Encouraging Transformation
An index that ranks tobacco companies aims to hasten the demise of combustible cigarettes.
By Stefanie Rossel
In the end, it will be about the money—that’s one expectation driving the Foundation for a Smoke-Free World’s (FSFW) most recent initiative. To accelerate the reduction of harm caused by smoking, the foundation plans to introduce an index designed to incentivize tobacco manufacturers to develop and market less hazardous products. A good score on the index could help tobacco companies attract new investors.
The Tobacco Transformation Index (TTI) is designed to provide quantifiable evidence over time of what steps the world’s 15 largest tobacco manufacturers—which account for around 85 percent of global cigarette volume—are taking toward achieving a world free of combustible cigarettes and other high-risk tobacco products as well as any actions they take to impede that progress. Cigarette makers have invested millions of dollars into the development of reduced-risk products (RRP) over the past few years, but they have been criticized for targeting high-income countries with their novel products while continuing to market combustible cigarettes in low-income and middle-income countries. The new index intends to foster faster change in these regions, too, by detailing tobacco manufacturers’ activities in 36 countries, which represent about 85 percent of the world’s current combustible tobacco sales and consumption.
“Of the more than 5 trillion cigarettes consumed globally each year, about 80 percent are consumed in low-[income] and middle-income countries,” explains David Janazzo, the FSFW’s chief financial officer and vice president of industry transformation. “Around 87 percent of global nicotine consumption is derived from cigarettes, another 7 percent from other forms of combustible tobacco, about 2 percent from various forms of smokeless tobacco, and the balance from RRPs, including e-cigarettes, heated tobacco products [HTP] and nicotine replacement therapies. Currently, combustibles drive the vast majority of consumption. The foundation’s mission is to end smoking in this generation and, importantly, to reduce the deaths and diseases caused by smoking.”
The index will be published every two years. Using an objective methodology that is presently under development, the TTI will measure various parameters, including companies’ allocation of capital, research and development; volume sales by product type—that is, combustible cigarettes versus RRPs—and violations. In addition, the index will review factual indicators associated with the countries it covers to demonstrate their policies and actions in contributing to a world free of high-risk nicotine products through measures such as tax structure, regulatory policy on RRPs and other metrics.
“The index strives to make patterns and trends visible over time that show the changing distribution of combustible cigarettes versus less-hazardous products,” says Janazzo. “It will give the foundation and all stakeholders a window not only into what companies are saying but also into what they are doing. How will they invest their money in R&D? Will it be directed into more or less harmful products? How serious is their commitment to tobacco harm reduction? We will also monitor companies’ transparency and their commitment to reduction of harm.”
Countering tobacco divestment
The index is designed to stimulate competition among tobacco companies to deliver the required business transformation. It also seeks to enhance awareness and engagement among investors, policymakers and others. “We believe investors have a significant influence on corporate management decision-making,” says Janazzo. “The index will provide them and their advisors with quantifiable evidence of how companies are addressing industry transformation, on both an absolute and a relative basis, as an additional tool with which to wield influence and promote change. By creating a direct relationship between a company’s transformation and shareholder value—while quantifying transformation through clear and transparent metrics—we envision a market-driven approach that incentivizes sustainable change.”
The index targets investors who remain committed to tobacco. In recent years, a growing number of investors have divested their tobacco holdings. In September 2018, the United Nations launched their “Tobacco-Free Finance” pledge, which aims to eliminate investment in tobacco. Among its goals are raising awareness of the role financial institutions can play in tobacco control. At press time, the pledge had 151 signatories, among them well-known investors such as Allianz and Zurich Insurance Group, which together represent more than $10 trillion in assets under management, corporate loan books and gross premiums.
Other investors, including the U.K. National Employment Savings Trust, have announced the exclusion of tobacco from their portfolios, arguing that the tobacco sector is a dying industry facing stricter regulation, increasingly aggressive legal action and falling smoking rates.
Exposing their operations in an index by agreeing to release comprehensive and perhaps sensitive data may hence become an economic necessity for tobacco companies. “The Tobacco Transformation Index will rely as much as possible on public and independently sourced information,” says Janazzo. “But some of the necessary data will be nonpublic, accessed through nondisclosure agreement and protected accordingly. The companies will be encouraged to make all such data public, and transparency will in some form be encompassed by the index scoring methodology.” The Index will score and rank the companies, regardless of their participation level.
