# Our

# purpose is

to

# reduce

 the

# health impact

# of our business

# by offering a

# greater choice

of enjoyable and

# less

# risky

\*†

# products



# for our consumers.

We are clear that combustible cigarettes pose serious

health risks. The only way to avoid these risks is not to

start or to quit. However, we encourage those who would

otherwise continue to smoke to switch completely to

scientifically-substantiated, reduced-risk alternatives.\*†

To deliver this, BAT is transforming into a truly

multi-category consumer products business, with a

mission to stimulate the senses of new adult generations.

### ESG Front and Centre

Our corporate purpose puts ESG front and centre, with a principal focus on reducing

the health impact of our global business in order to build A Better TomorrowTM. In 2022,

we conducted a Double Materiality Assessment ahead of EU regulatory changes on

sustainability reporting. Our new Combined Annual and ESG Report integrates our

business and sustainability strategy like never before and is designed to provide

stakeholders with a more holistic view of our approach. For more details, see page [27](#id739eb8a094346e4a1dd9989c862058f_7764).

This Report is prepared with reference to current and future sustainability reporting requirements and frameworks, including:

–UK Taskforce on Climate-related Financial Disclosures (TCFD)

–EU Sustainable Finance Disclosure Regulation (SFDR)

–EU Sustainability Reporting Standards (ESRS) of the EU Corporate Sustainability Reporting Directive (CSRD)

–Global Reporting Initiative (GRI)

–Sustainable Accounting Standards Board (SASB)

–Sustainable Development Goals (SDGs)

For more information, please visit bat.com/sustainabilityreporting

Notes:

BAT’s New Category products are not smoking cessation devices and are not marketed for that purpose.

\*Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

†Our vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products, including Velo, Grizzly, Kodiak, and Camel Snus, which are sold in the U.S., are subject

to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

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|  |  |  |  |  |  |
| Strategic Report | |  |  |  | [Governance](#id739eb8a094346e4a1dd9989c862058f_8604) |

Overview

[Chair’s Introduction](#id739eb8a094346e4a1dd9989c862058f_5481) .................................…........... [3](#id739eb8a094346e4a1dd9989c862058f_5481)

[Chief Executive’s Review](#id739eb8a094346e4a1dd9989c862058f_5736) ................................…. [5](#id739eb8a094346e4a1dd9989c862058f_5736)

Our ESG Roadmap .............................................…. [7](#id739eb8a094346e4a1dd9989c862058f_15378)

[Our Year in Numbers](#id739eb8a094346e4a1dd9989c862058f_6649) ........................................…. [8](#id739eb8a094346e4a1dd9989c862058f_6649)

[Finance](#id739eb8a094346e4a1dd9989c862058f_6535) [and](#id739eb8a094346e4a1dd9989c862058f_6535) [Transformation](#id739eb8a094346e4a1dd9989c862058f_6535)

[Director’](#id739eb8a094346e4a1dd9989c862058f_6535)[s](#id739eb8a094346e4a1dd9989c862058f_6535)[Overview](#id739eb8a094346e4a1dd9989c862058f_6535) .............................................. [9](#id739eb8a094346e4a1dd9989c862058f_6535)

[Investment Case](#id739eb8a094346e4a1dd9989c862058f_6665) ...............................................…. [11](#id739eb8a094346e4a1dd9989c862058f_6665)

[Strategic Management](#id739eb8a094346e4a1dd9989c862058f_6844)

[Our Global Business](#id739eb8a094346e4a1dd9989c862058f_6774) ............................................ [13](#id739eb8a094346e4a1dd9989c862058f_6774)

[Our Consumer-Centric](#id739eb8a094346e4a1dd9989c862058f_6792)

[Multi-Category Portfolio](#id739eb8a094346e4a1dd9989c862058f_6792) ...............................… [15](#id739eb8a094346e4a1dd9989c862058f_6792)

[Our Business Model](#id739eb8a094346e4a1dd9989c862058f_6906) ........................................…. [17](#id739eb8a094346e4a1dd9989c862058f_6906)

[Non-Financial Information](#id739eb8a094346e4a1dd9989c862058f_7047)

[Statement](#id739eb8a094346e4a1dd9989c862058f_7047) .............................................................…. [19](#id739eb8a094346e4a1dd9989c862058f_7047)

[Engaging with Our Stakeholders](#id739eb8a094346e4a1dd9989c862058f_6183)..............…. [21](#id739eb8a094346e4a1dd9989c862058f_6183)

[Our Markets and Megatrends](#id739eb8a094346e4a1dd9989c862058f_6168) ..................…. [23](#id739eb8a094346e4a1dd9989c862058f_6168)

[A Strategy for Accelerated Growth](#id739eb8a094346e4a1dd9989c862058f_7481) ...........[25](#id739eb8a094346e4a1dd9989c862058f_7481)

Integrating Sustainability for

A Better TomorrowTM ....................................….[27](#id739eb8a094346e4a1dd9989c862058f_7764)

QUEST: [Simplify the Business](#id739eb8a094346e4a1dd9989c862058f_5852) ..................…. [29](#id739eb8a094346e4a1dd9989c862058f_5852)

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|  | Explore the story of our year  Featuring downloadable versions of this and  previous reports, as well as other content –  all accessible on desktop, tablet and mobile.  www.bat.com/reporting |

[A Better Tomorrow™](#id739eb8a094346e4a1dd9989c862058f_5758)

[For Consumers](#id739eb8a094346e4a1dd9989c862058f_8228) .....................................….. [31](#id739eb8a094346e4a1dd9989c862058f_8228)

[Our Vapour Products](#id739eb8a094346e4a1dd9989c862058f_5896) ..................................…...  [33](#id739eb8a094346e4a1dd9989c862058f_5896)

[Our Tobacco Heating Products](#id739eb8a094346e4a1dd9989c862058f_8732) ...............…. [35](#id739eb8a094346e4a1dd9989c862058f_8732)

[Our Modern Oral Products](#id739eb8a094346e4a1dd9989c862058f_8965) .........................….[37](#id739eb8a094346e4a1dd9989c862058f_8965)

[Our Traditional Oral Products](#id739eb8a094346e4a1dd9989c862058f_9424) .................…...[39](#id739eb8a094346e4a1dd9989c862058f_9424)

[Our Combustible Products](#id739eb8a094346e4a1dd9989c862058f_9443) ........................…..[40](#id739eb8a094346e4a1dd9989c862058f_9443)

[Beyond Nicotine](#id739eb8a094346e4a1dd9989c862058f_9462) ................................................…  [42](#id739eb8a094346e4a1dd9989c862058f_9462)

[For Society and the Environment](#id739eb8a094346e4a1dd9989c862058f_8800) .….....  [43](#id739eb8a094346e4a1dd9989c862058f_8800)

[ESG Front and Centre](#id739eb8a094346e4a1dd9989c862058f_9481) ...................................…  [45](#id739eb8a094346e4a1dd9989c862058f_9481)

[ESG Framework](#id739eb8a094346e4a1dd9989c862058f_9518) ................................................…  [46](#id739eb8a094346e4a1dd9989c862058f_9518)

Double Materiality Assessment ..............…  [47](#id739eb8a094346e4a1dd9989c862058f_15528)

SDG Mapping of Our Material

Sustainability Topics ..................….................... [50](#id739eb8a094346e4a1dd9989c862058f_17209)

Strategic Management: Our Material

Topics .....................................…................................  [51](#id739eb8a094346e4a1dd9989c862058f_15538)

[TCFD Reporting](#id739eb8a094346e4a1dd9989c862058f_9626) ................................................…  [71](#id739eb8a094346e4a1dd9989c862058f_9626)

[For Employees](#id739eb8a094346e4a1dd9989c862058f_8819) ...........................................  [83](#id739eb8a094346e4a1dd9989c862058f_8819)

People, Diversity and Culture ....................…  [85](#id739eb8a094346e4a1dd9989c862058f_9644)

Health and Safety ............................................…  [93](#id739eb8a094346e4a1dd9989c862058f_16730)

ESG Limited Assurance Report...................[96](#id739eb8a094346e4a1dd9989c862058f_20797)

[For Shareholders and Investors](#id739eb8a094346e4a1dd9989c862058f_8837) ..........  [97](#id739eb8a094346e4a1dd9989c862058f_8837)

[Financial Performance Summary](#id739eb8a094346e4a1dd9989c862058f_9681) ..........…  [99](#id739eb8a094346e4a1dd9989c862058f_9681)

[Treasury and Cash Flow](#id739eb8a094346e4a1dd9989c862058f_9700) .............................…  [105](#id739eb8a094346e4a1dd9989c862058f_9700)

[Other](#id739eb8a094346e4a1dd9989c862058f_9718) .....................................................................…  [107](#id739eb8a094346e4a1dd9989c862058f_9718)

[Regional Review](#id739eb8a094346e4a1dd9989c862058f_9736) ..............................................…  [109](#id739eb8a094346e4a1dd9989c862058f_9736)

[Business Environment](#id739eb8a094346e4a1dd9989c862058f_8856)

[Group Principal Risks](#id739eb8a094346e4a1dd9989c862058f_8875) ....................................…  [117](#id739eb8a094346e4a1dd9989c862058f_8875)

[Directors’ Report](#id739eb8a094346e4a1dd9989c862058f_8898)

[Chair’s Introduction](#id739eb8a094346e4a1dd9989c862058f_8918)

[on Governance](#id739eb8a094346e4a1dd9989c862058f_8918) ....................................................[123](#id739eb8a094346e4a1dd9989c862058f_8918)

[Board of Directors](#id739eb8a094346e4a1dd9989c862058f_9915) ............................................. [125](#id739eb8a094346e4a1dd9989c862058f_9915)

[Management Board](#id739eb8a094346e4a1dd9989c862058f_9933) ......................................…[129](#id739eb8a094346e4a1dd9989c862058f_9933)

[Governance Framework](#id739eb8a094346e4a1dd9989c862058f_10023) ............................…[131](#id739eb8a094346e4a1dd9989c862058f_10023)

[Leadership Overview](#id739eb8a094346e4a1dd9989c862058f_9951) ...................................…[132](#id739eb8a094346e4a1dd9989c862058f_9951)

[Cultural Oversight](#id739eb8a094346e4a1dd9989c862058f_14254) .........................................…[133](#id739eb8a094346e4a1dd9989c862058f_14254)

[Principal Decisions Made](#id739eb8a094346e4a1dd9989c862058f_10005)

[by the Board](#id739eb8a094346e4a1dd9989c862058f_10005) ..........................................................[134](#id739eb8a094346e4a1dd9989c862058f_10005)

[Board Activities in](#id739eb8a094346e4a1dd9989c862058f_9969) 2022 ..................................[135](#id739eb8a094346e4a1dd9989c862058f_9969)

[Board Engagement](#id739eb8a094346e4a1dd9989c862058f_9987)

[with Stakeholders](#id739eb8a094346e4a1dd9989c862058f_9987) ..............................................[137](#id739eb8a094346e4a1dd9989c862058f_9987)

[Division of Responsibilities](#id739eb8a094346e4a1dd9989c862058f_10074) ........................…[142](#id739eb8a094346e4a1dd9989c862058f_10074)

[Board Effectiveness](#id739eb8a094346e4a1dd9989c862058f_10092) .........................................[144](#id739eb8a094346e4a1dd9989c862058f_10092)

[Nominations Committee](#id739eb8a094346e4a1dd9989c862058f_10110) ..............................[146](#id739eb8a094346e4a1dd9989c862058f_10110)

[Audit Committee](#id739eb8a094346e4a1dd9989c862058f_10128) ............................................… [151](#id739eb8a094346e4a1dd9989c862058f_10128)

[Remuneration Report](#id739eb8a094346e4a1dd9989c862058f_2192)

[Annual Statement on Remuneration](#id739eb8a094346e4a1dd9989c862058f_8489) ......[160](#id739eb8a094346e4a1dd9989c862058f_8489)

[Responsibility of Directors](#id739eb8a094346e4a1dd9989c862058f_9334)[@](#id739eb8a094346e4a1dd9989c862058f_9334) .........................182

|  |
| --- |
|  |
| Financial Statements |

[Group Financial Statements](#id739eb8a094346e4a1dd9989c862058f_1068)

[Independent Auditor’s Report](#id739eb8a094346e4a1dd9989c862058f_8568)[@](#id739eb8a094346e4a1dd9989c862058f_8568) ...........…...[183](#id739eb8a094346e4a1dd9989c862058f_8568)

Group Companies and Undertakings .....302

[Parent Company](#id739eb8a094346e4a1dd9989c862058f_8647)

[Financial Statements](#id739eb8a094346e4a1dd9989c862058f_8647)[@](#id739eb8a094346e4a1dd9989c862058f_8647) ...........................….......[312](#id739eb8a094346e4a1dd9989c862058f_8647)

|  |
| --- |
|  |
| [Other Information](#id739eb8a094346e4a1dd9989c862058f_6027) |

[Additional Disclosures](#id739eb8a094346e4a1dd9989c862058f_2578) ....................................[320](#id739eb8a094346e4a1dd9989c862058f_2578)

[Shareholder Information](#id739eb8a094346e4a1dd9989c862058f_8454) ........................…....[375](#i226b519de0b84d77945d16f7178457c7_136613)

British American Tobacco p.l.c. (No. 3407696) Annual Report 2022

This document constitutes the Annual Report and Accounts of British American Tobacco p.l.c. (the Company) and the British American Tobacco Group prepared in accordance with UK requirements

and the Annual Report on Form 20-F prepared in accordance with the US Securities Exchange Act of 1934 (the Exchange Act) and the rules promulgated thereunder for the year ended 31 December 2022,

except that certain phrases, paragraphs or similar sections denoted with a ‘@’ symbol do not form part of the Annual Report on Form 20-F as filed with the US Securities and Exchange Commission

(the SEC) and certain phrases, paragraphs or similar sections denoted with a ‘»’ symbol do not form part of the Annual Report and Accounts. In addition, the Report of Independent Registered Public

Accounting Firm on pages [195](#id739eb8a094346e4a1dd9989c862058f_19842) and 195 will only be included in the Annual Report on Form 20-F. Moreover, the information in this document may be updated or supplemented only for purposes of the

Annual Report on Form 20-F at the time of filing with the SEC or later amended if necessary. Any such updates, supplements or amendments will also be denoted with a ‘»’ symbol. Insofar as this

document constitutes the Annual Report and Accounts, it has been prepared and is presented in accordance with, and reliance upon, applicable English company law and the liabilities of the Directors

in connection with this report shall be subject to the limitations and restrictions provided by such law.

This document is made up of the Strategic Report, the Governance Report, the Financial Statements and Notes, and certain other information. Our Strategic Report, pages [3](#id739eb8a094346e4a1dd9989c862058f_5481) to [122](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718), includes our purpose

and strategy, global market overview, business model, global performance, as well as our financial performance and principal Group risks. The Strategic Report has been approved by the Board of

Directors and signed on its behalf by Paul McCrory, Company Secretary. Our Governance Report on pages [123](#id739eb8a094346e4a1dd9989c862058f_8918) to [182](#id739eb8a094346e4a1dd9989c862058f_9334) contains detailed corporate governance information, our Committee reports@

and our Responsibility of Directors@. The Directors’ Report on pages [123](#id739eb8a094346e4a1dd9989c862058f_8898) to [152](#id739eb8a094346e4a1dd9989c862058f_13863) (the Governance pages)@, page [182](#id739eb8a094346e4a1dd9989c862058f_9334) (Responsibility of Directors)@ and pages [320](#id739eb8a094346e4a1dd9989c862058f_2578) to [391](#id739eb8a094346e4a1dd9989c862058f_9114) (the Additional Disclosure and

Shareholder Information pages) has been approved by the Board of Directors and signed on its behalf by Paul McCrory, Company Secretary. Our Financial Statements and Notes are on pages [183](#id739eb8a094346e4a1dd9989c862058f_8568) to [319](#id739eb8a094346e4a1dd9989c862058f_9258).

The Other Information section commences on page [320](#id739eb8a094346e4a1dd9989c862058f_2578).

This document provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards (IFRS). We believe these

APMs provide readers with important additional information on our business. We have included a Non-GAAP measures section on pages [325](#id739eb8a094346e4a1dd9989c862058f_10316) to [337](#i49422b2b471646dabd086f354630c16e_68557) which provides a comprehensive list of the APMs

that we use, an explanation of how they are calculated, why we use them and a reconciliation to the most directly comparable IFRS measure where relevant.

British American Tobacco p.l.c. has shares listed on the London Stock Exchange (BATS), the Johannesburg Stock Exchange (BTI), and, as American Depositary Shares, on the New York Stock

Exchange (BTI).

The Annual Report is published on bat.com. A printed copy is mailed to shareholders on the UK main register who have elected to receive it. Otherwise, shareholders are notified that the Annual Report

is available on the website and will, at the time of that notification, receive a short Performance Summary (which sets out an overview of the Group’s performance, headline facts and figures and key

dates in the Company’s financial calendar) and Proxy Form. Specific local mailing and/or notification requirements will apply to shareholders on the South Africa branch register.

References in this publication to ‘British American Tobacco’, ‘BAT’, ‘Group’, ‘we’, ‘us’ and ‘our’ when denoting opinion refer to British American Tobacco p.l.c. and when denoting business activity refer

to British American Tobacco Group operating companies, collectively or individually as the case may be.

The material in this Annual Report and Form 20-F is provided for the purpose of giving information about the Company to investors only and is not intended for general consumers. The Company, its

Directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this material is shown or into whose hands it may come and any such responsibility or

liability is expressly disclaimed. The material in this Annual Report is not provided for product advertising, promotional or marketing purposes. This material does not constitute and should not be

construed as constituting an offer to sell, or a solicitation of an offer to buy, any of our products. Our products are sold only in compliance with the laws of the particular jurisdictions in which they are sold.

References in this document to information on websites, including the web address of BAT, have been included as inactive textual references only. These websites and the information contained

therein or connected thereto are not intended to be incorporated into or to form part of the Annual Report and Form 20-F.

Cautionary statement

This document contains forward-looking statements. For our full cautionary statement, please see page [374](#id739eb8a094346e4a1dd9989c862058f_5309).

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| Inside This Report | | | |  |  |  |  |

1

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|  | In an increasingly complex  world, BAT's North Star  remains its purpose – to build  A Better TomorrowTM. To  succeed in delivering this, we  must continue to win and  nurture the trust of all our  stakeholders, including  shareholders. |  |

Luc Jobin

Chair

Dear Fellow Shareholders

2022 marks a year of great progress against

the strategy at BAT, given the backdrop of an

increasingly complex external environment.

I am proud of the delivery of the business in

2022.

Navigating a new economic cycle,

characterised by rising inflation, higher

interest rates and a tight labour market,

has required the business to be more

adaptable than ever.

Such complexities have been exacerbated

by international conflict, political instability

and supply chain constraints. In response,

BAT has increased its focus on driving both

a step change in New Categories and value

from the combustibles business.

I believe BAT’s strategy gets the balance

right between these two drivers of value.

On top of that, pursuing greater synergies

and simplification across the business has

delivered further savings for re-investment.

Over the last year, the business has

demonstrated the agility required to adapt

to a changing external environment.

One tool at our disposal is our active capital

allocation framework, introduced in 2021,

which allows us the flexibility to take into

account macro and fiscal developments to

deliver long-term value.

Progressing With Purpose

As a Board, our role is to work to ensure

BAT continues to deliver for the consumer,

investors and our wider stakeholders.

With international travel possible once

again, I have been delighted to see first-

hand how our A Better TomorrowTM

corporate purpose has become embedded

across so many levels of the organisation.

As the business transforms, the goal of

everyone across BAT is to maintain the

high performance and rapid progress we

have demonstrated since our A Better

TomorrowTM journey began in 2020.

With our New Category revenue and

consumers of Non-Combustible products

targets approaching, now is the time to

keep our momentum and focus.

We must provide even more adult smokers

with a portfolio of products that are a

better choice than cigarettes\*†.

As we have said before, reducing the

health impact of our business by offering

consumers a greater choice of reduced

risk\*† products is a multi-year endeavour. It

is unlikely to always proceed smoothly and

may involve periods of turbulence owing to

factors outside of our control. However,

what is clear to me is that every level of the

business is committed to delivering

sustainable growth.

Driving ESG Progress

This year, we have taken the opportunity to

embed sustainability reporting more

extensively into our Annual Report. Ahead

of forthcoming EU reporting requirements,

we believe this new 'Combined Annual and

ESG Report' provides a more holistic view

of our business performance.

Sustainability and ESG have long been an

intrinsic part of BAT’s DNA. We published

our first Sustainability Report in 2001. Since

then, the business has been repeatedly

recognised for its sustainability

achievements. This year alone, we received

the highest award - gold class - in the S&P

Global Sustainability Yearbook 2022, and

were named a Climate Leader by the

Financial Times.

As part of our commitment to the UN-

backed Race to Zero campaign, BAT

published its Low-Carbon Transition Plan

in 2022. This important document outlines

the actions the business will take to reach

its climate targets. This includes halving

absolute emissions across its value chain

by 2030, from a 2020 baseline, and to be

Net Zero across its value chain by 2050 at

the latest.

This is the latest milestone in BAT’s

journey to tackle climate change and to

build A Better Tomorrow™. Crucially,

targets and actions included in the Low-

Carbon Transition Plan are in line with

BAT’s ambitious 1.5ºC-aligned trajectory,

approved by the Science Based Targets

initiative in July 2022.

BAT is equally committed to protecting

biodiversity. The COP-15 UN Biodiversity

Conference took place in Canada in

December 2022 and BAT joined more than

300 leading companies in signing Business

for Nature’s call to protect and restore

biodiversity.

The need for mandatory requirements for

businesses and financial institutions to

disclose biodiversity impacts has never

been clearer. Biodiversity and climate are

inextricably linked and it is only through

creating a level playing field for businesses

that we hope to see meaningful progress

on protecting biodiversity.

Ethos & Culture

I would also like to reflect on how important

BAT’s ethos and culture is to delivering

BAT’s future. After all, our people are a key

stakeholder group; explicitly called out

when we talk about creating sustainable,

multi-pronged value.

In many ways BAT has a remarkable and

unique culture: truly global, immensely

diverse and marked out by a blend of new

talent and capabilities, alongside long-

standing experience. Of course, that

culture needs nurturing and cherishing.

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| Chair’s Introduction  Transforming for A Better TomorrowTM | | | |  |  |  |  |

2

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|  | 2022 marks a year of great  progress against the strategy  at BAT, given the backdrop of  an increasingly complex  external environment. I am  proud of the delivery of the  business in 2022. |  |
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|  | During uncertain times, our  role is to ensure BAT continues  to deliver for the consumer  and our wider stakeholders. |  |
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|  | We must provide even more  adult smokers with a portfolio  of products that are a better  choice than cigarettes\*†. |  |
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|  | Sustainability and ESG have  long been an intrinsic part of  BAT’s DNA. We published our  first Sustainability Report in  2001. |  |
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|  | As part of our commitment to  the UN-backed Race to Zero  campaign, BAT published its  Low-Carbon Transition Plan  in 2022. |  |
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|  | Each and every one of the  people across BAT deserves  huge credit for the  achievements of 2022. |  |
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|  | As the business transforms,  the goal of everyone across  BAT is to maintain the high  performance and rapid  progress we have demonstrated  since our transformation  journey began in 2020. |  |
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My Board colleagues and I have dedicated

significant time this year to understanding

that culture better and fostering its

development with management. We are

committed to making sure it develops

through building on its provenance while

also being contemporaneous and ‘fit’ for

the challenges of the world today. We will

continue to reflect further on that as part

of the Board’s programme through 2023.

Dividends

The Board has declared a dividend of 230.9p

per ordinary share, payable in four equal

instalments of 57.72p per ordinary share,

to shareholders registered on the UK main

register or the South Africa branch register

and to American Depository Shares (ADS)

holders, each on the applicable record dates.

The dividends receivable by ADS holders in US

dollars will be calculated based on the exchange

rate on the applicable payment dates.

Further information on dividends can be

found on page [104](#if2de028cc61e4485afa17e66d2701679_15664) of the Financial

Performance Summary and page [376](#id739eb8a094346e4a1dd9989c862058f_9036) in the

Shareholder Information section.

Board Changes

I was pleased to welcome Véronique Laury

to the Board in September 2022. Véronique

joined as an independent Non-Executive

Director and member of the Nominations

and Audit Committees.

With an extensive career in consumer

goods, including Kingfisher plc for over

15 years where she was Group CEO between

2014 and 2019, Véronique brings with her

impressive international, strategic,

transformation and digital experience.

I look forward to her contribution as

we accelerate our strategy to build

A Better TomorrowTM.

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| Colleagues meeting at our global headquarters in London, UK |

Confidence in BAT's Team

I have full confidence in the Management

Board of BAT and in the leadership of Jack. I

know that, as a team, they will continue to

lead the accelerated transformation of BAT

at pace.

Each and every one of the people across

BAT deserves huge credit for the

achievements of 2022. In testing

circumstances, they have demonstrated

resilience, dedication and an ability to

adapt to change. On behalf of the Board, I

offer them my thanks.

My Thanks

In an increasingly complex world, BAT's

North Star remains its purpose – to build

A Better TomorrowTM. To succeed in

delivering this, we must continue to win

and nurture the trust of all our

stakeholders, including shareholders.

I am grateful to everyone who has shared in

our transformation journey so far – equally

so to those new shareholders who have

joined us on the journey ahead.

Developments over the last few years have

shown that it will not always be straightforward.

However, with your support, I am confident

that BAT will continue to transform at pace

while delivering multi-stakeholder value long

into the future.

Notes:

\*Based on the weight of evidence and assuming

a complete switch from cigarette smoking.

These products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products, including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims

will be made as to these products without

agency clearance.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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3

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|  | 2022 shows that our strategy  is working. We have strong,  global New Category brands,  targeted geographic  expansion plans and an  unwavering commitment to  innovation that means we are  delivering for the consumer. |  |

Jack Bowles

Chief Executive

Dear Stakeholders,

During 2022, the business demonstrated

once again that it can transform while also

delivering strong results.

Our people have always been one of our

greatest strengths and this year that has

never been more evident. Their focus and

resolve in the face of global economic and

political upheaval have delivered excellent

progress against our three strategic

priorities to:

–Generate a step change in New

Categories performance;

–Drive value from combustibles; and

–Simplify the business.

As Tadeu highlights on page [9](#id739eb8a094346e4a1dd9989c862058f_6535), Group

revenue was up 7.7% on 2021. New

Categories have become a significant

contributor to this, delivering £2,894 million

in 2022 (up 40.9%). We remain on track to

meet our New Category revenue target of

£5 billion by 2025, and now expect

profitability (on a category contribution

basis) by 2024, one year ahead of plan.

Combined with a resilient performance

across our combustibles business during

the year, we believe we are well placed to

navigate an increasingly challenging

external environment.

On 11 March 2022, we announced our

intention to transfer our businesses in

Russia and Belarus while remaining

compliant with all local and international

regulations. I can now confirm that we are

in advanced discussions with a joint

management-distributor consortium with

a view to completing the transaction in

2023, albeit that process remains

unprecedented, complicated and complex.

A Purpose-Driven Strategy

At the centre of our strategy is our corporate

purpose to build A Better TomorrowTM. This

means offering a greater choice of enjoyable

and less risky products\*† for our consumers.

2022 shows that our strategy is working.

We have strong, global New Category

brands, targeted geographic expansion

plans and an unwavering commitment to

innovation that means we are delivering

for the consumer.

We now have 22.5 million consumers of

Non-Combustible products and revenue

from these products now accounts for

14.8% of Group revenue.

Across our three global New Category

brands, we are seeing the benefits of our

investments, driving sustainable growth

while reducing operating losses.

In the Vapour category:

–Revenue was up 55% (from 2021), with

our global brand, Vuse, extending its

global value share leadership position; and

–Our recently launched Vuse Go product

has achieved No.2 value share in the modern

disposables segment in the UK and

France and is now available in 24 markets.

In the Tobacco Heating Product

category:

–Our flagship THP, glo, continued to make

category volume share gains while also

increasing revenue (up 24%) in 2022; and

–We are seeing encouraging early results

from our Hyper X2 launch in Japan,

following the national rollout in October

2022. Hyper X2 is now available in 21

markets around the world.

In the Modern Oral category:

–Velo continued its strong volume share

leadership in Europe (now 69%), largely

driven by innovations including Velo Mini

pouches and Velo Max ranges; and

–Revenue in the Modern Oral category,

predominantly through Velo, was up 45%.

Driving value from combustibles:

Of course, our continuing drive for value

from the combustibles business is what

powers our investment in New Categories.

As such, the performance of that part of

the business remains an important driver

of growth.

We have a targeted portfolio of brands

across price tiers which have delivered a

robust performance across our APME,

AmSSA and Europe regions, driven by

resilient volumes.

With U.S. volumes continuing to face

pressure as a result of macro-economic

factors, we have activated commercial

plans across specific brands, channels and

states.

Beyond Nicotine

Our aspirations in the Beyond Nicotine

space have also evolved in 2022:

–In September, we invested in one of

Germany’s leading cannabis companies,

Sanity Group, with a non-controlling

minority stake;

–In November, we invested via a loan in

Charlotte’s Web, an independent leading

U.S. producer of hemp extract wellness

products; and

–At the start of the year, we created a new

biotech company, KBio, to accelerate the

development of our existing plant-based

technology capabilities.

Together, these exciting developments

represent another step in our exploration

beyond tobacco and nicotine.

Embedding Sustainability

I was delighted with the appointment of

our first Chief Sustainability Officer (CSO)

in August 2022, further embedding our

decades-long commitment to

sustainability.

On page [27](#id739eb8a094346e4a1dd9989c862058f_7764), Mike, our new CSO, and

Kingsley, our Chief Growth Officer, discuss:

–The ESG and sustainability landscape;

–Our strategic approach; and

–How our reporting on this critical area

of the business is evolving.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Overview |  |  |  |  |  |  |  |
| Chief Executive’s Review  Transforming and Delivering | | | | | | | |

4

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|  | During 2022, the business  demonstrated once again that  it can transform while also  delivering strong results. |  |
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|  | Our people have always been  one of our greatest strengths  and this year that has never  been more evident. |  |
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|  | Their focus and resolve in the  face of global economic and  political upheaval have ensured  excellent progress against our  three strategic priorities. |  |
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|  | At the centre of our strategy  is our corporate purpose to  build A Better Tomorrow™. |  |
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|  | We remain on track to meet  our New Category revenue  target of £5 billion by 2025 and  now expect profitability by  2024, one year ahead of plan. |  |
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|  | Across our three global  New Category brands,  we are seeing the benefits  of our investments; driving  sustainable growth while  reducing operating losses. |  |
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|  | We have also made great  progress on our existing ESG  commitments this year. |  |
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|  | With the external environment  becoming ever more complex,  I am confident that BAT's  proven resilience will ensure  we can capitalise on the  opportunities that will emerge. |  |

One important development in this area in

2022 has been the application of a Double

Materiality Assessment approach to

inform our strategy, as further detailed on

on page [139](#id739eb8a094346e4a1dd9989c862058f_14223). We took the opportunity

during 2022 to be among the first

companies globally to conduct and disclose

results from a Double Materiality

Assessment.

Such an approach looks not only at how our

business impacts ESG issues but also how

ESG-related matters impact our business.

Key to understanding this has been an

extensive stakeholder consultation

process.

The results of the Double Materiality

Assessment have already helped inform

my management team and me on strategy

and will continue to do so as we guide the

business through 2023 and beyond.

We also made great progress on our

existing ESG commitments this year:

–Our new Low-Carbon Transition Plan

charts a course for how we will halve

absolute emissions across our value

chain by 2030;

–We now have 28 certified carbon neutral

manufacturing and commercial

facilities\*\*; and

–As we progress towards 100% Group

certification by 2025, we achieved

Alliance for Water Stewardship

certification at our largest U.S.

manufacturing facility.

Notes:

\*Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products, including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims will

be made as to these products without agency clearance.

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| Some of our employees at our office in Sacheon. South Korea |

More details on our ESG Roadmap,

which is pivotal to our building A Better

TomorrowTM, can be found on page [7](#id739eb8a094346e4a1dd9989c862058f_15378).

Opportunities and Resilience

With the external environment becoming

ever more complex, I am confident that

BAT's proven resilience will ensure we

can capitalise on the opportunities that

will emerge.

One key to this is our Group-wide

transformation programme, QUEST.

Quantum, our business simplification and

efficacy programme, is the first pillar of

QUEST and has delivered £1.9 billion

annualised cost savings over the last

three years. The other pillars are described

in detail on page [29](#id739eb8a094346e4a1dd9989c862058f_5852) and highlight how we

are becoming the Enterprise of the Future.

As BAT, and the world around us evolves,

we need to make sure we are fit for the

future. QUEST is one way that we are

becoming more responsive,

transformational and resilient in the face of

change.

Of course, our people remain at the heart

of the transformation we are undertaking.

As they have proven time and again, it is

through their hard work and determination

that we will continue to deliver for

stakeholders now and in the future.

\*\*BAT's carbon neutral sites are externally verified as

adhering to internationally recognised standards /

carbon neutrality methodologies such as PAS 2060 and

purchase carbon credits verified by third parties, such as

VCS, Gold Standard and American Carbon Registry, to

offset residual emissions for which immediate plans do

not offer financially viable and/or real emission

reductions.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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5

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|  |  | Goals and targets | Metrics | Performance tracking | | |  |
|  | Topic | 2022 | 2021 | 2020 | Trend |
|  |  |  |  |  |  |  |  |
|  | Harm reduction | £5bn by 2025  in revenue from New Categories | New Category revenues (£bn) | 2.9 | 2.1 | 1.4 | l |
| 50m by 2030  consumers of our Non-Combustible products | No. of consumers (millions)t | 22.5 | 18.3 | 13.5 | l |
|  | Climate change | Net Zero by 2050  across our value chain - comprising Scope 1,  2 & 3 greenhouse gas (GHG) emissions  50% CO2e emissions reduction by  2030 across our value chain - comprising  Scope 1, 2 & 3 GHG emissions1  Carbon neutral operations by 2030  comprising Scope 1 & 2 GHG emissions | Scope 1 & 2 (market based) CO2e emissions  (thousand tonnes)t | 420 | 495 | 541 | l |
| Scope 1 & 2 CO2e emissions intensity  (tonnes per £m revenue)t | 15.2 | 19.3 | 20.0 | l |
| % Scope 1 & 2 CO2e emissions reduction vs  2020 baseline | 22.3 | 8.4 | N/A | l |
| Scope 3 CO2e emissions (thousand tonnes)  including biogenic emissions and removalst | \_2 | 5,243 | 5,614 | l |
| Circular  economy | <1% waste to landfill by 2025 | % waste sent to landfill from direct operations | 4.9 | 8.70 | 8.90 | l |
| 100% packaging  reusable, recyclable or compostable  by 2025 | % packaging reusable, recyclable or  compostable | 92 | 92 | 80 | l |
|  | % markets selling Vuse and glo with Take-Back  schemes | 100 | 100 | \_ | l |
|  | Biodiversity &  ecosystems | No gross deforestation  of primary native forests in our tobacco,  paper and pulp supply chains  Net Zero deforestation by 2025 of  managed natural forests in our tobacco,  paper and pulp supply chains | % sources of wood used by our contracted  farmers for curing fuels that are from  sustainable sources t | 99.99 | 99.89 | 99.70 | l |
|  | % paper and pulp volumes that is certified  as sourced sustainably t | 94 | 89 | \_ | l |
|  | Water | 35% less water use by 2025 | % reduction in water withdrawn vs 2017  baseline | 33 | 28 | 23 | l |
| 100% operations sites Alliance for Water  Stewardship certified by 2025 | % operations sites Alliance for Water  Stewardship (AWS) certified | 36 | 15 | \_ | l |
|  | Human rights3 | Zero child labour  aiming for zero incidents in our  Tobacco Supply Chain by 2025 | % farms with incidents of child labour  identified t | 0.38 | 0.70 | 0.50 | l |
|  | % incidents of child labour reported as resolved  by the end of the growing seasont | 100 | 100 | 98.5 | l |
|  | Monitoring  of supply chains | % farms monitored for child labour in our  Tobacco Supply Chaint | 99.99 | 99.91 | 99.70 | l |
|  | % product material and higher-risk indirect  service suppliers having an independent labour  audit within a three-year cyclet | 36.6 | 22 | \_ | l |
|  | Farmer  livelihoods3 | Crop diversification  supporting prosperous livelihoods | % farmers in our Tobacco Supply Chain  reported to grow other crops for food or as  additional sources of income t | 92.8 | 95.6 | 93.4 | l |
|  | People,  Diversity &  Culture | Increase to 45% by 2025  proportion of women in management roles | % female representation in management rolest | 41 | 39 | 38 | l |
|  | Zero accidents  aiming for zero accidents Group-wide  each year | Number of work-related accidents (including  assaults) resulting in injury, causing absence of  one shift or more | 83 | 95 | 114 | l |
| Lost Time Incident Rate (LTIR)t | 0.19 | 0.20 | 0.22 | l |
| Number of serious injuries and fatalities  to employees and contractorst | 36 | 31 | 39 | l |
|  | Ethics &  Integrity | 100% SoBC compliance  aiming for full adherence to our Standards  of Business Conduct (SoBC) | Number of established SoBC breaches4t | 84 | 99 | 116 | l |
|  | Number of disciplinary actions taken as a result  of established SoBC breaches that resulted in  people leaving BATt | 58 | 46 | 54 | l |
|  | Responsible  marketing | Full compliance  aiming for full compliance with  marketing regulations | Incidents of non-compliance with marketing  regulations resulting in a fine or penalty5t | 3 | \_ | \_ | \_ |

Notes: t2022 (2021 for Scope 3) metrics with independent limited assurance by KPMG in accordance with ISAE 3000; see page [95](#id739eb8a094346e4a1dd9989c862058f_17703) for a full list of assured metrics. See BAT 'Reporting

Criteria' for key terms and definitions, on bat.com/sustainabilityreporting. Environmental and Health & Safety data is reported for the period 1 December 2021 to 30 November 2022. In 2022,

BAT changed its CO2e emissions reduction baseline from 2017 to 2020, following SBTi approval of its near-term, 1.5°C-aligned, 2030 reduction target. See page 80 for CO2e emissions

reporting methodology. 1) Compared to 2020 baseline. Comprises 50% reduction in Scope 1, 2 and 50% reduction in Scope 3 GHG (CO2e) emissions. Scope 3 emissions target includes

purchased goods and services, upstream transportation and distribution, use of sold products and end-of-life treatment of sold products, which collectively comprised >90% of Scope 3

emissions in 2020. 2) Due to the complexity of consolidating and assuring Scope 3 data from our suppliers and value chain, Scope 3 data is reported one year later. 3) Our goals cover all

tobacco used in our combustibles & THP products ('tobacco supply chain'). Our metrics, however, derive data from our annual Thrive assessment, which includes our directly contracted

farmers and those of our strategic third party suppliers, representing over 80% of the tobacco purchased by volume in 2022 ('Tobacco Supply Chain'). 4) Consistent with previous years'

reporting, cases are not included in the above if they were not resolved at year-end. 5) This is a new GRI-aligned metric for FY2022, with a new reporting system. Although similar data

exists for FY2021 & 2020, because the reporting methodology has changed, prior data is not directly comparable.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Overview |  |  |  |  |  |  |  |
| Our ESG Roadmap  Our ESG Roadmap contains key goals and targets, metrics, current performance and prior-year comparatives for our material  sustainability topics. | | | | | | | |

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6

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| Our Performance Metrics | 2022 | % | 2021 | % | 2020 | IFRS GAAP | KPI | NON GAAP |
| Consumer |  |  |  |  |  |  |  |  |
| Number of Non-Combustible  Product Consumers | 22.5m |  | 18.3m |  | 13.5m |  |  |  |
| Market Share |  |  |  |  |  |  |  |  |
| Cigarette and THP volume share growth (bps) | -10 bps |  | +10 bps |  | +30 bps |  | • |  |
| Cigarette and THP value share growth (bps) | flat |  | +20 bps |  | +20 bps |  |  |  |
| Volume |  |  |  |  |  |  |  |  |
| Vapour (mn 10ml units/pods) | 612 | +14% | 535 | +56% | 344 |  |  |  |
| THP (bn sticks) | 24 | +26% | 19 | +79% | 11 |  |  |  |
| Modern Oral (mn pouches) | 4,010 | +22% | 3,296 | +70% | 1,934 |  |  |  |
| Traditional Oral (bn stick equivalents) | 7 | -8% | 8 | -4% | 8 |  |  |  |
| Cigarettes (bn sticks) | 605 | -5% | 637 | 0% | 638 |  |  |  |
| Other Tobacco Products (bn stick equivalents) | 16 | -10% | 18 | -9% | 20 |  |  |  |
| Financial |  |  |  |  |  |  |  |  |
| Revenue (£m) | 27,655 | +7.7% | 25,684 | -0.4% | 25,776 | • |  |  |
| Revenue at cc (%)1, 2 |  | +2.3% |  | +6.9% |  |  | • | • |
| Revenue from New Categories (£m) | 2,894 | +40.9% | 2,054 | +42.4% | 1,443 | • |  |  |
| Revenue from New Categories at cc (%)1 |  | +37.0% |  | +50.9% |  |  | • | • |
| Profit from Operations (£m) | 10,523 | +2.8% | 10,234 | +2.7% | 9,962 | • |  |  |
| Adjusted Profit from Operations at cc (%)1, 2 |  | +4.3% |  | +5.2% |  |  | • | • |
|  |  |  |  |  |  |  |  |  |
| Operating Margin (%) | 38.1% |  | 39.8% |  | 38.6% | • |  |  |
| Adjusted Operating Margin (%)2 | 44.9% |  | 43.4% |  | 44.1% |  |  | • |
| Diluted Earnings per Share (p) | 291.9 | -1.3% | 295.6 | +6.0% | 278.9 | • |  |  |
| Adjusted Diluted Earnings per Share (p)2 | 371.4 | +12.9% | 329.0 | -0.8% | 331.7 |  | • | • |
| Adjusted Diluted Earnings per Share at cc (%)1, 2 |  | +5.8% |  | +6.6% |  |  | • | • |
| Dividends per Share (p) | 230.9 | +6.0% | 217.8 | +1.0% | 215.6 |  |  |  |
| Dividend Pay-Out Ratio (%) | 62% |  | 66% |  | 65% |  |  |  |
|  |  |  |  |  |  |  |  |  |
| Net Cash Generated from Operating Activities (£m) | 10,394 | +7.0% | 9,717 | -0.7% | 9,786 | • |  |  |
| @Free Cash Flow after Dividends (£m) | 3,134 | +23.2% | 2,543 | -0.3% | 2,550 |  |  | • |
| Cash Conversion (%) | 99% |  | 95% |  | 98% | • |  |  |
| @Operating Cash Conversion (%) | 100% |  | 104% |  | 103% |  | • | • |
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| Borrowings, including Lease Liabilities (£m) | 43,139 | +8.8% | 39,658 | -9.8% | 43,968 | • |  |  |
| @Adjusted Net Debt to Adjusted EBITDA (ratio)2 | 2.9x |  | 3.0x |  | 3.3x |  | • | • |
|  |  |  |  |  |  |  |  |
| @Adjusted Return on Capital Employed (%)2 | 10% |  | 9% |  | 10% |  |  |  |
| Total Shareholder Return (rank) | 4 of 24 |  | 17 of 24 |  | 20 of 23 |  | • |  |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Find our key ESG goals, targets and metrics in our  ESG Roadmap on page [6](#id739eb8a094346e4a1dd9989c862058f_15378) |

Please refer to the Non-GAAP section from page [325](#id739eb8a094346e4a1dd9989c862058f_10316) for the Non-GAAP measures definitions. See the section ‘Non-Financial Measures’

on page [323](#id739eb8a094346e4a1dd9989c862058f_2641) for more information on these non-financial KPIs.

Notes:

@  Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.

1.Where measures are presented ‘at constant rates’ or ‘at cc’, the measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year results of the

Group and, where applicable, its segments. See page [108](#ie2705674220e4e0ba1527584a3003bbb_0-0-1-8-247685) for the major foreign exchange rates used for Group reporting.

2.Where measures are presented as ‘adjusted’, they are presented before the impact of adjusting items. Adjusting items represent certain items of income and expense which the Group

considers distinctive based on their size, nature or incidence.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Our Year in Numbers | | | | | | | |

7

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  |  |
|  | We are committed to our  active capital allocation  framework, which will deliver  long-term value to our  shareholders, driven by our  cash flow generation and  deleverage plans. |  |

Tadeu Marroco

Finance & Transformation Director

2022 was another successful year in

our transformational journey.

With value delivered from combustibles

and improving financial delivery from New

Categories, we believe we are well placed to

navigate the turbulent macro-economic

environment.

Furthermore, while translational foreign

exchange has negatively impacted the

value of our borrowings (in sterling terms),

we believe our continued cash generation

places the Group in a strong position for

future growth.

Revenue Higher Driven

by New Categories

Revenue increased 7.7% to £27,655 million

compared to 2021 (while 2021 was

marginally lower than 2020, down 0.4%

to £25,684 million).

Revenue from New Categories was up

40.9% in 2022 and 42.4% in 2021.

Combustibles pricing remained strong,

with Group price/mix of 4.6% in 2022

compared to 4.3% in 2021.

Foreign exchange movements affected the

Group's reported results in both periods,

being a tailwind of 5.4% in 2022 and a

headwind of 7.3% in 2021.

On a constant currency basis, revenue

was up 2.3% in 2022 and 6.9% in 2021.

Improving Financial Performance

from New Categories Drives Growth

Profit from operations increased 2.8%

to £10,523 million, with 2021 up 2.7% to

£10,234 million. In 2022, higher revenue,

a further reduction in losses from New

Categories and a translational foreign

exchange tailwind of 7.0% were offset

by higher adjusting items, which were

largely due to:

–The charges recognised related to the

proposed transfer of the Russian (and

Belarusian) business of £612 million;

–Restructuring and integration charges,

including in respect of Quantum, of £771

million (2021: £150 million), as we

streamline our business to drive agility,

and further enhance organisational

capabilities as we move forward into the

next phase of our transformation;

–A charge of £450 million recognised in

respect of the investigations by the

United States Department of Justice

(DOJ) and the United States Department

of the Treasury’s Office of Foreign Assets

Control (OFAC) into alleged historical

breaches of sanctions; and

–A charge of £79 million related to the

conclusion of the investigation into

alleged violations of the Nigerian

Competition and Consumer Protection

Act and National Tobacco Control Act.

These were partly offset by a net credit of

£460 million in Brazil related to the

calculation of VAT on social contributions in

prior periods (as the Group's litigation was

successfully concluded in the year). Such

adjusting items were higher than those

recognised in 2021, which included a

charge of £358 million related to the

disposal of the Group's Iranian business.

Our operating margin was consequently

170 bps lower at 38.1% in 2022 (2021: up

120 bps to 39.8%).

On an adjusted constant currency basis,

profit from operations grew by 4.3%

(2021: up 5.2%). This was driven by higher

revenue, a reduction in losses @of £578

million@ from New Categories and

efficiencies delivered in both 2022 and 2021

as part of Project Quantum (which has

delivered £1.9 billion of annualised savings

since 2020).

Adjusted operating margin (at current

rates) increased 150 bps to 44.9% (2021:

down 70 bps to 43.4%), largely driven by the

reduction in New Categories losses.

EPS Impacted by Substantial

Adjusting Items, Partly Offset by

FX Tailwind

On a reported basis, basic EPS was down

1.2% at 293.3p (2021: up 6.0% at 296.9p)

with diluted EPS down 1.3% to 291.9p (2021:

up 6.0% to 295.6p), as the impact of higher

adjusting charges in 2022 more than offset

the improved operational delivery and a

translational foreign exchange tailwind.

Excluding the adjusting items (discussed

on pages [101](#if2de028cc61e4485afa17e66d2701679_48370) and [102](#if2de028cc61e4485afa17e66d2701679_38073)) and the effect of

foreign exchange on the Group’s results,

adjusted diluted earnings per share, at

constant rates, increased by 5.8% to 348.1p,

building on the 6.6% growth in 2021.

Strong Cash Generation But Currency

Negatively Impacts Net Debt

We continue to focus on a balanced

approach to deleveraging, while investing

for the future and providing a return via

dividends to shareholders.

The Group’s cash conversion ratio, based

upon net cash generated from operations,

was 99% (2021: 95%) @and the operating

cash conversion ratio was 100% (2021:

104%)@. The Group realised £10.4 billion

(2021: £9.7 billion) of net cash generated

from operating activities, @or £3.1 billion

(2021: £2.5 billion) of free cash flow after

dividends – which is a measure the Group

uses to assess total cash generated by the

Group with which to repay borrowings.@

Due to the relative weakness of sterling

against the US dollar (currency headwind

of £3,911 million), which more than offset

the net repayment of borrowings in the

year, in 2022, total borrowings (including

lease liabilities) have increased from

£39,658 million in 2021 to £43,139 million

in 2022.

Despite the currency headwind on

borrowings, we continue to deleverage@,

with an adjusted net debt to adjusted

EBITDA ratio decreasing from 2.99 times

to 2.89 times@.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Overview |  |  |  |  |  |  |  |
| Finance and Transformation  Director’s Overview | | | | | | | |

8

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  |  |
|  |  |  |
|  | The Group continues to deliver  against its financial objectives.  This has allowed the Group to  continue to reward shareholders  with growth in dividends (up a  further 6.0%). |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  | Strong, sustainable, cash flow  generation underpins  confidence in the future. |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  | @We remain committed to our  medium-term targets of 3-5%  revenue growth (excluding  currency), high single figure  adjusted diluted EPS growth  and growth in dividends.@ |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  | Profit from operations was up  2.8% (2021: up 2.7%), being  growth of 4.3%, excluding  adjusting items and  translational FX. |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  |  |  |
|  | Strong cash generation has  enabled us to return £6.9  billion of cash to shareholders  in 2022, while still deleveraging  @to 2.89x adjusted net debt to  adjusted EBITDA@. |  |
|  |  |  |

Our liquidity profile remains strong, with

average debt maturity close to 9.9 years

and maximum debt maturities in any one

calendar year of around £4 billion. @Our

medium-term rating target remains

BBB+/Baa1, with a current rating of BBB+/

Baa2\*.@

Net finance costs in 2022 were £1,641

million, an increase of 10.5% on 2021, which

had declined to £1,486 million from £1,745

million in 2020. The increase in 2022 was

partly driven by a foreign exchange

headwind. On an adjusted, constant rate

basis, net finance costs increased 2.5% in

2022 (2021: down 4.5%), driven by higher

interest costs on debt issued in the year.

As part of the Group’s de-risking of future

funding, during 2020, gross interest cover

ceased to be a covenant in the Group’s

debt facilities.

The Group has debt maturities of around

£4 billion annually in the next two years.

Due to higher interest rates, net finance

costs are expected to increase as debts are

refinanced.

Active Capital Allocation Framework

We are committed to our active capital

allocation framework, which will deliver

long-term value to our shareholders,

driven by our cash flow generation and

deleverage plans.

These include:

–Continuing to grow the dividend;

–Maintaining our target leverage corridor

@of 2-3x adjusted net debt / adjusted

EBITDA@;

–Potential bolt-on M&A opportunities; and

–Share buy-backs to enhance shareholder

returns.

|  |
| --- |
|  |
|  |
| Colleagues at BAT Mexico having a discussion over coffee |

The Board will prioritise capital allocation

opportunities each year in line with this

new longer-term active capital allocation

framework, while continuing to take into

account macro-economic influences and

potential regulatory and litigation

outcomes.

At this time, the Board has decided to take

a pragmatic approach. Given our

incremental investment plans in 2023 to

further accelerate our transformation, and

in light of the uncertain macro-

environment, higher interest rates,

outstanding litigation and regulatory

matters, the Board has decided to prioritise

strengthening the balance sheet. This will

provide greater business resilience while

continuing to support future financial

agility, as we aim to reduce leverage more

quickly @towards the middle of our target

2-3x corridor@.

We have announced a dividend increase

of 6.0% to 230.9p (with a dividend pay-out

ratio of 62.2%).

Navigating the Near Term Challenges

With Confidence

Our business is extremely well placed for

the future.

With a diversified geographic and product

portfolio, and a track record of delivering

robust and consistent cash generation, we

believe the Group is well positioned to

continue to invest for future growth while

navigating the near-term macro-economic

uncertainties and challenges.

Notes:

\*A credit rating is not a recommendation to buy, sell or

hold securities. A credit rating may be subject to

withdrawal or revision at any time. Each rating should be

evaluated separately of any other rating.

@Denotes phrase, paragraph or similar that does not form

part of BAT’s Annual Report on Form 20-F as filed with

the SEC.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
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|  | | | | | | | |

9

### Transformation Driving

### Sustainable Growth

#### Delivering growth by reducing harm

#### and expanding our portfolio

Our corporate purpose is to build A Better Tomorrow™. Reducing

the health impact of our business, by encouraging those smokers

who would otherwise continue to smoke to switch completely to

scientifically-substantiated, reduced-risk alternatives\*†, is the

greatest contribution we can make to society. This means growing

our New Categories business as quickly as possible and developing

opportunities Beyond Nicotine to consolidate our position as

a high growth, multi-category consumer products company.

Revenue growth in the global nicotine industry is accelerating

through the development of New Categories, which offer

reduced-risk alternatives to combustible products.\*†

We are building strong global brands, specifically positioned

in each target consumer segment through our established

consumer-centric, multi-category strategy. In addition,

we are taking a disciplined approach to our Beyond Nicotine

strategy to further drive our transformation and long-term

business sustainability.

