Strategic Report Governance Financial Statements

STRATEGIC MANAGEMENT Delivering our strategy

Growth Innovations, such as capsules, re-sealable Pall Mall packaging, additive-free blends, new filter Pall Mall, our leading brand in terms of technologies and our more recent launch of Our brands delivered further volume, grew by 5.6% in 2014, delivering tube filters, accounted for nearly one-quarter a record volume of 92 billion cigarettes, as growth in 2014 as we continued of our total cigarette volume in 2014. a result of increases in Pakistan, South Africa, to invest in opportunities in key Cigarettes with tube filters have been rolled Mexico and Chile. This was partially offset markets and next-generation out to 24 markets and have also established by lower volume in Italy, Russia, the UK tobacco and nicotine products. a presence in Global Travel Retail outlets. and Belarus. The Group grew revenue by 2.8% at constant We continue to be the market leader for Innovations accounted for 20% of Pall Mall’s rates of exchange, driven by a price mix capsule products, with a segment share cigarette volume, while Pall Mall Fine Cut of 4.2%. Strong pricing in a number of of more than 40% in our key markets. volume was up by 5.4% in Western Europe, mainly driven by growth in Germany, key markets was partly offset by increased Dunhill competitive pricing activity and the growth Hungary, Belgium, the Netherlands and of lower-priced segments in certain markets. Dunhill delivered volume growth of 2.9% Luxembourg. Pall Mall remains the biggest At current rates of exchange, revenue to 55 billion cigarettes in 2014. This result Fine Cut brand in Western Europe. was driven by a very strong performance in decreased by 8.4%, reflecting the adverse Rothmans impact of exchange rate movements. Indonesia and growth in Brazil, partially offset by declines in Malaysia, South Korea and the Rothmans became part of our portfolio We grew volume in a number of markets, Gulf Co-operation Council (GCC) countries. of GDBs at the start of 2014 recognising including Bangladesh, Venezuela, China, the brand’s strategic value to the Group. Turkey, Ukraine, Pakistan and Iran. Innovations accounted for 81% of Dunhill’s The brand’s volume was up by 39.8% in 2014 volume, with 75% of all Dunhill 2014 reaching a total of 36 billion cigarettes However, volume was lower in Russia, cigarettes now sold in re-sealable packaging. – adding 5.5 billion cigarettes in Russia alone, Vietnam, Brazil and across Western Europe. building on the brand’s very successful launch Overall cigarette volume from subsidiaries Kent there in 2012. Rothmans also achieved was 667 billion, down by 1.4%, largely Kent volume in 2014 was 64 billion, down volume growth in Italy, Ukraine and the UK. as a result of industry volume decline. by 2.8% due to industry decline in Russia, Innovations accounted for 31% of Rothmans’ Romania and Ukraine, partially offset by cigarette volume, more than four times Total tobacco volume (including cigarettes growth in Iran, Uzbekistan, Japan and Turkey. greater than in 2013, driven by successful and other tobacco products) was 1.3% lower Innovations now account for 83% of the launches in Eastern Europe. than last year. Our Fine Cut tobacco business brand’s global volume. grew by 1.0%, driven by a good performance in Western Europe, where Fine Cut volume We continue to expand our offerings in Premium growth increased by 1.7%. the Kent HD range, featuring new tube The Group delivered a strong performance technology which further enhances the brand in the premium segment in 2014. Our share Our brands continued to perform well in and made up 36% of Kent volume in 2014. of this segment grew by 30 basis points, 2014, with another strong contribution from mainly driven by Dunhill in Indonesia, our Global Drive Brands (GDBs) – Dunhill, Lucky Strike Romania and Brazil, State Express 555 Kent, Lucky Strike, Pall Mall and Rothmans. Lucky Strike, our original American brand, and Kent in Vietnam, John Player Gold Leaf They drove our share growth of 10 basis saw volume growth of 0.8% to 31 billion in Pakistan and Lucky Strike in Argentina. points in key markets. cigarettes. The growth was driven by Mexico This more than offset the impact of declines Another good year for our GDBs and an improved performance in Western elsewhere – Kent in Russia, Lucky Strike, Kent European markets such as Spain, Belgium and Dunhill in Chile and Dunhill in the GCC. Our continuing investment in our GDBs has and France. seen their share of our global volume double to 42% since 2003. This was partially offset by volume decline in Chile, Poland and the Philippines. GDB volume growth of 5.8% in 2014 was Innovations now account for 33% of driven by Rothmans as well as the continued Lucky Strike volume, including our additive- strong performance of our other GDBs. free offer which continues to grow strongly. Our GDB market share grew by 90 basis Lucky Strike Fine Cut also had a successful points, with Rothmans and Pall Mall making year, with volume up by 12.7%, driven particularly strong gains. GDB Fine Cut by gains in Luxembourg, Germany, France, products performed well too, with volume Spain and Belgium. increasing by 6.6% in 2014.

