtual conference.
Advances in technology enable companies to gather ever-increasing amounts ofdata — for example, about the environmental footprint of their operations.However, this data needs to be presented in an accessible and verifiable way.
Motles says the need for increased focus on usability of ESG data and reportingwas a contributing factor in PMI’s decision to place sustainability withinfinance.
“Where in an organization is the center of expertise of managing data? It’s inFinance,” she explains. “Moving sustainability into Finance adds robustness tosustainability data, and adds integrated decision-making to the financefunction. It is insufficient to assess the future of the company purely on afinancial basis.”
3. CSOs need to work hand-in-hand with the C-suite
At the recent launch of the new S30Grouplast month, HRH The Prince of Wales called for empowered CSOs, working inlock step with their C-suite counterparts. S30 — launched by the SustainableMarkets Initiative, EY and Freuds — will provide a forum for seniorsustainability leaders and help make the case for other businesses to appointCSOs.
As Prince Charles said at the launch: "I very much hope to see major businessesaround the world appoint suitably empowered CSOs to ensure sustainability iscentral to business strategy, decision-making, procurement, supply chains andcustomer engagement. Sustainability leaders need to work hand-in-hand withC-Suite counterparts, bringing them along as part of the solution; and withyounger employees who I know care deeply about sustainability and want to seereal, demonstrable action.”
And when Sustainability and Finance teams work together, they will inevitablylearn from each other and strengthen the business.
Motles agrees with the Prince, saying that, “Sustainability teams have a lot tolearn in terms of financial strategic thinking; and equally, in finance, thereis an opportunity to expand horizons and think more about the long-term future.As we transform our business, it’s important that we encourage and invite opendialogue — not just with our stakeholders, but also amongst internal teams.”
She continued, “Foundationally, as a company we believe that sustainability mustbe embedded into every aspect of our business. Sustainability strategy iscorporate strategy, and key ESG issues are key business issues. In this regard,our non-financial and financial performance are deeply interrelated when wethink about the success and the future of our company.”
Motles recognizes PMI’s predicament when reporting onsustainability:“If we want to talk about ESG, we need to be ready to say we sell a product thatis harmful but have shifted our resources and focus to create betteralternatives to continued smoking.”
As mentioned earlier, in 2016, PMI announced its new purpose: to deliver asmoke-freefutureby focusing its resources on developing, scientifically substantiating andresponsibly commercializing smoke-free products that are less harmful thansmoking— with the aim of completely replacing cigarettes as soon as possible for adultsmokers who would otherwise continue to smoke.
PMI predicts that in some countries it may be possible to end cigarette saleswithin 10 to 15 years given the right regulatory encouragement and support fromcivil society. But it’s a complex issue. Motles points to the myriad of nicotineproducts, tobacco-control measures and smoking-cessation therapies alreadyavailable; and yet, over one billion people still smoke.
“This is a systemic issue — in which industry, public authorities, and everypart of society must work together. Our intention is not just to make ourcompany smoke-free. We are driving a kind of change that aims for cigarettes tobecome obsolete and replaced by better alternatives for those adult smokers whowill not quit,” she says.
Earlier this year, PMI published its first IntegratedReport,including a Statement of Purpose — which re-affirms its commitment to deliver asmoke-free future. The company is confident that aligning the Sustainability andFinance functions will accelerate its transformation.
Philip Morris International
Organizational Change
Published Dec 16, 2020 1pm EST / 10am PST / 6pm GMT / 7pm CET
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