We have set ourselves ambitious targets to reach 50 million

consumers of our Non-Combustible products by 2030, with New

Categories revenue to reach £5 billion (by 2025) and profitability in

2024, one year ahead of plan. These ambitions will be met through

the delivery of our three clear strategic priorities:

–to drive a step change in New Categories, to accelerate growth

supported by increased investment;

–to generate value through Combustibles, to provide the

capabilities and funding; and

–to simplify the Group, to create a stronger, faster and more

agile organisation.

Reducing our Health and

### Environmental Impact

#### Creating sustainable value

#### for all our

#### stakeholders

Our work to reduce the health and environmental impact

of the business will drive growth and create shared value,

delivering results that benefit shareholders and wider society.

We will continue to create a stronger BAT by:

–focusing on excellence in environmental management;

–delivering a positive social impact; and

–adhering to robust corporate governance.

This builds on our strong ESG foundations, including:

–our status as the first tobacco company to produce a

Sustainability Report in 2001;

–publication of a Human Rights focus report in 2020, the first

of its kind by a tobacco company to be aligned with the UN

framework of Human Rights reporting;

–being named in the Dow Jones Sustainability Indices for 21

consecutive years; and

–receiving an 'A' rating from CDP (formerly know as the Carbon

Disclosure Project) in climate change in 2022^.

Our commitments are anchored in challenging targets against

which we will track and share the progress of our transformation,

including achieving Net Zero across our value chain by 2050.

Meanwhile, our ‘delivery with integrity’ programme is focused

on ensuring that our ethical standards are never compromised

for the sake of results.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  |  |  |  |
|  |  |  |  |  |
|  | 50mn  Non-Combustible product  consumers targeted by 2030 |  | 1bn+  current consumers in global  combustibles market with  the potential to convert to  reduced-risk products\*† |  |
|  |  |  |  |  |
|  |  |  |  |  |
|  | £5bn  New Categories revenue  targeted by 2025 |  | 14.8%  Group revenue from  Non-Combustibles in 2022 |  |
|  |  |  |  |  |

Notes:

\*Based on the weight of evidence and assuming a complete switch from cigarette

smoking. These products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products,

including Velo, Grizzly, Kodiak, and Camel Snus, which are sold in the U.S., are subject to

FDA regulation and no reduced-risk claims will be made as to these products without

agency clearance.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  |  |  |  |
|  |  |  |  |  |
|  | 21st  consecutive year in the Dow  Jones Sustainability Indices |  | Carbon  Neutral  Scope 1 & 2 targeted by 2030 |  |
|  |  |  |  |  |
|  |  |  |  |  |
|  | Net Zero  across the value chain (Scope  1, 2 & 3) targeted by 2050 |  | 100%  packaging to be reusable,  recyclable or biodegradable  targeted by 2025 |  |
|  |  |  |  |  |

^A rating, whether by CDP or any other organisation, is not a recommendation to buy,

sell or hold securities. A rating may be subject to withdrawal or revision at any time.

Each rating should be evaluated separately from any other rating. In addition, the criteria

used in ratings may differ among ESG rating organisations. Companies may also supply

different information to such organisations (or none at all) and this lack of consistency

may impact rankings.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Overview |  |  |  |  |  |  |  |
| Investment Case | | | | | | | |

10

### Creating the Enterprise

### of the Future

#### Leveraging proven expertise and developing

#### new capabilities to deliver our ambitions

Our New Category portfolio benefits from decades of insights and

expertise that have driven our No. 1 global revenue position in

combustibles (excl. China). This, combined with increased

investment behind new capabilities, gives us confidence that we

can deliver our medium- to long-term ambitions.

Our three global New Category brands leverage the benefits of our

world-class R&D and our manufacturing, distribution, marketing

and brand building capabilities. These are supported by new senior

talent from a diverse range of industries to further enhance our

capabilities and our global footprint.

Our long-standing experience operating within complex

regulatory, legal and fiscal frameworks, provides BAT with a

compelling competitive advantage to drive portfolio growth and

transformation within the wider tobacco industry.

Through Project Quantum, our business simplification and

efficiency programme, we have achieved £1.9 billion of annualised

savings since 2020 to invest in new capabilities. Building on

Quantum’s success, QUEST will accelerate our organisational and

business transformation programme, driving next generation

innovations:

–building new digital capabilities;

–empowering our people; and

–enhancing our future sustainability.

Through QUEST, we are creating the Enterprise of the Future.

@

### Continuing

### our Track Record

### of Delivery

Commitment to

#### delivering

#### returns

#### and cash to shareholders

We are confident in our growth outlook, and have

a proven track record of performance whatever the

external environment.

Over the last 10 years, we have delivered 9% adjusted diluted EPS

growth (at constant rates) and a 6% dividend CAGR and are

confident in our medium-term targets of 3-5% revenue growth,

increased operating margin and high-single digit adjusted EPS

growth (at constant rates).

This will be driven by:

–increasing New Category contribution to Group revenue growth

and earnings;

–continued value growth in combustibles; and

–business simplification to become a stronger, simpler, more

agile organisation.

With strong profitability, >90% operating cash conversion and

leverage at c.2.89x adjusted net debt / adjusted EBITDA, we have

adopted a more active capital allocation framework to deliver

long-term value for shareholders. This will include:

–continuing to grow the dividend;

–maintaining our target leverage corridor of 2-3x adjusted

net debt / adjusted EBITDA;

–considering potential bolt-on M&A opportunities; and

–share buybacks to enhance shareholder returns.@

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  |  |  |  |
|  |  |  |  |  |
|  | 22.5m  consumers of our Non-  Combustible products |  | 22m  consumers in our contactable  consumer database  >170  markets in which we operate |  |
|  |  |  |  |
|  |  |  |  |
|  | £1.9bn  annualised savings delivered  2019- 2022 |  | 3,000  new capability hires  since 2019 |  |
|  |  |  |  |  |

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  |  |  |  |
|  |  |  |  |  |
|  | High Single  Digit  medium-term adjusted  diluted EPS growth  target (at cc)@ |  | >90%  operating cash conversion  targeted annually@  9%  adj. diluted EPS average  growth (at cc) over 10 years |  |
|  |  |  |  |
|  |  |  |  |
|  | 3-5%  medium-term revenue  growth target (at cc)@ |  | 6%  dividend CAGR over 10 years |  |
|  |  |  |  |  |

Notes:

Use of the term “cc” refers to constant currency where measures are calculated based on a

re-translation, at the prior year’s exchange rates, of the current year’s results of the Group.

@Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report

on Form 20-F as filed with the SEC.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

11

To build A Better Tomorrow™, our marketplace analysis delivers insights

regarding consumer trends and segmentation. This facilitates our

geographic brand prioritisation across our regions and markets.

|  |
| --- |
|  |
| To achieve a step change in New Categories, we are creating the Enterprise of the Future –  building new capabilities around the world focused on science, innovation and digital information.  Consumer preferences and technology are evolving rapidly, and we are staying ahead of the  curve with our digital hubs, the creation of innovation hubs and further development of our  world-class R&D laboratories. We are also leveraging the expertise of our external partners  and are looking forward to exciting results from our venturing initiative, Btomorrow Ventures. |

|  |
| --- |
|  |
| Revenue by Region |

£27,655m

Total revenue

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | U.S. | £12,639m |
|  |  |  |  |
|  |  |  |  |
|  |  | AmSSA | £4,203m |
|  |  |  |  |
|  |  |  |  |
|  |  | Europe | £6,346m |
|  |  |  |  |
|  |  |  |  |
|  |  | APME | £4,467m |
|  |  |  |  |

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  |  |  |
|  |  |  | For more key detail on our Regional  Performance, see pages [109](#id739eb8a094346e4a1dd9989c862058f_13825) to [116](#i48429a5b09ac424497da538f0e334a68_32962) |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Effective from 2023, the Group will  revise its regional structure and  report on three regions, being;  –the United States of America;  –Asia-Pacific, Middle East and Africa  (APMEA); and  –Americas and Europe (AME). |  |

|  |
| --- |
|  |
| Our four complementary regions  Map is accurate as at 31 Dec 2022 and is representative of general geographic regions  and does not suggest that the Group operates in each country of every region. |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| Our Global Business | | | | | | | |

12

O

#### ur business is divided

#### into four complementary regions, with a balanced

#### presence in both high-growth emerging markets and highly profitable

#### developed markets.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  |  |  |
| 4 | 5 | 138 | 50,000+ |
| regions | major product categories | employee nationalities | employees |

|  |  |
| --- | --- |
|  |  |
|  |  |
|  |  |
| United State of America (U.S.) | |
| Key Markets:  United States of America | |
|  |  |
|  |  |
| Americas and Sub-Saharan Africa  (AmSSA) | |
| Key Markets:  Argentina, Brazil, Canada, Chile, Colombia,  Nigeria, Mexico, South Africa | |
|  |  |
|  |  |
| Europe | |
| Key Markets:  Belgium, Bulgaria, Czech Republic, Denmark,  France, Germany, Greece, Hungary, Italy,  Kazakhstan, Netherlands, Poland, Romania,  Russia, Spain, Switzerland, Turkey, Ukraine,  United Kingdom.  Russia will remain in the list of key markets until the  transfer of the Russian business is complete. | |
|  |  |
|  |  |
| Asia-Pacific and Middle East (APME) | |
| Key Markets:  Algeria, Australia, Bangladesh, Egypt, Gulf  Cooperation Council (including Saudi Arabia),  Japan, Malaysia, Morocco, New Zealand,  Pakistan, South Korea, Taiwan, Vietnam.  From 1 January 2022, Algeria, Sudan, Morocco, Libya,  Tunisia and Egypt moved from Europe and North Africa  (now Europe) to APME. No restatement of prior year  figures has been made as the impact was not material to  either Europe or APME. | |
|  |  |
|  | Read more on pages [109](#id739eb8a094346e4a1dd9989c862058f_13825) to [116](#id739eb8a094346e4a1dd9989c862058f_15251) |

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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13

Revenue by product category

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | New Categories | £2,894m | 10.4% |
|  |  |  |  |
|  |  |  |  |
|  | Traditional Oral | £1,209m | 4.4% |
|  |  |  |  |
|  |  |  |  |
|  | Combustibles | £23,030m | 83.3% |
|  |  |  |  |
|  |  |  |  |
|  | Other | £522m | 1.9% |
|  |  |  |  |

£27,655m

Total revenue

Strategic Portfolio

These are our key brands in both the

combustible and Non-Combustible

categories. This ensures focus and

investment on the brands and

categories that will underpin the

Group’s future performance.

The strategic portfolio is:

Non-Combustibles

All brands within New Categories

and the strategic Traditional Oral

brands in moist and snus.

Combustibles

Dunhill, Kent, Lucky Strike, Pall Mall,

Rothmans, Newport (U.S.), Natural

American Spirit (U.S.), Camel (U.S.).

|  |  |
| --- | --- |
|  |  |
|  | Notes:  BAT’s New Category products are not smoking  cessation devices and are not marketed for that  purpose.  \*    Based on the weight of evidence and assuming  a complete switch from cigarette smoking.  These products are not risk free and are  addictive.  †    Our Vapour product Vuse (including Alto, Solo,  Ciro and Vibe), and certain products, including  Velo, Grizzly, Kodiak, and Camel Snus, which are  sold in the U.S., are subject to FDA regulation  and no reduced-risk claims will be made as to  these products without agency clearance. |

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| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  | Category |  |  |
| Our Reduced-Risk Portfolio (Non-Combustibles)\*† |  | Vapour | Vapour products are handheld, battery-powered devices  that heat a liquid (called an e-liquid) to produce an inhalable  aerosol, commonly known as vapour. These products can  be either open or closed systems. Open systems offer a  customised vaping experience – using a refillable tank.  Closed systems work with disposable, pre-filled cartridges,  offering greater convenience. |  |
|  | THP | Tobacco Heating Products (THPs) are a new category  of tobacco product designed to heat rather than burn  tobacco. They create an inhalable aerosol that contains  nicotine and are also known as 'heat-not-burn' products. |  |
|  | Modern Oral | Modern Oral products are our smoke-free oral nicotine  products, sometimes called nicotine pouches, designed for  use in the mouth. Consumers place a disposable nicotine  pouch between their gum and upper lip where nicotine and  flavours are released and nicotine is absorbed through the  tissues lining the mouth. |  |
|  | Traditional Oral | Traditional oral products include snus and snuff. Snus is  a moist form of oral tobacco originating from Sweden.  It is available in loose form or as pouches. The tobacco  is typically mixed with water, salt and aromas. |  |
|  |  | Combustibles | The Group sold 605 billion cigarette sticks and 16 billion  OTP (stick equivalents) in 2022. The Group operates  in over 170 markets, with 41 fully integrated cigarette  manufacturing facilities in 39 markets. |  |

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| Our Consumer-Centric  Multi-Category Portfolio | | | | | | | |

BAT is a leading consumer-centric, multi-category consumer

goods business dedicated to stimulating the senses of adult

consumers worldwide. Our portfolio reflects our commitment

to meeting the evolving and varied needs of today’s adult consumer

who seeks sensorial enjoyment for different moods and moments.

14

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  | Global Drive Brands |  |  | Market Footprint |
|  |  |  |  | 33  markets where our Vapour products  are currently available |
|  |  |  |  | 28  markets where our THPs are  currently available |
|  |  |  |  | 28  markets where our Modern Oral  products are currently available |
|  |  |  |  | 3  markets where our Traditional Oral  products are currently available |
|  |  |  | U.S. Specific | |
|  |  |

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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15

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
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|  |  |  |  |  |  |
|  | Our eight-step business model | | |  |  |
|  | Our business model begins and ends with the consumer.  The insights we gather from adult consumers, underpinned by  robust science, unlocks value by ensuring we offer the right  product choices to meet their preferences. Our product portfolio  is constantly being enhanced through innovations designed to  better serve adult consumers and build A Better Tomorrow™. | | |  | Following the responsible sourcing of raw materials and  components, we utilise our global footprint to manufacture at  speed and scale. We use our global distribution capabilities to  ensure our products are where they need to be, when they are  needed. Through our responsible marketing practices and  powerful portfolio, we market and sell our products which,  in turn, generate further insights. |
|  |  |
|  |  |
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|  |  |  |  |  |  |
|  |  |  | Read more about  our stakeholders on page [19](#id739eb8a094346e4a1dd9989c862058f_7047) |  |  |
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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| Our Business Model | | | | | | | |

As a global business, we strive to understand our diverse consumers, develop

products to satisfy their preferences and ultimately distribute them across

170+ markets. Taking into account feedback from stakeholders also enables

us to refine our strategy, deliver sustainable value and build A Better Tomorrow™.

16

Seeing over

the horizon

As one of the most long-standing

and established consumer goods

businesses in the world, we have a

unique view of the consumer across

our product categories, which is

increasingly driven by powerful

data and analytics. These insights

ensure that the development and

responsible marketing of our products

are fit to satisfy consumer needs.

Driven by our unique and data-driven

consumer insight platform (PRISM),

we focus on product categories and

consumer segments across our

global business that have the best

potential for long-term sustainable

growth.

Link to risks

Tobacco, New Categories and other

regulation interrupts growth strategy

Inability to develop, commercialise and

deliver the New Categories strategy

Climate and circularity

Accelerating tobacco

harm reduction

World-class science is needed to

substantiate the quality, product

safety and reduced-risk potential of

our New Category products. This is

crucial for building consumer trust

and encouraging adult smokers to

completely switch to less risky

alternatives\*†.

We have an extensive scientific

research programme in a broad

spectrum of scientific fields, including

molecular biology, toxicology and

chemistry. We are transparent

about our science and publish details

of our research programmes on

our dedicated website, www.bat-

science.com, and the results of our

studies in peer-reviewed journals.

Link to risks

Inability to develop, commercialise and

deliver the New Categories strategy

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our science  on pages [33](#id739eb8a094346e4a1dd9989c862058f_5896), [35](#id739eb8a094346e4a1dd9989c862058f_8732), [37](#id739eb8a094346e4a1dd9989c862058f_8965) and [51](#id739eb8a094346e4a1dd9989c862058f_15538) |

Staying ahead

of the curve

As consumer preferences and

technology rapidly evolve, we rely on

our growing global network of digital

hubs, innovation hubs, world-class

R&D laboratories, external

partnerships and our corporate

venturing initiative, Btomorrow

Ventures, to stay ahead of the curve.

Driving sustainable growth is at the

core of our innovation. We make

significant investments in research

and development to deliver

innovations that satisfy or anticipate

consumer preferences and generate

growth for the business.

Led by our strength in developing

consumer insights, each innovation

helps us on our journey to build A

Better Tomorrow™ by reducing the

health impact of our business.

Link to risks

Inability to develop, commercialise and

deliver the New Categories strategy

Sourcing materials

responsibly

The majority of our tobacco is sourced

by BAT Group's vertically integrated

Leaf Operations through direct

contracts with c.81,000 farmers.

The remainder is from third-party

suppliers that, in turn, contract with

an estimated 195,000 farmers. The

vast majority of tobacco farms in our

supply chain are smallholder family

farms.

Beyond tobacco, we source product

materials like paper and filters for

cigarettes and, for our New Category

products, we have a growing supply

chain in consumer electronics and e-

liquids. We also have a vast number

of suppliers of indirect goods and

services that are not related to our

products, such as for IT services

and facilities management.

Link to risks

Geopolitical tensions

Injury, illness or death in the workplace

Solvency and liquidity

Climate and circularity

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our supply  chain on pages [44](#id739eb8a094346e4a1dd9989c862058f_15520) to [94](#ib7f6c2fd07b14abe9855c51cf71be497_71970) |

Utilising our global

manufacturing footprint

We manufacture high-quality

products in facilities all over the

world. We also ensure that these

products and the tobacco leaf we

purchase are in the right place at

the right time.

Our New Category products are

manufactured in a mix of our own

and third-party factories. We work

to ensure that our costs are globally

competitive and that we use our

resources as effectively as possible.

Link to risks

Geopolitical tensions Injury, illness or

death in the workplace

Disputed taxes, interest and penalties

Foreign exchange rate exposures

Solvency and liquidity

Climate and circularity

Moving our products

seamlessly everywhere

By applying modern technologies,

including AI and machine learning, we

ensure our products are where they

are needed when they are needed.

Our products are sold around the

world and we distribute them

effectively and efficiently using a

variety of distribution models suited

to local circumstances and conditions.

These distribution models include

retailers, supplied through our direct

distribution capability or exclusive

distributors, and our Direct-to-

Consumer business – which has been

accelerated through the deployment

of owned e-commerce sites.

Link to risks

Tobacco, New Categories and other

regulation interrupts growth strategy

Inability to develop, commercialise and

deliver the New Categories strategy

Litigation

Foreign exchange rate exposures

Climate and circularity

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  |  |

Marketing our

products responsibly

Tobacco and nicotine products

should be marketed responsibly

to adults only and not designed to

appeal to youth.

Through a globally responsible

approach to marketing, we help

to raise standards and prevent

underage access, while growing our

market share by encouraging adult

consumers to choose our products

over those of our competitors.

Our International Marketing

Principles (IMP) govern our marketing

across all product categories. They

include strict requirements to be

responsible, accurate and targeted

at adult consumers only. Our IMP are

applied even when they are stricter

than local laws.

Link to risks

Tobacco, New Categories and other

regulation interrupts growth strategy

Inability to develop, commercialise and

deliver the New Categories strategy

Litigation

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about responsible  marketing on page [65](#id739eb8a094346e4a1dd9989c862058f_15649) |

Offering the

consumer choice

We have a powerful brand portfolio

that we are proud of. Our global

brands are well positioned, with

leading-edge insights, science and

innovation behind our product pipeline.

We offer adult consumers a range

of products, including combustible

products, Vapour, Modern Oral and

THPs, in markets around the world.

Our range of high-quality products

covers all segments, from value-for-

money to premium.

Link to risks

Competition from illicit trade

Geopolitical tensions

Significant increases or structural changes

in tobacco, nicotine and New Categories

related taxes

Inability to develop, commercialise and

deliver the New Categories strategy

Foreign exchange rate exposures

Disputed taxes, interest and penalties

Climate and circularity

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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17

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| A Better Tomorrow™ for: |  |  |  | Read more about these Stakeholders  pages [21](#id739eb8a094346e4a1dd9989c862058f_6183) and [22](#id739eb8a094346e4a1dd9989c862058f_14373) |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  |  | Consumers |  |  |  | Society |
|  | Our consumers are at the core of everything we do  and our success is underpinned by addressing their  preferences, offering them a choice of enjoyable,  innovative and less risky products\*†.  Measured by  –33 countries where Vapour products are available  –28 countries where Tobacco Heating Products  are available  –28 countries where Modern Oral products are available | |  |  | The greatest contribution we can make to society is  by reducing the health impact of our business. We will  do this by encouraging those smokers who would  otherwise continue to smoke to switch completely  to scientifically-substantiated, reduced-risk  alternatives\*†. Achieving this, while working  to reduce our impact on the environment, is central  to delivering A Better Tomorrow™.  Measured by  –22.5m consumers of Non-Combustible products  –84.3% of operating waste recycled  –22% reduction in Scope 1 & 2 emissions from  our new 2020 baseline  Notes:  \*    Based on the weight of evidence and assuming a complete switch from cigarette  smoking. These products are not risk free and are addictive.  †    Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products,  including Velo, Grizzly, Kodiak, and Camel Snus, which are sold in the U.S., are subject  to FDA regulation and no reduced-risk claims will be made as to these products  without agency clearance. | |
|  |  | Suppliers |  |
|  | Across the BAT Group, we work with thousands of different  suppliers worldwide. Our suppliers are valued business partners  and we believe, by working together, we can raise standards,  drive sustainable practices, create shared value and build A  Better Tomorrow™ for all. | |  |
|  |  | Customers |  |
|  | Our customers include retailers, distributors and wholesalers  who are essential for driving growth and embedding responsible  marketing practices. | |  |
|  |  |  |  |  |  |  |
|  |  | Our People |  |  |  | Shareholders & Investors |
|  | We employ 50,000+ people worldwide. Attracting and  retaining an increasingly diverse workforce and  providing a welcoming, inclusive working environment  are key drivers in BAT’s transformation journey to build  A Better Tomorrow™. Our focus is on providing a  dynamic, inspiring and purposeful place to work.  Measured by  –accredited as Global Top Employer by the Top Employers  Institute  –79% Engagement Index score in our Your Voice employee  survey  –0.19 Lost Time Incident Rate (LTIR) vs 0.20 in 2021  –proportion of women in management roles grew to 41% | |  |  | We are committed to delivering sustainable and  superior returns to our shareholders and investors.  It is essential that we maintain the support of our  shareholders and investors to enable access to capital.  This allows us to implement our strategy and achieve  our business objectives.  @Measured by  –3-5% revenue growth over the medium-term  –high-single digit adjusted EPS growth at constant rates  of exchange over the medium-term  –65% dividend payout ratio over the long-term  –deleveraging the balance sheet to within our 2-3x adjusted  net debt/adjusted EBITDA range@ | |

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|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Non-Financial Information Statement | | | | | | | | | | |  |
|  | Non-financial information reporting required  under the UK Companies Act is included in  the Strategic Report as referenced below: | | |  | Our reporting in the following areas includes information about the policies and principles that govern  our approach, due diligence processes, outcomes and non-financial performance indicators: | | | | | | |  |
|  |  |  | Our business model is  set out on pages [16](#id739eb8a094346e4a1dd9989c862058f_6906) to 18 |  |  |  | Environmental matters  pages [6](#id739eb8a094346e4a1dd9989c862058f_15378), [46](#id739eb8a094346e4a1dd9989c862058f_9518) and [53](#id739eb8a094346e4a1dd9989c862058f_15552) to [60](#i98149e930e394afbb0db1ecf1411f029_135645) |  |  |  | Employees  pages [6](#id739eb8a094346e4a1dd9989c862058f_15378), [46](#id739eb8a094346e4a1dd9989c862058f_9518), [83](#id739eb8a094346e4a1dd9989c862058f_8819) to [94](#ib7f6c2fd07b14abe9855c51cf71be497_71970) |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  | See pages [117](#id739eb8a094346e4a1dd9989c862058f_8875) to [122](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718) for  Group Principal Risks |  |  |  | Social matters  pages [6](#id739eb8a094346e4a1dd9989c862058f_15378), [46](#id739eb8a094346e4a1dd9989c862058f_9518), [51](#id739eb8a094346e4a1dd9989c862058f_15538) to [52](#id739eb8a094346e4a1dd9989c862058f_19555) and [61](#id739eb8a094346e4a1dd9989c862058f_15617) to [64](#id739eb8a094346e4a1dd9989c862058f_19607) |  |  |  | Respect for human rights  pages [6](#id739eb8a094346e4a1dd9989c862058f_15378), [46](#id739eb8a094346e4a1dd9989c862058f_9518) and [61](#id739eb8a094346e4a1dd9989c862058f_15617) to [64](#id739eb8a094346e4a1dd9989c862058f_19607) |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  | See pages [6](#id739eb8a094346e4a1dd9989c862058f_15378) and [7](#id739eb8a094346e4a1dd9989c862058f_6649) for the Group's financial  and non-financial key performance indicators |  |  |  | Anti-bribery and anti-corruption matters  pages [6](#id739eb8a094346e4a1dd9989c862058f_15378), [46](#id739eb8a094346e4a1dd9989c862058f_9518) and [67](#id739eb8a094346e4a1dd9989c862058f_15661) to [68](#i61464e4022874402ab39d55c5876c2d6_112799) |  |  |  |  |  |
|  | Further details of our Group policies and principles can be found at www.bat.com | | | | | | | | | | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |

@Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| Our Business Model  Continued | | | | | | | |

18

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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19

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| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  |  |  |  |
|  |  |  |  |  |
|  | Consumers | Shareholders & Investors | Our People |  |
|  |  |  |  |  |
| Why this stakeholder is  important to us | As preferences and attitudes change  in an evolving industry, understanding  our consumers is essential to  both successful portfolio and  business growth. | It is essential that we maintain the  support of our shareholders and  bondholders to maintain access to  capital. This allows us to implement  our strategy and achieve our  business objectives. | The quality of our people is a major  reason why our Group continues to  perform well. We understand the  value of listening and responding  to feedback from our people to  maintain a fulfilling, rewarding  and responsible work environment. |  |
|  |  |  |  |  |
| Examples of how we  engaged in 2022 | –Consumer panels, focus groups  and interviews  –Consumer care helplines  –Responsible marketing and  transparent communication  –Real-time digital platforms | –Annual General Meeting  –Investor relations programme  and shareholder engagement on our  Directors’ Remuneration Policy  –Institutional shareholder meetings  –Capital Markets Days  –Investor roadshows  –Results announcements  –Annual Report and Form 20-F  –Suite of focused ESG reports and  wider disclosures  –Stock exchange announcements  –Shareholder information on website | –Director market and site visits  –Virtual forums  –Employee town halls  –Global and regional webcasts  –Your Voice employee survey  –Works councils and European  Employee Council meetings  –Graduate and management  trainee events  –Individual performance reviews  –Speak Up channels |  |
|  |  |  |  |  |
| What matters to our  stakeholders | –Health impact of our products and  other social considerations  –Product quality  –Affordability and price  –Ingredients/nicotine levels  –Plastics/post-consumption  product waste | –Business performance  –ESG agenda  –Corporate governance  –Strength of Group leadership  –Board succession planning | –Reward  –Career development  –Diversity and inclusion  –Corporate responsibility  –Health and safety  –Business ethics |  |
|  |  |  |  |  |
| How we respond | –Development of innovative products  –Product stewardship, quality and  safety standards  –Clear and accurate product  information  –International Marketing Principles  –Circular economy strategy and  initiatives | –Regular dialogue and communications  with shareholders and investors  –Robust corporate governance  –Double Materiality Assessment and  review of reporting landscape  –Continual improvement of our  Delivery with Integrity programme  –Our range of enjoyable and innovative  products  –Product quality and safety standards  –International Marketing Principles | –Extensive communications and  engagement with our people  worldwide during and following the  pandemic  –Board review of and feedback on  workforce engagement  –Training and development  programme  –Diversity & Inclusion Strategy  –Delivery with Integrity programme |  |
|  |  |  |  |  |
| Principal risk impact | –Competition from illicit trade  –Tobacco, New Categories and other  regulation interrupts growth  strategy  –Significant increases or structural  changes in tobacco, nicotine and  New Categories related taxes  –Inability to develop, commercialise  and deliver the New Categories  strategy  –Climate and circularity | –Competition from illicit trade  –Geopolitical tensions  –Tobacco, New Categories and other  regulation interrupts growth strategy  –Litigation  –Significant increases or structural  changes in tobacco, nicotine and New  Categories related taxes  –Inability to develop, commercialise  and deliver the New Categories  strategy  –Disputed taxes, interest and penalties  –Foreign exchange rate exposures  –Solvency and liquidity | –Geopolitical tensions  –Injury, illness or death in the  workplace |  |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Engaging with Our Stakeholders |  |  |  |  |  |  |  |
| Engaging with Our Stakeholders | | | | | | | |

We work with, take into account and respond to the views and concerns

of our stakeholders. This enables us to adapt to emerging risks and work

to meet the expectations placed upon us as a multinational business.

20

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|  |  |  |  |  |  | UK Companies Act:  Section 172(1) Statement | | |  |
|  | Suppliers | Customers | Government &  Wider Society |  |  | Our Directors have a duty,  individually and collectively  as the Board, to act as they  consider most likely to promote  the success of the Company for  the benefit of our members as  a whole.  As part of this duty, our  Directors must have regard for  likely long-term consequences  of decisions and the desirability  of maintaining a reputation for  high standards of business  conduct. Our Directors must  also have regard for our  employees’ interests, business  relationships with our wider  stakeholders, the impact of our  operations on the environment  and communities in which we  operate and the need to act  fairly between shareholders.  Consideration of these factors  and other relevant matters is  embedded into all Board  decision-making, strategy  development and risk  assessment throughout the year.  Our key stakeholders and  primary ways in which we  engage with them are set out  in the table to the left. Pages  [89](#iecb80c297bcf49878ca96946d0f9b1c3_95480), [134](#id739eb8a094346e4a1dd9989c862058f_10005), [137](#id739eb8a094346e4a1dd9989c862058f_9987) to [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429) and [168](#iff8934d3734b44f4b1d79b07b59bc890_252487) to  [170](#iff8934d3734b44f4b1d79b07b59bc890_252488) provide further explanation  of our Board’s approach to  understanding stakeholder  interests to enable relevant  considerations to be drawn  on in Board discussion  and decision-making.  Where the Board delegates  authority for decision-making  to management, our Group  governance framework  discussed on pages [131](#id739eb8a094346e4a1dd9989c862058f_10023) and [132](#i22d97af4610047a89b51933beef8ed79_289017)  mandates consideration of  these factors and other  relevant matters as a critical  part of delegated authorities.  Examples of some of the ways  that these factors have shaped  Group strategy and initiatives  during the year are referenced  in the table to the left.  Examples of how these factors  have been taken into account  in Board decision-making  and strategy development  during the year are provided  on page [134](#id739eb8a094346e4a1dd9989c862058f_10005). | | |  |
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|  | Effective relationships with farmers  and suppliers of tobacco leaf, product  materials and indirect services are  essential to an efficient, productive  and secure supply chain. | Our customers include retailers, global  and local key accounts, distributors  and wholesalers that are essential for  driving growth and embedding  responsible marketing practices. | We seek to be part of the debate that  shapes the regulatory environment  in which we operate, and to work  collaboratively to develop joint  solutions to common challenges. |  |  |  |
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|  | –Extension Services farmer support  –Ongoing dialogue and relationship  management  –‘Supplier Voice’ survey, events and  supplier summits  –Strategic partnerships | –Ongoing dialogue and account  management  –‘Customer Voice’ survey  –Audits/performance reviews  –Sales calls and visits by trade  representatives  –B2B programmes  –Digital B2B eCommerce platforms | –Meetings and ongoing dialogue  –Submissions to government and  advisory committees  –Multi-stakeholder partnerships and  working groups, such as the ECLT  Foundation  –External Scientific Panel  –Peer-reviewed research  –Biodiversity action and pledges  ahead of COP 15 summit  –Community investment  programmes and NGO partnerships  –Double Materiality Assessment  related engagements |  |  |  |
|  |  | • | Digital B2B eCommerce platforms |  |  |  |
|  | –Productivity/quality/cost  –Sustainable agriculture  –Farmer livelihoods  –Human rights  –Health and safety  –Climate change impacts  –Impact of conflict in Ukraine  –Ongoing impacts of COVID-19 | –Route-to-market planning  –Contingency planning  –Cost, price and quality  –Stock availability  –Consumer buying behaviour  –Youth access prevention  –Ongoing impacts of COVID-19 | –Product regulation  –Tax/excise/illicit trade  –Responsible marketing  –Public health impacts  –Human rights  –Climate change impacts  –Ongoing impacts of COVID-19 |  |  |  |
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|  | –Supplier Code of Conduct  –Thrive sustainable agriculture and  farmer livelihoods programme  –Leaf operational standards for PPE  and child labour prevention  –Farmer Extension Services support  and training  –Ongoing COVID-19 support | –Customer loyalty programmes  and incentives  –Global Youth Access Prevention  (YAP) Guidelines and initiatives  –Ongoing COVID-19 support | –Standards of Business Conduct  (SoBC)  –Delivery with Integrity programme  –Carbon neutrality target for 2030  and Net Zero target for 2050  –Human rights and climate  impact assessments  –Community investment  programmes and  charitable donations  –Ongoing COVID-19 support |  |  |  |
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|  | –Geopolitical tensions  –Inability to develop, commercialise  and deliver the New Categories  strategy  –Solvency and liquidity  –Climate and circularity | –Competition from illicit trade  –Geopolitical tensions  –Significant increases or structural  changes in tobacco, nicotine and  New Categories related taxes  –Inability to develop, commercialise  and deliver the New Categories  strategy  –Climate and circularity | –Competition from illicit trade  –Geopolitical tensions  –Tobacco, New Categories and other  regulation interrupts growth  strategy  –Significant increases or structural  changes in tobacco, nicotine and  New Categories related taxes  –Inability to develop, commercialise  and deliver the New Categories  Strategy |  |  |  |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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Listening to our stakeholders helps us better understand their views

and concerns, and enables us to respond to them appropriately.

It gives us valuable inputs to, and feedback on, our strategic approach,

as well as our policies, procedures and ways of working.

21

We are a global business, operating at scale, in a fast-paced world. Our markets are

shaped by long-term consumer, economic, cultural and social trends, as well as the

regulatory environment. Generational differences and shifts in taste are continuing to

evolve, as health and wellness become ever more important. We continue to respond

to this changing environment by advancing our strategy and long-term priorities.

Megatrend:

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|  | Costs of Living |  |  |  |  | Sustainability and Technology |  |  |  | Supply Chains |  |
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|  | Changes to Consumer Behaviour  Consumers worldwide faced a series of  rises in the cost of living during 2022.  This has been caused by sharp rises in  commodity prices, as well as enduring  strains on supply chains and increased  demand for products and materials  after the pandemic. The damage that  inflation has caused to consumer  confidence and purchasing power has  led the public to look for savings in  ‘discretionary’ areas, such as by  deferring expenditure on non-essential  items, or buying cheaper alternatives  where possible.  In addition, the taxation policies pursued  by many countries on traditional tobacco  products, and increasingly on nicotine-  based alternatives, have led to further  increases in costs for nicotine consumers.  Costs & Health Choices  Consumer behaviour is also  increasingly driven by longer-term  trends, such as greater societal  awareness of health issues. This can be  seen in the increased popularity of  health technology, such as wearable  health devices, and the need for a  greater understanding of ‘life-style  choices’ in marketing.  The increasing availability of reduced-  risk products\*† (RRPs) in many markets,  driven by technological innovation and  significant industry investment, can  play a huge role in responding to these  behavioural changes by providing  satisfying nicotine alternatives at  affordable prices to consumers.  However, for RRPs\*† to realise their  potential, they must be supported by  effective regulatory regimes that  enable responsibly managed growth  and promote informed consumer  choice. |  |  |  |  | The Climate and Technology  The impacts of climate change and the  need for individuals, corporate bodies  and states to reduce carbon footprints  are becoming more pressing every year.  At the same time, technology is playing  a greater role in our lives, meaning the  environmental impact of electronic  waste will command ever-greater  attention, including offering smokers  who do not want to quit access to  RRPs\*†.  As RRPs\*† become more established as  part of the nicotine market, demand for  resources to build their technological  components will increase, along with  the need for solutions for their  responsible disposal. It will be  important to reconcile these pressures  that growth creates with the need for  businesses to operate in more  sustainable ways.  Environmental Regulation  Extended producer responsibility  policies, in which policymakers create  incentives for producers to minimise  their environmental impacts, are  increasingly common policy tools.  While there is a place for these  schemes, they need to be balanced  with other policy objectives, including  ensuring that smokers who do not  want to quit are able to access RRPs\*†.  Solutions to reduce the environmental  impact of our business will ultimately  come from innovation, as much as from  changing behaviours.  Across our business, we continue to  embed sustainability. We will continue  to find ways to reduce our own impacts  on the environment, including through  enhanced ESG policies. |  |  |  | After-Effects of COVID-19  The return to normality by large  elements of the global economy after  COVID-19 has eased many supply chain  issues, removing barriers to operations  such as lockdown restrictions and  border checks.  However, COVID-19 lockdowns in China  during 2022 meant that, while the  effects of the pandemic appeared to be  receding, they have not disappeared.  Additionally, as the global economy has  emerged from the pandemic, some  consumer behaviours have altered  dramatically, creating new demands  on already strained supply chains. For  example, the increasing use of  technology in more sectors and more  elements of our lives has caused an  unprecedented demand for microchips,  including in the nicotine industry. The  devastating conflict in Ukraine, and  the restrictions placed on economic  activity with Russia, also continue to  affect fuel costs, which further  exacerbate supply chain issues.  Geopolitical Disruptions  The truly globalised nature of supply  chains has boosted global prosperity  at an unprecedented scale in recent  decades, raising living standards across  the world. However, it is also becoming  more evident that our mutual reliance  on each other for industrial activity  means that disruptions in one area of  the world can have far reaching impacts.  Along with the strains caused by  changes in business and consumer  needs, supply chains are increasingly  being tested by wider geopolitical  issues. Carefully managing supply chain  resilience is therefore an increasingly  important factor for global businesses. |  |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| Our Markets and Megatrends | | | | | | | |

22

Overview

The modern nicotine market is evolving to

increasingly comprise a wider range of

products which cater to a broader set of

consumer tastes and needs. As a result,

traditional tobacco products, along with

new nicotine products, such as Vapour,

THP and Modern Oral, meet the needs of

more than a billion consumers globally.

Global Combustible Market

The most recent sales data for the legal

global tobacco market indicated that it

was worth approximately US$935 billion.

Combustible cigarettes were the largest

product category within the market,

representing 83% of the total value of

tobacco sales worldwide and with over

2.8 billion cigarettes consumed (excl.

China). This amounts to a cigarette

market with a global value of US$518 billion

(excl. China).

The value of the global Non-Combustible

products market stands at some

US$68 billion.

18% of the world’s adult population (incl.

China) still choose to smoke. Having

remained broadly stable for a number

of years, this figure indicates that a very

sizable proportion of the global population

is likely to continue to smoke unless they

are offered suitable, Non-Combustible,

alternatives. While the regulation of

combustibles and changes in societal

attitudes have contributed to declines in

smoking prevalence in many countries,

research is also increasingly attributing

reductions in cigarette smoking to the

uptake of RRPs\*† among smokers, for

example in Japan.

The illicit market

With the end of mobility restrictions in

most jurisdictions after the pandemic, the

size of the illicit tobacco market appears to

be growing again. Illicit volumes are forecast

to approach 14% of all sales by 2026,

compared with 12.6% (excl. China) in 2021.

The tragic conflict in Ukraine has also had a

destabilising impact on the market, leading

to a dramatic rise in the illegal segment of the

tobacco market in that part of the world: a

quarter of Russians have switched to illegal

cigarettes, according to some surveys.

Within the European Union, a 2021 KPMG

report noted that illicit cigarette

consumption was estimated to have

increased by 3.9% vs 2020.

Price differentials between markets,

regulatory changes and broader macro-

economic pressures have the potential to

exacerbate the problem. It is generally

accepted that there is a direct correlation

between steep and/or ad hoc increases in

taxes and illicit sales.

Global combustible regulation

Combustible tobacco products are among

the most highly regulated consumer

products in the world. To date, legislators

have focused on the introduction of

demand-side regulatory measures. This

has included plain packaging, product-

specific regulations, graphic health

warnings on packs, tougher restrictions on

smoking in enclosed public places, bans on

shops displaying tobacco products at the

point of sale and restrictions on flavourings

in tobacco.

While regulation is in many cases driven

by global agreements on tobacco product

regulation, it varies considerably from

market to market.

In recent years, numerous countries have

committed to smoke-free targets, setting a

date by which they expect to reduce or

contain the prevalence of tobacco use to

less than 5%. An example of this is in New

Zealand where, as part of their plan to

achieve their smoke-free target by 2025,

the Parliament in December 2022 passed a

bill to ban “the sale of smoked tobacco

products to anyone born on or after 1

January 2009”.

Environmental concerns regarding litter

associated with cigarette consumption

have also led to an increased number of

policy initiatives. The EU’s Single-Use

Plastics legislation has led the way by

requiring EU Member States to introduce

extended producer responsibility schemes

for, amongst other things, cigarette filters.

Global New Categories Market

Technology and innovation continue to

revolutionise the nicotine market. Non-

Combustible products offer consumers

less risky\*† but compelling alternatives to

cigarettes. These products include Vapour

products, THPs and Modern Oral nicotine

pouches. These can deliver nicotine

without the process of combustion and are

increasingly popular among smokers who are

looking for alternatives to smoking but do not

want to give up nicotine consumption

completely.

Evidence of this shift can be seen in global

revenues from these products, which are

estimated to comprise US$55 billion for

Vapour products, THPs and nicotine

pouches, an increase from US$43 billion in

2020. The most recent external estimates

value the Vapour product market at US$23

billion, with THPs valued at US$29 billion

and Modern Oral estimated to be worth

US$3 billion.

Nicotine pouches, the newest innovation in

RRPs\*†, are expected to achieve the fastest

rate of growth among new nicotine

products between 2021 and 2026, with

some estimates projecting 500% growth in

market value within that timeframe.

New Categories regulations

Globally, while the RRP\*† market is

becoming more established, regulation of

the sector is still developing.

In some cases, the role that RRPs\*† can play

in reducing the harms from smoking has

been embraced by regulators, such as in the

UK, New Zealand and Canada. These

markets have aimed to communicate to

consumers that RRPs are better

alternatives\*† to smoking and have

regulated these products accordingly,

while at the same time being mindful of the

need to prevent usage by youth.

Other markets, however, have not yet been

convinced of the public health benefits that

RRPs\*† could provide and have sought

instead to limit access to them, such as in

Australia, Brazil and India, where sales of

RRPs\*† are currently banned. Some markets

have also inadvertently confused nicotine

consumers by seeking to treat the

products in the same way as combustibles.

Public policy will play an important role in

how RRPs\*† are perceived among nicotine

consumers, impacting their uptake and

success, making this debate of increasing

importance as the RRP\*† market develops.

Other developments

The emerging and rapidly growing market

for wellbeing products is expected to

continue to grow. One such market,

cannabidiol (CBD), is expected to gain

wider use, as evidenced by its recent

growth in market size and the increase

in governments considering potential

legalisation of its recreational use.

Some markets, such as Germany and the

Czech Republic, are also re-examining

the merits of maintaining their current

prohibitionist stances on cannabis, in

response to projected increases in

adults using the black market to

procure these products.

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|  |  | See pages [117](#id739eb8a094346e4a1dd9989c862058f_8875) to [122](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718) to read more about our  Group Principal Risks |  | Notes:  All data sources on this page are from Euromonitor International research published in 2022 and based on 2021 data (the  latest full year available), unless otherwise stated.  \*    Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not  risk free and are addictive.  †    Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products including Velo, Grizzly, Kodiak, and  Camel Snus, which are sold in the U.S., are subject to FDA regulation and no reduced-risk claims will be made as to  these products without agency clearance. |
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|  |  | For further discussion regarding the regulation  of our business, please see pages [363](#id739eb8a094346e4a1dd9989c862058f_4392) to [367](#ib2ca2a09b7af468b86c606a868ebb699_386089) |  |
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23

Our Mission

Stimulating the Senses

of New Adult Generations

Today, we see opportunities to capture

consumer moments which have, over time,

become limited by societal and regulatory

shifts, and to satisfy evolving consumer

needs and preferences.

Our mission is to anticipate and satisfy this

ever-evolving consumer: provide pleasure,

reduce risk, increase choice and stimulate

the senses of adult consumers worldwide.

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| We made great progress on  our strategic targets in 2022.  As part of our growth strategy,  New Category revenue grew  41% and we now have a total  of 22.5 million consumers of  our Non-Combustible products  (up 4.2 million).  Kingsley Wheaton  Chief Growth Officer |

Must Wins

High Growth Segments

Driven by our unique and data-driven

consumer insight platform (PRISM), we will

focus on product categories and consumer

segments across our global business that

have the best potential for long-term

sustainable growth.

Priority Markets

By relying on a rigorous market

prioritisation system (MAPS), we will focus

the strengths of our unparalleled retail and

marketing reach, as well as our regulatory

and scientific expertise, on those markets

and marketplaces with the greatest

opportunities for growth.

Notes:

\*Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products, including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims will

be made as to these products without agency clearance.

How We Win

Inspirational Foresights

Built on our successful history, we have

a unique view of the consumer across

all of our product categories, which is

increasingly driven by powerful data

and analytics. These insights ensure

that the development and responsible

marketing of our products are fit to satisfy

consumer needs.

Remarkable Innovation

As consumer preferences and technology

evolve rapidly, we rely on our growing

global network of digital hubs, innovation

super centres, world-class R&D

laboratories, external partnerships and

our corporate venturing initiative to stay

ahead of the curve.

Powerful Brands

For over a century, we have built trusted

and powerful brands that satisfy our

consumers and serve as a promise for

quality and enjoyment. We will build the

brands of the future by focusing on fewer,

stronger and global brands across all our

product categories, delivered through our

deep understanding and segmenting of

our consumers.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| A Strategy for Accelerated Growth | | | | | | | |

In 2022, 15%

#### of Group revenue was from non-combustible products.

#### This was achieved

#### through a multi-category approach which is the very essence of our purpose to build A Better

#### Tomorrow™ – providing adult consumers with a range of enjoyable and less risky

\*† choices for

#### every mood and moment.

24

Connected Organisation

Few companies can claim the global reach

that we have. Cultivating an ecosystem

that directly connects us with consumers

and stakeholders, especially through the

power of digital technology, ensures we

can build the brands of the future, deliver

access to markets and foster innovations

that offer sensorial enjoyment and satisfy

consumer needs.

People and Partnerships

Our highly motivated people are being

empowered through a new ethos that is

responsive to constant change, embodies

a learning culture and is dedicated to

continuous improvement. But we cannot

succeed on our own, and our partnerships

with farmers, suppliers and customers

are also key for ensuring sustainable

future growth.

U.S. Focus

The United States comprises nearly half

of our global business. It is also the single

largest economy in the world, the largest

single centre for technology and the key

driver of global consumer trends, and

is where we have the deep consumer

understanding and financial strength

to support the delivery of our mission to

stimulate consumer senses around the

rest of the world.

Our Purpose

By stimulating the senses of new

adult generations, our purpose is

to create A Better Tomorrow™ for

all our stakeholders. We will create

A Better Tomorrow™ for:

Consumers

By responsibly offering enjoyable and

stimulating choices for every mood and

every moment, today and tomorrow;

Society

By reducing the health impact of our

business by offering a range of alternative

products, as well as by reducing our

environmental and social impacts;

Employees

By creating a dynamic, inspiring and

purposeful place to work; and

Shareholders & Investors

By delivering sustainable and

superior returns.

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|  |  | For more information about our  purpose see inside front cover |

Short-Term Deliverables to

#### Fuel A Better Tomorrow

™

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Simplify the Business

Our ongoing simplification programme,

Project Quantum, which had realised £1.9

billion of annualised savings through

simplification and efficiencies by the end

of 2022.

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|  |  | For more key details see  pages [29](#id739eb8a094346e4a1dd9989c862058f_5852) to [30](#id739eb8a094346e4a1dd9989c862058f_17882) |

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Ensure a Step Change in New

Categories Performance

With our unique cross-category

consumer understanding, we are

clear there is a huge opportunity

for our New Categories.

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|  |  | For more key details see  pages [33](#id739eb8a094346e4a1dd9989c862058f_5896) to [38](#id739eb8a094346e4a1dd9989c862058f_14907) |

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Drive Value From Combustibles

We drive value from combustibles to fuel

our investment in, and transition revenue

to, New Categories.

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|  |  | For more key details see  pages [40](#id739eb8a094346e4a1dd9989c862058f_9443) to [41](#id739eb8a094346e4a1dd9989c862058f_15792) |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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The model below outlines the key components of how we are building A Better Tomorrow™,

#### from our mission to stimulate the senses of adult consumers worldwide and the outcomes

this will deliver for stakeholders, to the

#### ethos

#### that guides our

#### decision-making

.

25

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| Our purpose to build  A Better Tomorrow™, by  reducing the health impact  of our business, while also  driving excellence across ESG  matters, is well-aligned to the  attitudes and expectations of  our stakeholders.  Kingsley Wheaton  Chief Growth Officer |

Dear Stakeholders,

We are delighted to share our first

‘Combined Annual and ESG Report’ with

you: incorporating our Sustainability

reporting into our Annual Report more

extensively, and in an integrated way.

Sustainability at our Core, Underpinned

by Double Materiality Assessment\*\*

Our purpose to build A Better Tomorrow™,

by reducing the health impact of our

business, while also driving excellence

across ESG matters, is well-aligned

to the attitudes and expectations

of our stakeholders.

Recognising the importance of further

integrating sustainability into our business

strategy, in 2022, Mike Nightingale was

appointed as our first Chief Sustainability

Officer (CSO).

We also implemented a new Double

Materiality Assessment (DMA)-led

approach to inform our Sustainability

Agenda (see below). This updated

approach reflects how we are seeking to

put sustainability at the core of everything

we do, and is increasingly embedded in

every business function.

Taking a Double Materiality Approach

The forthcoming EU Corporate Sustainability

Reporting Directive (CSRD) requires

reporting on a Double Materiality basis and, we

have taken the opportunity to be among

the first companies globally to conduct and

disclose the results of our Double

Materiality Assessment (DMA). See page

[47](#id739eb8a094346e4a1dd9989c862058f_15528) for details.

We have used the outputs of this new

DMA to better inform our understanding

of, and reporting on, those sustainability

issues which are most important for BAT

and to our stakeholders. This analysis

considers both BAT’s impact on ESG

matters, and the impact of ESG matters

on BAT.

We have used the output to guide our

reporting on sustainability in this new

Combined Annual and ESG Report.

Stakeholder engagement

Strong engagement with our stakeholders

has always been important to us. Our

approach to the DMA has allowed us to

further deepen and widen this engagement.

External assurance

Recognising the importance of confidence

in our disclosures and transparency, we

engaged KPMG to conduct external

assurance of key ESG metrics in this report, in

accordance with international standard

ISAE 3000. Their independent limited

assurance report for ESG metrics is available

on page [96](#id739eb8a094346e4a1dd9989c862058f_20797).

This is in addition to their audit of ESG-

related financial metrics, such as

New Category product sales.

Tobacco Harm Reduction at the

Forefront of our Strategy

At the centre of our strategy is our

corporate purpose to build A Better

TomorrowTM, and reduce the health impact

of our business. Over the last 10 years we

have built a multi-category portfolio of

reduced-risk products\*†, tailored to meet

the evolving preferences of adult consumers.

As Luc, Jack and Tadeu have highlighted,

we continue to make strong progress on

our journey and are confident in generating

£5 billion revenue from the New Category

business by 2025, with 50 million consumers

of our Non-Combustible products by 2030.

Our core purpose of harm reduction is of

paramount importance to us. Its

importance to stakeholders was made

clear through the DMA we conducted,

which identified it as our primary issue.

As we deliver A Better TomorrowTM, and

reduce our health impact, we must also

drive progress across all our other material

ESG areas to ensure BAT’s transformation

is complete.

Achieving Excellence in

Environmental Management

Alongside affirming the utmost importance

of Harm Reduction, our DMA demonstrated

an elevated importance for Climate

Change, Circularity and Biodiversity, while

recognising continued relevance of other

material issues in our strategy.

Climate Change: By addressing climate

risks and opportunities across our value

chain, we can better support the long-term

sustainability of our business, our planet

and wider society. By 2030, we aim to

achieve a 50% reduction in our Scope 1, 2 &

3 emissions and to be Net Zero across our

value chain by 2050 at the latest. See page [53](#id739eb8a094346e4a1dd9989c862058f_15552)

for more details.

Circular Economy: Circularity is at the

heart of how we seek to manage resources.

From minimising operational waste to

innovative New Category product designs,

we are working to address a growing global

concern about plastic and other waste.

By 2025, we aim for 100% of our packaging

to be reusable, recyclable or compostable.

Find out more on page [55](#id739eb8a094346e4a1dd9989c862058f_15564).

While the Vuse Go format in the Vapour

category provides flexibility and convenience,

which makes it a compelling alternative to

cigarettes, we recognise that the rapid

growth of the Modern Disposable segment

presents additional environmental challenges.

Reducing the environmental impact of the

Modern Disposable segment is a key focus of

our efforts, alongside our product Take-

Back schemes and efforts to transition

consumers to our pod-based products.

Biodiversity and Ecosystems: Sustainable

agricultural practices help farming communities

thrive and defend against deforestation

and other loss of the natural environment.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| Integrating Sustainability  for A Better Tomorrow™ | | | | | | | |

26

We aim for Net Zero deforestation of

managed natural forests in our tobacco,

paper and pulp supply chains by 2025. Find

out more on page [57](#id739eb8a094346e4a1dd9989c862058f_15588).