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STRATEGIC MANAGEMENT Delivering our strategy continued

Growth continued International brands In addition to our GDBs, we continue to invest in a strong range of international brands that play an important role in many markets’ portfolios. Viceroy is the largest in volume terms. It experienced volume decline of 2.6% in 2014, due to market declines in Poland and Russia, partially offset by increases in Azerbaijan, Egypt and Turkey. John Player Gold Leaf is a very important We are committed to leading in next-generation products regional brand in Asia-Pacific and the Middle East. Its volume declined by The Group is committed to leading Voke 2.1% in 2014, due to decreases in Pakistan, the market in next-generation tobacco We are also looking at nicotine products Bangladesh and Sri Lanka partially offset and nicotine products. that are regulated as medicines, including by strong volume growth in the GCC. We will complement our core tobacco a new nicotine inhalation product called Benson & Hedges grew in several markets, business by offering adult consumers Voke. This innovative product does not although overall volume fell slightly due to a wide choice of alternative products, require batteries or any other energy market declines in Bangladesh and Australia. including e-cigarettes, medicinal nicotine source and is activated simply by inhaling. Craven A was heavily impacted by market products and tobacco heating products. Following receipt of the relevant licences decline in Vietnam and in other markets in from the UK medicines regulator, we are The Group is investing significantly in this Asia-Pacific and EEMEA. the first tobacco company to have a nicotine category because it will create long-term product licensed as a medicine. We plan CTBAT International Ltd, our joint venture growth opportunities for the Group while to commercialise and launch Voke in the with subsidiaries of China National Tobacco meeting consumer demand for less risky UK by the end of 2015. Corporation, commenced operations in alternatives to smoking. Tobacco heating products 2013. It owns and manages the worldwide We are well placed to deliver these Tobacco heating products heat tobacco international rights to State Express 555 as new products. We understand the rather than burning it, making them a well as the rights outside China to the leading needs of smokers and we are investing potentially less risky option. We plan to Chinese brand, Shuang Xi. substantially in the research, development begin consumer trials of a tobacco heating and commercialisation of a pipeline State Express 555 volume was up by product by the end of 2015 and have our of products. 24.7% in 2014, driven by increases in China, first product in a test market in 2016. Cambodia and Global Travel Retail, partially Vype offset by decline in Vietnam. Shuang Xi Regulation In 2013, we were the first international has been successfully launched in Pakistan, We think overly restrictive regulation tobacco company to launch an e-cigarette Russia, Poland, Hong Kong and Macau. that treats products like e-cigarettes in the in the UK. Since then, we have further same way as traditional tobacco could be increased our understanding of the needs counterproductive. It could stifle innovation of consumers in this sector. and the growth of the category and prevent In 2014, we used these insights to smokers becoming aware of and accessing develop the range. We launched two these new products. We support regulation new innovative products to better meet that has high consumer safety and product consumer expectations – Vype eStick quality standards and restricts sales to over and Vype ePen. 18s, while enabling companies to freely innovate and to distribute and market We have also increased retail distribution their products responsibly. and supported the brand with investment in responsible TV and cinema advertising Standards aimed solely at adult smokers and users We uphold high standards for our products. of other nicotine products. We have a robust approach to quality and We will use what we have learned in the product testing for e-cigarettes. We voluntarily UK market to support the launch of Vype use appropriate warnings on packs and our in further markets. marketing is directed at existing adult smokers or consumers of other nicotine products only.

