Our thinking

Don’t let ESG go up in smoke

2 June, 2023

Environmental, Social, Governance (ESG) investing is now the fastest-growing segment of the asset management industry, but at the same time is under increasing scrutiny, with some questioning its ability to determine what really ‘counts’ as worthy of the label.

All of which makes for interesting context for a slightly unexpected intervention this week.

Enter Philip Morris International (PMI), the maker of Marlboro cigarettes, whose CEO Jacek Olczak gave an interview to the Financial Times on Tuesday, in which he said PMI is on track to becoming an ESG stock as the company retreats from cigarettes and shifts toward vaping.

This is part of a push to win back investors that have shunned the stock because of tobacco exclusion policies. Olczak argued the company’s renewed focus on reduced-risk products like vapes means it’s in with a chance. While vaping is not as bad for you as smoking, it’s not harmless and regulators are starting to close in. The government announced restrictions on flavoured vapes earlier this week, and Australia has already banned recreational vaping.

Despite the shift to vapes, PMI sold 621 billion cigarettes worldwide last year. Cigarettes are the leading cause of preventable death globally, killing over 8 million people a year. We know the dangers big tobacco companies present in less regulated markets, through our tobacco prevention work in Africa for the Bill and Melinda Gates Foundation, in response to the concerning increase in teenage girls taking up smoking.

Whilst PMI is still yet to make half of its revenue from non-tobacco products, we would be alarmed if Olczak’s claims are true, and investors are considering classifying the company as ESG stock. We need to look beyond a company’s proposed goals, to interrogate if its holistic company practices – from the products it sells to the way it manufactures and sells them – stand up to ESG standards.

This challenge around defining what counts as ESG is compounded by the fact that there is no universal, objective, rigorous framework. We’re seeing ESG’s credibility under the spotlight, and despite further incoming ESG regulations the UK is lagging behind the EU and US.

At a time when ESG is facing scrutiny on its reliability for assessing how organisations are having a positive impact on the world, PMI’s inclusion would come as a major blow.

Let’s hope Olczak’s claims are smoke without fire.

By Alice Railton