Manage our supply chain sustainably

As part of our procurement practices we identify and screen suppliers for business relevance and potential sustainability-related risks before engaging with them. Our screening methodology includes country-specific, sector-specific, and commodity-specific risks to determine a list of significant suppliers through a sustainability lens. In 2023, we had over 1,000 significant suppliers.

We then evaluate spend segmentation and the nature of components suppliers provide us with as well as supply flexibility to determine a list of critical suppliers. In 2023, we had 202 critical suppliers.

In addition to classifying suppliers as significant or critical, our approach to sustainable supply chain management is built on the following core principles:

• We leverage the reach and understanding we have of our supply base to proactively engage our suppliers to implement impactful programs that can help us make progress in our sustainability strategies, such as tackling climate change, preserving nature, and improving the quality of life of people in our supply chain.
• We perform supplier due diligence, assess their sustainability performance, and support them in driving continuous improvement toward compliance requirements.
• We invest in enhancing supplier capabilities by engaging with them directly through dedicated training run by sustainability experts (read more about our Sustainability Accelerator later in this section).
• We embed sustainability criteria in our strategic sourcing decisions and supplier selection process.

Our supply chain sustainability due diligence is guided by our RSP, which align with the UN Guiding Principles on Business and Human Rights (UNGPs), the 10 principles of the UN Global Compact, and the International Labour Organization (ILO) Conventions. It also helps us build preparedness for anticipated and pending legislation such as the European Corporate Sustainability Due Diligence Directive Proposal.

The RSP details our expectations and sets process and performance requirements for our suppliers. We expect all our suppliers to adhere to the mandatory section of our RSP requirements and close identified gaps to continuously improve their sustainability performance.

To monitor RSP adherence, we apply tailored due diligence mechanisms within specific segments of our supply chain. In our tobacco supply chain, our work is governed by our Good Agricultural Practices (GAP) and Agricultural Labor Practices (ALP) Code, which are operationalized at the farm level by field technicians working year-round with the farmers contracted by PMI and our suppliers. In our electronics supply chain, we leverage the work of the Responsible Business Alliance (RBA). For direct and indirect materials and services suppliers we collaborate through our preferred partner, EcoVadis.

Adherence to our RSP—and to GAP for our tobacco supply chain—is being built into our contractual agreements with suppliers. We use a suite of tools, including third-party assessments, on-site audits, and field visits to monitor performance.

Currently, our global supply chain supports our two main finished product categories—smoke-free products that are increasing in resource allocation in line with our growth strategy, and combustible cigarettes.

The majority of our supply chain spend for smoke-free products derives from our direct spend on electronics. During 2023, as we purchased more tobacco than in past years to replenish inventory, the overall proportion of supply chain spend attributable to electronics dropped relative to our overall spend on tobacco. As a result, smoke-free product supply chain spend decreased slightly to 41 percent (2022: 43 percent).

In the updated version, we broadened its scope to incorporate more relevant topics including environmental stewardship, forest, and biodiversity; enhanced sections on responsible sourcing of minerals; and added some sector-specific clauses on illicit trade, product scientific integrity, and scientific engagement that will drive improvements in the sustainability performance of our suppliers.

These additions allowed us to ensure further alignment with PMI’s Code of Conduct and account for current and emerging regulatory requirements. The updated document is composed of two parts: the first part contains mandatory requirements that all our suppliers must agree to implement; the second part provides guidance and implementation tips to suppliers that want to go beyond minimum requirements.

To deploy our updated RSP we developed a robust roll-out plan focused on raising awareness and building capabilities with relevant internal and external stakeholders.

All PMI employees have the ability to complete dedicated RSP fundamentals training, which is mandatory for relevant functions of the Company that have regular interaction with suppliers. Additional advanced RSP training was developed and launched at the end of 2023 for PMI employees to deep dive on key principles, case studies, roles and responsibilities, and the six steps due diligence framework.

We communicated with all suppliers and provided them the opportunity to contact PMI directly for further support, when required. We ran two remote training sessions on RSP inviting over 3,000 suppliers. While the sessions were recorded over 600 suppliers attended these live sessions.

The RSP will be translated into over 30 languages to facilitate supplier understanding and its deployment. All contractual commitments will include an RSP adherence requirement by 2025.

Our supply chains are long and complex. Our procurement team therefore engages with significant suppliers to drive impact.

We use preferred platforms such as EcoVadis and RBA to perform desk-based assessments and on-site audits to drive performance improvements. On a regular basis we run supplier performance reviews in which we coach suppliers and provide guidance on the closure of previously identified gaps.

It is suppliers’ responsibility to put in place a corrective action plan (CAP) and drive improvements in their supply chain. These CAPs are reviewed by PMI’s procurement function and sustainability experts, who also offer ongoing guidance. We assessed our two largest leaf suppliers in 2023 as pilots, with the intention of expanding to additional suppliers as we and the suppliers learn what the requirements for the assessments are.

We aspire that 100 percent of spend with critical suppliers from whom PMI sources be done so sustainably by 2025. In 2023, we made continued progress, reaching 91 percent (2022: 93 percent).

During 2023, 120 suppliers representing 95 percent of our total direct material spend were assessed. Of these, 91 percent were determined to be sourced sustainably by PMI, based on the score provided by the assessment platform, and only 9 percent were below the minimum threshold required. Suppliers with a low score are mandated to drive improvement through dedicated CAPs.

