Imperial Brands PLC (IMB) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining our webinar today. We would like to share with you how we are profession our approach to our environment, social and governance agenda. And how is this supporting the delivery of our core business objectives. In January 2021, we outlined our new 5-year strategy to transform Imperial into a business better able to deliver sustainable growth year in, year out. This set out clear strategic priorities supported by new ways of working and a cultural change program. Our plans are on track, and the new strategy has begun to deliver stronger, more consistent performance. We also launched a new company purpose and vision defining why are we here and what are we trying to achieve. Embedded within these are our ESG priorities. Today's presentation will outline how we identified those priorities and how we are transforming our culture. Taken together, our purpose, vision, strategy and ESG agenda represent an exciting opportunity to make a positive difference for all stakeholders. Now I know there may be some skeptics watching today's webinar who believe any tobacco company talking about ESG is almost a contradiction in terms. And it is true. There's no escaping the simple fact that smoking is harmful to people's health. From that standpoint, the best advice is never to start smoking. And if you do smoke, to give up. But what is exciting as well about this sector is that it is going through a profound transformation. Thanks to next-generation products, we now have the opportunity to provide potentially reduced harm alternatives. At the same time, we can make a positive difference to our planet and the lives of our people. And as you will hear today, by getting closer to our consumers, impure can make a distinctive contribution to the positive change happening in our industry. Now before I join Imperial, I spent 5 years in the automotive sector, which is going through its own long-term transition from the internal combustion engine towards less carbon-intensive forms of motoring. It's this opportunity to play a part in driving major change with positive social and environmental outcomes, which was an important factor in my decision to join Imperial, all of which is why I'm especially pleased to be speaking to you today introducing Imperial's ESG webinar. Following the launch of our strategy, purpose, vision and behaviors, we completed an ESG materiality assessment listening to the views of consumers, customers, employees, regulators and investors. This assessment identified 8 focus areas which I would like to come on in a moment. Our focus areas and the Link metrics and targets have been signed off by the Board. And in July, we launched our new people and planet strategy internally. We will integrate ESG metrics, consumer health and climate into our executive remuneration for fiscal year '23. Our detailed ESG materiality assessment confirmed 8 key focus areas, which are grouped into 3 categories: has the futures, making a positive contribution to society and providing a safe and inclusive workplace. These are critical to achieving our vision and long-term purpose as we build a strong challenger business powered by responsibility, focus and choice. Today, we want to be transparent and acknowledge that we had different levels of maturity with different starting points in each of the areas. However, we are committed to delivering on all of them. In this session, we will focus on our work in 4 of these 8 areas. Each of our 8 focus areas are also aligned to the United Nations' sustainable development goals. We've introduced a new government framework to ensure Imperial runs responsibly and in the best interests of our stakeholders. In December last year, I became Chair of a new cross-functional ESG Committee, which provides a senior level focus on our priorities. The committee reports regularly to the PLC Board, which provides oversight and guidance. And to track our progress on each priority, we monitor a number of nonfinancial data points. And this is supported by a rigorous audit process. Just as our financial information is assured by external auditors, E&Y, they similarly assure the nonfinancial information we publish annually. And as with our financial information, their role is not only to assure but to challenge our approach. Additionally, 4 areas geometric, we are aligned with a wide range of global reporting initiative standards to ensure we are reporting in a comparable manner to other companies. The cost of managing each priority is part of our financial planning, and we use the Assure data to track our progress. This year, we will publish our first stand-alone report detailing our strategy for climate change in line with the requirements of the task forward on climate-related financial disclosures. For climate reporting, we have been aligned with the Global Greenhouse Gas Protocol for several years, again, to ensure comparability. Now for the first time, we have executive leadership team sponsors for each of our ESG priorities. This is intended to inspire engagement throughout the entire company. We firmly believe this executive level sponsorship puts us in a stronger position to deliver against our goals. And in the past year, we invested to enhance our ESG skills and capabilities. Our new ESG function is led by Tony Dunnage, who joined us last year. Tony brings 34 years of end-to-end operational expertise and supply chain management at Unilever. Tony, has practically experience of implementing energy reduction and efficiency programs, including helping 200 Unilever factories worldwide transition to 0 waste. Also driving a strong linkage between our ESG initiatives and our global cultural transformation by having Tony a report to Alison Clarke, our Chief People and Culture Officer. Alison will provide further details on our progress later. Now we recognize this is just the start. And that in some of these topics, we're early in our journey. You can find further information on all 8 topics on our website. However, today, we're focusing on the 4 areas that have scored most highly in our materiality assessment. These are consumer health, climate change, farming lifehold and welfare and diversity, equity and inclusion. At Imperial, we start with the consumer. Andy Dasgupta, our Chief Consumer Officer, will provide detail on our approach to consumer health. Now putting our Chief Consumer Officer in charge of our drive to reduce harm is very deliberate. The way improve will make Imperial will make a material contribution to harm reduction is by getting ever closer to our consumers, understanding their needs and habits and then innovating at pace and creating new compelling propositions. Andy has a long track record of working closely with consumers in large global businesses, such as Glaxo Smith Kline, PepsiCo and Fonterra. Our second material issue is climate change, and Tony Dunnage will set out our initiatives here. Last year, we committed to net 0 by 2040 and among the first in our industry to do so. With a strong track record of delivery here and our future ambitions are supported by detailed short- and medium-term objectives. Next, Mark Ballance, our Leaf Sustainability Manager will explain our approach to pharma life lots and welfare. Mark, who comes from a family of tobacco farmers in Zimbabwe has a deep expertise of leaf sourcing and of our partnership approach. Finally, Alison Clarke will share the great progress we're making with our culture transformation as well as an update on our work in making payroll a more diverse and inclusive organization. Creating the right culture is a core foundation of our ESG agenda, just as it is by a wider corporate strategy. Now following our presentations, there will be plenty of time to answer your questions. Let me now hand over to Andy Dasgupta, who is the sponsor for our consumer health priority. Andy, over to you.