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Key performance indicators (KPIs) Total shareholder return – annual % Group share of key subsidiary markets* (compound annual growth rate – CAGR) (Increase in % share) 11.4% +10bpts

Definition:Total shareholder return (TSR) is measured according to the return Definition: This is our retail market share in index calculated by Datastream, on the basis of all companies’ dividends being the Group’s key markets, which cover around reinvested in their shares. The return is the percentage increase in each company’s 80% of the volumes of subsidiaries. index over a three-year period. Target: To continue to grow market share. Objective: The Group is focused on increasing shareholder value, which is Note: *Share figures are rebased annually measured using TSR compared to a fast-moving consumer goods (FMCG) peer to reflect market and segment changes. group. The FMCG comparator group is reviewed annually to ensure it remains both relevant and representative.

FMCG Group – 1 January 2012 to 31 December 2014 Global Drive Brands’ (GDBs) The FMCG Group comparison is based on three months’ average values cigarette volume (bn) BAT 11.4% Median 14.6% 35 278 263 254 30 278bn

25 +5.8%

20

15

10 2014 2013 2012 Upper quartile Definition: GDB volume is calculated as the total 5 Lower quartile volumes of the five GDBs sold by our subsidiaries. 0 Target: To increase our GDBs’ share faster than the rest of our portfolio. 2012 and 2013 figures have been re‑stated to include Rothmans’ volume.

Net turnover (NTO) at constant New KPI introduced Adjusted diluted earnings per share exchange rates In 2014, we reviewed our KPIs at current rates (pence) and how they support our strategic objectives. The TSR indicator 216.6 £15,682m was reduced by discontinuing 208.1 205.2 a FTSE 100 Index comparator -3.9% +2.8% 15,682 15,260 and focusing solely on a FMCG comparator group. We have introduced net turnover as an indicator of organic growth.

2014 2013 2012

Definition: This is our adjusted diluted earnings per share 2014 2013 (EPS) – the detail of the calculation and adjustments are explained in Note 7 in the Financial Statements. Definition: Gross turnover net of duty, Target: To grow adjusted diluted EPS at the rate of high excise and other taxes. single figures per annum, on average, over the medium Target: To grow NTO by 2–5% per year. to long term.

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STRATEGIC MANAGEMENT Delivering our strategy continued

