British American Tobacco (BTI) Risk Analysis

Description The tobacco and nicotine industry is one of the most highly regulated in the world, with manufacturers required to comply with a variety of different regulatory regimes across the globe. Most of these regulations, whether already in place or proposed, can be categorised as follows:– Category bans: Prohibitions on the sale, import, possession, or use of specific products, including New Categories;– Product Regulations: On use of ingredients, product design and attributes (e.g. nicotine strength or flavours), as well as product safety standards and product disclosure requirements;– Packaging and labelling: Requirements for health warnings and other government-mandated messages to be printed on packaging, as well as requirements around pack shape, size, weight and colour, plain packaging requirements or markings required for single-use plastics;– Advertising and sponsorship: Partial or total bans on advertising, promotions and sponsorships for products, as well as brand stretching (the association between a tobacco and a non-tobacco product by using tobacco branding on the non-tobacco product);– Retail: Restrictions on where tobacco and non-tobacco nicotine products can be sold, such as the types of outlets (e.g. supermarkets and vending machines), restrictions on how they can be sold (e.g. above-the-counter versus beneath, or online), and restrictions on adult purchase;– Place: Bans on smoking or vaping in certain places;– Price: Regulations which affect prices of tobacco and non-tobacco nicotine products, such as excise taxes and minimum pricing;– Responsibility: Obligations under Extended Producer Responsibility schemes (e.g. cigarette waste clean-up) and measures to combat illicit trade. On top of legal requirements the Group also operates a number of global policies which may impose additional obligations or standards beyond those required by local regulatory regimes. The Group recognises and supports the objectives of governments and policymakers in reducing smoking rates and the associated health impacts, as well as the role of regulation in achieving these goals. Accordingly, we endorse tobacco and nicotine regulations that are grounded in robust evidence, tailored to local circumstances, effectively achieve intended policy objectives, and avoid unintended consequences, such as the expansion of illegal markets. However, there is a risk that in some areas, the evolving regulatory environment may not follow these principles due to several key factors:– Irresponsible behaviour or marketing practices by competitors, particularly in markets where appropriate regulation is lacking, or actions that violate existing regulations, may cause reputational harm to the industry as a whole and result in disproportionate regulation or bans.– Pressure on governments from international organisations, agencies, tobacco control NGOs, influential national regulators, and the private sector—including philanthropists, pharmaceutical companies, security technology firms, and social justice groups—may drive the pursuit of regulatory policies intended to harm the tobacco and nicotine industry.– Regulators may also have a limited understanding of New Category products and their potential role in tobacco harm reduction. Concerns about underage access and the environmental impact of these products can further increase the risk of inappropriate regulation. From a compliance perspective, the Group may also fail to implement the appropriate level of control measures or maintain adequate compliance standards with regulatory requirements. For example, the Group’s marketing activities may not fully comply with relevant laws, regulations, or the Group’s Responsible Marketing Framework. Inadequate information, instruction, and training in relevant areas, along with a lack of awareness or understanding of applicable regulations—including those not just related to tobacco and nicotine but also to batteries or environmental regulations—may further increase these risks. Additionally, failure to monitor, assess, and implement new or updated regulatory requirements could exacerbate compliance challenges. Finally, there may also be negative and disproportionate societal reactions to consumer misuse or abuse of tobacco and/or nicotine products, particularly in New Categories, or toward certain product types. Combustible Products With respect to combustible tobacco products, many of the measures outlined in the Framework Convention on Tobacco Control (FCTC) have been or are in the process of being implemented through national legislation in many markets in which the Group operates, including some of the non-legally binding recommendations (e.g. plain packaging and flavour bans). In November, the eleventh Conference of the Parties to the Framework Convention on Tobacco Control (COP11) will take place in Geneva, and part of the discussions will focus on analysing forward-looking tobacco control measures beyond the current scope of the FCTC. In the U.S., the Food and Drug Administration (FDA) announced its intention to ban menthol as a characterising flavour in cigarettes. The Biden Administration’s Fall 2023 Unified Agenda anticipated issuance in March 2024 of a final rule to ban menthol as a characterising flavour in cigarettes; however, in April 2024 the Biden Administration indicated that a final rule would take significantly more time. The new Trump Administration has withdrawn the rule from the Office of Management and Budget and it is currently held pending the new administration’s reconsideration of regulations