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Sector Reports - 31/05/2019

The Tobacco Industry fails to convince about its contribution to sustainability

This report provides Vigeo Eiris’ exclusive opinion on 14 companies belonging to the Tobacco Sector and their vulnerabilities, controversies and material risks.

The report covers the biggest challenges such as negative health impacts of tobacco consumption, and how the industry account on its capacity to respect fundamental human rights and to tackle the worst forms of child labour and the irreversible impacts on the environment. Since 2017,  Vigeo Eiris updated its framework  regarding health impacts of tobacco companies’ products and their societal consequences to reflect evolving stakeholders’ expectations. Since then, three rating criteria applied to the Tobacco sector have been set to zero “0”: Respect for human rights standards and prevention of violations, management of the negative societal impact due to tobacco consumption, product safety and its impacts on health. According to our findings, tobacco companies lack visible efforts over their capacity to adapt their economic and business models to reduce negative impacts on health, environment and society, particularly in developing countries.

A number of financial institutions have  implemented a tobacco-free finance policy, such as the Tobacco-Free Finance Pledge initiative launched in 2018 developed by the UN (United Nations) and Axa, BNP Paribas, AMP Capital and Natixis, as Founding Signatories. The initiative encourages the adoption of policies to withdraw from providing credit lines, insurance and investment in the tobacco sector, as outlined in the United Nations’ Sustainable Development Goals (SDG), including Goal 3 (Health and Well-Being) and Goal 17 (Partnerships for the Goals), in addition to the World Health Organization Framework Convention on Tobacco Control (WHO FCTC). Another objective is to encourage financial institutions to reconsider their business relationships with the tobacco industry due to the global tobacco epidemic which, according to the World Health  Organization (WHO) and the National Cancer Institute (NCI) estimate that the number of smoking adults increased by 4% since the turn of the century.

Additionally, WHO and NCI estimated that tobacco kills up to half of its users, more than 7 million people die each year from tobacco use and more than 6 million of those deaths are the result of direct tobacco use while around 890,000 are the result of non-smokers being exposed to second-hand smoke. On market share, according to the Journal of Global Health, tobacco sales are shifting from developed markets such as Sweden, Switzerland, Australia, New Zeland and the US, where smoking habits are declining and where tobacco companies operations are subject to more regulatory frameworks; to emerging markets such as Asia and Africa, where tobacco companies take full advantage of lax regulatory environments, growing populations and increasing incomes.

 

Key Findings:

  • The Vigeo Eiris review of the Tobacco Industry focused on two main supply chain activities: the tobacco leaf growing and the manufacture of tobacco products. The cultivation of tobacco, which takes place across 125 countries, according to the World Health Organization (WHO), involves activities such as seedling production, soil management, irrigation, use of Agrochemicals (pesticides and fertilisers), harvesting and burning of the crop residue. The second activity is the manufacture and distribution of products such as cigarettes and e- cigarettes, snuff and smoking tobacco, etc.
  • According to the Food and Agriculture Organization (FAO), China, Brazil and India are the largest tobacco leaf growers in the world.
  • According to the World Health Organization (WHO), the biggest cigarette manufactures with their percentage of the world’s market share are: China National Tobacco Corporation (43%), Philip Morris International (14%), British American Tobacco (12%), Japan Tobacco (8%) and Imperial Tobacco Group (4%); most of the companies are part of the Vigeo Eiris report. In 2017, cigarette retail values were worth USD 699.4 billion.
  • Vigeo Eiris awarded an overall weak score of (29/100) to companies in the Tobacco sector. The sector’s performance remains unchanged since our previous analysis in 2017.
  • The sector ranks 29th out of Vigeo Eiris’ 39 sectors, which cover a total research universe of 4,500 companies. Previously, the sector ranked 31st. The Sector least worst are concentrated in Europe, with an overall limited performance of (37/100), while laggards are listed in Emerging Markets region with a weak performance of (23/100), mostly due to the lack of information reported on CSR issues.
  • The Tobacco sector reporting rate is 64%, above the universe (58%), with European companies communicating most comprehensively on their ESG policies, practices and performances with an overall reporting rate of 75%. Companies in Emerging Markets have the lowest reporting rates of the sector with 55%. This performance is linked to the scrutiny of civil society and strict regulatory framework in developed countries.
  • ESG risk mitigation scores are limited in relation to operational efficiency (36/100) and human capital (32/100), and weak in relation to reputation (28/100) and legal security (24/100). The lowest score is achieved on the legal security. Regarding the management of issues affecting operational efficiency, companies show their highest performances especially in environmental strategy, audit and internal controls and board of directors.
  • The Tobacco sector faces 61 controversies, affecting 86% of the companies: 21% are involved in critical cases and 50% in high severity cases. The most recurrent controversies concern information to customers, labour standards in the supply chain, elimination of child labour and forced labour, product safety and responsible lobbying.
  • According to the World Health Organization (WHO), second hand smoking causes serious cardiovascular and respiratory diseases, including coronary heart disease and lung cancer for adults. For infants, it causes sudden death. Almost half of children regularly breathe air polluted by tobacco smoke in public places. For pregnant women, it causes low birth weight.
  • Economic slump linked to health, ethical and social risk increased in 2018 for all major tobacco companies reflected in share price declines. These falls were reflected in the S&P 500 Tobacco Index, which fell more than 23% during the year to September 2018. According to Bloomberg, Imperial Brands fell by more than 16% over the year to September 2018, shares of Philip Morris International fell 27% and shares of Japan Tobacco fell 9.4%.