Productivity Our new global operating model has been Our leading factories supply multiple markets introduced in over half of the Group and and produce a wide range of products six of our 10 most important markets. across our brand portfolio. In recent years, We are becoming a more Twenty-five factories and around 15,000 we have reduced our manufacturing efficient and effective business, of our employees are now working with footprint by closing some factories and with global systems and ways the common systems and processes. restructuring others. of working, a responsive supply The programme – the Group’s largest We continued to optimise our manufacturing chain and a long-established ever business transformation programme operations in 2014 and at the end of the year approach to securing the highest – will take a further two years to fully roll had 44 factories in 41 countries producing out worldwide. In 2015 the focus will be cigarettes and Other Tobacco Products. quality leaf for our products. on Africa, the Middle East and the Americas. We recognise the impacts of these decisions on employees and work hard to mitigate the By continually improving our productivity As the roll-out progresses, we expect to see outcomes for them and the wider community. today, we are able to generate funds to invest further improvements in the way our people in the growth of our business in the future. and business units work as they become even We are continually looking to improve In 2014, we continued to improve the more integrated. the efficiency of our supply chain. Last year Group’s operating margin, with a 54 basis we launched Integrated Work Systems, points increase to 38.7%. This is a good We operate a globally a new programme designed to maximise performance given that we absorbed integrated supply chain productivity in our factories while also significant increases in transactional costs The Group operates an integrated global ensuring we maintain high standards caused by exchange rate movements. supply chain focused on the effective and of product quality. It also demonstrates that we are becoming efficient delivery of market-leading products In 2014 we continued to drive cost savings a more efficient, effective and globally aligned and innovations to our markets to satisfy in our supply chain in areas such as leaf business, focused on reducing costs and consumers, drive share growth and create and blends, wrapping materials, logistics, complexity while making the best possible value for our business partners. manufacturing and indirect procurement. use of all of our resources. In 2014 this has seen the continued Savings such as these not only enhance We’re becoming a faster and roll-out of capsules and an increased focus our profitability, but also release funds that on introducing new cigarette tube filter we can invest in activities that will deliver more effective business innovations, which will continue in 2015. sustainable growth. In 2012 the Group began a programme to The Group has continued to invest in new We work with farmers to secure implement a new operating model, which machinery and equipment in 2014 to support includes standardised systems, data, structures future growth, for example, by ensuring we access to high-quality leaf and ways of working, underpinned by a global can meet growing demand for cigarettes with Tobacco leaf is the most essential part of our SAP system. These are being implemented tube filters and to support key markets such products. It’s crucial to our business to ensure in phases throughout the global organisation as Indonesia. we have secure and sustainable sources of and were ongoing throughout 2014. high-quality leaf that supports the Group’s Our investment in global planning systems strategic focus on delivering superior products With consistent ways of working, better and processes supports our strategic focus to our consumers. information and higher levels of automation, on delivering products ‘on time and in we expect that our markets will be able to full’ to ensure we can capitalise on growth The Group doesn’t own tobacco farms or operate faster and more effectively and move opportunities in our diverse markets. directly employ farmers. Instead, we buy more services above market. more than 400,000 tonnes of tobacco Having a clear global view of our plans means from over 100,000 contracted farmers and By January 2015, Asia-Pacific and Western we can allocate resources in the right areas. third‑party suppliers, mainly in developing Europe regions and a significant proportion It also improves our ability to react quickly countries and emerging economies in Africa, of EEMEA region were using the new global in situations when speed to market will give Asia and Latin America. SAP system – a total of 85 markets and Group us a competitive advantage. entities, such as above-market shared services. Our Global Leaf Pool, which is responsible The system is now supporting around 60% for buying and supplying all tobacco leaf of both the Group’s profit and volume. to the Group, provides economies of scale across the leaf supply chain.

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We invest more than £65 million each year Key performance indicators (KPIs) Business measures to support farmers. We have more than 1,000 leaf technicians worldwide who Adjusted profit from operations Operating margin provide on-the-ground advice and training at constant exchange rates for farmers, helping them run successful, profitable and high-yielding farms.

Our cutting-edge research into tobacco £6,075m 6,075 38.7% 38.7% 5,820 38.1% plants and in advancing agricultural practices 37.1% is reflected annually in the higher quality +4.4% +54bpts of the tobacco used in our products and increased productivity levels on farms. We also guarantee to buy a certain amount of tobacco from our farmers each year – this gives them a regular income which 2014 2013 2014 2013 2012 they can invest in their farms to build successful businesses. Definition: This is the adjusted profit from operations of the Definition:This is the percentage of adjusted Group’s subsidiaries – profit from operations at constant rates profit from operations divided by revenue. This approach benefits farmers by helping adjusted for the items shown as memorandum information them to have prosperous livelihoods and on the Group Income Statement. encourages future generations to continue Target: The Group’s medium- to long-term target is Objective: To increase operating margin to grow adjusted profit from operations on average by 50–100 basis points per annum. to farm and support their local communities by 5–7% per year. and the environment. It helps our leaf operations to remain efficient and secures our supply chain for the future, while also Cash generated from operations Free cash flow as a percentage of adjusted ensuring the integrity and quality of our at current rates earnings (excl. non‑tobacco litigation) products to satisfy our consumers. We review all our leaf suppliers through our Social Responsibility in Tobacco Production £2,660m 76% (SRTP) programme and publish their scores 2,982 82% 81% 2,739 76% on our website (www.bat.com/SRTPdata). 2,660 SRTP sets out the minimum requirements we expect of our leaf suppliers and covers good agricultural practices and environmental management, such as soil and water conservation, sustainable wood sourcing and protecting biodiversity. 2014 2013 2012 2014 2013 2012 Definition: Cash generated from operations is defined Definition: This measures our free cash flow We’ll continue to focus on as the free cash flow excluding restructuring costs and per share as a ratio of the adjusted diluted improving our productivity dividends and other appropriations from associates, earnings per share. per the alternative cash flow on page 42. By continuing to improve our productivity in Target: A specific target is set each year for the cash flow Target: To convert around 80% of our adjusted all areas of our supply chain, we can increase from operations. earnings per share to free cash flow. our profitability and continue to deliver returns to our shareholders. But it’s not just about today; it also underpins our future. The more efficient and effective we become, the more we are able to generate funds to invest in the things that will fuel future growth: our products, our innovations, our people, our markets and our next- generation products.

