Sustainability Report 2017

1 Philip Morris International Sustainability Report 2017 1 About PMI

Philip Morris International In 2017, our products were sold in substantiation of the reduced harm Inc. (PMI) is a leading over 180 markets, and we operated potential of our new products, 46 production facilities globally. we aim to ensure that our smoke-free international tobacco We are building our future on products meet adult consumer company with a diverse smoke‑free products that are preferences and rigorous regulatory workforce of 80,600 a much better consumer choice requirements. Our vision is that than continuing to smoke cigarettes. these products replace cigarettes people across the globe. Through our multidisciplinary, as soon as possible, to the benefit of state‑of-the-art capabilities in adult smokers, society, our company product development and scientific and our shareholders.

For more information, see www.pmi.com and www.pmiscience.com.

Ra aterials and other supplies

Lea ther

0,000 0,000 Farmers contracted by Suppliers worldwide PMI and our suppliers in 28 countries 1 Number of languages in Manufacturing and business facilities Retail Consuers 0% which PMI’s Responsible Of the tobacco we purchase Sourcing Principles is through direct contracts are available (by our leaf operations or our tobacco suppliers) bn Net earnings 2,00 0,00 . 1.01 10 .7 Field technicians providing mployees worldwide Manufacturing Retailers selling Fleet collision rate onsumers of PMI Adult consumers who 72bn support to contracted facilities globally PMI products (vehicle collisions combustible products have stopped smoking cise taes on tobacco farmers for per million km driven) cigarettes and made PMI products GAP implementation .% the change to IQOS mployees at 1% 77,000 10 managerial level O e scope 1+2 istributors 100% Markets where PMI 2 are women reduction since 2010 and wholesalers Tracking and products are sold 10,000 tracing (master Smokers switching RD 7% 22 case level) to IQOS every day

mployees covered O2e emissions from

by collective labor vehicles (g O2e agreements per km driven) 2 7% .% Research facilities Of our total R& mployee voluntary ependiture is turnover dedicated to our 00 smoke‑free vision World-class scientists, Good Agricultural Practices (GAP) Animal Marketing Principles Good Responsible Sourcing engineers and & Agricultural Labor Practices (ALP) welfare Conversion Practices Principles technicians hired to 2,00 support our best‑in‑ Patents granted Conflict Anti-diversion Guidebook for Success Human Rights class R& capability worldwide related minerals practices and tools (PMI ode of onduct) ommitment since 2008 to our smoke‑free products ngagement Principles Sustainability at PMI 1 bn earnings Net 72bn on taes cise PMI products Responsible Sourcing Sourcing Responsible Principles Rights Human ommitment Sustainability Report 2017 IQOS .7 who Adult consumers smoking stopped have and made cigarettes to the change 10,000 switching Smokers day to every IQOS

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Marketing Principles Good Principles Marketing Practices Conversion Success for Guidebook onduct) of (PMI ode term value value term - Consuers 10 PMI of onsumers products combustible 10 PMI where Markets sold are products ngagement ngagement Principles Animal Animal welfare Anti-diversion tools and practices free future. future. free - 1.01 rate collision Fleet collisions (vehicle million km driven) per 100% and Tracking (master tracing case level) e 2

Good Agricultural Practices (GAP) (GAP) Practices Agricultural Good (ALP) Practices Labor Agricultural & Conflict minerals e emissions from e emissions from 2 22 O 77,000 istributors and wholesalers . selling Retailers PMI products vehicles (g O vehicles per km driven) per Retail For PMI, sustainability means creating long creating means sustainability PMI, For while minimizing the negative externalities associated associated externalities negative the minimizing while The engagement beyond our own operations is key, key, is operations own our beyond The engagement From the more than 350,000 farmers from which we we 350,000 which than from farmers more the From million 150 approximately the to up right tobacco source important impact an have products, we PMI of consumers us, around environment and the communities the on achieve We cannot address. to committed are we which this alone. with our products, operations and value chain. value and products, our operations with impactsplace. take significant most the where is this as environment, regulated highly in a operating While achieve to compliance mere beyond go to strive we smoke a sustainable Creating value at PMI at value Creating e scope 1+2 e scope 2 Manufacturing globally facilities 1% O reduction since 2010 since reduction Manufacturing and business facilities Manufacturing 7% covered mployees labor collective by agreements .% voluntary mployee turnover 0,00 worldwide mployees .% at mployees level managerial women are 2,00 granted Patents related worldwide smoke‑free our to products 7% R& total our Of is ependiture our to dedicated vision smoke‑free ther 0,000 worldwide Suppliers 1 in languages of Number Responsible which PMI’s Principles Sourcing available are 00 scientists, World-class and engineers to hired technicians best‑in‑ support our class R& capability 2008 since 2 facilities Research RD Ra aterials and other supplies and other aterials Ra Lea 0,000 by contracted Farmers suppliers PMI and our in 28 countries 0% purchase we the tobacco Of contracts direct is through operations leaf our (by suppliers) tobacco our or 2,00 providing technicians Field support contracted to for farmers tobacco implementation GAP Contents

Sustainability at PMI Transforming Driving operational our business excellence

Letter from the CEO 4 Replacing cigarettes with Ethics and compliance 26 smoke-free products 12 Our approach to sustainability 6 Responsible marketing 28 Our ambition for Sustainability governance a smoke-free future 14 Interacting with governments 29 and management 6 The rationale for our Our approach to corporate tax 29 Defining our focus 7 business vision 16 Data protection 29 Stakeholder engagement 8 Scientific assessment of our smoke-free products 16 Human rights 31 Our work and the UN Sustainable Development Goals (SDGs) 9 Encouraging scrutiny Tackling illicit tobacco trade of our science through and related crimes 32 SDGs and UNGC transparency and engagement 18 cross-reference index 10 Responsible supply chain 36 Investing in production capacity Responsible Sourcing for smoke-free products 18 Principles (RSP) 36 Good Agricultural Our commercialization efforts Practices (GAP) 38 behind smoke-free products 19

Our view on tobacco regulation 21

Business transformation metrics 24

2 Philip Morris International Sustainability Report 2017 Sustainability at PMI Transforming our business Driving operational excellence Managing our social impact Reducing our environmental footprint Concluding remarks 3

74 76 75 69 64 73 66 68

Sustainability Report 2017 65 looking and cautionary

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This blue tint indicates the stories that transformation. business our to relate Concluding remarks Concluding This report has been reviewed by PMI’s Senior Management team, has assured our transformation metrics on page 25. welcomeWe your feedback onthis report emailing at: us by [email protected] including our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and our President, External Affairs General & Counsel. PricewaterhouseCoopers SA (PwC) Next steps Forward Annex 2: Overview of engagement principles Overview our of sustainability performance Glossary acronyms and statements Annex Overview 1: marketing of combustible for principles products Notes Independent Assurance Report developmentsKey since 2000 Business Transformation Metrics –

Philip Morris International Morris Philip 55 56 54 61 59 58 58 60 54 60 60

based targets

- The report is structuredaround the important topics our of sustainability efforts, and our disclosures are mapped against Principles the Ten the of United Nations Global Compact (UNGC) and the United Nations Sustainable Development GoalsSee (SDGs). page 10. The data and information, including the infographics, cover the full year and all our2017 operations, unless mentioned. explicitly a science-based approach Science and renewables stewardship tobaccoWater in agriculture Climate change – Greening our vehicle fleet Working with tobacco gas emissions Water: stewardship across and beyond our operations farmers to reduce greenhouse greenhouse reduce to farmers Conserving biodiversity and deforestation combatting Deforestation Waste management Littering Biodiversity 59 Responsible management chemicalsof for crop protection Reducing our footprint environmental

46 48 40 41 41 43 43 43 43

being -

Inclusion and diversity Labor relations Rewarding our employees Living wage Health and well Safety in the workplace Agricultural labor practices Working at PMI Transforming our company company our Transforming culture We are happyWe to share our third Sustainability Report. By publishing this report closer to the release our of we aimAnnual to provide Report 2017, a morecomprehensive overview ourof company and sustainability efforts earlier in the calendar This report year. builds on the PMI Sustainability Report 2016, Asissued we progress in September 2017. on our sustainability reporting journey, we will provide deeper insights into our performance. About this reportAbout this Managing our social impact Letter from the CEO

Dear reader, Clearly, we cannot achieve a smoke-free As for operational excellence, we remain In my mind, sustainability encompasses future alone. It depends on a number of focused on securing the integrity of our four aspects. First, companies need to factors out of our direct control, mainly supply chain through our efforts to tackle reduce to the largest extent possible any support from regulatory and public health illicit trade in tobacco products. We also harm associated with their products. authorities, that will influence the pace pushed transparency further by publishing Being respectful of people throughout and scale of switching away from our approach to corporate tax and data the value chain and preserving the combustible products. We are committed privacy, as well as an overview of our environment are the next two pillars. to continue leading the industry in this Marketing Principles and our Principles for Last, but not least, sustainability requires massive transformation, and we call on Engagement with third-parties. These last operational excellence. all stakeholders to work together towards two policies relate to business practices a smoke-free future. for which we receive frequent criticism My ambition is to make PMI a true from tobacco control advocates and leader in sustainable business practices. I am also pleased with the way we others. We therefore urge concerned We therefore need to excel in all of these continue making progress on our social stakeholders to provide us objective four areas, starting first and foremost sustainability agenda. For example, with feedback on these policies and examples with our products. 34.4% of management positions held by of practices that they feel we need women, we are on track to reach our goal to change. Smoking cigarettes causes serious disease, of 40% by 2022. Another example is the and the best way to avoid the harm of roll-out of our Responsible Sourcing To benchmark ourselves and learn from smoking is never to start, or to quit. Principles that will help to identify and other companies, PMI joined the United But much more can be done to reduce manage labor issues in our non-agricultural Nations Global Compact (UNGC) in 2015. health risks for the world’s 1.1 billion men supply chain, which is becoming We participated in many of the UNGC and women who would otherwise increasingly important as we transform Local Networks, not only to learn, but also continue to smoke. While nicotine is our company from a cigarette maker to contribute and share our experiences, addictive, it is the smoke generated by to a smoke-free technology leader. talents and resources on joint initiatives. burning tobacco that is the principal But challenges remain, in particular on We were encouraged by the positive problem. Through groundbreaking complex social issues such as child labor reactions in many Local Networks to our research, we have developed a range of and living conditions for migrant workers active participation, once initial skepticism smoke-free products that are enjoyable in our tobacco supply chain. We are towards our company was overcome. I was for smokers and have the potential to determined to continue to address these therefore disappointed by the UNGC’s significantly reduce health risks when issues in cooperation with civil society decision last year to exclude all tobacco compared to smoking. partners and governments, as you can companies from its membership. read about in our case study on Mexico. I am often asked when we will stop selling The UNGC’s decision does not change our cigarettes. Our objective is to reach this Last year's environmental milestones commitment to implement its principles. moment as soon as possible by replacing include the fourth consecutive year Nor does it alter my conviction that a cigarettes with smoke-free products. in which PMI was recognized in CDP’s smoke-free world is achievable and, Last year, smoke-free products already Climate A-List and the first time that indeed, a better world. However, in my represented over 4% of our shipment our water programs achieved CDP A-list mind, recognizing and encouraging those volume and around 13% of our net ranking. PMI is one of 25 companies to willing to disrupt their existing business revenues, excluding excise taxes, in just be A-listed for both climate and water, to replace it with a more sustainable one, two years since commercialization. placing us in the top 1% of the 3,000 and thus lead sector transformation, To further accelerate this transformation, corporations participating. We is the fastest way to meet global we continue to shift resources towards acknowledge that the transformation societal expectations, rather than smoke-free products. In 2017, 39% of of our company towards smoke‑free practicing exclusion. our global commercial expenditure and products invariably brings along new 74% of our global R&D expenditure challenges we need to address, I am pleased to share with you this report were spent on reduced-risk products.1 in particular increased use of water outlining our work to transform our The results of our efforts exceeded our and energy at the manufacturing level, company. We are committed to continue own expectations: By year-end 2017, and the management of electronic waste. operating responsibly, while successfully over 4.7 million adult smokers had stopped delivering solutions not only to our smoking cigarettes and made the change consumers, employees and shareholders, to IQOS, our main smoke-free product. but also to society in general. And 10,000 more are switching every day. I cordially invite you to comment, challenge, and guide us as we continuously seek to improve the sustainability of our business and contribute to the UN Sustainable Development Goals.

André Calantzopoulos Chief Executive Officer

4 Philip Morris International Sustainability Report 2017 Sustainability at PMI 5 Sustainability Report 2017 Philip Morris International Morris Philip My ambition is to make PMI a true leader in sustainable sustainable in a leader true PMI make to is ambition My many in excel to need We therefore practices. business products. our with startingforemost areas, firstand Sustainability at PMI

Our approach Our sustainability strategy is a key element Each pillar encompasses key topics of PMI’s overall business strategy and is addressed in this report. They cover to sustainability structured around four pillars which specific programs, management enable our vision of a smoke-free future: approaches, activities, processes, goals To us, sustainability is about creating and Key Performance Indicators (KPIs), long-term value while minimizing the ——Transforming our business; which are managed throughout the negative externalities associated with ——Driving operational excellence; company by the relevant functions our products, operations, and value chain. ——Managing our social impact; and and business operations. ——Reducing our environmental footprint.

Smoke-free future

Transforming our business Driving operational Managing our social impact Reducing our Research & Development excellence Health, safety and well-being environmental footprint Product innovation Ethics and compliance Labor relations Climate change Sustainable growth Supply chain management Inclusion and diversity Biodiversity Value chain transformation Responsible marketing Talent management Water Sustainability management and development Waste management Human rights Agricultural Labor Practices (ALP) Illicit trade prevention Stakeholder engagement Corporate tax

Sustainability governance Our Senior Management Team Led by the Vice President, Social & (Management Board) is regularly reviewing Economic Affairs, who reports to the and management sustainability matters – strategy, President, External Affairs & General key programs, and budget – through Counsel, a member of PMI’s Senior PMI’s Board of Directors believes a cross-functional representation, Management Team, the Sustainability that environmental, social, and coordinated by the Sustainability Team. Team has evolved over the past years governance (ESG) factors relevant to ensure our company is equipped to the company’s business are critical From an operational perspective, with the relevant know-how and to PMI’s long-term success. the Sustainability Team manages and expertise in view of the changing coordinates our sustainability work The Board’s sustainability oversight nature of our business. across PMI functions and regions seeking was more formally established at the to ensure it is embedded at all levels of beginning of 2018 when its Nominating the organization. Finally, we are creating and Corporate Governance Committee three cross-functional working groups was given the mandate to oversee the to manage environmental, social and sustainability strategy and performance, reporting matters that are overseen and to advise the Board on sustainability by committees composed of senior matters. Part of the Board’s oversight function heads. is a focus on management’s efforts to enhance shareholder value responsibly and sustainably.

6 Philip Morris International Sustainability Report 2017 Sustainability at PMI 7

being, - Sustainability Report 2017 related aspects were identified - Consumer Waste: Actions to - Post Good environmental management of ourof operations. minimize impactsminimize through product programs management waste design, and recycling where possible. Increasing our efforts to prevent littering through education.consumer Climate Change Mitigation and Adaptation:Efforts to reduce greenhouse gas emissions and prepare for the effectsof climate change in our operations and supply chain, including water stewardship actions; and Good laboratory and clinical practices in our R&D efforts; and Good Agricultural Practices: Actions to ensure tobacco farmers have access to the information, systems and tools needed to be successful business owners who the minimize environmental impacts theirof activities and provide good working conditions on their farms; Fighting illicit trade in tobacco products; Employee engagement and well labor relations, workplace health and safety, inclusion and diversity, and talent recruitment and management; — — — — — — — — — — — — — Underpinning our approach our Underpinning Governance, product,environmental and employee as being important for our continuous improvement efforts. Many are described in this report and include: —

Philip Morris International Morris Philip

Tobacco Tobacco

tobacco materials to origin, - tobacco materials, especially - and accessible manner. Transparency and Reporting: Disclosure our of significant sustainability performance risks and opportunities comparable in a clear, to eliminate all forms labor of abuses and to achieve safe and fair working conditions on tobacco farms; Agricultural Labor Practices: Actions Responsible MarketingYouth and Smoking Prevention:Strive to ensure that we continue to market our adult consumers; and products responsibly and only to and source them in a responsible and sustainable manner (including electronics); Materials: Actions to identify and trace non Responsible Sourcing of Non- of Sourcing Responsible Corporate Governance and Ethics: Promotionof the highest standards of complianceof and integrity across our global operations and value chain. and commitment to stakeholders; Clear alignment our of public policy advocacy with our core strategy — — — — — — — — We identifiedWe additional areas from a risk management perspective, includinggood agricultural and labor practices in tobacco farming and the need for climate change mitigation and related action throughout the value chain. also We need to anticipate and manage the supply chain risks related ourto non as our product portfolio now increasingly includes electronic devices. Our ambition is to turn these strategic risks into opportunities to add value. — how we advocate on policy issues related to our products, including taxation and regulation. — strategicTurning risks into opportunities way – and only to adult consumers – and being even more transparent in Credibility and responsibility The analysisalso identified aspects that are critical to building the credibility and engagement with our stakeholders required for our business transformation, particularly the need to substantiate our commitments, demonstrate transparency and consistency in our approach, and maintain the highest standards in our policies, practices and actions. This also includesensuring that we continue to market our products in a responsible

free future. - Respect for Human Rights: Understanding, due diligence, and actions to respect human rights throughout our global operations chain. value and in supporting public health and harm reduction policies and research; and Our role and proactive approach Public Health Policy and Research: Harm Reduction: Continued recognition theof health impacts our of products and the prioritization andinvestment in reducing or eliminating those impacts through innovation and development productsof that can substantially reduce individual risk and population harm when compared to cigarettes; Product Innovation for Substantial — — — — — Fundamental to our business strategy business our to Fundamental Three areas are fundamental to the sustainability PMI’s of business strategy: — The results the analysis of 2016 were sorted into four categories as follows: We planWe to update this analysis in 2018 and share the results in our 2018 Sustainability Report. In 2016, we workedIn 2016, with Business for Social Responsibility (BSR) to identify the areas that are most significant to both our business sustainability and to our stakeholders and prioritized them. That analysis also highlighted areas opportunityof and risk, emerging themes, and gaps for management action. The analysis consisted a structured of review and engagement process, carried out by BSR and involving PMI’s functional leaders and subject matter experts as well as external stakeholders. It considered both our current business and changes driven by our visionof a smoke The analysis helped us to focus on where we need to prioritize and allocate resources to mitigate negative impacts and create opportunities for wider societal value, with product harm reduction the fundamental premise ourof strategy. Defining our focus our Defining Stakeholder engagement guided by AccountAbility’s Stakeholder The graph below highlights our main Engagement Standard: AA1000. stakeholders per category. As we progress towards a smoke-free Due to the highly regulated nature future, the trust of our stakeholders is of our business, we have also key to our success. We engage with implemented Engagement Principles stakeholders on an ongoing basis in a found on page 68 of this report. number of ways. In doing so, we will be

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8 Philip Morris International Sustainability Report 2017 Sustainability at PMI 9

SDG 16: OurSDG efforts 16: to combat illicit trade in tobacco products challenge the perception that illegal tobacco trade isa victimless crime without links to funding terrorism and other serious offences. Sustainability Report 2017

pronged approach to help help to approach pronged - Philip Morris International Morris Philip carbon, manufacturing, cycle impacts our of - - and litter prevention and recycling programs. products. From the products. From environmental impacts of tobacco growing, to efficient, low This report’s section on “Transforming our business” describes in detail how our business vision aligns with this SDG. SDG improve 12: We the life

SDG Smoking 3: cigarettes disease. serious causes By replacing cigarettes with less harmful alternatives we can significantly reduce the negative impactof our individuals products on society. and supply chain. SDG 8: We ensureSDG 8: We good working conditions for all our employees and can play a role in promotinggood working conditions for thousandsof our throughout workers

The table on the next page provides an overview how of our activities and programs relate at this stage. Sustainableto the 17 Development Goals and principles the 10 the of UN Global Compact. We certainlyWe care about all other SDGs. Nevertheless, our business has very little impact on certain SDGs, and therefore we can only make a relatively modest contribution to these global objectives Aligning our practices with the overall goals, even where our business has less impact less has business our where even goals, overall the practices our with Aligning to improve the productivity and food security of smallholder farmers. SDG 2: Through good agricultural practices and crop diversification we can help Taking ownership where we can provide a substantial contribution a substantial can provide we where ownership Taking Taking decisive action where we have the greatest impact greatest the we have action where decisive Taking We are committed to the SDGs and have adopted a three adopted have and SDGs to the committed are We make them a reality. We have prioritized our work where we can have the greatest greatest the have we can where work our prioritized have We reality. a them make furtherrefine will we evolve, SDGs the around expectations impact. As stakeholder vision business our through goals to the contribute we how on reporting and work our chain. value and operations our across and Our work and the UN Sustainable Development Goals (SDGs) Goals Development Sustainable UN the and Our work SDGs and UNGC cross-reference index

Page UNGC reference Principles

Transforming our business

Replacing cigarettes with smoke-free products See pages 12 to 25

Driving business excellence

Ethics and compliance See pages 26 to 27 10

Responsible marketing See page 28

Interacting with governments See page 29 10

Our approach to corporate tax See page 29 10

Data protection See page 29

Human rights See page 31 1, 2, 4, 5, 6

Tackling illicit tobacco trade and related crimes See pages 32 to 35 10

Responsible Sourcing Principles (RSP) See pages 36 to 37 3, 4, 5, 6, 10

Good Agricultural Practices (GAP) See pages 38 to 39 3, 4, 5, 6

Managing our social impact

Working at PMI See page 40 3, 4, 5

Inclusion and diversity See pages 41 to 42 6

Labor relations & living wage See page 43

Safety, health and well-being See page 43

Reducing our environmental footprint

Climate change See pages 54 to 57 7, 8, 9

Water See page 58 7, 8, 9

Conserving biodiversity and combatting deforestation See pages 59 to 60 7, 8, 9

Waste management See pages 60 to 61 7, 8, 9

10 Philip Morris International Sustainability Report 2017 Sustainability at PMI 11 6 8, 9 7, 8, 9 7, 8, 9 7, 8, 9 7, UNGC Principles 10 10 10 1, 2, 4, 5, 6 10 3, 4, 5, 6, 10 3, 4, 5, 6 3, 4, 5

Sustainability Report 2017

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See page 29 See page 31 See pages 32 to 35 See pages 36 to 37 See pages 38 to 39 See page 40 See pages to 42 41 See page 43 See page 43 See pages 54 to 57 See page 58 See pages to 60 59 See pages 60 to 61 Page reference See pages 12 to 25 See pages to 27 26 See page 28 See page 29 See page 29 free products - being - Inclusion and diversity Labor relations & living wage Safety, health and well footprint environmental our Reducing change Climate Water Conserving biodiversity and combatting deforestation management Waste Transforming our business our Transforming Replacing cigarettes with smoke Driving business excellence Ethics and compliance Responsible marketing Interacting withgovernments Our approach to corporate tax Data protection rightsHuman illicitTackling tobacco trade and related crimes Responsible Sourcing Principles (RSP) Good Agricultural Practices(GAP) Managing our social impact Working at PMI Transforming our business

A cigarette manufacturing line (on the left-hand side) and a heated tobacco unit manufacturing line (on the right-hand side) at our factory in Neuchâtel, Switzerland

Replacing cigarettes with While several attempts have been made to develop better alternatives to smoking, smoke-free products drawbacks in the technological capability of these products and a lack of consumer In 2017, PMI manufactured and shipped acceptance rendered them unsuccessful. 791 billion cigarettes and other Recent advances in science and combustible tobacco products and technology have made it possible to 36 billion smoke-free products, reaching develop innovative products that approximately 150 million adult consumers consumers accept and that are less in more than 180 countries. harmful alternatives to continued smoking. Smoking cigarettes causes serious PMI has developed a portfolio of disease. Smokers are far more likely smoke‑free products, including heated Contribution of Smoke-Free than non-smokers to get heart disease, tobacco products and nicotine-containing Products to PMI’s Total lung cancer, emphysema, and other e-vapor products that have the potential diseases. Smoking is addictive, and it Net Revenues to significantly reduce individual risk and 13% can be very difficult to stop. population harm compared to cigarettes. The best way to avoid the harms of Many stakeholders have asked us about smoking is never to start, or to quit. the role of these innovative smoke-free But much more can be done to improve products in the context of our business the health and quality of life of those vision. Are these products an extension of who continue to use nicotine products, our cigarette product portfolio? Are they through science and innovation. intended for developed countries only? For over a century, the basic design Are they aimed at compensating a decline and use of cigarettes have not changed. in cigarette sales? In 2016, we made a bold A smoker lights the cigarette, shredded announcement: Our business vision is tobacco leaves are burned, and the smoker to replace cigarettes with less harmful, 1 1 1 1 inhales nicotine, flavors, and various smoke-free products as soon as possible. Smoke‑Free Products Net Revenues other substances present in the smoke. Source: PMI Financials or estimates While nicotine is addictive and not risk-free, experts agree that the primary cause of smoking-related diseases is found in toxicants generated by combustion and inhaled in cigarette smoke.