advanced by Biden. Further, the FDA may seek to require the reduction of nicotine levels in tobacco products. On 15 January 2025, in the final days of the outgoing Biden Administration, the FDA issued a proposed product standard whereby the agency would limit nicotine level in cigarettes following a two-year effective date from publication of any final rule. The proposed rule is currently subject to public comment, but may be de-prioritised by the new Trump Administration as it considers all proposed regulations advanced by the Biden Administration. Thus, it is not known whether or when this proposed rule will be finalised, and if adopted, whether the final rule will be the same or similar as the proposed rule. Traditional vanguard countries on tobacco control efforts, such as the UK, Australia, Norway, and the Netherlands, continue to push the boundaries of tobacco regulation by exploring extreme measures like generational sales bans (GSB)—which would prohibit anyone born after a certain date from purchasing tobacco products. This concept was initially proposed in New Zealand but later dismissed. There is a risk that such regulations could also extend to New Category products. In the UK, for instance, the Labour Government's legislative agenda includes plans to introduce a bill that would implement a GSB for both cigarettes and tobacco heated products (THPs). Separately, the Intergovernmental Negotiation Committee (INC) on Plastic Pollution, mandated by the UN Environment Assembly, has been tasked with developing an international legally binding treaty to combat plastic pollution. The fifth session of the Intergovernmental Negotiation Committee (INC5) concluded on 1 December 2024 without countries reaching a consensus on the text. Countries agreed to adjourn negotiations to a later date, expected during 2025. While cigarette filters made of plastic remain referenced in a list of products to be made subject to eventual elimination in a proposed annex, single-use plastic vapour products – proposed as an addition by some countries are absent from the current text that will be discussed. Finally, preparations for a revised EU Tobacco Products Directive (TPD) are progressing. If an updated version (TPDs) is initiated, it is anticipated that the regulations under discussion will consider measures such as plain packaging for combustible products and/or stricter regulation of ingredients in tobacco and nicotine products, including Modern Oral (MO), which today is not included in TPD2. Smokeless Products (including New Categories) Progressive regulations, including forward-thinking policies for Smokeless products, are essential to build a smokeless world and deliver governments’ smoke free ambitions. The Group believes that the development of regulations for Smokeless products should follow the below principles:– Be based on science and evidence and proportionate to the product's risks compared with those of combustible tobacco;– Facilitate adult awareness of smokeless alternatives and allowing adult-only access;– Ensure product quality, environmental sustainability, and consumer relevance;– Enable effective enforcement. From a global perspective, regulation is still evolving and frameworks for regulation vary from country to country. While some regulators have implemented progressive regulations aligned with the previously described principles, others are considering applying the same regulatory frameworks used for traditional tobacco products. Some jurisdictions have banned or are contemplating banning flavours (e.g., flavours banned since May 2020 in the EU, extended to HP in 2023) or imposing unsatisfying nicotine limits, or directly banning certain product categories (e.g. MO in Belgium). The primary drivers behind many regulatory proposals targeting New Categories continue to be preventing youth appeal and addressing environmental issues. These concerns are made explicit in the reasoning justifying many legislative efforts to ban flavours in vapour products and, more recently, to ban disposables. Such regulatory proposals are particularly prevalent across Europe. Regarding the USA, and considering the risks associated with the FDA process, on 12 October 2021, the FDA issued its first Marketing Granted Orders (MGOs) for tobacco-flavoured Vuse Solo and Vuse Solo power units. On the same date, Reynolds American companies received Marketing Denial Orders (MDOs) for the flavoured (non-menthol and non-tobacco) Vuse Solo products. R. J. Reynolds Vapour Company has since filed an appeal against these MDOs, which remains pending. While a series of MGOs for tobacco-flavoured products have been granted, including recent MGOs for Vuse Alto “Golden” and “Rich” tobacco-flavoured vapour products, MDOs have also been issued (and may be issued in the future) for non-tobacco flavoured products, reflecting the risks associated with products that contain flavours outside of tobacco, which are currently subject to court challenges. In the specific case of Modern Oral products, the Group's Velo and Grizzly synthetic pouch products remain available in the USA, subject to FDA enforcement policies, and there can be no assurance that these products’ pending marketing authorisations will be granted or FDA’s enforcement policies will remain unchanged. If the FDA denies a marketing authorisation or takes enforcement action, the relevant product(s) would need to be withdrawn from the market unless a court or the FDA intervenes. Beyond the different market approaches toward the regulation of Smokeless products, the lack of harmonisation between markets also