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STRATEGIC MANAGEMENT Delivering our strategy continued

Winning organisation To help our people embrace this approach, We value diversity we have launched an online global talent Diversity matters to the Group because it resource, refreshed our leadership training makes good commercial sense – having A winning organisation is one and established partnerships with leading a diverse workforce means we are better with high-performing leaders business schools. able to understand and meet the needs of inspiring diverse teams of We are keen to develop our leaders from consumers in more than 200 markets. It is committed and engaged people within our business. We want to provide also important to our reputation because in a fulfilling, rewarding and talented people with rewarding career of societal expectations around diversity. progression and, in doing so, retain valuable responsible work environment. Our specific diversity ambition is to achieve expertise and knowledge. by 2020 a sustainable improvement in senior The quality of our people is a major reason representation of women and nationalities why the Group continues to perform well. This commitment was demonstrated in that are key to our success. They make us a winning organisation by using 2014 when more than 80% of our senior appointments were people from within their expertise, experience and enterprise to The Group’s broad geographic presence our business. respond to the challenges of the marketplace means we are well placed to attract talented to deliver strong business results. We also continued to improve our retention people from many different countries and diverse nationalities are widely represented The way our people operate is embodied of high-performing leaders and to focus on across the business, including at Board level. in our four Guiding Principles: Enterprising succession plans for our critical leadership roles. Spirit, Freedom Through Responsibility, Bring your Difference Nationalities represented Open Minded and Strength from Diversity. They underpin our culture and guide how When we do look to recruit, we seek to Total we deliver our strategy (see page 15). bring in people who will provide additional Board level 7 knowledge and skills that will strengthen Global headquarters 71 Our aim is to maintain a high-performing our teams and ultimately make us a Management level globally 137 organisation that attracts, develops and stronger business. retains talented people. We continue to invest in providing our people with a great place To do so, it is important that our Group One of the ways that we are supporting to work. So we are proud that in 2014 we stands out as an attractive employer in a women’s progression into senior roles is were once again ranked as a top employer highly competitive global recruitment market. through a programme called Women in in many markets around the world, including So in 2014 we refreshed our employer brand, Leadership, which provides training, mentoring Germany, Brazil and Southern Africa. Bring your Difference. and other types of career support for high potential female employees. We continue We also launched a new-look global to establish women’s networks in markets, Leadership capabilities careers website (www.bat-careers.com) including South Korea and Australia. We are committed to ensuring the Group and established a stronger presence on continues to develop high-performing social media, including LinkedIn, Facebook In 2014, the proportion of women in all managers who will lead the delivery of and Twitter. management roles across the organisation our strategy both now and in the future. was 32%. A share in our success In 2014 we launched new leadership The table below sets out the gender breakdown We offer our UK employees the chance capabilities that provide our people within the Group as at 31 December 2014, to share in our success via our Sharesave with clarity on what we believe defines comparing numbers for all employees, our Scheme, Partnership Share Scheme and good business and people management most senior managers and the Main Board. Share Reward Scheme. at British American Tobacco. The capabilities With 30% female representation on our Main centre around the expectation that our We also operate several similar schemes for Board, we exceeded a target recommended leaders are ‘passionate owners, inspiring senior management in our Group companies. by the UK Government. people to deliver outstanding results’. They are designed to guide all aspects of our talent development lifecycle, including the qualities we look for in people when % % we recruit, plus how we develop leaders’ Total Male Female Male Female skills, assess their performance and manage Main Board 10 7 3 70 30 succession planning. Senior managers* 212 183 29 86 14 Total Group employees 57,478 43,577 13,901 76 24