12 Philip Morris International Sustainability Report 2017 Transforming our business

13 - vapor products: - Sustainability Report 2017 scale city test the of product was initiated in 2017. - Philip Morris International Morris Philip uses a pressed carbon heat source that, once ignited, . A small a nicotine solution. ofOne these – MESH – uses new proprietary technology. vaporization TEEPS heats the tobacco without burning it, to generate a nicotine Products under this platform are e battery‑powered devices that produce an aerosol by vaporizing containing vapor with a reduction in harmful toxicants similar to IQOS Platform 4 Platform 2

or HEETS features, containing vapor. - containing vapor with significantly - , using the consumables HeatSticks We are exploringWe two routes for this platform: one with electronics and one without. fewer harmful toxicants compared to cigarette smoke. Platform 3 is based on acquired technology that uses a chemical process to create a nicotine Products tobacco without Platform 3 IQOS an electronic holder that heats tobacco rather thanburning it, thereby creating a nicotine Platform 1 Heated tobacco products tobacco Heated Smoke-free products: our product Platforms products: product our Platforms Smoke-free Our ambition for a smoke-free future

Projection of smoking Projected smoking prevalence prevalence Today an estimated 1.1 billion men and women around the world smoke cigarettes or other combustible tobacco products such as cigars, bidis, and pipe tobacco. 1 1 Smoking prevalence, which was estimated at 22.1% in 2010 (age 15+), has been in constant decline for several decades, and the World Health Organization (WHO) projects it will continue declining by 0.21 percentage points per year.2 1 At that pace, it will take almost 100 years until the world is smoke free. Projected number of smokers At the same time, global population is growing by around 70 million people per year. The combined effect of a 613m growing population and a declining 5m smoking prevalence results in a projected 1.16 billion smokers by m m 2025. These WHO projections assume current tobacco control policies and do not consider the potential of smoke‑free products.

Member states of WHO are rightly dissatisfied with the slow pace at which smoking is declining and have established 1 a 2025 target to reduce the prevalence of tobacco use by 30% compared to 2010, aiming to achieve a smoking Global populationpopulation Projected number of smokers 3 These projections are based on WHO/UN data and refer to age 15+ prevalence of 15.5%. Projected number of smokers As population growth partially offsets These projections are based on WHO/UN data and refer to age 15+ the impact of this prevalence target, there will still be approximately 950 million smokers by the year 2025 if the WHO objective is achieved.

14 Philip Morris International Sustainability Report 2017 Transforming our business 15

free products to replace - free products.As a result, Sustainability Report 2017 - free products - PMI’s aspiration to switch smokers to our smoke Reduction aimed for by WHO with additional tobacco control measures the use smoke of cigarettes for people who would otherwise smoking.keep Our competitors are also increasing their efforts to develop and commercialize their own smoke we expect a positive acceleration of innovation, competition,and consumer adoption that could reduce global smoking prevalence at a pace significantly beyond past reductions and futuregoals set by the WHO.

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<95m >40m target and PMI smoke-free aspiration 2025 estimate based on WHO prevalence free world. free - free products 2025 by versus free products. also We excluded free products could reduce reduce productsfree could ‑ - - It is our ambition that at least 30%of our consumers who would otherwise continue smoking switch to our smoke Based2010. on that ambition,we project that 2025 by at least 40 million PMI cigarette smokers will have switched a decade – a majoracceleration towards competingof cigarette brands to our smoke the possible positive interventions by governments to regulate products proportionate to the harm they cause. Clearly, governments and civil society, especially leading scientists and public health professionals, and ideally the WHO, can play a decisive role in encouraging to smoke-free products. The combinationof measures to discourage tobacco initiation and encourage cessation and our full effort to replace cigarettes with smoke smoking PMI of products by 40% within smoke a These are illustrative calculations,as we left out the potential for PMI to grow market share by switching consumers

free -

free products -

Smokers of of Smokers 152m PMI products PMI 2025 estimate based on WHO prevalence projection free products, the number of - Smokers of PMI products People who quit or less people starting People who switch to PMI smoke

Consumers PMI products of – projection(assuming 2025 constant PMI market share) In the base case scenario, and without smoke We believeWe smoking prevalence can be reduced much faster by supplementing measures that governments take to discourage smoking initiation and encourage cessation with efforts to otherwise would who smokers encourage continue smoking to switch to smoke products. illustrate To the opportunity for public health, we project the number of consumers PMI of products for the year 2025. These calculations are consistent with the WHO projections, PMI’s Business Transformation Metrics shown on page 25, and assume a constant global market share for PMI (excluding China and the U.S., where we do not have a material presence). smokers buying PMI products is projected to increase slightly to an estimated million by 2025.152 The WHO target to reduce the prevalence tobacco of use – assuming a proportionate effect on smokers using PMI products – implies million reductiona 19 133 million to smokers PMI of products by 2025. PMI’s ambition PMI’s The rationale for our We are observing this in Japan, where We are often asked about our willingness many IQOS users previously smoked to license our technology to other tobacco business vision cigarettes made by our competitors. companies. PMI has granted Altria an We are thus increasing market share, exclusive license to commercialize IQOS We understand that our vision of replacing thereby enhancing business results. in the United States, and we are in cigarettes with smoke-free products is In addition, the profit margins of principle open to other partnerships unprecedented for a tobacco company. smoke‑free products are similar to where it makes business sense and helps Some will question our motives, and or exceed those of cigarettes helped to advance a smoke-free world. others will question why PMI would seek by differentiated excise tax, as many to transform a very profitable market for governments recognize that products cigarettes. The answer is simple: Our goal such as IQOS are not cigarettes and Scientific assessment of of developing and commercializing less require a different tax system and yield. harmful products to replace cigarettes is our smoke‑free products completely aligned with the expectations A smoke-free world can be achieved faster The catalyst for our transformation is of smokers, society, and our shareholders. if the industry as a whole, including new the science behind our smoke-free entrants, are incentivized for efforts products. We knew from the outset that Our success as a business was primarily in this direction. A wide variety of our science would be met with skepticism. built on offering the best smoking companies – from small start-ups to Since 2008, we have hired over 400 experience through our top-quality multinational tobacco companies – scientists and engineers who are working cigarette brands, including Marlboro, is increasingly active in the smoke-free in state‑of‑the‑art facilities and use L&M and Chesterfield. We are convinced category. All multinational tobacco cutting-edge technologies to develop that our continued success will depend, companies are commercializing at least and assess our smoke-free products. above all, on our ability to offer men one smoke-free product, and the category Our scientific assessment program follows and women who smoke less-harmful is undergoing rapid change. This is a a stepwise approach inspired by alternative products. positive development, provided that all pharmaceutical industry standards and The business case is straightforward. companies show the same commitment in line with draft guidance issued by the PMI leads the smoke-free category, to scientific rigor and transparency. U.S. Food and Drug Administration’s (FDA) thanks to sustained R&D investments. Center for Tobacco Products in 2012. Technological innovation is transforming We are therefore in an excellent We conduct our research in accordance our industry. Developing, assessing, position to not only switch consumers with international standards and practices, and commercializing novel, less-harmful who smoke PMI cigarettes, but also such as internationally accepted alternatives to cigarettes should, in our those who smoke competing Good Laboratory Practices (GLPs) view, become the focus of competition. cigarette brands. and Good Clinical Practices (GCPs). PMI has been, and will continue to be, a driving force of this transformation.

Our five-step approach to assess individual risk and population harm

1. Developing the product 3. Clinical studies 5. Long-term assessment Assessment of a smoke-free product’s risk Once we have completed our laboratory research, We monitor and research the use of our reduction potential relies on the quality of the we conduct clinical studies with adult smokers smoke-free products once they are on the market initial product design and on strict manufacturing to understand whether switching to smoke-free in order to assess the product’s contribution to controls to ensure that the product delivers a products reduces their exposure to toxic harm reduction. We are undertaking post-market consistent aerosol. We eliminate combustion compounds. We also determine whether this surveillance studies, starting in Japan, where our and ensure that the product delivers less Harmful leads to a favorable change in clinical risk markers objective is to assess the marketed product in and Potentially Harmful Constituents (HPHCs). associated with smoking-related diseases. order to further substantiate the results collected In this initial phase of designing a product, The effects measured in smokers who switch to in the pre-market clinical assessment and we verify that the product’s design does not pose a smoke-free product are compared with those perception and behavioral assessment programs. any additional risks to those already known for in smokers who continue to smoke cigarettes This is done by collecting a set of qualitative and cigarettes. Only then can we begin to conduct and smokers who quit using any tobacco and quantitative data on the use of the smoke-free further research. nicotine product for the duration of the study. product in real world conditions.

2. Laboratory studies 4. Consumer use research Our next step is to verify the potential of a We also conduct several types of perception smoke-free product’s aerosol to reduce risk and behavioral studies to better understand a compared to cigarette smoke by measuring smoke-free product’s potential to benefit public a reduction in toxicity as well as a reduction health. These studies include research into how in risk using laboratory models. If they smokers perceive a product’s risk and how they are reduced significantly, we move on to adopt and use a smoke-free product under clinical studies. real-life conditions. We also verify that never smokers and former smokers understand that smoke-free products are not intended for them.

16 Philip Morris International Sustainability Report 2017 Transforming our business 17

8

free product - is likely to present hand smoke. - and 9 Better breath Less unpleasant aftertaste Reduced tooth discoloration Improved oral Improved hygiene Sustainability Report 2017 use does not adversely affect

approached levels observed in the observed in levels approached cessation groups; IQOS indoor quality on based air indoor air quality exposure limits and is not a source second of — — These results give us confidence that switching fully to IQOS less risk harm of than continuing to smoke. are convincedWe its introduction will benefit public health. Our research efforts will continue to seek ways to further reduce the risk harm of and to broaden our smoke portfolio such that we have products that are acceptable and affordable alternatives to all smokers.

8 Philip Morris International Morris Philip

week - Less smell Noash No risk of burning No negative impact on indoor qualityair Reduced impact Reduced those and users on them around in two one , conducted in animal 7 related diseases month clinical studies - - market surveillance market - market perception and : Scientific substantiation progress - Japan behavior assessmentbehavior Post Totality scientific of supporting evidence potential risk reduced combustion No Reduced HPHC formation Reduced toxicity Reduced exposure risk clinical of Reversal markers Pre significantly reduced their exposure toxicants.to 15 These reductions and two three Clinical studies conducted to date confirm the resultsof our laboratory switched who studies. Smokers completely to IQOS Laboratory studies confirm that switching IQOS to model diseases,of led to a reduction and their associated mechanisms. those approached reductions These observed in the cessation group; Laboratory studies conducted in animal models disease of confirm that these lower levels toxicants of result in IQOS vapor being significantly less toxic than cigarette smoke; smoking key in — — — — — — IQOS

6

free

-

that starts 4 are very advanced reduction potential - term use all of our - 5 vapor contains on average average on contains vapor does not generate combustion , at our R&D center in Neuchâtel, Switzerland 95% lower levels toxicants of 95% - at similar levels to cigarette smoke; compared to the smoke from a reference cigarette designed for scientific research, with nicotine IQOS 90 IQOS or smoke; Two scientistsTwo conduct studies to understand the aerosol of PMI’s main smoke-free product, IQOS — — — Our studies on IQOS with the initial design of the product platform, a fundamental step for quality and consistency. Laboratory and clinical studies are then used to evaluate exposure and risk reduction potential. In addition, we also conduct research on how people understand communications about a product’s risk profile and on how the product isactually used. Finally, we monitor the long products once they are in the marketplace. see if our productsTo fulfill their potential to have a positive impact on public health in the real world, it is important for us to follow the products even after they have been launched on the market. combineWe a number approaches, of including safety surveillance, clinical studies and epidemiological studies, in order to progressively obtain a clearer picture the of risk products. our of and point towards risk reduction. Our findings to date show that: — Developing and assessing a smoke product is a rigorous process Encouraging scrutiny can independently develop methodologies Investing in production and draw their own conclusions. of our science through Through this robust, 21st-century capacity for smoke-free transparency and approach to peer review and scientific products engagement verification, we can gauge the extent to which our own research is in line Our company’s shift toward a smoke-free Ideological rhetoric is often fierce with these crowd‑sourced results. future means going beyond developing when tobacco is the topic, preventing Since the inception of the sbvIMPROVER the products and science. It also means the public from understanding factual platform, nearly 200 institutions across supplying the demand. The case of IQOS information and undermining sound the globe have taken part in the program, in Japan illustrates the need to anticipate public policy. Confusion can be and the Challenges have verified our demand. Despite optimistic projections exacerbated by headlines and media research. The Challenges and all for a nationwide roll-out of IQOS in Japan, stories. We understand that harsh publications and news articles related in 2016, consumer demand exceeded our media coverage or biased scientific studies to this platform are available online.10 expectations. We were surprised by the are inevitable, and certainly take great rapid pace of adult smoker conversion to care in our consumer information and We use various print and online the product once we hit a critical mass of our public statements because the public communication tools to share our science 2-3% market share nationwide. By June and consumers expect it – and deserve and encourage further debate and 2016, we had to ration the number of no less. We recognize these hurdles but understanding about our smoke-free IQOS devices sold across the country to are doing our best to counter and correct products. We have a dedicated website avoid a situation where smokers who had inaccuracies that erode the information (www.PMIscience.com) to share the latest switched to IQOS would be unable to find environment in which consumers, information about our ongoing research, heated tobacco units. At the same time, policy makers, and investors are making peer-reviewed publications, and we issue we accelerated investment in the important decisions. a regular “Scientific Update for manufacturing capacity for heated Smoke‑Free Products.” tobacco units. Sharing our science, gathering feedback, and participating in robust scientific We have created an infrastructure Our factory in Neuchâtel, Switzerland, 11 debate help answer important questions and website, Intervals.science, to share was the first to produce the heated we receive about our innovative products more detail on the methods we use tobacco units used with the IQOS device. from the public, scientific experts, and to assess products and the data we In 2015, our factory in Bologna became regulators. Since 2008, we have published generate to support our results. the first site fully dedicated to heated more than 200 smoke-free-product- With this platform, we also aim to foster tobacco unit production. We are also related studies and book chapters in increased reproducibility and trust in converting some existing cigarette peer-reviewed publications, such as the science relevant for tobacco harm factories such as in Greece and Romania. the American Journal of Physiology, reduction and a dialogue among all Nature Biotechnology and Regulatory relevant stakeholders. Toxicology and Pharmacology. Lastly, on September 12, 2017, we Milestones and investments Over the last two years, we presented announced our support of the Foundation our results at over 150 scientific for a Smoke-Free World. We agreed conferences around the world. In 2017, to contribute $80 million per year our scientists presented research results over the next 12 years, as specified in at 76 leading scientific conferences the agreement. We made an initial and published over 45 book chapters contribution of $4.5 million in 2017 and and articles in peer-reviewed journals. +$4.5bn +400 the first annual contribution of $80 million Since 2008, we have World-class scientists, In 2018, we are going one step further in the beginning of 2018. The Foundation invested more than engineers, and USD 4.5bn in technicians hired since in our scientific transparency by making is an independent body and is governed by its independent Board of Directors. fundamental research, 2008 to support our the data from our non-clinical and clinical product and commercial best-in-class R&D The Foundation’s role, as set out in its studies about our smoke-free products development, capability in our two available to the public. corporate charter, includes funding production capacity, R&D facilities in research in the field of tobacco harm scientific substantiation, Neuchâtel (Switzerland) Our systems toxicology program uses reduction, encouraging measures that and studies on adult and Singapore smoker understanding large datasets to build an understanding reduce the harm caused by smoking, of disease mechanisms, predict the extent and assessing the effect of reduced of damage to the body from exposure cigarette consumption on the industry to toxic substances, and estimate value chain. improvements if those exposures are reduced. In 2011, we launched our sbvIMPROVER platform, a crowd-sourcing +2,900 Patents granted initiative developed with IBM, to enable worldwide related to independent scientific experts to review smoke-free products and validate our scientific methods and conclusions. It does so through the publication of Challenges and defined criteria by which scientific institutions

18 Philip Morris International Sustainability Report 2017 Transforming our business 19

.

free -

free

- free - has been has devices, combined combined devices, Sustainability Report 2017 free products extends to all - efforts are necessary in finding products that are affordable and acceptable for consumers in different parts the of world. acknowledge We the need to continue working to vision we must allocate our budget a fully fledged portfolio of smoke products and realize that additional develop different product platforms solutions to reduce the financial barrier switching of to smoke products, such as the temporary A substantial partof our marketing and sales budget in countries where we have launched IQOS re‑allocated from cigarettes to IQOS Clearly, to promote our smoke and headcount accordingly. Our goal to replace cigarettes with smoke countries where we operate, regardless developmentof status. are only We at the beginning commercializing of that can achieve this goal. are We also experimenting withother lending IQOS of with promotional offers if permitted locallegislation. by .

Philip Morris International Morris Philip free kit - free. - free products, - business model - to - centric model to assist - free products contain nicotine, - are addictive, and are not risk and the start their of conversion journey. Customer care services, including digital tools, are then available to follow up and to encourage smokers not to fall back to cigarettes, as well as to address any questions or issues. Smoke to a consumer understandWe that any communication with adult smokers about these products must be carried out responsibly, attuned to the local environment and, observing regulatory obligations. Our employees and third parties acting on our behalf their behaviors. For these reasons, we are shifting from a business smokers with this transition. This effort includes the deploymentof specialized field personnel,“coaches,” or who have been rigorously trained to perform quality guided trials with adult smokers and explain the fundamental differences between cigarettes and IQOS must follow strict principles in the commercializationof smoke For adult smokers, a successful guided trial – a truly personalized experience – leads to the purchase an of IQOS which are formalized in our Good Conversion Practices(GCPs) which are being implemented as smoke products are launched. See page 28.

free - free - in Milan, in . We also. We know that free products and how - , used with IQOS free products vary from one - PMI’s factory in Greece, its first cigarette factory fully converted to the manufacture of HeatSticks products varies substantially around The regulatory environment in which Italy, and Nagoya, Japan, in late 2014. we commercialize our smoke the world. As a result,it is easier in some countries than others to make smokers aware smoke of they should use them. The differences in the regulatory environment explain, tolarge a extent, why switching rates to smoke As the heated tobacco category is new, we face several challenges unseen before: increased time to communicate product benefits; consumer acceptanceof a different ritual; and a willingness to stay the product throughout the with conversion process.know We that it usually takes one to two weeks for someone to fully stop smoking cigarettes and switch to IQOS those who smoke are reluctant to change geography to another. to geography products is only the start: The next challenge is to convince smokers to switch. have learned We a great deal about the consumer conversion journey since our city tests IQOS of Developing and manufacturing and Developing scientifically substantiated smoke Our commercialization Our commercialization efforts smoke-free behind products Our global progress overview

IQOS is available in key cities in 37 markets and nationally in Japan in 2017.

a na nor a ra u u ro ga n ran ria e a e a a a i an n i a u a r em a r n e ni i m ua a s o an n o n o a s ti a n a a r ro u e a nm o ti a a e r a a i b er an er m m e o s a a n u r o u b s a a n in i a r e n e e i or e o u e g e a n o e i i i o n n a e m u r g a a a b n n o o i i m a a

n a s r a a e u a ss i a a s a n n a a a o e e u s ti e n f e ri a a s e r a e r ain e r b e r n ia o u Tu r r o ou is e r i u ia s s e as a n fr ia

20 Philip Morris International Sustainability Report 2017 Transforming our business 21

Sustainability Report 2017 to this end. But it is equally clear that millions men of and women will continue to smoke, and they should have the opportunity and information to switch to better alternatives. and we support regulatory measures Many regulators, including the U.S. andFDA Public Health England, have included tobacco harm reduction as a complementary pillar their of comprehensive tobacco control plans, complementing cessation and prevention programs. regulations be clear, shouldTo continue to dissuade people from starting to smoke and encourage cessation,

Philip Morris International Morris Philip

free alternatives. - free products. free future, our - - The in our answer, is view, innovation – in products and in policies. As we work yet satisfying, smoke to design a smoke priorities Technologyare changing. that we and others have developed makes it possible to shift the tobacco and nicotine market towards a future in which cigarettes are replaced by less harmful, Not all regulatory and fiscal rules that apply to cigarettes are relevant and justified for smoke Regulators must differentiate supply and demand measures – for example, product, communication, and fiscal policies – based on product attributes and riskprofiles. Thisof is critical importance for the people who smoke and who deserve policy choices that respect them and their ability to decide. And policies should be sensible, and based on principled pragmatism rather than influenced by ideology.

containing - known risks smoking of have - where those interested in our science can visit to find out more about our scientific work PMI’s R&D facility in Neuchâtel, Switzerland, Comprehensive requirements were put products should be subject to strict rules and enforcement. in place to control nearly every aspect theof cigarette business. The question then becomes: What’s the plan to address the needs men of and women who are looking for less harmful, yet satisfying, alternatives to smoking? The well Our view on tobacco tobacco on Our view regulation led regulators to impose more restrictions and higher excise taxes on cigarettes than on any other consumer product – while allowing cigarettes to remain available to adults. There’s absolutely no doubt that nicotine Philip Morris Japan on the forefront of our transformation

Nagoya, Japan, was selected as the As the market leader of this new category, Customer care call center world’s first pilot market for IQOS PMJ increased its total tobacco market With the introduction of IQOS, PMJ in November 2014. We found that adult share. In fact, around 70% of IQOS users established a dedicated call center with Japanese smokers readily accepted IQOS, have switched from competitive brands staff trained to respond to a wide variety as it allowed them to enjoy a satisfying of combustible cigarettes. of questions ranging from scientific tobacco experience with no fire, no ash, evidence to technical support. In 2017, less smell, and without negatively Transforming our business the Customer Care Call Center impacting indoor air quality. By the responded to an average of 15,000 end of the Nagoya pilot launch in August In July 2016, PMJ undertook a massive daily contacts through an omni-channel 2015, the offtake share of IQOS had organizational change wherein the approach, including phone calls, e-mail, grown to 0.8% for the city of Nagoya. number of sales staff were significantly and online self-service support. In September 2015, Philip Morris Japan reduced, and a new IQOS development (PMJ) expanded the IQOS sales area team was created. Over the last two Logistics chain to include 12 major Prefectures, years, 30% of PMJ staff have been fully To return and repair devices with followed by nationwide expansion reallocated from combustible products technical issues, PMJ has created a in April 2016. to smoke-free products, with the other bi-directional logistics network that IQOS continued to grow in popularity, 70% supporting both portfolios. On top allows for the return of defective and production was soon unable of that reorganization, more than half devices and the delivery of a new device to meet demand. It was not an of PMJ marketing and sales budgets nationwide within 24 hours. uncommon sight to see lines in front were shifted to smoke-free products. PMJ is also undertaking efforts to recycle of IQOS stores where customers PMJ continues to transform the business the metal from devices that were returned, would patiently queue in the mornings model to address new challenges with and we are considering how to expand for a chance to purchase an IQOS device. innovative solutions, such as guided trials, and improve this program in the future. In addition, the competition a dedicated customer care call center, was quickly entering the category improved logistics chain, IQOS stores, IQOS stores with pilot launches of heated tobacco and digital platforms. products in Fukuoka and Sendai, PMJ has a network of nine dedicated IQOS stores across Japan. They serve as in May and December 2016. Guided trials a touchpoint for adult smokers interested Despite the limited supply of both IQOS PMJ sales staff meet face-to-face with in switching to IQOS to learn about the devices and HeatSticks, the market share legal-age smokers interested in switching device through guided trials, as well as in Japan continued to grow and by to IQOS to explain the scientific evidence provide current users with customer October 2017, three million smokers had behind IQOS and how to properly use service, IQOS devices, and accessories. quit smoking and converted to IQOS. and maintain the device. During these As of the fourth quarter of 2017, guided trials, the staff can directly Digital platforms address questions by interested smokers HeatSticks represented 13.9% of the PMJ has several innovative digital and seek to ensure that smokers switch nationwide tobacco market in Japan. initiatives that support smokers on to IQOS with a correct understanding their conversion journey and provide While the total tobacco industry volume of the product proposition and device up-to-date content to IQOS users. continues to decline in line with long- usage. In 2017 alone, 871,000 guided Smokers switching to IQOS are supported terms trends, the decline of combustible trials were conducted in Japan. by a “30-Day Challenge” program that products has accelerated with the sends information to registered users introduction of heated tobacco products. at regular intervals either by e-mail or through a social networking service platform to support them in their lifestyle change. Also, the IQOSphere user Total Market – In Market Sales Volume, Annual 2012-2017 community provides a wealth of content to registered users to enrich their iions IQOS experience. 1 1 1 1 1 11 Challenges 1 11 With any new product, there are new challenges that need to be addressed. 1 PMJ is on the forefront of PMI’s transformation and is striving diligently to address these new challenges. Accidental ingestion According to the Japan Poison Center 1 1 1 1 1 1 (JPC), an average of 97 cases of Reduced‑risk products (RRP) Cigarettes accidental or unintended HeatStick Source: Tobacco Institute of Japan IMS and PMJ Estimate/RRP includes competitive ingestion per month were reported RRP IMS