Many thanks, Stefan, and hello, everyone. Aligned with our purpose, 1 of Imperial's most important ESG ambitions is to make a meaningful contribution to tobacco harm reduction. The only way 1 can achieve this ambition is by starting with the consumer and by giving them choices to potentially improve their health outcomes through our portfolio of next-generation products and more importantly, making sure that they accept them. Here's why tobacco harm reduction is not a simple thing to achieve. It is not just about selling potentially reduced harm products, it is about the individual journeys of each of the world's 1 billion adult smokers. As illustrated in this equation, next-generation products have the potential to improve consumer health, yes. But to facilitate harm reduction, these new products must be accepted by consumers as alternatives to cigarettes. This is why we firmly believe that harm reduction starts with the consumer. Our consumer smoke for moments of relaxation and pleasure. And this smoking habit has existed for over a couple of thousand years in different forms, as 1 can see even in the old Egyptian Tomb paintings. So clearly, the pleasure of smoking is not something that people necessarily want to compromise on. So when we try to convert these consumers, it's very important to ensure that the experience they get from our products is as close to the experience of smoking as they are willing to accept. It's an informed choice made by adult smokers and our products are focused solely on smokers. Clearly, the best health-related outcome is for adult smokers not to use any tobacco products. Starting with these consumers, we have found that they fall into broadly 3 different categories: the first, they are still smoking and wanting to try new products, but wanting an experience that's as close to smoking as possible; the second, a more health-conscious smoker who is looking to find something potentially less harmful and is likely to compromise somewhat on the experience but not fully; and third, those who are willing to compromise on the experience but doesn't want to give up on the nicotine by increasing NGP choice and by improving the experience tobacco companies can increase adult smoker switching. To that end, we have reset our NGP strategy by defining an approach that plays to our strengths and is centered on meeting consumer needs. It's an important point of difference from how we operated in the past and from our larger competitors. It's a good example of our challenger mindset in action. As the smallest of the global players, we do not think it is our role to create new categories in markets. At this stage, we are focused on markets where an NGP category has an established presence and where we can leverage our existing combustible routes to market. Once we have identified which markets are attractive to us, we must then understand what our target consumers value most from their smoking experience. This allows us to define a clear boundary around our innovation. It also lets us know how best to engage with our consumers. Having clearly understood the consumer dynamics, our role in this market is to provide greater consumer choice with differentiated product offerings that meets an untapped consumer need. And this allows us to offer something unique versus our competition, which is very important to us. We are making smart investments in brand building and consumer communications and making use of our trade partners to provide consumers with a compelling offer. We know clearly which consumer touch points provides us with the highest return on investment, and that's where we focus. As we develop our understanding of these consumers, our messages and the channel choices are based on where to best engage with them and what attributes they value. That will make them switch and that will make them repurchase. As the smallest player, we are also focused on identifying partners who might help us not just in delivering better products but also provide new go-to-market means or tools, which would be beneficial for us. Ultimately, we believe this approach, which is grounded in consumer insight and data and which plays to our strengths will be more successful, creating more opportunities to make a meaningful contribution to harm reduction. But first, it's important to establish that products in different nicotine categories have different risk profiles from cigarettes. And we classify their risk compared with that of cigarettes on our relative risk scale. The crucial point is that unlike cigarettes, no next-generation products involve the burning of tobacco, which is the most harmful way to consume nicotine. This means next-generation products don't produce the harm food smoke that is the primary cause of smoking-related diseases. Our relative risk scale based on current scientific evidence shows all next-generation products have the potential to significantly reduce harm relative to continuing to smoke cigarettes. If we think of the 3 consumer groups that I mentioned earlier, the first who want and experience really close to smoking, they are most likely to choose heated tobacco as the alternative to smoking. The second group that I mentioned are more likely to choose vaping. And the third would probably choose modern oral, compromising on their experience, but still getting their nicotine hit. Of course, this explanation is rather simplistic and illustrative, honestly. While in reality, there are multiple complex, multiple category usage dynamics in play as well. For people to quit smoking, we need to ensure their journey is as easy as possible. the more hurdles they perceive, the less likely they are to create. So we have to keep innovating. The alternative has to be within an arm's reach for them. When they want it, how they want it at the price that they wanted and with the same or similar experience that they want. Because the smallest barrier to availability might well be the trigger for some of the consumers to get back to smoking. Delivering this requires innovation across our value chain. This includes developing agile supply chains and superior distribution networks. It needs rigorous science, focused consumer insights and novel marketing, go-to-market and connection models. We seek to substantiate the reduced harm potential through our scientific research in the laboratory at the clinic and once products are in market. Imperial Scientific Assessment Framework is a multistage, multiyear testing and research program designed to evaluate each of our NGP's harm reduction potential relative to combustible cigarettes. You actually can find further details on the Imperial Brand Science website. Insight into our consumers enable us to target them better, to understand why they purchase and why they might switch. Our findings to date suggest that no manufacturer has yet created the perfect reduced harm cigarette alternative. And this is encouraging for us as there is still time for us to continuously develop and improve our offering. Distribution is also key. The good news is that the majority of NGP consumers typically purchase through the same channels as they bought their cigarettes. So we are leveraging our existing sales and marketing organizations. Finally, our marketing approach needs to resonate with the target consumers to convince them to use our product and to build our brand awareness. Frankly, this is an area where we have lagged in the past. And this is where we can begin to build a difference with our new capabilities versus competition. All these elements enhance our ability to produce a portfolio of next-generation products that appeal to adult consumers to potentially improve their health outcomes. So our focus is on driving consumer acceptance while recognizing that not all consumers and markets are the same. There are different preferences and regulations across different markets, which is why we are also taking a portfolio approach to our range of products. Our heated tobacco product, Pulse, for instance, is targeted at consumers who prefer multiple sessions between charging. So they want convenience. We also know that some consumers prefer a compact heated tobacco device. This is why we are focused on these 2 key attributes for our first launches in heated tobacco with our bulk product. We have also enhanced the stick experience with our brand ID, which has resonated very well with consumers. In vaping, feedback on our all-new Blue 2.0 product launched in France suggest that consumers are finding it amongst the best vaping experiences. It has a longer battery life and enhanced economics. So it feels really good in the hands of consumers. The new pods address some of the previous concerns over things like leaking and the new pods now dock neatly with a magnetic click. In modern oral, we are taking an all factory approach, which means we are trying to see how we can enhance the taste and the smell experience for our target consumers while delivering the nicotine that they want. When usage of potentially reduced home next-generation products is coupled with a reduction in cigarette smoking, that's when it is likely to be consistent with improved consumer health outcomes based on what we know today. Let's now address the flip side of this equation and what regulators often cite as a concern, is the gateway or on-ramp to cigarette smoking by consumers who do not already smoke. It's vital that any next-generation product used by the never smokers, including the youth is minimized or eliminated altogether. Next-generation products at least from us are meant only for adult smokers and adult smokers and adult nicotine users only. Failure took knowledge and crossed the on-ramp will severely diminish any tobacco harm reduction potential and our contribution towards it. So our entire NGP philosophy reflects a no-tolerance approach to youth access through every stage of our product's life from conception to development and manufacturing through to perception and behavioral science, marketing, how we use post-market surveillance, we maintain a strict responsible marketing protocol. A good example is where we use mystery shopper programs to ensure regulatory requirements are being met at a retail level. And we receive direct consumer feedback on age verification amongst other controls. Where it is violated, we immediately take corrective actions. To reinforce our commitment to Youth access prevention, we seek to ensure that regulatory requirements are implemented adhered to and enforced. From manufacturers to retailers, we believe everyone must take responsible for their role in preventing youth access to adult products. As an example, in the U.K., we partner with the trade to make sure retailers put up an 18-plus signage on any tobacco units that we provide. We also put for adult smokers and vapers only on all consumer and shopper facing communication. And where we are able to use social media for our next-generation products, we strictly look to target smokers above 21 years of age. By collectively committing to responsible marketing and high product standards across the board, we can create a united front against youth access to nicotine products. So where are we today and where are we going? We started further back than our competition than we would have liked, but we have achieved a great deal in the past 18 months. Our first step was to bring the different NGP teams together under the Global Consumer office. So we can leverage our insights and expertise more effectively across tobacco and NGP. We then made some important new hires to improve our capabilities in key areas such as consumer insights and innovation. We also made some tough decisions to exit certain markets where we lapped the local route to market and where our NGP approach was just not working. The good news is that we have run successful launch pilots for Pulse in Europe and for a new consumer marketing proposition for Blue in the U.S. These have validated our strategy and our approach and we are now moving forward with further market rollouts. For example, most recently, we have rolled out Pulse ID in Italy. I firmly believe that we now have the foundations to build a growing and sustainable NGP business that can make a meaningful contribution to harm reduction. And I look forward to updating you on the progress. With that, let me hand you over to Tony Dunnage, who will take you through our climate change priority and how we are moving towards net Zero.