Water: As water scarcity risks may

increase with a changing climate, we are

working to drive water efficiencies in the

supply chain. By 2025, we aim to reduce

the total amount of water we withdraw for

our own operations by 35% vs 2017. See

page [59](#id739eb8a094346e4a1dd9989c862058f_15576).

Delivering a Positive Social Impact

From enhancing farmer livelihoods and

respecting human rights – to creating

a diverse, inclusive culture – we are

working to contribute to a more socially

sustainable world.

Human Rights: We are committed to

respecting the human rights of our

employees, the people we work with and

the communities in which we operate.

We continue to aim for zero child labour

and zero forced labour in our tobacco

supply chain by 2025. See page [61](#id739eb8a094346e4a1dd9989c862058f_15617).

Farmer Livelihoods: Enhancing farmer

livelihoods helps tackle rural poverty and

strengthens our supply chain. We are

committed to working to enable prosperous

livelihoods for all farmers in our tobacco

supply chain. Find out more on page [63](#id739eb8a094346e4a1dd9989c862058f_15601).

People, Diversity and Culture: Attracting

and retaining a diverse workforce and

providing a welcoming, inclusive working

environment are key drivers in BAT’s

transformation. By 2025, we aim to increase

the proportion of women in management

roles to 45%. Find out more on page [85](#id739eb8a094346e4a1dd9989c862058f_9644).

Health and Safety: We are committed to

providing a safe and healthy working

environment for our employees, and those

in our supply chain. Our ambition is for zero

accidents Group-wide and we audit Health

& Safety (H&S) across the higher-risk areas

of our supply chain. Find out more on page [93](#id739eb8a094346e4a1dd9989c862058f_16730).

Robust Corporate Governance

Our global principles and policies set out

how we work to promote consistent and

robust corporate governance, in every

market we operate in.

Responsible Marketing: Responsible

marketing practices are crucial for ensuring

only adult consumers use our tobacco and

nicotine products. We have strict

marketing requirements, and support our

employees, partners and customers in

effectively applying them.

We aim to have 100% adherence to our

International Marketing Principles and our

Youth Access Prevention Guidelines across

our global operations. Find out more on page [65](#id739eb8a094346e4a1dd9989c862058f_15649).

Ethics and Integrity: We are guided by a

robust, global set of principles and policies

in everything we do, in all our markets. We

aim for 100% adherence to our Standards

of Business Conduct (SoBC) in our own

operations, and with our Supplier Code of

Conduct (SCoC) in our supply chain. See

page [67](#id739eb8a094346e4a1dd9989c862058f_15661) for more information.

Sustainability Governance: We have

leveraged our 2022 DMA process to review

sustainability governance at BAT. We

already had strong governance structures

and arrangements in place. However, we

are focused on continual improvement.

We also identified 'climate and circularity'

as a principal risk for the first time in 2022,

further recognising their significance to

both society and BAT.

Going forward, we will continue to review

our arrangements in this area – outlined on

page [69](#id739eb8a094346e4a1dd9989c862058f_15637) – to help ensure that they are fit

for the future.

Our Approach to

Sustainability Reporting

Our forward-looking view

BAT has continuously updated its reporting

over the years, and this year marks another

step forward. For example:

–we are reporting on the Principal Adverse

Impact (PAI) indicators of the EU

Sustainable Finance Disclosure

Regulation (SFDR), within this report and

on bat.com; and

–we are starting to align to draft

standards for the CSRD, notably with

respect to Double Materiality (see page

46), and looking towards the US

Securities and Exchange Commission

(SEC) plans on climate-related reporting.

Our Sustainability Journey

We challenge ourselves to take a forward-

looking, future-oriented approach: in our

products, our governance, our stakeholder

engagement, our ESG goals and targets,

and in our reporting.

Whilst we recognise that there remains

much to be done to achieve a truly

sustainable business and society, we are

encouraged by our progress so far, working

in partnership with others, and welcome

feedback to sustainability@bat.com.

Notes:

\*Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro

and Vibe), and certain products, including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S.,

are subject to FDA regulation and no reduced-risk

claims will be made as to these products without

agency clearance.

\*\*Our Double Materiality Assessment and any related

conclusions as to the materiality of sustainability or

ESG matters do not necessarily refer to the evaluation

of factors, results or other considerations that are

financially material to our business taken as a whole,

except where specified. In particular, the consideration

of BAT's impact on the sustainability of society and

the environment may not be financially material and

may not significantly alter the total mix of information

available about our securities.

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| We challenge ourselves  to take a forward-looking,  future-oriented approach:  in our products, our  governance, our stakeholder  engagement, our ESG goals  and targets, and in our  reporting.  Mike Nightingale  Chief Sustainability Officer |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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27

### Quantum

has achieved annualised savings of £1.9bn

whilst we continue simplifying

the organisation.

### Unleash Innovation

is transforming our capabilities

to win as a multi-category business.

### Empowered Organisation

is strengthening our talent pool.

### Shaping Sustainability

continues to put sustainability front

and centre of everything we do.

### Technology & Digital

is creating new channels to connect

with our consumers and enabling the

simplification of our organisation.

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| £600m+  productivity savings in 2022 |
|  |
| 3  new Global Business Services (GBS)  Hubs embedded in Mexico, Poland  and Pakistan |
|  |
| 15+  new capabilities added to our  GBS Hubs, such as our Customer &  Consumer Engagement Centres |

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| --- |
|  |
| New  global device development centre  in Shenzhen, China |
|  |
| 150+  engineers, scientists and product  developers recruited |
|  |
| ~2x  New Categories R&D spend vs 2021 |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | | | | | | | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Short-Term Deliverables to Fuel A Better TomorrowTM | | | | | | | | | | | | | |
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|  |  |  |  |  |  | Simplify the Business |  |  |  |  |  |  |  |
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QUEST is our Group-wide programme designed to accelerate our transformation

into the Enterprise of the Future: a global, consumer-centric, multi-category company,

with sustainability at its core.

28

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|  |
| 3,000+  new capability hires since 2019 |
|  |
| 214  global graduates from 39 markets at  our graduate academy for future  leaders |
|  |
| 5  consecutive years as a certified Global  Top Employer |

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| --- |
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| 2  ground-breaking studies with New  Category product consumers1 |
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| 16  key environmental metrics tracked as  part of our new, dynamic Green Impact  Analytics tool |
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| 95+  stakeholder dialogues undertaken as  part of our first Double Materiality  Assessment |
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| Notes:  1.indicating that consumers, who switched  completely to Velo or to glo, had better results for  several biomarkers linked to early developmental  processes of smoking-related diseases compared  with smokers. |

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| 22m  consumers in our contactable  consumer database (2021: 14.2m) |
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| 53.6%  increase in Active Subscriptions –  @delivering 31.8% of total e-commerce  revenue@ |
|  |
| 250k  hours saved via 290 new Robotic  Process Automation bots |
|  |
| @ Denotes phrase, paragraph or similar that does  not form part of BAT's Annual Report on Form 20-  F as filed with the SEC. |

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Each letter of QUEST represents one of the five priority areas we are focused

on to re-define our business and re-shape our product portfolio – driven by digital

transformation and underpinned by our ethos.

29

For C

## onsumers

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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30

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |
| We are enabling  consumer choice |  | We prioritise  product quality |  | We market and  communicate responsibly |  | We are building brands  with purpose |
| Multi-Category |  | +150 Peer-Reviewed  Papers |  | Adult Only |  | 100% Markets |
| portfolio of less risky products\*†  tailored to meet the evolving  preferences of adult  consumers |  | published to date on our  cutting-edge research into  New Category products |  | consumers targeted for all our  product marketing, enshrined  in our International Marketing  Principles (IMP) |  | glo and Vuse markets with  Take-Back schemes in place |
|  |  |  |  |  |  |  |
| 22.5 Million |  | High Product  Standards |  | Digital Confidence  Unit |  | 92% of Packaging |
| adult consumers who have  already chosen our reduced-  risk\*† products |  | based on decades of product  stewardship experience, which  we hope will become industry  benchmarks and a basis for  future regulation |  | conducting 24/7 monitoring of  all BAT digital channels globally  for responsible marketing  using cutting-edge technology |  | capable of being reused,  recyclable or compostable in  2022 |
|  |  |  |  |  |  |  |
| New |  | Thousands of Hours  of Testing |  | iCommit  Training |  | 30% Recycled Plastic |
| Global Device Development  Centre in Shenzhen, China, to  generate further consumer  insights |  | undertaken before our  products reach the consumer,  in line with our Group Quality  Policy Statement |  | to drive IMP and YAP  compliance across our digital  channels |  | target for average recycled  content in plastic packaging by  2025 |
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| 60 Markets |  | Quality |  | Responsible Flavour |  | <1% to Landfill |
| where our New Category  products are available, offering  adult smokers greater choice |  | ingredients and clear and  accurate product information |  | descriptors for our e-liquids  that do not appeal to youth,  or are not associated with  youth culture |  | target for operating waste  going to landfill by 2025 |
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| --- | --- | --- |
|  |  |  |
|  |  | Notes:  \*    Based on the weight of evidence and  assuming a complete switch from  cigarette smoking. These products  are not risk free and are addictive.  †    Our Vapour product Vuse (including  Alto, Solo, Ciro and Vibe), and certain  products, including Velo, Grizzly,  Kodiak, and Camel Snus, which are  sold in the U.S., are subject to FDA  regulation and no reduced-risk  claims will be made as to these  products without agency clearance. |
|  | Having launched our first Vapour  product in 2013, 2022 marked  a decade of portfolio transformation.  Kingsley Wheaton  Chief Growth Officer |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| A Better Tomorrow™  For Consumers | | | | | | | |

31

|  |
| --- |
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|  |

## Our Vapour

## Products

\*†

#### Vapour products are

#### battery-powered devices

#### that heat liquid

#### formulations – e-liquids –

#### to create a vapour which

#### is inhaled.

#### As Vapour products

#### do not

#### contain tobacco and do not

involve combustion, the

v

#### apour contains substantially

fewer and lower levels of

#### the toxicants found in

#### cigarette smoke.\*†

Highlights

–Vuse value share up 250 bps vs 2021 to

reach 35.9% share in our Top 5 markets.

–Vuse achieves national value share

leadership position in the U.S., increasing

840 bps vs 2021 to 40.9%, and leading in

35 states.

–Consumer acquisition up 1.6 million,

reaching 10.0 million, with growth in

all Top 5 markets.

–Vapour volume up 14.3%, with revenue

44% higher at constant rates of

exchange.

–Vuse Go (the Group's modern disposable

offer) launched in 24 markets, including

the UK, France, Spain, Canada, Greece,

Germany and Ireland.

Vaping is not harmless. But there's

overwhelming scientific

agreement it's far less harmful

than smoking. And that's what we

need to compare it with.

Dr Colin Mendelsohn, Associate

Professor, University of New South

Wales, Chair, Australian Tobacco Harm

Reduction Association, 2022

33

Number of markets where the Group’s

Vapour products are sold

Vapour Top 5 markets \*\*\*

U.S., UK, France, Germany and Canada.

The Scientific Evidence

Organisations, such as Public Health

England (PHE)\*\*, are clear that vaping is

likely to be much less risky than smoking

traditional cigarettes when used as a

complete substitute for continued

cigarette smoking. Further evidence

continues to emerge globally about the role

of Vapour products as a reduced-risk\*†

alternative.

In 2022, we conducted a first-of-its-kind

study of Vuse, designed to assess and

provide insights into the real-world health

impact of vaping.

The study provides a comprehensive

analysis of biomarkers and physiological

measures from Vuse consumers who have

been using the product for over six months

with the results from smokers, former

smokers and never smokers. Protocol

details explaining the innovative design of

the latest study were published in the

Journal of Health and Environmental

Research.

The cross-sectional study design uses a

single set of data readings to measure

biomarkers of exposure to certain toxicants

and biomarkers of potential harm relevant

to smoking-related diseases.

What makes the study particularly relevant

is that the samples, taken at a single time

point, provide a snapshot of data that

reflects the ‘lived experience’ of the adults

in the study; whether using Vuse, smoking

or having quit smoking. The participants

had been using a product they had chosen

in the way they wanted.

The results will provide important new

insights and show us the differences

between Vuse consumers, smokers, former

and never smokers across a range of

important biomarkers thought to be linked

to the development of diseases. Results

from the completed study will be published

in due course.

|  |  |
| --- | --- |
|  |  |
|  | Notes:  \*    Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk  free and are addictive.  †    Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products, including Velo, Grizzly, Kodiak, and  Camel Snus, which are sold in the U.S., are subject to FDA regulation and no reduced-risk claims will be made as to  these products without agency clearance.  \*\*  Public Health England (PHE) was replaced in Oct 2021 by UK Health Security Agency and Office for Health  Improvement and Disparities.  \*\*\* Key Vapour markets are defined as the Top 5 markets by industry revenue, being the U.S., the UK, France, Germany and  Canada and accounting for 88% of total industry Vapour revenue (rechargeables and disposables). |

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| BAT Annual Report and Form 20-F 2022 | | | | | | | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Short-Term Deliverables to Fuel A Better Tomorrow™ | | | | | | | | | | | | | |
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|  |  |  |  |  |  | Ensure a Step Change in New Categories Performance | | | | | |  |  |
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32

Regulation and PMTA

The future of tobacco harm reduction

has always depended on robust science,

and ensuring that this is accessible

to audiences outside the scientific

community is critical. This need is growing

stronger than ever and consumers want to

be clear on the risk profile of these

products.

In addition, consumer perceptions of

nicotine are evolving with many consumers

over-estimating the risks associated with

nicotine generally.

This also demonstrates the importance

of having, and enforcing, a robust and

effective regulatory framework that

ensures high product standards and

prevents access and appeal to youth –

things we have long advocated. Robust

science has to be at the centre of any

regulatory development and engagement.

We are fully committed to working in

a regulated market. This approach is

underscored by the U.S. Food and Drug

Administration’s Premarket Tobacco

Product Application (PMTA) process.

PMTAs are based on a summary of all

research findings to demonstrate that the

marketing of a product meets the FDA’s

criteria as "appropriate for the protection

of the public health".

In October 2021, Vuse Solo received the first

of its kind FDA marketing authorisation for

Vapour products in Original flavour. In May

2022, the FDA issued a marketing

authorisation for tobacco flavoured Vuse

Vibe and Ciro. This confirmed that the

marketing of the authorised Vuse Solo,

Vuse Vibe, and Vuse Ciro products are

appropriate for the protection of the public

health, the culmination of years of scientific

study and research. The Vuse Alto PMTA,

which was submitted nearly a year after

Vuse Solo, shares the same foundational

science. We are confident in the quality

of our applications. We have received and

are challenging the FDA's Market Denial

Order dated January 2023 related to Vibe

and Ciro (menthol variants) and are seeking

a permanent stay\*\*.

We support efforts by the FDA to both

address the increasing availability of

flavoured synthetic nicotine products

and enhance enforcement actions against

flavoured disposable Vapour products.

While synthetic nicotine disposables in

the U.S. continue to grow, driven by the

availability of flavours, since March 2022,

these products are now under FDA

regulatory control, and are required to

receive PMTA authorisation to remain

on the market. The Group does not have

synthetic nicotine disposable in the U.S.

However, where possible, we continue to

innovate across our Vuse portfolio to drive

increased satisfaction for consumers.

Performance Summary

Vapour continued its strong momentum

driven by Vuse. Total volume of

consumables was up 14.3% to 612 million

units, having grown 56% (to 535 million

units) in 2021. Combined with consumable

pricing across all Top 5 markets, this drove

revenue up 55% to £1,436 million, or 44%

at constant rates of exchange, with 2021

up 52% to £927 million (or an increase of

59.3% at 2020 rates of exchange).

Vuse maintained global Vapour value share

leadership with a full year value share of

35.9% (up 250 bps vs 2021) led by the

continued strong performance of Vuse

Alto. The category accelerated, led by the

modern disposable segment which, with

its convenient and flexible format, presents

a compelling alternative to cigarettes. We

consolidated our volume share leadership

of devices in all Top 5 markets, driven by

industry-leading consumer acquisition up

1.6 million to 10.0 million consumers.

In the U.S., Vuse achieved the No.1 position

in both value share and volume share, driven

by the continued success of Vuse Alto. Total

Vapour value share for the year was up

840 bps to 40.9%, maintaining the

momentum of 2021 which was, itself, up

from 24.9% in 2020. Vuse consumables

volume grew 10% in 2022, having grown

67% (to 291 million units) in 2021. We

retained our market-leading position (by

volume) of closed system devices, with

growth of 700 bps to 64.4% compared to

2021 (2021: up 370 bps to 57.3%\*). In addition

to volume growth, revenue growth of 63%,

or 46% on a constant currency basis,

was driven by price increases in both

consumables and devices during the year,

and by leveraging our Revenue Growth

Management (RGM) tool as a key enabler

of value creation.

In Canada, driven by ePod and supported by

the launch of the Group's first connected

Vapour device (Vuse ePod2+), we consolidated

our value share leadership position, with

total Vapour value share up a further

890 bps to 89.5% in 2022.

We have maintained value leadership in

the rechargeable sub-category in all Top

5 markets. However, the growth of the

disposable segment in 2022 has impacted

our value share (on a total Vapour category

basis) in a number of markets, with the

launch of Vuse Go stabilising the value share

performance in the final quarter of 2022.

Specifically, on a full-year basis in 2022:

–in the UK, total Vapour value share of the

category was 14.8%, compared to 29.5%

in 2021;

–in France, Vapour value share was 38.8%

in 2022, a decrease of 6.3 ppts (versus

2021); and

–in Germany, our value share of total Vapour

was 21.4%, down 37.9 ppts (2021: 59.4%).

Proportion of Vapour revenue

by region in 2022 (£m)

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | 2022  £m | 2021  £m |
|  |  |  |  |
|  | U.S. | 913 | 561 |
|  |  |  |  |
|  |  |  |  |
|  | AmSSA | 218 | 141 |
|  |  |  |  |
|  |  |  |  |
|  | Europe | 286 | 207 |
|  |  |  |  |
|  |  |  |  |
|  | APME | 19 | 18 |
|  |  |  |  |
|  |  |  |  |
| Total | | 1,436 | 927 |
|  |  |  |  |

Note:

\*2020 rebased to 53.6%, leading to the movement in 2021

being revised to an increase of 370 bps.

\*\* Menthol variants accounted for approximately 75% of

total Vuse consumables in 2022

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
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|  | | | | | | | |

33

|  |
| --- |
|  |
|  |
|  |

## Our Tobacco

## Heating

## Products

## (THPs)

\*†

THPs heat tobacco to

generate a nicotine-

#### containing aerosol, with

#### a tobacco taste, which

#### the user inhales.

#### Because the tobacco is

heated instead of burned,

#### the resulting aerosol

comprises mainly water,

glycerol, nicotine and

#### tobacco flavours – different

#### to cigarette smoke

.\*†

Highlights

–glo THP category volume share up

140 bps in Top 9 markets vs 2021 to

reach 19.4%.

–glo consumer acquisition up 2.0 million

reaching 8.8 million.

–glo consumable volume up 26%, ahead

of industry volume growth of 15%.

–glo revenue growth up 24% with

sequential growth in H2 2022.

In terms of risk reduction, [THPs]

avoid the intake of all those

compounds that are released with

the combustion of classic cigarettes.

Dr Piero Clavario,

Director of Anti-Smoking Centre and

Cardiology Department at the Azienda

Sanitaria Locale, Genoa, 2021

28

Number of markets where the Group’s

Tobacco Heating Products are sold

THP Top 9 markets \*\*

Japan, South Korea, Russia, Italy, Hungary,

Greece, Ukraine, Poland and the

Czech Republic.

Russia will remain in the Top 9 markets

until the sale of the Russian business

is complete.

The Scientific Evidence\*

In a cigarette, the tobacco is burned by

combustion at temperatures over 900ºC,

releasing a highly complex mixture of

gases, particles and compounds and

leaving behind a grey ash. In contrast,

THPs heat tobacco to much lower

temperatures (~200‒300ºC).

As there is no combustion, the aerosol

consists mainly of water, glycerol,

flavourings, and nicotine. Also, odour

is greatly reduced, and there is no ash.

By not burning the tobacco this

dramatically changes the composition of

the aerosol. Comparing cigarette smoke

with glo aerosol, the weight of evidence

shows that the levels of toxicants were

reduced on average by 90-95%.\*†

To date, most research has been

conducted by industry scientists, but an

increasing number of independent reports

are broadly aligned with these findings and

support the role of THPs as a less risky\*†

alternative to smoking.

|  |  |
| --- | --- |
|  |  |
|  | Notes:  \*    Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk  free and are addictive.  †    Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products including Velo, Grizzly, Kodiak, and  Camel Snus, which are sold in the U.S., are subject to FDA regulation and no reduced-risk claims will be made as to  these products without agency clearance.  \*\*  The key THP markets are defined as the Top 9 markets by industry revenue. They were adjusted in 2022, with Greece  and Hungary introduced, replacing Germany and Romania. Accordingly, glo's category volume share for 2021 was  rebased on the new definition from 18.1% to 17.9%. Top 9 markets by revenue are Japan, South Korea, Russia, Italy,  Greece, Hungary, Ukraine, Poland and the Czech Republic. Russia will remain in the Top 9 markets until the sale of the  Russian business is completed. The Top 9 account for 80% (2021: 82%) of total industry THP revenue. |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | | | | | | | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-Term Deliverables to Fuel A Better Tomorrow™ | | | | | | | | | | | | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  | Ensure a Step Change in New Categories Performance | | | | | |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |

34

In 2022, we published the results of a year-

long study which showed that smokers

switching exclusively to glo, BAT’s flagship

THP, achieved significant and sustained

improvements in several indicators of

potential harm compared to those who

continued to smoke.

The full results, which were published in

Internal and Emergency Medicine, build

upon the favourable changes reported at

three and six months. The improvements

observed were sustained over the 12

months of the study, adding to the weight

of evidence that supports glo as a less

risky\* alternative for adult smokers who

would not otherwise quit.

The results from this study are the most

important data we have ever generated

about glo and for the THP category in

general. This real-world study allows us to

assess the changes that adult smokers

switching exclusively to glo experience, by

assessing early indicators of potential harm

associated with disease development. It

provides much needed new evidence about

the size of the change and durability of the

effect switching completely to glo can

have, and reinforces glo’s potential as a

reduced-risk product\*.

Designed with Purpose

Our new glo Pro, Hyper, and Hyper+ models

feature induction heating, enabling devices

to reach their operating temperatures of

around 240-280ºC faster. This makes them

more efficient and enjoyable for consumers

to use.

Building on glo Hyper+, which launched in

2020, Hyper X2 incorporates advanced

induction heating technology encased in a

smaller, lighter weight device. A separate

boost function for faster heating, battery

status LED indicator, a protective iris-

shaped shutter and bold new colourways

complete the new Hyper X2 offer.

The system also requires fewer

components susceptible to temperature

degradation, enabling the use of a wider

range of temperatures, which are still

substantially lower than temperatures

needed for combustion. This helps

to unlock a broader range of sensory

experiences.

This more powerful heating system

produces a faster and more precise device,

offering consumers more flexibility, while

still tightly controlling temperature and

avoiding combustion.

Performance Summary

Driven by the continued success of glo

Hyper in Japan and across Europe, total

consumable volume grew 26% to 24.0

billion sticks in 2022. In 2021, consumables

grew by 79% to 19.1 billion sticks, partly due

to the withdrawal of Sens which negatively

impacted 2020.

In 2022, glo achieved higher THP category

volume share in the Top 9 markets, up 140

bps in 2022 to 19.4%, with growth in the

majority of the Top 9 markets. Excluding

Russia, our share of Top 8 markets

(representing over 82% of total THP

volumes) reached 18.7%, up 1.1 ppts.

This performance was driven by glo Hyper,

including Hyper X2. glo Hyper was launched

in 2020 and is powered by Advanced

Induction Heating and provides a step

change in consumer satisfaction with 30%

more tobacco and a boost button.

Revenue increased 24.3% to £1,060 million

(2021: up 34.4% to £853 million), largely

driven by the higher volume, with growth

increasing between the first and second

half of 2021. The increase in 2021 was partly

due to the withdrawal of glo Sens in 2020

which negatively impacted that year by

£50 million. Excluding the impact of the

relative movements in sterling, at constant

rates of exchange revenue grew 26.7% in

2022, compared to an increase of

46.1% in 2021.

In APME, where the most mature THP

markets are, our consumable volume grew

17.0%, maintaining the momentum of 2021

when consumable volume increased

26.5%. Revenue was up 2.3% (2021: +2.8%)

or 9.1% (2021: +13.0%) at constant

exchange, driven by higher volume and

consumable pricing, partly offset by a

partial absorption of excise increases.

In Japan, glo’s volume share of the tobacco

market reached 7.4%, an increase of 60 bps

on 2021 (2021: 6.8%), as consumers

continue to switch to reduced-risk\*†

alternatives to cigarettes. In a fast growing

market, our THP category volume share

was 20.1%, down 120 bps from 21.2% in

2021. In the second half of 2022, we

launched glo Hyper X2, our new upgraded

device platform supported by strong

marketing activation plans.

In Europe, which has seen strong industry

volume growth of 17% in 2022 (2021: 45%),

our consumable volume increased 33.8%,

having grown 195% in 2021. Accordingly,

revenue increased 57.3%, or 53.3% at

constant rates of exchange, having grown

150% (or 167% at constant rates of

exchange) in 2021. The region now

represents over 54% of our global THP

volume (or 43% excluding Russia) and 51%

of our global THP revenue (or 41%

excluding Russia).

Proportion of THP revenue

by region in 2022 (£m)

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | 2022  £m | 2021  £m |
|  |  |  |  |
|  | U.S. | — | 1 |
|  |  |  |  |
|  |  |  |  |
|  | AmSSA | — | — |
|  |  |  |  |
|  |  |  |  |
|  | Europe | 537 | 341 |
|  |  |  |  |
|  |  |  |  |
|  | APME | 523 | 511 |
|  |  |  |  |
|  |  |  |  |
| Total | | 1,060 | 853 |
|  |  |  |  |

Within this growing category, glo

continued to increase its volume share

across all key European markets, with

aggregate category share in the Top

European markets reaching 20.2%, up

3.8 ppts vs 2021. Excluding Russia, our

aggregate share of the category reached

18.7%, up 4.7 ppts.

Driven by Hyper, glo performed well across

the Top European markets:

–In Greece, glo category volume share

reached 13.2%, up 470 bps;

–In Poland, category volume share

reached 31.2%, up 14.4 ppts;

–In Italy, glo category volume share

reached 14.5%, up 170 bps; and

–In Hungary, category volume share

reached 14.4%, up 740 bps.

glo is now available in 28 markets. With

Hyper X2 now in 21 markets globally, we

plan to enter further new markets in 2023

and launch our new device Hyper X2 in

selected European markets by the end of

the year.

Notes:

\*Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims will

be made as to these products without agency clearance.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

35

|  |
| --- |
|  |
|  |
|  |

## Our Modern

## Oral Products

\*†

#### In recent years, a new

#### category of Modern Oral

#### products has emerged.

These come in the form of

#### nicotine pouches that are

#### placed under the lip so that

#### nicotine can be effectively

#### absorbed.

Highlights

–Continued strong global volume growth

(up 21.7%), with consumer numbers up

0.6m to 2.7m.

–Category volume share in key Top

5 markets was 30.4%, down 440 bps,

driven by a decline in the highly

competitive U.S. market.

–Volume share leadership in Modern Oral

in Europe at 68.8%.

–Europe revenue up 30.8%, with volume

up 29.9%, as Velo remains volume share

leader in 15 Modern Oral markets in

Europe.

–U.S. revenue up significantly to £36 million

despite 50.1% decline in volume.

One of the best solutions for

smokers is snus (an oral

smokeless tobacco product which

is usually placed behind the upper

lip), sold in Scandinavia, where

they have reduced the number

of smokers to 5%.

Dr David Khayat

Former president of France’s National

Cancer Institute and head of medical

oncology at the Clinique Bizet, Paris, 2022

28

Number of markets where the Group’s

Modern Oral Products are sold

Modern Oral Top 5 markets \*\*

U.S., Sweden, Norway, Denmark and

Switzerland.

The Scientific Evidence\*

Modern Oral nicotine pouches are a

relatively new product category, which

build upon the extensive scientific evidence

available for snus. However, Modern Oral

products are designed to offer adult

consumers an improved, tobacco-free

reduced-risk\*† alternative.

The weight of laboratory chemical studies

for Velo, our flagship Modern Oral brand,

show the pouches produce substantially

lower levels of toxicants than is contained

in cigarette smoke and lower levels than

in snus.

The weight of evidence suggests Modern

Oral nicotine pouches have a profile that is

comparable to nicotine replacement therapy

products (NRT).

In 2022, results from an innovative cross-

sectional clinical studyi of Veloii were

published in Biomarkers Journal. The study

shows Velo consumers had significantly

better results for several indicators linked

to smoking-related diseases compared

with smokers. In the study, consumers

exclusively using Velo for over six months

had significant favourable differences in

several biomarkers of exposure and

biomarkers of potential harm relevant to

smoking-related diseases compared to the

adults who smoked.

These results are very important for Velo

and the Modern Oral nicotine product

category. They build on the extensive scientific

evidence, including epidemiological data, that

already exists for snus. The results also add

to the weight of evidence that supports our

belief that Velo is a reduced-risk\*† product

for smokers who completely switch from

cigarettes as compared to continued smoking.

|  |  |
| --- | --- |
|  |  |
|  | Notes:  i    Azzopardi, D. et al (2022). Assessment of biomarkers of exposure and potential harm, and physiological and subjective  health measures in exclusive users of nicotine pouches and current, former and never smokers.  ii    The study was conducted using Lyft, since re-branded as Velo.  \*    Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk  free and are addictive.  †    Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products, including Velo, Grizzly, Kodiak, and  Camel Snus, which are sold in the U.S., are subject to FDA regulation and no reduced-risk claims will be made as to  these products without agency clearance.  \*\*  Key Modern Oral markets are defined as the Top 5 markets by industry revenue, being the U.S., Sweden, Norway,  Denmark and Switzerland and accounting for 80% of total industry revenue. |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | | | | | | | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-Term Deliverables to Fuel A Better Tomorrow™ | | | | | | | | | | | | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  | Ensure a Step Change in New Categories Performance | | | | | |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |

36

Our Products

Our Modern Oral products are white in

colour and contain high-purity nicotine,

water and other high-quality food-grade

ingredients, including eucalyptus and pine

tree fibres, flavouring and sweeteners.

Originating in Scandinavia, Velo is now a

leading global brand of nicotine pouches.

These typically appeal to a broader

audience than Traditional Oral tobacco

because of their attractive price

positioning. With comparatively lower

excise rates (versus Traditional Oral and

combustibles) Modern Oral generally has

higher margins than Traditional Oral.

We are also delivering a step change in

Modern Oral manufacturing. Truly living

our ethos, our Modern Oral factory in

Pécs, Hungary, put together a bold plan

to implement food industry standards

for Modern Oral manufacturing. This has

enabled us to ensure the availability of

products that comply with regulations

in different countries.

With a cross-functional team across

quality, production, engineering and EHS

teams delivering technical changes and

process improvements, Pécs became the

first site in BAT’s history to obtain the ISO

22000 certification for food safety standard.

We have also built and recently

commissioned a new facility in Trieste, Italy

that will further enhance our capabilities

and provide additional capacity (in Modern

Oral and THP).

In line with the Group's ESG ambitions,

Velo plastic cans are being upgraded

to use single polymer plastics, with the

use of bio-based materials also being

trialled achieving International

Sustainability and Carbon Certification.

Performance Summary

2022 has been a year of further growth

in volume and value.

Our growth continued in 2022, with volume

up 21.7% to 4.0 billion pouches (2021: up

70.5% to 3.3 billion pouches).

Revenue increased 45% to £398 million

(2021: up 39% to £274 million). Excluding

the impact of foreign exchange, this was

an increase of 46% in 2022 and 41% in 2021,

on a constant rates basis.

Volume share of the Modern Oral category

in our Top 5 markets was 30.4%, down

440 bps compared to 2021, driven by a

highly competitive pricing environment in

the U.S.

In the U.S., our volume share of Modern Oral

declined by 580 bps as volume was down

50% to 301 million pouches (2021: up 272% to

602 million pouches). The growth in 2021 was

driven by discounting to drive consumer trial,

which then partly reversed in 2022 as the

Group has focused on delivering value,

reducing promotional support for Velo and

prioritising investment behind Vuse in the

much larger Vapour category.

Accordingly, revenue increased in 2022 to £36

million, having declined 81.5% to £2 million in

2021.

The market remains highly competitive, with

current low moisture product formulations

continuing to result in low levels of average

daily consumption and high poly-usage. As a

result, we have submitted a PMTA for a

superior Velo product, leveraging our

international insights.

In Europe, we are volume share leaders of

the Modern Oral category in 15 markets

where we are active. Revenue increased by

30.8% (2021: up 43.9%) or 32.3% (2021: up

45.6%) at constant rates of exchange.

From a high base, volume share was

marginally lower at 68.8%, down 60 bps.

As the Modern Oral category continues to

grow and become more established in

Europe, we continue to see strong growth

in average daily consumption, including in

Sweden which reached 11 pouches (per

consumer) in November 2022\*\*\*.

Furthermore:

–In Sweden, where Modern Oral has

grown to represent 19.0% of the total oral

category, our volume share of the

Modern Oral category reached 58.1%,

a decline of 170 bps on 2021, impacted

by heavy competitor discounting, with

volume share stabilising in the final

quarter;

–In Norway, Modern Oral now represents

33.5% of the total oral category. We

maintained our leadership position with

volume share of the Modern Oral

category at 64.1%, up 20 bps on 2021,

building on the momentum of 2021 (up

180 bps on 2020);

–In Denmark (down 40 bps at 92.2%) and

in Switzerland (up 160 bps to 93.2%), we

maintained our volume share leadership

position in the Modern Oral category

from a high base; and

–In the UK, we gained market leadership

with volume share of 51.6%, an increase

of 2,220 bps from 29.4% in 2021.

We continue to seek opportunities and

develop the category in other markets as

we believe that Modern Oral is an exciting

longer term opportunity to commercialise

reduced risk products\*†.

–In Kenya, after the category was

reinstated as regulated under the

Tobacco Control Act, we have

reintroduced Velo to a limited retail

universe with positive early momentum,

as we focus on driving guided trial.

–In Pakistan, now our third largest Modern

Oral market (by volume), we have rapidly

achieved national coverage. Enabled by

powerful, consumer-centric digital activations,

Velo has reached a monthly volume in the

country of over 40 million pouches.

–In South Africa, we have expanded our

pilot in Johannesburg, with guided trial

and expansion into key accounts

delivering encouraging early results.

–Following a pilot in Japan (in Fukuoka), we

have exciting expansion plans for 2023.

–The Group's pilot in Indonesia was

terminated with valuable insights gained.

Proportion of Modern Oral revenue

by region in 2022 (£m)

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | 2022  £m | 2021  £m |
|  |  |  |  |
|  | U.S. | 36 | 2 |
|  |  |  |  |
|  |  |  |  |
|  | AmSSA | 1 | — |
|  |  |  |  |
|  |  |  |  |
|  | Europe | 348 | 266 |
|  |  |  |  |
|  |  |  |  |
|  | APME | 13 | 6 |
|  |  |  |  |
|  |  |  |  |
| Total | | 398 | 274 |
|  |  |  |  |

Note:

\*\*\*Source: Kantar New Category Tracker

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

37

|  |
| --- |
|  |
|  |
|  |

## Our

## Traditional

## Oral Products

#### The

#### most

#### common

#### products in Traditional

#### Oral are

#### largely

#### moist oral

tobacco popular in the

U.S.

#### , with the main brands

#### being Grizzly and Kodiak.

#### These products are less

#### finely ground than another

#### Traditional Oral product

referred to as Swedish-

style snus. Both of these

#### Traditional Oral products

are available in loose form,

#### as well as in pre-packed

#### pouches.

Our Products

We also sell a range of Traditional Oral

products, including Swedish-style snus

and American moist snuff, available in loose

tobacco form or as pre-packed pouches.

We have long sold snus in Sweden and

Norway through our Fiedler & Lundgren

business, whose brands include Granit

and Mocca; and in the U.S. we market snus

under the Camel brand. Our American

moist snuff products include our flagship

Grizzly brand, as well as the premium

moist snuff brand Kodiak.

During 2022, the decision was taken to

withdraw the Modified Risk Tobacco

Product (MRTP) applications for Camel

Snus, as we have adjusted our near-term

priorities and are focusing on providing a

diverse portfolio of New Category products

in line with our global harm reduction

strategy. We remain committed to offering

potentially reduced-risk\*† products that

help adult smokers migrate from

combustible cigarettes while meeting the

evolving needs of other adult nicotine

consumers.

Performance Summary

Total revenue increased 8.2% to £1,209

million (2021: down 3.6% to £1,118 million),

as pricing underpinned both 2022 and 2021.

However, in 2022, volume was lower (down

8.3%) than the prior year (at 7.4 billion stick

equivalents), with 2021 3.9% lower than 2020.

Translational foreign exchange impacted

both years, being a tailwind in 2022 of

10.5% (compared to a headwind of 6.6% in

2021) due to the relative movement of

sterling. On a constant rates basis, revenue

fell 2.3% in 2022 having grown 3.0% in 2021.

In the U.S., which accounts for

approximately 97.1% of the Group’s

revenue from Traditional Oral, volume

declined 8.1% in 2022 (2021: down 5.1%).

Value share of Traditional Oral was down

60 bps (2021: up 10 bps), while volume

share was down 70 bps (2021: down 50

bps). The decline in 2022 was driven by

strong macro-economic headwinds

leading to downtrading, accelerated cross-

category switching and reduced

consumption.

Outside the U.S., being 2.9% of the Group's

revenue from the category, volume was

9.8% lower in 2022, driven by Sweden

where the Group’s volume share (as a

proportion of total oral) declined 10 bps

(2021: increased 50 bps). This was driven by

Lundgrens Modern Oral launch and

Granit’s price strategy to drive value.

Notes:

\* Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

† Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims will

be made as to these products without agency clearance.

Proportion of Traditional Oral revenue

by region in 2022 (£m)

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | 2022  £m | 2021  £m |
|  |  |  |  |
|  | U.S. | 1,174 | 1,077 |
|  |  |  |  |
|  |  |  |  |
|  | AmSSA | — | — |
|  |  |  |  |
|  |  |  |  |
|  | Europe | 35 | 41 |
|  |  |  |  |
|  |  |  |  |
|  | APME | — | — |
|  |  |  |  |
|  |  |  |  |
| Total | | 1,209 | 1,118 |
|  |  |  |  |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | | | | | | | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-Term Deliverables to Fuel A Better Tomorrow™ | | | | | | | | | | | | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  | Ensure a Step Change in New Categories Performance | | | | | |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |

38

|  |
| --- |
|  |
|  |
|  |

## Our

## Combustible

## Products

#### We are focused on growing

our strategic brands of

Dunhill, Kent, Lucky Strike,

Pall Mall, Rothmans,

#### Newport (U.S.), Natural

#### American Spirit (U.S.)

#### and Camel (U.S.) which

now account for 66% of

#### our combustible volume.

#### Our combustibles business

#### is founded on understanding

#### and meeting the preferences

#### of adult smokers in all parts

of the

#### world

.

Highlights

–Group value share was flat, driven by the

U.S., up 10 bps, but offset by Europe and

AmSSA.

–Volume share down 20 bps.

–Strong price/mix +4.6%.

Value and Volume Share

Group cigarette value share was flat in

2022 (2021: up 10 bps), driven by the

continued performance of the strategic

cigarette brands in the U.S. (up 10 bps),

with total U.S. value share up 10 bps. This

combined with higher cigarette value share

in Japan, Spain, Pakistan, Colombia, Saudi

Arabia, the UK and Denmark, but was offset

by lower value share in Canada, Russia,

Brazil, South Korea, Romania, Bangladesh,

New Zealand and Germany.

Group cigarette volume share was down

20 bps in 2022 (2021: down 10 bps). The

decrease in 2022 was mainly driven by

Brazil, Bangladesh, the U.S., South Korea,

Russia, Poland and Romania, partially offset

by volume share gains in Japan, Pakistan,

Colombia and Spain. In 2021, this was a

decrease of 10 bps driven by lower volume

share in the U.S. (as we focused on value

generation), South Africa, Australia, Saudi

Arabia, Brazil, New Zealand and Russia

more than offsetting growth in

Bangladesh, Pakistan, Turkey and Japan.

41

Number of cigarette

factories in 39 countries

|  |
| --- |
|  |
|  |
| Change in cigarette value share  in key markets (bps) |
| flat |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| flat |
| +10 |

Definition: Annual change in cigarette value

share – being the value of cigarettes bought by

consumers of the Group’s brands in key markets as

a proportion of the total value of cigarettes bought

by consumers in those markets (see page [323](#i8814a73ee0b84e67a0db699932ce6fc1_293483)).

Volume Performance

In 2022, Group cigarette volume was down

5.1%, at 605 billion sticks (2021: down 0.1%

to 637 billion), with the total cigarette

market returning to a more normalised

decline of 2%, having been largely stable

in 2021.

Volume declined in the U.S. in both 2022

and 2021 (discussed below) while both

years were also impacted by the disposal

of the Group’s Iranian business partway

through 2021. Furthermore, in 2022, volume

was down in Turkey, Germany, Nigeria and

Chile, largely due to an increase in illicit

trade and a return to more normalised

market performance post COVID-19.

Volume grew in both years in Brazil (due to

lower illicit trade) and Bangladesh (due to

the strength of the local portfolio), with

2021 also benefiting from higher volume in

South Africa (which recovered from the

impact of the COVID-19 lockdown and

sales ban in 2020). In 2022, as travel

restrictions have started to relax, our

Global Travel Retail business began to

recover, having negatively impacted Group

cigarette and THP volume by an estimated

1.0% compared to pre-pandemic levels.

However, volume is still below the levels

observed pre-COVID-19.

In the U.S., Group cigarette volume was

down 15.4% to 59 billion, having declined

5.0% to 70 billion in 2021. The movement

in 2022 was partly impacted by trade

inventory movements (mainly linked to the

timing of price increases and uncertainty

about a potential excise increase) in the

final quarter of 2021, which partially

unwound in 2022. Furthermore, the low

value segment has increased due to down

trading as consumers' disposable income

has reduced due to macro-economic

pressures.

|  |
| --- |
|  |
|  |
| Change in cigarette volume share  in key markets (bps) |
| -20bps |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| -20 |
| -10 |

Definition: Annual change in cigarette volume

share – being the number of cigarettes bought by

consumers of the Group’s brands in key markets as

a proportion of the total cigarettes bought by

consumers in those markets (see page [323](#i8814a73ee0b84e67a0db699932ce6fc1_293482)).

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | | | | | | | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-Term Deliverables to Fuel A Better Tomorrow™ | | | | | | | | | | | | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  | Drive Value From Combustibles | | | |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |

39

On 29 April 2021, the FDA announced it was

setting into motion the process of

advancing two tobacco product standards

regarding menthol in cigarettes and all

flavoured cigars. In April 2022, the FDA

published proposed product standards.

The Group’s U.S. business will evaluate any

proposed regulation and will participate in

any consultation and rulemaking processes

by submitting robust comments grounded

in science-based evidence. The Group

submitted comments in August 2022. The

weight of published science does not

support regulating menthol cigarettes

differently from non-menthol.The weight of

scientific evidence neither shows a

difference in health risks between menthol

and non-menthol cigarettes, nor indicates

that menthol cigarettes adversely affect

initiation, dependence, or cessation. In

December 2022, the sale of all tobacco

products with characterising flavours

(including menthol) other than tobacco

was banned in the State of California. The

Group will continue to monitor the impact

in the coming periods.

Strategic Brand Performance

The performance was underpinned by the

strategic cigarette brands, with value share

10 bps higher in 2022 (2021: up 20 bps):

–Dunhill’s overall value share was flat

(2021: down 10 bps) as growth in Brazil,

Pakistan, Taiwan, Saudi Arabia and

Romania was offset by declines in South

Korea, USA, Germany and Chile. Volume

was 7.3% higher (2021: down 8.9%),

largely driven by Brazil and Pakistan;

–Kent’s value share was down 10 bps

(2021: flat) as growth in South Korea,

Chile, Russia, Ukraine, Taiwan and South

Africa was offset by lower value share in

Brazil, Japan and Romania. Volume was

down 6.1% (2021: down 2.6%) as growth

in Ukraine was more than offset by lower

volume in Brazil and Japan and the

Middle East (due to the sale of the Iranian

business partway through 2021);

–Lucky Strike’s value share grew 60 bps

(2021: up 30 bps), as growth in the U.S.,

Japan, Russia, Germany, Chile, Spain,

Bangladesh, Italy and France more than

offset lower value share in Taiwan,

Mexico, Brazil and the Netherlands.

Volume grew 14.5% (2021: up 19.6%)

driven by Russia, the U.S., and Japan,

partially offset by Algeria;

–Rothmans’ value share was flat (2021:

down 10 bps) as growth in the Czech

Republic, Romania, Brazil and New

Zealand was offset by lower value share

in Russia, Poland, South Korea, Australia,

Italy and Spain. Volume was 5.1% lower

(2021: 3.0% down) as growth in Brazil,

Cuba and the Czech Republic was more

than offset by lower volume in Russia,

Yemen, Algeria and Turkey; and

–Pall Mall’s value share was 40 bps lower

(2021: 20 bps down) as growth in Poland,

Mexico and Pakistan was more than

offset by lower value share in the U.S.,

Australia, Germany, Chile, Malaysia and

Romania. Volume was down 9.5% (2021:

up 2.2%) largely driven by the U.S.,

Germany and Chile.

The Group’s US domestic strategic

combustible portfolio performed well:

–Newport value share increased 10 bps

(2021: up 70 bps), while volume declined

17.0% (2021: down 3.3%);

–Natural American Spirit performed

well with value share up 10 bps (2021: up

20 bps). Volume was 9.2% down, having

been marginally lower in 2021 (down

0.8%); and

–Camel’s value share declined 30 bps in

the U.S, (2021: down 30 bps) with volume

15.7% down (2021: 9.0% down), driven by

competitive pricing pressures.

Volume of other tobacco products (OTP)

declined 10.3% to 16.5 billion sticks equivalent

(2021: 9.2% decline), being 3% of the

Group's combustible portfolio (2021: 3%).

Revenue

In 2022, revenue from combustibles was up

4.5% at £23,030 million (2021: £22,029

million, down 3.2%). Pricing in both years

was strong with price/mix in 2022 at 4.6%,

and 4.3% in 2021. However, this was offset

by the decrease in volume in 2022,

including the partial unwinding of the 2021

U.S. trade inventory movement discussed

earlier and the sale of the Group’s Iranian

business (as described on page [215](#i99191d8bb39e44aaaa2bfc5e0a19c92e_56014) and

[268](#iacbff9ba8d0e4b02b352fd6515a4315e_54115)) partway through 2021. 2021 was, itself,

also impacted by an estimated £260 million

impact of structural excise change and

competitive pricing in Australasia, when

compared to 2020.

Revenue is affected by the relative movement

of sterling against the Group's reporting

currencies. In 2022, this was a translational

foreign exchange tailwind of 5.1%, compared

to a headwind of 7.2% in 2021.

After adjusting for the currency headwinds,

revenue from combustibles at constant

rates of exchange was down 0.6% to

£21,888 million. In 2021, this was

an increase of 4.0%.

Proportion of combustibles revenue

by region in 2022 (£m)

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | 2022  £m | 2021  £m |
|  |  |  |  |
|  | U.S. | 10,470 | 10,015 |
|  |  |  |  |
|  |  |  |  |
|  | AmSSA | 3,751 | 3,435 |
|  |  |  |  |
|  |  |  |  |
|  | Europe | 4,996 | 5,024 |
|  |  |  |  |
|  |  |  |  |
|  | APME | 3,813 | 3,555 |
|  |  |  |  |
|  |  |  |  |
| Total | | 23,030 | 22,029 |
|  |  |  |  |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | | | | | | | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-Term Deliverables to Fuel A Better Tomorrow™ | | | | | | | | | | | | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  | Drive Value From Combustibles | | | |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |

40

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | | |
|  |  |  |
|  |  |  |
|  | Beyond  Nicotine |  |
|  | Our mission is to  ‘stimulate the senses of  new adult generations’  and we remain committed  to reducing the health  impact of our business.  As well as offering less  risky\*† nicotine-based  alternatives, we see a new  range of non-nicotine-  based products forming  an expanding part of  our portfolio.  Notes:  \*    Based on the weight of evidence and assuming a  complete switch from cigarette smoking. These  products are not risk free and are addictive.  †    Our Vapour product Vuse (including Alto, Solo, Ciro  and Vibe), and certain products, including Velo,  Grizzly, Kodiak, and Camel Snus, which are sold in  the U.S., are subject to FDA regulation and no  reduced-risk claims will be made as to these  products without agency clearance. |  |

As consumers increasingly seek products

offering wellbeing and stimulation

characteristics, we are working with our

venturing unit, Btomorrow Ventures (BTV),

and selected third parties to strengthen

our positioning for this market. Our well-

established market research has given us a

detailed understanding of consumer needs,

allowing us to invest in, acquire and

develop natural ingredients and new

delivery formats that satisfy these needs.

We believe our supply chain strengths and

trade market capabilities mean that, when

ready, we can deliver associated products

to consumers at speed and scale.

BTV has completed 22 investments since

launch in 2020. In 2022, this included five new

investments and two exits, which delivered

on their strategic objectives for BAT whilst

also achieving a positive financial return.

We continue to invest in innovative

consumer, new sciences and technology

businesses aligned with our strategic

priorities. While we have impaired the

investment in Organigram by £59 million

(net of tax), partly due to the volatility in

global cannabis stock prices, we remain

pleased with our strategic collaboration.

This includes our joint Product

Development Collaboration Agreement

focusing on research and development

activities. Organigram is performing and

we continue to explore opportunities to

expand our cannabis ecosystem, including

new investments in Sanity Group

(Germany) and Charlotte’s Web (U.S.) in

the second half of the year, as discussed on

page [267](#iacbff9ba8d0e4b02b352fd6515a4315e_54117), as we monitor changes in the

regulatory environment.

In January 2022, we announced the launch

of KBio Holdings Limited (KBio) to

accelerate the research, development and

production of novel treatments for rare and

infectious diseases. KBio will leverage the

existing plant-based technology

capabilities of BAT and Kentucky

BioProcessing Inc. (KBP), the existing BAT-

owned U.S. plant biologics organisation.

We continue to invest in companies that

are carefully selected for original ideas

across a range of criteria, as well as a

cultural fit. This allows us to continue

leveraging the strength of the Group in

helping entrepreneurial candidates

accelerate and sustain growth. This

approach provides us with evolving

capabilities for the future across both New

Categories and Beyond Nicotine.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Find out more at  www.btomorrowv.com |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

41

## For Society

and

## the Environment

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

42

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |
| We are reducing our  environmental impact |  | We are protecting  biodiversity |  | We respect human rights  and help farmers to thrive |  | We act with integrity and  market responsibly |
|  |  |  |  |  |  |  |
| Net Zero by 2050 |  | Net Positive |  | Farmers Thrive |  | 100% |
| We have reduced our Scope 1 &  2 CO2e emissions by 22% since  2020; and our Scope 3  emissions by 7% since 20201. |  | In our Tobacco Supply Chain3,  we aim to have a net positive  impact on forests by 2025 and  we are advocating to  strengthen legislation to  protect biodiversity. |  | We support our farmers to  thrive through rigorous  monitoring and by developing  best practice and varieties via  our Global Leaf Agronomy  Development Centre. |  | Of our employees completed  training and compliance sign-  off on our Standards of  Business Conduct (SoBC) in  2022. |
|  |  |  |  |  |  |  |
| SBTi-Aligned targets |  | Risk Assessment |  | Community-Focused |  | Speak Up |
| Our science-based targets for  50% Scope 1, 2 & 3 CO2e  emissions reduction by 2030  vs 2020 have been approved by  the Science Based Targets  initiative (SBTi)2. |  | We undertook biodiversity risk  assessments for our directly  contracted farmers in 2022 to  better understand and  evaluate their potential  impacts. |  | We are building community  resilience through improving  access to healthcare and  supporting women's  empowerment programmes. |  | Channels are available for any  employee to report concerns  in confidence, by phone, email  or online. |
|  |  |  |  |  |  |  |
| Greater Circularity |  | Sustainably Sourced |  | Human Rights |  | SoBC App |
| We have increased our  operations' waste recycling  rate to 84% (2021: 79%). In  2022, we reduced our total  waste sent to landfill by 48%. |  | 99.99% of wood used by our  contracted farmers for  tobacco curing in 2022 was  from sustainable sources. 94%  of paper & pulp volumes were  certified sustainably sourced. |  | We are assessing human  rights across our supply chain  through on-going due  diligence, Human Rights  Impact Assessments (HRIAs)  and supplier audits. |  | Available in 14 languages,  providing easy access to our  SoBC, Supplier Code of  Conduct and Speak Up  channels. |
|  |  |  |  |  |  |  |
| Water Stewardship |  | Soil Management |  | Providing a Voice |  | Responsible |
| 23% of our total water use was  recycled in 2022, and 24 sites  achieved Alliance for Water  Stewardship (AWS)  certification in 2022. |  | We have best practice soil  management plans  implemented across 82% of  farm hectares in our Tobacco  Supply Chain3. |  | Grievance mechanisms and  supplier assessments help  ensure that wherever we  source tobacco, people always  have a voice. |  | In our marketing to consumers  and transparent across our  communications. |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Notes:  1.Due to the complexity of consolidating and  assuring Scope 3 data from our suppliers and  value chain, we report Scope 3 data one year  behind other metrics.  2.Compared  to a 2020 baseline. Comprises  50% reduction in Scope 1, 2 and 50%  reduction in Scope 3 GHG emissions. Scope  3 emissions target includes purchased goods  and services, upstream transportation and  distribution, use of sold products and end-of-  life treatment of sold products.  3.'Tobacco Supply Chain' refers to the tobacco  supplied by our directly contracted farmers  and those of our strategic third party  suppliers, who participate in our annual Thrive  assessment, representing over 80% of the  tobacco purchased by volume in 2022. |
|  | We strive to add value to society  by taking a long-term, collaborative  approach to protecting the environment,  enhancing farmer livelihoods,  respecting human rights and  supporting local communities.  Zafar Khan  Director, Operations |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| A Better Tomorrow™  For Society and the Environment | | | | | | | |

43

Our Sustainability Agenda is integral to our Group strategy and purpose

to build A Better Tomorrow™. It reflects our commitment to reducing the

health impact of our business as our principal focus area, while achieving excellence

across environmental, social and governance (ESG) matters relevant to our business.