22 Philip Morris International Sustainability Report 2017 Transforming our business 23

free - free - use is permitted. now enjoy relaxing free products already - Sustainability Report 2017 lounge. free Japan by completely - lounge where smoking is not and the product’s scientific up from in the 5% same quarter of As2016. a result this of phenomenal growth – never before seen in the tobacco category – cigarette sales in Japan have been declining at record Realizing a smoke-free a smoke-free Realizing future In the smoke last quarter 2017, of products from PMJ and its competitors comprised the of 17% tobacco market, pace, over dropping the same by 16% period. Smoke represent over 40% PMJ’s of 2017 sales volume. Our ambition is to realize a smoke replacing cigarettes with smoke products in Japan as soon as possible. IQOS allowed, but IQOS of theof smoking room. The company met with PMJ to learn more about IQOS substantiation, especially the impact on indoor air quality. Based on these discussions, the management decided to remodel the smoking room to an Tests were performed on the air quality theof lounge, and an employee satisfaction survey was conducted to gauge the results the of new initiative. Theresults show that there nois negative impact on indoor air quality, and employees who switched from cigarette smoking to IQOS in this IQOS

Philip Morris International Morris Philip 1 1

1 , the , management 1 1 device for the users without the smell smell the without users store in Ginza, Japan. 1 IQOS smoking and offer guests the option - An a major telecommunications company were complaining about the bad smell number IQOS of and high maintenance fees traditional of rooms. smoking Goshobo is a traditional Japanese ryokan (inn) operating in the Arima hot spring resort The management since of 1191. decided to make the inn completely non rentingof an IQOS durationof their stay. As another example, employees of the inn wanted to find a way to remove the potential fire hazard of combustible cigarettes while accommodating guests who wished to enjoy tobacco during their stay. Learning IQOS of

PMI cigarettes

1

. With , PMJ is website website areas. free Japan, - IQOS related businesses. 1 ingestion by children. - offers many convenience users still need to be HeatStick free products.free IQOS PMI cigarettes and HeatSticks - free products free bothering without Source: Tobacco Institute of Japan IMS and PMJ Estimate/Note: Denominator = Cigarettes + RRP including Japan Tobacco’s PloomTECH and British American Tobacco’s glo consumables IMS 1 - manners can truly transform the way way the transform truly can 1 1 PMJ SharePMJ Market, of Annual 2012-2017 Transforming society Transforming IQOS smokers enjoy tobacco products, but to achieve a smoke regard to indoor use IQOS of benefits, IQOS considerate those of around them. Although PMJ launched a campaign to remind users to pay attention to their surroundings when using IQOS aiming to create space for users of smoke people who do not use nicotine products, for instance by transforming existing smoking areas into IQOS IQOS in 2017. As PMI became awarein 2017. such of cases, to prevent accidental ingestion by children, PMJ partnered with JPC to share information and prompt consumers calling PMJ call centers to contact JPC. Additionally, PMJ started awarenessan the through campaign and leaflets. PMJ will continueto find new ways to communicate with consumers regardingthe preventionof accidental Mitsubishi Estate Co., Ltd. is a market‑leading real comprehensive it is important for the society as a whole to understand the potential smoke of estate developer operating a wide range real of estate Mitsubishi Estate established IQOS 10 lounges in common areas office of buildings which have become very popular with tenants as they meet the needs the of rapidly growing Philip MorrisJapan on the forefrontour of transformation Business transformation The third metric – net revenues (operating revenues net of sales and metrics promotional incentives) – shows the portion of our revenues that is generated Last year, we introduced a set of business by the sales of smoke-free products transformation metrics to make the (including electronic devices and actions we are taking to pursue our accessories). Excise taxes are excluded smoke-free vision measurable and from the net revenue figures. verifiable. The first two metrics show our resource allocation between The next three metrics show our combustible products and smoke-free smoke‑free product shipment volumes products, while the following four (including both heated tobacco units show progress in making smoke-free and e-cigarettes) and ourcombustible products the core of our business. tobacco product shipment volume We will continue to publish updates (mainly cigarettes), as well assmoke-free on our performance on a regular basis. product volumes as a percentage of total volume. It is our ambition that by 2025 The first metric –R&D expenditure – at least 30% of our shipment volume shows how much of our total spend comes from smoke-free products. on research and development is dedicated to smoke-free products. As for previous years, our business transformation metrics have also It includes the costs related to clinical been assured. studies, the development of new machinery, prototype, and product acceptability testing. The R&D expenditure for our combustible tobacco products is largely related to legal compliance requirements, such as the measurement and reporting of tar, nicotine and carbon monoxide for cigarettes, and adaptation to regulatory changes.

The second metric – commercial expenditure – shows how much of our total spend on the commercialization of our products is dedicated to smoke-free products. Commercial expenditure includes costs for marketing, consumer engagement, and trade promotions. As with the other metrics these refer to our global business, and therefore, the total includes commercial expenditures related to cigarettes in the many markets where we have not yet launched smoke‑free products. For markets where we are commercializing new products, this percentage is and will be significantly higher. Last year, approximately 39% of our global commercial expenditure was dedicated to smoke-free products. The shift in resource allocation will continue in the years ahead.

PMI’s first purpose-built factory for manufacturing HeatSticks, near Bologna, Italy

24 Philip Morris International Sustainability Report 2017 Transforming our business 25 1

<550 >250 2025 >38% >30% Aspiration >46 >6% <755 >16% >55% >80% 2018 Sustainability Report 2017 36 791 74% 13% 39% 4.4% 2017

7.7 845 15% 72% 0.9% 2.7% 2016 Actuals Philip Morris International Morris Philip 8% 0.8 881 70% 0.1% 0.2% 2015 market sales. -

free/Total) - cigarettes. The 2018 aspiration pertains to in - free/Total) - free/Total) - shipment volume (billion units) 4 shipment volume (billion units) 3

(Smoke 2 free productfree free product shipment ratio(Smoke free/Total) - - Combustible product Smoke Net Revenues Net Commercial expenditure (Smoke Transforming our business our Transforming R&D expenditure (Smoke Our performance: Smoke Includes cigarettes and other combustible tobacco products. Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions. Includes heated tobacco units and e Assuming constant PMI market share. do We not set aspirational targets for R&D and commercial expenditureto enable but thewe expect stated both outcome ratios in terms to continue of shipment increasing volume. The 2017 metrics are subject to PwC’s Assurance Report. See page 75. 4 2 3 1 Driving operational excellence

We believe that acting with integrity We believe that a strong compliance with government officials, third parties and preventing unlawful and unethical culture is achieved through a combination who interact with government officials on behavior is essential to our long-term of elements: the right Code of Conduct our behalf, membership of organizations, success. We strive to go beyond mere and Principles & Practices, the required advocacy activities, and reporting and compliance in our operations and across level of awareness, training and record keeping. our value chain. Our efforts to drive commitment to our values from all operational excellence are reflected employees, a working environment Last year, we revised our Code of Conduct in the way we manage our ethics and that fosters appropriate conduct, an and related Principles & Practices to compliance program, market our products understanding of how and why people provide even more clarity and guidance responsibly, engage with stakeholders, behave in certain ways, followed by a to employees, especially as smoke-free approach corporate tax and data privacy, diligent and fair investigation process products become core to our business. uphold human rights, tackle illicit for suspected misconduct and We outlined specific requirements for tobacco trading, and implement proportionate disciplinary action. scientific integrity and for marketing responsible business practices in our reduced-risk products, reflecting the supply chain. In this section we provide The Guidebook for Success, together transformation of our company. an update on our performance and with its supporting Principles & Practices, Awareness of, and commitment to, our key developments in 2017 for each covers the following core risk areas: Guidebook for Success is implemented of these topics. competition law; conflicts of interest; environment, health, safety, and security through training for employees and (EHS&S); fiscal and trade (including relevant third parties (in the form of Ethics & Compliance anti-illicit trade); protection of information; classroom and online training, town halls, marketing and sales; and workplace and leadership communications, and team Our Ethics & Compliance program and our labor practices. It also covers a range discussions), and the promotion of a culture of ethical business conduct provide of anti-bribery topics, including giving working environment where employees a strong foundation as we transform our and receiving gifts and entertainment, feel comfortable and safe speaking up business. Honesty, respect, and fairness facilitating payments (prohibited), when things don’t seem right or can be are core values which unite and guide us contributions involving or connected improved. We have a third-party-operated at PMI. They are integral to our company culture and the basis of our Code of Conduct (also referred to internally as our Guidebook for Success). Compliance training (‘000) 2015 2016 2017 Competition law 7.79 6.54 5.98 Compliance overview 51.00 112.15 53.16 EHS&S 7.57 9.39 7.50 Employment 11.52 10.59 11.37 Fiscal & trade 22.71 14.35 5.87 Government relations 19.00 12.22 12.31 Information protection 8.96 7.57 42.82 Intellectual property 10.26 4.48 3.26 Marketing 44.27 45.00 33.16 Records management 9.61 15.23 9.94 Other compliance 0.85 0.84 0.63 Total number of training1 193.54 238.36 186.00

1 2015 and 2016 training numbers have been updated to include live trainings that were conducted during these years but reported late, after the publication of our 2016 Sustainability Report.

26 Philip Morris International Sustainability Report 2017 Driving operational excellence 27

714 317

2017

75/25 186.00 - 792 292 2016 76/24 238.36 out our of revised - wide employee survey on employee wide - Sustainability Report 2017 753 279 2015 77/23 193.54 The global roll Code Conduct. of our compliance culture to gain in 2018 insightsinto areas for further andimprovement; A company A — — — As our company transforms, we must be mindful new of challenges. A continued commitment to a strong culture ethical of business conduct, including anti Looking ahead: Looking Maintaining a strong culture compliance corruption, is essential. In particular, we plan: —

Philip Morris International Morris Philip relatedtraining - 12 Audit Committee. The Ethics & Compliance function runs annually an integrated risk assessment together with our Corporate Audit and Internal Controls teams, which look at risks the company. across through different channels to employees and relevant third parties. Approximately half the of training was live and half was online. Three‑quarters was given to employees and one quarter to third parties. As our Codeof Conduct refresher training is conducted in even years, the number trainings of decreased in 2017. Our VP and Chief Ethics & Compliance Officeroversees our Ethics & Compliance & Principles our to Adherence program. Practices is monitored by the Internal Controls function along with the independent Corporate Audit department, which reports directly to the Board’s In 2017, we provided around 186,000In 2017, Ethics & Compliance 1

Number substantiated of claims Number reports of suspected of misconduct Our performance: Ethics and compliance Ratioof employees trainedversus third parties trained(%) Number compliance of trainings (‘000) 2015 and 2016 training numbers have been updated to include live trainings that were conducted during these years but reported late, after the publication of our 2016 report. Employees attend a training session at PMI’s Operations Center in Lausanne, Switzerland 1 In 2017, we reviewed 714 allegations we reviewedof 714 In 2017, which approximately 30% were referred a day, seven days a week,a day, in all languages Althoughanonymous PMI. at spoken reportingavailable, is approximately two‑thirds the of people who reported suspected misconduct gave their name. to other departments, and40% were substantiated as misconduct across all areas our of Code Conduct. of Of these, the top two categories were theft and fraud against the representing company, approximately half the of cases,and workplace integrity and employment, representing approximately one quarterof the cases. Nearly two‑thirds employees of whose misconduct was substantiated left the approximately company, one‑third received written verbalor warnings or financial penalties. Compliance Helpline available hours 24 Responsible marketing One area where many express concern relates to our marketing principles and practices. Some of the concerns raised include whether our communications to adult consumers are appropriate, whether we target non-smokers or minors, and whether we have lower marketing standards in developing countries than in developed countries.

Our Marketing Code for combustible products is based on the following key principles, which are applied across the world without exception: 1. We market and sell our combustible products to adult smokers (not to An IQOS flagship minors or non-smokers); store in Japan 2. We warn consumers about the health effects of combustible products; 3. Our marketing must be honest, Good Conversion Practices (GCPs) for Smoke-Free Products accurate, and transparent; and 4. We respect the law and our 1. Smoke-free products are for adult 4. Smoke-free products are not an high standards. smokers who want to continue alternative to quitting. The best enjoying tobacco or nicotine. choice for consumers concerned To proactively invite discussion with about the health risks of smoking stakeholders about opportunities to 2. We do not offer smoke-free is to quit altogether. improve our approach, we have provided products to people who have never a complete overview of our marketing smoked or who have quit smoking. 5. To experience the benefit of principles for combustible products 3. Our goal is to switch every adult smoke-free products, adult smokers with this report. See Annex 1. smoker who would otherwise keep should switch completely and smoking combustible products to abandon smoking permanently. We have also developed marketing smoke-free products, such as IQOS. 6. Smoke-free products are not risk practices for our smoke-free products We are committed to supporting free or a safe alternative to portfolio: our Good Conversion Practices adult smokers in their switching cigarettes, but they are a much (GCPs) for Smoke-Free Products, journey through education better consumer choice for smokers which are summarized to the right. and guidance. who wish to continue to use tobacco and nicotine.

A pack of Marlboro with a graphic health warning in Germany

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Sustainability Report 2017 party risks. - and tax authorities. In U.K.,the PMI interacts in an open and real time manner with Her Majesty’s Revenue and Customs (HMRC), and we conduct an annual Business Risk Review with HMRC at which taxkey issues and business changes with a potentialU.K. tax impact are discussed. . and greaterscrutiny by stakeholdersof privacy. data approach companies how Global data protection laws have become more prevalentand rigorously enforced. collaboration(a of External Affairs and the Information Protection &Governance group (IPG)) and the Data Protection Governance Board, which reports twice per year into the Corporate Risk Governance Committee. The GPP also mandates practices that the GDPR introduces or enhances, in areas such privacy data impact assessments,as privacy training, and awareness compliance assessments, personal data inventories, and data subject rights. Additionally, many existing data protection approaches have been reviewed and principle the strengthened, as such transparencyof and the management thirdof Data protection In recent years there has been increasing privacy issues of awareness public In anticipation of the new EU General Data ProtectionRegulation (GDPR), is the introductionof greater central through privacy, data for governance data privacy leads (for markets and functions), a central privacy office team PMI has developed its Global Privacy Program(GPP) to establish a new global standard for data privacy across markets and functions throughout PMI. The GPP has been developed over a period 18 of months by a multidisciplinary PMI team and is based on an internationally established privacy and recognized is program The system. management designed to support PMI functions and affiliates within the EU to achieve GDPR compliance and to embed policies and practices that facilitate a fully compliant approach to data privacy. Outside the EU, the GPP sets the GDPR as PMI’s global standard, ensuring that the whole PMI organization is aligned to a high standard privacyof practice. One the of elements key the of GPP

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routine tax - length basis in accordance with - Monitoring and reviewing business activities: Business structures and transactions are continually monitored and reviewed by all PMI affiliates for tax compliance. Documentation and tax records: In accordance with PMI’s policies, PMI affiliates are responsible for the appropriate creation and retention of allof relevant tax records. Tax reportingTax and procedures:Tax PMI’s Standards and Guidelines are designed to ensure that effective and predictable taxcompliance and control measures are in place. In accordance with these policies, all tax filing obligations must be accurately completed on a timely basis and in accordance with applicable laws and regulations. or customs matters. Where there is sufficient uncertaintyover the tax treatment particular a of transaction or there is a potentially significant impact, external advice is obtained. Escalation Taxand involvement of PMI Department: In accordance with PMI’s policies, PMI affiliates consult with the DepartmentPMI Tax on all important transactions, including recurring or new transactions, business structures or operations withother PMI affiliates or unrelated parties, and determine positions, exposures or actions regarding material, non Roles and responsibilities: Clear definition of roles and responsibilities are formalized in each PMI affiliate in accordance with PMI’s Tax Compliance Program. — — — — — — — — — To achieve this objective,To we have developed mandatory practices which include: — Dealing with tax authorities PMI conducts all transactions on an arm’s current OECD principles, and we support greater transparency between tax payers and tax authorities. When it is relevant and feasible, we have upfront conversations with tax authorities in the countries where we operate to minimize uncertainty on both sides. For example, tax rulings do provide a higher level certainty of not just for us but also for the tax authorities. taxHowever, rulings are not the only securing transparency of means and certainty. For example, in Australia we are part the of Lead Relationship Manager Program, and in the Netherlands we joined Program. Monitoring Horizontal the Both programs promote ongoing and transparent relations between tax payers

13

We do not operateWe “letter box” companies. We do not engageWe in aggressive tax planning, and we do not have in place any contrived tax structures; and tax authorities in the countries where we do business; We are openWe and transparent with We pay taxWe commensurate with the activitieswe perform and substance we have in a particular country; Business decisions are not determined by tax considerations alone; We complyWe with local rules and regulations; — — — — — — PMI has implemented governance arrangements out clear set which accountabilities for the management taxof compliance risks and tax planning. PMI’s tax strategy is to maintain a comprehensive, effective, and practical risk management program, shared best practices, a structured and documented planning, framework, appropriate control and coordinated decision making. — — — — — Our approach to tax is based on PMI is committed to conducting business in compliance with all applicable tax laws, and it has established tax standards intended to ensure compliance with those laws. Legal obligations and societal expectations require that our transactions are based on sound tax strategies and that we act in good faith in all dealings with tax authorities andother stakeholders. the following: — Our approach to to Our approach corporate tax corporate While confident about our practices, we want to be more proactive in addressing concerns raised. With this report we are making available and inviting feedback on our principles for engagement organizations. public and governments with See Annex 2. Some our of critics voiced have concerns about the way we interact with governments. Our Code Conduct of and Compliance Principles & Practicesgovern these interactions, which are conducted transparently,with integrity, and in adherence with local laws. strive We to report advocacy, rules with for comply on our activities as required in several jurisdictions, and we are transparent when others engage on our behalf. alsoWe publicly disclose the limited political contributions we make. Interacting with Interacting governments A contract farmer in Santa Catarina, Brazil

30 Philip Morris International Sustainability Report 2017 Driving operational excellence 31

profit - specific - for - conducted by 18 Sustainability Report 2017 on Fundamental Principles and Rights at Work. will talk We with and listen to people whose human rights we might affect.We will look closely at our practices, continuously strive to improve them, and operate systems to implement this commitment from supplier consumer. to an independent third party (Control Union Certifications) trained and overseen by Verité, a not As part the of ALP program, we disclose detailed reports country of externalassessments to address findings. alsoWe intend to conduct a pilot human in (HRIA) rights impact assessment collaboration with experts and in stakeholders. relevant with consultation Through our HRIA, we expect to gain a better understandingof the actual and potential human rights impacts at site level. The results will inform our approach moving forward as well as our program design and implementation. Human rights grievance mechanisms Providing access to effective grievance mechanisms line in with the Guiding Principles is a core element our of everyone that believe We approach. and seek help when needed. That’s why we strongly support a culture speaking of up and ask suppliers, to provide in our RSP, workers with easily accessible means to raise concerns and to protect them from retaliation. Properly implemented, such mechanisms are one the of most efficient methods for ongoing due diligence organization specializing in labor and human rights issues, with action plans in our supply chain should have the appropriate means to voice concerns and effective remediation. As we move forward, we will continue looking into ways to provide access throughout mechanisms grievance to our operations and supply chain.

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learning -

depth understanding depth of Our Commitment to respect human rights are committed We to business practices that respect internationally recognized human rights in line with the United Nations Guiding Principles on Business and Human Rights. base We our Commitment on the International Billof Human Rights and the International Labor Organization’s 1998 Declaration The Roadmap includes three practical understandingof human rights risks and our of expectation to have PMI’s Commitment embedded throughout our operations and value chain.We aim on business and human rights. Last year, we developed a Human Rights e core elements:core Embedding a culture respect of The foundationof our Human Rights program is the commitment PMI’s of senior management to instilling a culture respectof for human rights throughout our operations. Our employees and business partners need to have a achieveto this through ongoing training module, available to all our employees. In addition, we are developing tailored functional training sessions to ensure - in more a what human rights mean for individual functions, as well as concrete steps and actions expected from them. Human rights due diligence Human rights due diligence is the rights program. human our of cornerstone Over the last several years, we have developed due diligence processes for labor rights in our tobacco supply chain, EHS&S risks throughout our operations, chain. value our across risks integrity and Our ambition is to scale up these processes in the years to come and develop new ones as needed to integrate due diligence processes covering all human rights risks across our entire value chain. This is a vast undertaking, and we will build on the existing foundations already put in place across our organization.

15 functional and to - 17 which is the basis our of 14 applies to farmers contracting 16 holders. - working with us and our tobacco farmers on continuously improving living and working conditions on farms. this exercise, each functional area has developed a human rights action plan focused on the most salient risks to rights In 2017, we developed our HumanIn Rights 2017, Roadmap to identify the practical steps required to integrate our Human Rights Commitment throughout our global operations and value chain. As partof Human Rights Roadmap to commitment our implement Our Commitment Our we published PMI’s Human RightsIn 2017, Commitment, Human rightsHuman In addition, a rangeof policies and or chain value our addresses programs specific groups, such as tobacco workers and children. Amongst those, our Responsible Sourcing Principles (RSP) Human Rights program. Our Commitment is the result internal of cross consultations and external stakeholder dialog, and it reflects our commitment to the United Nations Guiding Principles on Business and Human Rights. with PMI or our suppliers and includes Agricultural Labor Practices (ALP) covering the topics child of fair labor, treatment, income and work hours, forced safe labor, work environment, freedom association, of and compliance with the Affiliates law. and suppliers contracting tobacco farmers are committed to implementing the ALP program and the ALP Code Our Good Agricultural Practices(GAP) program and Implementation Guidance apply to all suppliers doing business with PMI and establish our expectations in the areas humanof rights and labor rights, the integrity. business and environment, Terra Munda: Promoting the integration of migrant workers in Southern Italy

Between 2011 and 2016, approximately ——Legal counseling and awareness Secondly, a comprehensive vocational 630,000 migrants arrived in Italy of existing social services; and training program was developed in 19 by sea. Many stayed in the south ——Italian language classes. collaboration with PMI Italy, its partners of the country to work in the agricultural and suppliers as well as a number of sector, which is labor intensive. As a result of the findings, IOM local NGOs and institutions to support Given the imbalance in demand developed two sets of interventions the integration of 19 migrants. Over a and supply of labor in that sector, to address the exploitation of migrant six-month period, these individuals employment costs are low. The workers and to protect their rights participated in a remunerated competition among migrant workers under the umbrella of the Terra training program, which included for jobs increases their vulnerability Munda program. accommodation and transport to to labor rights abuses. and from the workplace, counseling, Firstly, two teams of dedicated IOM Italian language courses, and workplace staff were established on the ground Against this backdrop and considering safety and security training. the company’s sourcing of tobacco and assisted migrants living in informal from this part of Italy, PMI began settlements by: working with the International ——Providing social orientation and legal Organization for Migration (IOM) in counseling to vulnerable migrant 2015. Since then, PMI has been workers living within informal supporting a project entitled “Terra settlements; Munda”, 20 which focuses on gaining I had never grown tobacco ——Identifying the most vulnerable cases insights into labor rights abuses and before, maybe it exists in Africa (including victims of trafficking or the various challenges facing migrant but I didn’t know. I was excited exploitation, unaccompanied children, workers in agriculture in Southern Italy. etc.) and referring them to relevant to learn new ways of growing A preliminary assessment was authorities for necessary assistance; crops. I am also grateful because conducted in 2016 to establish the most ——Gaining the trust of the local migrant I have learned how to interact pressing needs of migrants living in communities and monitoring their with Italians in the workplace, informal settlements in the regions emerging needs; and in the city, and in public places. of Campania and Apulia. It identified ——Providing cultural and linguistic Now I feel that I can fight for shortcomings in four priority areas: support. my rights and look for a job ——Decent accommodation and housing; By December 31, 2017, these teams on my own. ——Vocational training and job had supported over 5,200 individuals – A beneficiary from Senegal placement opportunities; in 14 months.

