How Tobacco Companies Are Crushing ESG Ratings

'Women involved in tobacco farming often face structural and cultural barriers,' the tobacco giant Philip Morris wrote in its 2022 ESG report. 'Globally, less than 15 percent of agricultural land is owned by women.'

June 13, 2023

S&P Global made headlines this month when it gave Tesla, the world's largest manufacturer of electric cars, a lower environmental, social, and governance score than Philip Morris International, the maker of Marlboro cigarettes.

The electric car company, whose CEO, Elon Musk, has become a culture-war lightning rod, earned just 37 points on the 100-point scale compared with the cigarette giant's 84.

ESG ratings are supposed to guide investors, and their money, toward ethical enterprises. But Big Tobacco has lapped Tesla in the ESG ratings race more than once: Sustainalytics, a widely used ESG ratings tool, gives Tesla a worse score than Altria, one of the largest tobacco producers in the world. And the London Stock Exchange gives British American Tobacco an ESG score of 94—the third highest of any company on the exchange's top share index—while Tesla earns a middling 65.

How could cigarettes, which kill over eight million people each year, be deemed a more ethical investment than electric cars? It may have something to do with the tobacco industry's embrace of corporate progressivism.

Companies like Altria have gone out of their way to emphasize the diversity of their corporate boards and the breadth of their social justice initiatives, from funding minority businesses to promoting transgender women in sports. But Tesla, whose executives are overwhelmingly white men, has resisted that bandwagon, going so far as to fire its top LGBT diversity officer last year.

The "S" in ESG typically includes diversity programs. Philip Morris International, which in 2021 advertised a partnership with "African data scientists," got a social score of 84 from S&P Global. Tesla got a measly 20.

The contrast highlights the hazards of a movement that lumps pressing health and environmental issues in with ideological fads. Early ESG efforts were laser-focused on "sin stocks"—companies whose core business was deemed immoral—including tobacco. But as ESG investing has ballooned, so has the number of variables used in ESG ratings, which now encompass everything from labor practices and carbon pledges to diversity trainings and human rights. That has created countless opportunities to game the system, experts say, and lets even the most sordid companies score points—and investors—by toeing the progressive line.

"ESG company ratings often measure abstract woke goals that have no rational connection to companies' actual businesses," said Boyden Gray & Associates managing partner Jonathan Berry, who sued NASDAQ last year over its diversity requirements for corporate boards. "Companies score 'points' mainly by demonstrating their compliance with the latest dogmas issued by the DEI complex."

Cigarettes are the leading cause of preventable death in the United States, killing more people than alcohol, illegal drugs, and car accidents combined. And their supply chain involves a litany of environmental sins: The industry's carbon footprint is substantial, and even e-cigarettes, marketed as a less harmful alternative to tobacco, can result in serious pollution because they don't biodegrade. Tobacco farming, which mostly takes place in developing countries, causes deforestation and soil erosion. Tobacco workers are exposed to toxic chemicals, including high doses of nicotine, which can lead to hospitalization.

But ESG ratings often mask those effects. Some scores, including S&P Global's, say in fine print that they are sector-specific, which means companies are held to different standards depending on their industry. An unusually green tobacco giant could score better than an electric carmaker with an all-male board, and corporations can earn points merely by setting water reduction targets or using "diverse" suppliers.

That may be why Philip Morris International, in its 2022 ESG report, bragged about "empowering" female tobacco farmers. "Women involved in tobacco farming often face structural and cultural barriers," the report explained. "Globally, less than 15 percent of agricultural land is owned by women."

This sort of rhetoric permeates Big Tobacco's ESG reports, documents aimed at investors seeking an ethical portfolio. Imperial Brands touts its trainings on "microaggressions" and a board that is 40 percent women. Philip Morris International and British American Tobacco promote their scores on Bloomberg’s Gender Equality Index—Tesla doesn't doesn't participate—which uses self-reported data to track companies' progress toward "equitable inclusion." Altria advertises a granular list of diversity targets, including for "AAPI women." And in 2020, the company's "Corporate Responsibility" report addressed the "pandemic within the pandemic" caused by "systemic racism." It did not mention that smoking, like COVID-19, disproportionately kills black Americans.