* ‘Senior managers’ are defined here as the members of the Management Board (excluding the Executive Directors) and the Directors of the Group’s principal subsidiary undertakings. The principal subsidiary undertakings, as set out in the financial statements, represented approximately 83% of the Group’s employees and contributed around 80% of Group revenue and profit from operations in 2014.

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In February 2015 three new Non-Executive We set high standards Business measure Directors joined our Main Board, which The Group has clear policies and standards now comprises four women and nine men. covering everything from health and safety Employee engagement index We aim to provide equal opportunities to to anti-bribery measures. Our Standards of 72% 69% all employees. We do not discriminate when Business Conduct set out our commitment to making decisions on hiring, promotion or good corporate behaviour for our employees. 72% retirement on the grounds of race, colour, In 2014 we updated them to reflect new gender, age, social class, religion, smoking policies: ‘Respect in the workplace’ reinforces habits, sexual orientation, politics or disability, our commitment to treat each other with subject to the inherent requirements of the respect and as equals, including promoting role to be performed. We are committed diversity, while ‘Human rights and our to providing training and development for operations’ defines our role as a good employees with disabilities. BAT 72% corporate citizen, setting out, for example, FMCG Comparator Group 69% Safe place to work our commitments to no child labour. Definition: Results from our biennial ‘Your Voice’ The Group’s goal of zero accidents reflects Employee engagement employee opinion survey, last carried out in 2014, our commitment to keeping our people as enable us to calculate our employee engagement We are committed to ensuring that our safe as possible at work. In 2014, accidents index – a measure that reflects employee satisfaction, people are engaged with our business. across the Group decreased by 19%, with advocacy and pride in the organisation. We keep them informed about our strategy, 72% of our sites achieving zero accidents. Objective: To achieve a more positive score than the performance and other developments via norm for 30-plus FMCG companies in our comparator Sadly, the number of people who died global communications cascades, face-to-face benchmark group. increased from six in 2013, to eight in 2014 dialogue, presentations and our intranet. (includes employees and contractors). Every two years we conduct a survey to We deeply regret this loss of life and the measure employee engagement. Our most suffering caused. recent survey in 2014 had a response rate The fatalities occurred as a result of road traffic of 93% – 1 percentage point up on our last accidents and armed attacks on trade and survey in 2012 and 11 percentage points distribution personnel in some challenging higher than the average response rate for environments where there are security risks this type of survey. or poor transport infrastructure. We achieved an Employee Engagement The ‘Your Voice’ survey We review all accidents to identify actions Index score of 72% in the survey, ahead of to reduce the chances of similar events a FMCG comparator norm of 69%. Broadly, response rate was excellent. happening. We have launched a programme this score combines employee satisfaction Clearly employees feel that for our trade and distribution teams that with their attitudes towards recommending provides tools, guidance and procedures us as a place to work, their desire to stay the Group takes engagement for security and driver safety. and their pride in working for us. very seriously as such a high We also operate programmes to protect Our High Performance Index score rose participation level would and promote the health and well being of three percentage points to 72%, indicating not be possible without them employees and their families. These include our continued focus on leadership and medical services, healthy lifestyle and family- talent development is supporting our seeing a real commitment friendly initiatives, such as flexible working. high-performance culture. from leadership to use We will use feedback from the survey to the feedback. address any areas of improvement in 2015, alongside our other initiatives to provide IBM, the ‘Your Voice’ survey provider a workplace that will enable people to develop and contribute to the Group’s success in the years ahead.