Tackling illicit tobacco Yes, the problem of illegal trade impacts For us, this challenge means continuing our business, but the effects stretch far to invest time, effort, and resources in trade and related crimes beyond our bottom line. Fighting illicit maintaining the integrity of our supply trade links directly to combating chain, protecting our consumers, and According to the United Nations Office on corruption, contributing to improving working with governments and other Drugs and Crime, transnational organized human rights, labor rights, and partners to tackle the systemic causes crime is an annual business of environmental standards, principles of illicit trade. USD 870 billion.21 It is not just luxury that organizations involved in illicit goods that are counterfeited or smuggled trade ignore or violate. Our efforts focus on three main and sold illegally. Cigarettes are among the objectives: most illegally trafficked goods in the world. Awareness continued to increase in 2017 ——Effective measures to secure our supply Criminals are increasingly attracted to the that illegal tobacco trade is not a victimless high profits and minimal risks associated chain and prevent the illegal diversion crime and that it links to the funding of of our products; with illegally trafficking tobacco products. terrorism and other serious crimes. This was reflected in many forums ——Support for regulation and Fighting illicit trade in tobacco products, including some in which PMI participated, public‑private partnerships to stop including preventing the diversion of our such as the Helsinki Commission illicit trade; and own products, is a key component of our hearing held in the U.S.,22 an event sustainability program. It is within our best ——Investment in research, training, held by the Business Council for interest, that of our customers and and education to raise awareness International Understanding in Panama23 shareholders, but also of governments and tackle the issue. and the Financial Times round-table to safeguard the legitimate supply discussion on Combating Illicit Trade in and purchase of tobacco products. the United Kingdom.24

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26 2017. - Sustainability Report 2017 Diversion Governance - border smuggling, border by - Tracking and tracing keeps track of product shipments. helps It determine where products have been diverted from their legitimate supply chain. In our business environment, we deploy tracking and tracing at the master case (10,000 cigarettes, 500 packs), carton (200 cigarettes,10 packs) and pack levels. Further details can be found in our Anti Committee Progress and Outlook Report 2016 definition,introduces jurisdictional The capacitychallenges. to borders national beyond operate important an is advantage for organized criminal groups, which can their quickly modus change operandi or trafficking routes. Smuggling is a much more diffusemore a much Smuggling is and difficult criminal activity to tackle many where is – and this haven. safe found have criminals Cross – Marc Firestone, President External Affairs & General Counsel – U.S. Congressional hearing, July 2017

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Tracing based -

customer 2nd external specific dynamics, ensuring -

approach and classified markets into risk categories to focus our resources and controls where they are most needed. Our updated Customer Know Your policy includes mandatory actions for markets exposed to higher risk product of diversion, such as yearly customer due diligence and monthly volume monitoring, or an assessment tracking of and tracing controls. For example, our affiliate in Ukraine introduced the monitoring of retailer purchases for specific brands and compared volume requested versus market In 2017, we also adopted a risk In 2017, that deliveries our of brands are assessed. continuously Under declaration Under Tobacco products that are produced and distributed in the same country, a portion of which is not declared to the domestic authorities. tax Counterfeit Tobacco products that have been permission the without manufactured of the trademark rights holder. customer

1st external

Diversion - evolving nature - PMI warehouse PMI responsible actions, such as 25 - Tobacco products that are generally legally produced in a market and which are smuggled into another market where they have limited or no legal distribution. Illicit whites Genuine tobacco products that are produced for lawful distribution in their market of intended destination but illegally diverted into a different market. Contraband Tracking The categories illegal of tobacco trade Manufacturing Under the guidance our of Anti of criminalof activity in this area, our tools and processes are continuously refined and updated to help address new areas of risk. Governance Committee, we continuously refine our Principles & Practices to ensure our tools are applied systematically PMI. across for which they are intended. Collaboration and market tracking and tracing or volume monitoring, toare fighting key the diversion of our products. Given the fast We are committedWe to ensuring that our products are sold legally in the markets Effective measures to secure our supply chain and prevent the illegal diversion our of products in the supply chain Tracking and tracing the prevent Tracking illegal to diversion PMI legal of products Support for regulation and Investment in research, training, To gain a better understanding of the size, public‑private partnerships and education to raise awareness nature, trends, and actors typifying the to stop illicit trade and tackle the issue illicit tobacco trade, PMI applies a research PMI welcomes regulation and partnerships A key element of our strategy includes methodology based on the collection of to help address illicit trade. Over the years, increasing awareness of the illicit tobacco empty cigarette packs (Empty Pack Survey our supply chain controls have been trade and its drivers. By assessing these or EPS). improved through cooperation with aspects, PMI and others can provide In 2017, Empty Pack Surveys were regulators and governmental agencies insights to governments and local conducted in 79 countries. In total, with whom we have specific commitments authorities to inform future actions 117 surveys were commissioned to and obligations. and combat illicit trade more effectively. external parties, around 70% thereof 29 In addition to supporting the ratification with other tobacco manufacturers. of the World Health Organization’s Framework Convention for Tobacco Control (FCTC) Protocol to Eliminate Illicit Maghreb report 2016 Trade in Tobacco Products, we also support regulations which extend beyond In 2017, for the first time, we studied qualitative analysis by the Royal United national borders covering regional the illicit tobacco trends in the Maghreb Services Institute for Defense Studies organizations such as the European Union region in cooperation with KPMG. In (RUSI), which highlighted the dynamics (EU). With much of the illicit tobacco trade addition to KPMG’s proprietary analysis behind the illicit trade in cigarettes and entering the EU from outside its borders, of the magnitude of the illicit tobacco other diverted products in this region. we know that concerted action is needed trade, the report also includes a more to have a real impact.

PMI remains committed to anti-diversion practices through bilateral cooperation Education and training to agreements with governments and local authenticate PMI legal products customs authorities in the form of PMI works with law enforcement agencies Memoranda of Understanding (MoU). in countries worldwide, investing in These MoUs have resulted in the education and technical training as continued exchange of information and another key part of our anti-illicit strategy. technical training for law enforcement In 2017, we trained more than 700 officers. In 2017, PMI signed 10 MoUs, members of law enforcement agencies bringing the total to more than 50 MoUs, in 15 countries on how to differentiate with governments in 48 countries.27 Raising awareness among between counterfeit and authentic packs Thanks to the framework set by our MoUs the general public of PMI cigarettes. and the exchange of information with Accessible and transparent communication authorities, 76 illegal factories producing on the illicit trade of tobacco products is counterfeit PMI brands were dismantled key for PMI. In 2017, we launched in 2017 by law enforcement agencies, stopillegal.com. The objective of this site of which 48 were based in Poland. is to inform the general public on the We estimate that in Poland alone we magnitude of illicit trade, its drivers helped to avoid the sale of four billion and consequences, as well as to share counterfeit cigarettes. Had the illegal PMI’s Principles & Practices on this issue. factories not been dismantled, the estimated tax loss in the EU markets would have been around EUR 1 billion.28

The key to combating illicit trade is sharing information between different agencies, whether they be border guards, coast guards, police, customs, security services or tobacco manufacturers.

– Howard Pugh, Europol – Stopillegal, January 2017

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90 85% 27% 100%

countries across 10 10 across 2018 goal 5 additional At leastAt 500 18 75% 25% 2017 100% countries Sustainability Report 2017 10 additional 10 717 across 15717

n/a 67% 25% 2016 100% SELEC an independent Expert Council. relatedcrimes, such as money laundering, corruption, and organized crime. PMI IMPACT has received 157 applications across56 countries globally, which are currently being assessed by inclusive of 5 additional 14 countries 2,176 across 2,176

(11 countries)

n/a

Philip Morris International Morris Philip 25% 53%

2015

100% 507 across 507 6 additional 15 countries 1 Impact.com. -

is now underway and will be reported www.PMI at upon The implementationof all these projects first round, a total32 of projects from countries 18 wasselected. The second funding round PMI of which openedIMPACT, in September called for projects2017, that address different formsof illegal trade and 2

kind global funding - its - of - Tracking and tracing sold% of – packs with unique code applied Our performance: illicit Tackling tobacco trade Keeping full coverage for tracking and tracing – master case level Extending Memoranda Understanding of (MoU) with law enforcement agencies/governments – number countries of Regional studies and country analysis to improve awareness illicitof trade global – % of cigarette consumptioncovered Training for law enforcementTraining agencies to monitor diversion PMIof products – number law of enforcement officers trained Number views of on stopillegal.com (‘000) Full coverage equates tracking to 95% and tracing in our supply chain(excluding Kretek business). There are of 5% master cases not covered – these are destined Data for period July 16, 2017 – December 31, 2017 (the website was launched in 2017). to countries which are not identified as a source of potential diversion or where PMI sells to a single customer in the country. PMI employee scans a master case as part of our tracking and tracing system initiative to support public, private, organizations non‑governmental and in implementing effective solutions against illegal trade and related crimes. PMI has committed100 USD million for this program. In the initiative’s 1 2 trade together together trade Launched PMI in IMPACT 2016, is the first PMI IMPACT: Combating illegalPMI IMPACT: Responsible supply chain Responsible Sourcing Ensuring our Responsible Sourcing Principles (RSP) Program starts on the right foot Our business has a significant, global In 2017, we started to roll out the RSP, supply chain organized by five main Initially, in the wake of stakeholder communicating directly with global categories. We have a large agricultural concerns, we focused on addressing labor partners covering 99% of our total spend supply chain, ranging from tobacco and other risks in the places where we on global vendors by December 2017. growers – in both developed and source tobacco. In 2011, we developed We also engaged with a number of developing countries – to producers of the Agricultural Labor Practices (ALP) suppliers to clarify questions related other agricultural products, such as clove, program – a key pillar of our broader mainly to the implementation of menthol and guar gum. Another part of Good Agricultural Practices (GAP) these principles. the supply chain consists of manufacturers program – with the help of Verité, of direct materials used to produce a leading not-for-profit organization We launched the RSP in three of our five cigarettes and other tobacco products, specializing in labor and human rights regional procurement clusters, starting such as acetate tow (for cigarette filters) issues.30 This program has been rolled out with Sustainability and RSP Awareness and paper (both cigarette paper and globally: Every farmer with whom PMI or sessions with regional and country packaging materials). Key to our business our leaf suppliers have a direct contract procurement management, followed are also the manufacturers of machines has a contractual obligation to implement by the development of comprehensive for our cigarette and heated tobacco the ALP program. supplier communication plans. products factories, a highly specialized During 2017, we translated the RSP industry. A recently added part of our In 2017, we released our Responsible into 13 languages to accommodate supply chain consists of the manufacturers Sourcing Principles31 and Implementation local requirements. of electronic devices for heated tobacco Guidelines, which established the products and e-cigarettes. Finally, we work foundation for a more comprehensive To further foster engagement with supply with thousands of suppliers of goods and systematic approach to addressing chain partners, we regularly reach out to and services that are not specific to the supply chain sustainability beyond our groups of suppliers to discuss topics that tobacco business, but essential for any agricultural supply chain. The RSP provides are of common interest, and sustainability business, such as office equipment, PMI’s expectations in the areas of human is now firmly on the agenda of these company cars, and consultancy. rights and labor rights, the environment, events. For example, with our Turkish and business integrity, and applies to all affiliate we organized a supplier As a responsible business, we want to suppliers doing business with PMI, except sustainability day with the participation understand and continuously address for tobacco farmers, who must follow of the managing director and senior potential sustainability issues in our our GAP/ALP program. The RSP program management. The coverage of the global supply chain, ranging from was developed in consultation with workshop represented over 60% of our environmental impacts to labor abuses external stakeholders, who are experts direct and indirect procurement spent or corruption. We are working with on human rights and sustainability, and in the country. business partners to proactively identify, with a selected group of key suppliers. manage, and reduce risks, and create shared value. We see this as a fundamental part of upholding our commitment to sustainability and, in particular, to the UN Guiding Principles on Business and Human Rights.

It was a great pleasure for me to meet with you and your colleagues at such a meaningful seminar. I honestly believe and see that both companies, PMI and BillerudKorsnas, are in the same lane to achieve sustainability targets and it is very nice to see both companies are having full focus on this critical and responsive issue.

– A workshop participant PMI business partners attend a Sustainability Day organized by our Turkish affiliate

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32 depth - about our our about day assessment assessment day - party sources. - We communicatedWe to both Sustainability Report 2017 31 site visit and management - EMS suppliers for IQOS expectation that they should increasingly source minerals from smelters or refiners that are certified “conflict as free” by available third Conflict minerals due diligence we continued to Duringstrengthen2017, our conflict minerals due diligence process related minerals to 3TG (tungsten, tantalum, tin, andgold) that are mined in the DemocraticRepublic of the Congo and adjourning countries. included We Conflict Minerals as oneof the principles in our RSP. The results the of review showed We alsoWe took steps to integrate sustainability criteria into the assessment newof EMS suppliers select for PMI. To PMI’s second we EMS supplier, established specific qualifying criteria (e.g., regarding labor/human rights risks, preference to suppliers contracting and managing workers directly) and one a conducted interviews for each the of three finalists Subsequently, process. bidding the in we also conducted a full sustainability review, led by Verité, the of selected supplier to gain a more in understanding its of status and seek alignment with our RSP early on. that the supplier was very well aligned andwith minor gaps our RSP, identified are being addressed. with an on

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site - tier suppliers. - learning was - learning to various in 2018 - supply chain to identify human in and understanding. During 2017, - to understand the living and working conditionsof workers, particularly migrant workers, who make up a significant percentageof the supplier’s PMI andlabor force. During 2017, workedVerité together with the EMS supplier to address the gaps that had been identified. In addition to regular reporting, the assessment team conducted a further on visit to discuss and validate the supplier the measures; improvement been addressed. In addition, we started to map out the IQOS rights risks down to third have now identifiedWe the suppliers with the highest inherent risk, and during we will start2018 to work towards getting a better understanding of these suppliers and how to manage risks. has made progress in addressing the gaps and topics recruitment like fees, and working conditions have a comprehensive e target groups worldwide. Our objective is to train procurement personnel developed in consultation with external experts in human rights, the environment, and business integrity. plan We to roll out the e as well as other relevant functions within our company. Organizational training The integrationof the RSP into our organization is fundamental to achieving buy

. In 2016, growing nature - free product IQOSfree - Our focus so far has been on our main smoke We are increasinglyWe expanding a new and complex supply chain that includes electronics manufacturing. Electronics suppliers are new partners to PMI and are often geographiesin where we have not previously done significant procurement direct of materials (mainly China and Southeast Asia) and where human rights issues have been flagged.Further, the fast thisof novel part our of business means that new suppliers are continuously being added to our electronics supply chain, particularly for tier 2 suppliers and below. PMI worked with Verité to carry out a labor the of assessment comprehensive management systems, starting with one ourof electronics manufacturing services The supplier. (EMS) purpose of the assessment was to identify strengths and gaps in the supplier’s systems and Managing risk as develop we our electronics supply chain During 2017, we strengthenedDuring2017, our governance model. In addition to the existing Supply Chain Sustainability Coordinators for Global Suppliers, we extended the network to include regional Sustainability Coordinators in each our of five procurement clusters. alsoWe increased operational support for sustainability with dedicated resources at our European Service Center. Governance Good Agricultural Since 2016, we have assessed conformity 2. Minimizing the impact of tobacco of our tobacco leaf suppliers, as well as of farming on the environment Practices (GAP) our own tobacco leaf operations, to our (see pages 56-60) GAP standards through the industry-wide We source around 90% of our tobacco GAP promotes environmentally Sustainable Tobacco Program (STP) that is through direct contracts with over sustainable practices, including curing independently managed by AB Sustain, 350,000 tobacco farmers in 28 countries barn improvements, the use of more an independent supply chain management worldwide. PMI has direct contracts sustainable tobacco-curing fuel sources company, and includes:33 with 23,000 of these farmers. The other to reduce greenhouse gas emissions, the elimination of highly hazardous 332,000 have direct contracts with ——Annual self-assessments performed by Crop Protective Agents (CPA), the over 20 third-party suppliers with whom tobacco suppliers via the online STP promotion of bio-pesticides and PMI has direct contractual relationships. portal and reviewed by AB Sustain; and Around 2,800 trained agronomists, the overall reduction of CPA use, employed by PMI and our suppliers, ——On-site reviews conducted by AB biodiversity management and provide support to contracted farmers Sustain auditors with visits to a sample reforestation, as well as water, soil, throughout the tobacco-growing season of contracted farmers, as well as a and waste management. to improve overall conditions and thorough review of tobacco suppliers’ production, visiting farms regularly policies, procedures, and documentation 3. Making tobacco farming more throughout the crop season. demonstrating the level of STP profitable implementation. One of the outcomes Tobacco is a valuable crop that helps of the formal assessment is an Direct contracting is critical to enable strengthen food security and nutrition independent performance rating us and our tobacco suppliers to work and allows farmers to generate against all STP criteria. collaboratively with farmers and to drive significant income, particularly in the systematic implementation and In 2017, on-site reviews were conducted the case of smallholder farms. monitoring of our standards. It also Promoting practices and technologies benefits the farmer in a number of ways: in eight countries, making a total of 16 countries reviewed over two years. to improve farmers’ yields and crop ——Ahead of the growing season, the quality, and to reduce labor contractual agreement on the volume Our GAP program focuses on three requirements, leads to a higher income and price of the tobacco protects areas, with mandatory implementation for the farmer. It also frees up land the farmer from market fluctuations for all tobacco farmers with whom PMI or for alternative crops, thereby helping and provides better assurance that our leaf suppliers have direct contracts: to create an additional source of there is a buyer for the crop; income. Our program also includes 1. Improving working conditions assistance to farmers in growing these ——Farmers can access crop inputs, such as on the farm (see pages 48-53) alternative crops. seeds, at a lower cost than market price; The Agricultural Labor Practices (ALP) ——Removing middlemen reduces program focuses on promoting and transportation costs or other non monitoring good labor practices, value-added fees charged to farmers; including health and safety conditions, and terms of employment, and preventing ——The contract can be used by the and eliminating child and other farmer as collateral for credit or other labor abuses. financing arrangements.

Reducing hardship at work and improving efficiency in Greece

Tobacco growing is labor intensive. method for harvesting oriental tobacco, As such, efficiency improvements which represents around 45-50% of are crucial for optimal production. total labor requirements in tobacco Initiatives to reduce the number of harvesting in Greece. In previous years, working hours required to grow the different prototypes of harvesting crop range from mechanization, curing machines were tested, and in 2017, preparation, to packing simplification. working with tobacco suppliers, While this is a global effort, the specific we tested two row-harvesting initiatives depend on the particular machine prototypes in Greece characteristics of the crop and the operating on 40 hectares of a land. farms in each country. The feedback from both tobacco suppliers and their contracted farmers For example, labor scarcity and an has been positive. In addition to aging farmer population in Greece increasing harvesting efficiency, are concerns for long-term sustainable we see mechanized harvesting of A contract farmer in Greece harvests tobacco production. PMI initiated a oriental tobacco using a two-row oriental tobacco as a way to mitigate harvesting machine prototype project to find a less-labor-intensive labor‑related issues, such as child labor.

38 Philip Morris International Sustainability Report 2017 Driving operational excellence 39

>90 100

Goal by 2020 by three years 24 countries supplier every Every tobacco 19 90 77.0 2017 6,433 tobacco) 8 (33% of purchased Sustainability Report 2017 15 88 72.0 2016 7,508 tobacco) 8 (22% of purchased Philip Morris International Morris Philip 13 88 n/a 32.5 2015 11,043

2,3 3 1 3,4

Our performance: Agricultural supply chain Tobacco purchasedTobacco through direct contract by our leaf operations or our tobacco suppliers(%) Number contracted of farms in the scope Control of Union assessments per year (ALP topics) Cumulative numberof tobacco supplier locations (countries) assessed by Control Union (ALP since 2013 topics) Systematic monitoringof labor practices (%coverage) by AB Sustain Number tobacco of supplier locations(countries) assessed in different countries, the number of farms covered by the assessments will vary. The variation in the number of farms assessed over the last three years does Data relate to our total tobacco supply chain, except when explicitly mentioned in footnotes. Data relate to crop season, which may span over more than one calendar year. Data cover approximately 90% of our sourced tobacco. According to our methodology, these assessments cover different countries and tobacco suppliers every year. Depending on the geography and typical farm size therefore not reflect a reduction in the scope of the assessments. A tobacco farm worker in Nayarit, Mexico 1 2 3 4 Managing our social impact

Continuously improving PMI’s social and the steps we are taking to equip our The transformation of our business goes impact within our operations and beyond people to adapt and thrive as our company hand in hand with evolving our ways of is essential to our long-term success. shifts towards smoke-free products. working, our mindset and behaviors, as This starts with how we attract and Social responsibility does not stop at well as our culture. PMI’s People & Culture retain people at PMI, the labor standards our operations: We also discuss our (P&C) Leadership Team is accountable for we expect from farmers and suppliers, Agricultural Labor Practices program. driving the internal transformation that and our shifting attitude towards will enable the success of our smoke-free consumer centricity. In this section, vision. Defining the behaviors required to we provide an overview of what it is like Working at PMI drive this vision and attracting, supporting, to work at PMI: our company culture, We are a multigenerational, diverse and retaining people from every part of our approach to inclusion and diversity, community of 80,600 employees the globe are key P&C priorities. labor relations as a foundation for worldwide, speaking over 80 languages sustainable business, and ongoing efforts and working together in a culture of in the areas of employee safety, health honesty, respect, and fairness. and well-being. We also look to the future

PMI employees around the world

Indonesia 35.8%

Philippines 5.7%

Other Asia Japan Argentina 2.4% 3.4%

Brazil Mexico Other EEMA 3.7% 2.1% Other LA&C Russia Turkey 4.8% 2.4%

Poland Italy Switzerland Germany Other EU 4.8% 3.8% 3.7% 2.7%

40 Philip Morris International Sustainability Report 2017 Managing our social impact 41 1 building - astern urope, Middle ast and Africa Sustainability Report 2017 14,119 training hours were provided.14,119 1,552 employees1,552 participated; and — — — To furtherTo enable our people to develop mindsets and capabilities to act and lead others inclusively, we continuously train People & Culture professionals and people managers on how to mitigate unconscious biases in recruitment, talent, and performance management. Over the past we completedyear, 60 awareness workshops; which: in —

Americas Asia and Pacific

Philip Morris International Morris Philip and post‑maternity and - onemarkets now operate - uropean Union 1 1 1 flexible work arrangements. While we have laid the foundation, we have more to do to fully leverage the benefitsof flexible work. have launchedWe parental support programs and initiatives designed to help employees achieve their ambitions to be both great parents and great professionals. These include the creationof a network group called “Parents@pmi” and pre for workshops and for new fathers. also We continued to support the International Dual Career Network, a platform designed to support the careersthe of partners and spouses of ourof internationally mobile employees. and when they work and focusing on output instead “being of seen working” can increase productivity, provide environmental benefits from cutting business travel, and support employees in balancing business and personal priorities. Fifty Giving people autonomy over where where over people autonomy Giving A diverse global leadership

free future through - Inclusion and diversity Inclusion believeWe the best way to spark innovation, solve problems, and make better decisions is to harness the power Diversity is about differences.At PMI, An essential elementof our inclusion of differentof skills, ideas, and perspectives from diverse groups people of who are supported by an inclusive culture. are We a truly global and diverse organization. we think about differences broadly, including, without limitation gender, – gender identity, ethnicity, nationality,age, sexual orientation, religious background, ability, education, and technical skills. All these of differences contribute to diversity thought of because they impact how we see the world. Inclusion is about treating people fairly and equitably so that they can contribute their personal best in every It is about way. mindsets, behaviors, and employment practices that value, respect, and accommodate differences, promote listening, and learning from others, and create space for constructive disagreement. and diversity agenda is a focus on leveraging the full potentialof women in the workplace. with By closing 2017, 34.4% women in management positions, up 1.6 point versus we continue 2016, to progress towards our 2022 goal of reaching 40% female representation at the managerial support level. To this goal, we aim for a 50:50 gender ratio in our recruitment women pipeline. In 2017, accounted for 43% new of hires at managerial levels new of and hires 47% at more junior levels. Career support and advancement are also critical for 38%achieving of this goal. In 2017, promotions at managerial levels were women. of company culture company Converting our HumanResources function to People & Culture reflects the importance developing of a new culture within PMI that is focused on enabling a smoke Transforming our Transforming The function P&C is organized to deliver our consumer at the core everything of do. we a new and exciting people agenda in line with our aspirations to continue making PMI a great place to work. The function has been designed so that it will maintain and grow the capabilities that have made PMI so successful in the past, while developing our people and equipping them to successfully transform the company. insight and innovation, and on putting Snapshot of local inclusion and diversity initiatives

All PMI regions and affiliates have customized their Inclusion and Diversity (I&D) agenda and activities to focus on their own priorities. Here are some highlights:

Africa Asia and Pacific Europe and Middle East Launched the AFRICAN CUP to Australia Italy further develop talent from diverse Created innovative ways to engage Implemented the Women in backgrounds and build new capabilities employees on I&D issues by providing Development program for the across the region. This project leverages platforms to share views and Greenfield factory in Bologna. Offers PMI’s talents to help solve business perspectives. Examples: “Don’t Argue” opportunities for women without a issues and fast-track capability building debate on pros and cons of flexible technical background to pursue a career in Africa through international working arrangements and BAR-B- in a manufacturing environment. assignments in that region. GRAS BBQ to raise awareness and support for the plebiscite of the Russia Algeria Marriage Equality Act. Introduced flexible time and remote Conducted a conference for all working arrangements to help foster employees to raise awareness of Indonesia an inclusive work environment as I&D, including unconscious bias Launched the Sampoerna Inclusive an enabler of transformation, and and challenging cultural Leadership Award (SILA) to engage to support professional growth and gender stereotypes. managers and their people to “walk and work-life balance. the talk” and recognize those showing Senegal exemplary inclusive behaviors. Aims Switzerland Participated in the very first women to propagate inclusive leaders to help Participated at the Bern PRIDE parade development forum in sub-Saharan foster a more inclusive environment. in support of the Swiss LGBT+ Africa, attended by more than community, launched unisex toilets 200 top-level business executives Malaysia in its premises, and conducted forums from multiple sectors. Promoted work-life balance practices where senior PMI leaders spoke and participated in the Life at Work about LGBT+ inclusion. South Africa Awards to recognize companies Worked with organizations like the creating increasingly diverse, inclusive, Turkey Global Fund for Women and local and family-friendly workplaces. Collaborated with the Women communities on initiatives relating Entrepreneurs Association of Turkey to the abuse of women and children. Philippines (KAGIDER) to help women achieve their PRIDE month was celebrated for career goals and aspirations through Americas the second year in a row as part an external mentorship program. of affiliate‑wide communication Argentina and awareness building programs. United Arab Emirates Promoted flexible working arrangements Increased its focus on gender diversity with the #QuieroRemoteWork challenge. Singapore & Taiwan by targeting a balanced gender ratio People were encouraged to work Embarked on efforts to better in the talent acquisition pipeline, remotely and share their experiences understand the needs and expectations implementing contemporary onboarding via a knowledge-sharing platform of different generations in the programs, and promoting flexible including posts with pictures, workforce. A Generational Efficacy working arrangements. comments, and “likes”. Workshop took place to gain insights into diverse generational needs and United Kingdom Canada to map out priorities and actionable The LGBT+ and allies group “PML Continued to improve its disability next steps. Stripes” directed efforts to successfully agenda through ongoing training, celebrate “National Coming Out Day” implementing an accessibility plan, and conducted a fundraising event and removing barriers for people for a local charity, the Terrence Higgins with disabilities. Trust, in commemoration of World AIDS Day. Mexico Implemented a program aligned with the Official Mexican Standards (NOM) 25 Local Bronze Certification, focusing on gender equality and non‑discrimination, salary equity, prevention of workplace violence, work-life balance, and equal treatment and opportunities.