Thank you, Andy, and hello, everyone. As identified in our materiality assessment, climate change is a priority for us. We know that climate change represents a large risk to business and society with asset destruction, crop failure and mobility, all likely to be increasingly affected. In line with the recommendations from the task force on climate-related financial disclosures, we've explored the impact that climate change is likely to have on our value chain. These will be reported in our 2022 annual reporting accounts. Today, we're going to focus on the positive role we intend to play in the global drive towards mitigating the impacts of climate change. As Stefan mentioned earlier, we've aligned our work to United Nations sustainable development goals. This means we're part of something much bigger. One of the topics we're focusing on in our climate change ambition is energy. Here, we draw on the United Nations Sustainable Development Goal 7, affordable and clean energy. Sustainable Development Goal 7 highlights the importance of clean and affordable energy. The goal is split in 2 parts and encourages increasing renewable energy and improving energy efficiency. Put more simply, it's about how much energy we consume and the composition of that energy, 2 areas where we are increasing our activities. Before I go into detail on how we intend to deliver on our ambitions, let me first put the challenge in perspective in relation to global CO2 emissions. The chart on the left shows the increase in global emissions from the pre-industrial levels to date. We're all aware that this trend now needs to reverse and quickly in order to limit global warming. To put our contribution into context, we emit around 1.2 million tonnes of CO2 equivalent annually of the 35 billion tons emitted globally, but there is no other path then for all companies, all governments and all of society to pull together and get behind the decarbonization commitments that have been made. And we accept our responsibility to reduce our carbon footprint we aim to achieve net 0 in a 2-stage process. First, in our own operations and then across our value chain. We know that we can make a meaningful contribution in this space. We've been reporting in line with Greenhouse Gas Protocols for several years. Strong data availability allows us to take a data-led approach on our climate change metrics and underpins our decision making. I called into our company life cycle assessment completed for a baseline year of 2017, 22% of our emissions occur within our direct operations. And these are our direct emissions or scope 1 and 2 emissions. This is our current focus, and we've mapped out a 5-step approach towards net zero. The first 3 of these steps relate to our Scope 1 and 2 decarbonization plan, including energy efficiency, switching to renewable grid electricity and then a transition of all energy types to renewables. Our Scope 3 emissions, those that we accrue from our value chain are not within our direct operations are a rest. This is an area we're still working on with our supply chains. For instance, we've identified that 104 of our largest suppliers contribute around 80% of our scope-free footprint. And more than 50% of this group of suppliers will have science-based climate targets in place by 2025. We're using the CDP platform as the main engagement channel and we'll provide further detail on our plan when it is firmed up. So how are we doing against those ambitions? Taking 2017 as our baseline and efficiencies during the period 2017 and 2021 have delivered a 14% reduction in emissions driven by operational and energy efficiency programs. During the 2022 financial year, we took a company decision to accelerate our transition to renewable electricity. You can see a large drop in CO2 emissions during 2022, mostly driven by this decision. And we expect a further reduction in 2023, again, driven largely by renewable electricity. We're working through how to transition the balance as shown in this chart. We're currently evaluating options for Scope 1 fuel transition. Transition in all of our energy, not just our electricity to Net Zero is a much more complicated task. We're engaging with external partners to determine our best options ranging from technology change to fuel transition, for example, we switch to Biofuels. Our recent performance on our climate change metrics gives us confidence in our quest to go further faster. We've reduced our Scope 1 and 2 emissions by more than 1/3 compared to our 2017 baseline, and we've achieved a healthy reduction in total energy consumption at 17%. And earlier this year, we're excited to join a group of prestigious companies for the Waste to Zero initiative, and we're proud to have been recognized by multiple agencies, including CDP, who have ranked us an A for Climate in the last 3 years. and the FT who have named us climate leader for 2 years running. This places us broadly in a similar place to our much bigger peers. Although we do not yet have all of the answers, we believe we're well positioned to achieve our climate ambitions. What does this mean? In the last year, we committed to be net 0 in our total operations at Scope 1, 2 and 3 by 2040. We're among the first to do so in our industry, and this is 10 years ahead of the Paris Agreement and aligned to a 1.5-degree scenario. In support of this, we also set interim targets: first, 100% of our purchased good electricity to be from renewable sources by 2025. And we've taken a big step towards this, moving from 3% in 2021 to currently over 90%; second, to be net 0 from our direct operations at Scope 1 and 2 by 2030. These actions have led to a big reduction in our CO2 emissions in 2022, and we anticipate another large reduction next year. Given this solid early progress, we have confidence we'll make our climate change targets. Let me now hand over to Mark Ballance, Senior Manager of Leaf Procurement and Sustainability. Mark has been with Imperial for 5 years and comes from a family of tobacco farmers in Zimbabwe. At Imperial has helped develop our oversight and business planning in the leaf procurement, developing strong relationships with suppliers and a keen understanding of the salient issues in the area of farmer livelihoods and human rights. Over to you, Mark.