Our strategic approach is driven by

extensive stakeholder engagement. In

2022, we undertook our first Double

Materiality Assessment (DMA) through

an independent, third-party consultant.

Through this robust process, we engaged

with key stakeholder groups to understand

the ESG matters most material for our

business, complemented by our wider and

ongoing stakeholder engagement processes

(see page [20](#id739eb8a094346e4a1dd9989c862058f_6183)).

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | For more on our Double Materiality Assessment  process, see pages [47](#id739eb8a094346e4a1dd9989c862058f_15528) to [49](#id739eb8a094346e4a1dd9989c862058f_17148) |

This has supported our efforts to keep

pace with emerging topics and stakeholder

expectations.

Outlined below are the priority areas that

form the core of our Sustainability Agenda,

reviewed and updated in 2022 through our

DMA. These are backed by clear and

measurable goals and targets, as detailed

in our ESG Roadmap.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Find details of our ESG Roadmap on page [6](#id739eb8a094346e4a1dd9989c862058f_15378) |

Going forward, we will continue to reflect

and consult on our goals and targets, to

ensure that they are sufficient and future-

focused. As part of our regular review of

the DMA, we will consider both impact and

financial materiality (see page [47](#id739eb8a094346e4a1dd9989c862058f_15528)).

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | More details on all our sustainability reporting  and ESG disclosures can be found online  www.bat.com/sustainability |
|  |  |

Our Sustainability Agenda

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
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|  |  |  |  |  |  |  |
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|  | Reducing the health impact of our business | | | | |  |
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| --- | --- | --- |
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|  | Excellence in  Environmental  management |  |
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|  | Climate Change |  |
|  |  |  |
|  |  |  |
|  | Circular Economy |  |
|  |  |  |
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|  | Biodiversity &  Ecosystems |  |
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|  |  |  |
|  | Water |  |
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| --- | --- | --- |
|  |  |  |
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|  | Delivering a positive  Social impact |  |
|  |  |  |
|  | Human Rights |  |
|  |  |  |
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|  | Farmer Livelihoods |  |
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|  |  |  |
|  | People, Diversity  & Culture |  |
|  |  |  |
|  |  |  |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  |  |
|  |  |  |
|  | Robust corporate  Governance |  |
|  |  |  |
|  | Responsible Marketing &  Transparent  Communications |  |
|  |  |  |
|  |  |  |
|  | Ethics & Integrity |  |
|  |  |  |
|  |  |  |
|  | Sustainability  Governance |  |
|  |  |  |
|  |  |  |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- |
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|  |  |  |  |  |  |  |  |  |
|  | Creating shared value for | | | | | | |  |
|  |  |  |  |  |  |  |  |  |
|  | Consumers |  | Society |  | Employees |  | Shareholders &  investors |  |
|  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more on each of our Sustainability Agenda  Material Topics across pages [51](#id739eb8a094346e4a1dd9989c862058f_15538) to [94](#ib7f6c2fd07b14abe9855c51cf71be497_71970) |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| ESG Front and Centre | | | | | | | |

44

We have a clearly defined governance framework to support management control and

Board-level oversight of our Sustainability Agenda and ESG priority areas.

This provides a flexible channel for the structured flow of information, management and

oversight of ESG matters from local business units up to the Board level.

Our Group policies (indicated by \* in the

table below) are endorsed at Board

level and are implemented for application by

all Group companies.

Our Group policies are underpinned by a

range of principles, statements, operating

procedures, standards and guidelines

to help support effective implementation of

our commitments.

Together, this framework supports the

effective identification, management and

control of risks and opportunities for our

business in these and other areas.

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Policies and Procedures | Summary of areas covered | Key stakeholder groups |
| Standards of Business  Conduct (SoBC)\*  Available at www.bat.com/principles | Sets out our policies for: Speak Up, respect in the workplace,  human rights, health, safety and welfare, environmental, lobbying and  engagement, conflicts of interest, anti-bribery and corruption, gifts  and entertainment, political contributions, community investment,  protection of corporate assets and financial integrity, competition  and anti-trust, anti-money laundering and tax evasion, sanctions,  anti-illicit trade, data privacy and information security. | Our People  Governments and Wider Society |
| Supplier Code of Conduct\*  Available at www.bat.com/principles | Covers: compliance, human rights, environmental sustainability,  marketing and trade and business integrity. | Customers  Suppliers |
| Environment Policy\*  Available at www.bat.com/principles | Our commitments to following high standards of environmental  protection, adhering to the principles of sustainable development and  protecting biodiversity, covering our direct operations and supply  chain, including agricultural, manufacturing and distribution operations.  Our Environment Policy was revised in 2022 to include an  assessment of our value chain impacts, our circular economy  principles, our new biodiversity commitments and information on  metrics and targets. | Our People  Suppliers  Customers  Governments and Wider Society |
| International Marketing  Principles (IMP)\*  Available at www.bat.com/principles | Govern marketing of all our products and include the requirement for  all our marketing to be targeted at adult consumers only. | Consumers  Customers  Suppliers |
| Global Product Stewardship  Framework Policy\* | Sets out our approach to product stewardship and fulfilling our duty  of care to consumers when bringing new products to market. This  policy was revised in 2022 to articulate our approach to robust  product stewardship across our multi-category portfolio. | Consumers  Suppliers  Customers  Governments and Wider Society |
| Youth Access Prevention  (YAP) Guidelines | Supports our strict IMP requirement to market our products to adult  consumers only by setting out requirements for retailer-facing YAP  activities to be carried out in all our markets. | Consumers  Customers |
| Biodiversity Statement | Sets out the principles we follow to manage our impact on  biodiversity and the wider environment. | Suppliers  Governments and Wider Society |
| Circular Economy Position  Statement | Our commitment to applying circular economy principles across  our operations and product categories. | Consumers  Suppliers  Governments and Wider Society |
| Operational Standard on  Child Labour Prevention | Detailed guidance and procedures for tackling the risk of child labour  in BAT Group's own Leaf Operations. | Our People  Suppliers  Governments and Wider Society |
| Group Community  Investment Framework | Sets out the Group strategy for community investment and  charitable donations, aligned to the United Nations Sustainable  Development Goals. | Our People  Governments and Wider Society |
| Climate Change and Energy  Standard | Provides guidance for all managers or others within BAT that have a  duty for the application of implementing a climate change related  initiative across all BAT’s facilities and working environments. | Our People  Suppliers  Governments and Wider Society |
| Green Mobility Standard | Specifies BAT’s green mobility strategy aimed at reducing the  environmental impact of BAT’s fleet, namely carbon dioxide  equivalent emissions (CO2e), air pollution, and noise, by deploying  strategic beyond Internal Combustions Engine (ICE) options. | Our People  Suppliers  Governments and Wider Society |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| ESG Framework | | | | | | | |

45

#### BAT has conducted Materiality Assessments

^ since 2007 and, in 2022, we undertook our

first Double Materiality Assessment (DMA). These allow us to understand the importance of

sustainability topics both to stakeholders and our business. Topics with the highest level of

importance form the basis of our sustainability agenda and reporting.

Introduction and Overview

In 2022, we undertook a significant update

to our materiality approach, by conducting

our first Double Materiality Assessment

(DMA) through an external consultancy.

This has provided greater insight, focus and

granularity on the sustainability / ESG

matters which are significant in terms of:

1) BAT's impact on society and the

environment; and

2) Potential risks and opportunities which

could have an impact on BAT's financial value.

In December 2022, the EU adopted the

final version of the Corporate Sustainability

Reporting Directive (CSRD), which requires

in-scope companies to report their

sustainability performance in line with the

European Sustainability Reporting

Standards (ESRS) - drafts of which have

been produced by the European Financial

Reporting Advisory Group (EFRAG). In

particular, the CSRD requires reporting on

a double materiality basis.

While we have taken account of the CSRD

and ESRS in our DMA, we recognise that

this is an evolving area and, as such, we will

review our DMA on a regular basis.

Our Double Materiality Process

Topic identification

Inventory and Benchmarking

This included a review of applicable

sustainability standards, frameworks, and

principles. BAT was benchmarked against

leading companies from both inside and

outside of our industry to evaluate the

relative maturity of sustainability at BAT.

Maturity was examined in seven ways:

1.Materiality approach and outcomes;

2.Reporting scope and frequency;

3.Use of frameworks and metrics;

4.Governance;

5.Risk assessment;

6.Policies; and

7.Supply and value chain coverage.

Risk assessment

The risk assessment collated a list of

sustainability-related risks relevant to BAT.

In order to arrive at a risk matrix, these

were then evaluated according to their

potential impact and likelihood. Such

evaluation of issues according to risk is one

of the key inputs to the assessment of

impact and financial materiality.

The materiality thresholds were

determined by evaluation of their potential

impact on BAT’s operations and wider

value chain. This included consideration of

potential occurrence across the value chain

and risk type (e.g. financial, operational,

legal or reputational), as well as the impact

and likelihood based on geography,

industry, stakeholders, public interest and

developing trends. The risks were classified

at a gross (not residual) level. This was one

of the key inputs to the materiality matrix,

along with the others, as set out below.

Extensive Stakeholder Engagement

The external consultancy used engaged with a

large number of internal and external

stakeholders as part of the DMA process.

External participants included

representatives from a wide range of

organisations, including shareholders and

investors, NGOs, labour unions, suppliers,

workforce representative groups and

experts in areas, such as human rights.

Internally, this included employees at all

levels and functions and across geographies.

Several Directors also participated, including

the Chair of the Board, our Chief Executive and

our Finance & Transformation Director, as well

as our Chief Growth Officer and our Chief

Sustainability Officer. Site visits were undertaken

in Brazil and the UK for an overview of our

manufacturing, leaf and commercial

operations, as well as for face-to-face

interviews with our employees and others.

+95

Dialogues and semi-structured interviews

with external and internal stakeholders

+2,600

Group company employees

participated in a focus survey

to provide their perspectives

on ESG priorities

Impact Assessment

Prioritisation of BAT's impact on

society and the environment

In order to prioritise the different 'outward'

impacts on BAT, the findings of the risk

assessment were combined with the

learnings from the stakeholder engagement,

alongside the results of benchmarking against

other companies across a range of sectors.

This included assessing BAT's actual and

potential negative impacts on people and their

human rights, the environment and the

economy; through the topics of the ESRS.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| Double Materiality Assessment | | | | | | | |

46

According to the European Sustainability

Reporting Standards (ESRS), a

sustainability matter is material from an

impact perspective if it is connected to

actual or potential significant impacts by

the undertaking on people or the environment

over the short-, medium- or long-term.

Financial Materiality

We analysed potential risks and

opportunities which could have a

significant impact on BAT's financial value.

These pose potential 'inward impacts'.

For each issue and overall topic identified,

several questions were used to establish

whether they met our financial materiality

criteria:

–Could it affect assets / liabilities

recognised in financial reporting today, or

be recognised because of future events?

–Could it affect Enterprise Value?

–Could it influence the possibility to

continue to use or obtain resources

needed for our business, as well as the

quality and pricing of those resources?

–Could it affect our ability to rely on

relationships needed in our business

processes?

Double Materiality

Having undertaken our detailed

assessments, the relative 'outward' and

'inward' importance of issues and overall

topics was determined.

|  |  |
| --- | --- |
|  |  |
| Our Sustainability Agenda | |
|  | Reducing the health impact of our business |
|  |  |
|  | Excellence in environmental management |
|  |  |
|  | Delivering a positive social impact |
|  |  |
|  | Robust corporate governance |
|  |  |

Double Materiality Matrix

The findings from this exercise produced

the following results, in comparison to our

previous materiality assessments:

Unchanged

Harm Reduction

New Additions

Circular Economy; Sustainability

Governance

Increased Importance

Climate Change; Biodiversity &

Ecosystems; Ethics & Integrity; People,

Diversity & Culture

The conclusions of the DMA reflect the

challenges that society, the global

economy and our industry face today.

In line with our previous assessments and

long-standing sustainability strategy, the

top priority continues to be Harm

Reduction, aligned with BAT's ongoing

transformation into a multi-category

consumer goods company selling reduced-

risk products\*†.

Climate Change and Circular Economy are

also 'Tier 1' topics for BAT, in line with the

increasing concern about their impact on,

and importance for, society and the

environment. Furthermore, “Climate and

Circularity” is now recognised as a Principal

Risk to the Group (see page 121).

The other significant topics identified

reflect a mix of those that are specific to

our business (e.g. Farmer Livelihoods), as

well as expectations of good corporate

citizenship (e.g. Sustainability Governance

and Ethics) and environmental sustainability

(e.g. Climate, Biodiversity & Ecosystem

and Water).

Next steps – Roadmap/Action Plan

The outcomes of the DMA have been

reviewed by our Main Board and

Management Board, and are playing an

important role in shaping our current and

future sustainability strategy and ESG

reporting framework. This has included

developing a more focused set of

performance metrics and advancing our

ESG Roadmap (see page 6), and combining

the principal components of our ESG

reporting into this Annual Report.

Also, in line with the findings relating to

Sustainability Governance, BAT appointed

its first Chief Sustainability Officer (CSO)

in September 2022.

Looking ahead, the DMA outcomes will be

used across the Group to inform ESG risk

mitigation, adaptation and management,

as well as to further develop our ESG

Roadmap, goals, targets and action plans.

Note:

^Although financial materiality has been considered in the

development of our Double Materiality Assessment ("DMA"),

our DMA and any related conclusions as to the materiality of

sustainability or ESG matters do not imply that all topics

discussed therein are financially material to our business taken

as a whole, and such topics may not significantly alter the total

mix of information available about our securities.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |
|  | | | | | | | |

47

#### Our Double Materiality Assessment identified 11 key topics – each

#### comprising

several sub-

topics – as being material in terms of a) BAT’s impact on society and the environment, and

#### b) the financial materiality of ESG impacts on

#### BAT

.

#### These topics and sub-topics are

#### listed here, along with where to find more information on them.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | Material Topic | Descriptor | Sub-topics include |
|  | Harm reduction | Our work centres on the development and promotion of reduced-risk  products\*†. We aim to reduce negative health impacts and support high  product quality and safety standards. | –Tobacco harm reduction  –Reduced-risk products\*†  –Beyond Nicotine products  –Product quality and safety |
|  | Climate change  See page [53](#id739eb8a094346e4a1dd9989c862058f_15552) for details | We will work to reduce GHG emissions and energy consumption and  increase business resilience to climate change risks. | –GHG emissions / Net Zero  –Energy consumption and efficiency  –Climate change mitigation and  adaptation  –Renewable energy |
|  | Circular  economy  See page [55](#id739eb8a094346e4a1dd9989c862058f_15564) for details | We will foster circularity principles throughout our value chain and the  minimisation of value chain resource consumption. | –Resource use and circularity  –Sustainable sourcing  –Waste management |
|  | Responsible  marketing and  transparent  communication  See page [65](#id739eb8a094346e4a1dd9989c862058f_15649) for details | We market our products responsibly by adhering to our International  Marketing Principles (IMP) and through our Youth Access Prevention (YAP)  initiatives. In addition, compliance with applicable product regulations and  appropriate labelling of our products facilitate transparent and trustworthy  product communications. We have a range of approval processes at local,  regional and global levels which support our aim that all of our  communications are transparent and trustworthy. | –Youth Access Prevention  –International Marketing Principles  –Product regulation  –Transparent and trustworthy  communications |
|  | People,  Diversity and  Culture  See page [85](#id739eb8a094346e4a1dd9989c862058f_9644) for details | We will continue to work to attract and retain talent across the Group. In the  areas of employee wellbeing and capacity building, we aim to ensure diversity,  equality and inclusion. We also respect freedom of association and the right to  collective bargaining. | –Employee wellbeing  –Diversity and inclusion  –Talent attraction and retention  –Health and safety |
|  | Biodiversity and  ecosystems  See page [57](#id739eb8a094346e4a1dd9989c862058f_15588) for details | We will work to protect the ecosystems where we operate by  strengthening their resilience, preventing deforestation and any subsequent  form of biodiversity loss. | –Forest conservation  –Land use change  –Sustainable agriculture  –Tobacco curing |
|  | Ethics and  integrity  See page [67](#id739eb8a094346e4a1dd9989c862058f_15661) for details | We strive to uphold business ethics by, amongst other things, working to  counteract all forms of corruption. We also aim to ensure data privacy and  cyber security. We engage in constructive collaboration with law  enforcement agencies and engage transparently with regulators,  policymakers and governmental officials. | –Standards of Business Conduct  –Anti-illicit trade  –Tax transparency  –Transparent engagement and  advocacy |
|  | Human rights  See page [61](#id739eb8a094346e4a1dd9989c862058f_15617) for details | Our focus is to abolish child labour, forced labour and prevent modern  slavery, as well as to respect human rights in our value chain. | –Respect for human rights  –Child labour, modern slavery /  forced labour  –Standards in the supply and value  chains |
|  | Sustainability  governance  See page [69](#id739eb8a094346e4a1dd9989c862058f_15637) for details | Our aims and achievements in this area, and in capacity building, cover the  topics of sustainability governance and communications, as well as  management of sustainability risks and opportunities. | –Sustainability governance and  communications  –Sustainability risks and  opportunities management  –Accountability and assurance  –Sustainability goals, metrics,  milestones and targets |
|  | Farmer  livelihoods  See page [63](#id739eb8a094346e4a1dd9989c862058f_15601) for details | We invest in farmer and community amenities to seek to enable prosperous  livelihoods. We continue to promote occupational health and safety, as well  as fair working practices - including access to grievance mechanisms. | –Living income  –Working conditions  –Community Impact  –Crop and income diversification  –Collective bargaining rights |
|  | Water  See page [59](#id739eb8a094346e4a1dd9989c862058f_15576) for details | We work to promote responsible water stewardship and the management  of consumption and water risk. This includes our management of  discharges to aquatic ecosystems. | –Water stewardship  –Water consumption  –Waste water discharges |

Notes:

\*Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products, including Velo, Grizzly, Kodiak, and Camel Snus, which are sold in the U.S., are subject to FDA

regulation and no reduced-risk claims will be made as to these products without agency clearance.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| Double Materiality Assessment  Continued | | | | | | | |

48

|  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |
| High-Level SDG Mapping | | | | | | | | |  |  |
| Goals | | |  |  |  |  | Link to our Material Sustainability Topics | | | |
|  |  | Strategic  These goals align with our principal focus area  to reduce the health impact of our business.  They also align with our global efforts to combat  climate change, which extend across all aspects  of our business. |  |  |  |  | See Tobacco Harm Reduction  page [51](#id739eb8a094346e4a1dd9989c862058f_15538) |  |  |  |
|  |  |  |  |  | See People, Diversity and Culture  page [85](#id739eb8a094346e4a1dd9989c862058f_9644) |  |  |  |
|  |  |  |  |  |  | See Circular Economy  page [55](#id739eb8a094346e4a1dd9989c862058f_15564) |  |  |  |
|  |  |  |  |  | See Responsible Marketing and Transparent Communications  page [65](#id739eb8a094346e4a1dd9989c862058f_15649) | | | |
|  |  |  |  |  |  | See Climate Change  page [53](#id739eb8a094346e4a1dd9989c862058f_15552) |  |  | See Circular Economy  page [55](#id739eb8a094346e4a1dd9989c862058f_15564) |
|  |  |  |  |  | See Biodiversity and Ecosystems  page [57](#id739eb8a094346e4a1dd9989c862058f_15588) |  |  | See Water  page [59](#id739eb8a094346e4a1dd9989c862058f_15576) |
|  |  | Priority  These are the global goals that align with our  SDG priority areas, and where we can make a  significant contribution through our global  activities. |  |  |  |  | See Human Rights  page [61](#id739eb8a094346e4a1dd9989c862058f_15617) |  |  |  |
|  |  |  |  |  | See Farmer Livelihoods  page [63](#id739eb8a094346e4a1dd9989c862058f_15601) |  |  |  |
|  |  |  |  |  |  | See Tobacco Harm Reduction  page [51](#id739eb8a094346e4a1dd9989c862058f_15538) |  |  | See Farmer Livelihoods  page [63](#id739eb8a094346e4a1dd9989c862058f_15601) |
|  |  |  |  |  | See Circular Economy  page [55](#id739eb8a094346e4a1dd9989c862058f_15564) |  |  |  |
|  |  |  |  |  |  | See Ethics and Integrity  page [67](#id739eb8a094346e4a1dd9989c862058f_15661) |  |  |  |
|  |  |  |  |  |  |  |  |  |  |
|  |  | Localised  These goals align with issues for which a  localised response is needed, tailored to the  specific circumstances. |  |  |  |  | See Farmer Livelihoods  page [63](#id739eb8a094346e4a1dd9989c862058f_15601) |  |  |  |
|  |  |  |  |  | See People, Diversity and Culture  page [85](#id739eb8a094346e4a1dd9989c862058f_9644) |  |  |  |
|  |  |  |  |  |  | See Water  page [59](#id739eb8a094346e4a1dd9989c862058f_15576) |  |  |  |
|  |  |  |  |  | See Biodiversity and Ecosystems  page [57](#id739eb8a094346e4a1dd9989c862058f_15588) |  |  |  |

|  |  |
| --- | --- |
|  |  |
| Our Sustainability Agenda | |
|  | Reducing the health impact of our business |
|  |  |
|  | Excellence in environmental management |
|  |  |
|  | Delivering a positive social impact |
|  |  |
|  | Robust corporate governance |
|  |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| SDG Mapping of Our  Material Sustainability Topics | | | | | | | |

#### The

UN

#### Sustainable Development Goals (SDGs) were designed to provide a shared

#### blueprint for governments, civil society and the private sector to create a sustainable

#### future.

 We have mapped our Sustainability Agenda and our material sustainability topics to the

SDGs in order to

#### determine

#### those that are the most relevant for our business and stakeholders.

#### Here, we provide a high-level

#### mapping

#### of our material sustainability topics to these key global goals

for 2030.

49

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | Reducing the health impact of our business | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Tobacco Harm Reduction\*† | | | | | | |  |
|  | | | | | | | | |
|  | Our Goals | |  |  |  |  |  |  |
|  | £5bn | |  | 50m |  |  | |  |
|  | in revenues from New  Category products by 2025 | |  | consumers of our Non-Combustible  products by 2030 | | | |  |
|  | | | | | | | | |
|  | 2022 performance highlights | | | |  |  |  |  |
|  | 40.9% | |  | 22.5m |  | £323m | |  |
|  | increase in New Category  revenue, up to £2.9bn in  2022 | |  | consumers of our Non-  Combustible products in  2022 |  | investment in Research  and Development in 2022 | |  |
|  | | | | | | | | |
|  | GRI Standard | |  | SFDR PAI Indicators |  | SASB Standards | |  |
|  | This topic is not mapped  to a specified Standard | |  | This topic is not mapped  to a specified Indicator |  | FB-TB 260a.1 | |  |
|  |  | | | | | | |  |
|  | Highlights | | | |  |  |  |  |
|  | –Completed and published results from our landmark one-year,  real-world study of our Tobacco Heating Product, glo.  –Published an important review of the behavioural, chemical,  toxicological and clinical studies of glo and the potential for  bridging existing data to new product iterations.  –Completed and published the results from our pivotal cross-  sectional study of our Modern Oral nicotine pouches, Velo.  –Completed an innovative cross-sectional study of our Vapour  product, Vuse. Results to be published in 2023.  Notes:  1.  WHO: Tobacco, Key Facts. May 24 2022 (who.int).  2.  The Global State of Tobacco Harm Reduction (GSTHR) Briefing Papers:  February 2022. 82 million vapers worldwide in 2021: the GSTHR estimate  — Global State of Tobacco Harm Reduction.  3. Cox et al (2019) Addict Behaviour Report and. Hajek et al. (2019).  \*    Based on the weight of evidence and assuming a complete switch from  cigarette smoking. These products are not risk free and are addictive.  †    Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and  certain products, including Velo, Grizzly, Kodiak, and Camel Snus, which  are sold in the U.S., are subject to FDA regulation and no reduced-risk  claims will be made as to these products without agency clearance. | | | |  |  | For more information on  our New Category  products and the science  associated with them, see  pages 32 to 37 of this  document. |  |

Our Approach

We have a clear purpose: to build A Better

Tomorrow™ by reducing the health impact

of our business. That is why we are changing:

creating new products, backed by science

and tested to meet or exceed industry-

leading standards, that provide adult

smokers with reduced-risk\*† alternatives.

Why Tobacco Harm

Reduction Matters

We know combustible products pose

serious health risks. The only way to avoid

those risks is not to start smoking or to

quit. Yet more than 1.3 billion people today

continue to smoke1. Tobacco harm

reduction is a well-recognised public health

strategy that aims to minimise the harm

caused by combustible cigarettes by

encouraging adult smokers, who would

otherwise continue to smoke, to switch

completely to scientifically substantiated,

reduced-risk\*† alternatives.

Over 100 million2 adults worldwide are now

using reduced-risk\*† products as an

alternative to cigarettes. For those who

would otherwise continue to smoke, we

encourage making the switch by providing

consumers with a range of scientifically-

substantiated reduced-risk\*† alternatives to

smoking that deliver comparable

satisfaction in nicotine delivery, use and

sensorial aspects.

For example, some studies suggest that

Vapour products are more successful than

nicotine replacement therapy in helping

people stop smoking, by providing a

satisfactory alternative to cigarettes3

despite not being smoking cessation

products nor marketed as such.

These products need to be supported by

world-class science and industry-leading

product safety and quality standards.

Responsible, science-backed, and well-

thought-through regulation is also crucial

for enabling adult smokers to access and

enjoy reduced-risk\*† products with

confidence, while allowing governments

and health bodies to know that these

products are manufactured to high product

safety and quality standards.

Consumer Choice

Smokers are most likely to switch to less

risky alternatives\*† when they find a

product that meets their preferences.

That is why we offer a multi-category portfolio

of New Category products tailored to meet

these preferences. Our portfolio for adult

consumers includes Vapour Products,

Tobacco Heating Products and Modern

Oral nicotine pouches.

Our new or enhanced products are backed

by science and industry-leading standards.

We utilise our deep consumer insights to

anticipate trends in order to meet evolving

consumer needs.

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
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| Strategic Management |  |  |  |  |  |  |  |
| Harm Reduction | | | | | | | |

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| --- | --- | --- | --- | --- | --- |
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50

We do this through the innovative work

of our state-of-the-art R&D centres in

Southampton, UK and Winston-Salem,

U.S. This is also supported by our new

Global Device Development Centre in

Shenzhen, China.

Collaborations with external partners and

our corporate venture capital initiative,

Btomorrow Ventures (BTV), also help us to

stay at the forefront. Our Open Innovation

team, as part of our New Categories R&D

function, works in partnership with BTV to

identify partners (including start-ups) that

have innovative technologies and materials

that hold promise for our product pipeline.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Find out more on our  New Category products on pages [32](#id739eb8a094346e4a1dd9989c862058f_5896) to [37](#id739eb8a094346e4a1dd9989c862058f_14907) |

World-class Science

World-class science is crucial to providing

a robust evidence base to substantiate the

role of New Category products in tobacco

harm reduction.

We apply our robust nine-step risk

assessment framework to evaluate the

emissions, exposure and risk of our products.

We also openly share our science and publish

our research in peer-reviewed journals.

For over 60 years, R&D has been a critical part

of our business. We invest more than £300

million a year in R&D to deliver innovations that

satisfy or anticipate new consumer preferences.

The main focus of our R&D investment

is on developing and scientifically

substantiating New Category products

to assess their reduced-risk potential.

We use a wide range of analytical

techniques, specialised laboratory

technology and expertise to test our

products and aim to ensure they meet high

quality standards. This is supplemented

by collaborations with an ecosystem of

global external researchers who bring

independent and specialist expertise that

enhance our internal capabilities.

We aim to follow best practice and adhere

to high standards of governance and ethics

in all our scientific research. Regardless of

the results of such research, we are

committed to sharing the outcomes.

We work hard to make our science

accessible and understandable to a wider

audience. In 2021, we refreshed our dedicated

website www.bat-science.com, and published

a Science and Innovation Report.

We also introduced a new ‘At a glance’

e-zine to provide a concise overview of how

science and innovation are transforming

our business at pace.

Our new R&D Virtual Visitor Experience

utilises the latest technology to offer global

audiences an immersive tour of our facilities

in Southampton, UK, reinforcing our

commitment to openly share our science.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Find details of our world-class  science on pages [32](#id739eb8a094346e4a1dd9989c862058f_5896) to [37](#id739eb8a094346e4a1dd9989c862058f_14907) |

Testing Our Products: Our Nine-Step

Risk Assessment Framework

Most alternative tobacco and nicotine

products are relatively new to the market.

As a consequence, in most cases, there is a

lack of long-term epidemiological data

needed to demonstrate the overall impact

on public health. That is why it is necessary

to take a ‘weight of evidence’ approach.

Drawing on work by the U.S. Institute of

Medicine, we developed a nine-step risk

assessment framework. This evaluates the

emissions, exposure and risk profile of our

New Category products and compares

them to smoking cigarettes or other

comparators, such as nicotine replacement

therapy. The graph below shows the

evidence generated at each of the steps to

develop a weight of evidence that supports

our products as reduced-risk\*† alternatives

to cigarettes.

Our scientists have published more than

150 scientific papers to date about our New

Category products utilising this framework.

As well as publishing our own research, our

scientists also constantly monitor and

review external publications to gain a

holistic view of the evidence base.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  |  |  |  |
|  | Emissions | Exposure | Risk | Long-term |
|  | 1.Combustion  studies  2.Emissions  studies  3.Toxicological  studies | 4. Use behaviour  5. Clinical:  Pharmacokinetic  studies  6. Clinical:  Exposure | 7. Clinical:  Individual risk  8. Population risk:  Post Marketing  Surveillance (PMS)  9. Epidemiological  modelling | Epidemiological  data |
|  |  |  |  |  |
|  |  |  |  |  |

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | Emissions | Exposure | Risk |
|  | What chemicals or  compounds do our  products release  during use? | What happens to the cells  when they are exposed to  those chemicals or  chemical compounds? | What does that mean for  individual and population  health risk in the long term? |

+150

Number of peer-reviewed

papers published to date on

our New Category products

Standards and Regulation

Access and availability of less risky\*† products

depend on having the right regulatory and

market conditions. High standards and

responsible industry practices are also key.

We hold ourselves to high standards and

hope some of these will become industry

benchmarks and the basis for future

regulation. So we share our approach,

information and expertise with industry

groups, standards bodies and regulators.

Regulation of New Category products

continues to evolve. Globally, there are

regulators passing progressive laws that

encourage adult smokers who would

otherwise continue to smoke to switch to

New Category products, but there are

other regulators who view them more

cautiously. As the science and evidence

to substantiate these products grow,

we hope to see more countries passing

progressive regulations, further

accelerating New Category growth

and tobacco harm reduction.

We believe a stakeholder-inclusive,

whole-of-society dialogue that includes

regulators, policymakers, consumers and

the industry is key to developing effective

policies that can accelerate tobacco harm

reduction as quickly as possible. Regulation

around New Category products should be

founded on science, not opinion.

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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51

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | Excellence in environmental management | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Climate Change | | | | | | |  |
|  | | | | | | | | |
|  | Our Goals | |  |  |  |  |  |  |
|  | 50% | |  | Net Zero |  |  | |  |
|  | reduction in Scope 1, 2 & 3  CO2e emissions by 20301,2 | |  | across our value chain by  2050 at the latest |  |  | |  |
|  |  |  |  |  |  |  |  |  |
|  | Carbon  neutral | |  | 50% |  |  | |  |
|  | direct operations (Scope 1  & 2 emissions) by 2030 | |  | renewable energy use by  2030 (Updated Target) |  |  | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 22.3% | |  | 7% |  | 33% | |  |
|  | reduction in Scope 1 & 2  CO2e emissions vs 2020  baseline | |  | reduction in Scope 3 CO2e  emissions in 20212 vs  2020 baseline |  | renewable energy use:  achieving our 30% 2025  target three years early | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicators |  | SASB Standards | |  |
|  | GRI 302-1, GRI 302-3, GRI  302-4, GRI 305-1, GRI  305-2, GRI 305-3, GRI  305-4, GRI 305-5 | |  | 5, 6, E4, E5 |  | FB-AG-110a.1, FB-  AG-110a.2, FB-AG-110a.3,  FB-AG-130a.1 | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Environment Policy  –Environment, Health and Safety (EHS) management system  –Supplier Code of Conduct  –Climate Change and Energy Standard  –Green Mobility Standard  Note:  1.Compared to 2020 baseline. Comprises 50% reduction in Scope 1 & 2 and  50% reduction in Scope 3 GHG emissions. Scope 3 emissions target  includes purchased goods and services, upstream transportation and  distribution, use of sold products and end-of-life treatment of sold  products, which collectively comprised >90% of Scope 3 emissions in 2020. | | | | |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Our Approach

We have an integrated climate strategy

that includes our products' whole value

chain: to help mitigate climate change and

reduce emissions; adapt and be resilient to

the impacts of climate change; and, overall,

effectively manage associated risks.

Why Climate Change Matters

We rely on natural resources to run our

business. Our ability to secure these resources

is directly linked to the effects of climate

change and, as a global organisation, we have

a responsibility to our planet. Minimising

impacts across our value chain and reducing

our carbon footprint is simply the right thing

to do - and makes sound business sense.

Our Integrated Climate Strategy

BAT’s approach to mitigating and adapting to

climate change is shaped by our climate

strategy, which is supported by our

Environment Policy and by ambitious goals

and targets. These include: halving GHG

emissions across Scope 1, 2 & 31 by 2030 and

achieving Net Zero across our value chain by

2050 at the latest. We are focused on our

near-term, 2030 target, which has been

approved by Science Based Target initiative

(SBTi). In parallel, our mitigation activities are

helping our business and supply chain become

more resilient to the transitional and

operational effects of climate change.

See our TCFD report on page [71](#id739eb8a094346e4a1dd9989c862058f_9626) for full

details of our GHG emissions and page [45](#id739eb8a094346e4a1dd9989c862058f_9518)

for our Environment Policy.

To reduce Scope 1 & 2 GHG emissions, we are:

–Using site-specific decarbonisation

roadmaps for all our manufacturing facilities

and investing in energy efficiency projects

and management systems;

–Implementing on-site renewable energy

generation projects, increasing renewable

energy use by purchasing green

electricity and assessing options for

power purchase agreements; and

–Rolling out electric and hybrid vehicles

across our fleet.

Scope 3 GHG emissions (including biogenic

emissions and removals) comprise most of

our total carbon footprint, contributing to

91% of our total value chain emissions in 2021.

In order to reduce Scope 3 emissions, we

are focusing our efforts on the most

carbon-intensive categories first, taking the

following approach:

–Collaborating with tobacco farmers

through carbon-smart farming;

–Using sustainable tobacco curing fuels,

aligned with no gross deforestation, and

eliminating residual use of coal for curing;

–Building a climate-resilient supply chain

partnership with direct and indirect

suppliers; and

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| Climate Change | | | | | | | |

52

–Fostering a circular economy throughout

our value chain by increasingly using readily

recyclable materials, designing for end-of-

life, and implementing product Take-Back

schemes3 for our New Category devices.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | For more information on our decarbonisation  strategy, read our Low-Carbon Transition Plan  on www.bat.com/LCTP |
|  |  |

Scope 1 & 2:

Decarbonising our Operations

Our Climate Change and Energy Standard

provides guidance and consistency on

our approach to decarbonisation and its

implementation across our global operations.

In 2022, we continued to enhance our

decarbonisation strategy by engaging with

stakeholders and other third-parties, which is

helping us address harder-to-tackle

decarbonisation areas. For example, for Scope

1, we are assessing renewable hydrogen

development based on region-specific factors.

Additionally, we implemented initiatives which

resulted in the reduction of some 10,000

tCO2e of emissions vs 2021. This is equivalent

to 2% of our 2020 baseline. Initiatives included

smart energy management systems that

optimise consumption using artificial

intelligence (AI), for example in Singapore,

Mexico and Bangladesh; upgrading and

replacing heating, lighting and air-conditioning

systems; installing solar heating; and replacing

fossil fuel boilers with low carbon alternatives,

such as sustainable biomass in Germany and

South Korea.

We monitor energy consumption across our

business by comparing production output to

benchmarks, setting high-usage alarms, and

having experienced staff available to monitor

energy consumption and address

breakdowns or faults.

In 2022, we reduced our absolute Scope 1 &

2 GHG emissions by 120,000 tCO2e, vs

2020, a decrease of 22.3%. We continued

to expand the number of externally verified

carbon neutral sites4, reaching a total of 28

manufacturing and commercial facilities.

At those carbon neutral sites, we purchased

verified carbon offsets to offset the residual

emissions. These credits are generated

from projects such as improved forest

management, afforestation and reforestation.

Renewable energy:

Accelerating our progress

In 2022, 33% of our direct energy usage

came from renewable sources, an increase

of 4.3 pps from 2021. This includes biomass.

By the end of 2022, 39 of our operations

sites were purchasing 100% renewable

electricity and 26 were generating

renewable energy on-site, avoiding some

36,000 tCO2e emissions. In 2022, we

achieved our 2025 target to increase our

renewable energy use to 30%. In doing so,

we have increased our target to reach 50%

renewable energy use by 2030.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | For more information and a breakdown of our  energy usage see our ESG Performance Data  Book |

Our journey to reducing fleet emissions

In 2022, our vehicle fleet accounted for

approximately 20% of our Scope 1 & 2 GHG

emissions. Our Green Mobility Standard

outlines our strategy to reduce the

environmental impact of our fleet. We are

working with our fleet partners to transition

to electric battery, plug-in hybrid and

self-charging hybrid vehicles, for example,

in Australia, Italy, the U.S., South Korea

and Jordan.

While we transition our fleet, we are also

reducing associated emissions through

several initiatives. We optimise travel

routes through telematic systems in

vehicles. These systems help alert drivers

and us to improvements in driving that are

designed to enhance both road safety, as

well as fuel efficiency, which could lead to

reduced emissions. Between 2020 and

2022, these combined efforts have reduced

fleet emissions by around 10%.

Scope 3: Engaging with

our Value Chain

Our Supplier Code of Conduct outlines the

minimum expectations for suppliers, including

specific elements related to environmental

impacts and carbon reduction plans. To reach

our near-term Scope 3 reduction target, we

are focusing our efforts on our most carbon-

intensive areas first, namely purchased

tobacco and our largest direct and indirect

suppliers of goods and services.

Purchased Tobacco

Tobacco growing is a key contributor to the

emissions within our value chain. Almost 31%

of our Scope 3 GHG emissions come from the

tobacco we source, contributing 1,600,000

tCO2e in 2021, with the majority coming from

fuels used to cure tobacco leaves.

To help farmers reduce emissions, we have

a range of initiatives covering farming

practices, exploring new curing

technologies, alternate fuel sources and

new fertilisers with lower emissions, as well

as ‘carbon-smart’ farming practices

throughout the growing cycle.

The aim of carbon-smart farming is to reduce

emissions from farming activities, whilst

removing carbon from the atmosphere

through reforestation and reduction of soil

disturbance. The programme is currently

underway in the Group's own Leaf Operations

in Brazil, Bangladesh, Mexico, Pakistan and the

U.S. - which represent our highest directly

contracted tobacco volumes.

We are monitoring GHG emissions,

removals and different agricultural

practices in these countries to further

develop and scale-up the programme as

part of our broader climate strategy. The

methods used also have additional benefits,

such as increasing water retention capacity

and improving drainage, as well as

improving soil quality. As a result, many

farmers are seeing increased yields and

better-quality crops.

We have continued to support the

elimination of the residual use of coal as a

fuel for curing. In 2022, the Group's own

Leaf Operations in China and Vietnam

eliminated coal from their tobacco curing

and replaced it with biomass, thereby

reducing the use of coal for curing across

our purchased tobacco to around 5%.

Direct and Indirect suppliers

Group-wide, we have more than 30,000

direct and indirect suppliers. For example,

we source product materials, such as

paper and filters for cigarettes, THPs, and

packaging for all our products. For our New

Category products, we have a growing

supply chain in consumer electronics and

e-liquids. We also have a large number of

suppliers of indirect goods and service,

such as IT services and facilities

management.

In 2022, we invited over 200 priority suppliers

to make climate change disclosures via CDP,

with a completion rate of over 90%.

We have also requested those suppliers to

commit to a series of environmental pledges,

including:

–Submitting an annual climate change

disclosure via CDP;

–Setting science-based targets via SBTi;

and

–Initiatives to support removal and/or

reduction of single-use plastics.

We estimate c.50% of our direct and

indirect supplier emissions can be

attributed to 60 suppliers. By engaging with

these suppliers through data collection,

information sharing, direct discussions and

asking them to participate in the CDP Supply

Chain Programme, we are focusing on areas

where we believe we can make the biggest

impact.

Our goal is to have 20% of suppliers of

purchased goods and services by spend to

set Science-Based Targets by 2025. At the

end of 2022, we were more than half-way

to achieving this goal, with 13% of suppliers

having Science-Based Targets in place.

In 2023, we will continue to engage with

our purchased goods and services supply

base. We are aiming to cover 95% of the

emissions in this area through our

engagement, to make further progress

towards our Scope 3 target.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | For more information about our targets see  TCFD report on page [71](#id739eb8a094346e4a1dd9989c862058f_9626) |

Notes:

2.Due to the complexity of consolidating and assuring

Scope 3 data from our suppliers and value chain, we

report Scope 3 data one year behind other metrics.

3.  For more information on our approach to Take-Back

schemes, see page 55

4.BAT's carbon neutral sites are externally verified as

adhering to internationally recognised standards /

carbon neutrality methodologies such as PAS 2060 and

purchase carbon credits verified by third parties, such as

VCS, Gold Standard and American Carbon Registry, to

offset residual emissions for which immediate plans do

not offer financially viable and/or real emission

reductions.

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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53

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | Excellence in environmental management | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Circular Economy | | | | | | |  |
|  | | | | | | | | |
|  | Our Goals | |  |  |  |  |  |  |
|  | 100% | | | 100% |  | 30% | |  |
|  | of our packaging1 to be  reusable, recyclable or  compostable by 2025 | |  | of Vuse and glo markets  with device Take-Back  schemes in place |  | average recycled content  in plastic packaging by  2025 | |  |
|  |  |  |  |  |  |  |  |  |
|  | -25% | |  | 90% |  | <1% | |  |
|  | reduction in waste  generated by 2025  (Updated Target)2 | |  | recycling rate of  waste  generated by 2025  (Updated Target) |  | waste going to landfill by  2025 (Updated Target) | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 92% | |  | 84.3% |  | 48% | |  |
|  | of packaging was reusable,  recyclable or compostable | |  | waste recycling rate |  | reduction in waste sent to  landfill vs 2021 | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicators |  | SASB Standard | |  |
|  | GRI 306-1, GRI 306-2,  GRI306-3, GRI-306-5a | |  | 9, E13, E9 |  | This topic is not mapped  to a specified Standard | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Environment Policy  –Circular Economy Position Statement  –Supplier Code of Conduct  –Sustainable Tobacco Programme  Notes:  1.In 2022, we expanded our target to include all types of packaging, rather  than just plastic packaging.  2. vs 2017 baseline. In 2022 we increased this target to a 25% reduction by  2025, having surpassed our initial 15% reduction target already. The  scope of this KPI relates to BAT's direct operations. | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Our Approach

Our aim is to use fewer resources, create

less waste and enable reuse, recycling and

circularity in our products. We aim to do

this by being smarter in how our products

are designed, made, packaged, transported

and in our products' end-of-life options.

Why a Circular Economy Matters

We have the responsibility to reduce our

consumption of finite resources and work

towards a circular economy. Discarded

plastics and other waste impact the

environment. Consumers are increasingly

interested in products' environmental

footprints.

Our transformation from Combustibles

to New Categories brings additional

challenges - products with different

environmental profiles and changes to

resource use. We need to be constantly

improving our products' design and

circularity, and creating less overall waste.

Our Circular Economy Strategy

To mitigate the environmental impacts

of our current and future product portfolio,

we are guided by three core principles,

reflected in our Circular Economy Position

Statement:

–Simplify: Simplifying the design of

products and packaging to improve

recyclability and to reduce our use of

virgin materials and finite resources;

–Maximise: Maximising the longevity of

our products to improve the experience

for our consumers; and

–Recover: Minimising waste through

increased product recovery, reusability

and recycling.

Transitioning to a circular economy

requires innovative approaches. As such,

we carry out life cycle analysis (LCAs)

across our products to identify areas for

further improvement.

Adopting circular economy principles

reduces the environmental impact of our

products, creates more efficient operations

and offers our employees opportunities to

innovate.

Investing in R&D

We recognise that our portfolio transition

to reduced risk\*† alternatives brings additional

challenges to the delivery of our environmental

commitments as New Category products

tend to have different and/or greater

environmental footprints. To tackle this

challenge, we are investing in the R&D

of products that provide reduced risk\*†

alternatives to smokers that also have

a lower environmental impact. We are

seeking to design products that are

easier to dismantle at end-of-life, with

greater reusability and recyclability, and

packaging that uses more recycled and

recyclable content.

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54

As part of our efforts towards a circular

economy, we have a growing pipeline of

initiatives that seek to develop products

with lower environmental impact. Over the

course of 2022, we have been working with

an external partner in developing an

integrated ‘tool kit’ to measure and inform

the environmental impacts arising from

any design decisions.

Promoting a Culture of Circularity

Improving product circularity is a key pillar

of our circular economy strategy. However,

we are also not losing sight of other

opportunities to embed circularity across

our business and value chain.

We continue to improve efficiencies in our

manufacturing operations and logistics, as

well as seeking to leverage our purchasing

power, where possible, to drive materials,

goods and services that have a lower

environmental impact.

We are committed to implementing new

solutions and technologies that will

accelerate this journey, while nurturing a

culture of innovation and collaboration with

business partners across our value chain

and other external partners in order to

develop new solutions.

Reducing Product-related Waste

Our goals for 2025 include further

eliminating plastic in our packaging, and

increasing the recycled content of the

plastic packaging that we do use. This sits

alongside our efforts to minimise packaging

overall, and our aim for all of our packaging

to be reusable, recyclable or compostable

by 2025. We are implementing this across

our product categories:

Vapour products

In 2022, we changed the pack profile of our

Vapour refills in Canada and included

recycled cardboard content in them. The

reduced pack profile has resulted in a 15%

reduction in CO2e per refill and a 45%

saving in paper use in Canada. We plan to

roll out the reduced pack profile and

recycled board content across the Group

over the course of 2023.

Tobacco Heating Products (THPs)

Our glo device packaging is recyclable,

where local facilities exist, and we have

worked to eliminate any unnecessary

plastic packaging1 from it. We've removed

all plastic wrap from glo device packaging,

which has resulted in a saving of 20 metric

tonnes of plastic per year. In 2022, we also

reduced the device box size by over 55% vs

2021, which has resulted in a saving of 300

metric tonnes of paper per year, and a 65%

reduction in CO2e footprint from the changes

to our device packaging.

Traditional and Modern Oral products

Globally, over 80% of the cans used in our

Velo products are recyclable, where local

facilities exist. In the U.S., Traditional Oral

product containers (Grizzly moist snuff

and Camel Snus) are made from plastic

(polypropylene) and steel, which are

recyclable, where facilities exist.

Transforming cigarettes

We have made progress in improving the

recyclability of plastic packaging in FMC.

For example, 93% of our plastic packaging

for cigarettes can be recycled and all poly

film, as well as tear-off strips used on

packs, can be recycled (subject to local

recycling infrastructure). We are also

conducting trials on alternative plastic-free

materials for cellulose acetate cigarette

filters (filters classified as having plastic

content).

Other Tobacco Products (OTP)

In our OTP category, we are working on

several projects to maximise recyclable

material in our portfolio. The focus is on

converting all non-recyclable plastic

laminate pouches and standing bags to

recyclable plastic. Our ambition is to have

this portfolio migrated by 2025.

Designing for End-of-Life

Butt littering and disposal of New Category

products are two big challenges we face.

Tackling cigarette butt littering

BAT recognises the impacts of cigarette butt

littering. It is a complex topic with no easy

answers. We are committed to working with

consumers to enhance their understanding of

the impact of butt littering and encourage

responsible disposal.

Research shows that consumer education

and awareness-raising initiatives are likely

to be some of the most successful measures.

At BAT, we support a number of such

initiatives and education campaigns.

We have developed a new butt littering toolkit

that will be rolled out across BAT in 2023. This

utilises learning from our existing initiatives to

focus on approaches that have proved to be

most effective and resonated best with

consumers. In 2022, we continued to

implement campaigns across Italy, Denmark,

France and Romania - among other countries.

Take-Back schemes

Since the end of 2021, BAT has had Take-

Back schemes in all markets where we sell

New Category devices. These comprise

one or both of: device return containers in

our directly-operated and third-party retail

outlets; and participation in national

electrical equipment return and recycling

schemes.

Take-Back schemes allow for the

responsible disposal of end-of-life

products, which can range from recycling

to incineration with energy recovery,

depending on local infrastructure,

capacities and regulatory environment.

Reducing Waste

In 2022, as well as achieving a further 8.6%

reduction in absolute waste versus 2021,

we also passed our initial target of a 15%

reduction in waste from operations by

2025 against a 2017 baseline, achieving a

21.5% reduction. As a result, we have

increased our target to a 25% reduction in

waste from operations by 2025, against a

2017 baseline.

In 2022, we also increased the percentage

of absolute waste we recycle by an

additional 5.4pps, up to 84.3% against our

updated target of 90%, by 2025.

In 2022, 52% of our operations sites

achieved zero waste to landfill. To address

waste to landfill more broadly across our

direct operations, we have also updated

our waste to landfill target to <1% globally

by 2025.

These improvements were achieved by

utilising existing processes from our

Integrated Work System (IWS), conducting

loss analysis and value stream mapping.

This enabled a targeted approach to our

more challenging waste streams, allowing

our Global Waste Centre of Excellence

(CoE) to focus on the 'waste top losses' and

implement action plans, such as waste

segregation and recycling programmes.

The CoE brings together subject matter

experts from across our global operations

to support the identification and

implementation of solutions and best

practices at a local level.

Optimising Agricultural Waste

Our approach is for all of our tobacco

suppliers and their contracted farmers to

dispose of empty agrochemical

containers safely.

For example, in Brazil, we partner with an

industry scheme that collects and recycles

agrochemical containers from more than

100,000 farms through 1,800 collection

points in almost 400 municipalities across

the country. In Croatia, almost 80% of our

directly contracted farmers participate in a

municipal waste programme for recycling

seedling trays and empty agrochemical

containers.

We are also helping to reduce waste and

by-products from other types of

agriculture by using them as alternative,

sustainable fuels for tobacco curing.

Examples include jute sticks, rice husk

briquettes and other agricultural waste in

Bangladesh; candle nut shells in Indonesia;

and rice husks in Sri Lanka and Vietnam.

Notes:

1.Any plastic packaging element technically replaceable

by non-plastic materials without compromising product

properties (i.e. quality, safety or other regulatory

requirements), as classified by our R&D teams.

\*    Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

†    Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products, including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims

will be made as to these products without agency clearance.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | Excellence in environmental management | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Biodiversity and Ecosystems | | | | | | |  |
|  | | | | | | | | |
|  | Our Goals | | | |  |  |  |  |
|  | 100% | |  | Zero |  | Net Zero | |  |
|  | of wood used by our  contracted farmers for  tobacco curing to be from  sustainable sources | |  | gross deforestation of  primary native forests in  our paper, pulp and  Tobacco Supply Chain1 |  | deforestation of managed  natural forests in our  paper, pulp and Tobacco  Supply Chain1 | |  |
|  | | | | | | | | |
|  | Net positive  impact | |  | Zero |  |  | |  |
|  | in our Tobacco Supply  Chain1 on forests by 2025 | |  | conversion of natural ecosystems in our  Tobacco Supply Chain1  by 2025 (Updated Target) | | | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 100% | |  | 98% |  | 94% | |  |
|  | of tobacco purchased free  of gross deforestation of  primary native forest | |  | of tobacco purchased at no  risk of net deforestation of  natural forest and no  conversion of ecosystems |  | of paper and pulp  volumes are certified as  sustainably sourced (FSC  and PEFC ) | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicators |  | SASB Standard | |  |
|  | GRI 304-1, GRI 304-2 | |  | This topic is not mapped to  a specified Indicator |  | FB-AG-430a.3 | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Environment Policy  –Biodiversity Statement  –Supplier Code of Conduct | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |
|  | Note:  1.'Tobacco Supply Chain' refers to the tobacco supplied by our directly  contracted farmers and those of our strategic third party suppliers, who  participate in our annual Thrive assessment, representing over 80% of the  tobacco purchased by volume in 2022. | | | |  |  |  |
|  |  |  |  |  |  |  |  |  |

Our Approach

We continue to work with the farmers in

our Tobacco Supply Chain1 to help protect

biodiversity and forest resources. We also

aim to use only paper- and pulp-based

packaging materials that are certified as

sustainably sourced.