presents a risk in the New Categories space. The harmonisation of standards and a consensus behind certain regulatory measures will be critical from a business perspective, ensuring a more predictable and efficient operating environment. Beyond Nicotine As the Group also looks to Beyond Nicotine products including CBD and cannabis (in connection with its investments in Organigram, Sanity Group and Charlotte's Web), it may be subject to additional regulation and these products might not be scalable on a global basis given varying degree of regulation. Impact Extreme regulatory measures, impacting one or more New Categories (Smokeless) and/or combustible tobacco products and/or Beyond Nicotine products, could adversely affect volume, revenue and profits, as a result of: restrictions on the Group’s ability to sell and differentiate its products or brands, leverage price, innovate, make scientific claims, and make new market entries. In addition, new regulations and lack of standards harmonisation among markets could lead to greater complexity, as well as higher production and compliance costs. As an example, through the acquisition of Reynolds American Inc., the Group acquired the Newport brand, the leading menthol cigarette brand in the U.S., the Group’s largest single market. The sales of Newport, together with the other menthol brands of the Group’s operating subsidiaries, represent a significant portion of the Group’s total net sales. Any action by the FDA or any other governmental authority, including states and localities, banning or materially restricting the use of menthol in tobacco products (such as the proposed FDA ban on menthol cigarettes) could have a significant negative impact on sales volumes which would, in turn, have an adverse effect on the results of operations and financial position of the Group. Disproportionate regulation of Smokeless products could significantly hinder our ability to deliver on our mission of Building a Smokeless World as part of our transformative journey. Full category bans or regulations that jeopardise consumer acceptance would have a significant impact on the Group's strategy for Smokeless products. These measures could both feed the illegal market (such as in the case of the increase in illicit single-use vapour devices in the U.S. market) and undermine our ability to compete and develop our products profitably while encouraging consumers to switch. As BAT always complies with regulations, such disproportionate regulation that lacks robust enforcement measures reduces BAT’s ability to compete on equal terms with less responsible industry actors, who disregard or deliberately don’t comply with local law and regulations. California’s 2022 flavour ban on all tobacco and nicotine products disrupted the market along with discouraging adult combustible consumers from switching to reduced-risk New Categories. Without heightened enforcement, illegal flavoured products will remain, and the ban has not reduced FMC prevalence among youth and adults. Key findings from the 2022 Online CA Adult Tobacco Survey, CA Tobacco Prevention Programme, updated for 2024, showed that the adult smoking prevalence in California pre-ban was 6.6% compared to post-ban 7.1% in 2023. Although a visible increase in the prevalence and even though the data is not likely to be statistically significant, it is clear that no decrease of the adult smoking prevalence has occurred following the introduction of the ban in 2022. There is a risk that environmental and sustainability regulations, such as Extended Producer Responsibility (EPR) schemes for cigarette manufacturers, will continue to impact New Category products, especially if the EU EPR schemes for New Category products are picked up by more countries outside of EU, Disproportionate regulation of our combustible products not only impacts our ability to execute the Group strategy for these products, but also influences investor sentiment in the sector and the residual value of the Company. Emerging issues such as filter bans, mandatory limits on nicotine products, and generational sales bans can significantly affect both our current business operations and future expectations. As a reflection of the real or perceived impact of stricter regulation of our business, the Group's share price has also experienced, and could in the future experience, shocks upon the announcement, expectation or enactment of restrictive regulation. All these effects may have an adverse effect on the Group's results of operations and financial conditions and cause the Group to fail to deliver on its strategic growth plans. Finally, and considering the significant number of regulations that may apply to the Group’s businesses across the world, the Group is and may in the future be subject to claims for breach of such regulations. Government authorities (such as the FDA), organisations or even individuals may allege that our marketing activities do not comply with the relevant laws and regulations, or with our Responsible Marketing Framework. As such, the Group could be subject to liability and costs associated with civil and criminal actions as well as regulatory sanctions, fines and penalties brought in connection with these allegations. Even when proven untrue, there are often financial costs and reputational impacts in defending against such claims and allegations, including potential adverse impact on the treatment by the FDA of the Group ‘s PMTAs in the U.S. Each of these results may in turn have an adverse effect on the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic growth plans.