Thank you, Tony. It's great to be able to speak about farmer livelihoods and welfare. This is something that I am passionate about and is 1 of the key aspects of the S and ESG, where we're part of making a positive contribution to society. We'll start with a short video that will provide some insight into the agricultural world. [Presentation]

As we saw in the video, there are big challenges facing agriculture globally, but there are also many opportunities. This is just as true within our industry as others. We know that like others, with agri supply chains, everything starts on the farm and supporting those farmers livelihoods and their welfare is not only important for their future, but for ours, too. By continuing to collaborate with the industry and support our suppliers to help their farmers, it is not only having a positive impact on the planet and for farming communities but helps our supply chain become more robust and sustainable into the future. Imperial continues to focus on 3 main pillars: one, working with our suppliers; two, collaborating as an industry; and three, conducting our own due diligence through the Imperial Care program. We understand that we can't tackle systemic issues alone and need to work with a wide group of stakeholders, including our suppliers and other industry players. This partnership approach enables us to collaborate to amplify positive incomes for both communities and the environment. Therefore, we are reemphasizing our partnerships and collaborations. A key one is the sustainable tobacco program, an industry-wide approach providing access to both verified data and the opportunity to collaborate with subject matter experts such as the foundation for eliminating child labor and tobacco growing. Our work is centered around Imperial Life Care program. As well as verifying that our suppliers' due diligence processes are robust, the program works with suppliers to ensure alignment of their standards to the United Nations guiding principles. We saw the majority of our leaf through 2 tobacco suppliers, Universal Leaf and Alliance One. These are large reputable multinationals with their core competency and growing and processing tobacco. The governance procedures are robust, supported by code of conduct, speak-up mechanisms and policies that are being practiced on the ground. They have established due diligence processes in place, including agricultural labor and good agricultural programs and have been refined and implemented over many years. They have a deep engagement with their farmers with regular on-farm visits and the use of seed-to-sale technology to ensure transparency. Our suppliers have field technicians on the ground that use GPS tracking to record the location of their visits and provide both traceability and data. This information is consolidated and fed into our industry programs. On average, each technician typically covers 120 farms, and each farmer is visited on average 8 times a year through both announced and unannounced visits. The data collected during these visits is made available to us and ranges from crop information to adherence with labor and environmental regulations and best practices. Our suppliers also actively support communities in addressing some of the root causes of key issues they face. For example, last year, Universal planted millions of trees around the world as part of the reforestation program. And as part of Alliance One's commitments to improving access to education, the supplier initiated projects to improve school infrastructure, established after-school clubs and set up vocational training programs. More details of these programs can be found on their sustainability reports, which are available on their websites. These robust governance processes are reported by suppliers and verified by third parties. This supports mature programs such as the industry-wide sustainable tobacco program, which allows the industry to collaborate to create positive impact in tobacco grand communities and to drive continual improvement. The STP is guided by frameworks, including the United Nations guiding principles on business and human rights and the United Nations Sustainable Development Goals, which support supply chain due diligence expectations. All suppliers from whom we source tobacco are expected to participate in the STP and all data is verified and available to Imperial. Our own due diligence actions are supported through our Care program, which links to the STP. The care program guides our actions through our supplier partnerships and industry collaborations. As part of the program, we support suppliers through our leaf partnership projects. These are projects conducted in tobacco brand communities. The aim of each project is to have a positive impact on either people or the environment in that target area. In 2021, our leaf partnership projects benefited 130,000 farmers and their families and the projects underway in 2022 are expected to benefit an additional 84,000. Our mature and ongoing projects have currently improved access for up to 136,000 farmers and their families to water sanitation and hygiene. This means that, for example, some people have access to a physical toilet for the very first time. Improving access to education is key, and Imperial has participated in more than 20 projects in recent years to increase access to schools, including feeding programs, infrastructure improvement after school clubs and during COVID, even adapting programs to let's play at home. In Madagascar, where we directly grow tobacco, 80% of the fuel used in the tobacco carrying process comes from renewable sources through a combination of tree planting, biomass and briquettes. By 2023, we hope this will be close to 100%. So what do we want to achieve globally? With our farmer livelihoods and welfare strategy, we're committed to 3 overarching ambitions. First, we're supporting farmers with access to projects to increase financial security by 2025. This includes increasing access to productivity initiatives at complementary crops. Secondly, we want to build in the programs when our suppliers already have in place. These are to provide 180,000 farmers and their families with increased access to basic needs such as clean drinking water and education as well as projects to help them diversify income streams and increase productivity. Our third ambition is to support our suppliers and their farmers to implement sustainable agricultural practices. This includes a target to provide access to sustainable wood by 2025. For us, everything starts on the farm, and we aim to have pride in every lead purchased. Thank you. Let me now hand over to Alison Clarke. Alison joined Apparel in 2021 as our Director of People and Culture, and has led cultural change programs at several major international businesses. Over to you, Alison.