42 Philip Morris International Sustainability Report 2017 Managing our social impact

43

being

- free - being border - - being of (H&WB) - life balance, and the - module to support our global life balance. - Sustainability Report 2017 Supporting stress management and work Promoting healthy eating; and Encouraging physical activity; Illness and disease prevention; — — — — internally in collaboration with our Market Research team to collect feedback on what means H&WB across the globe. This allowed us to identify the top three areas concern of to our employees: stress, sleep, and work — alternatives for employees who do not want to quit tobacco use, in local markets where such options available.are local committees H&WB in our affiliates. such committees existedIn 2017, in 36 our of markets. Composed of cross‑functional team members and employee representatives, they foster the collaboration and dialogue necessary to tailor the activities according to the specific needsof local employees. During we initiated the latter partof 2017, a global survey on health and well activities of interest to employees inside and outside the workplace. This assisted us in forming the global strategy for health and well‑being. also We launched a digital BalancedYou approach toward H&WB. Aimed to define, inform, and support employee participation in health and well activities, itcovers for example: articles written on contemporary topics, challenges to encourage cross participation and a sense of community, and coaching tips and support via live chat support. personal and planWe to implement a smoking cessation program for employees, which is currently under development inorder to enhance approach.PMI’s H&WB Separately, we also envisage introducingsmoke We encourageWe the establishment of — — and demographics. With this in mind, we continue to roll out our program and minimum requirements on promoting initiativesH&WB through our BalancedYou our employees, both inside and outside the workplace, is a multifaceted topic touching on the physical, emotional, and behavioral aspects living. of It is understood differently from country to country and is influenced by personal preferences, local culture, behaviors, program across affiliates worldwide. This covers four main areas: — Health andwell-being Health The health and well

Philip Morris International Morris Philip

term

- paid people

- surveyed, 34 - andlong Salary certification in Switzerland Salary certification2019. by - - Is aligned with the social and cultural expectationsof the community country and/or of whichof individuals are part. Provides the means for an individual/family to purchase the goodsand services necessary to attain a basic standardof living and accumulate to minimum a level savings; of and Is earned within normal working hours; — — — — — Living wage According to our concept, a living wage: — no permanent employee was paid below the living wage rate. In 2018, we will run a similar survey Our ambition is that noneof our employees get paid below the living for temporary and seasonal employees. wage rate. all elementsimportant toour existing and future employees. Our compensation programs are at, or above, market median in all countries where we do business. Alongwith the transformationof our business, we adapt our programs to be We establishWe our programs considering the most relevantto our diverse, multicultural multigenerational and workforce. are committed We to rewarding superior performance aligned with our short the first multinational company to achieve Equal and Japan, and we aim to receive a global Equal transformation targets. are committedWe to pay men and women equally for equal work and seniority, wherever we operate around the world. are proud We to have been in our organization are able to maintain a fair standard living. of After defining the concept and methodology with BSR, we ran a living wage survey in countries where we had over 50 permanent The resultsemployees confirmed in 2017. that, in the 58 countries to assess whether the lowest In 2016, we startedIn 2016, a project with Business for Social Responsibility (BSR) Living wage

out

-

free future, - being, financial planning, - learning tool for employees who lead - to attract the talent we need to business our achieve successfully strategy. offer compelling We programs in the areas compensation of and benefits, health and well Rewarding our employees our Rewarding Our total reward programs enable us and education. Our Workplace Integrity which Policy, Collective Labor Agreements(CLAs) Building and strengthening respect and trust are at the core our of labor relations principles.with the efforts Today, we are the transform to deploying currently business towards a smoke this becomes even more important. all PMI employees are expected to know and speaks follow, to our commitment to fundamental principles and rights at work. respectWe the right ourof employees to form or jointrade unions and employee representative organizations of their own choice, and they should be able to make an informed decision free from coercion, thereby guaranteeing freedom of association.We recognize our employees’ right to bargain collectively through employee representatives.We respect the terms collective of agreements and, where collective bargaining arrangements are in place, we ensure that PMI bargains in good faith. make all efforts We to conduct fair and cooperative negotiations, to overcome potential difficulties that may arise and reach sustainable and business responsible agreements, which will serve the parties in the long term. Overall, we maintain a strong commitment to promote cooperation on matters of mutual concern and observe high standards employmentof and labor relations. with trade unions and employee representatives demonstrate our commitment meaningful to engagement. CLAs govern many our of employees’ terms and conditions at work and may include working hours, occupational health and safety, holidays, wages, and procedures for dispute resolution. we had 80 CLAsIn 2017, countries, in 35 covering approximately our of 67% employees. strengthened We the labor relations capability within our People & Culture function by rolling out an e Labor relations For 2018, we plan a progressive roll labor relations at the country level. to line managers in other business areas. Equipping our people and organization to successfully transform our business

PMI is undergoing a significant 2. The way we lead and behave ——We have developed an online training transformation which affects every part Today’s challenges differ from those program designed to give people the of our business and every employee. we faced in the past. We need to change foundational information they need It is crucial that we put the necessary many of the ways we think and act, on our new product portfolio that has systems and processes in place to fully both as individuals and as a company. been accessed by 27,000 users. support people throughout this pivotal That is why we need a new approach ——We have developed the Transformation period and equip them for success. to leadership within PMI and a new Academy – a 12-week training program The year 2017 saw considerable efforts culture that helps ensure that our for management teams worldwide, across the key pillars enabling our people have the mindset and behaviors focusing on smoke-free products transformation: How we organize necessary to drive the innovation, regulatory complexities, responsible ourselves, how we lead and behave, collaboration, and consumer – and marketing, and sustainability. In 2017, and how we work. stakeholder – centricity required to 250 leaders in 20 markets participated successfully operate our transformation. in this program. 1. The way we organize Through an innovative survey, we ——In our operations, we have introduced To accelerate and enhance our ability engaged over 10,000 employees to a manufacturing excellence program to deliver on our vision, we have define the behaviors required to drive using new standardized routines, implemented a new Operating Model, long-term success and ultimately processes, and tools, which is deployed which separates development from create a smoke-free future. sequentially to develop the capabilities deployment to enable the company to of our people. In 2017, 14 factories better focus on both innovation and 3. The way we work implemented this program and over consumer centricity. To bring this To ensure no employee is left behind 1,500 employees were trained. Operating Model to life, building new in our transformation journey, we have ——We have also introduced a different capabilities (e.g., in science and in implemented various programs to help way of working based on consumer technology, to be equipped in today’s them understand different business centricity, enabling employees to digital era) and upskilling our employees challenges and equip them with the deliver faster while ensuring solutions will be the focus for 2018. necessary knowledge to lead the meet the final consumer needs. transformation towards PMI’s smoke- This program covered over 3,000 free vision: employees in 2017.

Employees working together at PMI

44 Philip Morris International Sustainability Report 2017 Managing our social impact 45

Goal 2022 40 by 2 4.9 13) 20) 67 41.6 11.0 34.4 2017 80,600 2 (out of 2 (out of 68 based employee health and 13) 17) 4.3 Sustainability Report 2017 - 41.2 11.2 32.8 2016 79,500 being metrics into our broader 2 (out of 1 (out of - corporate reporting framework. well We are studyingWe best practices and looking at ways to define and embed evidence We wantWe to ensure that none our of employees receive a salary below the living wage rate. company transformation.We will continue building and reinforcing our labor relations capabilities across the globe. — — — — 67 16) 12) 4.3 31.0 13.8 40.6 2015

80,200

2 (out of 1 (out of

Philip Morris International Morris Philip

Salary - Salary certification - month audit and - We believeWe that sound labor relations and a constructive dialogue with our employees and their representatives will help us to respond to the challenges and opportunities arising from our in management positions to 40% by 2022, and we will pursue our goal to reach a global Equal with theby 2019 Equal Foundation, working in partnership certification procedure. with PricewaterhouseCoopers (PwC) for the 18 — — 1

1

Women in management positions(%) Number women of on Board Directors of Employee turnover rate (%) Women employees (%) Number women of in Company Management (management board) Employees covered by collective labor agreements(%) Our performance: Working at PMI Number of employees of Number Employee voluntary turnover rate (%) In the next few years, we will continue to work on our goal increasing of the representationof female employees a smoke‑free future entails an which transformation, organizational calls for a new mindset and perspective. Consumer centricity, a multistakeholder approach, and continuous focus on inclusion and diversity enablers are key to achieve this. Our business vision to create The aggregated data cover approximately 70% of our employees. As of October approximately 1, 2017, of our workforce 74% in non OECD countries was covered by collective labor agreements. kretek cigarettes kretek in Indonesia A hand roller of — — — — Looking aheadLooking 1 2 Safety in the workplace In 2017, the LTI rate across the whole of Safety across our fleet PMI was 0.10 (injuries per 200,000 hours With a fleet of more than 25,000 vehicles PMI has 46 production facilities globally. worked) and in our factories it stood at in more than 100 countries and over We have developed and implemented a 0.05. Thirty-five of our factories achieved 500 million kilometers driven in 2017, leading environmental and occupational zero LTI for more than a year, and several road safety is a key concern. Despite our health, safety, and security management sites have reached up to five years low injury rate, unfortunately in 2017, system, which involves policies, standard without LTIs. two PMI employees lost their lives in road practices, and procedures at all of our accidents. We continue to make our best We also conduct regular safety manufacturing centers. We have set effort and invest in a safe fleet, fleet assessments at our offices, warehouses, minimum requirements based on PMI safety programs, and employee awareness. and car fleet organizations. Additionally, best practices and local regulations We manage our vehicle fleet with an we have engaged Bureau Veritas, an and have embedded these requirements integrated approach based on nine external certification body, to assess into every level of our organization. elements: leadership, baseline assessment, the management systems at our Training and awareness programs risk assessment, hiring of drivers and manufacturing centers around the world support our ambitions, globally and placement, training, performance in accordance with internationally at the affiliate level. recognition, vehicle selection and recognized standards for safety and maintenance, incident reporting and In 2017, we expanded the scope of environmental management. investigation, and management reviews our Mission Zero program beyond our and communication. manufacturing operations to reach our In 2017, 42 (some 91%) of our factories were certified to OHSAS 18001, country sales and marketing organizations. In 2017, we made progress across our the international safety management We piloted safety cultural assessments Fleet Safety program: in several markets that allowed us to build standard. Newly acquired or built factories a systematic approach to improve safety have begun the certification process. ——We implemented our Fleet Safety performance. We launched new safety Because we have new onboarding program in all markets where we executive leadership workshops and tools, factories we may not reach 100%, operate and involved our sales and undertook employee engagement but that remains our goal. Due to a factory force organization; activities across our affiliates. closure in the Dominican Republic and ——We focused on innovative technology the geopolitical situation in Venezuela, solutions (gamification and telematics) We established PMI Markets Safety where we could not have our site certified, to facilitate safe driving and accident Awards for the first time, to recognize our certification percentage decreased prevention; those markets that had already started versus 2016. applying the Mission Zero philosophy ——Our collision rate (collisions per million to their day-to-day work, and to Despite good results and low injury km driven), which covers higher encourage their further commitment rates, we are committed to exploring severity road accidents, has declined to sustain PMI’s safety culture and more innovative and engaging ways to 1.01 per million km driven (from 1.22 environmental commitments. to keep our performance world class. in 2016); Managing change with safety in mind ——We launched a new global online driver In 2017, our Lost Time Injury (LTI) rate, is essential as we convert existing risk assessment tool complemented by the most widely used benchmark to factories or build new production sites local practical fleet driving programs; assess prevalence of serious work-related for smoke‑free products. injuries, was the best in our industry and ——We established a working group with one of the lowest among our fast‑moving the top 12 biggest markets (covering consumer goods peer group. approximately 18,000 vehicles) to govern global fleet safety development; and ——We have gained better understanding of safety dynamics in our fleet based on employee feedback and reporting.

Our performance: Safety in the workplace 2015 2016 2017 Goal

Lost Time Injury (LTI) rate (per 200,000 hours worked) 0.11 0.12 0.10 <0.10 Fatalities (PMI employees and contracted employees) 0 1 2 0 Fleet crash rate – vehicles crashes per million km driven1 5.3 6.8 6.2 <4.0 Fleet collision rate – vehicles collision per million km driven 1.24 1.22 1.01 <1.50 Manufacturing facilities with OHSAS 18001 certification (% of PMI factories) 93 93 91 100

1 Regarding fleet safety, as of our 2018 Sustainability Report we will no longer report on Fleet crash rate (which includes cosmetic damage) as we believe collision rate (collisions per million km driven), which covers higher severity road accidents, is a better indication of our safety performance.

46 Philip Morris International Sustainability Report 2017 Managing our social impact 47 Sustainability Report 2017 Philip Morris International Morris Philip

, An employee at PMI’s first purpose-built factory for manufacturing HeatSticks near Bologna, Italy Agricultural Labor Systematic monitoring Evaluating the impact of Practices35 Systematic monitoring of farms the ALP program implementing the ALP program begins To assess the effectiveness of the ALP According to the International Labor with the collection of individual farm program, we focus on four questions: Organization (ILO), the largest share of profile data. The farm profiles, updated ——Is child labor being eliminated on farms child labor occurs in the agricultural sector: each growing season, provide the field supplying tobacco to PMI? Around 108 million children are impacted technicians with key information about worldwide, involved in different forms of the farm and the people working and ——Is the working environment safe? hazardous work.36 living there (demographic information, ——Are workers being paid enough to size and nature of the farm, number meet their basic needs? PMI’s Agricultural Labor Practices (ALP) and age of people present, categories ——Is all farm labor voluntary? program aims to eliminate child labor and of workers, housing arrangements, other labor abuses and to achieve safe and school attendance). The year 2017 is the first year that and fair working conditions in all farms we were able to assess performance where our tobacco is sourced. Our over The field technicians then visit the farms of the program based on the four 350,000 contracted farmers, representing throughout the tobacco-growing season questions above, establishing a baseline over 90% of the tobacco PMI buys, are and evaluate how well labor practices align for future analysis. required to comply with the ALP Code.37 with the ALP Code principles. When they identify issues requiring immediate In 2017, approximately 13,000 Prompt Our approach intervention, called “Prompt Actions”, Actions were recorded by field technicians. The ALP Code sets out seven principles they immediately address them with related to child labor, income and work the farmer and together develop an Almost two-thirds related to unsafe hours, fair treatment, forced labor, safe individual improvement plan against which work environment, mainly linked to work environment, freedom of association, progress is monitored. In those cases inadequate Crop Protection Agents (CPA) and compliance with the law; and 32 where a farmer consistently resists making storage practices and application of CPA standards to measure compliance with the changes required, the contract is not without appropriate personal these principles. Training is provided to renewed or may be terminated. In the protective equipment. farmers, workers, agronomists, and field 2016/2017 season, 36 contracts were Approximately one-third of Prompt technicians on these topics. terminated. In addition to Prompt Actions, less serious issues are also monitored Actions related to hazardous tasks Striving to ensure that our standards and addressed. performed by children below 18 years are met, field technicians working for old. The most common hazardous PMI or our tobacco suppliers conduct The aggregation of data collected across work performed relates to the contact regular farm visits to detect potential over 350,000 farms is challenging. with fresh tobacco leaves and the issues. The field technicians also provide In 2015 and 2016, we made steady associated risk of exposure to nicotine, additional support, such as distributing progress in standardizing our processes mainly during harvesting, and during Personal Protective Equipment (PPE) and systems by developing data templates the preparation of strings of tobacco to reduce labor-related risks, and more and electronic records. This allowed us leaves for curing. generally work with farmers on to create a global ALP monitoring dataset The remaining 1.9% of Prompt Actions, continuously improving living and working enabling analysis at market and regional representing 245 cases, were related to conditions on farms. We also collaborate levels. To gain a more complete and the following topics: income and work with other stakeholders in the tobacco accurate overview of the risks and hours, fair treatment, or situations that supply chain, including governments patterns of vulnerability of tobacco could be related to forced labor. and NGOs, to tackle underlying systemic workers, we also compare the ALP problems present in the agricultural sector. monitoring data with information gained through CU third-party assessments. In addition, external third-party assessments are conducted by Control Union (CU) certifications,38 a certification agency specialized in sustainable supply chains across multiple industries. The results of these CU assessments, including the action plans to address identified issues, are disclosed publicly.39 We also publish comprehensive progress reports of the ALP program.39

A field technician in Malawi supports farmers in implementing good agricultural practices in tobacco growing

48 Philip Morris International Sustainability Report 2017 Managing our social impact 49

party

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40 Sustainability Report 2017 connected impacts. Farmers often - on work safety. Furthermore, migrant workers' families frequently bring their children, creating a riskof child labor. the tobacco farms supplying PMI, especially during the peak harvesting time. Their presence on farms is associated with many risks to the standards the of ALP Code, as illustrated in our case study on Mexico. These include inadequate accommodation, pay via a crewlow pay, or group lack leader, redress of for harm, accidents or unfair treatment, and difficulties in ensuring effective training there are many seasonal workers on facilitators (unaffiliated with PMI’s suppliers), participants expressed the most significant changes that have occurred will continueWe to explore new ways to evaluate the effectiveness of our program and make changes where necessary. will continueWe to be fully transparent Focus on migrant workers Data gathered on farm profiles show In that exercise, coordinated by third in their lives as a result the of farm’s participation in the ALP program. Evaluating theoverall impactof the ALP program is a complex exercise requiring complementary multiple, approaches. in disclosing the program’s performance. In addition to this quantitative analysis, we have been gathering qualitative information on the impactof the ALP program on people’s lives through interviews with farmers and workers. in a community inMalawi with our suppliers’ farmersgrowing tobacco, a new participatory method for impact evaluation was tested involving the collectionof “Most Significant Change” stories from farmers and workers on farms enrolled in the ALP program. Although the sample was not statistically representative, the stories revealed a striking range meaningful of and often inter emphasized the increased economic security they and their families have been able to realize as a result of direct contracting and support from the PMI supplier. In a pilot exercise, conducted in 2017 Other 1 3% <2% 17% 46% 32% Philip Morris International Morris Philip due to not due to not 1 2 or insufficient worker stored in a way that could 1 cause a health and accident risk wearing proper protective equipment accommodation Unsafe  Others CPA Exposure to CPA Exposure to GTS wearing proper protective equipment Types of safe of workTypes environment issues Safe work environment issues 5% 3% 3% 2% 7% <4% 10% 27% 39%  1 

Hazardous work performed by children below 18 years old Others Handling or applying CPA Working in extreme temperatures Driving a tractor or operating machinery with moving parts Handling or applying fertilizer Carrying heavy loads Working with sharp tools Stringing Harvesting or handling green tobacco CPA: Crop Protection Agents GTS: Green Tobacco Sickness 1 2 Types of hazardous of work performedTypes childrenby years below old 18 ALP Prompt Actions in 2017 Improving the living and working conditions of migrant workers in Nayarit, Mexico

In the State of Nayarit (Mexico), burley The plan was developed together with children’s presence in the field when and sun-cured tobacco farmers rely our local supplier Tabaco del Pacifico they return from daycare centers, on indigenous Cora and Wixáritari Norte (TPN – a subsidiary of Universal with continued risk of child labor. (or Huichol) workers for the harvesting Corporation) in consultation with all season. These workers migrate with relevant stakeholders (workers, PMI concluded that any intervention their families from Mexico’s highlands indigenous leaders, supplier’s field staff, to fully address the living conditions of and settle in tobacco-growing areas, third-party NGOs, local authorities, workers and their families would involve where they live in very poor conditions companies from other sectors) and changes in the traditional organization of throughout the harvesting period. our ALP program partner Verité. work in Nayarit’s burley and sun-cured While PMI previously reported on crop. With that in mind, as of December progress in addressing child labor Typically, the four to five months of 2017, PMI introduced a series of among this community, attempts to earnings during the tobacco season measures to reorganize labor schedules improve living conditions for these are the main source of annual income and activities and to prohibit field work workers and their families have had for the Cora and Wixáritari families. after sunset. very limited success.41 Maximizing the number of working hours and income is thus the key reason why To enable this change and assure workers In the last quarter of 2017, PMI did an they often prefer living in the field during income and buy-in, PMI agreed with TPN in-depth analysis of this complex and the harvest period, as other possible to a 25% increase on the piece-rate paid deep-rooted problem and developed accommodation options are generally to workers, and TPN developed a a plan aiming to: at some distance from the fields and sensitization campaign in the workers’ communities of origin with support from ——Provide adequate accommodation would imply loss of time and money due to commuting. the National Committee of Indigenous to all migrant workers; Peoples (CDI). ——Provide workers access to shade area In the 2016-2017 season, TPN provided for rest and lunch, and to sanitation basic emergency shelters to 100% of Farmers with contractual agreements in the field; contracted farmers. However, these did with TPN agreed they would be responsible for ensuring adequate ——Prevent workers from living in not fully provide a safe and sanitary solution for workers and their families, accommodation for workers, the the tobacco fields as of the current transportation logistics to and from harvesting season; and and further investments in more permanent and improved infrastructure the field, and the provision of sanitation ——Prevent night work in the fields. was not a feasible solution, as most of and clean water for washing in the fields. the farmers’ land is rented and may TPN also agreed with farmers that, change year-on-year. Moreover, even if provided these conditions were met, adequate accommodation in the field they would provide a monetary incentive could be provided, there would still be to cover the farmers’ costs. issues with long working hours and

A migrant worker in Nayarit, Mexico, with her three children as they wait for the school bus

50 Philip Morris International Sustainability Report 2017 Managing our social impact 51 Sustainability Report 2017 PMI assumed the overall implementation costs this of program and informed our supplier that we would not be willing to purchase tobacco sourced from farmers who do not participate in this season’s effort or who do not comply with the full range conditions of established.

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FAI’s earlyFAI’s monitoring data and feedback from workers and farmers is very encouraging. While there are many challenges to overcome in the implementationof this plan (e.g., improvements inthe housing conditions offered to workers, in child labor) we believe that we have created the right conditions to address the critical issueof the working and (workers and respective families) covering every single burley and farm contracted tobacco sun‑cured by TPN in the State Nayarit. of preventing children accompanying their parents to the field from engaging living conditionsof Cora and Wixáritari families working in tobacco. estimate We that by the end the of season we will have reached over 6,000 people

2018 2018 -

June 2018), - party NGO (Fundación - A migrant worker in tobacco fields in Nayarit, Mexico and medical services for the children theof migrant families, and are run by a local NGO (Desarrollo Rural de Nayarit – Dernay). For the 2017 season (finishing in May Dernay extended the opening time theof centers and increased the accommodation capacity to welcome the maximum possible number withall stakeholders, including indigenous representatives.Furthermore, PMI engaged a third Mexicana de Apoyo InfantilFAI), which – and housing monitors independently working conditions provided by the farmers and collecting workers feedback. regularlyFAI updates TPN on the results theirof monitoring, and TPN field staff follow up on individual issues identified. PMI supports five childcare centers, which provide education, nutrition, TPN is implementing the measures agreed with PMI, providing the logistical support to farmers, monitoring their progress, and coordinating efforts of children. of Improving theliving and working conditionsof migrantworkers in Nayarit, Mexico The PCSD Partnership – A multistakeholder Partnership for Enhancing Policy Coherence for Sustainable Development42

The PCSD Partnership, facilitated by Sustainable Development. Members of and is committed to compile a the OECD’s Unit on Policy Coherence, the Partnership work together to foster comprehensive case study on was added to the UN’s global registry synergies across economic, social, and sustainable agricultural transformation of voluntary commitments and environmental policy areas, identify through a policy coherence lens and multistakeholder partnerships in 2016. trade-offs and reconcile domestic policy its sectoral implications in long-term It brings together governments, civil objectives with internationally agreed economic development (2030-2063). society, and the private sector from all objectives, and address the spillovers The case study will identify the key regions of the world committed and of domestic policies. barriers to this transition, document working to enhance policy coherence for leading practices, and illustrate the most sustainable development as a key means Philip Morris International joined likely economic development scenarios to implement the Agenda 2030 for the PCSD Partnership in late 2017 in 2030 and 2063.

