Philip Morris jumps into sustainable financing pool

A tobacco giant, the very kind of company that socially conscious investors shun, now wants in on the booming action in sustainable finance.

Philip Morris International Inc. on Friday laid the groundwork for issuing debt with an embedded promise to ween itself off cigarette sales.

With bonds or loans linked to environmental, social and governance criteria, borrowers set targets known as key performance indicators that are usually aligned with sustainable development goals. The issuer pledges to pay a penalty to lenders if they fall short. For Philip Morris, the goal is shrinking its cigarette business.

Philip Morris' entry into sustainable finance is eye-catching because for many ESG investors, avoiding the company is a tenet. But the Marlboro maker's attempt to woo these investors makes sense as funding is plentiful, with companies and governments globally pricing a record $652 billion this year in so-called green or social bonds, or debt linked to sustainability goals.

"As a big company, we have a big environmental and social impact, but the biggest impact comes from the product we sell, and we want to show not only how the company is changing the product for another, but transforming our entire value chain," Jennifer Motles, Philip Morris chief sustainability officer, said in an interview.

The move comes as Philip Morris nears a takeover of Vectura Group PLC, a U.K. maker of asthma drugs. The acquisition has prompted criticism from health organizations on ethical concerns about a tobacco company owning a pharmaceutical firm.

The funding plan, which Philip Morris is calling business transformation-linked financing, includes a goal of increasing the company's smoke-free revenue to 50% of total net revenue by 2025, from 23.8% in 2020. It also will aim to increase the number of markets where it sells smoke-free products to 100 by the same year, from 64 in 2020.

As they rush to sustainable finance, well-intentioned investors worry that their money won't actually have the environmental or societal benefits claimed by borrowers. This fear of so-called greenwashing may be misplaced in the market for bonds that fund ESG projects, according to S&P Global Ratings.

Philip Morris says it envisions a smoke-free future, and has been working on alternative products like its IQOS heated-tobacco offering that it says will one day replace cigarettes entirely.

It also aims for at least $1 billion in sales from products not linked to nicotine, fueled in part by the Vectura acquisition.

"This is not about greenwashing, but about what this framework can spark," Ms. Motles said. "My hopes are that the investor community, which has amazing power in terms of driving change, can be better informed about what they can ask other cigarette companies. If other cigarette companies adopt the same metrics, and start reporting on them transparently, we can make cigarettes obsolete and can multiply the pace at which this is achieved."