Many thanks, Mark, and hello, everyone. So back in January 2021 at our Capital Markets Day, I described a road map for building a performance-based culture to support the delivery of our strategic priorities. And I'm pleased to report today that we've made significant progress. And as I'll explain, the development of our ESG strategy and capabilities is an essential pillar of our culture change journey. Last year, I described how Imperial had many strengths, but its culture at that point was too siloed. And we also lacked the consumer capabilities needed to build brands and a sustainable NGP business. And I said that what we would use were 2 key levers to build our new culture. One was investment in capabilities that we needed to service our new aspirations, and 2 was deep collaboration with our people to retain that institutional knowledge. So how have we delivered? So starting with capabilities, we said we would appoint a new Chief Consumer Officer to drive greater consumer centricity and reboot our NGP operations. And we quickly brought on board Andy Dasgupta, who has assembled a very talented new team which is already delivering results. We've taken the same approach to developing our capabilities in ESG, which done properly requires people with distinct specialized skills. Now you heard from Tony Dunnage, who joined as ESG Director last year from Unilever, and he's building a really strong team. And similarly, we've also invested in creating a new team, we have experience of driving strategies for diversity, equity and inclusion in complex global businesses. And last year, I also promised we would co-create a new purpose and vision to align and engage our people. And we did this by working with our people from across the organization. And in fact, we went much further than that. So let's look at our purpose and vision for a moment. An important point to call out is that our commitment to ESG is enshrined in these 2 statements. Our purpose expresses our ambition to be a healthier future. And this applies not only for our consumers, but also to communities and planet. And our vision states that our pursuit of commercial success will be powered by responsibility. Now to underpin the purpose and vision, we co-created 5 new core behaviors that articulate what success looks like in our new culture. And these 2 are directly linked to our commitment to ESG. So authentic and inclusive to all pots front and center, our commitment to DE&I. Taking accountability with confidence was developed with an eye to building a stronger culture of health, safety and well-being. And internally, we now articulate an ambition for 0 injury in the workplace. Build our future is in part about building the patient long-term mindset that's needed to deliver on our Net Zero targets. And start with the consumer means that we need to be aligned with the long-term consumer trends towards potentially less harmful moments of relaxation and pleasure. These behaviors underpin an important element of our culture change and ESG journey. Deep collaboration with our people is essential if our progress is to be genuinely sustainable. The initial materiality study that shaped our approach was done in consultation with colleagues. And in the past few months, Tony and the team have spent many hours discussing our new ESG ambitions with colleagues to collectively build plans to achieve them. And it means our people understand the strategy and are thinking how they can get involved. And they're even starting to provide crowdsourced ideas that will help us achieve our goals faster. To really engage people with the company, we've dispensed with the ESG acronym and we now refer instead to our people and planet strategy. All the different elements of culture change come together in our connections program, which we launched last year. So over the past 12 months, we focused on providing development to ensure that every single 1 of our people has got a really good understanding of our purpose and our vision and our behaviors. And in particular, how to deploy these behaviors in their everyday working lives. So for 1,500 of our most senior leaders, this has meant an immersive 15-hour program where they've had the time to think deeply about what the behaviors mean to them and then to start to practice them and role model them. And the program has been structured in waves that are cascaded through the group, starting with the executive leadership team and their direct reports and then fanning out to senior leaders and factory managers and functional heads. Every one of our employees will have completed my connections by the end of 2022. And we're now moving into the next phase of our culture change journey. During 2023 will be focused on 2 activities. First, we're embedding our behaviors into performance management with the bonuses of senior leaders now being awarded against both how they deliver and what they deliver. And second, we're building our leadership capability in performance coaching because these 2 things together will accelerate our journey to create in a performance culture, which, as I've said, is a really key enabler to our strategy. Earlier this month, Stefan and I launched this program with our leadership community, and there was a very high level of engagement on those calls. This anecdotal evidence that culture changes started to become embedded is back to by data. So a survey conducted in July with our top 500 leaders indicated the culture change program is exceeding on every single external benchmark with 93% of our leaders understanding what our behaviors mean for them in their roles every day. Similarly, with diversity, equity and inclusion, we've developed our approach in close collaboration with our people. And at the center of our efforts of being 4 employee resource groups, focusing on gender, ethnicity, disability and LGBTQ Plus. The 500 members of these groups have been instrumental in developing our strategy for this area. And as I've said, diversity, equity and inclusion is a really important part for our culture change program and for our ESG ambitions. So when we started 2 years ago, there had been no structured group-wide approach in this area. And we are pleased with the progress we've made. We know we're still at the very early stages of a long journey. But as we began the work in this area, we wanted to send a very clear message from the top that in the last 18 months, we have transformed our executive leadership team from 14% women and no people of color or different ethnic background, to 30% women and 30% of people of color and a different ethnic minority background. And we've made similar improvements at the Board level. But we know that much more work now needs to be done to drive fairer representation across our broader leadership team and the enterprise as a whole. And that's why with strong input from our employee resource groups, we've been developing an end-to-end 5-year strategy, which we're presenting to our board next month. Now given where we are in this process, It'd be inappropriate to go into too much detail today. But what I can say is that over the next 12 months, we intend to focus on 3 areas: One, improving our employee data, and we know we need a more solid baseline to measure future progress; two, to a community of allies, which is a bedroom for a sustainable approve; and three, reviewing how we attract, recruit and retain talent and how we manage career advancement. And we know we need a deeper understanding of those critical issues for these underrepresented groups across the entire employee journey. Now I hope this presentation has given you a stronger understanding of how seriously we're taking culture change and how culture changes intertwined with our approach to ESG and how these elements are coming together to support our strategy to create a more sustainable company. I'm now going to hand you back to Stefan.

