What is the future of Western oil majors as they battle increased scrutiny from socially activist investors, citizens, and governments? My suggestion is that they learn from the practices of Philip Morris International (PMI), the tobacco giant. PMI’s 2020 sustainability report states that “more than one billion people worldwide…and around the same number will smoke in 2025.” The report goes on to say that the addressable market of 1 billion customers worldwide has stayed constant since 2010. The World Health Organization projects this to be constant for at least another five years because nicotine is a highly addictive substance. Similarly, oil has similarly addicted customers. Despite all the promise of renewables, we have not managed yet to reduce the demand for oil. 

Tobacco worldwide is dominated by five listed companies: Altria, British American Tobacco (BAT), Imperial Tobacco (IMP), Japan Tobacco (JT), and PMI. The biggest player is the state-owned China National Tobacco Corporation (CNTC). CNTC has a market share of 46% and PMI of 14%, the largest of the listed companies. Also important is Indian Tobacco Company (ITC) which is 30 percent owned by BAT. In the world of oil, akin to CNTC, state owned enterprises (SOEs) or quasi-SOEs such as Aramco of Saudi Arabia and Rosneft of Russia produce around 50% of the world’s oil. However, we have hundreds of Western oil companies in business now. My guess is that we are likely to witness consolidation in this group or purchases by private buyers, such as private equity firms. The oil SOEs are generally untouchable. Roughly 60% of PMI’s 2020 revenues are collected by the Government as excise taxes ($47 billion of $76 billion). Appropriate carbon taxes, if implemented, would also account for a large proportion of the revenue of Western oil majors in the next decade or so.

So, if you are Chevron and you could peek into a crystal ball, what does the future hold? Is there a managerial playbook for how to transform yourself and still be a relevant, thriving viable company over the coming decades? I do not mean to minimize the differences between oil and tobacco. Cheap oil has transformed lives, especially in the developing world, for the better. Without cheap oil, China and India would not have been able to lift millions out of poverty. But I am deeply concerned that 13 of the top 15 most polluted cities in the world are from India, where I am writing this from.

Many, if not most, of Western asset managers bucket tobacco and oil under the “excluded” category without fully appreciating nuances in companies within oil or tobacco. If I were the CEO of one of the large Western majors, I would study PMI’s transformation closely. In this piece, I contrast the practices of PMI with that of Chevron as a counter-example.

But before doing so, let me be clear. Putting aside the addictive pleasure people derive from smoking, cigarettes damage health and cause many deaths every year. Hence, one could argue there’s little good that can be said about the cigarette business. And while PMI is executing the major business transformation I describe below, it still sells hundreds of millions of cigarettes every year. My intention is to draw managerial lessons for oil from tobacco and provoke a deeper conversation about business transformation, as opposed to endorsing or criticizing either the tobacco or the oil business.

Prepare for a scenario where your main product is completely phased out

PMI’s competitors focus on expanding their portfolios and offering more choice to their customers. PMI, in contrast, aims to switch out of cigarettes completely, by offering both choice and better alternatives to customers via heated tobacco products branded as IQOS. It has set a target of booking more than 50 percent of its revenues coming from reduced risk products (RRPs) by 2025, thereby dramatically cannibalizing its cigarette business. Remarkably, New Zealand has banned the sale of cigarettes to anyone born after 2008. PMI is well positioned to exploit that ban. I am not suggesting that the sale of oil will ever be banned but PMI’s business transformation is worth understanding. Chevron’s 2020 sustainability report talks a lot about general trends in the oil market but has little by way of strategy for how to deal with the sunsetting of oil in the future.

View sustainability as an opportunity for innovation and publish a scorecard of business transformation metrics

Many oil majors consider sustainability as an externally imposed development that they have to deal with. Instead, disrupt the business from the inside and view sustainability as a way to differentiate yourself from the competition. This is more than empty sloganeering. PMI publishes goals and metrics related to (i) the number of adult users that have switched to IQOS; (ii) the number of markets where IQOS is sold; (iii) proportion of revenue from smoke free products (a sizeable 24%); (iv) proportion of R&D devoted to smoke-free products (99%!) apart from the traditional sustainability metrics such as (i) the number of IQOS devices recycled (84%); (ii) reduction in scope 1+2+3 emissions; (iii) supply chain practices; and (iv) not marketing to youth. The competition, by and large, continues to focus on traditional cigarettes and is likely to be not ready for an outright ban on cigarette sales that may be on the horizon, if New Zealand is an early indicator.

