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 in history: the calamitous effects of climate change, the depletion of natural resources and the widening of social inequities. It is clear that ignoring these issues is no longer an option.
This is why it is now assumed that every sector must play a role, and that the only way to solve these immense challenges is through multilateral collaboration and partnerships. But what does this mean for businesses?
For much of the current and last centuries, businesses have largely turned a blind eye to their environmental and social impact, but this is increasingly starting to change. It is now largely understood that having a positive impact on society and the environment is not only the right thing to do, but a requirement for business’ long-term success.
Easier said than done. Developing global, scalable environmental and social programs requires enormous resources — sometimes building entire teams. It’s easy to set targets; it’s much harder to make the tough decisions needed to achieve them.
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For the world’s largest companies, which answer to shareholders, the ability to prioritize the long term becomes even more challenging. Luckily, it isn’t only climate activists who are creating pressure — the investor community and financial sector are also demanding companies to better align their sustainability and business strategies. While the global pandemic has amplified and accelerated the urgency for stronger action, the long-term message is clear: If companies don’t take the action needed around environmental, social, and governance (ESG) topics, we will feel the effects for generations to come.
Business has been slow to heed the call to action. But Philip Morris International (PMI), perhaps surprisingly, has taken a leadership position in aligning its corporate and sustainability strategies. And while some may not think a tobacco company and sustainability can go hand in hand, PMI acknowledges that its most material topic is its product. In 2016, it publicly committed to actively phase out cigarettes and is working to deliver on its vision of eradicating smoking altogether. The company has also spent nearly two decades shifting resources towards developing products that are better alternatives to smoking, and placed the transformation of its business at the core of its sustainability strategy.
Just last month, PMI further reinforced its commitment to sustainability by moving its global sustainability team under the leadership of Chief Financial Officer (CFO) Emmanuel Babeau.
PMI may be one of the first to make this prescient move; but here are three reasons 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 extract our planet’s natural resources at an unsustainable pace; and 2) companies that pay attention to these issues, and invest accordingly, outperform those who do not. Institutional investors are seeing these two realities and are increasing their efforts in assessing the performance of companies using ESG factors, according to the fifth EY Climate Change and Sustainability Services survey of 298 institutional investors globally. The Art of Alignment: Sustainability and Financial Transparency, published by SustainAbility in November 2019, also identified investors as the primary audience demanding greater alignment between financial and sustainability transparency.
However, EY’s research shows that investors continue to be concerned about the gap that exists between financial and non-financial performance. The research further shows gaps in data quality and integrity, and inconsistencies in integrated reporting. Financial performance is managed by finance teams, whereas ESG performance is often led by sustainability teams. With investors increasingly demanding high-quality, accurate ESG data alongside financial data, bringing these two areas of reporting and expertise together becomes an imperative.
In this area, PMI is leading from the front. The appointment of Jennifer Motles, PMI’s Social Impact & Sustainability Lead, to the position of CSO sees the role move from External Affairs to Finance; with Motles reporting to the CFO, Babeau. PMI attributes the move to the increased recognition, by both companies and investors, that fully integrating ESG drivers into business strategy can significantly enhance both the sustainability agenda and financial performance.
“This move outlines that ESG is core to PMI’s performance and success, and further demonstrates PMI’s leadership in sustainability and corporate purpose,” Babeau said, regarding Motles’ appointment. “It is our firm belief that sustainability and business performance do not follow separate paths and narratives. They are fully interrelated and mutually reinforcing and should be organized and presented to all 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 systems and controls that characterize financial reporting. Unlike financial reporting, ESG reporting does not have consistent metrics, assurance or reporting formats that investors and companies can analyze or compare. This topic was discussed in depth with nearly 400 people at the recent Integrate 2021 virtual conference.
Advances in technology enable companies to gather ever-increasing amounts of data — 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 reporting was a contributing factor in PMI’s decision to place sustainability within finance.
“Where in an organization is the center of expertise of managing data? It’s in Finance,” she explains. “Moving sustainability into Finance adds robustness to sustainability data, and adds integrated decision-making to the finance function. It is insufficient to assess the future of the company purely on a financial basis.”
3. CSOs need to work hand-in-hand with the C-suite
At the recent launch of the new S30 Group last month, HRH The Prince of Wales called for empowered CSOs, working in lock step with their C-suite counterparts. S30 — launched by the Sustainable Markets Initiative, EY and Freuds — will provide a forum for senior sustainability leaders and help make the case for other businesses to appoint CSOs.
As Prince Charles said at the launch: "I very much hope to see major businesses around the world appoint suitably empowered CSOs to ensure sustainability is central to business strategy, decision-making, procurement, supply chains and customer engagement. Sustainability leaders need to work hand-in-hand with C-Suite counterparts, bringing them along as part of the solution; and with younger employees who I know care deeply about sustainability and want to see real, demonstrable action.”
And when Sustainability and Finance teams work together, they will inevitably learn from each other and strengthen the business.
Motles agrees with the Prince, saying that, “Sustainability teams have a lot to learn in terms of financial strategic thinking; and equally, in finance, there is 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 open dialogue — not just with our stakeholders, but also amongst internal teams.”
She continued, “Foundationally, as a company we believe that sustainability must be embedded into every aspect of our business. Sustainability strategy is corporate strategy, and key ESG issues are key business issues. In this regard, our non-financial and financial performance are deeply interrelated when we think about the success and the future of our company.”
Motles recognizes PMI’s predicament when reporting on sustainability: “If we want to talk about ESG, we need to be ready to say we sell a product that is harmful but have shifted our resources and focus to create better alternatives to continued smoking.”
As mentioned earlier, in 2016, PMI announced its new 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 for adult smokers who would otherwise continue to smoke.
PMI predicts that in some countries it may be possible to end cigarette sales within 10 to 15 years given the right regulatory encouragement and support from civil society. But it’s a complex issue. Motles points to the myriad of nicotine products, tobacco-control measures and smoking-cessation therapies already available; and yet, over one billion people still smoke.
“This is a systemic issue — in which industry, public authorities, and every part of society must work together. Our intention is not just to make our company smoke-free. We are driving a kind of change that aims for cigarettes to become obsolete and replaced by better alternatives for those adult smokers who will not quit,” she says.
Earlier this year, PMI published its first Integrated Report, including a Statement of Purpose — which re-affirms its commitment to deliver a smoke-free future. The company is confident that aligning the Sustainability and Finance functions will accelerate its transformation.