Thank you, Alison, and to all our presenters today. I would like to conclude by summarizing why are we committed to our ESG agenda. Our priorities are fully aligned and integrated into our strategy, purpose and vision. In some areas, such as climate change, we are building on solid foundations. We've already made really good progress. However, we recognize other areas, where are we coming from in, but there is an opportunity to make a real difference, such as in consumer health. Creating the right culture is critical to both our corporate strategy and our ESG agenda. And we're reinforcing delivery of our ESG objectives through new hires strong executive accountability and clear governance. Put simply, the goal of our refreshed ESG strategy is to support the delivery of our corporate strategy, creating value for all our stakeholders over the long term. Thank you for listening to all of us today. We would now like to take your questions.

Thank you, Stefan. Hello, I'm Peter Durman, Head of Investor Relations at Imperial Brands, and I'll help coordinate the Q&A today. We have all the presenters here ready to answer your question. [Operator Instructions] I should add, we'll not be commenting on current trading today ahead of our trading update that we'll issue next week on the 6th of October. So perhaps while we wait for people to gather their questions, I'll start off with a couple, and these -- both of these will be for you, Tony. Clearly, the materiality exercise has been an important -- really important way to understand how we prioritize our 8 focus areas, particularly around consumer health and climate change. Can you talk to us a little bit about what you went through with material, how that worked in practice, what you went through? And how did these issues sort of rise to the top as it like of the priority list?

Yes. Sure, happy to answer that one, Peter, because we didn't cover it particularly in the presentation. So for any program or strategy focus is key, and you'll hear that as a theme running through certainly in that presentation and as much of the communication that comes from us as an organization. And the topic of ESG can be incredibly complicated if we let it to our job clients, and there are more than 400 emerging themes in 70 over our June topics. So we used a process to ramp these topics to see those which were the most material in terms of risk and opportunity for us. So let's call the materiality assessment. Now this past time when we conducted that assessment, we used an artificial intelligence tool, which really took us into a new level of being able to carry out this process. And that tool is equipped with huge data sets, all regulation relative to markets where we operate and also allows us to do the stakeholder engagement, which Alison mentioned earlier. And basically, after that incredibly complex exercise, it gives us that 2x2 in terms of what's most material to us the business and our strategy. And then on the other axis, what's most material to the stakeholders because in the end, in this multi-stakeholder environment in which we operate, it's those 2 things. So always being true to our purpose, vision and strategy, but listening to the voice of the many stakeholders, whether that's consumers, whether it's employees, whether it's shareholders. So that's the process we undertook which gave us the very clear priorities.

Great. And then one more, and then I'll hand it back to the operator. So 1 further one. You made a clearly significant improvement in sourcing electricity from renewable areas in the past year. Can you just shed a bit of light on exactly what you've done there? How have you achieved that significant improvement?

Sure. I think if you look at the Imperial management team now, and most people had acknowledged that it's a relatively new team, a lot of new hires coming from large global organizations. And one of the great things when you get that discontinuity use fresh eyes and fresh inputs. So the obvious exercise that we carried out, first of all, was to look at where have we got what we would call low-hanging fruit in each of the areas. And in climate change, renewable electricity was 1 of those areas that hadn't really been adopted in a big way. And myself and mostly our Chief Supply Chain Officer, Javier Huerta, who have some connections from the past actually saw it as a great opportunity. Mobilized legal procurement teams and actually from the first of December last year, activated a loss of renewable electricity. And you would see those with a keen eye on looking at the chart, actually, some of that will flow through into '23. Now I think it's important to say that renewables do have a premium in terms of cost. And 1 of the important conversations we had is if you look at our past performance in the area of energy efficiency, is somewhere where we've really excelled. And what we're really confident about is the fact that our energy efficiency program will more than compensate in terms of the additional premium that we see for enable electricity.

Great. Thanks, Tony. I can see we've got some questions online. So I'm going to hand back to the operator, Sharon, if I can hand over to you to line up the call, please.

[Operator Instructions] Your first question comes from the line of Vladimir Demine from Morgan Stanley.

It's Vladimir Demine from Morgan Stanley Investment Management. Thank you very much for a very interesting presentation. Can I follow up on the issue of child labor. And when I look at your bigger competitors, what I can see is they have quite -- now they have quite a lot of disclosure in terms of helping us to track the progress on that, so incidents or potential incidents of child labor and how they've been dealt with, for example. And the second thing I can see is they've been increasing collaboration with third parties, be it and NGOs or supply chain experts and auditors that help them assess and assess the situation on the ground developed plans for improvement. And I couldn't find much in terms of reference to such actions in your disclosures. So can we discuss whether you have similar programs? Do you plan to have similar programs and actions and disclosure? And if not, why not?

Thanks, Rami. I'm going to hand over to Mark to answer that question.

Vladimir, thanks for the question. So I'm going to break it down into 2 parts. So the first is just around child labor and how we are tracking and reporting on this versus strategies of our peers. And the second is around collaboration. I think the first point to note in terms of our supply chain, we have a slightly different strategy to our peers. And we really have a partnership approach with our suppliers. Around about 97% of our supply chain is outsourced, which is the vast majority of what we purchase. In terms of the data that we get through from our suppliers, that is very much their data that they share with us through the sustainable tobacco program. So we use that data to make sure that we are aware of what our suppliers are doing to be responsible when they get issues reported through to them and that they identify through the systems that they have in the ground. But that data very much belongs to them. So for us to share data from our suppliers and the public domain isn't really our play. In terms of our direct operations, we have a very small number of directly contracted farmers, and that information also passes through the sustainable tobacco program. And any information through that, we will share through our modern slavery statements, and that will be reported publicly. From a collaboration perspective, this is a really good point as well. And what we've started doing a lot recently is increasing our collaboration. So through the sustainable tobacco program, we are working very closely with a lot of the other manufacturers and with our suppliers. We also are building relationships with the likes of the ECLT, which is eliminate child level in tobacco growing, and various other organizations such as that. That will be the reason we're doing that. We also use third parties to help us really identify what the root causes are. So the way we look at these kind of issues is every country is specific. So we want to make sure when we are looking at issues in that country, our suppliers are focusing on what the priority issues are which we can help them to identify. And thereafter, the third parties that we're using as our peers are doing are really making sure that we're identifying the root causes. Through the partnerships -- the lead partnership projects that we fund, we then go on and support our suppliers through stakeholder management as well to address those root causes in specific countries.