To transform itself, a business must conduct a holistic review and overhaul its business model to include extensive changes in the firm’s operations and value chain and the way the firm interacts with society. This is captured in PMI’s “Statement of Purpose” signed by every member of its board of directors. I do not know of any U.S. company that has done so, including all the signatories to the Business Roundtable’s “Statement of the Purpose of a Corporation” which I’ve written about before. My analysis with Aneesh Raghunandan suggests that the BRT signature is more greenwashing than substantive.

I do not get the impression that Chevron has thought seriously about sustainability as integral to its corporate purpose. Their sustainability report talks about investing $3 billion by 2028 to advance their energy-transition strategy. That number is 2.5% of $15 billion annual capex spending extrapolated to 2028 ($3/($15*8 years). Chevron seems to have targets for zero flaring by 2030. These are relatively low hanging fruit in oil and gas whereas a well-defined net zero aspiration is much harder. Chevron’s definition of net zero would only cover scope 1 and 2 emissions only, not scope 3, in any case. Moreover, Chevron’s targets seem to be anchored on emissions per barrel (intensity measure) as opposed to total emissions.

Make the Chief Sustainability Officer (CSO) report to the CFO

One of my simple litmus tests aimed at assessing whether a firm is serious about sustainability is to check who the CSO reports to. In PMI, the CSO, Jennifer Motles, reports to the CFO, Emmanuel Babeau. This enables better integration of ESG drivers into business strategy and hence mutually reinforces the link between financial performance and sustainability. It also serves to have the same high quality internal control and measurement systems for sustainability reporting as for financial reporting. Chevron has appointed a vice president of strategy and sustainability but he appears to report to the president of Chevron North America Exploration and Production.

Embed sustainability priorities in executive accountability

Viewing sustainability as central to business strategy makes it easier to integrate sustainability drivers into executive compensation goals. I have written about half-hearted or non-existent integration of ESG drivers in compensation plans earlier. PMI links executive compensation to at least two sustainability metrics: (i) revenues from business transformation related to net revenues of smoke-free products; and (ii) non-combustible product volume. Chevron’s 2020 proxy statement links executive pay to reductions of flaring and methane intensity, which are great initial steps, but the targets could become much more aggressive.

Cultivate a culture that welcomes not rebuffs challenge

The CEO of PMI, Jacek Olczak, states “I cordially invite you to question, to challenge, and above all to engage with us as we remain focused on making our company one that is centered on sustainability and a higher purpose.” I have not seen or heard of such a culture among the oil majors, except perhaps a bit for Exxon after the Engine no.1 initiative.

Gather and publish data on the whole value chain

PMI’s business transformation is based on an in-depth understanding of the global tobacco and nicotine value chain. Seventy thousand data points on this chain are published in their Tobacco and Nicotine database and covers information on number of farms, volume of cigarettes manufactured, and government revenues from excise for over nine years. I have never seen anything similar in the world of oil and gas.

Make multi-stakeholder engagement the norm

Business transformation depends on the cooperation of stakeholders- from supply chain to regulators, consumers, employees, investors and the finance community, and civil society. In each case, explain why you engage, how you engage and what are the key issues that are discussed. PMI does this well, but I have not seen something similar in oil and gas.

Don’t shy away from negative externalities imposed by the firm

Most oil majors barely engage with “single materiality” issues or sustainability factors that are important for enterprise value creation for investors. “Double materiality” refers to risks and opportunities material from a financial and non-financial perspective especially, negative and positive externalities created by the firm for which the market does not hold the company accountable. PMI advocates for adding “P” (the impact of the product) to ESG, an aspect that ESG ratings ignore. I have written about this in the case of Cola Cola. PMI, perhaps on account of Big Tobacco’s long history with regulators and lawsuits, has been far more pro-active in dealing with health related problems created by the burning of tobacco when smoking a cigarette. Oil and gas could do far more.

In sum, if sustainability is truly imbedded in corporate purpose, strategy and implementation is better integrated with all aspects of business. If sustainability is viewed as a value imposed by activist investors or outsiders, as seen by most of the oil and gas industry, a company’s ESG efforts will always come across as disjointed and sometimes aimed at spin or even greenwashing. The oil and gas majors would do well to understand how PMI has been transforming itself over the last decade or so.

As a business school professor, I am always drawn to managerial lessons one can glean from companies that have battled a similar crisis before. Tobacco, to some extent, has been there and done that. Oil would do well to learn from Tobacco.

This article is also published on Forbes. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.