PMI’s Sustainability Index and Sustainability KPI Protocol

These strategies are aggregated into two performance measures:

1. Product Sustainability

Aggregates key performance indicators pertaining to social and environmental impacts generated by our products. 

2. Operational Sustainability

Aggregates key performance indicators pertaining to social and environmental impacts generated by our business activities. 

Consistent with our most recent sustainability materiality analysis results (see PMI Sustainability Materiality Report 2021), addressing the impacts generated by our products stands at the core of our strategy. The Sustainability Index reflects this by attributing two thirds of the total Index weight to Product Sustainability and one-third to Operational Sustainability.

Given the bespoke nature of the Index, external guidelines on how to weigh each of the strategies within our two performance measures are not available. Therefore, to ensure credibility and consistency, we relied on a quantitative and qualitative interpretation of our sustainability materiality assessment results.

Accordingly, within the Product Sustainability performance measure, we overweight the three strategies that aim to address the social impact of the product (i.e., purposefully phase out cigarettes, maximize the benefits of smoke-free products, and seek net positive impact in wellness and healthcare). 

In contrast to the impacts generated by our products, the social and environmental impacts of our operations are more balanced. Therefore, within the Operational Sustainability performance measure, the two social-related strategies (i.e., foster an empowered and inclusive workplace (20 percent) and improve the quality of life of people in our supply chain (30 percent)) together represent half of the weight, and the two environmental-related strategies (i.e., tackle climate change (40 percent) and preserve nature (10 percent)) account for the other half.

The respective weight of each strategy is driven by the results of the materiality assessment; strategies to address topics that were identified as most material are attributed a higher weight than those topics identified as emerging. For example, aligned to its prominence in our sustainability materiality assessment, the strategy “tackle climate change” is overweighted compared to the “preserve nature strategy” which addresses the emerging topics of biodiversity and water.

Each strategy is connected to one or more individual KPI(s), additionally KPIs are weighted within their respective strategy. To ensure each KPI contributes meaningfully to the Index, we have set a minimum threshold weight for any individual KPI.

Internally, our Sustainability Index is supported by targets and performance ranges for each KPI aligned with our 2025 Roadmap and measured for the final year of each three-year Index cycle. Specifically, for each KPI we have set targets and four performance ranges quantifying the performance versus the target as either “missed,” “partially met,” “met,” or “exceeded” for the final measurement year of the Index cycle.

Calculation of the Index score

At the end of each performance share unit (PSU) vesting cycle we will publish the scores for the total Index as well as the Product Sustainability and Operational Sustainability measures in our company’s integrated report, indicating the individual performance of each KPI. The scores for two performance measures will be used in the calculation of PSU performance metric achievement for the cycle.

Step 1

To compute the total Index score, at the close of each cycle KPIs are assessed against predefined targets and performance ranges for the final year of the PSU cycle. In our Integrated Report, we disclose our 2025 aspirations.

Step 2

Once all KPIs are scored, they are aggregated into two scores: one for Product Sustainability, and one for Operational Sustainability. these two scores, ranging from 0 to 3, are calculated as the weighted average of their respective constituent KPI scores. Finally, the numeric scored are normalized to range between 0 and 150 percent.

Step 3

The total Index Score is calculated considering a two-thirds weight for Product Sustainability and one-third weight for Operational Sustainability.

Performance ranges

Given the significant variation in the nature of the KPIs included in the Index and in the maturity of the underlying strategy and programs, a strategic approach was taken to determine a wide or narrow performance range per KPI based on PMI’s (i) ability to control, (ii) maturity on the topic, and (iii) forecasting accuracy.
At each performance share unit (PSU) vesting cycle, for each KPI we will assess the Company’s actual performance against the respective performance ranges. This assessment forms the basis of our calculation of the Index score, described in further detail in the following section.

Governance

The KPI performance ranges have been provided by the relevant business functions and validated by the Company’s Chief Financial Officer, VP & Controller, Chief Sustainability Officer, and VP Strategic Planning & Business Intelligence. The performance ranges linked to the PSU cycle are additionally approved by the Board of Directors.
The Index helps us cascade sustainability priorities throughout all levels of the Company, serving as inputs into both business function and individual objectives. This enables us to integrate Sustainability considerations into strategy, creating deep organizational alignment.

In 2022, to better align with shareholder and other stakeholder expectations, the Compensation and Leadership Development Committee of PMI’s Board of Directors decided to enhance the Company’s practices, explicitly strengthening the link between long-term executive compensation and sustainability performance. For that purpose, our Sustainability Index was linked to part of our performance share unit (PSU) award and represents 30 percent of its total for the 2022-2024 performance cycle. 

Over the past two years, a number of our shareholders and other stakeholders singled out the incorporation of the Sustainability Index into our PSU performance metrics as a positive development. Accordingly, we have continued the practice of linking our sustainability performance to our long-term equity compensation by leveraging an updated version of the Sustainability Index for subsequent three-year PSU cycles.
For more information, please refer to PMI’s 2024 Proxy Statement.