[Operator Instructions] I will hand back to Peter while we wait for further questions.

Great. Thanks, Sharon. Perhaps another 1 in connection with the climate change and our commitment to get to Net Zero, and I'll hand this 1 to you, Tony, if I may. Clearly, this is obviously some ambitious targets set out over a decade. Can you give us a little bit more color around how we expect to get there. And in particular, around Scope 3, which is obviously the kind of obviously outside our control. I can understand how get there with things that were in our control. But how do we get there with the Scope 3 emissions? What's our thinking on that?

Yes, sure. I think in case people didn't notice that 1 of the early actions we took a year ago actually was to bring forward our 2050 ambition for NextEra to 2014 because we really believe that that's possible. And I think that's the first point to make. And then if I start from 2022 and roll out to 2040, picking up the point on supplies last. So -- and Also, when we make these long-term ambitions, you absolutely need short- and medium-term goals along the way to be able to demonstrate progress. So we were really clear that we wanted some 2025 goals because quite frankly, that's just around the corner. And that's why we want to follow the path that many organizations have done and really activate the electricity we spoke about. So by 2025, our grid electricity or from renewable sources. That actually really makes a huge reduction in our CO2 footprint. Actually, more than 2/3. And I think it's a really important point. So a big quick early reduction. By 2030, we also want to get the nonelectrical related emissions. So this is on our sites, it's the gas, it's these were pure and also the fleet. So we've got quite a large fleet as an organization. So that's the transition of those other fossil fuels, and that's quite trippy. But we've got some early signs. Some may have seen that we've got our first net factory in Sweden. We're working hard to plot the pathway for others, but we really believe that 2030 ambition, we're making great progress on. And then, Peter, as you asked, the 2040 is somewhat more complicated, of course, because it's the footprint around us, how Scope 3. So that's basically the upstream and the downstream. So we've made a very encouraging start, I would say, and we use the CDP platform. So many analysts may be aware set organization, but we use the CDP platform because that's where most organizations are reporting by at the moment. So we've engaged with around 100 suppliers who are about 80% of our footprint. Great engagement. Actually, we received an A for our supplier engagement, which we feel very proud of. And that early engagement, as I say, is encouraging. So we're really beginning to have joint discussions and look at where we can see joint value in the exercise we do. So lots and lots to do in the Scope 3. It's everyone's more complicated area. But as I say, 80% is the focus at the moment, a great start, but we certainly won't rest on our levels there.

Great. Thanks, Tony. So I've had a message from Panav at Barclays. He's having trouble to get through on the telephone line. So he's emailed me his question. So perhaps I can ask this question. It's about electronic waste. So it's probably got 2 angles. Maybe, Andy, you can talk about it from a kind of consumer side. And maybe, Tony, you can think about it more from a sort of waste management side. So the question is, in contrast to traditional tobacco products, cigarette cigars, et cetera. The newer generation heated tobacco devices and e-cigarettes are powered by batteries. And sorry, excuse me, second -- and the performance starts to deteriorate clearly after charging cycle, which implies the devices will need to be replaced every 1 -- 1.5 to 2 years. How are you planning to handle the electronic waste side of things? And maybe you can think about it from a consumer education side and maybe from your side from the waste management side?

Yes. So thanks, Paul. Thanks for the question. And clearly, this is something that's top of mind for us as well. We are approaching this through, I'd say, 3 different lenses. The first lens is really answering the question around the material that we use in our products, ensuring that for example, the plastic that we use is recycled or recyclable. And now to that effect by next year, we will be moving to over 2,000 tonnes of plastic recycled plastic in the EU from where we are today. So that's kind of the first area, and we're looking at it across the different types of materials that we have. The second piece is really around process improvements that drive recyclability of things like our farms. Now we have actually been piloting a program in a few markets like Germany and France, where we do have -- we encourage our consumers to return the pods at -- into specific locations. What we have learned, though, is that the return rate is rather low. So what we are doing now, and this goes back to the comment that I made earlier. Effectiveness in this area is going to be through really understanding consumer behavior and by removing barriers to consumption. So consumers, typically we have found will not go out of the way to do things that we just because we want them to do it. So we are now studying consumer journeys through our market pilots to really understand where do they purchase, how do they purchase, where do we do the store. And on the basis of that data, we are now going to be preparing a full-fledged proper recycling plan where we are going to be partnering with whether it's key customers in the market or whether with NGOs who are doing a lot of good work in this space. And the third piece is really around effectively how we are going to be measuring ourselves in this and how we are going to be driving this as we move forward. And this, again, is critical for us because we believe that how in the journey and how we measure ourselves, which stage of how we are tracking the consumer through their lifestyle of usage as well as the product life cycle whereby we are putting in a huge amount of effort from our R&D side in doing what might look very basic, but by improving, for example, the life cycle of our batteries by 50%, you delay and you improve recyclability by a significant amount. So that's where we are putting in a huge amount of effort. And those 3, we believe, is going to be some of the key initiatives. Now the other thing that is important, especially in certain areas such as disposables is consumer education. And we are watching this space very closely. We are also preparing a full-fledged consumer education plan which will be compelling in nature and because that is what is going to ensure consumer compliance. So I hope that answers your question, Panav. We are approaching it at multiple.

Yes. And let me try to answer without repeating too much, actually. So when I talk about life cycle assessment, it's something slightly different to the lifetime of the battery. So what's really important when you consider waste and the real end to end is to take what's called a life cycle approach. And that's really looking from the very start of that, any element, which is in a product to the consumer disposal and for sure, the biggest and most challenging element is the consumer disposal. Now as our NGP business growth, we fully accept the responsibility on us to be able to, as Andy said, educate the consumer, work with our customers and to create an ecosystem where it's I would say, much more friction than us in terms of the consumer wanting to return and understanding the value of returning. The other point I would add is the life cycle assessment exercise, which is a very well-understood exercise by most organizations really gives an output, which in research and development teams are able to assess and they can look at product A versus product B and elements see within those products versus Element B, where they can make a comparison on what the environmental impact maybe how that play through with the changing regulatory environment. And also, again, you'll hear from us how we play that out to the consumer always keeping the consumer first in mind with everything we do. So a very, very complex area. And I think this is 1 where we'll definitely continue to use consumer insights be very data-led and be quite scientific in terms of the end-to-end life cycle assessment.