CAPs are segmented by theme, indicator, and priority. Depending on priority, suppliers of direct materials are requested to close identified gaps in an agreed timeframe, and to conduct a reassessment to ensure compliance. In 2023, we actively supported supplier CAP reviews with underperforming suppliers. Overall, 13 suppliers (representing approximately 10 percent of our critical DIM suppliers) that re-assessed in 2023 as part of current and previous CAP review cycles improved their scorecards. The average score increase was 10 points versus the previous assessment in EcoVadis.

¹ Excluding farmers and electronics suppliers, for which we use tailored due diligence tools, as described in this section.

We continued to participate in RBA’s Validated Assessment Program (VAP)—the standard for on-site compliance verification and effective, shareable audits. Under the program, independent external auditors review our electronics suppliers’ sustainability performance against the RBA Code of Conduct, aligned with PMI’s RSP. To gather additional audit data, we leveraged customer managed audits (CMAs), a comparable audit standard recognized by RBA.

In 2023, 91 percent of our spend with critical electronics suppliers were covered by VAP or CMA audits. The average RBA score of our suppliers was 170 (out of a maximum of 200), compared with an RBA average of 173 in 2022. Audit reports revealed several common issues across suppliers in the areas of working time, emergency preparedness, and wages and benefits.

To drive improvement in these areas, we leveraged two key RBA programs: the Responsible Factory Initiative (RFI) and the Responsible Labor Initiative (RLI). The RFI focuses on building capability of suppliers' factories to help them prepare for RBA audits. The RLI provides a set of tools to address potential forced labor issues associated with migrant workers (read more in the People in our supply chain section of this report).

Our 2023 conflict minerals submission to the U.S. Securities and Exchange Commission (SEC) covering the year ended December 31, 2022 showed that approximately 72 percent of the smelters or refiners (SORs) in our conflict mineral supply chain were confirmed to be Responsible Minerals Initiative Audit Program (RMAP)-Compliant or RMAP-Active. With respect to the remaining 28 percent, we conducted due diligence measures to verify whether they sourced 3TGs from the Covered Countries (as defined by the U.S. SEC) during 2022.

We conducted a GAP assessment and benchmark of our conflict minerals due diligence practices to identify leading practices and enhance our conflict minerals due diligence approach. The benchmark was performed in collaboration with human rights consultants Article One and PMI’s Procurement function.

Based on the benchmark study and industry insights collected, PMI launched a pilot with two electronics suppliers to increase the frequency of data collection and better anticipate potential risks. We will assess the pilot’s learnings and share them in our next report.

Another mineral, cobalt, is also linked to unethical mining practices. This critical raw material is used in the batteries that power our smoke-free devices. While the quantities required for our products are minor relative to the global market size, we are deploying a due diligence program based on the RMI approach along with tools to identify and address potential human rights risks in our supply chains.

In 2023, all our battery suppliers responded to a PMI request. Subsequent due diligence indicated that, as of December 31, 2023, each of the 18 smelters from which PMI battery suppliers source cobalt were either on RMI’s conformant list (17 smelters) or under initial screening (one smelter). We continue to engage with our suppliers to improve visibility into this complex supply chain and enhance our due diligence framework.

Our Good Agricultural Practices (GAP) define the principles and measurable standards to be met by all those who grow and supply tobacco to PMI. These standards focus on four areas: governance, crop, environment, and people. The latter is governed by a dedicated Agricultural Labor Practices (ALP) Code.

GAP principles are mandatory for all suppliers of tobacco to PMI and are reflected in supply contracts.

To ensure a consistent level of due diligence across our tobacco supply chain, we began onboarding our two major leaf suppliers to EcoVadis. Additional suppliers will be onboarded to EcoVadis in 2024.

The IPS is vital to providing traceability and visibility in our supply base; it enables the deployment of our GAP and ALP monitoring and remediation system down to the farm level. At the center of this system are field technicians, employed by PMI or our third-party suppliers. These technicians visit each farm at least five times during the crop season on average and monitor how well sustainability requirements are applied and commercial processes are working. They also provide agronomic assistance, deliver training to farmers, identify and address labor issues, and ensure the implementation of improvement plans are implemented.

In 2023, field technicians enabled us to monitor compliance with GAP by all farmers supplying tobacco to PMI under the IPS.

Third parties, such as specialized NGOs, can also monitor GAP implementation. This is an approach we have taken in Brazil since 2020 in collaboration with Produzindo Certo, a specialist company helping farmers operate more efficiently and sustainably. During 2023, almost all (over 99 percent) contracted farmers agreed to be part of this voluntary program.

IM&S suppliers were segmented to determine significant suppliers that are in scope for deployment of sustainability programs. Over 700 suppliers were included in scope in 2023.

IM&S spend is complex and involves a large number of small suppliers that serve the specific needs of different markets. It requires a large effort to engage suppliers and ensure they perform due diligence on their supply chains. To support our suppliers on this journey we organized an event during 2023, during which we shared our sustainability aspirations and proposed a plan to collaborate to drive impact and progress toward our net zero ambition together.

In addition, training sessions were conducted for markets and suppliers to explain the relevance and importance of onboarding on EcoVadis. Over 56 percent of IM&S suppliers disclosed their sustainability efforts through EcoVadis and over 78 percent  reached PMI’s minimum performance requirements.

Low-performing suppliers were supported through capability building sessions with procurement and sustainability experts.

In 2023, we continued to participate in multi-stakeholder working groups organized by the Indirect Spend Alliance, sharing best practices and learning from peer companies.