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STRATEGIC MANAGEMENT Delivering our strategy continued

Sustainability Natural resources – preserving forests, and our people. All our tobacco marketing water, soil health and biodiversity, all is governed by legal requirements in markets of which are essential for long-term and our International Marketing Principles Sustainability has always been agricultural productivity. (IMP), which in many cases go far beyond crucial to our business, but last year local laws. We’re committed to 100% IMP Infrastructure and resources – helping compliance and put immediate actions in we sharpened our approach further ensure tobacco-growing areas are viable place if any incidents of non-adherence to ensure we continue to generate places to live and work, by providing farmers are identified. long-term shared value for our with access to technology and investing in consumers, our shareholders and community projects. Our youth smoking prevention (YSP) activities around the world include lobbying Skills, knowledge and labour – promoting our stakeholders. for minimum age laws of 18 where none exist human rights, tackling child labour, and working closely with retailers. In 2014, In 2014, the Group developed a new protecting the health of farm workers and YSP activities took place in 99% of markets sustainability agenda through a detailed providing advice and training for running where these are feasible and allowed. materiality process. We identified three key successful businesses. areas of sustainability that are most significant With our experience and expertise we have Community networks – helping to build to our business and stakeholders: harm much to offer governments and regulators and strengthen farmer networks, by providing reduction; sustainable agriculture and farmer when it comes to developing policies the support and opportunities farmers need livelihoods; and corporate behaviour. around tobacco. We’ve long supported the to be able to share best practice and become Organisation for Economic Co-operation and Harm reduction more self-sufficient and resilient. Development’s Principles for Transparency At the heart of our strategy is our vision Like all crops, tobacco does have its impacts, and Integrity in Lobbying. In 2014, we to satisfy consumers in tobacco and but we work with farmers to mitigate them. published our Principles for Engagement, beyond. We are demonstrating this in our For example, wood is often used as a fuel in which provide even clearer guidance for our commitment to researching, developing tobacco-curing processes. So we’re helping external engagement. and promoting a range of innovative farmers to preserve natural forests through Good environmental management is vital to tobacco and nicotine products to offer adult afforestation programmes, which provide ensuring our business and local communities consumers a choice of less risky alternatives a sustainable source of wood. As a result, maintain access to natural resources. Using a to regular cigarettes. This can ultimately 94.8% of the wood our farmers use for mixture of performance management and risk benefit public health, while also supporting curing does not come from natural forest. the future growth for our business. assessments, we constantly monitor and Exploitative child labour is a particularly reduce our direct environmental impacts and We think we are best placed to deliver these important issue for any industry with develop new ways of making our operations alternative products. We understand what an agricultural supply chain. Our Social more efficient. We are especially focused on consumers want and we have world-class Responsibility in Tobacco Production minimising our energy consumption and research and development capabilities, (SRTP) programme, against which all our carbon emissions. robust quality standards and global reach. leaf suppliers are reviewed, has a specific We continue to make good progress towards focus on child labour. We also co-founded The Group is making significant progress in our long-term target to cut carbon dioxide the development of e-cigarettes, medicinal the Eliminating Child Labour in Tobacco equivalent (CO2e) emissions by 50% by Growing (ECLT) Foundation and remain nicotine products and tobacco heating 2030 and by 80% by 2050 from our year active members. The ECLT’s activities include products. You can read more about these in 2000 baseline. the Growth section of this Strategic Report working with governments to improve access (page 20). to education and social services for children. We use the Greenhouse Gas Protocol Corporate Standard to guide our CO2e Sustainable agriculture Corporate behaviour reporting methodology, adopting an equity The farmers we work with are valued We are committed to operating to the share approach to defining, consolidating and business partners and crucial to the success highest standards of corporate conduct and reporting our Scope 1, Scope 2 and Scope 3 of our business – if they do well, we do well. transparency across our business, benefiting CO2e emissions. The table below sets out our We work to enable prosperous livelihoods governments, consumers, the environment emissions for 2014. for all farmers who supply our tobacco leaf, benefiting rural communities and the environment. Our approach to supporting Emissions 2014 2013 farmers’ livelihoods focuses on five key areas: Scope 1 CO2e emissions (tonnes) 342,385 358,658 Farm income – helping our farmers to have Scope 2 CO2e emissions (tonnes) 370,724 390,242 profitable businesses, with tobacco grown Scope 3 CO2e emissions (tonnes) 212,018 209,567 alongside a diverse range of other crops. Total (tonnes) 925,127 958,467 Intensity (per million cigarettes equivalent) 0.83 0.84