Why Biodiversity and

Ecosystems Matter

As noted in our Biodiversity Statement, we

have both an impact and a dependence on

biodiversity, through our business

operations and use of ecosystem services,

such as forest products, soil and water.

Conventional agricultural practices can be

resource-intensive as they can be

associated with deforestation, pollution

and biodiversity loss.

To avoid this, we continue to develop,

advance and implement sustainable

agricultural practices that help to preserve

natural capital, enhance rural livelihoods

and help increase farmers’ resilience to

climate change.

Advocating for Increased

Biodiversity Protection

BAT was one of 300+ leading global

companies that first signed a call to action by

the business coalition Business for Nature.

The coalition advocates for mandatory

reporting by businesses, and asks

governments to strengthen legislation

protecting biodiversity.

Governments participating in the COP-15

UN Biodiversity Conference in December

2022 were urged to implement new

reporting requirements for large and

transnational businesses and financial

institutions. Creating a level playing field for

businesses, increasing accountability to

investors and consumers, and empowering

local communities are just some of the

benefits of this call to action.

Working with our Paper and Pulp

Supply Chain

For our paper- and pulp-based supply chain,

we work with suppliers who can demonstrate

that material is sourced sustainably. That

means certification from the Forest Stewardship

Council (FSC) or the Programme for the

Endorsement of Forest Certification (PEFC).

94% of our pulp-based materials (including

primary and secondary packaging, fine

paper, acetate tow and point of sale

materials) were certified as sustainably

sourced in 2022. Certification must also be

in place for any new paper or pulp suppliers

we appoint.

Our Journey to Net Positive

In our Tobacco Supply Chain1, we aim to

have a net positive impact on forests by

2025. Our objective is to increase primary

native forests and biodiversity value.

To achieve this goal, we provide our directly

contracted farmers with tree saplings as

sources of sustainable fuel for tobacco

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56

curing, as well as training in forest and

biodiversity management. Our third-party

suppliers are expected to follow similar

practices with their contracted farmers.

Since the 1970s, we have provided more

than 400 million saplings to our contracted

farmers and their local communities to

promote wood self-sufficiency in Brazil,

Kenya, Bangladesh and Pakistan.

22% of our contracted farmers used

alternative, locally available biomass fuels

for tobacco curing in 2022. These include

sugarcane bagasse briquettes in Kenya,

and jute sticks and rice husks in Sri Lanka

and Bangladesh.

In 2022, as part of our Thrive programme,

we continued to engage with farmers on

training. Training was delivered by the

Group's own Leaf Operations and strategic

third-party suppliers through farm visits

and communication material, covering best

practices on natural resource preservation,

forest, biodiversity and soil management.

Protecting Forests in Partnership

with Farmers and Suppliers

Forests or other natural areas being

cleared to create farmland for tobacco is a

risk that we are working hard to reduce.

We monitored 100% of our directly

contracted farmers in 2022, regarding

farmland expansion and the risk of natural

ecosystems conversion (including wetlands,

peatlands, grasslands, woodlands, and wet

and dry savannah - in addition to forests).

This includes the risk of encroaching on

legally protected areas and/or recognised

biodiversity areas.

Regular, scheduled farm visits are used

alongside unannounced visits. Where non-

compliance is found, prompt action

is taken. Before we contract with new

farmers, we undertake due diligence to

check for no deforestation, no natural

ecosystems conversion and relevant

biodiversity practices.

If any cases of deforestation are observed,

the relevant farmer will be put under

remediation to reforest in the same eco-

region and/or jurisdiction.

We ask our third-party suppliers to take

equivalent steps.

Driving Actions Through our 2022

Biodiversity Risk Assessment

In 2022, we commissioned a new Biodiversity

Risk Assessment. This mapped our directly

contracted farmers against five global

biodiversity risk indicators and categorised

their farms as low, medium & high risk. The

work was carried out by an external

consultancy, which assessed data from

69,200 (91.5%) of our directly contracted

farmers in the 2021 crop year.

Based on a combined Biodiversity Risk

Score, 98% of farms assessed

(representing 96.4% of the total assessed

farmed area) were classified as low

biodiversity risk.

High risk areas were identified in Brazil and

Sri Lanka. Medium biodiversity risk areas

were found in Brazil, Kenya and Venezuela.

Overall, high and medium risk areas

represented less than 1% of the total farm

area assessed in each country.

One of the most relevant indicators

assessed is proximity to World Heritage

Sites (WHS) or Alliance for Zero Extinction

(AZE) sites. Results showed

a total of 127 farmers (0.2%) with farms

covering 974 hectares (0.3%) of the total

farmland assessed near or adjacent to

WHS and / or AZE areas.

Additionally, 854 farmers (1.2%), covering

9,027 hectares of land (2.8% of the total

farmland assessed), are near or adjacent to

protected areas or Key Biodiversity Areas.

In total, there are 10,001 hectares -

representing 3% of the assess area - near

critical biodiversity areas.

Sites were also assessed using the Species

Threat Abatement and Restoration (STAR)

indicator, a biodiversity metric based on

the IUCN Red List of Threatened Species.

Our assessment results showed a relatively

low level of risk to areas of high biodiversity

significance. 75 hectares were classified

with high Threat significance and one

hectare with high Restoration significance.

These are regions with high significance for

threatened or endemic species of birds,

mammals and/or amphibians. It does not

mean the farmers are causing the threat or

damaging the environment, but that there

is increased risk or significance in areas

relatively near to them. Over the course of

2023, we will work with the Group's own

Leaf Operations to develop management

plans to mitigate these risks.

We are also working on a new Biodiversity

Operating Standard, further outlining

requirements on biodiversity risk

management and protection. This includes

operational requirements and procedures

mandatory for the Group's own Leaf

Operations and to serve as guidance for

the third-party Leaf suppliers in order for

the Group to meet its forest-related

targets.

Supporting Biodiversity

and Natural Capital

To further support biodiversity and natural

capital, we work to reduce the use of

agrochemicals, reduce soil erosion and

preserve soil fertility. Training on best

practices in sustainable agriculture,

appropriate to growing conditions, are

provided to our directly contracted farmers in

collaboration with our Global Leaf Agronomy

Development Centre in Brazil.

Reducing agrochemical usage

Our standard is that only approved

agrochemicals with the lowest possible

toxicity according to the World Health

Organization (WHO) classification are used

in our purchased tobacco, avoiding any

highly hazardous pesticides (HHPs). We

monitor the level of adherence to our

agrochemical standard from crop planning

to the final packed leaf, ensuring suppliers'

compliance.

Any HHPs used prior to 2018 were replaced

or withdrawn by the Group's own Leaf

Operations and third-party suppliers.

Our Global Leaf Agronomy Development

Centre works to continuously enhance

integrated pest management strategies,

which are then deployed to the farmers by

our Field Technicians. Ongoing

developments include: selection of disease-

resistant tobacco varieties; the use of

biological control strategies that can lead

to a reduction in the use of agrochemicals

and biodiversity preservation.

In 2022, biological control strategies were

recommended in 9 of the Group's own Leaf

Operations.

For example, in Brazil, 33% of our directly

contracted farmers use some form of

biological control techniques for pest

control. Additionally, an independent study

found that the level of active chemicals

used per hectare of tobacco in Brazil is

1.01 kilograms – the second lowest among

19 different crops analysed.

Promoting best practice

in soil management

Soil plays a vital role in removing carbon

from the atmosphere, storing and purifying

water, preventing land erosion and

supporting habitats.

In farms where we source tobacco, farmers

receive training on best practice soil

management and other land management

practices. In 2022, it was reported via our

Thrive assessments that 82% of tobacco

hectares in our Tobacco Supply Chain1 had

best practice soil and water management

plans in place.

Mono-cropping - growing the same crop

continuously on the same land - is known

to contribute to the depletion of soil

nutrients. Crop rotation is a recognised

best practice approach to protecting and

enhancing soil health, which we encourage

alongside diversification. Both increase

farmers’ resilience to economic factors,

weather, climate issues and pests and they

also help to enhance food security and

preserve soil health.

In 2022, 92.8%2 of farmers in our Tobacco

Supply Chain1 were growing other crops -

such as rice, corn, vegetables, wheat, maize

and soy - in addition to tobacco.

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Note:

2.This was marginally lower in comparison to 2021,

due to changes in our purchasing mix.

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|  |  | Excellence in environmental management | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Water | | | | | | |  |
|  | | | | | | | | |
|  | Our Goals | |  |  |  |  |  |  |
|  | 35% | |  | 100% |  | 30% | |  |
|  | reduction in water  withdrawn by 2025 vs  2017 baseline | |  | of operations sites  Alliance for Water  Stewardship (AWS)  certified by 2025 |  | of water recycled by 2025 | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 33% | |  | 36% |  | 22.6% | |  |
|  | reduction in water  withdrawn vs 2017 baseline | |  | of operations sites AWS  certified in 2022 |  | of water recycled in 2022 | |  |
|  | | | | | | | | |
|  | 7% | |  | 82% |  |  | |  |
|  | reduction in water  withdrawn vs 2021 | |  | of tobacco hectares in our Tobacco Supply Chain1 have  best practice soil and water management plans in place | | | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicators |  | SASB Standards | |  |
|  | GRI 303-1, GRI 303-2, GRI  303-3, GRI 303-4, GRI  303-5 | |  | 8, E6, E7, E8 |  | FB-AG-140a.1, 140a.2,  140a.3,  FB-AG-430a.3  FB-AG-440a.2 | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Group Environment Policy  –Water Security Standard  –Soil and Groundwater Protection Standard  –Supplier Code of Conduct  –Leaf Supplier Manual (LSM)  –Sustainable Tobacco Programme | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Why Water Matters

Good water management is vital to

sustainable farming and running efficient

operations. We recognise it is both our

responsibility and good business practice

to use water efficiently and wisely.

Our Approach

We are using less water by optimising

processes, eliminating losses and

increasing recycling. We are also helping

our contracted farmers pursue more

sustainable irrigation methods, while

seeking to protect local communities'

access to clean water.

High Standards in Water

Management

Our Environment Policy is implemented by

all Group companies. It outlines our

commitment to high standards of

environmental protection, the principles

of sustainable development and the

protection of biodiversity and water.

It is complemented by our Water Security

Standard – aligned with CDP’s

requirements for managing water risk

effectively – and Soil and Groundwater

Protection Standard. These define the

controls and standards we follow to help

protect against spillages and leakages that

could impact surface waters, groundwater

or soil. For our suppliers, our Supplier Code

of Conduct (SCoC) defines the minimum

standards we expect, including specific

criteria for environmental sustainability

and water.

For our tobacco suppliers, the SCoC is

complemented by our Leaf Supplier Manual

(LSM). It includes requirements for water

protection planning and water extraction

for irrigation that we expect our suppliers

to follow and monitor.

In addition, the industry’s Sustainable

Tobacco Programme (STP) includes water

management criteria which also applies to

our suppliers.

Rigorous Water Stewardship

across our Operations

Through our long-standing environmental

management systems, we have been

steadily decreasing water withdrawal

and increasing the Group's water recycling

rate for a number of years.

We use water in our factories and Green

Leaf Threshing sites and, to a lesser

extent, in our offices and distribution sites.

Although our manufacturing processes

are not particularly water intensive, we do

operate in some water-stressed locations

around the world. Optimising water use is a

high priority for the local environment and

communities in those localities.

We use the World Resources Institute's

(WRI) Aqueduct Water Risk Atlas to

identify our sites located in water-stressed

areas. In 2022, 16 of our sites in 11 countries

were identified as being in a water-

stressed area. For such sites, we have

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58

more stringent requirements for water

management on site and water recycling

rates, in line with our Water Security

Standard.

Sites in water-stressed areas are required

to have a plan to achieve a water recycling

rate of at least 25% and a score of 3.5 out

of 4 as per the Water Roadmap – an

internal tool that allows us to assess key

aspects of water management, such as

water withdrawal, water efficiency and

water discharge.

At a Group level, we seek to ensure all sites

in water-stressed areas regularly self-

assess in accordance with the 'Water use

and discharge management' section of our

EHS Roadmap. This covers water

withdrawal and discharge compliance, as

well as links to the Alliance for Water

Stewardship (AWS) process.

Our sites implement a range of initiatives

to eliminate water losses, improve water

efficiency and replace fresh water with

recycled water, wherever possible.

Examples of water saving initiatives include

replacing water-cooled chillers with air-

cooled chillers in Turkey, and optimising

water consumption when 'stem washing'

across our green leaf threshing (GLT)

operations.

70% of our operations sites currently

reduce water withdrawn by recycling

water on site, in manufacturing operations

and utilities. Examples include upgrading

our ultra-filtration and Reverse Osmosis

(RO) systems - with significant success in

our Sacheon factory, South Korea;

condensate return to boilers; and reusing

water for utilities and other technical needs

after it has been treated for effluent. These

initiatives are in operation across our sites

in Pakistan, Croatia, Brazil, Indonesia and

Turkey.

33%

Reduction in water

withdrawn vs 2017 baseline

Across the Group, we achieved a 33%

reduction in water withdrawn in 2022,

versus our 2017 baseline. We have also

increased the amount of water we recycle

to 22.6% through our zero-loss mindset

and focusing on identifying our 'top losses'

across operations.

As members of the AWS, we committed to

100% of our operations sites to be certified

against the AWS Standard by 2025. The

AWS Standard is a globally recognised

framework that allows water users to

better understand their water use and

impacts, and to work collaboratively and

transparently towards sustainable water

management within a catchment context.

At BAT, we use it across our operations,

and believe its implementation can bring

about many benefits for our sites on issues

such as understanding water

dependencies and impacts, mitigating

operational and supply chain water risks,

ensuring responsible water procedures are

in place, building relationships with local

water-related stakeholders and addressing

challenges shared with others in the

catchment.

In 2022, a further 24 sites were audited and

recommended for AWS certification, which

now takes the Group total to 34 sites. We plan

to seek certifications for 19 additional sites

during 2023.

34

# sites

Group sites now audited/

recommended for AWS certification

Throughout the year, we delivered training

on the AWS Standard for EHS practitioners

across our operating sites. Further training

is underway to equip key regional teams as

specialist assessors to support the Group

in meeting the governance and compliance

requirements of AWS.

Water discharge monitoring

Monitoring water discharges means we

are better able to assess and reduce our

impact on the environment and comply

with regulatory requirements. Across the

Group, we track water discharge

destination, treatment method, quantity

and quality.

In 2022, we performed a screening for

priority substances and pesticides,

phosphates and nitrates. 100% of our

operational sites reported no process use

of these substances, and 38% reported not

using them in any on-site ancillary or

support services. BAT operates control

measures globally in line with its Group

procedures for hazardous substances

management designed to avoid any

uncontrolled emissions to water, soil or

groundwater across its operations – including

for ancillary and support processes.

An Active Approach to Water

Stewardship in Tobacco Growing

Adopting a comprehensive approach - from

assessing water risks and any subsequent

water deficits from rainfall - is at the centre

of how we support our contracted farmers in

water stewardship. Across many regions of

the world where we operate, there is sufficient

annual rainfall to satisfy tobacco growing

requirements.

Where rainfall levels are insufficient,

farmers may also use irrigation to grow the

crop. In 2022, 33% of the hectares of our

tobacco sourcing area made some use of

irrigation systems. A number of the

locations where we source tobacco are

identified as areas of ‘water stress’.

We actively monitor the proportion of tobacco

crops in areas with higher risk for water stress.

We map tobacco supplier locations via the

WRI Aqueduct tool, which is incorporated into

the industry-led Sustainable Tobacco

Programme.

In 2022, mapping identified that some of our

tobacco sourcing areas in 18 countries -

including India, Chile and Turkey - are located

in water-stressed areas. 18.3% of the

tobacco we purchased in 2022 originated

from areas designated as water-stressed. In

those areas, we seek to work directly with

farmers to optimise and reduce crop

water usage.

Where irrigation is used for tobacco

growing, we monitor and report water use

with our Thrive programme, which we also

use to monitor wider best practice water

and soil management. In 2022, these plans

were in place for 82% of tobacco hectares

in our Tobacco Supply Chain1.

Through our Global Leaf Agronomy

Development Centre, we are actively

looking at ways to work with directly

contracted farmers to reduce water

usage, with different techniques applied

depending on the local circumstances

and growing conditions.

Where implemented, we believe our

technology-driven approach is leading to

increases in water efficiency, reducing the

volume required of water per hectare.

For example, we have introduced our

directly contracted farmers to drip

irrigation technology in seven countries,

including Brazil, Mexico and Pakistan. This

helps save water, reduce soil erosion and

salination, and boosts yields. In 2022, we

ran pilot programmes in Bangladesh,

Pakistan and Vietnam. Initial results

showed savings of between 25-50% of

water use when compared to traditional

furrow irrigation methods.

We are currently running a global project

using our Asian Agri-Tech Hub in

Bangladesh, to identify opportunities for

reducing the cost of the drip irrigation

system by simplifying the components.

Another important initiative for water

saving is the Alternate Furrow Irrigation

system. In 2022, we continued with trials

and commercial evaluations in Bangladesh

and Pakistan. Initial results are promising

and show potential water savings of up to

8% compared to traditional furrow

irrigation - without compromising crop

yield or quality.

Looking forward, new programmes to

anticipate future challenges with water

scarcity, water reduction and engagement

with local communities are in development.

These include innovative seedling floating

systems, smart irrigation using real-time

sensors and new drought resistant

tobacco varieties.

Note:

1.Tobacco Supply Chain' refers to the tobacco supplied by

our directly contracted farmers and those of our

strategic third party suppliers, who participate in our

annual Thrive assessment, representing over 80% of the

tobacco purchased by volume in 2022.

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|  | | | | | | | | |
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|  | Human Rights | | | | | | |  |
|  | | | | | | | | |
|  | Our Goals1 | |  |  |  |  |  |  |
|  | Zero | |  | 100% |  |  |  |  |
|  | aiming for zero child and  forced labour\* in our Tobacco  Supply Chain1 by 2025 | |  | of product materials and high-risk indirect suppliers to  have undergone at least one independent labour audit  within a three-year cycle | | | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights1 | | | |  |  |  |  |
|  | 100% | |  | 0.38% |  | 10 | |  |
|  | of farms monitored in our  Tobacco Supply Chain1 for  child labour | |  | of farms with incidents of  child labour identified vs  0.7% in 2021 |  | HRIAs completed in our  tobacco sourcing  countries | |  |
|  | | | | | | | | |
|  | 96.4% | |  | 348,257 | | 36.6% | |  |
|  | of farmers received  training/capacity building  on child labour issues | |  | attendances via farmer  human rights training/  capacity building |  | of product material &  higher-risk indirect  suppliers having an  independent labour audit  within a three-year cycle | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicators |  | SASB Standards | |  |
|  | GRI 408-1, GRI 413-1, GRI  413-2, GRI 414-1, GRI 414-2 | |  | S10 S13 S14 |  | FB-AG-430a.2, FB-  AG-430a.3 | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Standards of Business Conduct (SoBC)  –Our Supplier Code of Conduct  –Employment Principles  Note:  1.Our goals cover all tobacco used in our combustibles & THP products  ('tobacco supply chain'). Our metrics, however, derive data from our annual  Thrive assessment, which includes our directly contracted farmers and  those of our strategic third party suppliers, representing over 80% of the  tobacco purchased by volume in 2022 ('Tobacco Supply Chain').  \*    For further detail, see Modern Slavery Statement 2022, to be published  in Q2 2023. | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Our Approach

We have a long-standing commitment

to respect fundamental human rights as

affirmed by the Universal Declaration of

Human Rights. This commitment is set out in

our SoBC and Supplier Code of Conduct (see

page 45). This includes respecting the rights of

our employees, the people we work with and

the communities in which we operate across

our supply chains and business operations.

Our human rights strategy is aligned to the

UN Guiding Principles for Business and

Human Rights (UNGPs) and focuses on

strong policies, good due diligence and (where

required) remediation programmes.

Why Human Rights Matter

Our business and supply chain covers

several industries with inherent human

rights risks and considerations, including

agriculture, electronics and manufacturing.

Focusing on what matters

We want to focus on what matters most

to people across our supply chain and

business operations. To do this, we

undertake a defined process, aligned to the

UNGPs. We engage to understand the

views of and impacts upon, our key

stakeholders and rights-holders. We also

aim to have a holistic approach that identifies

emerging risks, trends and best practices.

Respecting Human Rights in our

tobacco supply chain

Tobacco, due to inherent challenges in

global agriculture, may be particularly

vulnerable to human rights-related risks.

This includes temporary workers' rights,

rural poverty and the use of family labour

on small family farms. It is estimated by the

International Labour Organization (ILO)

that 70% of child labour incidents globally

occur in agriculture2.

Supporting farmers and building

trusted relationships

Human rights issues are complex and the l

ocal situation on the ground can be nuanced.

Remediation requires cooperation and

dialogue, rather than confrontation. We

believe this is where our relationship with

directly contracted small-scale farmers

enables us to have a real and lasting impact.

Our Field Technicians visit our contracted

farmers approximately once a month during

the growing season. In addition to agronomy

support, this is an important way to train and

monitor farms on human rights.

Using our digital platform

to protect Human Rights

Our Farmer Sustainability Management

(FSM) system is a digital platform that our

Field Technicians use to record data on each

individual farm visit. More than 30% of the

criteria are related to human rights, including

monitoring for child and forced labour and

interviews with farm workers.

Note:

2.International Labour Office and United Nations Children’s

Fund, Child Labour: Global estimates 2020, trends and the

road forward, ILO and UNICEF, New York, 2021. License: CC

BY 4.0.

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60

Playing Our Part in the Sustainable

Tobacco Programme

All of our Leaf suppliers are expected to

participate in the industry’s Sustainable

Tobacco Programme (STP), which requires

an annual self-assessment against priority

themes, including Human Rights. Suppliers

are assessed against Verisk Maplecroft’s risk

indices, including for human rights.

As part of a new STP pilot, those suppliers

with a higher risk profile are prioritised for in-

depth, on-site reviews conducted by an

independent third party. Based on this

process, during 2022, the overall STP

programme piloted 10 in-depth assessments

(IDAs) in four countries (Argentina, Brazil,

North Macedonia and Mozambique), covering

six Leaf suppliers which BAT sourced from. At

this stage, there are plans to expand this pilot

to an additional 22 suppliers in six countries

during the course of 2023.

Reporting and Resolving

Incidents of Child Labour in our

Tobacco Supply Chain

The Operational Standard on Child Labour

is mandatory for all of the Group's own Leaf

Operations and is used as a guidance

across our third-party leaf suppliers.

In 2022, a total of 942 incidents (2021: 1,790) of

child labour were reported on 0.38% (2021;

0.70%) of farms in our Tobacco Supply Chain1,

of which 100% were reported as resolved

during the growing season. The majority of

these cases related to under-18-year-olds

working on tasks such as harvesting. The

2022 reduction was supported by: ongoing

implementation of child labour mitigation

programmes, farmers training and

stakeholder engagement within our

Tobacco Supply Chain1; and improved data

for our strategic third-party leaf suppliers,

which, for 2022, comprised farmers specifically

supplying BAT, when possible. We recognise

the complexity of child labour and that

monitoring cannot take place on every farm

every day of the growing season, so incidents

may be hidden or under-reported. That is why

it is so important to work to address root causes.

We monitor the recurrence of child labour

instances and remediation plans often

involve local community support. In 2022,

more than 90% of the farmers reporting

child labour incidents identified this type of

non-compliance for the first time. Where

we identify recurring non-compliance, the

farmer’s contract is not renewed for the next

growing season.

Delivering Human Rights Training

to Farmers and Their Communities

The Group's own Leaf Operations and

strategic third-party suppliers provide human

rights training and awareness programmes

for farmers and community members, with a

focus on child labour and workers’ rights /

forced labour. In 2022, 348,257 attendees

were reported to have received this training

and we also provided refresher training about

Prompt Action procedures and governance to

the Group's own Leaf Technicians.

Giving Farmers a Voice

We track access to grievance mechanisms

across our Tobacco Supply Chain1 as part

of our Thrive assessments. In 2022, Thrive

identified that 100% of the farms are

monitored for grievances, and 99.3% of

farmers and farm labourers reported

having access to at least one type of

grievance mechanism.

Our Human Rights Impact

Assessment Programmes

In recognising the need for a greater

understanding of the root causes of human

rights issues and complementing our own

farm monitoring, we also undertake Human

Rights Impact Assessments (HRIAs) for

selected tobacco-sourcing countries, in line

with the UNGPs and conducted by

independent human rights experts. By the

end of 2022, 10 HRIAs had been completed

in eight of our tobacco sourcing countries,

namely: Bangladesh, India, Indonesia,

Mozambique, Pakistan,Turkey, Zimbabwe

and North Macedonia. Collectively, these

assessments have engaged more than

5,239 rights-holders in tobacco-growing

communities. The outcomes include

additional actions to address any impacts

found and increased awareness - for

example the use of Personal Protective

Equipment at key stages during the crop

cycle, women’s empowerment training or

farmer monitoring procedures.

Respecting Human Rights in our

Product Materials Supply Chain

Beyond tobacco, we source product

materials such as paper and filters for

cigarettes, and electronics and e-liquids for

our New Category products.

Prior to approval, suppliers must undergo

an independent due diligence audit,

performed by our partner Intertek and

aligned to ILO standards. This covers

forced labour, child labour, wages and

hours, Health and Safety, Environment and

Management systems. We expect

suppliers to achieve a score of 70% to

qualify. Existing suppliers are externally

audited using a risk-based approach.

In addition, we have partnered with

external provider EcoVadis to expand our

due diligence programme. This means that

direct materials suppliers identified as

higher risk continue to be audited by

Intertek, while all suppliers outside

Intertek's scope are assessed through

EcoVadis. In 2022, 354 social assessments

of suppliers located in 55 countries were

conducted through our appointed third

parties, Intertek and EcoVadis. This comprised:

–Tier 1 product materials suppliers: 314;

–Lower tier product materials suppliers: 12;

–Indirect suppliers: 28.

Supplier audit findings 2022

Of all the issues identified, 82% were

classified as 'moderate' and 18% as 'major'.

The 'major' non-compliances identified in

these audits and actions included:

–Labour Standards/Human Rights 86%

–Environmental issues 14%

73% of corrective actions identified were

completed and verified by year-end 2022,

with the remainder on track to close by the

end of Q2 2023.

By 2025, we are aiming for all our product

materials and higher risk indirect suppliers

to have undergone at least one

independent labour audit within a three-

year cycle. By the end of 2022, this had

been achieved for 36.6% of those suppliers.

Respecting Human Rights in our

Business Operations

The policies, procedures and controls

adopted by businesses across our Group

seek to mitigate human rights risks.

We recognise that circumstances in some

countries present a higher risk for human

rights issues, such as higher levels of

corruption, criminality or unrest. Therefore,

in addition to Group-wide procedures and

controls, we have a process to identify and

monitor BAT operations in higher-risk

countries. This includes an annual risk

assessment process for countries with

Group companies present, using Verisk

Maplecroft’s human rights indices,

including its Modern Slavery Index. The

outcomes are submitted to and noted by

the Group Corporate Committee and Audit

Committee, and, by the relevant Regional

Audit & Corporate Social Responsibility

Committee (RACC), including action plans

for any areas for improvement identified.

In 2022, 28 countries with BAT operations

were identified as higher risk and

underwent the enhanced human rights

monitoring process and assessment.

Investigating and Remediating

Workplace Breaches

Our Standards of Business Conduct (SoBC)

set out how allegations of wrongdoing or

SoBC breaches should be investigated and

dealt with fairly and objectively.

In 2022, we received 117 reports of alleged

SoBC breaches relating to our Respect in

the Workplace and Human Rights Policy.

Upon investigation, actual breaches were

found to have occurred in 33 cases -

related to Workplace issues - and

appropriate actions were taken, including

disciplinary actions that resulted in 8

people leaving BAT. In 40 cases, no

evidence of wrongdoing was found, and the

remaining cases were still under

investigation at the end of the year.

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|  |  | Delivering a positive social impact | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Farmer Livelihoods | | | | | | |  |
|  | | | | | | | | |
|  | Our Goal1 | |  |  |  |  |  |  |
|  | Prosperous Livelihoods | | | |  |  | |  |
|  | We are committed to working to enable prosperous  livelihoods for all farmers in our tobacco supply chain1 | | | |  |  | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights2 | | | |  |  |  |  |
|  | 87,206 | |  | 92.8% |  |  |  |  |
|  | people engaged in crop  diversification training | |  | crop diversification: % of  farmers in our Tobacco  Supply Chain2 growing  other crops |  |  |  |  |
|  | | | | | | | | |
|  | 29,366 | |  | 317,000 |  |  |  |  |
|  | people engaged in  women empowerment  training | |  | people with access to  clean water and  sanitation programmes |  |  |  |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicators |  | SASB Standards | |  |
|  | GRI 203-1 , GRI 203-2  GRI 413-1 , GRI 413-2 | |  | This topic is not mapped  to a specified Indicator |  | This topic is not mapped  to a specified Standard | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Supplier Code of Conduct  –Sustainable Tobacco Programme (STP)  –Community Investment Framework  Notes:  1.  Our goal covers all tobacco used in our combustibles & THP products  and referred to in this report as 'tobacco supply chain'.  2.  Our metrics derive data from our annual Thrive assessment, which  includes our directly contracted farmers and those of our strategic  third party suppliers, representing over 80% of the tobacco purchased  by volume in 2022 and defined in this report as 'Tobacco Supply Chain'. | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Our Approach

We recognise we have a vital role to play in

delivering a positive social impact across

our supply chain.

We support and work with farmers in

enhancing their livelihoods and food security.

Our community programmes help to build

long-term resilience for rural communities.

Our approach is underpinned by our

Community Investment Framework and the

requirements of our Supplier Code of Conduct

(see page [45](#id739eb8a094346e4a1dd9989c862058f_9518)).

Why Farmer Livelihoods Matter

If farmers have sustainable living incomes,

farming is made more attractive to the

next generation. It also reduces the risks of

exploitation, as well as child and forced

labour, and helps encourage improved

adherence to health & safety and

environmental standards. The majority

(63%) of our tobacco volume is sourced by

the Group's own Leaf Operations through

direct contracts with over 80,000 farmers.

The remainder is from third-party

suppliers.

Helping Farmers to Thrive

Our Thrive programme, an in house-

developed 'ecosystem' to collect data and

associated indicators across aspects of

farmers’ livelihoods, is based on the

internationally recognised ‘Five Capitals’

framework.

To be sustainable, we believe that farming

communities must be ‘in credit’ across five

types of ‘capital’: financial, natural, physical,

human and social. Strength in all five helps

farmers and rural communities to prosper

(see diagram on next page).

In 2022, we developed a new web-based

platform for Thrive-related data – Thrive

Digital – where suppliers complete their

annual submissions. This is an agile tool

integrated with data analytics dashboards.

Building on traceability, since 2022, we

have been able to report based on farmers

who supplied tobacco specifically to BAT,

rather than our suppliers’ total farmer base,

as part of our Thrive assessment.

Boosting Farmers' Incomes

Worldwide

We support our directly-contracted

farmers worldwide to help enhance their

livelihoods across the 'Five Capitals'.

For example, our Global Agronomy Centre in

Brazil continues to develop new tobacco

varieties that produce higher quality crops and

increase yields by up to 20%. In 2022, the

Group's own Leaf Operations in 12

countries adopted these varieties for

commercial growing or performed field trials

to improve their seed portfolio. This aims to

increase yields, improve quality and reduce

losses from diseases. We are also adapting

and developing mechanised solutions and

curing technologies to help farmers scale up

production, use sustainable agriculture

practices, reduce manual labour and minimise

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62

health & safety risks. These include soil tilling

and fertilising machines and automated

harvesters and curing systems. Automated

curing barns reduce fuel use

by up to 30% and make the curing process

45% less labour-intensive. The technology

is being implemented in a number of

countries from which we source tobacco,

such as Pakistan, Bangladesh, Sri Lanka

and India. In Brazil, this has been a

commercial solution for over 20 years.

As part of our new Leaf Up innovation

programme, in 2022, we worked with a

start-up to explore the feasibility of new

technology, such as artificial intelligence,

to predict crop quality performance. The

technology enables farmers to optimise

their growing practices and more

accurately forecast yields and productivity.

Farm productivity can also be increased

through farmer training and capacity

building. Our extension services of expert

Field Technicians play a crucial role in this.

They provide support for our directly

contracted farmers throughout the

growing cycle, helping to develop their

skills, promote better yields and build their

resilience. Our suppliers provide similar

support services for their contracted

farmers.

It was reported via our Thrive assessments

that 89,294 people engaged with farm

business management training

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|  | THRIVE – Five capitals of success |  |  |
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|  | Skills, knowledge and human  rights, including capacity building,  developing the next generation  of farmers, health and safety, and  eliminating child and forced  labour |  |
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|  |  | Resources and safety nets for  self-sufficiency and resilience,  including networks, grievance  mechanisms and women’s  empowerment |  |
|  |  |  |  |
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|  |  | Technology to enhance growing  practices and basic  infrastructure to live and work,  including clean water and  sanitation, energy, housing and  healthcare |  |
|  |  |  |  |
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|  |  | Climate change resilience and  the natural resources upon  which farming and landscapes  rely, including soil, water,  biodiversity and forests |  |
|  |  |  |  |
|  |  |  |  |
|  |  | Profitable farms and  sustainable living incomes, as  well as crop diversification and  food security |  |

in 2022 delivered by the Group's own Leaf

Operations and strategic third-party

suppliers.

Building Community Resilience

Our community programmes, which are

underpinned by our Community Investment

Framework, cover issues ranging from crop

diversification, women’s empowerment and

rural development to providing access to

healthcare, clean water and sanitation. For

example, our mobile doctor units in Pakistan,

operational since 1985, provided much-

needed healthcare services to more than

100,000 people in remote tobacco-growing

communities in 2022. Additionally, we have

clean water and sanitation programmes in

eight countries - including Bangladesh,

Kenya, Pakistan, Sri Lanka and Uzbekistan -

benefiting an estimated 317,000 people.

Enhancing Livelihoods Through

Crop Diversification

Growing a diverse portfolio of crops alongside,

or in rotation with, tobacco is crucial to

enhancing farmer livelihoods. We believe it

improves food security and increases farmers’

resilience by providing additional sources of

income. In 2022, 92.8% of our farmers in the

Tobacco Supply Chain2 were reported to be

growing other crops. The Group's own Leaf

Operations and strategic third-party suppliers

educate and support tobacco farmers on crop

diversification, with more than 87,206 people

engaged via training delivered in 2022.

Our diversification programmes are

tailored to local contexts and may include

providing free seeds, crop inputs and

training. For example, in Kenya, 95% of our

directly contracted farmers grow

diversified crop portfolios; and, in 2022,

20,000 avocado saplings were distributed

to farmers in the country. Once in full

production, this initiative has the potential

to increase farmers' additional income by

an estimated £2.6 million per year.

In Brazil, we have a long-term

diversification programme in place.

Established in 1985, this programme

encourages the planting of grains and

pastures immediately after the tobacco

harvest. In 2022, the programme grew

128,252 hectares of corn, black beans

and soybeans and provided an estimated

total additional revenue for farmers of

R$779 million (c.£120 million). In Sri Lanka,

since 2013, we have provided free seeds of

cereals and vegetables to contracted

farmers and community members,

enabling an additional source of income

and enhancing food security. In 2022, the

initiative involved 3,000 beneficiaries,

distributing approximately 2,500 kgs of

seeds and generating an estimated

additional income of US$440,000 and the

production of 300 tonnes of food.

Our Women Empowerment

Programmes

Empowering women in farming

communities can increase income,

independence and self-sufficiency. In 2022,

there were training programmes in 9 Thrive

supplier countries.

For example, our Pakistan Tobacco

Company Women Empowerment

programme designed specific training for

rural women to contribute to their families'

income by collaborating with the National

Rural Support programme to conduct

training in Child Health & Education, Health

& Safety and Gardening. In 2022, 7,800

women were trained through the

programme - covering 77% of the spouses

of our directly contracted farmers in

Pakistan. In addition, in Kenya 16,000 rural

women were trained via the women's

empowerment training programme.

Farmer Living Income Analysis 2022

– Promoting a Positive Impact

In 2022, we reviewed our living income

methodology in partnership with an expert

consultancy. We are processing the data

analysing different yield ranges for the total

farm income in the Group's own Leaf

Operations.

The total farm income will be compared

with global standard benchmarks on living

income, and we will be working to create

and implement tailored improvement plans

with the view to bringing more positive

impact and return to the farmers.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | Robust corporate governance | | | | | |  |
|  | | | | | | | | |
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|  | Responsible Marketing &  Transparency in Communications | | | | | | |  |
|  | | | | | | | | |
|  | Our Goal | |  |  |  |  |  |  |
|  | 100% | |  |  |  |  |  |  |
|  | of our marketing to be responsible | | | |  |  |  |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 3 | |  | 2 | |  | |  |
|  | Incidents of non-  compliance with regulations  resulting in a fine or penalty1 | |  | Incidents of non-compliance  with regulations resulting in  a regulatory warning1 |  |  | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicator |  | SASB Standards | |  |
|  | GRI 417-2, GRI 417-3 | |  | This topic is not mapped  to a specified Indicator |  | FB-TB-270.a.1, FB-  TB-270.a.2 | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standard(s) | | | |  |  |  |  |
|  | –International Marketing Principles (IMP)  –Youth Access Prevention (YAP) Guidelines  –Supplier Code of Conduct (SCoC)  Notes:  1.Incidents of non-compliance with regulations that result in warning or in  fine or penalty are dealt with at end market level. To collect the  'Incidents of non-compliance with regulations resulting in warning/fine  or penalty' compliance data, the local teams are asked to report any  instances or potential instances of breach, which may include  allegations of inappropriate marketing, or investigations regarding  marketing non-compliance, that they are aware of in their market. | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Why Responsible Marketing and

Transparent Communications Matter

We firmly believe that tobacco and nicotine

products should be marketed responsibly

and to adults only.

We also believe that, with respect to our

New Category products, marketing

freedoms are critical for our ability to

deliver on tobacco harm reduction. This

is because informing adult tobacco and

nicotine users about their attributes,

including their reduced-risk\*† profile in

comparison to cigarettes , is key to

motivating adult tobacco and nicotine

users to switch to New Category products

which would, in turn, reduce rates of

smoking and smoking-related diseases.

Our Well-Established Approach to

Marketing Products Responsibly

We grow our market share by encouraging

adult consumers to choose our products

over those of our competitors. In doing so,

we aim to market our products responsibly

while raising standards and preventing our

products from ending up in the hands of

those who are underage.

International Marketing

Principles (IMP)

Our IMP govern our approach to marketing.

They include five key principles, which

mandate strict requirements for our

marketing to be:

–Responsible;

–Accurate and not misleading;

–Targeted at adult consumers only;

–Transparent; and

–Compliant with all applicable laws.

We aim to apply these principles

consistently across our product categories,

even when they are stricter than local laws.

We hold our marketing suppliers to the

same high standards. Compliance with the

IMP is part of our Supplier Code of Conduct

(SCoC), which sets the minimum standards

expected of our suppliers. In addition, IMP

compliance is explicitly set out as a

requirement in our contracts with our

marketing suppliers.

In addition to the IMP, detailed compliance

procedures, guidance and toolkits help our

IMP to be applied consistently and

effectively in the market.

Youth Access Prevention (YAP) is key to

responsible marketing. We have a number

of guidelines, standards and toolkits

relating to YAP. These apply to all markets

where our products are sold, including

where they are distributed through

third parties.

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64

Our Regional Audit and CSR Committees,

as well as the Audit Committee, have

oversight of IMP and YAP compliance. In

2022 we identified three incidents1 of non-

compliance with regulations resulting in

fine or penalty and two incidents of non-

compliance with regulations resulting in a

warning. One incident of non-compliance

was still pending appeal by the end of the

year, therefore awaiting outcome.

Our ongoing iCommit

training programme

We continue to invest in iCommit, a

training programme on responsible

marketing. Established in 2021, it seeks to

drive IMP and YAP compliance across our

digital channels.

In 2022, we achieved 100% completion

of iCommit training across our regions

for BAT employees and over 5,000 agency

employees across 598 agencies, as well as

one million retailers across 93 markets.

During 2022, iCommit was enhanced and

implemented as a digitally enabled training

programme for all our marketing

colleagues and external agencies across all

channels and markets. Looking forward, we

plan to include the training as part of our

onboarding process for new joiners. We

also plan to incorporate training on

responsible marketing as part of the annual

SoBC sign-off process for all employees.

Responsible Marketing

in a Digital Age

Our e-commerce and social media

channels play an important role in

accelerating our transformation, driving

growth in New Categories, building strong

brands of the future and digitising our

business. However, it is critical that we do

this in a responsible way, which is why we

have clear rules and processes in place that

seek to ensure responsible marketing in the

digital space.

As a general rule, we only use social media

sites where the majority of users are

expected to be adults. Our social media

accounts and our paid content on these

platforms are only visible to those users

who have confirmed that they are adults.

Where we use social media partnerships to

promote New Category products, we

select third-party partners who have at

least an 85% adult following. When

conducting social listening, our use of

language-analysis algorithms is rapidly

improving our ability to identify and exclude

posts made by anyone underage, whatever

the platform.

In addition, our digital marketing hub

continues to provide guidance on how to

achieve long-term consumer satisfaction

and product awareness in a responsible way.

Monitoring compliance through our

dedicated Digital Confidence Unit

The Digital Confidence Unit (DCU) was

established in 2021. As a dedicated social

media monitoring unit, it utilises cutting-

edge technology to conduct 24/7

monitoring of:

–All BAT digital channels globally for IMP

and YAP compliance;

–Social media channels for user-generated

content, such as social media users

tagging our products and brands; and

–Brand reputation monitoring of any news

and digital content related to our brands

and products.

This approach identifies any potentially

non-compliant content in real-time,

enabling swift remediation. For example,

the DCU tracks all issues identified until

they are resolved.

Over the course of 2022, the DCU reviewed

100% of our own content on social media

and found that 99.4% of our own content

was IMP/YAP compliant.

In relation to the 226 potential compliance

issues identified in 2022, 99.8% have been

resolved, with the remainder in the process

of being resolved.

With regard to our combustible brands, we

do not use open social media2. We use

social media to communicate information

about our New Category products, where

legally permitted. This is important for

supporting adult smokers who are looking

for alternatives to smoking.

In 2022, we ran a successful DCU pilot

across 44 combustible brands in

27 languages. In 2023, the DCU plans

to expand its scope to integrate social

listening and crisis detection for

combustibles.

Committed to Communicating

Transparently and Openly

At BAT, we recognise that the most stable

and lasting relations are based on trust and

transparency. For this reason, we always

strive for our communication and

marketing initiatives to be responsible

across all channels, paying close attention

to how, what and with whom we

communicate.

This approach also extends to the quality of

our data and associated ESG and

Sustainability disclosures. Any claims or

statements in our communications

undergo a robust and thorough review

process that involves representatives from

all relevant functions, including our

Business Communications and Legal and

External Affairs (LEX) teams.

We also actively collaborate with our

suppliers to obtain information regarding

the materials and processes used during

the various production phases and carry

out all the checks needed to verify the

accuracy of the contents.

Notes:

\*Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products, including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims will

be made as to these products without agency clearance.

2.Open social media are networks that allow internet

users to view content through search engines and

interact with anyone who uses the platform.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | Robust corporate governance | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Ethics and Integrity | | | | | | |  |
|  | | | | | | | | |
|  | Our Goal | |  |  |  |  |  |  |
|  | 100% | |  |  |  |  |  |  |
|  | aiming for adherence to our  Standards of Business Conduct (SoBC) | | | |  |  |  |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 100% | |  | 84 |  | 58 | |  |
|  | of Group employees  completed SoBC training  and compliance sign-off  procedure | |  | number of established  SoBC breaches1 |  | number of disciplinary  actions resulting in people  leaving BAT | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR  PAI Indicators |  | SASB Standard | |  |
|  | GRI2-26, GRI 205-2, GRI  205-3, GRI 415-1 | |  | 10, 11, 14, S5, S6, S7, S15,  S16, S17 |  | This topic is not mapped  to a specified Standard | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Standards of Business Conduct (SoBC)  –Supplier Code of Conduct (SCoC)  –Anti-Illicit Trade (AIT) Policy  –Supply Chain Compliance Procedure (SCCP)  Notes:  1.Consistent with previous years' reporting, cases are not included in the  above if they were not resolved at year-end.  2.  Euromonitor International estimates. | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Our Approach

Our Standards of Business Conduct (SoBC)

cover areas such as: anti-bribery and anti-

corruption (ABAC), political contributions, anti-

money laundering and tax evasion.

Our Supplier Code of Conduct (SCoC)

outlines the minimum standards expected

of our suppliers and also includes provisions

relating to ABAC, sanctions, anti-tax

evasion and anti-illicit trade. We conduct a

detailed review of our SoBC and SCoC

every two years. The most recent reviews

were undertaken in 2021.

Why Ethics and Integrity Matter

In an organisation as diverse and

multinational as BAT, it is essential that

we work to a consistent set of rules and

standards of behaviour across the Group.

Our culture is based on ethical values. Our

Delivery with Integrity programme drives

our consistent approach to managing key

risks, including bribery and corruption.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read about our Group Risk Factors relating to  corporate behaviour and compliance with  sanctions and competition laws on pages 353  to 355 |
|  |  |

Promoting an Ethical Culture

Our Delivery with Integrity global compliance

programme was established in 2017. It

promotes an ethical culture and communicates

expected behaviours as set out in our SoBC. For

example, our SoBC app provides easy access

to policies, procedures and guidance,

including our SCoC and our global ‘Speak Up’

channels. To date, the app has been

downloaded c.36,000 times.

The programme includes the Third-Party

Anti-Financial Crime Procedure, an

updated AIT Intelligence Compliance

Procedure, the Sanctions Compliance

Procedure and the use of newly developed

systems to conduct risk assessments. In

addition, our Mergers and Acquisitions

(M&A) Transactions Compliance Procedure

is in place and defines due diligence

requirements for corporate M&A

transactions (including joint-ventures,

acquisitions and disposals).

Enabling Everyone to 'Speak-Up'

Our SoBC and SCoC make it clear that our

employees, business partners and suppliers

should speak up if they have a concern about

actual or suspected wrongdoing. We always

listen to these concerns and treat them as a

serious matter. We do not tolerate

harassment, victimisation or reprisals of any

kind against anyone raising a concern – such

conduct is itself a breach of the SoBC.

People can speak up in various ways, including

talking directly to a Group Designated Officer,

Human Resources, Legal or to their line

manager. Our externally managed global

Speak Up channels can be used anonymously,

and are available in multiple languages,

24 hours a day online, by text, or telephone.

We have worked hard, via ongoing training

and communication and the Integrity

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66

Network, to help our people see Speak Up

as a trusted channel.

Addressing Non-compliance

with Our SoBC

Not all contacts made via our Speak Up

channel involve alleged SoBC breaches.

Some relate to questions regarding the

SoBC or other matters. In 2022, 292 of all

the 571 SoBC contacts were assessed as

alleged SoBC breaches and reported to the

Audit Committee. In 48% of these alleged

breaches, the person raising the case

chose to remain anonymous.

Our SoBC Assurance Procedure defines

how all reports of alleged SoBC breaches

should be triaged, investigated and

remediated fairly and objectively. Our

Business Integrity Panel helps to promote

a consistent approach to this procedure.

In 2022, figures for detailed investigations

conducted into all reported cases are:

–No wrongdoing was found in 111 cases

(2021: 154);

–The investigation continued at year-end

for 971 cases (2021: 51); and

–84 cases were established as breaches

and appropriate action taken (2021: 99).

We take appropriate action for all cases

established as breaches, which will vary

from case to case depending on the

circumstances. In 2022, the established

SoBC breaches resulted in 58 people

leaving BAT (2021: 46) and 36 written

warnings (2021: 72). Where any weakness

in internal controls is identified, appropriate

measures are taken to strengthen them.

Breakdown of reports of alleged SoBC

breaches in 20221

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Policy areas | | % breakdown |
|  |  |  |
|  | Social and Environment | 40% |
|  |  |  |
|  | Corporate Assets and Financial  Integrity |  |
|  | 29% |
|  |  |
|  |  |
|  |  |  |
|  | Personal and Business Integrity | 16% |
|  |  |  |
|  | Others not relating to a specific  policy area |  |
|  | 13% |
|  |  |
|  |  |
|  |  |  |
|  | National and International Trade | 2% |
|  |  |  |
|  |  |  |
|  | External stakeholders | 0% |
|  |  |  |

Note:

1.Figures with independent limited assurance by KPMG.

Preventing and Tackling Illicit

Trade in Tobacco Products

Approximately 372.2 billion cigarettes a

year are smuggled, manufactured illegally

or counterfeited2. Consequently, illicit trade

deprives governments of billions in taxes

each year. Revenue accumulated from

illicit trade in tobacco products is also

being used to fund terrorism, human

trafficking and other illegal activities. In

addition, counterfeit cigarettes are not

manufactured to stringent product quality

and safety standards.

The Anti-Illicit Trade (AIT) Policy in our

SoBC sets out the controls all Group

companies must put in place to prevent

our products from being diverted into illicit

trade channels. Our SCoC defines the

minimum standards expected of our

suppliers, including for AIT, and is

incorporated into our contractual

arrangements. In addition, our Supply Chain

Compliance Procedure (SCCP) provides

guidance on complying with our AIT Policy.

At every scheduled Board meeting, the Board

reviews a report from our Legal and External

Affairs (LEX) Director, which includes updates

on AIT initiatives.

Our anti-Illicit trade strategy

We fully support regulators, governments

and international organisations in tackling

illicit tobacco trade.

Our approach to fighting the black market

in tobacco includes: internal governance

and supply chain compliance, gathering

and analysing market information on the

scope of illegal trade, working with

authorities to help facilitate appropriate

enforcement, engaging with international

bodies such as the World Customs

Organization to increase responsiveness on

the issue, informing regulators about the

impacts of the illegal tobacco trade and

raising awareness of the topic among our

employees, business partners and the public.

Our work to tackle illicit trade

We engage with key external stakeholders

across our industry and other sectors on

a range of AIT priorities. Our teams fully

cooperate with enforcement agencies

and local tax and customs authorities,

where needed.

The AIT strategy is supported by our

research activities to further understand the

size and scope of the problem. We also use

security systems to trace and authenticate

our products, enhancing our supply chain

controls by, for example, using digital coding

technology. Our expert team is able to

analyse seized products, determine

counterfeits and identify illicit machinery

used in their production.

We also work with governments and other

organisations to make our combined

efforts more effective. As part of our

European Union Cooperation Agreement

with the European Commission and its

member states, we make contributions

to the EU’s efforts to fight the illicit tobacco

trade.

We continue to further strengthen our AIT

approach by appropriately updating our

SCCP. Amongst other supply chain

controls, we rolled out a dedicated

eLearning programme for all relevant

employees. The completion rate for the

2022 SCCP eLearning was approximately

90% across the Group.

Regulation and Engagement – Guided

by Integrity and Openness

Our SoBC includes our Lobbying and

Engagement Policy and Political

Contributions Policy, implemented by all

Group companies and applicable to all our

employees. These policies require all our

engagement activities with external

stakeholders to be conducted with

transparency, openness and integrity and

our employees are committed to these

policies.

For global regulatory priorities, the views

we advocate are the same as those we

publish on our website, and we have

long supported the OECD’s Principles for

Transparency and Integrity in Lobbying.

We also respect the call for transparent

and accountable interaction between

governments and relevant stakeholders,

including the tobacco industry, established

in Article 5.3 of the World Health

Organization’s Framework Convention

on Tobacco Control.

We are open about what we think and

always try to offer constructive solutions

that will best meet the objectives of

regulation, while minimising any negative

unintended consequences. Regulatory

engagement by our businesses is

monitored throughout the year by our

Regional Audit and CSR Committees.

The Management Board’s Regulation

Committee, chaired by the LEX Director,

meets three times a year and is responsible

for reviewing key regulatory and excise

trends, Group priority focus areas,

and the execution of global plans regarding

regulation, as well as monitoring progress.

Our Board is kept updated on regulatory

engagement activities during the year.

Details of any political contributions are

reported twice a year to the Audit

Committee. The Group does not make

contributions to UK or EU political

organisations or incur UK or EU political

expenditure. Details of political

contributions outside these jurisdictions

are set out on page [159](#i063086bbd4724f0a917bdd6df645c957_441325).

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| --- | --- | --- |
|  |  |  |
|  |  | Find details of our other governance priorities,  including data privacy and cyber security on  pages 344, 356 and [357](#ibcccba13e24945d28d241c8fc215b96b_0-0-1-1-394556) |
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|  |  | Robust corporate governance | | | | | |  |
|  | | | | | | | | |
|  |  |  |  |  |  |  |  |  |
|  | Sustainability Governance | | | | | | |  |
|  | | | | | | | | |
|  | Our Goal | |  |  |  |  |  |  |
|  | Effective | | | |  |  | |  |
|  | management of sustainability governance | | | |  |  | |  |
|  |  | | | |  |  |  |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | CSO  appointment | |  | Board  oversight |  | Advocating  support | |  |
|  | first Chief Sustainability  Officer (CSO) appointed | |  | of Sustainability and ESG  matters |  | for progressive Climate  Change and Biodiversity  policies and actions | |  |
|  | | | | | | | | |
|  | GRI Standards | |  | SFDR PAI Indicators |  | SASB Standard | |  |
|  | This topic is not mapped  to a specified Standard | |  | This topic is not mapped  to a specified Indicator |  | This topic is not mapped  to a specific Standard | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –All Group Policies (see page 45 ) | | | |  |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book':  bat.com/sustainability  reporting |  |

Why Sustainability

Governance Matters

The evolution of and attention to

sustainability and ESG matters have

increased in recent years. Regulations and

expectations have substantially broadened

and deepened, not least because of the

challenges associated with climate change

and biodiversity loss which the world faces.