Smoke-free products and their impact on tobacco growing

The production of smoke-free products farmers are growing around 2,000 A key component for the success requires less tobacco compared to hectares of pigeon peas and more of these initiatives is ensuring the cigarettes. When large numbers of than 100 hectares of chuma beans. availability of water when required, consumers eventually switch to regardless of whether the alternative smoke‑free products, we expect As part of this work, farm trials are crops are grown during the dry or a gradual decrease in tobacco leaf conducted to identify high‑yielding, rainy season. We are working with requirements, which will free up land disease-resistant, and drought‑tolerant Netafim, a company specialized and capacity for other uses. varieties of groundnuts and soya in precision irrigation, to promote beans that should ensure top relevant solutions. Solar boreholes To proactively prepare for and enable performance for the Malawian and storage tanks will be constructed this crop diversification in the most climatic conditions. Our tobacco and different irrigation systems will be effective way, we are following a suppliers are supporting the selected tested. Finally, to reduce post-harvest multistakeholder approach involving farmers for this trial by providing losses, the more than 12,000 farmers suppliers, NGOs, and other companies and distributing crop inputs, helping involved in the food crop program active in the agricultural sector. We are, with insurance and storage, as well are provided with Purdue Improved for example, partnering with USAID as providing advice by their Crop Storage bags, which are specifically Malawi Feed the Future Program to agronomists and support in the designed to reduce insect damage to diversify smallholder farmers marketing of their production. crops in storage. production away from tobacco and into other food crops such as soybean or groundnuts, and have joined the Global Agribusiness Alliance (GAA) .43

We are also working with our tobacco suppliers and their farmers to introduce additional varieties of alternative crops to smallholder farmers. This allows them to not only grow food crops for their own consumption, but also crops that can serve as additional sources of income.

Malawi has been selected as one of the priority markets for our diversification efforts as tobacco accounts for more than half of the country’s export. At this initial stage, more than 7,600

farmers are growing 1,000 hectares of Food crops (maize and groundnuts) grown alongside groundnuts, 267 farmers are growing tobacco on an IPS contracted farm in Malawi 200 hectares of soybeans and 4,600

52 Philip Morris International Sustainability Report 2017 Managing our social impact 53

44

100

Goal

by 2020 by 24 countries 19 77.0 2017 6,433 Sustainability Report 2017 15 72.0 2016 7,508 Minimum wage for workers. Safe working conditions, including the availability Personal of Protective Equipment to prevent exposure to CPA and Green Sickness Tobacco (GTS); Accommodation for workers; and Children under involved 18 in hazardouswork; — — — — — — — Looking ahead Looking Now that we have established a comprehensive and systematic way evaluatingof the effectiveness of our ALP program, we will review and update the program as necessary in 2018, focusing on fourcritical areas: — 13

32.7

2015 11,043

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2 1 Together withTogether ourtobacco leaf suppliers, we are exploring with international food crop buyers and NGOs the possibilities to create a route to market for surplus food crops produced by tobacco growers in these countries, leveraging on the infrastructure and logistics already in place for tobacco production. Although the proportionof farmers growing food crops for their own consumption remained stable globally, at approximately 70%, the number of tobacco farmers growing and selling food crops as an additional sourceof income to in 2016 rose in 2015, from 41% 35% 46% in 2017.

3

assessments by year (ALP topics) Cumulative numberof tobacco supplier locations (countries) assessed by Control Union (ALP since 2013 topics) Number contracted of farms in scope Control of Union Our performance: Agricultural LaborPractices Systematic monitoringof labor practices (%coverage) therefore not reflect a reduction in the scope of the assessments. Data relate to crop season, which may span over more than one calendar year. According to our methodology, these assessments cover different countries and tobacco suppliers every year. Depending on the geography and typical farm size Data coverapproximately 90% of our sourced tobacco. in different countries, the number of farms covered by the assessments will vary. The variation in the number of farms assessed over the last three years does 2 3 1 We have seenWe significant improvements to grow alternativeto crops For several years, we have been supporting smallholder farmers to grow food crops alongside tobacco. In Malawi and Mozambique these efforts encompass technicalassistance and financing for fertilizer and seeds, mainly for maize. contracted 117,000 smallholder In 2017, farmers produced 290,000 tons of food, with 110,000 farmers receiving support. financial in food crop yields, up nearly fourfold in the case maize. of This is strengthening food security and often results in a surplus for sale at local markets. Focus on supporting farmerson Focus Reducing our environmental footprint

Effective environmental management Climate change – PMI also achieved CDP Supplier across our operations and value chain goes Engagement Leadership for our actions beyond compliance with applicable laws a science-based approach and strategies to reduce emissions and and regulations: It is central to the security lower climate-related risks in our supply Climate change, one of the biggest of raw material supply, promotes efficiency chain, making it onto CDP's Supplier challenges facing humanity today, requires and savings, and minimizes negative Engagement leader board, and placing collective global action. Following the environmental impacts. PMI within the top 2% of companies adoption of the Paris Climate Agreement in 2017. Our environmental management strategy in 2015, there is widespread follows a two-pronged approach: understanding of what needs to be done to protect the planet. PMI supports the Science-based targets and ——Minimizing our impact on the renewables environment through carbon footprint Agreement, and we are playing our part PMI supported the call for a price on and water use reduction, conserving in delivering on the necessary action. carbon in the Paris Climate Agreement and biodiversity and combating In 2017, we continued to make progress committed to developing science-based deforestation, as well as waste in reducing our environmental impact targets. Our targets, which were minimization; and across our value chain: in our factories recognized by the Science-Based Targets ——Understanding and adapting to potential where our carbon footprint is relatively initiative in 2017, demonstrate how PMI future business impacts of major small compared to other industries, as well can contribute to keeping global warming environmental trends, such as the as beyond the factory gates. That includes below 2°C based on pre-industrial levels. impact of climate change on tobacco looking at both our upstream supply chain growing. We undertake risk assessments activities (currently focusing on tobacco We have set our performance baseline to quantify the impacts of these trends farming) and downstream, following our as 2010. Against that baseline, we aim to along our value chain. Based on the product and packaging environmental reduce absolute CO2e emissions from results, we develop management and impacts to end-of-use. We also work our own operations by 30% by 2020, adaptation strategies. towards ambitious targets, based on 40% by 2030 and 60% by 2040. We are climate science, which guide and inform well on track in 2017, achieving an overall Through life-cycle and other assessments our climate change programs as part of reduction of 31% for our GHG scopes 1 along our value chain we understand our culture of continuous improvement. and 2 emissions, driven by the use of our main areas of impact and therefore greener electricity, exceeding our where to set priorities. These areas CDP Climate leadership for 2020 target. include tobacco farming for carbon the fourth year in a row footprint reduction and water stewardship Across our value chain, we aim to reduce Every year we report on the status of our action and product end-of-use for action absolute CO2e emissions by 40% by 2030. activities and progress to CDP, the leading on litter and waste. We also need to In 2017, we achieved a 30% reduction international not-for-profit organization manage new areas of impact due to the across scopes 1, 2 and 3, driven by gains assessing companies’ efforts on climate increasing use of electronics and batteries in curing efficiency and use of greener change. Out of over a thousand of the in our products. fuels in tobacco agriculture. We also have world’s largest companies assessed by a long-standing commitment to reduce In this section, we provide an update CDP last year, PMI’s operational carbon the emissions intensity of our value chain footprint is nearly 90% lower than the on our 2017 activities related to climate (measured in CO2e per million cigarettes change, water use, biodiversity, average, and PMI is one of only 25 equivalent) by 30% by 2020. In 2017, deforestation, and waste. These efforts companies recognized in CDP’s 2017 we remained on track to meet this target, demonstrate how we are embedding “Climate A List,” for consistently taking reaching a 24% reduction since 2010. SDGs 6-7 and 13-15 into our sustainability comprehensive action to reduce strategy and how these activities greenhouse gas (GHG) emissions contribute towards advancing SDG 12 on and mitigate climate change, and for Responsible Consumption and Production. the transparency of our disclosures.

Global greenhouse gas emissions scope 1, 2 and 3 (‘000 metric tons CO2e)

1 bseine 1

1

1 Scope 3 Scope 2 Scope 1

54 Philip Morris International Sustainability Report 2017 Reducing our environmental footprint 55 e 2

target reduction – 60% absolute science‑based powered fleet - driving initiatives with - target Sustainability Report 2017 reduction – 40% absolute science‑based from our affiliate in Spain, where we replaced the entire diesel with hybrid electric cars (around 300 cars). As result a this of project, the fleetCO One example how of we have comes approach this implemented emissions were reduced with by 21%, an associated reduction otherin pollutants typical diesel of vehicles. Beyond the environmental improvements, there was an outstanding engagement within our organization whereby our employees actively participated in the selection hybridof vehicle models available from different manufacturers.We also recognize that having the correct vehicles is only the starting point and are now focusing on eco technical training for our employees on how todrive in the most efficientway.

reduction

30% absolute

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based - 1 Achieved reduction 31% absolute e emissions from 2 1 eveloped Achieved 27% emissions, generating cost savings, our fleet decreased by approximately versus baseline. our16% 2010 advancement technological Significant in electric vehicles make them more commercially competitive for fleet managers, and a range fully of electric, hybrid, and other low carbon emissions vehicles are now available in many of the markets where we operate. are We roadmap global a developing therefore on how to move towards a more sustainable fleet, cutting carbon and maximizing efficiency. In 2017, fleet emissions representedIn 2017, around 30% our of Scope GHG 1 emissions. Reducing those emissions must therefore form a core part of our carbon reduction strategy. In 2017, the absolute CO 25,000 vehicles across the world. Greening our vehicle fleet PMI operates a fleetof more than targets technology green and development, we set a target to source 80% ourof production electricity needs from renewables by 2030. In 2017, In order to support our science with green electricity supplied to our facilities for the first time in Mexico, Colombia and Serbia, 53% electricity of was sourced from wind, solar or hydro plants. will continue We sourcing more as renewable electricity becomes available in the countries where we operate. absolute reduction. science‑based targets

1 in factory GHG intensity effectiveness Beat our target - of 20% reduction efficiency - day basis we use - to - 1 and targets to 2015 and 2020 Set our baseline design in new facilities; - e), necessarye), to drive the investments 2 helping farmers improve fuel efficiency and use greener fuels in our tobacco supply chain. greening our fleet; and purchasing greener fuels; purchasing greener purchasing electricity; eco fuel efficiency in our manufacturing processes; — — — — — — 1 We are continuingWe our Marginal Abatement Cost Curve (MACC) approach to identify where to act by comparing and ranking all ourGHG reduction projects globally based on their cost in reducing emissions. have also We set an internal carbon price per ton (USD 17 CO — — — — needed.On a day The programs for achieving our targets are comprehensive and include: — — Absolute GHG Emissions: Scope 1 and2 – Results and Targets of initiatives.of As an example, in2017 we installed three high MACC to refreshMACC and enhance our list tri‑generation power plants – systems which generate heat, cold, and power in one efficient combined process – coupled with solar photovoltaic energy generation in Indonesia and Turkey. 1 Working with tobacco Eliminating the use of coal In 2018, we expect to review the first farmers to reduce and non-sustainable firewood outcomes of the Miombo regeneration Based on current plans, more than strategy and management plans to validate greenhouse gas emissions 70% of our flue-cured tobacco purchases whether they provide a sustainable should be cured with renewable fuel approach to the supply of firewood. The environmental impact of tobacco sources by 2020. In 2017, 36% of the If the practices are demonstrated as farming can be significant, and the flue-cured tobacco we purchased was feasible and sustainable, we intend to GAP program is therefore crucial for cured with renewable fuels (versus establish more than 10,000 hectares managing and reducing our overall 29% in 2016) of which 29% was cured of such managed forestry by 2020. environmental footprint. with sustainably sourced firewood In 2017, approximately 23% of our and 7% with biomass. As a result, Most GHG emissions related to the Virginia purchases were still cured GHG emissions from curing activities tobacco supply chain come from the with coal. Plans have been developed to were reduced by over 330,000 tCO e. curing process for Virginia flue-cured 2 replace coal with agricultural waste pellets, tobacco (Virginia). Our target is to lower To increase the use of renewable and green electricity produced by hydro- the GHG emission intensity related to traceable curing fuel sources, PMI leaf power plants, and sustainable firewood this curing process by 70% by 2020, operations and tobacco suppliers planted in countries still using coal to cure our compared to a 2010 baseline. We are more than 26 million trees in Brazil, Virginia purchases. Our objective is that well on track, with a 38% reduction Indonesia, Malawi, Mozambique, Pakistan, by 2020, no coal will be used to cure achieved so far by 2017. To achieve the Philippines, and Tanzania. Natural our flue-cured tobacco purchases. this target we focus on improving curing forest regeneration practices were barn efficiency and eliminating the use In 2018 and 2019, our GHG emissions implemented in collaboration with our of coal and non‑sustainable firewood. related to tobacco flue-curing are tobacco suppliers in the secondary expected to decrease further through Miombo woodland46 in Malawi, Improving curing barn efficiency a significant increase in the usage of Mozambique, and Tanzania. One of the main tobacco types used traceable firewood coming from in our products is Virginia tobacco, To further improve the supply of sustainably managed tree plantations which is cured in heated barns and thus sustainable firewood for both curing (more than 200 million trees were planted requires an energy source, such as wood. Virginia tobacco and for domestic between 2000 and 2017). As part of our About five kilograms of wood are needed requirements in tobacco farming precautionary approach, we do not to cure one kilogram of Virginia tobacco. communities, our tobacco supplier piloted assume that fuelwood is from sustainable With Virginia tobacco representing two community management plans for sources unless we have proof – and approximately two-thirds of our global the secondary Miombo woodlands in we calculate our carbon footprint tobacco variety needs, and around Mozambique. These were based on accordingly, using a “full carbon” emission 140 grams of tobacco to produce providing technical and financial support factor for fuel wood that we are not sure a carton of 200 cigarettes, approximately to the tobacco farming communities, is renewable. 0.5 kilogram of wood is required for which will gradually take up the the curing of 200 cigarettes.45 management and ultimately harvest the firewood. Most tobacco growers around the world own their own curing barns. Our GAP program focuses on improving combustion efficiency, ventilation, and controls of the barns. In 2017 alone, approximately 23,000 barns were improved in Brazil, Indonesia, Italy, Malawi, Pakistan, the Philippines, Spain, and Tanzania, bringing the total number of barns improved since the beginning of the program in 2014 to approximately 45,000. We aim to improve a total of 60,000 barns by 2020.

To further improve curing efficiency, a trial has been carried out in Brazil and Pakistan involving the installation of fins on the heating pipes in flue-curing barns to increase the exposed surface area and hence the efficiency of the heat exchange. Based on initial results in Pakistan, this method can lead to savings of more than 10% of firewood-fuel.

Sustainably sourced wood chips used as fuel in tobacco curing

56 Philip Morris International Sustainability Report 2017 Reducing our environmental footprint 57 Sustainability Report 2017 Philip Morris International Morris Philip

Renewable and traceable fuel sources

Biomass adoption Self-sufficient firewood e reduction(%) e reductions in ourtobacco 2 2 1 1 1 1 1 1 1 1 1 tret Tobacco purchased no at riskTobacco deforestation of of old growth forest(%) PMI targets for 2020 environmental improve to CO performance in our supply tobacco chain Renewable and traceable fuel sources (%) tret tret A monitoringand verification framework has been launched across in 2017 our leaf supply chain to monitor and verify the impact the of more than 40 initiatives being implemented. These initiatives support the achievement our of 70% carbon footprint reductiongoal for 2020 by eliminating the useof coal and promoting firewood, non‑sustainable the use alternative of biomass fuels and improving curing efficiency. CO supply chain chain supply Water: stewardship across Putting tobacco’s water footprint into context and beyond our operations Tobacco growing and manufacturing take around one‑third of the water required In comparison to other products, tobacco to make the same amount of tea or one sixth of that required for coffee or chocolate is not particularly water intensive. Water is (per weight of finished product).¹ used in our factories, in the manufacture of raw materials such as filters, paper and packaging materials, and in agriculture, even though more than half of the tobacco grown is rain-fed and does not require irrigation.

In our environmental programs, we do not just seek to reduce what we use but also to act as a water steward. That means responsibly using the water we need without negatively affecting the needs Tobacco Tea Chocolate of others by: 1 Estimation based on PMI water use data for manufacturing and “The green, blue and grey water ——Understanding how much water we footprint of crops and derived crop products”, M. M. Mekonnen and A. Y. Hoekstra, 2011. need and using it optimally; (http://wfn.project-platforms.com/Reports/Mekonnen-Hoekstra-2011-WaterFootprintCrops.pdf) ——Not negatively impacting the quality of water resources; We joined the Alliance for Water WASH services,47 and there are no ——Striving to ensure access to safe Stewardship (AWS) in 2017, a leading indications that the situation of Water, Sanitation and Hygiene (WASH) organization dedicated to better managing smallholder tobacco farmers and in all our facilities and increase water within the local watersheds. contracted workers would differ much availability of WASH services on We successfully piloted the adoption from other rural households. Our first our contracted farms; of the AWS Standard in our factory priority is on smallholder farms where ——Respecting the vulnerability of water in Brazil and developed a toolbox for PMI’s active support in providing WASH resources we use and the role of those wider implementation. In March 2018, services is most needed. resources in the wider community; our factory became the first factory in the country to be certified by AWS. The pilot project in Malawi aims to provide ——Seeking partnerships to improve our Based on the results and learnings a concrete example of how to invest into water management practices; and from this pilot, we will roll out the AWS improving WASH services for farmers ——Continuously improving these practices Standard globally. As a priority, we plan in the supply chain and to identify through our Good Agricultural Practices to certify the ten factories which ranked opportunities for further roll-out of a program in our tobacco supply chain. highest in our previous risk assessment WASH intervention. In developing our by 2020 and to extend to the rest of project, we used UNICEF/WHO criteria In 2017, we achieved A-List status for our operations until 2030. for basic service level provision, which CDP Water, which recognizes our water are defined as: stewardship initiatives. Water stewardship ——An improved drinking water source in tobacco agriculture within a 30-minute roundtrip; Water is not a major input to conventional tobacco product manufacturing, but we More than half of the tobacco crops ——An improved sanitation facility which is seek continual water use reduction across supplied to PMI globally are rain-fed and not shared with other households; and manufacturing facilities and focus on do not require supplementary irrigation other than at the seedling stage. ——A handwashing facility with water achieving improvements in water and soap. efficiency, conservation, and reusing or In 2017, water baseline studies were recycling water where possible. conducted in 60 different geographical In 2018, we plan to begin a program of areas where specific types of tobacco providing and adapting boreholes fitted In 2017, the process to manufacture our with hand pumps. We are also new smoke-free products required are grown. The selected areas represent 90% of PMI’s global purchases of tobacco investigating more innovative solutions, approximately four times more water per such as cloud fishing nets (condensing unit of product than for conventional leaf. A water risk assessment system has been developed, including a global risk water from air) and ferro-cement water cigarettes. Our efforts are geared towards storage tanks. PMI is engaging with local improving water efficiency throughout that assessment tool and a tailored local risk assessment methodology and guideline. stakeholders during the pilot to leverage process by implementing new process their local expertise and networks, designs, reusing or recycling water, and by Three important tobacco-sourcing countries – Brazil, Malawi and U.S. – and we already see their strong interest using rainwater harvesting where feasible, to be involved and contribute to the with a view to minimum water discharge. were selected to pilot and validate the risk assessment methodology. socio‑economic development of Malawi. In 2017, PMI implemented other initiatives to reduce water use and increase water The pilot risk assessment in Malawi helped recovery; however, due to our new us highlight the lack of access to adequate manufacturing process, our average water safe Water, Sanitation and Hygiene consumption increased from our lowest services (WASH), which poses a risk to farmers’ and workers’ health and level of 4.0m3 in 2016 to 4.8m³ of water livelihoods. In Malawi, more than 30% of for every million units of product the rural population lacks access to basic equivalent (cigarettes and Heatsticks).

58 Philip Morris International Sustainability Report 2017 Reducing our environmental footprint 59

Sustainability Report 2017 farming systems or farmed - The tobacco supplier plan must aim to enhance habitats, promote native species, maintain biodiversity on the farm through protectionof conservation areas and endangered species; the conservationof natural habitats corridors and between natural habitats; land conversion; soil conservation practices; and minimization pollutionof or land. water, to the air, Biodiversity initiatives are linked to tobacco landscape where our tobacco suppliers work with the farmers to make them understand the requirements and provide examples that apply to their daily work.

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- and Due to the nature PMI’s of business, in our supply chain. Impacts linked to through addressed are farming tobacco our Good Agricultural Practices program for tobacco suppliers, where we describe our requirements for good environmental practices, including integrated pest management and soil conservation practices, as well as biodiversity management. GAP provides guidance on biodiversity management practices and requires there are no significant impacts on biodiversity or deforestation from our own operations. Where we do have a larger role to play on biodiversity is our tobacco suppliers to develop and biodiversityimplement a management plan that incorporates, and goes beyond laws, applicable the with compliance and regulations for tobacco forest‑growing areas. production Tobacco areas must not be located in places that could cause negative effects on national parks, wildlife refuges, biological corridors, forestry reserves, bufferzones, or other public or private biological conservation areas.

A live barn structure in Malawi It is important for successful agriculture that diversity in habitats and species Biodiversity represents the diversity naturalof habitats, species of in these habitats, and the of genome within these species. Its conservation is essential, not only because we utilize a great diversity species of but also because healthy habitats provide vital services pollination,like biological pest control, filter functions of soils, and the regulation nutrientof cycles. is maintained, as biodiversity raises the resilience ecosystems of and helps provide valuable ecological services including genetic diversity, whichkey is pest biological control. for Biodiversity Conserving biodiversity and combating deforestation Responsible management of chemicals for crop protection Identifying and promoting the use of natural agents to combat pests To achieve responsible management in tobacco plants of chemicals for crop protection, and to reduce risks to the health and safety of farmers and farm workers, we have established an Integrated Pest Management (IPM) program. 50 9 IPM plans are underway in all the main Microorganisms Semiochemicals areas where tobacco is grown for PMI. (bacteria, fungi, (pheromones) Tools have been developed to support oomycetes, virus) the implementation of the program in collaboration with the not-for-profit Centre for Agriculture and Bioscience 148 48 International (CABI), namely a manual active substances to help screen bio pesticides, a database identified with over 300 non-Highly Hazardous Pesticides (non-HHP) alternatives, and best practice guidelines for Personal Protective Equipment (PPE) and for 36 53 Botanicals Macroorganisms the disposal of empty Crop Protection (beneficial nematodes, Agent (CPA) containers. Our newly lacewings, ladybird beetles, launched IPM app has reached parasitoid wasps, predatory approximately 700 users, while the © CABI bugs and mites) new IPM website49 has reached more than 6,500 views in 2017. Both the An example of our efforts in this area deforestation. We plan to work with IPM app and website benefited from is the collaboration with our tobacco key suppliers to map these material the addition of newly developed content. suppliers in the “Live Barn” initiative flows and increase the traceability We have made significant progress in Malawi and Mozambique: Trees are of our supplies. towards achieving our target to eliminate planted in such a way that they will Going forward, we intend to develop WHO TOX150 CPAs by crop year 2018 eventually serve, in-situ, as the poles a company-wide policy and increase and HHPs by crop year 2020 through for a curing barn, hence removing the our disclosure on this topic through promoting alternative and less toxic CPAs need to cut trees to build curing barns. submission to CDP Forests in 2018. and bio pesticides. At the end of 2016, More than 85,000 live barns have the volume of purchased tobacco without been planted across the two countries, quantifiable level of any WHO TOX1 CPAs and the first 1,000 are starting to be Waste management was at 98%, in line with our target to reach used in the current curing season. 100% by 2018. Eighty-four percent of Each of our factories operates a waste Tobacco growing is, however, not a our tobacco purchases did not contain management program to reduce, reuse, significant contributor to deforestation any other quantifiable HHP residues, and recycle waste before any final through land-use change, mainly due to which represented progress against treatment or disposal. In 2017, 94% the decreasing area of tobacco farmland. our target to completely eliminate of our factory waste was recycled, A 2017 study using the Big Chain Tool 51 the use of HHPs by 2020. composted or sent for energy recovery. confirmed this for PMI’s tobacco supply chain. In 2017, we also supported a Deforestation Beyond our own manufacturing land-use change study, which led to operations, a bigger challenge lies One of the most significant environmental the publication of the Land-Use in the waste resulting from the use issues facing the world is deforestation, 52 Change Guidance. of our products. Our products and which results in both a loss of biodiversity packaging are mostly made of renewable and climate change impacts. In addition to considering deforestation materials, such as tobacco leaves, paper, risk in tobacco farming, in 2017, PMI cellulose acetate filters, and cardboard. PMI has been working for many years assessed the risks of deforestation across with suppliers and farmers to address After use, paper and cardboard its entire value chain. Among the components, such as empty packs, are the issue of wood used as fuel in tobacco commodities most linked to deforestation, curing, which in some places is associated recyclable, and the rest, such as plastic wood pulp is important to PMI as the raw film wrapping and cigarette butts, with risk of deforestation. We address material for paper, cardboard, and this by improving curing-barn efficiency should be properly disposed of cigarettes filters. The corresponding with general waste. and increasing the use of sustainable supply chains tend to be more complex and traceable curing-fuel sources. than for tobacco, and a small share of We currently purchase 94% of tobacco these materials is made from pulp sourced cured at no risk of deforestation, from countries known to experience up from 88% in 2016.

