RESPONDING TO A CHANGING WORLD Sustainability Report 2016 SUSTAINABLE PROGRESS AGAINST OUR CHIEF OUR BUSINESS AND HARM AGRICULTURE AND CORPORATE OUR GOALS AND STAKEHOLDER INDEPENDENT EXECUTIVE VALUE CHAIN REDUCTION FARMER LIVELIHOODS BEHAVIOUR MATERIALITY ENGAGEMENT ASSURANCE INTRODUCTION Q&A with Our Group vision is to be the world’s best at satisfying consumer moments What is the biggest change that BAT has in tobacco and beyond, based on the had to respond to over recent years? key strategic focus areas of growth, I think it has to be the evolution of technology and productivity, a winning organisation innovation that has enabled the development of a whole and sustainability. range of smoking alternatives, which can perform to consumers’ expectations and be scaled commercially. This enables our business to deliver growth today, while ensuring we generate the funds to invest in our We’ve embraced this change and, over the last five years, future. Tobacco remains at the core of our business have built a whole new area of our business focused on and will continue to provide us with opportunities researching, developing and commercialising this new for growth. However, we also see substantial generation of tobacco and nicotine products. growth opportunities in new types of tobacco and Does this change everything? In reality, I don’t think all nicotine alternatives, which we call Next Generation smokers will switch to these alternative products over the Products, and are making significant progress in the medium term. But I do believe that through the creation commercialisation and development of a range of of inspiring products, we can drive change for the good. products which offer consumers potentially less risky At the heart of this is our desire to reduce the health alternatives to conventional cigarettes. impact of smoking on the world. As a key strategic focus area, sustainability is crucial to the delivery of our Group strategy and is integrated How is BAT responding to the increasing across all areas of our business. In particular, focus on human rights in supply chains? three key areas have been identified through a detailed materiality process as having the greatest Our global agricultural supply chain is a vital part of our significance to our business and our stakeholders: business and we’ve long been aware of the importance Harm Reduction, Sustainable Agriculture and Farmer of protecting human rights in this area. That’s why we Livelihoods, and Corporate Behaviour. welcome the UN Guiding Principles on Business and Human Rights, and legislation such as the UK Modern This Report covers these areas and how we are Slavery Act, as they provide a much clearer roadmap for responding to the challenges and opportunities they companies to follow. create. As with any business, we need to deliver value for our shareholders, but this should not be at a From an industry-wide perspective, the new Sustainable ‘cost’ to society. So the concept of shared value and Tobacco Programme is bringing together best practice mutual benefit is central to our whole approach – by to strengthen standards for suppliers across the tobacco taking action to address our impacts today, we can leaf supply chain. I believe it’s an excellent example of create value for the future of our business and for collaboration, and shows how different parties can come stakeholders across our value chain. together to make a difference for the common good. However, human rights remain an incredibly challenging area and one which we are constantly working to improve. For example, in 2016, we rolled out our new Supplier Code of Conduct which sets out the minimum standards IN THIS REPORT we expect all our suppliers to adhere to, including specific human rights criteria. 02 Our business and value chain We’ve also been working over the last year to strengthen 04 Harm reduction due diligence for all our suppliers outside of our agricultural supply chain. This includes a new integrated system focused 12 Sustainable agriculture and farmer livelihoods on assessing suppliers’ human rights risk exposure and then prioritising the highest risk for self-assessments and on-site Corporate behaviour 20 audits. We are now conducting a phased roll out to all our 32 Progress against our goals and commitments suppliers worldwide. 