Having appropriate governance in place to

deliver on our sustainability commitments

is more important than ever before. In particular,

this is why we believe effective oversight and

management of sustainability-related risks

and opportunities are essential to BAT’s

ability to deliver A Better TomorrowTM and

achieve long-term sustainable growth.

Our Approach

Our governance approach seeks to ensure

Board-level oversight of our sustainability

agenda across the Group (see page [73](#id739eb8a094346e4a1dd9989c862058f_15018)).

During 2022, the Board reviewed and

approved new and updated Group

environmental targets, and revised Group

Health & Safety and Environment policies.

More details are set out in the TCFD

section on page [71](#i76209b2ed1c248f5b179322fa8ad67be_158380).

To further strengthen our focus on

Sustainability and ESG matters, we

appointed our first Chief Sustainability

Officer (CSO). Sustainability has been

central to our business and Ethos for

decades. The creation of this new role

reflects a step change in our approach to

Sustainability, placing it as a strategic

priority for the organisation. Under the

CSO's leadership, we are entering into a

new phase, embedding sustainability firmly

into the Group's strategy, as well as in

everyday decision-making processes. The

CSO and his team are dedicated to setting

and driving the Sustainability and ESG

agenda across the Group by working

alongside other functions such as Operations,

Marketing, R&D and Investor Relations.

Advocacy and actions

As a leading multi-category consumer

goods business, we have the opportunity

to build resilience into the system and

advocate for a more sustainable world.

This year, we achieved two milestones in

this area, by publishing our Low-Carbon

Transition Plan and by joining 300+ leading

companies in signing Business for Nature’s

call to protect and restore biodiversity. For

more information see pages [52](#id739eb8a094346e4a1dd9989c862058f_15552) and [56](#id739eb8a094346e4a1dd9989c862058f_15588).

We know advancing sustainability across

our value chain is the right thing to do and

makes sound business sense. That is why

we have set targets and signed

commitments alongside our peers to

increase accountability to investors and

consumers and empower local communities.

These actions demonstrate our commitment

to building A Better TomorrowTM.

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68

Ratings and Recognitions

Our sustainability efforts and commitment to high standards have received notable independent recognition from both investor ratings

agencies and award bodies in 2022.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Sustainability and ESG Ratings\* (examples) | |  |  |  |
|  |  | |  | |  |
|  | A in CDP Climate and A- in Water Security & Forests  In 2022, we achieved A, A- and A-, respectively, in the CDP  Climate Change, Water Security and Forests assessments;  placed in the top 2% of companies CDP scored. | | Dow Jones Sustainability Indices (DJSI)  BAT scored 88 (out of 100) in the 2022 S&P Global Corporate  Sustainability Assessment (9 December 2022). Based on the S&P  Global ESG Scores, BAT was selected for inclusion in the DJSI  World Index; placed in the top 3% of companies assessed. We  have been included in the DJSI indices for 21 consecutive years. | |  |
|  |  |  |  |  |  |
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|  | Best-in-class ISS Score  As of December 2022, BAT received an  ISS Governance and Environment Quality  Score of 1. Scores are ranked on a scale of  1 to 10. A governance score of 1 indicates a  lower governance risk and an environment  quality score of 1 indicates better  environmental disclosure. | MSCI1  In December 2022, BAT received a rating of  BBB (on a scale of AAA to CCC) in the MSCI  ESG Ratings assessment. | | Sustainalytics2  As of January 2023, BAT received an ESG  Risk Rating of 33.4 from Sustainalytics and  was assessed to be at high risk of  experiencing material financial impacts  from ESG factors. |  |
|  |  |  |  |  |  |

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|  | Sustainability and ESG Awards\* (examples) | |  |  |  |
|  |  | |  | |  |
|  | Financial Times Climate Leader  In 2022, we were named as a Climate Leader by the Financial  Times for the second successive year, for reduction in greenhouse  gas emissions (GHG) intensity, and placed in the top 3% of  companies surveyed. | | Global Top Employer  We have been named as a Global Top Employer for five  consecutive years, recognising our commitment to best-in-class  working environments and career opportunities. | |  |
|  |  |  |  |  |  |
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|  | Race at Work Charter  We are signatories to the UK  Race at Work Charter for  supporting racial equality in the  workplace. | Gold Class Sustainability  Award  We were awarded the highest  Gold Class in the S&P Global  Sustainability Yearbook 2022. | Workforce Disclosure  Initiative (WDI)  Our 2022 WDI submission  received a score which placed  us in the top 10% of  participating companies. | Gartner Supply Chain Top 25  Our Supply Network Operations  was recognised in the Gartner  Supply Chain Top 25 global  rankings for the third year in a  row. |  |
|  |  |  |  |  |  |

Notes:

1.The use by BAT of any MSCI ESG research llc or its affiliates (“MSCI”) data, and the use of MSCI logos, trademarks, service marks or index names herein, do not constitute a sponsorship,

endorsement, recommendation, or promotion of BAT by MSCI. MSCI services and data are the property of MSCI or its information providers, and are provided ‘as-is’ and without

warranty. MSCI names and logos are trademarks or service marks of MSCI.

2.Copyright ©2022 Sustainalytics. All rights reserved. This publication contains information developed by Sustainalytics (www.sustainalytics.com). Such information and data are

proprietary of Sustainalytics and/or its third party suppliers (Third Party Data) and are provided for informational purposes only. They do not constitute an endorsement of any product or

project, nor an investment advice and are not warranted to be complete, timely, accurate or suitable for a particular purpose. Their use is subject to conditions available

at https://sustainalytics.com/legal-disclaimers.

\*    A rating or award is not a recommendation to buy, sell or hold securities. A rating or award may be subject to withdrawal or revision at any time. Each rating and award should be

evaluated separately of any other rating. The methodologies of any rating or award presented here may not be he same as those of other ratings, awards or methodologies that may

be used by our stakeholders and may emphasise different aspects of ESG practices and performance, and, thus, may not be representative of our ESG performance in all respects.

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69

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| TCFD at a glance: Summary of our response | | | | | | |
| Governance: Disclose the organisation's governance around climate-related issues and opportunities | | | | | |  |
|  |  |  |  |  |  |  |
| a) Describe the board’s oversight of climate-  related risks and opportunities. | Our Board has oversight of our climate-related risks and opportunities. The Board  approves the Group’s environmental targets. It reviews the Group's environment  strategy, targets and performance twice a year and the Group risk register, which  includes climate-related risks, annually. In 2022, the Board approved a revised  version of the Environment Policy. The Audit Committee reviews the Group risk  register twice a year and oversees the Group's approach to TCFD reporting. | | |  | Read more  on page [72](#i76209b2ed1c248f5b179322fa8ad67be_158380)-[73](#id739eb8a094346e4a1dd9989c862058f_15018) |  |
|  |
|  |  |  |  |  |  |  |
| b) Describe management’s role in assessing  and managing climate-related risks and  opportunities. | Management is responsible for identifying and assessing risks including climate-  related risks. Mitigation plans are required to be in place to manage the risks  identified and progress against those plans is monitored. | | |  | Read more  on page 71-[73](#id739eb8a094346e4a1dd9989c862058f_15018) |  |
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| Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation's businesses, strategy, and financial  planning where such information is material | | | | | |  |
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| a) Describe the climate-related risks and  opportunities the organisation has identified  over the short, medium, and long term. | We have identified 10 climate-related risks and opportunities. For each, the level of  likelihood and impact has been analysed across three time horizons: short term  (2023 – 2027), medium term (2028 – 2037), and longer term (2038 – 2050). | | |  | Read more  on page [76](#id739eb8a094346e4a1dd9989c862058f_17034)-[77](#id739eb8a094346e4a1dd9989c862058f_18747) |  |
|  |
|  |  |  |  |  |  |  |
| b) Describe the impact of climate-related risks  and opportunities on the organisation’s | We have assessed the impact of these risks and opportunities on our strategy and  financial planning. The results show that, while there are financial risks that would  need to be managed, these are not substantive enough to require a material  change to our business model. | | |  | Read more  on page [74](#id739eb8a094346e4a1dd9989c862058f_16938)-[75](#id739eb8a094346e4a1dd9989c862058f_16998) |  |
|  |  |  |  |
|  |  |  |  |  |  |  |
| c) Describe the resilience of the organisation’s  strategy, taking into consideration different  climate-related scenarios, including a 2°C or  lower scenario. | We have conducted an assessment of the resilience of our strategy, taking into  consideration two climate-related scenarios: sustainable transition (based on a  global temperature increase scenario of 1.5°C) and climate change inaction (based  on a global temperature increase scenario of 3°C or more). | | |  | Read more  on page [75](#id739eb8a094346e4a1dd9989c862058f_16998) -[76](#id739eb8a094346e4a1dd9989c862058f_17034) |  |
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| Risk management: Disclose how the organisation identifies, assesses, and manages climate-related risks | | | | | |  |
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| a) Describe the organisation’s processes  for identifying and assessing climate-  related risks. | Directly-reporting business units (DRBUs) and functions identify risks and  opportunities, including climate-related physical risks, which are captured on risk  registers and assessed against the materiality thresholds, impact (high/medium/  low) and likelihood (probable/possible/unlikely), defined by our Risk Management  Framework. Group KPIs are set to identify climate-related risks (where relevant). | | |  | Read more  on page [79](#id739eb8a094346e4a1dd9989c862058f_17283) |  |
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| b) Describe the organisation’s processes for  managing climate-related risks. | Mitigation plans are required to be in place to manage the risks, including  climate-related risks identified, and progress against those plans is monitored.  Decisions on how to manage the risk are based on a variety of considerations,  including risk score, our ability to influence or control the risk and cost and  effectiveness of mitigation. | | |  | Read more  on page [79](#id739eb8a094346e4a1dd9989c862058f_17283) |  |
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| c) Describe how processes for identifying,  assessing, and managing climate-related  risks are integrated into the organisation’s  overall risk management. | Our processes for identifying, assessing, and managing risks, including climate-  related risks are integrated across the Group as part of our Risk Management  Framework. This includes regular reviews of the Group risk register by our Group  Risk Management Committee, chaired by the Finance and Transformation  Director. The Group risk register is also reviewed annually by the Board and  biannually by the Audit Committee. | | |  | Read more  on page [79](#id739eb8a094346e4a1dd9989c862058f_17283) |  |
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| Metrics and targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such  information is material | | | | | |  |
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| a) Disclose the metrics used by the  organisation to assess climate-related risks  and opportunities in line with its strategy and  risk management process. | We have clearly defined metrics for each of our ESG priority areas, including  climate change, against which we report on our performance and progress each  year. | | |  | Read more  on page [80](#id739eb8a094346e4a1dd9989c862058f_17315)-[82](#id739eb8a094346e4a1dd9989c862058f_18802) |  |
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| b) Disclose Scope 1, Scope 2, and, if appropriate,  Scope 3 greenhouse gas (GHG) emissions,  and the related risks. | We disclose Scope 1, Scope 2 and Scope 3 GHG emissions and the related risks in  our reporting. | | |  | Read more  on page [80](#id739eb8a094346e4a1dd9989c862058f_17315)-[82](#id739eb8a094346e4a1dd9989c862058f_18802) |  |
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| c) Describe the targets used by the organisation  to manage climate-related risks and  opportunities and performance against  targets. | Our targets to manage climate-related risks and opportunities include targets to  reduce Scope 1, 2 and 3 GHG emissions by 50% by 2030 (vs a 2020 baseline)1 and  to reach Net Zero carbon emissions across our value chain by 2050 at the latest.  These are supported by a range of other environmental targets against which we  report our performance and progress each year. | | |  | Read more  on page [80](#id739eb8a094346e4a1dd9989c862058f_17315)-[82](#id739eb8a094346e4a1dd9989c862058f_18802) |  |
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Note:

1.Compared to 2020 baseline. Comprises 50% reduction in Scope 1 and 2 and 50% reduction in Scope 3 GHG emissions. Where Scope 3 emissions target includes purchased goods and

services, upstream transportation and distribution, use of sold products and end-of-life treatment of sold product, which collectively comprised >90% of Scope 3 emissions in 2020.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| TCFD Reporting | | | | | | | |

A summary of our response to the

#### Task Force

#### on Climate-related Financial Disclosures

#### (TCFD)

#### recommendations is set out below.

#### Under FCA’s listing rules, our reporting is

consistent with the

#### four

#### TCFD recommendations and 11 recommended disclosures set out in

Figure 4 of Section C of the TCFD report “Recommendations of the Task Force on Climate-

#### related Financial Disclosures

#### ”; including the guidance set out within the 2021 TCFD annex.

We will continue to develop our TCFD disclosures in coming years, for more information see page [82](#id739eb8a094346e4a1dd9989c862058f_18802).

70

In 2022, the Group progressed its work to

further understand our resilience against

key risks and opportunities. This process

included:

–Developing our first Double Materiality

Assessment;

–Developing our Low Carbon Transition

Plan to achieve Net Zero GHG emission

by 2050;

–Working to embed best practice

recommendations into our TCFD

disclosures; and

–Trialling a balanced scorecard to further

enhance consideration of environmental

and social impacts into investment

appraisal.

Details are outlined in the following pages.

Governance

Board oversight

The Board is collectively responsible for

the sustainable, long-term success of

the Company and the Group’s strategic

direction, purpose, values and governance.

This includes responsibility for the Group's

strategy and ensuring that resources are in

place to meet the objectives and to

manage risks, including internal controls.

Our Board has strategic oversight of our

sustainability agenda and takes climate-

related considerations into account where

applicable when making strategic

decisions, including in relation to

budgeting, risk management and

overseeing capital expenditure. The Board

has approved all Group environmental

targets (including for carbon emissions)

and receives an update on performance

twice a year from the Director, Operations.

The Board reviews the Group risk register

annually, which incorporates climate-

related risks, and the Group budget which

takes into account capital allocation to

deliver the Group’s sustainability agenda

and associated targets. In 2022, the Board

approved a revised version of the Group's

Environment Policy, with policy reviews

developed by management, and the Board

was briefed on preparations for the Group's

first Low Carbon Transition Plan, detailing

the Group's roadmap to reach Net Zero

emissions by 2050.

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|  |  | Details of Board oversight of climate-related  matters and related activities can be found on  pages [136](#i69c564e82f994c44b1cde3aae09d67bb_2-0-1-12-415395) and [140](#i9c5bb655a1da4d89ac69a65ea4032c99_2-1-1-5-205543) |
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The Board has delegated certain

responsibilities to the Audit Committee which

is responsible for reviewing the effectiveness

of the Group’s risk management and internal

controls systems, including those relating to

climate change.

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| --- | --- | --- |
|  |  |  |
|  |  | Read more about our Climate and Circularity risk  in the Group Principal Risks on page 121 and in  the Group Risk Factors on page 344 |
|  |  |

The Audit Committee reviews the Group risk

register twice a year and regularly reviews the

Group’s progress against sustainability and

ESG targets, including emission targets

that address climate-related issues

(including carbon neutrality across Scope 1

and 2 GHG emissions by 2030, and Net

Zero emissions across our value chain by

2050). The Audit Committee also receives

reports from the Group’s Regional Audit

and CSR committees and Corporate Audit

Committee, which monitor the

effectiveness of business risk management

and internal controls across regions and

central functions. In 2022, the Audit

Committee oversaw the evolution of our

approach to reporting in alignment with

the TCFD framework. The Chair of the

Audit Committee provides a full briefing to

the Board following each Audit Committee

meeting, including decisions taken and key

topics discussed by the Audit Committee.

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|  |  | Details of Audit Committee oversight of climate-  related matters, metrics and reporting can be  found on pages [151](#id739eb8a094346e4a1dd9989c862058f_10128) to [152](#i063086bbd4724f0a917bdd6df645c957_445466), [154](#i063086bbd4724f0a917bdd6df645c957_445275), [156](#i063086bbd4724f0a917bdd6df645c957_445467) and [158](#i063086bbd4724f0a917bdd6df645c957_445468) |
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Management’s role

The assessment and management of climate-

related risks is embedded across relevant

business areas at Group, regional and local

levels, with appropriate management

oversight at each level, as shown on the chart

on page 72. This approach provides a flexible

channel for the structured flow of information,

monitoring and oversight of climate-related

risks and environmental matters at the level

and format best suited to the context.

Our Management Board, chaired by our Chief

Executive, is responsible for overseeing the

implementation of the Group’s strategy and

policies set by the Board, and for creating the

framework for the day-to-day operation of the

Group’s subsidiaries.

Management Board members receive regular

updates on material risks and strategic plans,

including those relating to climate change,

along with associated risk mitigation plans,

from risk owners, risk managers and their

respective teams. This includes regular

monitoring by the Group Risk Management

Committee, chaired by the Finance and

Transformation Director. The Chief Growth

Officer has overall responsibility for the

delivery of the Group Sustainability Agenda,

supported by the Sustainability team,

including our newly appointed Chief

Sustainability Officer, Head of Corporate

Sustainability and sustainability subject-

matter experts across the Group.

The Shaping Sustainability Programme Board

oversees the cross-functional delivery of the

‘Shaping Sustainability’ pillar of our QUEST

transformation programme. Members of the

programme board include the Chief Growth

Officer and the Director, Operations. The

programme is underpinned by a drive team,

including the Head of Corporate Sustainability

and Head of Operations Development and

Sustainability.

The Chief Sustainability Officer has overall

responsibility for delivery of the Group’s

climate strategy and environmental targets,

supported by the Group Head of Operations

Development and Sustainability, and the

Operations Sustainability team, including

the central Sustainability team and regional

sustainability managers.

Each reporting unit reports on a monthly

basis. In 2022, we strengthened our

reporting approach by increasing the

frequency of reporting from quarterly in the

first quarter of the year to monthly from

March onwards. Monitoring and reporting of

consolidated Group performance and metrics

is completed quarterly by the Group

Operations Sustainability team. Each directly-

reporting business unit of the Group (DRBU)

has an Environment, Health & Safety (EHS)

Steering Committee, with overall

responsibility to deliver environmental targets

at site level held by the General Manager or

site manager. EHS is also a standing agenda

item for management meetings and

governance committees at area, regional and

global levels.

These local management meetings and

committees report into the Operations

Sustainability Forum, chaired by the

Director, Operations. This acts as a conduit

to track delivery of environmental targets

and gain visibility of new and emerging

risks posed by climate change. The

Operations Sustainability Forum oversees

business plans to mitigate risks identified,

reviews performance and tracks progress

of our regions and business units in

delivering the Group’s environmental

targets. The Environmental Sustainability

Committee, also chaired by the Director,

Operations, is responsible for reviewing

environmental strategies for the

Operations Leadership Team.

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|  |  | Read more about our QUEST programme on  pages [28](#i102016d71a864846b18e8ad2933e9c5c_91601) to [29](#id739eb8a094346e4a1dd9989c862058f_17882) |

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We recognise the importance of providing consistent and reliable climate-related

information to investors and other stakeholders. Our reporting with reference to other

frameworks, including the Sustainable Accounting Standards Board (SASB) framework and the

Sustainable Finance Disclosure Regulation (SFDR PAI), can be found at www.bat.com/

sustainabilityreporting.

71

Governance of ESG & Sustainability

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| --- | --- | --- | --- | --- | --- |
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|  | Board Level Oversight | | |  |  |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Board of Directors | | | | | |
|  | At least six meetings per year | | | | | |
|  | Responsible for the long-term sustainable success of BAT and for the  Group’s strategic direction, purpose, values and governance, including  climate strategy | | | | | |

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| --- | --- | --- | --- | --- | --- |
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| Audit Committee | | | | |  |
| At least five meetings per year | | | | |  |
| All members are independent, Non-Executive Directors | | | | |  |
| Monitors and reviews the effectiveness of the Group’s accounting, internal  accounting controls, auditing matters and business risk systems and  oversees reporting against the Group's ESG metrics | | | | |  |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Reporting and Feedback |  |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Management Board Level Oversight | | |  |  |

|  |  |
| --- | --- |
|  |  |
|  | Management Board |
|  | Meets at least seven times per year |
|  | Chaired by the Chief Executive and  comprises the Executive Directors  and 11 other senior Group  executives1 |
|  | Responsible for overseeing the  implementation of Group strategy,  policies and monitoring Group  operating performance, including  in relation to climate and the  environment |
|  |  |

|  |
| --- |
|  |
| Group Risk Management  Committee |
| Meets twice per year |
| Chaired by the Finance and  Transformation Director and  composed of senior leadership |
| Oversees assessment and  monitoring of risks to the Group |
|  |

|  |
| --- |
|  |
| Corporate Audit  Committee (CAC) and  Regional Audit & CSR  Committees (RACCs) |
| Meet at least twice a year |
| CAC chaired by a Regional Director  and RACCs by an Executive Director  of BAT. All are composed of Group  executives. |
| Reviews the effectiveness of the  accounting, internal control and  business risk identification and  management systems within the  central business functions for the  CAC and the regions for the RACCs |

|  |
| --- |
|  |
| Shaping Sustainability  Programme Board |
| Meets around six times per year |
| Chaired by the Chief Growth Officer  and composed of Management Board  members, the Chief Sustainability  Officer and senior leadership |
| Oversees the implementation of  the Group’s transformation  programme and Sustainability  Agenda |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Reporting and Feedback |  |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Leadership Team Oversight | | |  |  |

|  |  |
| --- | --- |
|  |  |
|  | Environmental  Sustainability  Committee |
|  | Meets around four times per year |
|  | Chaired by the Director, Operations  and composed of senior leadership |
|  | Reviews environmental roadmaps,  strategies, risks and opportunities |

|  |
| --- |
|  |
| Operations Sustainability  Forum |
| Meets around four times per year |
| Chaired by the Director , Operations  and composed of senior leadership |
| Reviews performance against  environmental and social metrics  and targets |
| Has oversight of the Leaf  Sustainability Forum and Supply  Chain Due Diligence Committee |

|  |
| --- |
|  |
| Leaf Sustainability Forum |
| Meets around four times per year |
| Chaired by the Group Head of Leaf  and composed of senior leadership |
| Reviews strategic direction and  targets for addressing ESG risks  across the leaf supply chain, and  performance against leaf supply  chain targets |

|  |
| --- |
|  |
| Supply Chain Due  Diligence Committee |
| Meets around three times per year |
| Chaired by the Group Head of  Procurement and composed of  senior leadership |
| Reviews direct materials supply  chain performance (excl. leaf)  against environmental and social  metrics and targets |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Reporting and Feedback |  |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Group Sustainability Department and Business Functions | | |  |  |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Group Sustainability Department | | | | | |
|  | Composed of the Chief Sustainability Officer and the Group Sustainability  Team with sustainability subject-matter experts | | | | | |
|  | Develops the Group Sustainability Agenda and supports business  functions, regions and markets in driving its implementation | | | | | |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Business Functions, Regions and Markets | | | | |  |
| Implementation and execution of the Group Sustainability Agenda,  including by Leadership Teams and cross-functional workstreams  and programmes | | | | |  |
| Tracking and monitoring performance | | | | |  |

Note:

1.For the period 1 to 28 February 2023, the Management Board comprises 12 senior Group executives. Read more on pages 128 to 129.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| TCFD Reporting  Continued | | | | | | | |

72

Strategy

Our purpose to build A Better Tomorrow™

and our Group strategy are set-out on

pages [4](#id739eb8a094346e4a1dd9989c862058f_5407) and [24](#id739eb8a094346e4a1dd9989c862058f_7481). Our Sustainability Agenda,

with climate change as a key priority under

the environmental pillar, is set out on page [44](#id739eb8a094346e4a1dd9989c862058f_9481).

As a global organisation, we have a

responsibility towards our planet. Further, we

rely on natural resources to run our business

and our ability to secure these resources is

directly linked to the effects of climate change.

This is why minimising impacts across our

operations and supply chain is not only the

right thing to do, but it makes business sense.

Governments, businesses and individuals

must transition to a low-carbon economy.

In this context, BAT has established targets

to reach carbon neutrality by 2030 for our

operations and, by 2050, to be Net Zero

across our value chain. To report on our

progress, in 2022, taking into account –

amongst other things – the UK's commitment

to a Net Zero Economy by 2050, we

developed our first Low Carbon Transition

Plan, which details how we intend to:

–Align our business model with a world

in which the rise in global average

temperature should be limited to no

more than 1.5°C above pre-industrial

levels; and

–Contribute to a thriving economy that

works for people and planet in the long-

term by addressing climate-related risks

and opportunities.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our 2022 Low-Carbon  Transition Plan on bat.com/LCTP |

Our Low-Carbon Strategy

To deliver on our ambitious climate goals,

we have an integrated climate strategy

covering both our own business operations

and our wider value chain. Key attributes of

our climate strategy include:

–the performance of climate scenario

analysis to understand the resilience of

our business against a set of identified

climate-related risks and opportunities;

–reducing the environmental impact of

our direct operations, including the

reduction of CO2e emissions generated

by our sites and fleet through the

development of site-specific decarbonisation

roadmaps, which include energy saving

initiatives, and increased use of renewable

energy (both purchased and self-generated),

as well as reducing the waste generated

and maximising the share of waste

directed to recycling;

–responding to the environmental

impact of our value chain, including the

development of a supplier engagement

programme to achieve our ambition to be

a Net Zero company by 2050, and the

introduction of low-carbon farming

practices for our directly contracted

farmers (such as fertilisers, curing and

other carbon-smart farming);

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our approach on climate  change on page [52](#id739eb8a094346e4a1dd9989c862058f_15552) |

–the promotion of a circular economy

model to reduce downstream emissions,

including performance of life cycle

assessments of our products and the

incorporation of end of life treatment

to reduce their environmental impact,

reducing the use of embodied carbon and

single use plastic and increasing recyclability

to reduce the level of waste generated is

at the core of our processes;

–investments in R&D activity to develop

products at a lower environmental

impact and to underpin product

innovations, technical deployment of

agronomy best practices, low carbon

curing technologies and farming

techniques based on science; and

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our approach on Circular  Economy on page [54](#id739eb8a094346e4a1dd9989c862058f_15564) |

–the protection of our ecosystems,

to enhance the resilience of our internal

supply chain and wider value chain to

maintain access to critical raw materials,

while demonstrating our commitment to

nature by using more renewable energy

and reducing water usage and waste

generation where possible.

This supports the allocation of these critical

natural resources to food generation and

other activities, and reduces our susceptibility

to energy cost premiums and future

carbon taxes.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our approach to protecting  biodiversity and restoring ecosystems on  page [56](#id739eb8a094346e4a1dd9989c862058f_15588) |
|  |  |

Financial planning in decarbonisation

The risk and opportunities posed by climate

change continue to be deeply embedded

within our financial planning and form a critical

part of our Net Zero strategy. In 2021, we

incorporated Internal Carbon Pricing (ICP) in

our financial planning and in 2022, we have

broadened our approach through the trialling

of a Balanced Scorecard for capital

investment activities across our Global

Operations, whereby the environmental and

social impacts of potential projects are

considered against our commitments and

targets. Through this approach, we are able to

enhance our decision-making and governance

processes to consider these impacts,

particularly where policy and regulation is yet

to exist and, therefore, the effectiveness of

conventional financial appraisal tools such as

NPV and payback analysis is reduced.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our approach  on ICP on page [82](#id739eb8a094346e4a1dd9989c862058f_18802) |

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

73

Short-, medium-, and long-term financial

planning is performed by the Group and

considers factors likely to influence

business performance as outlined on

pages [76](#id739eb8a094346e4a1dd9989c862058f_17034)-[77](#id739eb8a094346e4a1dd9989c862058f_18747).

In 2022, financial planning has been

influenced by climate-related risks and

opportunities.

Revenue and operating costs

Physical risks of climate change have the

potential to impact business continuity and

supply chain constraints; our business

planning helps us to mitigate impacts on

revenue. Climate change-related risks and

opportunities also have the potential to

impact our operating costs through:

–Tobacco leaf cost increases due to

potential supply constraints caused by

chronic or extreme weather events;

–Raw materials and innovation cost

increases due to raw material shortages

and enhancements to our product

designs to reduce waste and increase

recyclability; and

–The cost of emerging regulation, as well

as taxes on carbon emissions and

potential increases to the cost of energy

impacting our direct operations and our

wider value chain as we transition to a

low carbon model.

Assets and capital expenditure

Climate change considerations are

integrated in our approach to capital

expenditure as follows:

–Capital allocation: We require that

significant resource allocation includes

climate-related considerations through

the use of ICP, marginal abatement cost,

and most recently, balanced scorecard

appraisal tools;

–Capital investments: We fund a

dedicated capital investment budget

used to progress the delivery of our ESG

commitments. In 2022, this amounted to

£27.1 million, with investments directed

towards equipment to drive energy

efficiency and renewable energy

generation, water recycling and efficiency

projects, waste reduction, and product

innovation-led specification improvements

to drive recyclability and reduce waste;

and

–Physical risks also influence our financial

planning strategy to enable us to

mitigate supply constraints from

impacting our consumers and business

continuity.

By having clear visibility of climate-related

risks and opportunities and mitigating

these where possible, the Group expects to

be able to continue to access capital and to

be in a position to undertake acquisitions or

divestments, as needed.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our approach to Financial  Planning in Decarbonisation in 2022 Low-Carbon  Transition Plan on bat.com/LCTP |
|  |  |

Climate scenario modelling

Identification

Identification of risks and opportunities

posed by climate change is an ongoing

process and draws upon internal and

external expertise, resources and other

information, including:

–internal senior management spanning all

functions of the Group, based at DRBU,

Regional, and Group levels;

–external consultants supporting our

preparations for and resilience to climate

change;

–relevant industry publications outlining

expected impacts of climate change on

our key inputs (including agriculture);

–relevant regulation (enacted or draft)

that may impact the Group’s products,

locations or operations;

–TCFD guidance on potential risks and

opportunities; and

–existing risks and opportunities identified

and managed as part of our Group risk

management processes.

The selection of the risks and opportunities in

our TCFD report was the result of a thorough

identification and materiality assessment

process, which was undertaken with the

assistance of an external party. Initially, 30 risks

and opportunities were identified, which were

subsequently reduced down to the 10 key risks

and opportunities detailed on pages 75-77

based on climate scenario analysis, further

materiality assessment, the input from BAT’s

subject matter specialists and using the

methodology defined in the Group Risk

Management Framework.

The classification of low/medium/high impact

and likelihood is described on page [79](#id739eb8a094346e4a1dd9989c862058f_17283) in the

Risk Management section.

This assessment will be reviewed annually to

help ensure it remains appropriate in the

context of a dynamic business and physical

environment, and to take account of

improved data or modelling which may

become available.

Understanding climate

scenario analysis

We have considered the impact of risks

and opportunities arising from climate

change to help inform our strategies and

financial planning to enhance the overall

resilience of our business. In this

assessment we considered two climate

scenarios across three time horizons.

The most recent Intergovernmental Panel

on Climate Change (IPCC) assessment

indicates that limiting global warming to

1.5°C is necessary to prevent the most

severe consequences of climate change

and as such we have aligned our analysis

to this IPCC methodology, and GHG

concentration trajectories known as

Representative Concentration Pathways

(RCP) 2.6 and 8.5, specifically considering

climate scenarios of 1.5°C and 3-4°C.

In containing global warming to 1.5°C,

a wide-ranging transition of our global

economy would be required, encompassing

policy and regulation, economic and societal

shifts, and the development and deployment

of new infrastructure and technologies. In

this scenario, transition risks are most

significant but the severity of physical risks

that may otherwise arise is reduced.

Conversely, in a scenario of continued

warming of 3-4°C, transition risks are

considered to be much lower, and physical

risks much higher.

Our analysis was performed against three

time horizons reflecting how risks and

opportunities are internally considered and

prioritised and are aligned to a number of

our key ESG-related targets, including:

–Short-term (2023–2027): This time period

is linked to our most recent business

plans, including glide-paths across our

operations to mitigate risks posed,

maximise opportunities that may arise

and the delivery of our business

objectives and external commitments;

–Medium-term (2028–2037): This time

period is focused on monitoring of risks

and opportunities, considering how

these may impact our Transformation

strategy and investment requirements

to deliver future business objectives

and external committments; and

–Longer-term (2038–2050): This time

frame aligns to our Low Carbon

Transition Plan across our value chain,

which incorporates an awareness of

the highly uncertain potential risks and

opportunities.

Qualitative assessments were performed

to understand how the potential impact

and likelihood of risks and opportunities

may change under each time horizon and

climate scenario, with more detailed

modelling undertaken to quantitatively

assess those risks and opportunities that

were considered to be most material to

our business. Material risks are those

that could have a significant effect on our

operations, strategy, and financial planning

if they are not managed appropriately.

In contrast, material opportunities may

improve our financial performance over

time in the event they can be realised.

The modelling performed drew on internal

and external data sources, such as carbon

and energy pricing projections, potential

future surcharges on single-use plastics in

our products, Group financial data, energy

consumption and costs by BAT site,

business growth projections and consumer

trends. This allowed us to refine our initial

qualitative assessment and quantify the

expected financial impact based on

assumptions of future developments.

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
| Strategic Management |  |  |  |  |  |  |  |
| TCFD Reporting  Continued | | | | | | | |

74

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Climate scenario models used | | | |  |  |
|  | Greater transition risk | |  |  |  |  |
|  |  |  |  |  |  |  |
|  |  | Scenario 1  Sustainable Transition | | |  |  |
|  |  |  |  |  |  |  |
|  |  | Warming 1.5ºC | | |  |  |
|  |  | Early decisive action by society  to reduce global emissions | | |  |  |
|  |  | Coordinated policy action  towards low-carbon economy | | |  |  |
|  |  | Actions sufficient to limit global warming  to 1.5ºC in line with the long-term temperature  goal in the Paris Agreement | | |  |  |
|  |  |  |  |  |  |  |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  |  | | | |  |  |
|  |  |  |  | Greater physical risk | |  |
|  |  |  |  |  |  |  |
|  |  | Scenario 2  Climate Inaction | | |  |  |
|  |  |  |  |  |  |  |
|  |  | Warming 3-4ºC | | |  |  |
|  |  | Governments fail to introduce further policies  to address climate change beyond those already  known and in place | | |  |  |
|  |  | Global temperature increase  above 3ºC by 2050 | | |  |  |
|  |  |  | | |  |  |
|  |  |  |  |  |  |  |

Material Climate-Related Risks and Opportunities Identified

We identified three climate-related opportunities and seven climate-related risks. The opportunities are moderate and mainly relate to the

potential launch of products with ESG-related features that consumers value. The two principal physical risks are more significant in the

3-4°C scenario and relate to the impact of extreme weather events and changes to precipitation patterns principally on our tobacco supply

chain. Transition risks are most notable in relation to new regulation on products, higher insurance premiums and higher cost of capital.

In summary, while there are challenges ahead, we believe that the Group is well placed to address them supported by our global reach, supply

chain flexibility, diverse product portfolio, leading brands and capital strength.

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Material climate-related opportunities identified | | | | | | |
| Type | | Scenario | Level of likelihood/  impact by | | |  |
| 2027 | 2037 | 2050 | Assumptions & Methodology |
| Opportunities associated with transitioning to low carbon economy | | | | | | |
| Products  & services | Shift in consumer preferences  results in increased revenue  from access to new and  emerging markets and new  demand for our products  Impact: Higher opportunity in  the 1.5°C scenario as consumers  value products with more  ESG-related features | 1.5ºC | ■ | ■ | ■ | Methodology: Modelling based on additional growth  opportunities if BAT differentiates itself from  competitors based on ESG-related features  Scenarios: Consumer sensitivity to ESG-related  features assumed to be higher in outer years, with  greater opportunity for additional growth in New  Categories compared to combustibles |
| 3-4ºC | ■ | ■ | ■ |
| Energy  sourcing | Use of lower-emission  sources of energy within our  direct operations reduce costs  Impact: Low savings  opportunity in both scenarios  due to BAT's commitment to  energy use reductions | 1.5ºC | ■ | ■ | ■ | Methodology: Assessment of energy demand and  cost over time with emissions trajectory per our 2022  published Low-Carbon Transition Plan and our  emission reduction commitments (refer to page 79)  Scenarios: As BAT plans to deliver Net Zero through  continued investment in technology, reduced  emissions and product development in both scenarios,  the main variable is cost of energy, which is higher in  the 1.5°C scenario. Cost impacts are mitigated by  energy use reductions |
| 3-4ºC | ■ | ■ | ■ |
| Energy  efficiency | Use of more efficient  production and distribution  processes within our direct  operations reduce costs  Impact: Low savings  opportunity in both scenarios  due to BAT's commitment to  energy use reductions | 1.5ºC | ■ | ■ | ■ |
| 3-4ºC | ■ | ■ | ■ |

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | Low |  |  | Medium |  |  | High1 |
|  |  |  |  |  |  |  |  |

Note:

1. The risk rating is the product of the impact assessment and the likelihood assessment, see page [79](#id739eb8a094346e4a1dd9989c862058f_17283), in accordance with the methodology in the Group Risk Management Manual.

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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75

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Material climate-related risks identified Continued | | | | | | |
| Type | | Scenario | Level of likelihood/  impact by | | |  |
| 2027 | 2037 | 2050 | Assumptions & Methodology |
| Transition risks associated with transitioning to low carbon economy | | | | | | |
| Emerging  regulation | New carbon pricing  mechanisms on the emissions  within our value chain increase  costs  Impact: Costs higher in the  1.5°C scenario due to  expected significant rises in  carbon prices | 1.5ºC | ■ | ■ | ■ | Methodology: Assessment of carbon usage and  carbon pricing costs over time with emissions  trajectory per our 2022 published Low-Carbon  Transition Plan and our emission reduction  commitments (refer to page 79)  Scenarios: The 1.5°C scenario assumes carbon tax  price projections by country of between £140 - £1,050  per tCO2e (world average of £412 per tCo2e) by 2050.  The 3-4°C scenario assumes Current Policies' carbon  tax price of between £2 - £13 per tCO2e (world average  of £6 per tCo2e) by 2050. REMIND-MAgPIE 3.0-4.4  carbon tax projections at a country level used to  estimate future potential tax charges. No tax assumed  on biogenic emissions under all scenarios |
| 3-4ºC | ■ | ■ | ■ |
| Emerging  regulation | Mandates on, and regulation  of, products and services  increase costs  Impact: Potential for global  transition regulation  significantly greater in the  1.5°C scenario | 1.5ºC | ■ | ■ | ■ | Methodology: European and UK Extended Producer  Responsibility costs and UK plastic packaging tax used  as proxy to estimate potential future impacts of  product regulation  Scenarios: Under the 1.5°C scenario, emerging  regulation assumed to be in place in most of our  markets by 2050, although high uncertainty on speed  and extent. Less pervasive regulation expected in the  3-4°C scenario |
| 3-4ºC | ■ | ■ | ■ |
| Market | Contraction of insurance  markets, higher premiums or  losses arising from uninsured  assets increase costs  Impact: Premiums higher in  both scenarios, with greater  impact in the 3-4°C scenario | 1.5ºC | ■ | ■ | ■ | Methodology: High-level assessment of expected  increases in premiums, reduction in cover, or insurers  seeking to withdraw from providing cover for certain  classes of insurance  Scenarios: Localised damage to properties and supply  chain disruption arising under the 1.5°C scenario. More  widespread damage to properties and disruption to  supply chains in the 3-4°C scenario |
| 3-4ºC | ■ | ■ | ■ |
| Market | Increasing energy prices  impacting direct operating  costs as well as the cost of  raw materials lead to  increased costs  Impact: Costs higher in the  1.5°C scenario due to  expected significant rises in  energy prices | 1.5ºC | ■ | ■ | ■ | Methodology: Assessment of energy usage  requirements and costs over time based on business  forecasts  Scenarios: In the 1.5°C scenario, electricity price rises  between 30-35% by 2050, and gas price rises between  150-200% by 2050 - based on REMIND-MAgPIE  3.0-4.4 energy cost projection model. The 3-4°C  scenario assumes electricity and gas prices rise  35-40% by 2050 |
| 3-4ºC | ■ | ■ | ■ |
| Market | Climate change-driven  increases to operating costs  and ESG concerns from  investors increase costs and/  or reduce access to capital  markets  Impact: Higher climate  related credit quality impact in  the 3-4°C scenario | 1.5ºC | ■ | ■ | ■ | Methodology: Increase in cost of debt driven by  impact to credit quality from climate change  Scenarios: Potential 25 bps-50 bps impact; at the  higher end in the 3-4°C scenario. Full impact of credit  adjustment over time as c.50% of currently issued  bonds mature by 2030, with over 90% by 2050 |
| 3-4ºC | ■ | ■ | ■ |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  | Low |  |  | Medium |  |  | High1 |  | Note: 1. The risk rating is the product of the impact assessment and the likelihood assessment, in accordance with the  methodology in the Group Risk Management Manual. |
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While the products we offer continue to

evolve, we will continue to need to access

raw materials, including tobacco and

tobacco extracts.

This increases our exposure to the physical

risks of climate change due to potential

tobacco growing disruption, damage or loss.

As outlined in the summary below, a

climate model used by IPCC was chosen

to project likely changes to regional

temperature behaviour, precipitation,

and soil water levels (surplus or deficit),

enabling us to estimate the likely impact on

crop yields, and the cost of, or access to,

tobacco in the future.

The analysis demonstrated that whilst

there were some favourable and

unfavourable impacts on yield, the potential

financial impact on annual cost of tobacco

is less than 5% and current climate change

trajectories indicate it is unlikely that the

Group would face reduced production

capacity due to consistent supply constraints.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| TCFD Reporting  Continued | | | | | | | |

76

We believe the impacts on yield can be

effectively mitigated through agronomy

action plans to avoid yield-driven cost of

production increases. In an extreme

climate change scenario, some of our Leaf

Operations could run a significant risk,

particularly if they face constraints on the

areas from which they can access tobacco.

This is monitored and considered less

probable based on our approach to building

resilience in the agricultural supply chain.

Transition risks are expected to have a

higher impact and increased likelihood of

occurring under the 1.5°C scenario, with a

consequential reduction to the severity of

physical risks, as policies are implemented

to slow climate warming. Our analysis has

considered the potential impact of policies

impacting fossil fuel-generated energy

costs, product and carbon emission taxes,

as well as resulting increases in cost of

capital and insurance premiums.

We are taking widespread action to reduce

our impact on the environment, including

significant steps to decarbonise our

operations and wider value chain through

the upgrading of energy efficient

technology and use of renewable energy

within our factories, collaboration with our

suppliers and the setting of targets to

reduce emissions across our value chain.

We are also engaging in extensive product

innovation efforts, including product life

cycle analysis to increase recycled material

content and reduce the use of plastics and

waste generated from our products and

operations. We support EPR policies and

continue to invest in Take-Back schemes.

We believe these mitigations should leave

us well placed to limit the financial impact

of regulation that may arise and continue

to access capital competitively.

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| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Material climate-related risks identified Continued | | | | | | |
| Type | | Scenario | Level of likelihood/  impact by | | |  |
| 2027 | 2037 | 2050 | Assumptions & Methodology |
| Physical risks associated with physical impacts of climate change – either acute risks (such as relating to extreme weather events) or  chronic risks (such as relating to longer-term shifts in climate patterns and higher temperatures) | | | | | | |
| Acute | Increased severity and  frequency of extreme weather  events such as cyclones and  floods, leading to agricultural  supply chain disruption and  reduced production capacity  and so increased costs  Impact: Greater production  shortfalls possible in the 3-4°C  scenario | 1.5ºC | ■ | ■ | ■ | Methodology: Assessed the cost to replace in-country  production shortfall up to 50% within our top 3  sourcing countries, with imported tobacco that is  subject to incremental landed costs  Scenarios: More extreme weather events anticipated  in the 3-4°C scenario utilising the Intergovernmental  Panel on Climate Change (IPCC) and other  international bodies' assumptions of temperature and  precipitation levels across our regions |
| 3-4ºC | ■ | ■ | ■ |
| Chronic | Changes in precipitation  patterns, such as water stress  and extreme variability in  weather patterns leading to  agricultural supply chain  disruption and reduced  production capacity and thus  increased costs  Impact: Greater production  shortfalls possible in the 3-4°C  scenario | 1.5ºC | ■ | ■ | ■ | Methodology: Assessed the yield impacts in our top 10  tobacco sourcing countries, including Brazil, Pakistan  and Bangladesh, which account for 83% of Group  tobacco volume grown or purchased in 2022  Scenarios: More extreme weather events anticipated  in the 3-4°C scenario utilising the HadGEM2 climate  model, as recognised by the IPCC, used to forecast  temperature and precipitation levels across growing  regions |
| 3-4ºC | ■ | ■ | ■ |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
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|  | Low |  |  | Medium |  |  | High1 |  | Note: 1.The risk rating is the product of the impact assessment and the likelihood assessment, in accordance with the  methodology in the Group Risk Management Manual. |
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Physical risks are expected to increase in

severity and frequency under the >3°C

scenario, with a lower impact from transition

risks. Our analysis has demonstrated that

weather events may impact unhindered

access to raw materials and disrupt

our operations.

Actions taken to mitigate these risks

include our wide-ranging efforts to prevent

deforestation, enhance biodiversity and

continue to drive agricultural best practice.

We seek to ensure our products and

operations are resource efficient and, in

doing so, seek to reduce the likelihood of

these events occurring. In addition, we

have robust business continuity plans in

place, including alternative manufacturing

locations, a diversified supplier base

spanning tobacco, raw materials and

finished goods purchasing, as well as

defined and regularly reviewed inventory

duration policies to enhance the resilience

of our supply chain to mitigate events

should they occur.

Climate-related risks and opportunities

have the potential to impact our business

over time. Through the identification and

measurement processes outlined above,

which are aligned to TCFD

recommendations, we are taking the

necessary steps to assess the likelihood

and severity of these impacts to enable us

to maximise positive impacts and minimise

adverse impacts on our business.

The majority of our risks and opportunities

are not expected to be driven by significant

regional variations, for example access to

capital markets, or any future regional

variation is sufficiently unpredictable that it

is not part of our methodology at this time.

The most notable regional variations are

within our two physical risks given they

relate to the sourcing of tobacco, which is

particularly sourced from South America,

Sub-Saharan Africa, South Asia and the US.

Summary

While there are challenges ahead, we believe

that the Group is well placed to address them.

Supported by our global reach, supply chain

flexibility, diverse product portfolio, leading

brands and capital strength, we believe that

we have the resilience and agility to transition

and create new growth opportunities.

The insights gained from the modelling

performed further strengthen the importance

and relevance of our climate strategy and Net

Zero carbon emissions target to mitigate

these risks. We will continue to review each

material climate-related risk and opportunity

and build upon our existing mitigation strategies

to enhance the resilience of our strategy

and our business to climate change.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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77

Risk Management

Our Risk Management Framework and

procedures are clearly defined and well-

established across the Group.

Risk registers, based on a standardised

methodology, are used at Group,

functional, and DRBU levels to identify,

assess, monitor and mitigate the risks

(both financial and non-financial).

The potential size and scope of climate-

related risks are assessed in the same

manner as the Group's other risks, which

are assessed and prioritised at three levels

by reference to their impact (high/medium/

low) and likelihood (probable/possible/

unlikely), as defined in our Group Risk

Management Manual.

There are various criteria, both qualitative

and quantitative, against which impact

may be measured. In financial (quantitative)

terms, high impact is deemed as in excess

of £250 million, with medium impact

£120- £250 million, and low impact

£60-£120 million at present. Risks below

£60million are not included in the Group

reporting but managed by the business.

Qualitative impact criteria are legal,

reputational and environmental. The

impact is assessed based on the current

net impact for a single year.

The methodology, including financial

thresholds and the likelihood overlay, was

also applied in the allocation of the high/

medium/low materiality levels for the 10

TCFD risks and opportunities.

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|  | Integration of climate-related risks into Group Risk Management Framework | | | | | | | | | | | | | | | | | | | | |  |  |  |  |
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|  |  |  |  |  |  |  | Climate and circularity “Direct and  indirect adverse impacts associated  with Climate Change and the move  towards a Circular Economy” is  recognised as a Principal Risk to the  Group; impact and mitigations are  set out on page 119. | | | | | |  | Group relevant climate-related  objectives, targets and KPIs  articulated and monitored. | | | | | | |  | Climate and other sustainability risks  are embedded as risk factors in each  relevant risk. | | |  |
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|  |  |  |  |  |  |  |  | Functions are required to identify  and assess risks and opportunities,  including climate-related physical  and transitional risks. | | | | | | |  | Environmental threshold is set  out in the Group Risk Management  Manual and used by the Group  when assessing risks. | | | | | |  | Review all physical asset values and  associated business interruption  impact across the Group to  understand potential impact from  climate change. | |  |
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|  |  |  |  |  |  |  |  |  | DRBUs are required to identify and assess risk and opportunities,  including climate-related physical risks. | | | | | | | | | | | | |  |  |  |  |
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Mitigation plans are required to manage the

risks (including climate change-related)

identified, and progress against those plans is

monitored. Decisions on how to manage the

risks are based on a variety of considerations,

including risk score, the ability to influence or

control the risk, and cost and effectiveness of

mitigation. Functional risk registers are

reviewed on a biannual basis by functional and

DRBU leadership teams.

At the Group level, specific responsibility

for managing each identified risk is allocated

to a member of the Management Board.

The Group risk register is reviewed biannually

by the Group Risk Management

Committee, chaired by the Finance and

Transformation Director.

In addition, the Group risk register is

reviewed biannually by the Audit

Committee and annually by the Board.

Identification process

ESG is core to the Group’s long-term

business strategy and ESG risk factors are

embedded across the Group’s risks in

accordance with the Risk Management

Framework. The TCFD identification and

materiality assessment process undertaken

in 2021 supported the Double Materiality

Assessment (DMA) conducted during 2022.

The DMA, which considered existing and

emerging regulatory requirements related

to climate change, as well as our 2021

TCFD report, highlighted existing ESG

focus areas of Harm Reduction, Climate

Change and Circular Economy for the Group.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our Double Materiality  Assessment on pages [46](#id739eb8a094346e4a1dd9989c862058f_15528) to [48](#id739eb8a094346e4a1dd9989c862058f_17148) |

“Climate and Circularity” is now recognised

as a Principal Risk to the Group,

highlighting the Group's existing

commitments in relation to climate change

and circular economy matters and

mitigation of associated risks.

A further review of ESG risks was

undertaken alongside the DMA to ensure

completeness of the Group risk register.

The review identified 43 ESG risks, most of

these risks had already been considered

within the Group risk register. Moreover

the 7 TCFD risks were also covered within

both the 43 risks and the Group risk

register. Engagement is ongoing to embed

and refine the ESG risks within the risk

management reporting process. In 2023, in

addition to the current Group risk register,

where ESG factors are embedded, there

will be an additional 'ESG risk register' to

enable greater visibility of each ESG risk

and its risk mitigation activities.

To support the biannual review of climate-

related risks, we have developed a dashboard

that enables us to understand the impact

to our physical property locations and

subsequent business interruption of climate

change. This analysis has been conducted

over three different time periods and across

various climate change scenarios and

hazards. This will be used to support risk

management and decision making within

the Group.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our approach on Risk  Management on pages [117](#id739eb8a094346e4a1dd9989c862058f_8875) to [122](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718) |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| TCFD Reporting  Continued | | | | | | | |

78

Metrics and Targets

We measure and track a wide range of ESG

metrics and targets which help us assess and

manage climate-related risks and opportunities.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our ESG Metrics  and Targets on page [6](#id739eb8a094346e4a1dd9989c862058f_15378) |

Our Harm Reduction metrics and targets

link to the opportunity we have identified in

Products and Services, while our climate

metrics and targets link both to the

opportunities identified in Energy Sourcing

and Energy Efficiency and to our transition

and physical risks. The latter are particularly

important to our climate targets, as outlined in

'Our Path to Net Zero by 2050' below, as

inaction would result in product shortfalls.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our climate-related risks and  opportunities on pages [75](#id739eb8a094346e4a1dd9989c862058f_17034) to [76](#id739eb8a094346e4a1dd9989c862058f_18747) |

Limiting the rise in average global temperature

to 1.5°C above pre-industrial levels requires

major and widespread action and companies

have an important role to play.

Our Path to Net Zero by 2050

Our Climate Targets

|  |
| --- |
|  |
| 50% Scope 1 & 2 GHG emissions  by 20301 |
| 50% Scope 3 GHG emissions  by 20301 |
| Net Zero value chain by 2050 |
| 50% total renewable energy use  by 2030 |
| Carbon neutral in Scope 1 & 2  operations by 2030 |
| 20% of suppliers by spend to set  Science-Based Targets by 2025 |

This is why, in 2021, we joined the UN-

backed Race to Zero Campaign and the

Science-Based Targets Initiative Business

Ambition for 1.5ºC, an alliance to halve

global emissions by 2030 and achieve Net

Zero carbon emissions by 2050. Race to

Zero represents more than 1,000 cities,

5,000 businesses, 400 investors and 1,000

higher education institutions, estimated to

cover nearly 25% of global CO2 emissions

and more than 50% of global GDP.

Previously, our targets were SBTi approved

based on a 2ºC trajectory. The latest

climate science shows we need to limit the

rise in average global temperatures to 1.5ºC

above pre-industrial levels.

As such, we have set 1.5ºC-aligned, absolute

reduction targets that accommodate Net

Zero criteria and definitions, which were

validated by the SBTi in July 2022. With

these targets we aim to:

How we intend to reduce

Scope 1 & 2 GHG emissions

|  |
| --- |
|  |
| Creating site-specific decarbonisation  roadmaps and investing in energy  efficient projects and management  systems |
| Increasing renewable energy use by  entering into longer-term power  purchase agreements and investing in  on-site renewable energy generation  projects |
| Rolling out electric and hybrid vehicles  in our fleet |

–Reduce absolute Scope 1 & 2 GHG

emissions by 50% by 2030 from a 2020

base year;

–Reduce absolute Scope 3 GHG emissions

from purchased goods and services,

upstream transportation and distribution,

use of sold products and end-of-life

treatment of sold products by 50% by

2030 from a 2020 base year; and

–Have 20% of our suppliers by spend

covering purchased goods and services

adopt SBTs by 2025.