60 Philip Morris International Sustainability Report 2017 Reducing our environmental footprint 61

,

littering - Sustainability Report 2017 littering campaigns. - We canWe achieve more byworking with others – industry peers, anti organizations and authorities – and sharing best practices across cultures and geographies. are developing We a guidance and toolbox a best of practices that we intend to share with our affiliates in 2018, when they develop and support local anti can either bring back the device to a point sale of or return the device through a deliveryservice if bought online in countries with online sales. Returned devices were inspected and sent for recycling and recovery. in our largest marketfor In IQOS 2017, so our objective is to improve thisover time. In cooperation with recycling experts, we have defined new internal standards for traceability and sustainable recycling. are now We identifying global partners to manage the inspection and recycling process incorporating these new standards. Japan, returned devices were recycled to recover valuable metals. The share of recycling is limited bycurrently available infrastructure and market conditions,

Philip Morris International Morris Philip . is sold is heated tobacco units are IQOS to dispose their of used products responsibly, and we have confirmed the feasibility this of approach. are We currently studying the economic feasibility developing of market recycling schemes for these heated tobacco units. Electronicwaste The are returned after use and recycled to the highest industry standards in every country where we market IQOS used with an electronic device, composed a holder of and a pocket PMI’s aimcharger. is that the devices In all countries where IQOS the devices can be returned at service points for proper disposal. Consumers We believeWe that the best way dealing of with cigarette buttsis to stub them out and dispose them of with general waste, which inmany countries is processed for energyfor recovery. canWe play an important role in raising consumers encouraging and awareness notthrough to litter, both information campaigns and the distributionof portable ashtrays. As littering is an increasingly important topic in many places, we recognize thatthere is an opportunity to be more impactful in our workover the long term.

do not not do free - cycle of - , we want to during a pilot recycling for IQOS in Lausanne, Switzerland PMI employees discuss recycling of HeatSticks initiative at PMI’s Operations Center With the growth smoke of Recycling after consumer use In 2017, we startedIn the 2017, collectionof used heated tobacco units from employees in our Operations Center, Factory and R&D facility in Switzerland. During we collected the year, 356,000 units, which represents an estimated 50% consumption. of The user feedback and collection statistics confirmed these products is managed sustainably. Heated tobacco units for IQOS be littered than conventional cigarettes. the interest and readiness users of burn and carry less odor than cigarette butts. Our observations also suggest that they have a lower propensity to products, such as IQOS ensure that the entire life Cigarette butts are among the most frequently littered items. In natural environments, cigarette butts decompose leachslowly, smoke residues, and risk being accidentally ingested animals. by Smokers should avoid littering and dispose theirof cigarette butts responsibly. Litteringof consumer goods is an issue concernof to society in many parts of the worldand is linked to two main drivers: consumer behavior and the availability wasteof disposal infrastructure. Littering Looking ahead We believe that we can also play a role We are committed to continuous in combating deforestation in the improvement by incorporating good Our business transformation brings tobacco supply chain and, to some environmental management into new challenges but also significant extent, in our wood pulp supply chain. product design, using components opportunities for environmental We want to work more closely with that can be recovered or recycled, sustainability. Our long-term targets on suppliers to improve pulp sustainability and working with experts to develop environment, including our science-based and traceability. the best technologies to reuse materials. targets, have been developed taking into This is especially important for future account the changes in our business. With the success of our smoke-free IQOS models and other new products. products, our new electronics supply Beyond our own operations, we also want chain is gaining importance. We want to apply good environmental stewardship to ensure a responsible and sustainable practices. Building on the successful use of batteries, plastics, and printed Brazilian pilot, we plan to start circuits. We are identifying potential implementing water stewardship across partners to make the production our operations, with ten factories process for our electronic devices expected to be certified by 2020 more efficient. and the remaining by 2030.

A tobacco field in Dowa, Malawi

62 Philip Morris International Sustainability Report 2017 Reducing our environmental footprint 63 >90 Goal Scope PMI fleet PMI fleet year 2018 year 2020 year and offices 70 by 2020 by 70 100 by 2020 by 100 PMI factories PMI factories PMI factories PMI factories PMI factoriesPMI PMI factories PMI factories PMI factories PMI factories,PMI PMI factories,PMI PMI factories,PMI PMI factories,PMI 100% by crop 100% by crop PMI operations PMI and value chain PMI valuechain PMI value chain PMI value chain PMI valuechain offices, and fleet offices, and fleet offices, and fleet offices, and fleet

94 85 90 38 100 <5.0 Goal 2017 Not yet yet Not Not yet yet Not available available Sustainability Report 2017 30 by 2020 30 by 30 by 2020 30 by 80 by 2030 40 by 2030 40 by 2030 60 by 2040 A A A 14 24 31 91 82 98 53 88 88 30 84 6.5 226 4.83 2017 2016 5,149 4,519 4,152 5,994 629,739 119,588 241,355 140,316 388,384 8,875,006 A- B A 69 94 87 12 88 16 87 27 23 93 32 4.8 227 Philip Morris International Morris Philip 3.95 2015 2016 5,691 3,394 6,620 5,025 351,990 314,049 130,077 666,039 122,434 8,230,327 B A

14 24 11 87 93 30 5.7 215 4.05 2015 7,070 5,690 6,381 3,654 119,471 127,631 329,323 361,720 691,044 8,025,559

0 B

296 5.34 2010 7,911 7,401 4,998 6,487 143,148 914,050 470,864 443,186

(baseline)

1

per million units 3 2 e per million cigarettes equivalent. 2 ‘000 metric tons) ) 3 e per km driven) 2 e scope 1+2+3 intensity reductione scope 1+2+3 e scope 1+2 absolute reductione scope 1+2 versus absolute reductione scope 1+2+3 e scope 3 ('000 metric tons) ( e scope 1+2+3 per million cigarettese scope 1+2+3 e scope 1+2 (metric tons) e scope 1+2 e scope 1 from fleet(metric tons) e emissions from vehicles e scope 2 (metric tons) e scope 1 (metric tons) e intensity reductionversus baseline 2010 (%) 2 2 2 2 2 2 2 2 2 2 2 2 CDP (rating) Water CDP Supplier engagement (rating) CDP Climate Change (rating) Waste disposed to landfill or incineration without energy recover (%) Manufacturing facilities certified to ISO14001 (%) CO Waste recycled (%) CO versus baseline 2010 (%) CO CO CO versus baseline 2010 (%) CO equivalent (kg)equivalent (g CO CO CO CO Water ratioWater (water use in m Our performance: Environmental metrics in our tobacco supply chain Our performance: Reducing our environmental footprint environmental of cigaretteof equivalent) Waste (metric tons) CO Energy used and purchased (Gigajoules) 2010 baseline2010 (%) CO Tobacco purchasedTobacco at no risk deforestation of of old growth forest(%) Tobacco purchasedTobacco through direct contract by our leaf operations or our tobacco suppliers (%) Water useWater (‘000 m Renewable electricity (%) Tobacco purchasedTobacco without any detectionotherof identified HHP residues(%) Tobacco purchasedTobacco without detectionof any CropWHO Protection TOX1 Agents(%) CO The breakdown of scope 3 emissions is published in our CDP submission. Intensity is measured in CO 1 2 Next steps

In this third Sustainability Report, We realize that the transformation ——Conduct a carbon and water we have tried to provide a more of our company brings along new footprinting of our new product comprehensive picture of our challenges we need to address: portfolio; and sustainability work. With the aim to reducing the environmental footprint ——Further raise internal awareness achieve greater transparency and to of smoke-free products manufacturing of sustainability. allow readers to assess our progress, process, promoting crop diversification we have included a fuller set of metrics amongst tobacco farmers, and equipping We welcome your feedback on this and data trends. our people to successfully transform report and look forward to sharing the company. our progress in our next report. We have also shared more contextual information on our business and how Starting in 2018, we aim to: we manage sustainability, and we ——Refresh the analysis of our significant have taken into account the feedback sustainability topics; we received on our last report. ——Implement our Human Rights Roadmap The progress we have made across and carry out a Human Rights Impact the four pillars of our strategy is an Assessment pilot for one market; indication of our sustainability ambition: ——Update our Agricultural Labor Practices We are on track with the transformation (ALP) program based on learnings of of our company, we are delivering the past years; towards our CO2 reduction targets within our operations and beyond, ——Expand our efforts on deforestation we are improving on our inclusion prevention and post-consumer and diversity KPIs, and we have waste management; strengthened the governance of our sustainability management.

PMI’s state-of-the-art R&D facility for smoke-free products in Neuchâtel, Switzerland

64 Philip Morris International Sustainability Report 2017 Concluding remarks 65 Sustainability Report 2017 Q

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Philip Morris International Morris Philip looking - risk products - or if regulation or taxation donot differentiate between such products and cigarettes; if it is unable to successfully brand products, new promote introduce equity, enter new markets or improve its margins through increased prices and productivity gains; if it is unable to expand its brand portfolio internally or through acquisitions and the developmentof strategic business relationships; or if it is unable to attract and retain the best global talent. PMI is further subject to other risks detailed from time to time in its publicly filed documents, including the10 Form also be adversely affected should it be unsuccessful in its attempts to produce and commercialize reduced exchange rates and currency devaluations, and limitations on the ability to repatriate funds; adverse changes in applicable corporate tax laws; adverse changes in the cost and quality tobacco of and other agricultural products and raw materials; and the integrity its of information systems. PMI’s future profitability may for the quarter ended March 2018. 31, Aspirational targets do not constitute financial projections. PMI cautions that the foregoing list important of factors is not a complete discussion allof potential risks and uncertainties. PMI does not undertake to update any forward statement that it may make from time to time, except in the normal courseof its public disclosure obligations.

looking - looking - looking statements. This report contains projectionsof future results and other forward of theof Private Securities Litigation Reform PMI is identifyingAct 1995, of important factors that, individually or in the aggregate, could cause actual results and outcomesto differ materially from those contained in any forward Pursuant to the “safe harbor” provisions In the event that risks or uncertainties materialize, or underlying assumptions prove inaccurate, actual results could vary materially from those contained in such forward- PMI’s business risks include: excise tax increases and discriminatory tax structures; increasing marketing and regulatory restrictions that could reduce our competitiveness, eliminate our ability consumers, adult with communicate to statements. future of Achievement results is subject to risks, uncertainties, and inaccurate assumptions. statements made PMI. by or ban certain our of products; health concerns relating to the useof tobacco products and exposure to environmental tobacco smoke; litigation related to tobacco use; intense competition; the effectsof global and individual country economic, regulatory, and political developments, natural disasters and conflicts; changes in adult smoker behavior; lost revenues as a result of counterfeiting, contraband, and cross‑border purchases; governmental investigations; unfavorable currency Forward-looking and Forward-looking cautionary statements Annex 1: Overview of marketing principles for combustible products

What we do Responsible marketing ——Premiums must be designed for adults and must not have particular appeal to Our Guidebook for Success (Code of principles minors. We may brand smoking-related Conduct) and internal Practices and 1. We market and sell our premiums such as ashtrays and lighters. Polices, including the PMI Marketing Code, combustible tobacco products If premiums are not smoking-related, reflect our commitment to market our to adult smokers only the branding, if any, must not be visible products responsibly, in compliance with to others when the premium is used. applicable laws, only to adult smokers, and What do we mean? ——We may sell and deliver Combustible providing accurate information. This is a We sell Combustible Tobacco Products Tobacco Products directly only to summary of those standards, as they are and compete for market share among age-verified Adult Smokers residing set forth on different internal documents. Adult Smokers who have chosen to smoke. in the country of intended sale. Our brands are among the most valuable We do not seek to influence any adult in the world. We put our creativity and ——We may offer free Combustible Tobacco consumer’s decision about whether or Products in limited quantities (typically innovation into developing and maintaining not to smoke. brand value. At the same time we know no more than one pack) only to age‑verified Adult Smokers as part of that tobacco products create health risks Our standards: to consumers. This is why it is so product trial, switch-selling or swapping ——We must not use images that have important to market our products activities. We must not engage in particular appeal to minors, including responsibly and only to adult smokers. switch-selling until after the initial youth-oriented celebrities or cartoons. At PMI we have to ensure that our purchase has occurred. We must not use models who are or employees and agents only engage in who clearly appear to be under the age responsible sales and marketing practices. 2. We warn consumers about the of 25. health effects of our combustible tobacco products How we do it ——We must only place Advertising in media channels, venues or events that are not What do we mean? directed to minors and whose audience The Marketing Code contains our Smoking causes serious disease and is minimum global standards that apply is reasonably estimated to be at least 75% adults. Advertising on television, addictive. We warn consumers about to all sales and marketing activities the health effects of smoking. of PMI relating to Combustible Tobacco in radio broadcasts, or in cinemas should only appear in the later evening hours. Products. We apply these standards Our standards: voluntarily when there is no applicable law ——We must not place Advertising on ——All Advertising and Consumer Packaging or when the applicable law is less strict. the front or back cover of a printed must have health warnings, even if the As Combustible Tobacco Products publication for general circulation law does not require these warnings. represent the largest part of our business or general circulation to the trade. If the law does not require or specify today, the Marketing Code provides ——We must not use outdoor Advertising health warning content and appearance, a solid foundation for responsibly selling that exceeds 35 square meters in total we must ensure that health warnings and communicating these products. size, either individually or in deliberate are clear and conspicuous. combination with other Advertising, The top priority for PMI is to develop ——If there is a legal requirement to print unless we can do so responsibly in light and market smoke-free products that are yields, we may voluntarily print tar, of existing local circumstances (e.g., a better choice for smokers than continued nicotine and/or CO yield numbers on where most of the billboards available smoking and have the potential to reduce Advertising and on Consumer Packaging for placement of Advertising exceed the risks of smoking-related diseases. in addition to yield labeling required 35 square meters in size). by law, as long as we also print the These innovative smoke-free products, ——We must not place outdoor Advertising following statement in a clearly legible like heat-not-burn, are subject to different where the Advertising is readable typeface and size: “The amount of tar, marketing and sales rules, namely the from facilities attended or frequented nicotine and/or CO you inhale will “Good Conversion Practices”. primarily by minors. Outdoor vary depending on how you smoke Advertising should not be placed While we are moving with speed to make the cigarette.” within 100 meters of such facilities. our vision of a smoke-free world a reality, we must acknowledge that the majority ——Company activities involving of our business today is traditional engagement and interaction with combustible cigarettes. At PMI, we consumers, whether offline or online operate under Responsible Marketing via digital media, such as events or Principles. These principles, as defined Direct Communication, must be below, embody our Company’s directed only to age-verified commitment to engage in responsible Adult Smokers, subject to specific marketing directed only to Adult Smokers. age verification process.

66 Philip Morris International Sustainability Report 2017 Concluding remarks 67

one

-

to

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Sustainability Report 2017 and commercialization. These products are not CombustibleTobacco Products and because they do not burn tobacco, they produce far lower quantities the potential to present less riskof harm to smokers who switch to these products versus continued smoking.We have a range RRPs of in various stages of development,scientific assessment harmfulof and potentially harmful compounds than found in cigarette smoke. PartnerTrade – any representative present, are likely to present, or have a retailof outlet, legal age meeting Associate General Counsel responsible for Brand Building. Smoke-Free Products or Reduced Risk Products (RRPs) – products that point (LAMP), or other business that is involved in the sale Combustible of Products.Tobacco trademark, Unbranded name, a – without logo or indicia a Combustible of Tobacco Product brand. the Senior Vice President Corporate Affairs and the Vice President & CombustibleTobacco Products – consumer engagement, directmail, short telephone, - electronic mail, messaging, and Company consumer websites. PMI Marketing Council – the PMI Senior Vice President Marketing and Sales, cigarettes andother combustible tobacco products, such “make as “roll your own”, pipe tobacco,your own”, cigars, cigarillos, cigarittos. and Direct Communications Company – communications to an Adult Smoker that are not intended for the general public, including communications via one all PMI employees and anyone doing business on behalf PMI. of the Marketing Code is mandatory for Who must follow mustWho follow code marketing the This Marketing Code applies to Philip Morris International Inc. and its direct and indirect subsidiaries, collectively referred to as Philip Morris International, PMI, or the Compliance company. with

Philip Morris International Morris Philip

packaging, in publications intended forgeneral circulation to the trade must have health warnings in black text on background, occupying white a no less than the of 10% total area of theof advertisement. and is at least years 18 old. Company or PMI Morris – Philip International Inc. and its direct and Definitions Advertising – any branded commercial communication aimed at promoting a PMI CombustibleTobacco Product to Adult Smokers, regardless the of medium. Adult Smoker – a consumer of CombustibleTobacco Products who is legalof age to purchase such products indirect subsidiaries. – Packaging Consumer wrapping, bundles or any materials in which CombustibleTobacco Products of Marketingof Sales and/or and (ii) reviewed by the AffiliateLaw and Corporate Affairs Departments. All decisions taken during the review process must be documented. Training 6. All Company employees who are directly involved in marketing and sales activities must receive training on these principles and practices. All third parties who are substantively involved in marketing and sales activities on behalf of the Company must be trained on the parts these of principles and practices that are relevant to their activities. The Affiliate Heads, are offered for sale to Adult Smokers. All activities subject to these principles and practices must be (i) approved by the Affiliate Head and the Affiliate Head the Regional Marketing & Sales Heads 5.Implementation have a robustWe process forensuring that our Marketing Code is implemented at the market level. The Affiliate Head is these with compliance for accountable principles and practices, and must ensure that the affiliate uses a robust and substantive review and approval process, such as a Brand MarketingReview. and the Marketing Code Program Owner are accountable to implement these trainings for all employees in and third‑parties contracted by their respective organizations.

specific, - related claims - related statements - related product and/or - Standard brand presentation (i.e., brand name, trademark must logo) and/or predominate in all Consumer Packaging designs. must We not use Advertising visuals on ConsumerPackaging. Any text placed on the external part of Consumer Packaging must be factual, brand We mustWe not pay to include the use of Combustibleof Tobacco Products, a CombustibleTobacco Product brand name or items bearing a Combustible ProductTobacco brand name in movies, entertainment programs theatrical or productions, on television or radio, on the Internet or in any other production (e.g., video games). and not Advertising copy. Trade PartnersTrade must clearly state Not“For Only. for Distribution Trade Advertisements Consumers.” to All written communications with the context Unbranded of platforms or campaigns, must make it clear that they are working for a tobacco company. PMI employees or contractors who interact with consumers, including in All persons, such as hosts, hostesses, brand ambassadors and trend experts, acting on behalfof the Company to engage with Adult Smokers must be legalof age to purchase Combustible ProductsTobacco and at least years 19 old. must We ensure that it is clear to Adult Smokers that these persons are acting on behalfof the Company. mustWe also adequately monitor their activities for compliance with these principles and practices. Product or brand must be accurate and not misleading, including about the health risks of smoking. All product adequaterequire substantiation. — — — — — — — — — — — — ensure that: ensure 4. We respect4. We the law and also Our standards:Our All our of marketing and sales activities mustrespect applicable laws, global standards decency, of and the local culture and practices prevailing in the country where the activities will be implemented. 3.Our marketing must be honest, transparent and accurate What do mean? we Annex 2: Overview of engagement principles

Our framework ——PMI only communicates to governments taxation and others, to disclose their and public organizations product relationship with, and any financial Our Guidebook for Success (Code of information that has been substantiated support they receive from, us so that Conduct) and several Principles & by such rigorous scientific methods. their audience has access to the Practices set out detailed standards for ——The positions PMI publicly advocates information material for them to make engaging with governments and public for, and the arguments supporting such a decision or adopt a view. organizations or third parties generally, positions, are consistent with PMI’s ——We keep accurate and complete doing external communications or public internal positions and do not overlook financial records of all expenses incurred statements, making contributions or any information that PMI may internally in interacting with government officials, providing financial support to certain have that might be material to public organizations and any other projects, giving gifts or providing PMI’s audience. third party. entertainment to third parties, and recording and reporting such expenses. ——PMI’s positions on regulation of its ——We communicate honestly and products, taxation, harm-reduction, respectfully, internally and externally. This document does not replace those employment, safety, and a vast array of ——We market and sell our products standards, but it describes their basic important topics result from self-critical, according to the following principles: tenets and summarizes their spirit. It also respectful internal debate that considers provides a means for PMI to tell the not only business objectives but also, —— We do not market or sell to minors, public what is important to PMI when among other things, PMI’s legal non-smokers or non-users of nicotine interacting with governments and public obligations, societal expectations, products. organizations, and allows PMI to invite human rights, long-term environmental ——Consumption of combustible tobacco feedback on these fundamental tenets. effects, and consumers’ rights to full products is harmful to health. and accurate information. —— Non-combustible products are not Key points to remember ——We believe that regulation and taxation risk-free. of tobacco and nicotine products should —— People concerned about the risks ——Communication and respectful be consistent with their different risk associated with any of our products, exchange of informed, substantiated, profiles. We make our views known should quit. and reasoned ideas is the best way through our website, the media, and to achieve regulatory and fiscal communications to governments such as ——Any positions or messages frameworks beneficial to the societies through public consultations and other communicated or advocated for with they apply to. available platforms. governments or public organizations are consistent with, and respectful of, ——We think it is our responsibility to share ——We do not bribe or try to these principles. our knowledge and expertise with inappropriately influence other governments, authorities and public people’s objectivity. ——We comply with reasonable, legal governmental requirements to provide organizations. ——We have strict standards governing information to authorities. ——The merit of PMI’s ideas, the rigor and how we provide gifts and entertainment validity of its scientific conclusions, the to government officials, members ——We communicate institutionally and verifiability of its facts and the integrity of public institutions and private do not allow the use of personal email of its employees should be the only individuals. We comply with accounts, or other means that might means through which PMI advances its those standards. be misleading, for company communications or the transmittal positions and communicates them to ——We have strict rules concerning what of PMI information. governments, public organizations contributions are appropriate, what due and opinion leaders. diligence is required before making ——We do not seek to gain access to, nor ——Corruption, bribery, influence- them, what disclosures are in order and, discuss with governments or other third trafficking, misleading information, when needed, how to maintain the parties, confidential information of secrecy about issues that are material independence of those that receive such others, including our competitors. to a decision, and dishonesty in general contributions. The same applies to our We comply with anti-trust regulations. are not acceptable forms of doing membership in external organizations. ——Our Compliance help-line and business at PMI. We comply with these rules. Department are available to anyone ——We require third parties interacting with working at PMI wanting to report What we do governments, public institutions or other suspected violations of our Guidebook audiences on our behalf to refrain from for Success or Principles & Practices. ——PMI’s research and development engaging in bribery or in other forms of Reports can be made anonymously. PMI activities follow rigorous scientific inappropriate influence. We make our respects and protects the identity of standards. When it comes to our internal standards known to them and those that raise concerns. PMI does not Reduced-Risk Products, PMI makes monitor their compliance therewith. tolerate retaliation of any kind against its findings public and invites good-faith reporting. external review. ——We require third parties interacting with others on our behalf and communicating ——PMI scientists are committed to about PMI’s position on topics such as those rigorous standards. harm-reduction, product regulation,

68 Philip Morris International Sustainability Report 2017 Concluding remarks 69 1

90

714 317 85% 27% <550 >250 2017 2025 >38% >30% 100%

75/25 186.00 countries across 10 10 across 2018 goal 5 additional At leastAt 500 Aspiration 18 >46 >6% 792 292 <755 75% 25% >16% >55% >80% 2018 2017 2016 100% 76/24 238.36 countries Sustainability Report 2017 10 additional 10 717 across 15717

36 n/a 753 791 74% 67% 25% 13% 279 39% 4.4% 2017 2016 2015 100% 77/23 SELEC 193.54 inclusive of 5 additional 14 countries 2,176 across 2,176 (11 countries)

7.7 n/a Philip Morris International Morris Philip 845 15% 25% 72% 53% 0.9% 2.7% 2016 2015 100% Actuals 507 across 507 6 additional 15 countries 1 market sales. - 8% 0.8 881 70% 0.1%

0.2% 2015

2 1 free/Total) - cigarettes. The 2018 aspiration pertains to in - free/Total) - free/Total) - shipment volume (billion units) 4 shipment volume (billion units) 3

(Smoke 2 free productfree free product shipment ratio(Smoke free/Total) - - Combustible product Tracking and tracing sold – % of packs with unique code applied Ratioof employees trainedversus third parties trained(%) Number reports of suspected of misconduct Number substantiated of claims Our performance: illicit Tackling tobacco trade Keeping full coverage for tracking and tracing – master case level Our performance: Ethics and compliance R&Dexpenditure (Smoke Our performance: Transforming our business our Transforming Extending Memoranda Understanding of (MoU) with law enforcement agencies/governments – number countries of Smoke Smoke Number compliance of trainings (‘000) Commercial expenditure (Smoke Net Revenues Net Regional studies and country analysis to improve awareness illicitof trade global – % of cigarette consumptioncovered Training for law enforcementTraining agencies to monitor diversion PMIof products– number law of enforcement officers trained Number views of on stopillegal.com (‘000) Data for period July 16, 2017 – December 31, 2017 (the website was launched in2017). to countries which are not identified as a source of potential diversion or where PMI sells to a single customer in the country. Full coverage equates tracking to 95% and tracing in our supply chain (excluding Kretek business). There are of 5% master cases not covered – these are destined Includes cigarettes and other combustible tobacco products. of our 2016 report. 2015 and 2016 training numbers have been updated to include live trainings that were conducted during these years but reported late, after the publication Assuming constant PMI market share. do We not set aspirational targets for R&D and commercial expenditure but we expect both ratios to continue increasing Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions. Includes heated tobacco units and e to enable the stated outcome in terms of shipment volume. 2 1 The 2017 metrics are subject to PwC’s Assurance Report. See page 75. 4 1 Driving operational excellence operational Driving 1 2 3 Transforming our business our Transforming Overview of our sustainability performance sustainability our of Overview Our performance: Agricultural supply chain1 2015 2016 2017 Goal

Tobacco purchased through direct contract by our leaf 88 88 90 >90 operations or our tobacco suppliers (%) Number of tobacco supplier locations (countries) assessed n/a 8 (22% of 8 (33% of Every tobacco by AB Sustain purchased purchased supplier every tobacco) tobacco) three years Systematic monitoring of labor practices (% coverage)2,3 32.5 72.0 77.0 100 Cumulative number of tobacco supplier locations (countries) 13 15 19 24 countries assessed by Control Union since 2013 (ALP topics)3 by 2020 Number of contracted farms in the scope of Control Union 11,043 7,508 6,433 assessments per year (ALP topics)3,4

1 Data relate to our total tobacco supply chain, except when explicitly mentioned in footnotes. 2 Data relate to crop season, which may span over more than one calendar year. 3 Data cover approximately 90% of our sourced tobacco. 4 According to our methodology, these assessments cover different countries and tobacco suppliers every year. Depending on the geography and typical farm size in different countries, the number of farms covered by the assessments will vary. The variation in the number of farms assessed over the last three years does therefore not reflect a reduction in the scope of the assessments.