26 British American Tobacco Annual Report 2014 Strategic Report Governance Financial Statements

The Group invests more than £50 million Business measures per year in fighting the illicit trade in tobacco. We are implementing supply Carbon dioxide equivalent (CO2e) Group energy use chain security systems and engaging with (tonnes CO2e per million cigarettes (gigajoules per million cigarettes governments and other international equivalent produced) equivalent produced) organisations to work together to address this global problem. We are working with the 0.83 0.84* 0.84 10.26 10.28* 10.29 European Commission, providing funding of 0.83 10.26 €134 million as part of a 20-year cooperation agreement to tackle illicit trade. 45% 13% lower than lower than Our approach to human rights is based on 2000 baseline 2007 baseline our core belief that universally recognised fundamental human rights should be respected. In 2014, we strengthened our 2014 2013 2012 2014 2013 2012 approach with a new Human Rights Policy Definition:We track Group CO2e in tonnes per million Definition: We track Group energy use in gigajoules per in our revised Standards of Business Conduct cigarettes equivalent produced. million cigarettes equivalent produced. (www.bat.com/sobc). The policy is aligned to Target: To reduce Group CO2e by 50% by 2030 from our Target: To reduce energy use to 9.82 by 2017, 17% lower the UN’s Framework and Guiding Principles 2000 baseline of 1.52 and by 80% by 2050. than our 2007 baseline. on Business and Human Rights and sets out Note: *The previously reported 2013 figure of 0.83 is Note: *The previously reported 2013 figure of 10.17 is our commitments to: eliminating child labour; re-stated to take into account an amendment to freight re-stated to take into account an amendment to freight no exploitation of labour; and freedom data for our business in Colombia and an amendment to data for our business in Colombia and an amendment to production volume data for our business in Peru. production volume data for our business in Peru. of association.

Our regional audit and CSR committees Water use Recycling monitor the performance of our companies (cubic metres per million cigarettes (percentage of waste recycled) in managing human rights in the workplace equivalent produced) and supply chain. This includes reviews of operations in countries of concern as 3.69 3.70* 3.76 92.6 88.9* 92.5 identified by independent human rights 3.69 92.6% risks analytics. Our supplier reviews include human rights 24% criteria. Our tobacco leaf suppliers are lower than reviewed through our SRTP programme 2007 baseline based on annual self-assessments which are independently validated by AB Sustain. 2014 2013 2012 2014 2013 2012 In 2014, our suppliers scored 89% for Definition: We track Group water use in cubic metres per Definition: We track the total percentage of Group waste activities to prevent child labour and AB million cigarettes equivalent produced. re-used or recycled against total waste generated. Sustain conducted 12 on-site reviews in eight Objective: To reduce water use to 3.6 by 2017, 26% lower Objective: To recycle more than 85% of waste generated countries. Suppliers’ SRTP scores are published than our 2007 baseline. in each year. on www.bat.com/SRTPdata. Our Business Note: *The previously reported 2013 figure of 3.65 is re- Note: *The previously reported 2013 figure of 89.1% is re- Enabler Survey Tool, which we use to review stated to take into account an amendment to production stated to take into account an amendment to the recycling strategic suppliers of direct materials, also volume data for our business in Peru. data for our business in Chile. includes human rights criteria. A sustainable future Our focus on sustainable practices has been recognised by our inclusion in the Dow Jones Sustainability Summary report 2014 Sustainability Index for the past 13 years, Find out more about our focus on sustainability 12 of them as industry leader. Our commitment in our Sustainability Summary report 2014. to developing next-generation tobacco and nicotine products, sustainable agriculture It is available on our corporate website and operating to the highest standards www.bat.com/sustainability of corporate conduct are the right things to do. Delivering them will help to ensure that we have a sustainable future, one in which we can continue to generate value for our shareholders while also meeting the expectations of stakeholders in wider society.

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