Reporting methodology – CO2e

Emissions

We use the World Business Council for

Sustainable Development GHG Protocol

Corporate Standard to guide our reporting

of Carbon Dioxide equivalent (CO2e)

emissions. We also use supporting

standards including:

–GHG Protocol Scope 2 Guidance, 2015

–GHG Protocol Corporate Value Chain

(Scope 3) Standard, 2011

How we intend to reduce

Scope 3 Emissions

|  |
| --- |
|  |
| Building a climate-resilient supply  chain with direct and indirect suppliers |
| Eliminating the use of coal for curing  and using sustainable curing fuels |
| Fostering circularity in our value chain |
| Designing for end-of-life |
| Increasing the use of sustainable  materials |

Note:

1.Compared to 2020 baseline. Comprises 50% reduction

in Scope 1 & 2 and 50% reduction in Scope 3 GHG

emissions. Scope 3 emissions target includes purchased

goods and services, upstream transportation and

distribution, use of sold products and end-of-life treatment

of sold product, which collectively comprised >90% of

Scope 3 emissions in 2020.

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| --- | --- | --- |
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|  | Actual |  |
|  | Scope 1, 2 & 3 emissions | |
|  |  |  |
|  | Projected |  |
|  | Scope 1, 2 & 3 emissions | |
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|  | Neutralisation |  |
|  | Measures that companies take to  remove carbon from the atmosphere  and permanently store it to  counterbalance the impact of  emissions that remain unabated | |
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|  | Compensation |  |
|  | GHG reductions or removals used to  compensate for GHG emissions  made elsewhere | |
|  |  |  |
| Note:  Figures include biogenic emissions and removals. | | |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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79

We report emissions where we have

Operational Control and include CO2, CH4

and N2O within our CO2e emission

reporting. We do not include data on other

GHG emissions (HFCs, PFCs, SF6 and NF3)

as they are estimated to be insignificant.

While we account for the contribution CO2,

CH4 and N2O make to our CO2e emissions, we

do not disclose the breakdown of CO2e

data on an individual GHG basis.

BAT's carbon neutral sites are externally

verified as adhering to internationally

recognised standards/carbon neutrality

methodologies such as PAS 2060.

Carbon neutral sites purchase carbon

credits verified by third parties, such as

Verified Carbon Standard (VCS), Gold

Standard and American Carbon Registry,

to offset residual emissions for which

immediate plans do not offer financially

viable and/or real emission reductions.

Baseline

In 2022, BAT had its new set of 1.5ºC aligned

targets approved by SBTi, replacing the

previous set of 2ºC aligned targets. The

targets revision led to change of baseline year

from 2017 to 2020. Currently, we use a 2020

baseline year for emissions reporting, which

has a total of 6,154,756 tCO2e split as follows:

–Scope 1: 342,034 tCO2e

–Scope 2: 198,830 tCO2e market-based

(Scope 2: 417,572 tCO2e location-based)

–Scope 3: 5,613,892 tCO2e

Data Collection & Validation

GHG emissions data for Scope 1 & 2 is

collected within our internal reporting

system (C360); it includes 180 reporting

units located across 91 countries.

BAT’s Scope 3 GHG emissions reporting

process aligns with the GHG Protocol

Corporate Value Chain (Scope 3)

Accounting and Reporting Standard. We

report emission where the Group has

Operational Control and includes CO2, CH4

and N2O within our CO2e emission

reporting.

A full breakdown of our GHG emissions is

presented below. The metrics subjected to

limited assurance process have been

marked with 't'. Please refer to page [95](#id739eb8a094346e4a1dd9989c862058f_17703) for

the complete list of assured metrics.

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| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| BAT Group Greenhouse gas emissions |  |  |  |  |
|  | Total emissions (thousand tonnes CO2e) | | | |
| Emission Source | 2019 | 2020 | 2021 | 2022 |
| Total Scope 11 CO2e♦ | 396 | 342 | 325 | 308 |
| Total Scope 2 CO2e Market-based1♦ | 386 | 199 | 170 | 113 |
| Total Scope 2 CO2e Location-based♦ | 453 | 418 | 393 | 356 |
| Total Scope 3 CO2e2♦ | 6,781 | 5,614 | 5,243 | N/A |
| Total Scope 3 CO2e non biogenic emissions | 4,502 | 3, 506 | 3,563 | N/A |
| Total Scope 3 CO2e biogenic emissions (including biogenic removals) | 2,279 | 2,108 | 1,681 | N/A |
| Category 1: Purchased Goods and Services (Total) | 4,049 | 4,011 | 3,703 | N/A |
| Category 1: Purchased Goods | 1,543 | 1,187 | 1,278 | N/A |
| Category 1: Purchased Services | 107 | 720 | 677 | N/A |
| Category 1: Purchased Tobacco Leaf | 2,189 | 1,969 | 1,600 | N/A |
| Category 1: Other Purchased Goods & Services | 210 | 135 | 149 | N/A |
| Category 2: Capital Goods | 463 | 177 | 142 | N/A |
| Category 3: Fuel and Energy Related Emissions | 166 | 134 | 188 | N/A |
| Category 4: Upstream Transportation & Distribution | 197 | 225 | 208 | N/A |
| Category 5: Waste Generated in Operations | 5 | 9 | 8 | N/A |
| Category 6: Business Travel | 33 | 8 | 14 | N/A |
| Category 7: Employee Commuting | 23 | 53 | 59 | N/A |
| Category 93: Downstream Transportation and Distribution | N/A | 27 | 31 | N/A |
| Category 11: Use of Sold Products | 587 | 641 | 662 | N/A |
| Category 12: End-of-Life Treatment of Sold Products | 1,253 | 324 | 227 | N/A |
| Category 14: Franchises | 5 | 5 | 1 | N/A |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Strategic Management |  |  |  |  |  |  |  |
| TCFD Reporting  Continued | | | | | | | |

80

2022 Performance

Our combined Scope 1 & 2 (market-based)

emissions are decreasing year on year. In

2022 these reduced by 15% vs 2021 (-22%

vs 2020 baseline).

Scope 1 emissions decreased by 5% vs

2021 (-10% vs 2020 baseline).This is driven

by energy efficiency activities and projects

across our operational sites, lower

production output and changes in footprint

in certain geographies.

Scope 2 emissions decreased by 34% vs

2021 (-43% vs 2020 baseline). This is driven

by an increase in renewable energy

sourcing for our sites, including an

expansion to new geographies where

renewable energy sourcing opportunities

emerged and maximised the proportion of

renewable electricity we source. This was

further supported by energy efficiency

activities and increase of on-site renewable

energy generation, mostly from solar

technologies. Our targets cover Scope 2

emissions aligned with the market-based

approach, but we are also monitoring and

disclosing Scope 2 emissions as per the

location-based approach. Scope 2

emissions (location based) decreased by

9% vs 2021 (-15% vs 2020 baseline).

Our total Scope 32 emissions decreased by

7% vs 2020. This reduction includes

strengthening our approach to on-the-

ground farmer-related data collection and

associated wood density factors, in order

to be able to more accurately calculate

their associated emissions.

Reporting methodology - Energy

Energy consumption is reported in line with

GRI 302, Energy, 2016, Disclosure 302-1,

Energy consumption within the

organisation. Energy Consumption is

calculated from raw data of fuel, electricity,

hot water and steam consumption, which

is submitted by reporting units across the

Group via our Internal Reporting Tool. The

data used in calculations is the same as

used for Scope 1 and 2 CO2e emissions.

2022 Performance

While details of the principal measures

taken for the purpose of increasing energy

efficiency across the Group are available at

pages [53-54](#id739eb8a094346e4a1dd9989c862058f_15552), our energy consumption

performance is outlined as follows:

–Energy consumption4 from activities for

which the Group is responsible (in million

kWh): 2022: 1,435; 2021: 1,508; 2020: 1,572.

Of the total figure reported for the Group

for 2022, 11 million kWh is from UK-based

activities (2021: 10 million kWh, 2020: 10

million kWh).

–Energy consumption resulting from the

purchase of energy by the Group for its

own use (in million kWh): 2022: 909; 2021:

972; 2020: 996.

–Of the total figure reported for the Group

for 2022, 15 million kWh is from UK-based

activities (2021: 16 million, 2020: 17million).

Other Metrics and Targets

Internal Carbon Pricing

As part of our decarbonisation strategy,

in 2021, we incorporated Internal Carbon

Pricing (ICP) into our financial appraisal

to facilitate delivery against our targets. ICP

is helping enhance decision-making and

prioritise capital expenditure allocation.

Prices are reviewed annually because we

aim to ensure they remain appropriate

drawing on a number of benchmarks,

including UNFCCC initiatives.

For 2022, a price of £60 per tCO2e was used,

with assumptions that prices will increase

between 2022 and 2030 up to £120 per

tCO2e as a consequence of anticipated

increasing demand for carbon credits. The

trialling of a scorecard in appraising capital

investment across the Group's operations

in 2022 allowed us to enhance our

consideration of the cost of carbon to more

widely consider the environmental and

social impacts of projects against our

external commitments and targets, further

strengthening our decision-making and

internal governance processes.

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|  |  | Read more about our Internal Carbon Pricing in  2022 in our Low Carbon Transition Plan on  bat.com/reporting |
|  |  |

Remuneration

Where relevant, employees, from the

Management Board (including the Director,

Operations) to local management, have

individual performance objectives that

form part of their responsibilities and are

linked to remuneration, including delivery

against ESG and climate-related priorities

and metrics.

Delivery against individual performance

objectives is a key consideration in

determining employee performance

ratings, which in turn have a direct impact

on compensation as they are used to

determine salary adjustments.

In addition, the Group retains the discretion

to make downward adjustments to

individual bonus payments in the event of

persistent underperformance against

performance objectives.

The ESG objectives within the

remuneration of Jack Bowles, Chief

Executive, and Tadeu Marroco, Finance and

Transformation Director, are focused on

Harm Reduction. We intend to keep further

integration of ESG and climate-related

metrics in Management Board

remuneration under active review.

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|  |  | Read more about our approach to Remuneration  for directors and employees on pages [160](#id739eb8a094346e4a1dd9989c862058f_2192) to [170](#iff8934d3734b44f4b1d79b07b59bc890_252488) |

Next steps

We know that the effects of climate

change are undeniable and they will

continue to impact the world, including the

countries where we operate and the

communities who live in them.

Through the adoption of the TCFD

recommendations and recommended

disclosures, we continue to analyse the

resilience of our strategy and business

against two potential climate scenarios

and three time horizons. We recognise that

this is a process of continuous

improvement, therefore we will keep

mitigating risks, adapting to a changing

landscape, seeking new opportunities and

responding to new regulations.

In light of this evolving landscape, we will

keep strengthening our understanding and

management of climate-related risks and

opportunities by:

–Reviewing our governance structure,

reflecting the leadership of our newly

appointed Chief Sustainability Officer;

–Reviewing the assessment of our

identified climate-related risks and

opportunities on an annual basis;

–Embedding the dashboard that enables

us to understand the potential impact of

climate change on our physical property

locations across the Group and

subsequent business interruptions;

–Outlining our mitigation activities'

approach in relation to climate-related

risks and opportunities identified in

addition to keeping those under review;

–Further aligning our metrics and targets

to our identified climate-related risks and

opportunities;

–Keeping further integration of ESG- and

climate-related metrics in Management

Board remuneration under active review;

and

–Continuing to work with other BAT

colleagues and external partners and

suppliers to reduce the environmental

impact of our operations and value chain.

Notes:

t...2022 (2021 for Scope 3) metrics with independent

limited assurance by KPMG, see page [95](#id739eb8a094346e4a1dd9989c862058f_17703) for a full list

of metrics.

1.In 2022, UK-based activities included 2,376 tonnes of

Scope 1 CO2e emissions (2021: 2,276) and 10 tonnes of

our Scope 2 CO2e emissions (2021: 173). Scope 1 & 2

CO2e emissions intensity (tonnes per £m revenue) 15.2

(2021: 19.3), (2020: 20.0).

2.Total Scope 3 includes biogenic emissions and biogenic

removals. Due to the complexity of consolidating and

verifying Scope 3 data in accordance with the GHG

Protocol, we report one year behind. As such 2022

Scope 3 data will be reported in the 2023 Annual Report

and Accounts and Form 20-F.

3.As part of our 1.5ºC Science-Based Targets approval

process we have added Scope 3 Category 9

(Downstream Transportation and Distribution) to our

2020 baseline.

4.Energy intensity (GWh per £ million of revenue): 2022:

0.085; 2021: 0.097.

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## For Employees

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| We embrace Diversity |  | We invest in Talent |  | We reward our employees  equitably |  | We provide a safe  workplace |
|  |  |  |  |  |  |  |
| Championing Inclusion |  | Global Careers Site |  | Fit for Purpose |  | 6% Reduction |
| we have established mentoring  programmes for female  employees globally and ethnic  minority talent in the UK. |  | our careers site leverages the  latest technologies to  personalise a candidate’s  experience, and is supported  across 13 languages. |  | we reward high levels of  sustainable, long-term  performance in an appropriate  and competitive way. |  | in total work-related accidents  and incidents across the  Group (vs 2021). |
|  |  |  |  |  |  |  |
| 41% Women in  Management Roles\* |  | 100% of Employees |  | Close, Long-Term  Links |  | Mental Health |
| overall representation in 2022,  compared to 39% in 2021. |  | in management roles with  access to our award-winning  digital learning platform,  The Grid, providing  personalised learning anytime,  anywhere. |  | between Group company  employees and shareholders  established through reward  offerings – c.17,000 employees  participate in our Global IEIS or  corporate bonus schemes. |  | support and wellbeing  programmes across the Group  and dedicated ‘healthy minds  champions’ in many markets. |
|  |  |  |  |  |  |  |
| 64% Ethnically  Diverse Groups\* |  | Women in Leadership |  | Globally Certified |  | COVID-19 Secure |
| in our total workforce, with 138  nationalities at management  level globally. |  | training, Women in STEM  programme and Global  Graduate Academy all focused  on developing future diverse  leaders. |  | across 44 markets, covering  approximately 40,000  employees, we are globally  certified as providing equal pay  for work of equal value. |  | workplace measures in place  for all employees returning to  their workplace. |
|  |  |  |  |  |  |  |
| BUnited |  | 3,000+ New  Capability Hires |  | Reimagining  Benefits |  | Focused on  Driver Safety |
| global network for our LGBT+  employees and allies. |  | includes data analytics, ESG,  digital, innovation, IP and sciences,  of which 47% are women. |  | we continue to evolve our  benefits portfolio to meet the  changing needs of our global  population. |  | our ongoing focus has seen  vehicle-related accidents,  attacks and assaults decline by  11% in 2022 (vs 2021). |
|  |  | \*  Refer to BAT Reporting Criteria for a full description of key terms and definitions used throughout. | | | | |

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|  | Our ongoing commitment to fostering a diverse and inclusive  culture at BAT is underpinned by our Ethos, which encourages  employees to be Bold, Fast, Empowered, Responsible and  Diverse. By combining existing and new capabilities, we are  radically redefining our organisation. Together, we will build  A Better Tomorrow™.  Hae In Kim  Talent, Culture and Inclusion Director | |

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| A Better Tomorrow™  For Employees | | | | | | | |

83

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|  |  | Delivering a positive social impact | | | | | |  |
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|  | People, Diversity and Culture | | | | | | |  |
|  | | | | | | | | |
|  | Our 2025 Goals | |  |  |  |  |  |  |
|  | 45% | |  | 40% |  | 50% | |  |
|  | increase the proportion of  women in management  roles\* to 45% | |  | increase the proportion  of women on senior  leadership teams\* to 40% |  | achieve at least 50% spread  of distinct nationalities in all  key Regional/Functional  leadership teams\* | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 41% | |  | 30% | | 100% | |  |
|  | proportion of women in  management roles\*  (compared to 39%: 2021) | |  | proportion of women on  senior leadership teams\*  (compared to 27%: 2021) |  | all key Regional/Functional  leadership teams\* achieved  +50% spread of distinct  nationalities | |  |
|  | | | | | | | | |
|  | 79% | |  | 78% | | 64% | |  |
|  | Engagement Index score  in Your Voice 2021  employee survey, 1 ppt  higher than our FMCG  comparator group | |  | High Performance Index  score in Your Voice 2021  employee survey, 4 ppts  higher than our FMCG  comparator group | | ethnically diverse groups\*  in total workforce | |  |
|  | | | | | | | | |
|  | GRI Standard(s) | |  | SFDR / PAI Indicators |  | SASB Standard(s) | |  |
|  | GRI 2-7, 2-8, 2-30, 401-1,  401-3, 404-1, 404-2, 405-1,  405-2 | |  | 12., 13., S4., S5. | | This topic is not mapped  to a specified Indicator | |  |
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|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Standards of Business Conduct (SoBC)  –Employment Principles  –Health and Safety Policy  –Group Data Privacy Procedure | | | |  |  | \*Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/sustainability  reporting |  |

Our Talent Strategy

Attracting, developing and retaining

a talented workforce are key drivers in

BAT’s transformation journey to build A

Better Tomorrow™.

Our ethos guides our culture and

behaviours across the Group and plays

a key role in delivering our purpose.

Developed with significant input from our

employees, it ensures an organisation that

is future fit for sustainable growth. The five

key principles – bold, fast, empowered,

diverse and responsible – underpin how we

deliver on both our purpose and our strategy.

The policies and principles that support

implementation of our strategy are

discussed on page [92](#i575a4c9e0b3245bca2b51c079b91e1ec_2231).

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|  | Our Ethos | |  | We are  Bold |
|  |  | We are  Fast |  | We are  Empowered |
|  |  | We are  Diverse |  | We are  Responsible |
|  |  |  |  |  |

Investing in Talent

Our transformation is driven by our talent.

We are investing heavily in attracting talent

with future capabilities, using an increasingly

data-led, digitally enabled approach.

We continue to invest across our hiring

needs by seeking to ensure our process

and technology are effective in meeting our

evolving business requirements. Our

careers site leverages the latest

technologies to personalise a candidate’s

experience, supported across 13 languages.

This drives engagement and applications

from early career to cross-industry

experienced hires.

In 2022, 45% of our external management

recruits brought new capabilities into the

organisation to accelerate our business

transformation. Since 2019, the total

number of hires bringing new capabilities –

such as data analytics, digital, ESG,

innovation, IP and science – is more than

3,000, and of these some 47% are female.

We continue to strengthen our employer

brand in line with our corporate purpose

and ethos by investing in early careers

across our flagship Battle of Minds

competition with a key focus on ESG

topics. Battle of Minds is a global

competition targeting early career talent

with an entrepreneurial mindset. The

competition not only connects BAT with

early-stage start-ups but also serves as a

talent pipeline into junior roles such as our

Global Graduate Programme.

Our commitment to fairness and inclusivity

is embedded throughout our recruitment

process, helping to ensure equal access to

opportunities at BAT.

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84

We use specialist technology to assist with

gender-neutral language in our job

advertisements (where permissible) and to

support detection and removal of potential

bias ahead of posting jobs.

Candidate screening is supported by AI

technology to ensure a fair process and

increase accessibility, where appropriate.

The interview process is conducted

according to clear guidelines for fairness

and inclusivity, such as ensuring diverse

interviewing panels. Once appointed,

successful candidates undergo robust pre-

employment checks, such as age

verification and right-to-work, to mitigate

the risks of child or forced labour.

In 2022, we won for a fifth consecutive year

the Global Top Employer award, a globally

certified award recognising organisational

excellence in people practices. And in early

2023, this success continued into a sixth year

when we were again recognised for this

global award.

Learning and Development (L&D)

Delivering world-class L&D opportunities

for our employees has always been an

integral part of our culture. L&D is

becoming an increasingly important

enabler to accelerate our transformation.

Our firm commitment to the development

of leadership and functional ‘must win’

capabilities resulted in:

–an average of 22 hours of learning over

the year for each of our 13,000 managers;

and

–an average of £326 investment in

learning per employee.

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|  |  | Driving ownership  and accountability |  |
|  |  | Board Diversity Policy |  |
|  |  | Group D&I dashboard and  regular Management Board  reviews for tracking progress |  |
|  |  | Diversity Champions |  |
|  |  |  |  |

We have refreshed the content on many of

our leadership, digital and functional

programmes and increased the size of our

portfolio by 25% from 57 programmes at

the end of 2020 to 71 at the end of 2022.

All functional ‘must win’ capabilities have

foundational learning programmes in place,

creating a level playing field of knowledge

and skills – with 38% of programmes now

developing advanced level capabilities.

In 2022, we launched a new programme for

the most senior 120 executives in the

Group called the GLM120 A Better

Tomorrow™ Programme. The programme

provided learning in:

–sustainable net turnover growth;

–ESG, science and regulation;

–impact and influence; and

–leading innovation.

All of the above are critical capabilities to

enable the acceleration of our transformation.

In 2022, we also continued to develop our

flagship learning programme – Made@BAT

by launching advanced level skills

development for all our marketing

managers, equipping them with the best

external, off-the-shelf learning content to

be able to build brands in the digital era.

To date, 85% of marketing managers have

taken part in the Made@BAT programme.

Over 3,200 managers attended our core

leadership programmes in 2022, including

the Women in Leadership programme and

the Global Graduate Academy.

The Academy provides intensive two-week

training as part of our one-year Global

Graduate programme. The programme

focuses on developing the next generation

of diverse leaders and accelerating the

development of their commercial and

leadership skills.

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|  |  | Building diverse talent  pipelines |  |
|  |  | Inclusive recruitment |  |
|  |  | Women in Leadership  training and mentoring |  |
|  |  | IGNITE returners programme |  |
|  |  | Women in STEM programme |  |
|  |  |  |  |

In 2022, the Global Graduate Academy was

awarded a Brandon Hall Group L&D Gold

Award for best blended learning programme.

We continue to accelerate and broaden the

capability development of all managers in

the Group via our digital learning platform,

The Grid. The platform provides leadership,

digital and functional learning content for

all 13,000 managers, anytime, anywhere,

promoting a culture of self-development

and continuous learning.

In addition, we have continued with

'Leadermeter', our flagship talent

development tool, that is supported by an

externally benchmarked and factual

leadership potential assessment

methodology. 'Leadermeter' focuses on

transformational leadership attributes, is

forward-looking and provides robust

individual insights. It facilitates an active

focus on an individual’s development and

allows for talent actions to build the

leadership pipeline. We completed a pilot in

2021, which covered c.13,000 managers

and, in 2022, reached c.2,200 new hires and

recently promoted managers.

Diversity and Inclusion

At BAT, we are proud to be a diverse global

organisation that encourages our people to

value their differences.

We think of diversity in its widest sense, as

those attributes that make each of us

unique. These include our race, ethnicity,

cultural and social backgrounds,

geographical origin, nationality, gender,

age, any disability, sexual orientation,

religion, skills, experience, education, socio-

economic and professional background,

perspectives and thinking styles.

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|  |  | Creating enablers |  |
|  |  | Parents@BAT: our global  programme for new parents |  |
|  |  | Employee networks and  communities |  |
|  |  | Independent certifications |  |
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|  |  | Collaboration with Employee  Resource Groups, building  allyship and D&I awareness  campaigns |  |  |  | Mastering Inclusion' training  for all employees and D&I toolkit  and guides |  |  |  | Continuous feedback, action  planning, review cycles.  Employee engagement and  listening sessions |  |

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85

In 2020, we set ourselves bold ambitions

for 2025, to accelerate the pace of

progress. We have made great progress in

all three of our strategic pillars, driving

ownership and accountability, building

diverse talent pipelines, and creating

enablers that support our commitment to

creating a diverse and inclusive culture.

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|  |  | Find more details of our efforts to accelerate  gender diversity in our Diversity and Inclusion  Report 2022 |
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Driving Ownership and Accountability

We seek to monitor, track and support the

progression of diverse groups. In 2022, we

expanded the scope of our confidential

voluntary ethnicity identity collection and

reporting beyond the UK to six additional

markets (Australia, Brazil, Canada,

Malaysia, South Africa and the US).

Together with the UK, these countries

represent approximately 30% of all our

Group company employees worldwide,

covering approximately 14,000 people. In

these seven markets, 92% of our

employees and 82% of our senior teams

have confidentially disclosed their ethnic

background. Collecting this data offers an

opportunity to better understand the

experience of different groups and their

movement throughout the talent lifecycle

at BAT and subsequently inform further

targeted initiatives.

Our D&I governance structure ensures clear

accountability for our business leaders and

leadership teams for achieving our 2025 D&I

ambitions. This includes a D&I dashboard

and regular reviews by our Management

Board to ensure close monitoring of

progress and plans. D&I remains fully

embedded in our talent review processes

and meetings. Each Region and Function

has five-year glidepaths to showcase plans

and estimated year-end forecasts.

In 2021, we released our first Group D&I

report which outlined a more complete

picture of gender, ethnicity and pay,

allowing us to measure our progress in

building a diverse and inclusive culture. We

voluntarily reported UK ethnicity pay and

expanded gender pay reporting to eight

new markets which represented c.40% of

all our employees worldwide.

Building on the progress made in 2021, we

are further expanding our reporting in

2022, with more than 80% of our

employees now included in our Gender Pay

Equity Reporting, and for the first time,

approximately 14,000 employees were

included in an Ethnicity Pay Equity review.

Our focus on pay equity is intended to

ensure that all employees performing the

same work or work of equal value are paid

equitably and pay is not influenced by

factors such as gender or ethnicity.

Building Diverse Talent Pipelines

We require all recruitment agencies we

work with to provide gender-balanced

longlists of candidates. In the UK, we

partner with firms accredited under the UK

Government’s Enhanced Code of Conduct

for Executive Search Firms. This

acknowledges firms with a strong track

record in, and promotion of, gender

diversity in the FTSE 350.

Since 2019, our Women in STEM strategy

has focused on attracting, developing, and

retaining more women in our R&D,

Operations, Finance and Digital Business

Solutions functions. In the UK, we continue

to be members of the multi-stakeholder

group WISE and official signatories of its

10-step framework. This provides evidence-

based action, knowledge, and tools for

achieving gender balance in the STEM

workforce, and against which we achieved

Rank 1 in 2022. These activities help

increase the level of STEM representation,

as we work to our goal of 40% female

representation on senior leadership teams.

Delivering development opportunities for

our employees and contributing to the

strengthening of our talent pipelines has

always been an integral part of our D&I

strategy. 'Women in Leadership' (WIL) is

our long-running programme within our

leadership portfolio, which supports the

accelerated development of women at

middle to senior levels. It is a key initiative

within our D&I agenda to grow the

proportion of women in management roles

across the business to 45% by 2025.

In 2022, we expanded the scope and

launched new WIL Foundation programmes

for women at a junior management level

and have grown the coverage to c.1,000

women managers.

Following a successful launch of our global

IGNITE returners programme in nine

markets (Argentina, Australia, Colombia,

Mexico, Pakistan, Poland, Trinidad &

Tobago, Turkey and the UK), we have

continued to recruit returners across the

world. IGNITE focuses on supporting

experienced professionals returning to the

workplace after a career break. It includes

flexible working, training and coaching for

returners, and training for line managers on

how to best support them.

We launched a new training programme

‘Mastering Inclusion’ with the main purpose

to raise awareness and build skill sets around

key D&I concepts and opened it up to all our

non-management employees too. It is

compulsory for all new hires and new

managers and, so far, more than 9,500

employees have completed the training.

D&I toolkits are available for all our

managers. Along with Allyship Guides on

LGBT+, Race and Ethnicity and Disability

Allyship, these continue to provide practical

information to help debunk myths and

misconceptions, understand unconscious

bias, micro-aggressions and micro-

inequalities, and provide tips on how to

proactively create an inclusive environment

and promote a sense of belonging for us all.

These guides were built through a robust

co-creation process and they complement

existing D&I training embedded across the

business, such as our 'Mastering Inclusion'

e-learning available to all colleagues, and the

D&I modules of our leadership programmes

like Leading Self; Leading Teams; and Leading

Through People.

We expanded the scope of 'Mission Gender

Equity' which is a cross-company mentoring

programme focusing on female talent to

build and strengthen our internal talent

pipeline to markets outside the UK and the

programme will cover 73 pairs of mentors-

mentees. We are piloting 'Mission Include' in

the UK, which is a similar cross-company

mentoring programme focusing on talent

from ethnic minority under-represented

groups, covering 13 pairs of mentors-

mentees. Both these programmes

are provided by our external partner

Moving Ahead.

Creating Enablers

'We are Diverse' is at the core of BAT’s

Ethos. As well as striving for gender

balance, our D&I strategy focuses on

diversity of nationalities and ethnicities.

Our employees remain at the heart of our

success without whom we are unable to

achieve our strategy. Together we continue

to build an inclusive culture where

difference is valued, where employees from

diverse backgrounds and experience feel

they belong, are at their best and inspired.

We have worked hard to set strong

foundations and create enablers to realise

genuine change.

We are signatories to the UK Race at Work

Charter for supporting racial equality in the

workplace. We strive to get the full value

and potential of diversity through inclusion.

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Our target is for at least a 50% spread of

distinct nationalities in all our regional and

functional leadership teams. We have 138

different nationalities, from a wide range of

ethnic backgrounds, in management roles

across the Group.

Progressive programmes and policies have

helped to cultivate an inclusive culture. Our

Parents@BAT programme also continues

to provide a range of benefits to support

new parents. This offers minimum

requirements for fully paid leave for new

mothers and adoptive parents and a return-

to-work guarantee, exceeding legal

requirements in many countries. It also

includes flexible working opportunities and

an online advice service offering coaching

support for all parents whenever required.

This year, we have offered enhanced

support to our new parents, working

families and their managers, with coverage

of expanded topics including hybrid

working, wellbeing, D&I, caregiving,

parenting older children and more. It has

been designed based on user research to

be easily accessible and deliver maximum

support with minimum time spent.

This also includes ‘Ask a Coach’ which

provides access to Talking Talent’s

executive coaches who are only a click

away, 24 hours a day. This new messaging

service includes unlimited, confidential,

one-to-one coaching support to build well-

being and navigate life/work success. In

2022, the return rate from parental leave

was 97% for women and 99% for men.

We launched confidential assisted fertility

support to our UK employees via Apricity,

our partner to our private medical plans.

Apricity offers a fertility concierge service

which employees can access via the

Apricity App.

In May 2022, we were recognised by a

major UK government-backed

accreditation scheme for the way we

attract, develop and support people with

disabilities and long-term health

conditions, and awarded Level 2 Disability

Confident Employer status − building on

our success in achieving Level 1 status two

years ago.

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|  | Senior Managers: Companies Act 2006  For the purposes of disclosure under Section 414C(8) of the Companies Act 2006,  the Group had 175 male and 48 female senior managers as at 31 December 2022.  Senior managers are defined here as the members of the Management Board  (excluding the Executive Directors) and the directors of the Group’s principal  subsidiary undertakings. The principal subsidiary undertakings, as set out in the  Financial Statements, represented approximately 70% of Group company  employees and contributed over 90% of Group revenue in 2022. |  |
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This demonstrates our commitment to

equal opportunities for disabled employees

and applicants, training and development

for disabled employees and reasonable

adjustments and support in the workplace

and recruitment processes.

Independent accreditation like this

recognises the impact of our D&I strategy.

Being acknowledged as a Disability

Confident Employer is a clear indication

that we recognise the diversity, experience,

insight, talent, and value that disabled

people and others bring to our business.

In 2022, we commenced participation in

the Brandon Hall Group awards

programme. Brandon Hall Group is a

leading research and analyst firm that

specialises in L&D, Talent Management,

Leadership Development, Talent

Acquisition, and Workforce Management.

Its award programme is the largest and

longest running for Human Capital

Management, and attracts entrants from

leading corporations around the world.

We were delighted to receive 3 awards,

Gold – Best Diversity, Equity and Inclusion

Strategy, Gold – Best Learning Program

that supports and promotes Diversity,

Equity and Inclusion and Silver – Best

Advance in Diversity Recruiting Strategy.

Inclusive culture

By fostering inclusion and belonging,

building allyship, and supporting the career

growth of colleagues, our Employee

Resource Groups (ERGs) collaborate with

the D&I team to deliver on our business

objectives and strategic imperatives.

Members of the leadership teams serve as

executive sponsors for ERGs to build

allyship and understanding while also

maximising the success and impact of

these groups.

Our ERGs then activate and embed this

work deep within our organisation and our

local communities. We have ERGs across

all levels of the Group, including our

Women in BAT, Healthy Minds Champion

and BUnited, which is our LGBT+ employee

resource group. In 2022, we opened several

new chapters in our local markets,

including the women employee group in

Saudi Arabia and disability inclusion group

in Nigeria.

Group Diversity as at

31 December 2022

Main Board

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|  | Male | 7 | 64% |
|  |  |  |  |
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|  | Female | 4 | 36% |
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Senior leadership teams

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| --- | --- | --- | --- |
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|  | Male | 600 | 70% |
|  |  |  |  |
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|  | Female | 262 | 30% |
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Total Group employees

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | Male | 33,907 | 67% |
|  |  |  |  |
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|  | Female | 16,490 | 33% |
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|  |  |  |  |

Nationalities represented

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|  | Main Board | 5 |
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|  | Global headquarters | 81 |
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|  | Management level globally | 138 |
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|  | Global Top Employer  In 2022, we won the Global Top  Employer award, for the fifth  consecutive year, a globally certified  award recognising organisational  excellence in people practices.    Disability Confident Employer  BAT was recognised by a major UK  government-backed accreditation  scheme for the way we attract, develop  and support people with disabilities and  long-term health conditions.    Race at Work Charter  We are signatories to the UK Race at  Work Charter for supporting racial  equality in the workplace.    Corporate Equality Index  In 2022, our U.S. and Mexico businesses  scored 100% on the Human Rights  Campaign Foundation’s Corporate  Equality Index for LGBT+ workplace  equality.    Women in STEM awards (WISE)  In 2022, we achieved a Rank 1  certification in the UK for our Science,  Technology & Engineering strategy.    Brandon Hall Awards  In 2022, we achieved Gold Awards  from the Brandon Hall Group. |  |

Workforce Engagement

Ensuring we have open engagement,

where we can listen to and learn from our

employees, is crucial to an inclusive culture.

We have a range of engagement channels

covering our global workforce, including:

–Market and site visits by our Directors

and Management Board members to

meet local employees;

–Town halls and Q&A sessions;

–Meetings with works councils, trade unions

and the European Employee Council;

–Our annual global leaders meeting

with the top 120 senior leaders across

the Group;

–Global, functional and regional webcasts;

–Webcasts and podcasts with the Chief

Executive and Management Board members;

–Global, independently-managed and

multilingual Speak Up channels; and

–Our global Your Voice employee survey

every two years, most recently in 2021.

Our 'Workforce Voice in the Boardroom'

programme focuses on ensuring the Board

understands the views of our workforce, and

reviews details of the key themes identified

and how we have responded to them.

Feedback from the Board, with associated

action, is cascaded back across our workforce

and the Board is kept updated on progress

against identified actions during the year.

In 2022, the key themes identified were

related to continuation of regular updates

on transformation, including sustainability

and innovation, and continuous focus on

prioritisation.

We have responded to this feedback with a

range of activities. For example, during a

five-day long Sustainability Week of events

held in July, we welcomed c.14,000 attendees

to various webcast panel sessions. Each

day was allocated to key ESG agenda

themes, including operations, diversity and

innovation. During the week, senior leaders

explained our ESG ambitions and initiatives

that we are undertaking and attendees also

had the opportunity to ask questions and

were able to share their views on ESG topics.

In the Year-End and Half-Year Results live

webcasts, the Chief Executive, Finance and

Transformation Director, and Chief Growth

Officer re-emphasised the Group’s purpose

and ambitions, shared the progress made

by the Group and highlighted the priorities

for the upcoming period. These live events

are also supported by complementary

communications which are accessible to all

employees. For example, the Year-End

Results email sent by the Chief Executive

was read by more than 25,000 employees.

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|  | Bloomberg Gender-Equality  We are proud to be included in the  2023 Bloomberg Gender-Equality Index  (GEI). The GEI helps bring transparency  to gender-related practices and policies.  This recognition is a demonstration of our  continued commitment and focus on  providing an inclusive work  environment and our desire to build on  the strengths gained through gender  diversity, equality and transparency.  Our efforts to create an inclusive  culture for women through our  recruiting initiatives, adoption of family-  friendly policies, sponsoring programmes  dedicated to educating women and  support of community programmes,  were identified as strengths. |  |

Your Voice

We conduct our global Your Voice survey

every two years, with the most recent

survey conducted in 2021.

In the 2021 Your Voice survey, we were

pleased to surpass our 2019 response rate

with 93% of all employees globally

choosing to respond (seven percentage

points higher than the average of our global

FMCG comparator group).

Our 2021 Your Voice results outperform

our FMCG comparator group in most

categories, with strong results in D&I,

people management, corporate

responsibility and empowerment. Our 2021

results were one percentage point higher

than our global FMCG comparator group

for our Employee Engagement Index and

four percentage points higher than the

average of our FMCG comparator group

for our High Performance Index.

These results reflect a connected,

committed, energised and high performing

organisation. The next Your Voice survey

will be undertaken in 2023. Results from

that survey will serve as the basis for

further shaping the priorities for the

organisation.

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|  |  | Find out more about how our Board engages  with our global workforce on pages [133](#id739eb8a094346e4a1dd9989c862058f_14254), [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429)  and [170](#iff8934d3734b44f4b1d79b07b59bc890_252488) |
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Rewarding People

Our SoBC makes clear our commitment to

providing fair, clear and competitive wages

and benefits. In line with good equal pay

practices, we have clearly defined pay

scales for all roles across the Group

worldwide. This approach ensures pay,

bonuses and benefits are consistently

applied and not influenced by factors such

as gender or ethnicity.

Reward is a key pillar in ensuring that we

have the right people to drive the business

forward. Reward is necessarily local and we

strongly support this approach through

global frameworks to ensure leading-edge

policies, processes and technology are

available to all markets.

Base pay rewards core competence

relative to skills, experience and

contribution to the Group, while annual

bonuses, long-term incentives, recognition

schemes and ad hoc incentives provide the

right mix to ensure that sustained high

performance is recognised and rewarded.

Our annual bonus and long-term incentive

plans are aligned throughout the

organisation, with eligible employees

participating in plans with the same

performance metrics as the Executive

Directors, supporting line of sight

throughout the organisation.

We also offer our UK employees the

chance to share in our success via our

Sharesave Scheme, Partnership Share

Scheme and Share Reward Scheme, and

operate several similar schemes for

employees in our Group companies.

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|  |  | Find details of our Directors’ Remuneration  Policy on pages [164](#ib83a7b63593b4e9c99c5e7a6814f1798_1-1-1-3-281708) to [170](#iff8934d3734b44f4b1d79b07b59bc890_252488) |

Benefits and Reward

Our benefits offering is a core component

of our reward strategy. We aim to deliver

benefits that are fair and competitive.

During 2022, we reviewed our global

benefits strategy and introduced new

innovations to provide employees with

greater choice and flexibility, including

investments in technology. Changes were

accompanied by enhancements to our

benefit programmes in the areas of

financial wellbeing, employee health and

assistance while re-appraising benefit

design to create greater value for

employees.

Our approach to rewarding Group

company employees and engagement on

remuneration matters is discussed further

on pages [168](#iff8934d3734b44f4b1d79b07b59bc890_252487) to [170](#iff8934d3734b44f4b1d79b07b59bc890_252488).

Equal Pay for Equal Work

Our focus on pay equity is intended to

ensure that all employees performing the

same work or work of equal value are paid

equitably and pay is not influenced by

factors such as gender or ethnicity.

In 2022, we partnered with Fair Pay

Workplace (FPW) to conduct a Pay Equity

Review. FPW is an independent specialist

consultancy that supports companies to

gain recognition for their commitment to

true pay equity using a trusted and

transparent methodology.

The review covered approximately 40,000

employees in 44 markets from a gender

perspective. Our broader D&I strategy also

focuses on diversity of ethnicities across our

business. This allowed us, for the first time,

to undertake an Ethnicity Pay Equity Review

for our employees in seven countries,

approximately 14,000 of our people.

The markets were selected to ensure

relevant international representation

comprising employees across all regions

and to provide a cross-sectional view of

BAT’s business operations.

We evaluated the base salary for each

employee at each level of the organisation,

considering any reasons for any salary

determinations, such as level or type of

work performed, individual performance,

location and experience.

The consolidated results of our global pay

equity assessment show:

–Women and men are paid within 1% of

one another for doing the same work or

work of equal value

–Ethnically diverse groups and non-

ethnically diverse groups are paid within

1% of each other for doing the same work

or work of equal value

This confirms that our global efforts to provide

consistent and fair compensation based on

legitimate drivers of pay are working.

We were pleased to receive further

accreditation from FPW for all the

countries included in the scope of our Pay

Equity review. FPW certification is a

transparent and trusted standard of

measurement to differentiate

organisations dedicated to true pay equity,

and this milestone represents another

important step in the Group’s D&I agenda.

Globally Certified across 44 markets

Certified organisations are recognised leaders

in ensuring equal pay for equal work.

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|  |  | Find more details in our Diversity and Inclusion  Report 2022 |

Responsible Restructuring

Where restructuring is necessary, we are

committed to doing so in a responsible

manner.

Responsible local approaches and

procedures to address each instance

include employee consultation periods,

severance pay and any other measures

that may be appropriate to the situation

and location. Examples include

outplacement support, career transition

services, financial advice and training to

help displaced employees to find

alternative employment.

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|  |  | You can read about our Group risk factor related  to talent on page [344](#i34903ffed42e46f7b96993e6b203c989_0-0-1-1-430362) |

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|  | Employee retention  –1,502 voluntary turnover of  management-grade employees in  2022  –10.6% voluntary turnover rate of  management-grade employees in  2022  –10.5% voluntary turnover rate for all  employees in 2022 |  |
|  | Collective bargaining  –28.6% Group company employees  covered by an independent trade  union or collective bargaining  agreement |  |
|  | Diversity  –30.4% representation of women on  senior leadership teams in 2022  –27.1% representation of women on  senior leadership teams in 2021  –26.7% representation of women on  senior leadership teams in 2020 |  |
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Our Employment Principles

Our Employment Principles set out a

common approach for our Group

companies’ policies and procedures,

recognising that each Group company

must take account of local labour law and

practice, and the local political, economic

and cultural context.

In developing our Employment Principles, we

have sought the views of a cross-section of

internal and external stakeholders, and have

consulted with employee representatives

and (where relevant) with our works councils.

Our Employment Principles are

implemented by Group companies and,

through our internal audit processes, Group

companies are required to demonstrate how

these are embedded into the workplace.

In addition to our Employment Principles,

our Board Diversity Policy applies

specifically to our Board and Management

Board, discussed on page [149](#i37e5279ba8e24f9dadbd3d8adb977221_20258).

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|  |  |  |  |  |  |
| Our policies and principles | |  |  |  |  |
|  | Summary of areas covered |  | Stakeholder groups | | |
| Employment Principles\*  Available at www.bat.com/principles | Employment practices, including commitments to diversity,  reasonable working hours, family-friendly policies, employee  wellbeing, talent, performance, equal opportunities, and fair,  clear and competitive remuneration and benefits and  responsible restructuring. |  | Our People |  |  |
|  |  | | |
| Health and Safety Policy \*  Available at www.bat.com/principles | Health, safety and welfare of BAT employees, contractors,  visitors and other relevant stakeholders. |  | Our People |  | Customers |
|  | Suppliers |  |  |
| Standards of Business Conduct\*  Available at www.bat.com/principles | Topics include respect in the workplace, promoting equality  and diversity, preventing harassment and bullying, fair wages  and benefits, and supporting work-life balance. As well as  human rights, health, safety, welfare and compliance with our  Group Data Privacy Procedures. |  | Our People |  |  |
|  |  | | |
| Group Data Privacy Procedure | The manner in which BAT processes personal data about all  individuals, including consumers and employees, contractors  and employees of suppliers. |  | Our People |  | Suppliers |
|  | Consumers |  | Customers |

Note:

\* These policies and principles are endorsed by our Board, implemented for application by all Group companies and support the effective identification, management and mitigation of

risks and issues for our business in these and other areas. Available at www.bat.com/principles.

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|  |  | Providing a safe working environment for all | | | | | |  |
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|  | Health and Safety | | | | | | |  |
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|  | Our Goals | |  |  |  |  |  |  |
|  | Zero | |  | 100% |  |  | |  |
|  | accidents Group-wide  each year | |  | of farmers and workers each year with sufficient PPE  for agrochemical use and tobacco harvesting | | | |  |
|  | | | | | | | | |
|  | 2022 Performance Highlights | | | |  |  |  |  |
|  | 6% | |  | 0.19 |  | 99.6% | |  |
|  | reduction in total Group-  wide accidents vs 2021 | |  | Lost Time Incident Rate  (LTIR) vs 0.20 in 2021 |  | farmers and workers in  our Tobacco Supply  Chain1 with sufficient PPE  for tobacco harvesting | |  |
|  | | | | | | | | |
|  | 83 | |  | 82% |  | 99.9% | |  |
|  | Lost Time Incidents vs  95 in 2021 | |  | of our sites achieved zero  accidents in 2022 |  | farmers and workers  Tobacco Supply Chain1  with sufficient PPE for  agrochemical use | |  |
|  |  |  |  |  |  |  |  |  |
|  | GRI Standard(s) | |  | SFDR / PAI Indicators |  | SASB Standard(s) | |  |
|  | GRI 403.1-10 (Inclusive) | |  | S1. , S2., S3., S4., S5. |  | FB-AG-320a.1 | |  |
|  | | | | | | | | |
|  | Relevant Policies and Standards | | | |  |  |  |  |
|  | –Group Health and Safety  –Supplier Code of Conduct (SCoC)  –Operational Standard for PPE  Notes:  1.'Tobacco Supply Chain' refers to the tobacco supplied by our directly  contracted farmers and those of our strategic third party suppliers, who  participate in our annual Thrive assessment, representing over 80% of the  tobacco purchased by volume in 2022.  2.Reference to 'tobacco supply chain' covers all tobacco used in our  combustibles and THP products. | | | | |  | Find out more:  Refer to the BAT  'Reporting Criteria'  for a  full description of key  terms and definitions:  bat.com/reporting  For more performance  metrics and operational  data refer to the BAT 'ESG  Performance Data Book' :  bat.com/sustainability  reporting |  |

Our Approach

We are committed to providing a safe

working environment for all our employees

and contractors. We also require farmers in

our Tobacco Supply Chain1 to have access

to personal protective equipment (PPE) for

agrochemical use and harvesting.

Why Health and Safety Matters

Providing safe working conditions and

continuing to strive for zero accidents across

the Group supports the wellbeing of our

employees, while enhancing our reputation

as an employer of choice.

Safety risks vary across our business

operations. For example, for our Trade

Marketing & Distribution (TM&D) teams,

the highest risks relate to road traffic

accidents or attacks and assaults from

armed robberies where our goods have a

high street value.

In our Tobacco Supply Chain1, farmers and

workers can be at risk of pesticide

poisoning from handling agrochemicals

when growing tobacco. Green tobacco

sickness (GTS) from handling wet, green

tobacco leaves during harvesting is also

a risk.

Policies and Accountabilities

Our Group Health and Safety Policy is

implemented for application by all Group

companies. It outlines our commitment to

applying the highest international

standards of health and safety for our

employees, as well as third-party personnel

on company premises.

For our suppliers, our Supplier Code of

Conduct (the Code) defines the minimum

standards we expect, including specific

health and safety criteria.

Additionally, our Operational Standard for

PPE in tobacco farming applies to all 81,285

farmers directly contracted by the Group's

own Leaf Operations. It requires all our

directly contracted farmers and their

workers to have access to PPE for

agrochemical use and harvesting.

Training and monitoring must be carried

out for all our contracted farms on PPE,

agrochemical use and GTS. We ask our

third-party leaf suppliers to implement

similar standards in their own operations.

Twice a year, the Board reviews

performance against our health and safety

targets and key performance indicators.

The Board also regularly reviews our

tobacco supply chain2 strategy.

Protecting Health and Safety Across

our Business Operations

Operating in diverse markets - including

some of the world’s most volatile regions -

can be challenging. That is why we have a

well-established approach to protect the

health and safety of our employees and

contractors across the Group.

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92

We track health and safety performance

across all our sites. A dedicated team

analyses the information to identify trends

or high-risk areas that require coordinated

cross-functional action.

Our comprehensive approach is based on

risk management. We then develop

tailored initiatives for specific priorities and

high-risk areas. For example, in

manufacturing, our accident prevention

programme focuses on preventing injuries

when using equipment or machinery.

The result has been a steady reduction in

accidents across the whole Group. Overall,

there was a 6% reduction in reported

incidents in 2022, to 116 (vs 123 in 2021),

which mainly comprised a 10% reduction in

Operations and 3.5% reduction in non-

Operations activities (such as TM&D and

commercial activities). In 2022, 82% of our

sites achieved zero accidents. This

performance was consistent with a

positive downward trend of our global

historical data in this area.

82%

of our operational sites achieved zero

accidents during the year

In TM&D, where there are high risks of road

traffic accidents or attacks and assaults,

we have comprehensive driver safety and

security programmes. This also includes

telematic systems in all our vehicles to

monitor driving behaviour and identify

areas for improvements.

In locations that are high-risk for attacks

and assaults, we constantly assess threats

to ensure appropriate protocols are in

place to keep our people safe. This can

include placing limits on loads carried to

reduce value, strategic route planning to

avoid predictability, and providing security

escorts.

In addition to our official and regular Health

and Safety (H&S) forums, in 2022 we

established a Centre of Excellence (COE)

approach for our top four H&S losses

(attacks and assaults, vehicle-related, slips

and trips and manual handling), with

monthly meetings providing solutions,

guidelines and technical knowledge to the

Group.

Every COE has representatives from all our

Regions and Functions, with the main

objectives of:

–Defining and updating global H&S

guidelines and process standardisation;

and

–Guiding end markets and sharing best

practices.

Our work to develop or upgrade processes,

and organise training and communication

has seen vehicle-related accidents and

attacks and assaults decline over recent

years. In 2022, we recorded an 11%

reduction, compared to 2021.

Sadly, there were four fatalities in 2022:

a contractor in Papua New Guinea;

a contractor in Brazil; an employee in

Mexico; and a member of the public in

South Africa. We deeply regret this loss of

life and the suffering it has caused to

family, friends and colleagues.

For every serious incident or fatality that

occurs, we work with the relevant

authorities on their investigations. These

incidents were investigated by local teams

and reviewed by the regional and global

EHS teams to avoid recurrences. Learnings

and action plans were disseminated across

all regions.

To prevent similar incidents from

happening again, we conduct rigorous

internal investigations to determine the

cause, identify lessons and develop an

action plan.

The Management Board receives details of

any serious incidents and associated

investigations that arise in the context of

Group operations. The Board is also

updated on such incidents and the

implementation of action plans.

Protecting the Occupational

Health and Wellbeing of all Employees

We aim to be among the leaders in

occupational health management. We

focus on identifying hazards, assessing risks

to people’s health at work and introducing

appropriate controls and support.

We also have programmes around the

world that protect and promote health and

wellbeing for employees, their families and

local communities. These include:

–Medical services, health screening,

vaccinations and insurance;

–Mental health support and counselling

services;

–Healthy lifestyle and fitness schemes;

–Family-friendly initiatives, such as flexible

working and help with childcare; and

–Where relevant, targeted programmes to

address significant endemic diseases,

such as HIV and malaria.

Throughout the COVID-19 pandemic, our

digital transformation enabled us to swiftly

shift to remote home working where

needed. In many parts of the world,

including our global headquarters in the UK,

we now have a hybrid working model.

We introduced ‘COVID-19-secure’

workplace measures for employees who

returned to their workplace. These include

regular cleaning and sanitising,

temperature checkpoints and free access

to COVID-19 testing.

We also provide our employees with

regular communications regarding

vaccination programmes and how to

access them. And, in over 25 countries, we

provided direct vaccine support, with

vaccines available on-site or free

transportation to vaccination centres.

Promoting Health and Safety

Throughout our Tobacco Supply

Chain

The main health and safety risks when

growing tobacco relate to exposure to

pesticides, and GTS, which can be

contracted from handling wet green

tobacco leaves during harvesting. However,

both these risks can be minimised with

appropriate use of PPE.

Our operational standard for PPE in

tobacco farming details our mandatory

requirements for 100% access and use of

PPE for contracted farmers and their

workers. This includes technical

specifications for the types of PPE

appropriate for agrochemical use and

harvesting, and for different climates and

conditions.

Our Extension Services team monitor our

contracted farms for compliance with our

standards. Our third-party suppliers are

responsible for monitoring the farmers

they buy tobacco from. In 2022, 99.9% of

our contracted farmers and those

supplying our strategic third-party

suppliers were reported to have sufficient

PPE for agrochemical use and 99.6% for

use when harvesting.

The Group's own Leaf Operations and

strategic third-party suppliers provide

regular training and guidance on how to

use, clean and care for PPE. The training

also covers health and safety best practice

and preventative measures against GTS,

and is supported by ongoing farmer

communications.

Training is also provided on the correct and

safe use, storage and disposal of

agrochemicals to protect the environment

and farmers’ health. During 2022 these

health and safety training sessions reached

325,260 attendants.