Great. Thanks, Tony. So an another analyst who's having trouble getting through on the phone. So this is Andrew from UBS. And this is really 1 for you, Andy. The U.K., France and Germany saw a massive rise in disposable e-cigarettes bringing with a very high risk of underage vaping. Should Imperial enter this segment, how would Imperial prevent under -- has using these products in this area?

Thank you, Andrew, and it's a great question. So yes, we have seen that the disposables category within vaping has exploded over the last 12 to 18 months. We are very closely watching this space because it is in this space where responsible marketing becomes supremely important. From our point of view, what we do believe is that there are 2 things. One is unlike the perception, the data that we have gathered around disposable suggests that a bulk of the users are still adults, and many of them are adult smokers who are switching into disposables for specific occasions for us. So that is 1 area that we have definitely identified. Now having said that, as far as use consumption goes, we are putting into place not just on the disposables area, but we have very stringent rules in place with our customers, the key retailers and so on with proper signages. We've got, and I referred to it during my presentation, we have put in place activities such as mystery shoppers to see whether our products are getting sold to under consumers who we are not targeting. And in case we do identify areas where there might be a violation, we do take corrective actions very rapidly. So if we do choose to enter this space, it would be with very clear guidelines, not just from our side in terms of consumer communication but also from our partners like retailers, et cetera, to ensure their compliance.

Great. Thank you. So I don't think there's any sort of further questions at the moment online. In terms of another question I think that people's minds, clearly, given consumer health is 1 for you, Andy. Clearly, given that consumer health is such an obviously important priority for us. Have we considered setting out some sort of targets or some sort of size of our ambition from what we've how big we think this could be as part of our business? And if not, what why not?

Thank you, Peter. This is a question very close to my heart because I think, firstly, we've got to acknowledge the fact that we are definitely behind where we would have liked to be at this point in time. We are behind our competitors. But finally now, that's probably 1 of the reasons why I -- along with many of the senior executives actually joined this company because I think the passion and the intent of this company under senior leadership to create a fully sustainable business, but a sustainable and substantial business for us is extremely strong. So I know that's the reason why I am here. One of the things that we also learned from our past is that we did not want to make commitments with proper quantitative targets before we understood the consumer dynamics as well as the market dynamics inside out. We believe, as I said earlier, there are so many different factors at play to create a successful consumer business around NGP that the approach that we have taken is not just through deep consumer insights work that we are doing, but also through actual pilots where we've got trackers in place to understand consumer trade, shopper dynamics. Now once we do it, we believe that the better metric for us to track would be the how we are going to be getting there to have a clear metric across every step of our consumer journey rather than have a long-term goal, whereby, of course, we have that we all here for that reason. But we would much rather make sure we are measuring progress on this journey and step-by-step, but definitely getting there.

Thanks, Andy. Just in terms of maybe 1 for you, Alison, around culture change. Clearly, we've highlighted culture change is a key enabler for the strategy and also for our ESG delivery. But how we are measuring our progress here is obviously quite a difficult area to have metrics? So how we know how investors know from the outside that we're kind of getting to the right culture in place within the organization?

I mean it's kind of simple answer really is that any cultural activity that you do need to be in pursuit of delivering strategic delivery. So you measure our success in terms of how strategy performance, it's all the external KPIs or indicators of whether or not being successful at all of the rise. What we also do internally is we measure and track our progress. So as I talked about in whether -- there are many things that we've done this year, which has been about engaging our people in the purpose and the vision and the behaviors. And each time we engage with on those events, we've only 9,000 events. By the end of the year, we'll have 20,000 people traded. We ask people, do you understand it, do you believe it engaged with it. And all of our measures, we just continued to post survey. The second our people believe that they are aligned, they understand it and they're enabled. In fact, 1 of the best kind of input measures was 92% of people believe that they understand how they can take their decision and behaviors into their day-to-day activity. So on each initiative, we track it and monitor it where we can pause to act and then ultimately, people can hold us to account in terms of the business growth and the KPI.

Great. Thanks, Alison. And we have another question Panav from Barclays. This is in connection I'll pass this one to you, Tony, if I may. Is there a risk that with the European factories facing sort of gas rationing this winter, first of all, do we have contingencies in place? So not quite an ESG question, but quite a topical question. And could this or other sort of the broader energy crisis have an impact on our ability to reduce emissions over time?

Yes. It's a very topical question, of course. So to answer the first element, do we have contingencies in place yet. We have standby generators. We have some retro fit in on the boilers, for example, so they're able to burn gas alternatives. And of course, you would expect us to do that and to -- then coming to the second part of the question, what are the consequences of that. Quite frankly, gas alternatives are higher in CO2. They are actually more expensive as well. So we have these contingencies in place if we need to activate them, we will because it's a business continuity action. And we will report accordingly on what that means in terms of difference to our CO2 output and energy consumption. And what I would say is that would be, I would hope, a 2023 not beyond action, I think we all hope that. So no significant impact in the mid or long term expected.

Great. Thanks very much. So we have no further questions at this time. So I'm going to hand the call back to Stefan for his closing remarks, if that's okay.

Thank you, Peter. I mean, first, I want to thank you all for your questions and any interest in webinar today. And I also want to say the presenters for their contribution today. I hope that to all of you, the weather now today has demonstrated our commitment as Imperial to the ESG agenda and how it is an integral part of our wider strategy works ambition. And I am clear and we're all aware that some might be skeptical of a tobacco company talking about ESG. However, I feel strongly that we have the opportunity to make a real positive difference to society and to the wider planet. And I would say, in many ways, this is a bigger opportunity in tobacco and in lots of other businesses. And as I shared with you earlier, this is 1 of the things that attracted me to this role that once the [indiscernible] joined Imperial Brand. And I sincerely hope that you, and each 1 of you as investors would also want to be part of this important journey with us, yes? We look forward to providing you with further updates on the progress that we're making in the future, but hopefully, you take away some good messages from today. So thank you again for spending this hour with us. And I say now goodbye to everyone. Thank you.