33 Materiality 34 Stakeholder engagement 36 Independent assurance British American Tobacco | Sustainability Report 2016 | www.bat.com/sustainability SUSTAINABLE PROGRESS AGAINST OUR CHIEF OUR BUSINESS AND HARM AGRICULTURE AND CORPORATE OUR GOALS AND STAKEHOLDER INDEPENDENT 01 EXECUTIVE VALUE CHAIN REDUCTION FARMER LIVELIHOODS BEHAVIOUR MATERIALITY ENGAGEMENT ASSURANCE our Chief Executive How are the growing number of allegations What role do you see BAT taking in against businesses impacting upon BAT? supporting the UN Sustainable We have always done our utmost to uphold high standards, Development Goals (SDGs)? openly engage with our stakeholders and work to I see a clear alignment between the SDGs and our own strengthen our approach to align to their expectations. sustainability priorities. This is especially true of our global Multinational businesses have long been subject to Sustainable Agriculture and Farmer Livelihoods (SAFL) stakeholder scrutiny and allegations – especially one like programme, which will enable us to measure our contribution ours in a controversial sector and with global operations and to the SDGs in a tangible way, especially the goals relating supply chains in challenging and diverse environments. to poverty, life on the land, gender equality, clean water and sanitation, and decent work and economic growth. So if we do receive any reports of unethical behaviour, such as two recent allegations of human rights abuses in our Goal 17, with its focus on partnerships, is also particularly tobacco leaf supply chains in Indonesia and Bangladesh, we relevant. Working collaboratively as part of multi-stakeholder conduct detailed investigations, take appropriate action to partnerships has always been central to our approach to address any issues identified, and report transparently on sustainability. Only by working together can some of the the progress and outcomes. biggest challenges we face, such as child labour in agriculture or the global illegal tobacco trade, be addressed effectively. This is BAT’s 15th year of sustainability reporting – what are you most proud of and where do you see the next 15 years taking the business? I’m incredibly proud of how we’ve continually developed our strategy to meet evolving stakeholder expectations and the needs of the business. We conducted our first detailed materiality assessment 10 years ago, which was instrumental in sharpening our agenda and taking us from a broad approach that included numerous socially responsible and philanthropic projects, to focusing-in on the core issues and embedding the principle of shared value across our day-to-day business practices. We’re taking everything we’ve learned over the years into the development of more global initiatives, which will help us to better quantify our contribution and ultimately demonstrate that what we do doesn’t just benefit our shareholders, but can also have a wider, positive impact. None of this is possible without the hard work, dedication, passion and energy I see in our people every day, at every level of the business. It gives me confidence in a sustainable and successful future for us all. Nicandro Durante CHIEF EXECUTIVE MARCH 2017 British American Tobacco | Sustainability Report 2016 | www.bat.com/sustainability SUSTAINABLE PROGRESS AGAINST OUR CHIEF OUR BUSINESS AND HARM AGRICULTURE AND CORPORATE OUR GOALS AND STAKEHOLDER INDEPENDENT 02 EXECUTIVE VALUE CHAIN REDUCTION FARMER LIVELIHOODS BEHAVIOUR MATERIALITY ENGAGEMENT ASSURANCE OUR SOURCE We source over 400,000 tonnes of tobacco Our people and leaf each year from a small number of first- tier suppliers, including our own in-house BUSINESS tobacco leaf operations, which directly relationships feed contract and support over 90,000 contracted into everything we farmers; as well as third-party suppliers, which contract their own farmers. do, at every stage AND VALUE We also source direct materials that go into our products, such as paper, filter tips and We employ around 50,000 people packaging, and indirect goods and services, worldwide, to whom we pay over such as machinery, IT and consultancy, from £2.4 billion each year in wages approximately 70,000 suppliers worldwide. and benefits. CHAIN The e-liquids used in our Vapour Products Our workforce is diverse and (e-cigarettes) are made from medical-grade multicultural, with 144 nationalities nicotine sourced from high-quality third- and 33% female representation in British American Tobacco is one of party manufacturers. the world’s leading multinational management roles globally. We also have 27% female representation How we create value companies, with brands sold in on our Board of Directors and are • We invest over £60 million each year in over 200 markets. ranked in the top 20 of the FTSE for providing on-the-ground support for our Ethnic Diversity of UK Boards. contracted farmers and have a dedicated programme focused on ensuring that we are We are also one of the world’s most successful Our business also supports meeting the real needs of rural communities. businesses – we are consistently among the top thousands of people across our 10 companies on the London Stock Exchange and value chain, including farmers, • Our Supplier