The paeans to diversity underscore how tobacco, long considered the quintessential sin stock, could exploit ESG to become a more palatable asset, profiting off the progressivism that has swept through C-suites and corporate boards. Most ESG funds exclude tobacco from their portfolios due to its harmful health effects. But cigarette makers are hoping to change that.

Philip Morris International CEO Jacek Olczak told the Financial Times in May that some ESG asset managers had asked his company, which sold over 600 billion cigarettes last year, for one-on-one meetings, signaling a possible rapprochement with tobacco.

"Asset managers will not spend the time on talking with you," Olczak said, if they don't plan to "reconsider the exclusion" policy.

That détente is largely due to the rise of smoke-free products, which now account for a third of Philip Morris International's revenue. But critics say the ESG movement, and the progressive marketing it encourages, have also played a role in legitimizing the cigarette industry. "Tobacco company ESG reports tend to deceive their primary audience, investors, into thinking that tobacco companies can be 'sustainable,'" the tobacco watchdog STOP wrote in an issue brief last year. "ESG reporting lets tobacco companies promote their corporate social responsibility (CSR) initiatives"—like DEI—"while obscuring the significant health, economic, and environmental damage they cause."

Some rating systems even encourage cigarette makers to market their products to marginalized groups. Altria has a perfect score on the Human Rights Campaign's Corporate Equality Index—a metric rumored to be behind the disastrous LGBT marketing campaigns at Target and Bud Light—which lets companies earn points by "advertising to LGBTQ consumers."

In California, tobacco kills almost as many gay and bisexual men as AIDS. LGBT youth nationwide are over twice as likely to smoke as their straight counterparts, and transgender adults smoke at three times the rate of the general public.

Altria said in a statement that it does not do "targeted advertising to the LGBTQ+ community" and that it earned its perfect score through other initiatives. Philip Morris International did not respond to a request for comment.

While the ESG juggernaut is relatively new, tobacco's corporate progressivism is not. When Philip Morris began advertising in gay periodicals in the 1990s, it dismissed critics of the move as bigots opposed to "inclusion." By the early 2000s, the company was using "Corporate Social Responsibility," the precursor to ESG, as a prophylaxis against lawsuits, according to a memo from Philip Morris's then-general counsel Steve Parrish.

"That will reduce the risks of lawsuits and improve our standing, when we are sued, as a 'responsible corporation,'" Parrish wrote to company executives in the 2000 memo, which was made public around that time in the course of litigation. "Otherwise, we will stand out as a target."

ESG ratings likely serve a similar purpose today, said Todd Henderson, a professor of law and economics at the University of Chicago. By performing well on them, tobacco companies can placate regulators and investors who think the "smoke-free future," as Philip Morris International calls it, is taking too long to materialize.

"A bad ESG score announces to the world you're a troglodyte," Henderson said. "That could be an invitation for socially conscious shareholders to seek board seats or oust a CEO."

BlackRock, State Street, and Vanguard joined forces in 2021 to oust three ExxonMobil board directors who were out of step with the investors' climate priorities. All three firms own sizable stakes in cigarette companies, albeit not through ESG funds, giving them a considerable number of proxy votes. Tobacco's talk about social justice, Henderson said, may be a ploy to avoid Exxon's fate.

All this feeds into a larger critique that the ESG movement turns investors and rating agencies into de facto philosopher kings, weighing different and sometimes incommensurable values against each other. "You have to measure the goodness of women on corporate boards and compare it to the badness of killing people," Henderson said. "That's really a question for Plato."

The clash of values, he added, is one reason ESG scores vary significantly across different rating agencies, which means companies like Altria can usually find at least one good number to show investors. And it explains how even an electric car company can wind up with the short end of the stick.

To wit: Chevron, long a target for climate activists, edged out Tesla in the S&P's latest ESG ratings. It earned a lower environmental score than the automaker but scored over twice as high as Musk's company on social issues, where the oil titan has flexed its marketing muscle. Chevron's 2022 "sustainability" report boasts that the "first woman offshore platform engineer in Israel was employed by our operations."

Thomas McKenna contributed to this report.

Update, 12:32 p.m.: An earlier version of this story incorrectly stated that Philip Morris sold six billion cigarettes last year. The correct number is 600 billion.