From bad to less bad
Janazzo is convinced that the approach will work despite the tobacco industry’s historic reputation of secrecy. “What we have seen in other industries is the power of technological innovation, combined with other influences, to drive change: Coal companies are shifting to renewable energy, waste management companies are shifting from dumping to recycling and reusing and automobile manufacturers are developing electric and hybrid cars, shifting away from reliance on the combustion engine,” says Janazzo. “This transformation can also occur in the tobacco industry. Companies compete with one another and are therefore interested in the actions of their peers.
By actively encouraging and monitoring this transition, the index will over time incentivize industry players to act more quickly and more responsibly than they otherwise would, according to the FSFW. “Conversely, players that do not make the necessary transition will be exposed,” says Janazzo. “As a result, stakeholders such as investors and public health professionals will be better informed and able to demand necessary action.”
Janazzo stresses that the index will not be an effort to spruce up the image of the tobacco industry. “The tobacco industry created a global health crisis and then tried for decades to cover it up. Its poor reputation is well-deserved, and stakeholders have every right to be distrustful,” he says. “But those facts alone will not lead to the end of the smoking epidemic. Indeed, to the extent we allow the tobacco companies to be responsible for changing themselves without external influence, we become responsible for maintaining the status quo.”
The objective of the index, he adds, is to highlight the journey from “bad” to “less bad”—not to reward the sale of deadly products. The index is intended to complement tobacco control efforts, such as the World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC) guidelines, governmental implementation of which is currently the primary method to tackle smoking-related diseases and deaths, according to the FSFW. “These efforts should and will continue,” says Janazzo. “However, more than a billion people still smoke, most of whom live in low-[income] and middle-income countries. Seven million smokers die prematurely every year. The bottom line is: Change isn’t happening fast enough.”
In its 2017 sustainability report, Philip Morris International (PMI) calculated that if the WHO’s projected pace of the decline in smoking prevalence continued at 0.21 percentage points per year while global population kept growing at 70 million people per year, it would take almost 100 years for the world to be smoke-free.
Independent
To set up the TTI, the FSFW studied two other ranking systems as models. The Access to Medicine Index, established in 2008, ranks the world’s 20 largest pharmaceutical companies according to their ability to make their pharmaceutical drugs more available, affordable, accessible and acceptable in 106 low-income and middle-income countries. The Access to Nutrition Index, launched in 2013, evaluates the largest food and beverage manufacturers’ policies and performances related to the world’s most pressing nutrition challenges: obesity and undernutrition.
Both indexes are financially and organizationally independent of their respective industries. While the FSFW was set up in 2017 with PMI as its sole supporter—the company pledged almost $1 billion of funding for 12 years—the foundation’s independence is guaranteed by provisions in its bylaws.
For the TTI, the foundation has developed a management and governance structure that supports its impartiality. Foundation personnel are kept out of the index-making process completely. To work out the design of the index, the Foundation in May 2019 sponsored a series of listening seminars and consultations around the world with more than 100 participants from multiple disciplines, including representatives from academia, the investor community, NGOs and tobacco associations as well as agricultural groups. Among other things, they discussed the index’s theory of change and identified and prioritized specific topics the system should address.
“The concern about independence was raised at each and every one of the stakeholder dialogue sessions,” says Janazzo. “The index will be funded by the foundation and will operate independently, allowing for findings that are critical of the tobacco industry. Transparency is key. Therefore, a steady flow of information concerning the structure, design and methodology will be disclosed before the first index is published.”
For development and implementation of the TTI, the FSFW appointed two companies: market intelligence provider Euromonitor and SustainAbility, a think tank and advisory firm. While Euromonitor is responsible for process design, index research, analysis and reporting, SustainAbility oversees stakeholder engagement and seminars as well as program oversight and project review.
The two will represent the official “index team” and will be guided by an advisory panel that is in the process of being established. Composed of experts with knowledge of business and investment, corporate behavior and public health, the panel’s task will be to provide strategic advice on governance, development and promulgation of the index.
The panel will operate independently from the foundation, Janazzo says, and will adhere to a charter that forbids industry involvement. “The advisory panel, consisting of members from various areas of expertise, will provide guidance [on] how the index can evolve over time as it is not a one-report initiative.” None of the panel members will be from the tobacco industry.
In data collection and verification, however, interaction with the industry cannot be avoided. It will be the index team’s job to document and report on the nature of interactions with the industry during the index development and data collection process. Before being incorporated into the index, all information provided by tobacco companies will be independently reviewed by the Euromonitor team.
The first report is scheduled for release this September.