 

 

Key Takeaways:

  • Child Labour in Global Tobacco Production: According to the International Labour Organization (ILO), which ratified the Minimum Age Convention, 1973 (No.138) and the Worst Forms of Child Labour Convention, 1999 (No. 182), about 108 million children, or 70% of the children involved in child labour, are concentrated primarily in agriculture. Of these, many millions are involved in tobacco growing. Some tobacco companies move into less regulated countries, where they negotiate extremely low prices of tobacco leaf production that often result in high debt for the producer, and consequently introduce child labour in its supply chain. Out of the 14 companies assessed by Vigeo Eiris, 64% face a total of 15 controversies ranging from significant to high severity over child and forced labour. Furthermore, British American Tobacco, Imperial Brands and Pyxus International are facing social allegations over exploitation of child labour in tobacco farming in developing countries like Indonesia but also western countries like the United States. Among the 9 companies facing controversies regarding this issue, 44% reported corrective measures and 33% were non-communicative.
  • Product Safety – A financial storm for the Tobacco Industry: The Tobacco Industry is facing material and economic impacts, consequence of the unsupportive outlook from financial institutions due to the increase in risks regarding health, safety, ethical and social issues. From the Tobacco-Free Finance Pledge initiative launched in 2018 and developed by the UN and Axa, BNP Paribas, AMP Capital and Natixis, to the shifting of the concept of fiduciary duty of investors. This risk has become increasingly clear in 2018 with all major tobacco companies experiencing share price declines; for example, the S&P 500 Tobacco Index fell more than 23% during the year to September 2018. Furthermore, the tobacco’s traditional consumers are shifting and are not being replaced by younger people, many of whom, reject smoking knowing in advance the health impacts of cigarettes, as well as their rising prices. Not even innovating alternatives are saving tobacco companies; as an example, Phillip Morris shares fell in April 2018 by 16% due to the poor sales of its heat-not-burn products. In October 2018, British American Tobacco announced a 10% cut of its full year sales.
  • Environmental impact and Tobacco’s lifecycle: Tobacco companies’ damage and impast on the environment goes far past the effects of the smoke that cigarettes put into the air. The tobacco growing, the manufacture of tobacco products and their transportation to retailers, all have severe environmental consequences, including deforestation, the use of fossil fuels and the dumping or leaking of waste products into the natural environment. Tobacco crop is often grown without rotation with other crops, leaving the tobacco plants and soil vulnerable to a variety of pests and diseases; as a result, tobacco plants use large quantities of chemicals and growth regulators to control pest or disease epidemics. Many of these chemicals are so harmful and dangerous to both the environment and farmers’ health, that they are prohibited in some countries. Furthermore, long after a cigarette has been extinguished it continues to cause environmental damage in the form of non-biodegradable butts which millions of kilograms are discarded every year. The sector’s overall performance in terms of environmental strategy is limited (49/100), with 93% of companies disclosing dedicated commitments in this regard, and the overall sector’s performance in waste management is limited (36/100). Yet, the overall sector’s performance in the protection of biodiversity is weak (27/100), with 71% of companies disclosing some basic commitments in this regard.

 

  • The ‘Trojan Horse’ – The Tobacco Industry and marketing strategies: The UN Sustainable Development Goals (SDGs) Goal 3A revolves around ensuring healthy lives and promoting well-being of all ages. The UN explains that among the indicator (3A.1) for this Goal is the prevalence of current tobacco use among persons aged 15 years and older. Yet, stricter regulatory framework in different regions is focused on the health impact regarding young consumers under the age of 18 years old. American tobacco companies face increased political pressure on State and local level with the “Tobacco 21” policy, raising the legal age to buy tobacco products from 18 to 21. For most EU countries, the legal minimum age to purchase tobacco is 18 years old. Yet, tobacco companies use marketing strategies to target the youth and women such as: adapting the packaging with lighter colours and words implying less toxicity to target young women and adapt other tobacco products with sweet flavours. Additionally, tobacco companies use social media, associating influencers such as actors’ positive image with tobacco. The sector’s overall performance in terms of responsible marketing remains weak (25/100), although 69% of companies disclose dedicated commitments in this regard. Moreover, British American Tobacco, Japan Tobacco, Imperial Brands and Philip Morris are facing 9 allegations in total over irresponsible marketing. Among the 4 companies facing controversies regarding this issue, 55% were non-communicative and 45% were reactive without corrective measures disclosed.

 

Above average performing areas:

  • Environmental Approach
  • Shareholders Rights
  • Audit and Internal control systems

Worst performing areas:

  • Fundamental Human Rights
  • Product SafetyManagement of the negative societal impact linked to tobacco consumption

Peer comparison (geographical area)

  • Europe: Imperial Brands (43/100)
  • North America: Philip Morris International (33/100)
  • Asia Pacific: Japan Tobacco (35/100)
  • Emerging Markets: British American Tobacco Malaysia (36/100)

Companies performance since 2018:

  • Europe: Swedish Match (+7)
  • North America: Vector Group; Philip Morris International (+1)
  • Asia Pacific: No progress
  • Emerging Markets: Hanjaya Mandala Sampoerna (+6)

Dr Bronwyn King, CEO Tobacco Free Portfolios declares: “It is pleasing to see a leading ESG Rating Agency acknowledge that the issue of tobacco requires different thinking and a different assessment process.  A ‘weak score’ for ESG for tobacco companies is a reflection of the fundamental conflict of tobacco production and marketing with global efforts to achieve the Sustainable Development Goals.”

Fouad Benseddik, Director of Methods and Institutional Relations of Vigeo Eiris adds : “The friction between the tobacco economy and the requirements of sustainable development is escalating: our ratings reflect both the increasing societal aversion and the risk of future performances of this sector”

To view an excerpt of our 2018 Diversified Banks sector report, download the document below
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Keywords : ESG