In an extraordinary interview with the Financial Times, Philip Morris CEO Jacek Olczek stated that the company was charting the way to turn its stock into an ESG stock. The interview made waves, and was quoted on leading news and financial websites (such as CNN, Seeking Alpha, Market Screener and others).
Recent research links companies with better sustainability and corporate responsibility characteristics to better return forecasts. According to the Financial Times, ESG investing is now the fastest-growing segment of the asset management industry. The term represents a variety of approaches to responsible and sustainable investment that takes into account rules of corporate responsibility, social responsibility, and environmental protection (such as investing in greener energy sectors).
For many years, as part of their ESG policy, some banks and investors avoided buying shares of companies involved in the production or distribution of alcohol, tobacco products, cannabis, etc., as well as investing in industries such as gambling, fuel, or defense industries. However, recently there has been some change in their position. A number of investors, including Sweden's SEB, have changed their stance on investing in these industries. Will this trend also affect the tobacco industry?
Photo: Yehoshua Yosef //,
In response to the reports, Dow Jones analyst website Barron's also issued a statement: "Now is the time to buy Philip Morris stock." According to analyst Brian Engler, portfolio manager at Covich Investment Group Partners; "Philip Morris is a different company than it was. The acquisition of Match Swedish in November establishes its global leadership in nicotine." Engler was referring to the company's portfolio of products that do not require users to burn tobacco and have reduced potential for damage. "This deal closed a month after it paid Altria $2.7 billion for the rights to sell Philip Morris' flagship IQOS product in the U.S., marking Philip Morris' first return to the domestic market since the two companies parted ways in 2008."
"The significance of both deals," Engler says, is that Philip Morris could have a longer, brighter future than many investors feared. "They are further proof that Philip Morris is on track to be a resilient, profitable and growing business for a very long time to come."
In an interview with the Financial Times, Olczak, the company's chief executive, said: "Philip Morris's strategy to quit cigarettes should lead to a rethink among investors. Philip Morris' shift from burning cigarettes to alternatives to nicotine consumption without combustion with reduced harm potential, which accounted for about a third of its revenue last year, has put the company's new product line "on the podium" when it comes to environmental, social and government impact," he said.
As part of a strategy to recruit investors who have so far disavowed the stock because of their ESG policies, a number of initial conversations were held with leading European funds, including a face-to-face meeting with an investor relations team at one of the companies; Olczak said, "Asset managers won't take the time to talk to you if they don't think there will come a day when they will have to reconsider their previous investment policies in relation to the company." Asked if he believed Philip Morris could be classified as ESG stock in the future due to its investment policy in alternatives to cigarette smoking, he replied: "I think so."
Philip Morris has set itself a goal of half of its revenue coming from smoke-free products by 2025, which mainly includes the IQOS tobacco heating system. However, analysts expect the rate to be slightly below 50%. Regarding this, Olczak said: "There is another school of thought that is also gaining more and more momentum, which claims that precisely by avoiding a certain industry you give up as an investor the ability to influence where the company goes."
The Financial Times notes that the challenges surrounding ESG definition are complex because there is no single, objective and rigorous universal framework. In Europe, where the ESG trend is more advanced, asset managers complain that new EU rules for classifying sustainable investments are not feasible, the Financial Times quotes Gayan Gurab, an analyst at Barclays, who said "Philip Morris has the best narrative to become an ESG stock in the industry...", the analyst refers to products such as IQOS and its $15.7 billion acquisition of Swedish Match last year. On the other hand, Gurab added that "the bar at which ESG funds will start looking at the industry is very high," and claimed that "they have a long journey to go before they can convince investors."
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