Managing our social impact

Our performance: Working at PMI 2015 2016 2017 Goal

Number of employees 80,200 79,500 80,600 Women employees (%) 40.6 41.2 41.6 Women in management positions (%) 31.0 32.8 34.4 40 by 2022 Number of women in Company Management (management board) 1 (out of 1 (out of 2 (out of 16) 17) 20) Number of women on Board of Directors 2 (out of 2 (out of 2 (out of 12) 13) 13) Employee turnover rate (%)1 13.8 11.2 11.0 Employee voluntary turnover rate (%)1 4.3 4.3 4.9 Employees covered by collective labor agreements (%) 67 68 672

1 The aggregated data cover approximately 70% of our employees. 2 As of October 1, 2017, approximately 74% of our workforce in non OECD countries was covered by collective labor agreements.

Our performance: Safety in the workplace 2015 2016 2017 Goal

Lost Time Injury (LTI) rate (per 200,000 hours worked) 0.11 0.12 0.10 <0.10 Fatalities (PMI employees and contracted employees) 0 1 2 0 Fleet crash rate – vehicles crashes per million km driven1 5.3 6.8 6.2 <4.0 Fleet collision rate – vehicles collision per million km driven 1.24 1.22 1.01 <1.50 Manufacturing facilities with OHSAS 18001 certification (% of PMI factories) 93 93 91 100

1 Regarding fleet safety, as of our 2018 Sustainability Report we will no longer report on Fleet crash rate (which includes cosmetic damage) as we believe collision rate (collisions per million km driven), which covers higher severity road accidents, is a better indication of our safety performance.

70 Philip Morris International Sustainability Report 2017 Concluding remarks 71 Scope PMI fleet PMI fleet and offices PMI factories PMI factories PMI factories PMI factories PMI factoriesPMI PMI factories PMI factories PMI factories PMI factories,PMI PMI factories,PMI factories,PMI PMI factories,PMI PMI operations PMI and value chain PMI value chain PMI value chain PMI value chain PMI value chain offices, and fleet offices, and fleet offices, and fleet offices, and fleet

85 100 <5.0 Goal Sustainability Report 2017 30 by 2020 30 by 30 by 2020 30 by 80 by 2030 40 by 2030 40 by 2030 60 by 2040 A A A 24 31 91 82 53 30 6.5 226 4.83 2017 5,149 4,519 4,152 5,994 629,739 119,588 241,355 140,316 388,384 8,875,006 A- B A 16 87 27 23 93 32 4.8 227 Philip Morris International Morris Philip 3.95 2016 5,691 3,394 6,620 5,025 351,990 314,049 130,077 666,039 122,434 8,230,327 B A 14 24 11 87 93 30 5.7 215 4.05 2015 7,070 5,690 6,381 3,654 119,471 127,631 329,323 361,720 691,044 8,025,559

0 B 296 5.34 2010 7,911 7,401 4,998 6,487 143,148 914,050 470,864 443,186 (baseline)

1

per million units 3 2 e per million cigarettes equivalent. 2 ‘000 metric tons) ) 3 e per km driven) 2 e scope 1+2+3 absolute reductione scope 1+2+3 intensity reductione scope 1+2+3 e scope 3 ('000 metric tons) ( e scope 1+2+3 per million cigarettese scope 1+2+3 absolute reductione scope 1+2 versus e scope 1+2 (metric tons) e scope 1+2 e scope 1 from fleet(metric tons) e emissions from vehicles e scope 1 (metric tons) e scope 2 (metric tons) 2 2 2 2 2 2 2 2 2 2 2 CDP (rating) Water CDP Supplier engagement (rating) CDP Climate Change (rating) Waste disposed to landfill or incineration without energy recover (%) Manufacturing facilities certified to ISO14001 (%) CO Waste recycled (%) CO CO CO CO CO versus baseline 2010 (%) versus baseline 2010 (%) equivalent (kg)equivalent (g CO CO CO CO Water ratioWater (water use in m environmental footprint environmental Our performance: Reducing our of cigaretteof equivalent) Waste (metric tons) CO Energy used and purchased (Gigajoules) CO baseline2010 (%) Water useWater (‘000 m Renewable electricity (%) Intensity is measured in CO The breakdown of scope 3 emissions is published in our CDP submission. 2 1 Reducing our environmental footprint environmental our Reducing Our performance: Environmental metrics in our tobacco supply chain 2015 2016 2017 Goal Tobacco purchased through direct contract by our leaf operations 88 88 90 >90 or our tobacco suppliers (%) Tobacco purchased without detection of any 94 98 Not yet 100% by crop WHO TOX1 Crop Protection Agents (%) available year 2018 Tobacco purchased without any detection of other 69 84 Not yet 100% by crop identified HHP residues (%) available year 2020

CO2e intensity reduction versus 2010 baseline (%) 12 14 38 70 by 2020 Tobacco purchased at no risk of deforestation of old growth forest (%) 87 88 94 100 by 2020

72 Philip Morris International Sustainability Report 2017 Concluding remarks 73

Sustainability Report 2017 own and make‑your‑own - free products – Products that ‑ – Thebrand name that PMI has – The brandname under which PMI your - IQOS has chosen to commercialize its Platform 1 controlled heating device into which a specially designed and proprietary tobacco unit is inserted and heated to generate aerosol an MESH chosen for one its of Platform 4 reduced‑risk products that leverages new proprietary vaporization technology MRTP – ModifiedTobacco Product,Risk the term used by the U.S. to refer FDA RRPs to MRTP application – Modified Risk ProductTobacco application under sectionof the FD&C911 Act Heated tobacco unit “offtake share” – The estimated retail offtake volume of heated tobacco units divided by the sum estimatedof total offtake volume for cigarettes, heated tobacco units and, where the data is available, other RRPs products, primarily – Other tobacco OTP roll cigarettes, pipe tobacco, cigars and cigarillos, and does not include reduced‑risk products Reduced-risk products (RRPs) or smoke present, are likely to present, or have the potential to present less riskof harm to smokers who switch to these products versus continued smoking.We have a range RRPs of in various stagesof development,scientific assessment and commercialization. Because they do not burn tobacco, they produce an aerosol that contains far lower quantities of harmful andpotentially harmful constituents than found in cigarette smoke

-

year

, Philip Morris International Morris Philip -

tax nicotine - Users – The estimated and HEETS FROM cigarettes”) - The process burning of , defined collectively as IQOS users that used HeatSticks/ heated tobacco units for over , as well as Marlboro Heatsticks Parliament HeatSticks Parliament IQOS as likely causes tobacco of related diseases Illicit tradeDomestic non- – productspaid HPHCs – Harmful or potentially harmful constituents which have been identified and containing liquid, such as electronic (or“e cigarettes OTP, combined Converted number Legal of Age (minimum 18 their of daily95% tobacco consumption over the past seven days Direct materials – Include printed board and paper (used to manufacture packs, cartons and bundles), acetate tow (the component key cigarette of filters), fine papers(used to manufacture cigarette and filter rods), flexibles (mainly wrapping films, inner liner and tear tape) and a variety materials of such as shipping cases, and ingredients An e-vapor product – An electrical product that generates an aerosol by heating a nicotine or non Heated tobacco units – The term PMI uses to refer to heated tobacco consumables, which include HEETS Marlboro HEETS and often light Combustible products– The term PMI uses to refer to cigarettes and old) HEETS MARLBORO HEETS Sustainable Tobacco Program Program STP – Sustainable Tobacco UNGC – United Nations Global Compact WHO – World Health Organisation Aerosol – Gaseous suspension fine of solid particles liquid and/or droplets – Combustion a substance in oxygen, producing heat

governmental organizations, organizations, governmental Eastern Europe, Middle East, operation and Development - SDGs – Sustainable Development Goals RSP – Responsible Sourcing Principles R&D – Research & Development PPE – Personal protective equipment PMI – Philip Morris International Inc. PMJ – Philip Morris Japan Limited NGOsIntergovernmental – organizations non- and Economic for Organisation OECD – Co – PeopleP&C and Culture and its subsidiaries Marginal abatement cost curve abatement – Marginal MACC respectively LA&C – Latin America and Canada HPHC – Harmful and potentially harmful constituents HHP – Highly hazardous pesticides Green Tobacco Sickness GTSTobacco – Green GHG – Greenhouse gas GCP – Good Conversion Practices GAP – Good Agricultural Practices FDA – U.S.FDA Food & Drug Administration European – EU Union EMS – Electronics manufacturing services and Africaand EEMA – CU – Control Unions CLAs – Collective Labor Agreements CPA – Crop protectiveCPA agent CDP – Carbon Disclosure Project APAC – Asia andAPAC Pacific ALP – Agricultural Labor Practices Glossary and acronyms Notes

1 As of December 31, 2017. 24 FT’s Combating Illicit Trade event in London, organized by the Financial Times 2 Data and projections are based on WHO global report on trends in prevalence and financially supported by PMI. of tobacco smoking, 2015, and UN Population Prospects. These official 25 https://www.stopillegal.com/docs/default-source/anti-diversion/anti_ projections refer to age 15+. diversion_toolkit.pdf?sfvrsn=2da673d7_2 3 WHO Budget 2016-2017. 26 https://www.stopillegal.com/docs/default-source/anti-diversion/anti-diversion- 4 Smith et al. (2016) Evaluation of the Tobacco Heating System 2.2. Part 1: governance-comittee-report-2016-17.pdf?sfvrsn=b8973d7_2 Description of the System and the Scientific Assessment Program. Regulatory 27 Argentina, Croatia, Czech Republic, Denmark, Dominican Republic, Estonia, Toxicology and Pharmacology, 81 Suppl 2:S17-S26. (PMID: 27450400). France, Poland, the Philippines and Switzerland. 5 https://www.pmiscience.com/news/absence-combustion-pmi%E2%80%99s- 28 Internal estimation based on the assumption that the main targeted markets heated-tobacco-product-platform-1 ; and https://www.pmiscience.com/ would have been Germany, France and the UK. system/files/publications/gfn_2017_mcgrath_what_is_combustion_and_why_ 29 E.g.,The Nielsen Company: http://www.nielsen.com/eu/en.html the_absence_of_ combustion_is_important_in_heated_tobacco_ products.pdf 30 https://www.verite.org/ 6 Schaller et al. (2016) Evaluation of the Tobacco Heating System 2.2. Part 2: 31 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/ Chemical composition, genotoxicity, cytotoxicity, and physical properties of the responsible-sourcing-principles.pdf?sfvrsn=15c19ab5_14 aerosol. Regulatory Toxicology and Pharmacology, 81 Suppl 2:S27-S47. (PMID: 27720919). 32 http://www.lbma.org.uk/refiners-gold-current (London Bullion Market Association- Good Delivery list) http://www.responsiblemineralsinitiative.org/ 7 Phillips et al. (2016) An 8-Month Systems Toxicology Inhalation/Cessation conformant-smelter-refiner-lists/ Study in Apoe-/- Mice to Investigate Cardiovascular and Respiratory Exposure Effects of a Candidate Modified Risk Tobacco Product, THS 2.2, Compared 33 https://www.absustain.com/ with Conventional Cigarettes. Toxicological Sciences, 149:411-432. (PMID: 34 We excluded Venezuela from our analysis due to hyperinflation rate in the 26609137). country throughout 2017. 8 Mitova et al. (2016) Comparison of the impact of the Tobacco Heating System 35 The numbers provided in this section are approximate numbers, considering 2.2 and a cigarette on indoor air quality. Regulatory Toxicology and the limitations faced during the data collection, the high number of people Pharmacology, 80:91-101. (PMID: 27311683). reported and the diversity of the markets assessed. The scope of our ALP data 9 Haziza et al. (2016) Evaluation of the Tobacco Heating System 2.2. Part 8: excludes China, France and the Dominican Republic. 5-day randomized reduced exposure clinical trial in Poland. Regulatory 36 http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/ Toxicology and Pharmacology, 81 Suppl 2:S139-S150. (PMID: 27816672). documents/publication/wcms_575499.pdf Luedicke et al. (2018) Effects of switching to the Menthol Tobacco Heating 37 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/ System 2.2, Smoking Abstinence or Continuing Cigarettes on Biomarkers of alp-code9a7cd8bc6c7468f696e2ff0400458fff.pdf?sfvrsn=908b0b5_0 Exposure: A randomized controlled, open-label, multicentre study in sequential 38 https://certifications.controlunion.com/en confinement and ambulatory settings (Part 1). Nicotine and Tobacco Research, 20:161-172. (PMID: 28177489). 39 https://www.pmi.com/sustainability/good-agricultural-practices/upholding- labor-rights-on-the-farms 10 https://www.sbvimprover.com/sbv-improver/publications 40 https://www.verite.org/verite-pilots-participatory-impact-evaluation- 11 http://intervals.science/ technique/ 12 In this report, we describe our continued commitment to a strong culture of 41 ALP Progress Report 2014-2015: https://www.pmi.com/resources/docs/ ethical business conduct and sustainability of our business. Despite our high default-source/pmi-sustainability/alp-progress-report-2014-2015. ethical standards and rigorous control and compliance procedures aimed at pdf?sfvrsn=6c08b0b5_6 detecting and preventing unlawful conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or 42 Philip Morris International is a member of the PCSD Partnership and the unlawful conduct by our employees and partners. specific mention to it in this report is provided for informational purposes only and is not to be construed as providing endorsements by the OECD or the 13 www.pmi.com/transparency United Nations. 14 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/0000- 43 https://globalagribusinessalliance.com/ pmi-human-rights-commitment-whitepaper_final.pdf?sfvrsn=c71985b5_4 44 Green Tobacco Sickness is a form of nicotine poisoning that may be contracted 15 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/ by handling wet, fresh, green tobacco leaves. responsible-sourcing-principles.pdf?sfvrsn=15c19ab5_14 45 Estimations based on requirements for a classical American Blend. For an 16 https://www.pmi.com/sustainability/good-agricultural-practices overview of our tobacco types, please see: https://www.pmi.com/our- 17 https://www.pmi.com/resources/docs/default-source/pmi-sustainability/alp-co business/about-us/products/tobacco-farming. de9a7cd8bc6c7468f696e2ff0400458fff.pdf?sfvrsn=908b0b5_0 46 Miombo is an ecosystem that includes tropical and sub-tropical grasslands, 18 https://www.pmi.com/sustainability/good-agricultural-practices/upholding- savannahs and scrublands. labor-rights-on-the-farms 47 According to the Joint Monitoring Program for Water Supply and Sanitation 19 https://publications.iom.int/system/files/pdf/wmr_2018_en.pdf (WHO/UNICEF). 20 http://www.italy.iom.int/en/activities/vulnerable-groups-and-minors/ 48 https://www.cabi.org/ terra-munda 49 www.tobaccoipm.com 21 https://www.unodc.org/unodc/en/frontpage/2012/July/new-unodc- 50 http://www.who.int/ipcs/publications/pesticides_hazard_2009.pdf campaign-highlights-transnational-organized-crime-as-an-us-870-billion-a- year-business.html 51 https://www.tfa2020.org/en/reports/annual-report-2017/#the-big-chain-tool 22 US: congressional Hearing, Helsinki commission, July 2017 – US Congressional 52 https://quantis-intl.com/lucguidance/ appointment where PMI was invited to testify as expert witness. 23 Panama: Business Council for International Understanding October 2017 financially supported by PMI and by Panamanian Alliance Against Illicit Trade.

74 Philip Morris International Sustainability Report 2017 Concluding remarks

75

Raphael Rutishauser Free Product performance. - Free Products - Sustainability Report 2017 Reviewing and assessing the management reporting processes for Business Transformation Metrics data and consolidation and their related controls Inspecting relevant documentation on a sample basis, including PMI policies, reporting management structures and documentation The data and information disclosed in the Business Transformation Metrics table on page 25 give a fair picture of PMI’s Smoke Test a sampleTest dataof from PMI operationsSwitzerland, in Japan and Germany concerning the completeness, accuracy, consistency and classification as Smoke The internal reporting systems to collect and aggregate the Business Transformation Metrics data are functioning as designed and provide an appropriate basis for the reporting; and Interviewing PMI representatives responsible for the internal reporting and data collection The internal financial reporting guidelines are applied in all material aspects as published on page 24; Reviewing the application of the internal financial reporting guidelines — — — — — — — — — believeWe that the evidence we appropriate to provide a basis for our assurance conclusions. have obtained is sufficient and — Lausanne, 2018 May 9, SA PricewaterhouseCoopers Richard Thomas — — — — Reasonable assurance conclusion assurance Reasonable opinion, our In — Summary work of performed Our assurance procedures included the following work but are not limited to: —

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Our Independence and and Independence Our Quality Control have compliedWe with the independence and other ethical requirements the of Code Ethics of for Professional Accountants issued by the International Ethics Standards Board for Accountants, which is founded on fundamental principles integrity, of objectivity, professional competence and due care, confidentiality and professional behavior. Our firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Our responsibility is to perform a reasonable assurance engagement to express an opinion on positions in the related Business Transformation Metrics table on page planned 25. We and conducted our engagement in accordance with InternationalStandard on Assurance Engagements (ISAE 3000) (revised) ‘Assurance engagements other than audits or reviews historical of financial information’. That standard requires that we comply with ethical requirements and plan and perform our procedures to obtain reasonable or limited assurance whether the related Business Transformation Metrics summary was prepared, in all material aspects, in accordance with PMI’s Management Responsibilities Management PMI’s PMI’s management isresponsible misstatement,material whether due to fraud or error. OurResponsibility the reporting criteria. for both the subject matter and the reporting criteria as well as for the entire reporting processof the selected information in accordance with the criteria. This responsibility includes the design, implementation and maintenanceof related internal control relevant to this reporting process that is free from

The data and information in the Business Transformation Metrics table, in all material aspects, on page 25. The internal reporting system and procedures to collect and aggregate the Business Transformation Metrics data; and The application of the internal financial reporting guidelines for the preparation theof Business Transformation Metrics published on page 24; — — — The prospective data in the Aspiration columns and for 2025 2018 are not subject to this assurance report. Consequently, we do not express any conclusion on this data. — — The reporting criteria used by PMI are described and disclosed and on in page 24 the internal financial reporting guidelines. These define those procedures, by which the Business Transformation Metrics data are internally gathered, collated aggregated.and Criteria Lausanne Philip Morris International Inc. and (‘PMI’). Subsidiaries Scope and subject matter Our reasonable assurance engagement focused on the Business Transformation Metrics PMI of for the financial year ended December included 2017 31, in the Sustainability Report 2017: — We have beenWe engaged to perform assuranceprocedures to provide reasonable assurance on the Business Transformation Metrics reporting of To the Board of Directors of Philip Morris International Inc. International Morris Philip of Directors of Board the To Metrics Reporting 2017 Independent Assurance Report on the Business Transformation Independent Assurance Report on the Business Transformation Key developments since 2000 towards a smoke-free future

The first e-cigarettes are commercialized in China

Late 1980s: PM USA US Institute of PMI expands R&D on commercialized Next, Medicine publishes smoke-free products a nicotine-free cigarette “Clearing the Smoke” It failed to satisfy It concludes that “reducing consumers risk of disease by reducing and was later exposure to tobacco withdrawn toxicants is feasible”

Pre 2000s 2001 2003 2004

1996: Launch of Eclipse in the USA by RJ Reynolds The first attempt at a heated tobacco product, using a carbon tip; consumer acceptance was low, and the product was withdrawn

1998-9: PM USA and PMI launch the first electronically heated tobacco product, called Accord in the USA and Adoption of the Oasis in Japan WHO Framework Consumer acceptance was Convention for Tobacco low, and the product was Control (FCTC) subsequently withdrawn It defines “tobacco control” as “a range of supply, demand and harm reduction strategies that aim to improve the health of a population”

76 Philip Morris International Sustainability Report 2017 Concluding remarks 77

Sustainability Report 2017 2009 US Family Smoking Prevention Controland Tobacco Act Provides authority to US Food and Drug Administration(FDA) to regulate tobacco products and creates a regulatory framework for the commercializationof “ModifiedTobacco Products”Risk PMI opens The Cube, The opens PMI a new R&D facility dedicated to smoke-free products smoke-free to Switzerland Neuchâtel, in

Philip Morris International Morris Philip

harm reduction harm It states that “nicotine itself is not especially hazardous” and that “if nicotine could be provided in a form that is acceptable and effective as a cigarette substitute, millions livesof could be saved.” UK Royal College Physicians of publishes a report on tobacco 2007

The Cube R&D facility in Neuchâtel, Switzerland optimal optimal taste, Australia Australia - low due to the bulky device and sub product the and withdrawnwas by PMIby in Switzerland and Heatbar is the second electronicallyof generation products; tobacco heated consumer acceptance was 2006-7: Launch2006-7: Heatbar of 2006 PMI completes multiple five-day clinical studies on IQOS, one of its smoke-free tobacco products Smokers who switched to IQOS reduced their exposure to PMI’s R&D facility in Singapore harmful chemicals, on average to levels approaching those found in PMI opens R&D facility smokers who quit for the duration in Singapore dedicated of the study to assessing smoke-free products

US FDA releases draft guidance on evidence that should support a Modified Launch of PMIScience.com to Risk Tobacco Product share PMI’s research methods Application (MRTPA) and findings

2010 2012 2014

PMI launches IQOS city tests in Italy and Japan

PMI acquires Nicocigs Ltd. and enters the e-cigarette market in the UK

PMI announces its first new factory dedicated to heated tobacco unit production PMI invests USD 680m in its first purpose-built factory for heated tobacco units in Bologna, Italy

EU Tobacco Products Directive II adopted establishing specific rules for marketing “novel tobacco products” and electronic cigarettes

78 Philip Morris International Sustainability Report 2017 Concluding remarks 79 79

for IQOS Sustainability Report 2017 Sustainability Report 2017 available in cities key 2017 have stopped smoking cigarettes cigarettes smoking stopped have and made the change to IQOS (December 2017) in Japan in Nearly 40% global of commercial expenditure is dedicated to products smoke-free More than adult 4.7m smokers in 37 marketsin 37 and nationally achieve a 10.8% or in 13.9% to be less risky than smoking cigarettes” conventional Pilot test PMI of heated tobacco products TEEPS in the Dominican Republic (December 2017) IQOS Q4 market 2017 share in 2017 PMI reaches 200 peer-reviewed publications and book chapters on the science around its smoke-free research publishes Health of Department UK five-year tobacco control plan technologies innovative welcoming that the minimize harm risk of for a Smoke-Free World 2017) (September comprehensive announces FDA plan to significantly reduce tobacco-related disease recognizing that innovation can lead to less harmful products KT&G launches its lil heated tobacco product in South Korea UK CommitteeToxicity (COT) on issues report on heated tobacco products The report concludes that, while still harmful to health, they likely “are for smokers for Launch the of Foundation In Japan, HeatSticks

Philip Morris International Morris Philip Philip Morris International Morris Philip

Zealand, Zealand,

vapor product - vapor product vapor - to the US FDA available markets in 19 launches cities in key in Canada, Denmark, Germany, Greece, South Africa, Spain, Kingdom United the Ukraineand launchesBAT Glo in Japan product tobacco heated a PMI submits an MRTPA for IQOS More than adult 1m smokers have and cigarettes smoking stopped made the change to IQOS (December 2016) IQOS Kazakhstan,Israel, Monaco, New Netherlands, the who intend to continue using tobacco products to switch to PMI city test MESH of in Birmingham, UK an innovative e PMI’s CEO announces ambition to convince all adult smokers as products smoke-free possible as soon JT launches in Japan PloomTECH e hybrid a 2016

,

day study - , in Spain and Israel month clinical studiesclinical month ‑ available in six markets cigarettes are significantly - Russia and Switzerland PMI completes two three Public Health England publishes a report on electronic cigarettes The report that concludes e less harmful than cigarettes IQOS launches cities in key Portugal,in Romania, in the US and Japan on IQOS confirming results from the earlier five PMI launches an e-vapor product, Solaris 2015 Trademarks: Trademarks and service marks in this report are the registered property of, or licensed by, the subsidiaries of Philip Morris International Inc., Recognition in 2017: and are italicized or shown in their logo form.

Photography: Vickers & Beechler, Thomas Jantscher, Sarah Hazlegrove (Tobacco People)

80 Philip Morris International Sustainability Report 2017 Philip Morris International Management SA Avenue de Rhodanie 50 1007 Lausanne Switzerland www.pmi.com