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|  |  | Find out about our Group risk factors  related to workplace health and safety  on pages [121](#idbfaa8132f3346799d7e661cfefb6890_1-0-1-22-205275) and [353](#i0c221b5792e54f0ba5d979b9cd12513f_0-0-1-1-371897) |
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93

^ Refer to KPMG Independent Limited Assurance Report on page [96](#id739eb8a094346e4a1dd9989c862058f_20797) for details on selected information.

|  |  |
| --- | --- |
|  |  |
| Underlying Selected Information | Selected Information |
| Consumers of non-combustible products (number of, in millions) | 22.50 |
| Scope 1 CO2e emissions (thousand tonnes) | 308 |
| Scope 2 CO2e emissions (market based) (thousand tonnes) | 113 |
| Scope 2 CO2e emissions (location based) (thousand tonnes) | 356 |
| Scope 1 and Scope 2 CO2e emissions intensity ratio (tonnes per £m revenue) | 15.20 |
| Scope 1 and Scope 2 CO2e emissions intensity ratio (tonnes per EUR m revenue) | 13.00 |
| Total Scope 3 CO2e emissions (thousand tonnes) ^ - for 2021, Scope 3 emissions are reported one year later | 5,243 |
| Total energy consumption (GWh) | 2,344 |
| Energy consumption intensity (GWh per million £ revenue) | 0.08 |
| Energy consumption intensity (GWh per million EUR revenue) | 0.07 |
| Renewable energy consumption (GWh) | 771 |
| Non-Renewable energy consumption (GWh) | 1,574 |
| Waste generated (tonnes) | 125,686 |
| Hazardous waste and radioactive waste generated (tonnes) | 1,753 |
| Total waste recycled (tonnes) | 105,997 |
| Total water withdrawn (million m3) | 3.50 |
| Total water recycled (million m3) | 1.02 |
| Total water discharged (million m3) | 1.66 |
| % of operations sites reported no production process use of priority substances ^ | 100 |
| % operations sites not using priority substances in any on-site ancillary / support processes ^ | 38 |
| Number of operations sites in areas of high-water stress with and without water management policies | 16 / 0 |
| % of sources of wood used by our contracted farmers for curing fuels that are from sustainable sources ^ | 99.9 |
| % of all paper and pulp volume that is certified as sustainably sourced | 94 |
| % of tobacco hectares reported to have appropriate best practice soil and water management plans implemented ^ | 82 |
| % of tobacco farmers reported to grow other crops for food or as additional sources of income ^ | 92.8 |
| % of farms monitored for child labour ^ | 99.99 |
| % of farms with incidents of child labour identified ^ | 0.38 |
| Number of child labour incidents identified ^ | 942 |
| % of child labour incidents reported as resolved by end of the growing season ^ | 100 |
| % of farms monitored for grievance mechanisms ^ | 100 |
| % of farms reported to have sufficient PPE for agrochemical use ^ | 99.9 |
| % of farms reported to have sufficient PPE for tobacco harvesting ^ | 99.6 |
| H&S - Lost Time Incident Rate (LTIR) | 0.19 |
| H&S - Number of serious injuries (employees) | 22 |
| H&S - Number of serious injuries (contractors) | 11 |
| H&S - Number of fatalities (employees) | 1 |
| H&S - Number of fatalities (contractors) | 2 |
| H&S - Number of fatalities to members of public involving BAT vehicles | 1 |
| % female representation in management roles | 41 |
| % female representation on senior leadership teams | 30 |
| % of key leadership teams with at least a 50% spread of distinct nationalities | 100 |
| Unadjusted gender pay gap (average %) | 24 |
| Incidents of non-compliance with regulations resulting in fine or penalty | 3 |
| Incidents of non-compliance with regulations resulting in a regulatory warning | 2 |
| Number of established SoBC breaches | 84 |
| Number of disciplinary actions taken as a result of established SoBC breaches that resulted in people leaving BAT | 58 |
| Number of established SoBC breaches - relating to workplace and human rights | 33 |
| % of product materials and high-risk indirect service suppliers that have undergone at least one independent  labour audit within a three-year cycle | 36.6 |

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| Strategic Management |  |  |  |  |  |  |  |
| ESG 2022 Assured Metrics  KPMG have conducted independent, limited assurance in accordance with ISAE 3000 over the 2022 ESG 'Selected Information'  listed below, as contained in this Annual Report. KPMG's Independent Limited Assurance Report is provided on page 95. | | | | | | | |

94

Independent Limited Assurance Report

to British American Tobacco p.l.c.

KPMG LLP (“KPMG” or “we”) were engaged by British American Tobacco p.l.c

(“BAT”) to provide limited assurance over the Selected Information described

below for the year ended 31 December 2022.

Our conclusion

Based on the work we have performed and the evidence we have obtained,

nothing has come to our attention that causes us to believe that the Selected

Information on pages [6](#id739eb8a094346e4a1dd9989c862058f_15378) and [80](#id739eb8a094346e4a1dd9989c862058f_17549) marked with a t and listed as 'Assured' on page

[94](#id739eb8a094346e4a1dd9989c862058f_17703) has not been properly prepared, in all material respects, in accordance with

the Reporting Criteria.

This conclusion is to be read in the context of the remainder of this report, in

particular the inherent limitations explained below and this report’s intended

use.

Selected Information

The scope of our work includes only the information included on pages [6](#id739eb8a094346e4a1dd9989c862058f_15378) and [80](#id739eb8a094346e4a1dd9989c862058f_17549)

marked with a t and that listed as 'Assured' on page [94](#id739eb8a094346e4a1dd9989c862058f_17703) (being together 'the

Selected Information') within BAT’s Combined Report (‘the Report’) for the year

ended 31 December 2022.

We have not performed any work, and do not express any conclusion, over any

other information that may be included in the Report or displayed on BAT’s

website for the current year or for previous periods unless otherwise indicated.

Where Selected Information is calculated in arrears or includes periods outside

of the year ended 31 December 2022, this is outlined within the reporting

criteria.

Reporting Criteria

The Reporting Criteria we used to form our judgements are BAT’s Reporting

Guidelines 2022 as set out at www.bat.com/sustainabilityreporting (‘the Reporting

Criteria’). The Selected Information needs to be read together with the

Reporting Criteria.

Inherent limitations

The nature of non-financial information, the absence of a significant body of

established practice on which to draw, and the methods and precision used to

determine non-financial information, allow for different, but acceptable

evaluation and measurement techniques and can result in materially different

measurements, affecting comparability between entities and over time.The

Reporting Criteria has been developed to assist BAT in reporting ESG

information selected by BAT as key KPIs to measure the success of its ESG

strategy. As a result, the Selected Information may not be suitable for another

purpose.

Directors’ responsibilities

The Board of Directors of BAT are responsible for overseeing:

–the designing, operating and maintaining of internal controls relevant to the

preparation and presentation of the Selected Information that is free from

material misstatement, whether due to fraud or error;

–the process of selecting and/or developing objective Reporting Criteria;

–the measurement and reporting of the Selected Information in accordance

with the Reporting Criteria; and

–the contents and statements contained within the Report and the Reporting

Criteria.

Our responsibilities

Our responsibility is to plan and perform our work to obtain limited assurance

about whether the Selected Information has been properly prepared, in all

material respects, in accordance with the Reporting Criteria and to report to

BAT in the form of an independent limited assurance conclusion based on the

work performed and the evidence obtained.

Assurance standards applied

We conducted our work in accordance with International Standard on

Assurance Engagements (UK) 3000 – ‘Assurance Engagements other than

Audits or Reviews of Historical Financial Information’ (‘ISAE (UK) 3000’) issued

by the Financial Reporting Council and, in respect of the greenhouse gas

emissions information included within the Selected Information, in accordance

with International Standard on Assurance Engagements 3410 – ‘Assurance

Engagements on Greenhouse Gas Statements’ (‘ISAE 3410’), issued by the

International Auditing and Assurance Standards Board.

Those standards require that we obtain sufficient, appropriate evidence on

which to base our conclusion.

Independence, professional standards and quality control

We comply with the Institute of Chartered Accountants in England and Wales

(“ICAEW”) Code of Ethics, which includes independence, and other

requirements founded on fundamental principles of integrity, objectivity,

professional competence and due care, confidentiality and professional

behaviour, that are at least as demanding as the applicable provisions of the

IESBA "Code of Ethics”. We apply International Standard on Quality Control

(UK) 1 Quality Control for Firms that Perform Audits and Reviews of Financial

Statements, and Other Assurance and Related Services Engagements and

accordingly we maintain a comprehensive system of quality control including

documented policies and procedures regarding compliance with ethical

requirements, professional standards and applicable legal and regulatory

requirements.

Summary of work performed

A limited assurance engagement involves planning and performing procedures

to obtain sufficient appropriate evidence to obtain a meaningful level of

assurance over the Selected Information as a basis for our limited assurance

conclusion. Planning the engagement involves assessing whether the

Reporting Criteria are suitable for the purposes of our limited assurance

engagement. The procedures selected depend on our judgement, on our

understanding of the Selected Information and other engagement

circumstances, and our consideration of areas where material misstatements

are likely to arise.

The procedures performed included:

–conducting interviews with BAT management to obtain an understanding of

the key processes, systems and controls in place over the preparation of the

Selected Information;

–selected limited substantive testing, including agreeing a selection of the

Selected Information to the corresponding supporting information;

–considering the appropriateness of the carbon conversion factor calculations

and other unit conversion factor calculations used by reference to widely

recognised and established conversion factors;

–reperforming a selection of the carbon conversion factor calculations and

other unit conversion factor calculations;

–performing analytical procedures over the aggregated Selected Information,

including a comparison to the prior period’s amounts having due regard to

changes in business volume and the business portfolio; and

–reading the narrative accompanying the Selected Information in the Report

with regard to the Reporting Criteria, and for consistency with our findings.

The work performed in a limited assurance engagement varies in nature and

timing from, and is less in extent than for, a reasonable assurance engagement.

Consequently, the level of assurance obtained in a limited assurance

engagement is substantially lower than the assurance that would have been

obtained had a reasonable assurance engagement been performed.

For the KPIs marked with a ^ symbol on page [94](#id739eb8a094346e4a1dd9989c862058f_17703), our procedures did not include

physical visits to the farms which provided the source data for the Leaf Data

and Human Rights KPIs and testing the accuracy of the sales volumes in BAT’s

Procurement IT system which were used in calculating Scope 3 CO2e

emissions (thousand tonnes) including the Scope 3 supply chain CO2e

emissions (thousand tonnes) from purchased goods and services. Additionally,

our procedures did not include physical visits to the operational sites which

provided the source data for the Emissions to Water KPIs.

This report’s intended use

This assurance report is made solely to BAT in accordance with the terms of

the engagement contract between us. Those terms permit disclosure to other

parties, solely for the purpose of BAT showing that it has obtained an

independent assurance report in connection with the Selected Information.

We have not considered the interest of any other party in the Selected

Information. To the fullest extent permitted by law, we accept no responsibility

and deny any liability to any party other than BAT for our work, for this

assurance report or for the conclusions we have reached.

George Richards

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

London E14 5GL

08 February 2023

The maintenance and integrity of BAT’s website is the responsibility of the

Directors of BAT; the work carried out by us does not involve consideration of

these matters and, accordingly, we accept no responsibility for any changes

that may have occurred to the reported Selected Information, Reporting

Criteria or Report presented on BAT’s website since the date of our report.

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95

F

## or Shareholders and Investors

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| We have strong  foundations |  | We have a strategy for  accelerated growth |  | We are transforming  our business |  | We are building a  sustainable enterprise  of the future |
|  |  |  |  |  |  |  |
| Founded in 1902 |  | Consumer-Centric |  | Investing |  | Brands With Purpose |
| and first listed on the London  Stock Exchange in 1912 – a  constituent of the FTSE 100  since its creation in 1984 |  | multi-category strategy  focused on being a high-  growth, consumer goods  business |  | in New Category products and  expanding our portfolio  ‘beyond nicotine’ |  | to satisfy the evolving  preferences of adult  consumers |
|  |  |  |  |  |  |  |
| 6.0% |  | Driving Value |  | 14.8% of Group  Revenues |  | 21 Years |
| dividend growth, to 230.9p per  share |  | from our combustibles  business to generate the funds  for investment |  | in Non-Combustible, reduced-  risk products\*† |  | in the Dow Jones Sustainability  Indices, as well as open and  transparent ESG reporting  aligned to best practice  frameworks |
|  |  |  |  |  |  |  |
| 200+ |  | Accelerated growth |  | £629m Savings |  | Sustainability |
| brands in our portfolio  specifically positioned in each  target consumer segment |  | in New Categories supported  by continuous investment |  | in 2022 (annualised), with £1.9  billion realised over 3 years, in  excess of original £1.0 billion  target |  | front and centre in all that we  do, focused on reducing the  health impact of our business,  underpinned by excellence  across our ESG priorities |
|  |  |  |  |  |  |  |
| Long History |  | Simplifying |  | New Capabilities |  | 60 Markets |
| of delivering returns and cash  flow to our shareholders with  £6.9 billion paid in 2022 |  | the business to create the  Enterprise of the Future |  | combined with our existing  skills and experience are  helping to radically redefine  our organisation |  | where our New Category  products are available |

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|  |  | Notes:  \*    Based on the weight of evidence and  assuming a complete switch from  cigarette smoking. These products  are not risk free and are addictive.  †    Our Vapour product Vuse (including  Alto, Solo, Ciro and Vibe), and certain  products, including Velo, Grizzly,  Kodiak, and Camel Snus, which are  sold in the U.S., are subject to FDA  regulation and no reduced-risk  claims will be made as to these  products without agency clearance. |
|  | Our 2022 full year performance  demonstrates that we are delivering  and transforming at speed, driven by  the strength of our multi-category  portfolio of global brands.  Tadeu Marroco  Finance and Transformation Director |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| A Better Tomorrow™  For Shareholders and Investors | | | | | | | |

97

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| --- | --- | --- |
|  |  |  |
|  | Highlights |  |
|  | Revenue up  +7.7% |  |
|  | New Categories revenue growth and  strong pricing in combustibles  supported by currency tailwinds, with  revenue up 7.7% |  |
|  |  |  |
|  | Profit from Operations  +2.8% |  |
|  | Profit from operations was up 2.8%. On  an adjusted, constant currency basis,  profit from operations grew 4.3%, with  an improvement in the financial  performance of New Categories as  losses reduced @by 62%@ |  |
|  |  |  |
|  | Diluted EPS down  -1.3% |  |
|  | Adjusted diluted EPS up 5.8%  at constant rates of exchange |  |
|  |  |  |
|  | @Deleveraging ratios  2.89x |  |
|  | Deleveraging ratio improved -0.10x to  2.89x, driven by strong cash generation  despite devaluation of sterling against  US dollar impacting borrowings@ |  |
|  |  |  |
|  | Dividend per share  230.9p |  |
|  | Dividend per share up 6.0% at 230.9p |  |
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Non-GAAP Measures

In the reporting of financial information, the

Group uses certain measures that are not

defined by IFRS, the Generally Accepted

Accounting Principles (GAAP) under which the

Group reports. The Group believes that these

additional measures, which are used internally,

are useful to users of the financial information

in helping them understand the underlying

business performance.

The principal non-GAAP measures which

the Group uses are revenue at constant

rates of exchange, revenue from New

Categories, Category contribution,

adjusted profit from operations, adjusted

diluted earnings per share, adjusted net

finance costs, adjusted taxation,

@operating cash flow conversion ratio,

adjusted cash generated from operations

and free cash flow (before and after)

dividends@. Adjusting items are significant

items in profit from operations, net finance

costs, taxation, the Group’s share of the

post-tax results of associates and joint

ventures and cash flow which individually

or, if of a similar type, in aggregate, are

relevant to an understanding of the Group’s

underlying financial performance.

As an additional measure to indicate the

results of the Group before the impact of

exchange rates on the Group’s results, the

movement in revenue from New

Categories, Category contribution,

adjusted profit from operations, adjusted

net finance costs and adjusted diluted

earnings per share are all shown at

constant rates of exchange.

These non-GAAP measures are explained,

defined and reconciled from the most

comparable GAAP metric on pages [325](#i49422b2b471646dabd086f354630c16e_68525) to [337](#i49422b2b471646dabd086f354630c16e_68557)

and note 2 in the Notes on the Accounts.

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|  | The discussion of 2020 results that are  not necessary to an understanding of  the Group’s financial condition,  changes in financial condition and  results of operations is excluded from  this Financial Review in accordance  with applicable US securities laws.  Discussion of such 2020 metrics is  contained in the Group’s Annual  Report on Form 20-F 2021, which is  available at bat.com/annualreport and  has been filed with the SEC.  Information contained in pages 34 to  43, pages 75 to the first column on  page 82 and from the heading  ‘Retirement benefit schemes’ on page  82 to page 83 of the Annual Report on  Form 20-F 2021 are accordingly  incorporated by reference into this  Annual Report on Form 20-F 2022 only  to the extent such information  pertains to the Group’s financial  condition and results of operations for  the fiscal year ended 31 December 2020. |  |
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|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Review |  |  |  |  |  |  |  |
| Financial Performance Summary | | | | | | | |

98

Revenue

In 2022, revenue was £27,655 million (up

7.7%), with 2021 marginally lower (down

0.4%) than 2020 at £25,684 million. New

Categories continued to perform well in

both years with revenue up 40.9% in 2022

and 42.4% in 2021. Despite continued

robust price/mix (of 4.6% in 2022,

compared to 4.3% in 2021), revenue from

combustibles was down 0.6% in 2022. This

decline was partly due to the full year

impact of the sale of the Group's Iranian

business (which completed midway

through 2021), with the prior year also

including an estimated £200 million benefit

from trade inventory movements in the

U.S., mainly linked to the timing of price

increases and uncertainty about a potential

excise increase, and which partially

unwound in 2022. Cigarette volume was

down 5.1% in 2022 at 605 billion sticks

(2021: 0.1% decline to 637 billion sticks).

Translational foreign exchange impacted

both years, being a tailwind of 5.4% in 2022

and a headwind of 7.3% in 2021, due to the

relative movement of sterling. Excluding

the impact of currency, revenue at

constant rates of exchange increased 2.3%

(2021: up 6.9%).

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| Reconciliation of revenue to revenue at constant rates | | | | | | | |
|  | 2022 | |  | 2021 | |  | 2020 |
|  | £m | Change %  (vs 2021) |  | £m | Change %  (vs 2020) |  | £m |
| Revenue | 27,655 | +7.7% |  | 25,684 | -0.4% |  | 25,776 |
| Impact of exchange | (1,382) |  |  | 1,877 |  |  |  |
| Revenue at constant rates | 26,273 | +2.3% |  | 27,561 | +6.9% |  | 25,776 |

Profit From Operations

Profit from operations was up 2.8% to £10,523

million compared to 2021, itself an increase of

2.7% to £10,234 million on 2020. 2022 was

supported by a translational foreign exchange

tailwind (2021: headwind) due to the relative

movement of sterling compared to the

Group’s operating currencies, including the US

dollar. During 2022, Project Quantum (the

Group’s restructuring and efficiency

programme) delivered incremental annualised

savings of £629 million, having delivered £595

million in 2021.

Raw materials and other consumables

costs increased 5.3% to £4,781 million in

2022, following a decline of 0.9% to £4,542

million in 2021. The results in both years are

impacted by translational foreign exchange

(a headwind in 2022, and a tailwind in 2021).

Both years were also negatively impacted

by a transactional foreign exchange

headwind of 1.5% in 2022 and 1.7% in 2021,

and the impact of underlying inflation on

costs, although this was partly offset by

the Group's continued drive for operational

savings.

Employee benefit costs increased 9.4% to

£2,972 million (2021: down 1.0% to £2,717

million). While the reduction in 2021 was

partly due to a translational foreign

exchange tailwind, this was a headwind in

2022 due to the relative weakness of

sterling. Furthermore, in 2022, the Group

incurred higher charges in respect of

redundancies related to Quantum.

Depreciation, amortisation and

impairment costs increased by £229

million to £1,305 million in 2022 compared

to a decrease of £374 million to £1,076

million in 2021. This includes the

amortisation and impairment charges of

£317 million (2021: £306 million) related to

the trademarks and similar intangibles

capitalised following recent acquisitions.

The higher charge in 2022 was largely in

respect of Quantum (recognised as a non-

cash adjusting item) of £220 million which

included impairment of assets as part of

the factory closures announced in the U.S.,

Singapore and Switzerland. In 2021, the

charge included goodwill impairment

charges of £54 million in Peru and £3

million following the exit from Myanmar.

|  |
| --- |
|  |
| Revenue  (£m) |
| £27,655m |
| +7.7% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| +7.7% |
| -0.4% |

Definition: Revenue recognised, net of duty,

excise and other taxes.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
| l | IFRS GAAP | l | KPI | l | NON-GAAP |
|  |  |  |  |  |  |

|  |
| --- |
|  |
| Change in revenue at constant rates  (%) |
| +2.3% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| +2.3% |
| +6.9% |

Definition: Change in revenue before the impact of

fluctuations in foreign exchange rates.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
| l | IFRS GAAP | l | KPI | l | NON-GAAP |
|  |  |  |  |  |  |

|  |
| --- |
|  |
| Profit from operations  (£m) |
| £10,523m |
| +2.8% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| +2.8% |
| +2.7% |

Definition: Profit for the year before the impact of

net finance costs/income, share of post-tax results

of associates and joint ventures and taxation on

ordinary activities.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
| l | IFRS GAAP | l | KPI | l | NON-GAAP |
|  |  |  |  |  |  |

|  |
| --- |
|  |
| Change in adjusted profit from  operations at constant rates (%) |
| +4.3% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| +4.3% |
| +5.2% |

Definition: Change in profit from operations before

the impact of adjusting items and the impact of

fluctuations in foreign exchange rates.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
| l | IFRS GAAP | l | KPI | l | NON-GAAP |
|  |  |  |  |  |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

99

Expenditure on research and

development was £323 million in 2022

(2021: £304 million) with a focus on

products that could potentially reduce the

risk associated with smoking conventional

cigarettes.

Other operating income increased by

£526 million to £722 million (2021: £196

million), largely due to the resolution of the

Brazilian VAT on social contributions claims

in the Group's favour, as the Group

recognised gross income of £472 million,

which has been included within adjusting

items.

Other operating expenses increased by

£1,550 million to £9,018 million (2021:

decrease of £199 million to £7,468 million).

The Group continued to invest in New

Categories, maintaining the gross

investment in line with 2021, itself an

increase on 2020 of £377 million, in part

funded by the efficiencies delivered by

Quantum.

Adjusting items included within profit from

operations totalled £1,885 million in 2022

(2021: £916 million). These related to:

–trademark amortisation and impairment

(2022: £285 million; 2021: £306 million);

–other litigation costs of £170 million (2021:

£80 million) which in 2022 was mainly in

respect of U.S. litigation costs including

Engle progeny. In 2021, the Group

recognised a net charge from

settlements in Turkey and South Korea of

£26 million;

–restructuring and integration costs of

£771 million (2021: £150 million) largely

related to Quantum which will simplify

the business and create a more efficient

and agile organisation to support the

growth of New Categories;

–charges of £612 million in respect of the

proposed sale of the Group's operations

in Russia and Belarus, with the assets

and liabilities classified as held for sale at

31 December 2022. In 2021, the Group

sold its operations in Iran recognising a

charge of £358 million, largely in respect

of the write-off of certain assets and the

reclassification, from reserves to the

income statement, of foreign exchange;

–a charge of £450 million, in 2022,

recognised in respect of the

investigations by the DOJ and OFAC into

alleged historical breaches of sanctions;

–a charge of £79 million (related to the

conclusion of the investigation into

alleged violations of the Nigerian

Competition and Consumer Protection

Act and National Tobacco Control Act);

–a credit of £460 million, in 2022, related

to the calculation of VAT on social

contributions in Brazil; and

–a credit, in 2022, of £16 million (2021:

credit of £35 million) following the partial

buy-out of the pension fund in the U.S.

In 2021, the Group also recognised charges

in respect of the impairment of goodwill of

£57 million (related to Peru and Myanmar)

and a credit of £59 million as an accrual

related to the Reynolds American

dissenting shareholders was released on

successful conclusion of that complaint.

Adjusted profit from operations is the

Group’s profit from operations before

adjusting items referred to above.

Adjusted profit from operations increased by

11.3% to £12,408 million, partly driven by the

foreign exchange tailwind. On a constant

currency basis this would have been an

increase of 4.3%. In 2021, adjusted profit from

operations fell 1.9% to £11,150 million, being an

increase of 5.2% on a constant currency basis.

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
| Analysis of profit from operations, net finance costs and results from associates and joint ventures | | | | | | | | | |
|  | 2022 | | | | |  | 2021 | | |
|  | Reported  £m | Adjusting  items  £m | Adjusted  £m | Impact of  exchange  £m | Adjusted  at CC  £m |  | Reported  £m | Adjusting  items  £m | Adjusted  £m |
| Profit from operations |  |  |  |  |  |  |  |  |  |
| U.S. | 6,205 | 630 | 6,835 | (740) | 6,095 |  | 5,566 | 321 | 5,887 |
| AmSSA | 2,022 | (280) | 1,742 | (83) | 1,659 |  | 1,496 | 94 | 1,590 |
| Europe | 1,270 | 812 | 2,082 | 21 | 2,103 |  | 1,885 | 71 | 1,956 |
| APME | 1,026 | 723 | 1,749 | 20 | 1,769 |  | 1,287 | 430 | 1,717 |
| Total regions | 10,523 | 1,885 | 12,408 | (782) | 11,626 |  | 10,234 | 916 | 11,150 |
| Net finance (costs)/income | (1,641) | 34 | (1,607) | 140 | (1,467) |  | (1,486) | 55 | (1,431) |
| Associates and joint ventures | 442 | 92 | 534 | (24) | 510 |  | 415 | 12 | 427 |
| Profit before tax | 9,324 | 2,011 | 11,335 | (666) | 10,669 |  | 9,163 | 983 | 10,146 |

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
| Analysis of profit from operations, net finance costs and results from associates and joint ventures | | | | | | | | | |
|  | 2021 | | | | |  | 2020 | | |
|  | Reported  £m | Adjusting  items  £m | Adjusted  £m | Impact of  exchange  £m | Adjusted  at CC  £m |  | Reported  £m | Adjusting  items  £m | Adjusted  £m |
| Profit from operations |  |  |  |  |  |  |  |  |  |
| U.S. | 5,566 | 321 | 5,887 | 456 | 6,343 |  | 4,975 | 809 | 5,784 |
| AmSSA | 1,496 | 94 | 1,590 | 98 | 1,688 |  | 1,553 | 65 | 1,618 |
| Europe | 1,885 | 71 | 1,956 | 132 | 2,088 |  | 1,962 | 148 | 2,110 |
| APME | 1,287 | 430 | 1,717 | 116 | 1,833 |  | 1,472 | 381 | 1,853 |
| Total regions | 10,234 | 916 | 11,150 | 802 | 11,952 |  | 9,962 | 1,403 | 11,365 |
| Net finance (costs)/income | (1,486) | 55 | (1,431) | (89) | (1,520) |  | (1,745) | 153 | (1,592) |
| Associates and joint ventures | 415 | 12 | 427 | 29 | 456 |  | 455 | (13) | 442 |
| Profit before tax | 9,163 | 983 | 10,146 | 742 | 10,888 |  | 8,672 | 1,543 | 10,215 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Review |  |  |  |  |  |  |  |
| Financial Performance Summary  Continued | | | | | | | |

100

Operating Margin

Operating margin in 2022 decreased by 170

bps to 38.1% due to the higher one-off

charges related to the Group's proposed

transfer of the Russian and Belarusian

businesses and charges related to

Quantum and the Nigerian investigations

and to the investigations by the DOJ and

OFAC into alleged historical breaches of

sanctions. This was partly offset by the

reduction in losses from New Categories

and the credit in respect of the calculation

of VAT on social contributions in Brazil. In

2021, operating margin was 39.8%, an

increase of 120 bps which was largely

driven by lower charges in respect of items

such as trademark amortisation, goodwill

impairment, litigation and Quantum in

2021, despite the impact of the sale of the

Group's Iranian business described earlier.

These are described in notes 5, 6 and 7 in

the Notes on the Accounts.

In 2022, adjusted operating margin

increased 150 bps to 44.9%, compared to a

decline of 70 bps in 2021 (to 43.4%). This

was largely driven by the reduction in

losses from New Categories as these

products improved their financial

contribution compared to the prior year

and the savings realised through Quantum.

Net Finance Costs

In 2022, net finance costs were £1,641

million, an increase of £155 million on 2021

which, at £1,486 million, were £259 million

lower than 2020.

The movement in 2022 was mainly due to

the impact of translational foreign

exchange due to the weakness of sterling

compared to the US dollar. Also in 2022,

interest expense increased, as debt

issuances in the year were at higher

interest rates than those maturing,

although this was partly offset by higher

interest income, driven by higher interest

rates on local deposits and an increase in

interest income in Canada due to the cash

build up in that market.

In 2021, the Group issued perpetual hybrid

bonds totalling €2 billion, recognised, in line

with IAS 32 Financial Instruments, as

equity. Interest on such instruments is

recognised in reserves rather than as a

charge to the income statement in net

finance costs. Accordingly, in 2022, in line

with IAS 33 Earnings Per Share, £49 million

(2021: £12 million) has been recognised as a

deduction from earnings similar to non-

controlling interests.

The reduction in 2021 was also driven by

charges incurred in 2020 as the Group

derisked the future financing requirements

through the early repurchase of certain

bonds, incurring charges that did not repeat.

Before adjusting items in respect of the

Franked Investment Income Group

Litigation Order (FII GLO), as discussed on

page [221](#i602b824e15fa4154b0870999f7f2b548_30590) (£33 million; 2021: £20 million),

interest on a settlement in Turkey in 2021

(£11 million) and the impact of translational

foreign exchange in both years, adjusted

net finance costs were 2.5% higher in 2022

and 4.5% lower in 2021. The Group’s

average cost of debt in 2022 was 4.0%,

compared to 3.5% in 2021.

The Group has debt maturities of around

£4 billion annually in the next two years.

Due to higher interest rates, net finance

costs are expected to increase as debts are

refinanced.

Associates and Joint Ventures

Associates largely comprised the Group’s

shareholding in its Indian associate, ITC.

The Group’s share of post-tax results of

associates and joint ventures, included at

the pre-tax level under IFRS, increased

from £415 million to £442 million in 2022.

This follows a decline in 2021 of 8.8% (from

£455 million in 2020). The movements are

largely due to the economic recovery in

India in 2022 from COVID-19 which led to

difficult trading conditions in 2021.

Included in the results for 2022 and 2021

are adjusting items, which included a

deemed loss of £3 million in 2022 (2021: £6

million deemed gain), arising on the

deemed disposal of part of the Group’s

shareholding in ITC (due to issuances of

ordinary shares under the ITC Employee

Share Option Scheme).

In both 2022 and 2021, the Group impaired

its investments in Yemen, recognising a

charge of £18 million in 2022 and £18 million

charge in 2021. Also, in 2022, due to the

volatility in global cannabis stock prices, the

Group recognised an impairment charge of

£59 million related to the Group's

investment in Organigram Holdings Inc.

Excluding such adjusting items and the

impact of translational foreign exchange,

the Group’s share of associates and joint

ventures on an adjusted, constant currency

basis increased 19.6% in 2022, to £510

million. In 2021, this was an increase of 3.3%

on 2020.

|  |
| --- |
|  |
| Operating margin  (%) |
| 38.1% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| 38.1% |
| 39.8% |

Definition: Profit from operations as a percentage

of revenue.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
| l | IFRS GAAP | l | KPI | l | NON-GAAP |
|  |  |  |  |  |  |

|  |
| --- |
|  |
| Adjusted operating margin  (%) |
| 44.9% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| 44.9% |
| 43.4% |

Definition: Adjusted profit from operations

as a percentage of revenue.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
| l | IFRS GAAP | l | KPI | l | NON-GAAP |
|  |  |  |  |  |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

101

Tax

In 2022, the tax charge in the income

statement was £2,478 million, compared to

£2,189 million in 2021 and £2,108 million in

2020.

The effective tax rates in the income

statement are therefore a charge of 26.6%

in 2022, 23.9% in 2021 and 24.3% in 2020.

These are also affected by the inclusion of

adjusting items described earlier and the

associates and joint ventures’ post-tax

profit in the Group’s pre-tax results.

Excluding these items, the underlying tax

rate for subsidiaries was 24.8% in 2022,

24.7% in 2021 and 24.9% in 2020. The

marginal increase in the underlying tax rate

in 2022 largely reflects the corporate tax

rate rises in Sri Lanka and Pakistan, while

the decrease in 2021 largely reflects the

prior and current year tax reclaims in Brazil

together with mix of profits.

See the section Non-GAAP measures

on page [332](#i49422b2b471646dabd086f354630c16e_68477) for the computation of

underlying tax rates for the periods

presented.

Tax strategy

The Group’s global tax strategy is reviewed

regularly by the Board. The operation of the

strategy is managed by the Finance and

Transformation Director and Group Head of

Tax with the Group’s tax position reported

to the Audit Committee on a regular basis.

The Board considers tax risks that may

arise as a result of our business operations.

In summary, the strategy includes:

–complying with all applicable laws and

regulations in countries in which we

operate;

–being open and transparent with tax

authorities and operating to build mature

professional relationships;

–supporting the business strategy of

the Group by undertaking efficient

management of our tax affairs in line

with the Group’s commercial activity;

–transacting on an arm’s-length basis

for exchanges of goods and services

between companies within the Group;

and

–engaging in pro-active discussions with

tax authorities on occasions of differing

legal interpretation.

Where resolution is not possible, tax

disputes may proceed to litigation. The

Group seeks to establish strong technical

tax positions.

Where legislative uncertainty exists,

resulting in differing interpretations, the

Group seeks to establish that its position

would be more likely than not to prevail.

Transactions between Group subsidiaries

are conducted on arm’s-length terms in

accordance with appropriate transfer

pricing rules and OECD principles.

The tax strategy outlined above is

applicable to all Group companies, including

the UK Group companies. Reference to tax

authorities includes HMRC.

The publication of this strategy is

considered to constitute compliance with

the duty under paragraph 16(2) Schedule

19 Part 2 of the UK Finance Act 2016.

The taxation on ordinary activities was a

charge of £2.5 billion in 2022, £2.2 billion in

2021 and £2.1 billion in 2020. Corporation

Tax paid (due to the timing of Corporation

Tax instalment payments which straddle

different financial years) was £2.5 billion

in 2022, £2.3 billion in 2021 and £2.1 billion

in 2020.

Our tax footprint extends beyond

Corporation Tax, including significant

payment of employment taxes and other

indirect taxes, including customs and

import duties. The Group also collects

taxes on behalf of governments (including

tobacco excise, employee taxes, VAT and

other sales taxes). The total tax paid in

2022 of £40.4 billion (2021: £40.5 billion,

2020: £41.1 billion) therefore consists of

both taxes borne and taxes collected as

shown in the table provided.

In addition to the major taxes, there are

a host of other taxes the Group bears and

collects such as transport taxes, energy

and environmental taxes, and banking

and insurance taxes.

The movements in deferred tax, taken

through other comprehensive income,

mainly relate to the change in the valuation

of retirement benefits in the year, as

disclosed in note 16 in the Notes on

the Accounts.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Deferred tax asset/(liability) | | | |
|  | 2022  £m | 2021  £m | 2020  £m |
| Opening balance | (15,851) | (15,780) | (16,626) |
| Difference on exchange | (2,007) | (148) | 506 |
| Other credits/(charges) to the income  statement | 174 | 29 | 184 |
| Changes in tax rates | 66 | 158 | 133 |
| Other (charges)/credits to other  comprehensive income | (106) | (110) | 23 |
| Net reclassification as held-for-sale | (22) | — | — |
| Closing balance | (17,746) | (15,851) | (15,780) |

|  |
| --- |
|  |
| Major taxes paid 2022  (£bn) |
| £40.4bn |
|  |

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | 2022  £bn | 2021  £bn |
|  |  |  |  |
|  | Tobacco excise, net VAT and  other sales taxes (collected) | 36.8 | 37.2 |
|  |  |  |
|  |  |  |  |
|  |  |  |  |
|  | Corporation Tax  (borne) | 2.5 | 2.3 |
|  |  |  |
|  |  |  |  |
|  |  |  |  |
|  | Customs and import duties  (borne) | 0.3 | 0.3 |
|  |  |  |
|  |  |  |  |
|  |  |  |  |
|  | Taxes by employees paid  (collected) | 0.6 | 0.5 |
|  |  |  |
|  |  |  |  |
|  |  |  |  |
|  | Employment taxes  (borne) | 0.2 | 0.2 |
|  |  |  |
|  |  |  |  |
|  |  |  |  |
| Total | | 40.4 | 40.5 |
|  |  |  |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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102

Earnings Per Share

Profit for the year was £6,846 million, a

1.8% decrease compared to £6,974 million

in 2021 (itself an increase of 6.2% on 2020).

A reduction in losses from New Categories

underpinned a good operational

performance in 2022, which was further

enhanced by translational foreign exchange

tailwinds. However, this was offset by

higher adjusting charges (due to Russia

and Belarus and charges related to Nigeria

and the DOJ and OFAC investigations into

alleged historical breaches of sanctions).

In 2022, the Group undertook a £2 billion

share repurchase programme, reducing

the number of shares (for the purposes of

the EPS calculation) by 1.3%. After

accounting for the movement in non-

controlling interests in the year, basic

earnings per share were 1.2% lower at

293.3p (2021: 296.9p; 2020: 280.0p). After

accounting for the dilutive effect

of employee share schemes, diluted

earnings per share were 291.9p, 1.3% lower

than 2021 (2021: 295.6p; 2020: 278.9p).

Earnings per share are impacted by the

adjusting items discussed earlier. Adjusted

diluted EPS, as calculated in note 11 in the

Notes on the Accounts, was up against the

prior year by 12.9% at 371.4p, with 2021

behind 2020 by 0.8% at 329.0p. Adjusted

diluted EPS at constant rates would have

been 5.8% ahead of 2021 at 348.1p, with

2021 up 6.6% against 2020.

Dividends

The Group pays its dividends to

shareholders over four quarterly interim

dividends. Quarterly dividends provide

shareholders with a more regular flow of

dividend income and allow the Company

to spread its substantial dividend

payments more evenly over the year,

aligning better with the cash flow

generation of the Group and so enable

the Company to fund the payments more

efficiently. The Board seeks to reward

shareholders with an increase in dividend,

by reference to 65% of adjusted diluted

EPS over the long term.

The Board has declared an interim dividend

of 230.90p per ordinary share of 25p,

payable in four equal quarterly instalments

of 57.72p per ordinary share in May 2023,

August 2023, November 2023 and February

2024. This represents an increase of 6.0%

on 2021 (2021: 217.8p per share, up 1.0%)

and a payout ratio, on 2022 adjusted diluted

earnings per share, of 62.2% (2021: 66.2%).

The quarterly dividends will be paid to

shareholders registered on either the UK

main register or the South Africa branch

register and to ADS holders, each on the

applicable record dates.

Under IFRS, the dividend is recognised in

the year that it is approved by shareholders

or, if declared as an interim dividend, by

Directors, in the period that it is paid.

The cash flow, prepared in accordance

with IFRS, reflects the total cash paid in the

period. Further details of the total amounts

of dividends paid in 2022 and 2021 (with

2020 comparatives) are given in note 22

in the Notes on the Accounts.

Dividends are declared and payable in

sterling except for those shareholders on

the branch register in South Africa, where

dividends are payable in rand. The

equivalent dividends receivable by holders

of ADSs in US dollars are calculated based

on the exchange rate on the applicable

payment date.

Further details of the quarterly dividends and

key dates are set out under 'Shareholder

information’ on pages [376](#i825f934e76db403c8fbb29df8799ed0b_2869) and [377](#i825f934e76db403c8fbb29df8799ed0b_2870).

|  |
| --- |
|  |
| Diluted earnings per share  (p) |
| 291.9p |
| -1.3% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| -1.3% |
| +6.0% |

Definition: Profit attributable to owners of BAT

p.l.c. over weighted average number of shares

outstanding, including the effects of all dilutive

potential ordinary shares.

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| l | IFRS GAAP | l | KPI | l | NON-GAAP |
|  |  |  |  |  |  |

|  |
| --- |
|  |
| Change in adjusted diluted EPS  (%) |
| +12.9% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| +12.9% |
| -0.8% |

Definition: Change in diluted earnings per share

before the impact of adjusting items.

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| --- | --- | --- | --- | --- | --- |
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|  |  |  |  |  |  |

|  |
| --- |
|  |
| Change in adjusted diluted EPS at  constant rates (%) |
| +5.8% |

|  |
| --- |
|  |
| 2022 |
| 2021 |

|  |
| --- |
|  |
| +5.8% |
| +6.6% |

Definition: Change in diluted earnings per share

before the impact of adjusting items and the

impact of fluctuations in foreign exchange rates.

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103

Treasury, Liquidity

and Capital Structure

The Treasury Function is responsible for

raising finance for the Group and managing

the Group’s cash resources and the

financial risks arising from underlying

operations. Clear parameters have been

established, including levels of authority,

on the type and use of financial

instruments to manage the financial risks

facing the Group. Such instruments are

only used if they relate to an underlying

exposure; speculative transactions are

expressly forbidden under the Group’s

treasury policy. All these activities are

carried out under defined policies,

procedures and limits, reviewed and

approved by the Board, delegating

oversight to the Finance and

Transformation Director and Treasury

Function. See note 26 in the Notes on the

Accounts for further detail.

It is the policy of the Group to maximise

financial flexibility and minimise refinancing

risk by issuing debt with a range of

maturities, generally matching the

projected cash flows of the Group and

obtaining this financing from a wide range

of sources. The Group targets an average

centrally managed debt maturity of at least

five years of which no more than 20%

matures in a single rolling year. As at 31

December 2022, the average centrally

managed debt maturity was 9.9 years

(2021: 10.1 years) with the highest

proportion maturing in a single rolling

12-month period being 18.6% (2021: 18.6%).

In order to manage its interest rate risk,

the Group maintains both floating rate

and fixed rate debt. The Group sets targets

(within overall guidelines) for the desired

ratio of floating to fixed rate debt on a net

basis (at least 50% fixed on a net basis in

the short to medium term). The interest

rate profile of liquid assets included in net

debt are considered to offset floating rate

debt and are taken into account in

determining the net interest rate exposure.

At 31 December 2022, the relevant ratios of

floating to fixed rate borrowings after the

impact of derivatives were 12:88 (2021:

18:82). On a net debt basis, after offsetting

liquid assets, the relevant ratios of floating

to fixed rate borrowings were 3:97 (2021:

10:90). Excluding cash and other liquid

assets in Canada, which are subject to

certain restrictions under Companies'

Creditors Arrangement Act (CCAA)

protection, the ratios of floating to fixed

rate borrowings were 7:93 (2021: 13:87).

As part of the management of liquidity,

funding and interest rate risk, the Group

regularly evaluates market conditions and

may enter into transactions, from time

to time, to repurchase outstanding debt,

pursuant to open market purchases, tender

offers or other means.

The Group continues to maintain

investment‑grade credit ratings\*, with

ratings from Baa2 (stable outlook)/BBB+

(negative outlook), respectively, @with a

medium-term rating target of Baa1/BBB+@.

The strength of the ratings has

underpinned debt issuance and the Group

is confident of its ability to successfully

access the debt capital markets.

The Group is party to the ISDA fallback

protocol and in January 2022, it

automatically replaced GBP LIBOR with an

economically equivalent interest rate

referencing SONIA for derivatives on their

reset date. For further information please

refer to note 26 in the Notes on the

Accounts.

Available facilities

The Group maintains a £25 billion Euro

Medium Term Note (EMTN) programme,

and U.S. (US$4 billion) and European (£3

billion) commercial paper programmes to

accommodate the liquidity needs of the

Group. At 31 December 2022, there was

£27 million commercial paper outstanding

(2021: £269 million outstanding). Cash

flows relating to commercial paper that

have maturity periods of three months or

less are presented on a net basis in the

Group’s cash flow statement.

The Group’s main bank facility is a

syndicated £5.7 billion committed revolving

credit facility. This facility was undrawn at

31 December 2022 (31 December 2021:

undrawn). In 2022, the Group exercised the

second of the one-year extension options

in February 2022. Therefore, the

£2.85 billion 364-day tranche was extended

to March 2023 at the reduced amount of

£2.7 billion and £2.5 billion of the five-year

tranche was extended from March 2026 to

March 2027 (with £3.0 billion of this

tranche remaining available until March

2025 and £2.85 billion remaining available

from March 2025 to March 2026). The

Group expects to refinance the £2.7 billion

364-day tranche in the first half of 2023.

During 2022, the Group extended short-

term bilateral facilities totalling £3 billion

from March to December 2023, some with

extension options to extend for further

periods. As at 31 December 2022, £875

million was drawn on a short-term basis.

Note:

\*A credit rating is not a recommendation to buy, sell or

hold securities. A credit rating may be subject to

withdrawal or revision at any time. Each rating should be

evaluated separately of any other rating.

Cash flows relating to bilateral facilities

that have maturity periods of three months

or less are presented on a net basis in the

Group’s cash flow statement.

Following the initial filing in 2019, the

Group's shelf registration statement on

Form F-3 was renewed with the SEC in

2022, pursuant to which B.A.T Capital

Corporation, BAT p.l.c. and B.A.T.

International Finance p.l.c. may issue debt

securities guaranteed by certain members

of the Group from time to time. This forms

part of the Group’s strategy to ensure

flexible and agile access to capital markets

and the registration statement is initially

valid for three years.

Use of facilities

These facilities ensure that the Group has

access to funding to supplement the cash

available or generated by the business in

the period to meet the operational

(including working capital) and general

corporate requirements including, but

not limited to, the timing of payments in

relation to:

–dividends (2022: £4.9 billion; 2021: £4.9

billion);

–capital expenditure (2022: £0.6 billion;

2021: £0.6 billion);

–MSA in the U.S. (2022: £2.5 billion; 2021:

£2.7 billion);

–refinancing obligations;

–share repurchase programme, as

applicable; and

–other corporate activity, such as litigation

or acquisitions as relevant.

Management believes that the Group has

sufficient working capital for present

requirements, taking into account the

amounts of undrawn borrowing facilities

and levels of cash and cash equivalents,

and the ongoing ability to generate cash.

Issuance, drawdowns and repayment

in the period

–In March 2022, the Group accessed the

US dollar market under its SEC Shelf

Programme, raising a total of

US$2.5 billion across two tranches;

–In May 2022, the Group repaid

€600 million bond at maturity;

–In June 2022, the Group repaid

US$419 million and £180 million bonds at

maturity;

–In August 2022, the Group repaid

US$750 million and US$601 million bonds

at maturity; and

–In October 2022, the Group raised

US$600 million in the US dollar market

under its SEC Shelf Programme.

In 2021, the Group repaid €650 million,

£500 million, €1.1 billion, CHF 400 million

and €500 million bonds at maturity, and a

£1,929 million term loan that had a maturity

date in January 2022.

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104

Also in 2021, the Group issued perpetual

hybrid bonds totalling €2 billion. The

issuance allowed the Group to raise

incremental euro-denominated securities,

which contributed to a more efficient

alignment of the Group’s earnings currency.

It also contributed to the diversification of

the Group’s sources of funding and further

strengthened its capital structure. The

issuance provided the additional benefit

of supporting the deleveraging journey

with the addition of a small benefit to the

credit metrics.

Cash Flow

Net cash generated from

operating activities

Net cash generated from operating

activities increased by 7.0% to £10,394

million in 2022, compared to a decrease of

£69 million to £9,717 million in 2021. In 2022,

translational foreign exchange was a

tailwind, while it was a headwind in 2021

due to the relative movements of sterling

against the Group reporting currencies,

notably the US dollar, in those periods. The

growth in 2022 was also due to an increase

in provisions (partly related to the DOJ and

OFAC investigations) and other non-cash

items, including depreciation, amortisation

and impairment, while payments in respect

of litigation were £231 million in 2022,

compared to £248 million in 2021. 2021 was

also impacted by the timing of MSA

payments in the U.S. and higher tax

payments (mainly in Canada and the U.S.),

compared to 2020.

Net cash used in investing activities

In 2022, net cash used in investing

activities decreased to £705 million (2021:

£1,140 million), partly due to a lower net

outflow of £129 million from short-term

investment products, including treasury

bills (2021: £228 million net outflow). 2021

was negatively impacted by the disposal of

the Group’s operations in Iran (£98 million)

and the purchase of the equity stake in

Organigram. Purchases of property, plant

and equipment were largely in line with

2021, at £523 million (2021: £527 million).

In 2022, the Group invested £630 million in

gross capital expenditure, a decrease of

5.0% on the prior year (2021: £664 million).

This includes purchases of property, plant

and equipment and certain intangibles, and

the investment in the Group’s global

operational infrastructure (including, but

not limited to, the manufacturing network,

trade marketing software and IT systems

and the expansion of our New Categories

portfolio). The Group expects gross capital

expenditure in 2023 of £600 million.

Net cash used in financing activities

Net cash used in financing activities was an

outflow of £8,878 million in 2022 (2021:

£8,749 million outflow), with the outflow in

each year largely driven by:

–dividend payments (2022: £4,915 million,

up 0.2%; 2021: £4,904 million, up 3.4%).

The movement in both years was

affected by the higher dividend per share.

The marginal increase in 2022 was

partially offset by the reduction in

number of shares due to the share buy-

back programme undertaken in 2022;

–purchases of shares under the share buy-

back programme in 2022 of £2,012 million

and

–the net issuance of borrowings (2022:

£223 million; 2021: £3,865 million net

repayment). In 2021, this was partly due

to the issuance of the hybrid bonds

totalling £1,685 million.

In 2022, interest paid increased 7% to

£1,578 million (2021: £1,479 million), driven

by higher interest charges as new debt

issued replaced cheaper debt on maturity.

In 2022, the Group repaid borrowings of

£3.0 billion and issued £3.3 billion of new

borrowings. The Group repaid borrowings

of £4.8 billion in 2021, and issued £1.0 billion

of new borrowings and issued perpetual

hybrid bonds totalling €2 billion (£1.7 billion).

Please refer to note 26 in the Notes

on the Accounts for further details.

@Free cash flow (before and after

dividends paid to shareholders)

Free cash flow (before dividends paid to

shareholders), as defined on page [334](#i49422b2b471646dabd086f354630c16e_93844), was

£8,049 million, up 8.1% on the prior year

(2021: up 2.1% to £7,447 million; 2020:

£7,295 million). The increase in 2022 was

driven by higher net cash generated from

operating activities, while an increase in net

interest paid, up £99 million to £1,588

million, was partly offset by a reduction in

net capital expenditure (2022: £599 million;

2021: £632 million).

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Summary cash flow | | | |
|  | 2022  £m | 2021  £m | 2020  £m |
| Cash generated from operating  activities | 12,537 | 11,678 | 11,567 |
| Dividends received from associates | 394 | 353 | 351 |
| Tax paid | (2,537) | (2,314) | (2,132) |
| Net cash generated from operating  activities | 10,394 | 9,717 | 9,786 |
| Net cash used in investing activities | (705) | (1,140) | (783) |
| Net cash used in financing activities | (8,878) | (8,749) | (7,897) |
| Transferred to held-for-sale | (368) | — | — |
| Differences on exchange | 431 | (253) | (253) |
| (Decrease)/increase in net cash and  cash equivalents in the year | 874 | (425) | 853 |

After payment of dividends to

shareholders, free cash flow was

£3,134 million (2021: £2,543 million;

2020: £2,550 million).@

Cash flow conversion

The conversion of profit from operations

to net cash generated from operating

activities may indicate the Group’s ability

to generate cash from the profits earned.

Net capital expenditure was marginally

lower (2022: £599 million; 2021: £632

million).

Based upon net cash generated from

operating activities, the Group’s conversion

rate was 99% compared to 95% in 2021,

which was largely in line with 2020.

@Operating cash flow conversion ratio

(based upon adjusted profit from

operations) was once again ahead of the

Group's target of 90%, being 100% in 2022

compared to 104% in 2021 and 103% in

2020. The performance in 2022 was driven

by the increase in net cash generated from

operating activities, partly offset by higher

tax paid, leading to a growth of operating

cash flow that was largely in line with

adjusted profit from operations. See page

[333](#i49422b2b471646dabd086f354630c16e_68563) for further information on this

measure.@

Restricted cash

Cash and cash equivalents include

restricted amounts of £1,411 million (2021:

£1,024 million) due to subsidiaries in CCAA

protection (note 32 in the Notes on the

Accounts) as well as £324 million (2021:

£305 million) principally due to exchange

control restrictions.

@Denotes phrase, paragraph or similar that does not form

part of BAT's Annual Report on Form 20-F as filed with

the SEC.

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105

Borrowings and Net Debt

Total borrowings (which includes lease

liabilities) increased to £43,139 million in

2022 (2021: £39,658 million) largely due to

the relative movement of sterling against

other currencies, particularly the US dollar

and the euro. In 2022, this was a headwind

of £3,911 million (2021: £409 million

tailwind).

Total borrowings include £798 million (31

December 2021: £754 million) in respect of

the purchase price adjustments related to

the acquisition of Reynolds American Inc.

As discussed on page [104](#i38beb0f59f474b7e83e59155ae834f98_151201), the Group

remains confident about its ability to

access the debt capital markets

successfully and reviews its options

on a continuing basis.

Net debt is a non-GAAP measure and is

defined as total borrowings (including

related derivatives and lease liabilities) less

cash and cash equivalents and current

investments held at fair value.

Net debt, at 31 December 2022, was

£39,281 million (2021: £36,302 million; 2020:

£40,241 million), with the movement in net

debt largely due to the relative movement

of sterling against other currencies,

particularly the US dollar and the euro,

which was a headwind of £3,030 million in

2022 (2021: £124 million tailwind).

@The movement in net debt also includes

the free cash flow before dividends earned

in the year (2022: £8,049 million; 2021:

£7,447 million) as described on page [105](#i38beb0f59f474b7e83e59155ae834f98_151202).

This is partly offset by dividends paid to

owners of the parent of £4,915 million

(2021: £4,904 million).@

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Reconciliation of total borrowings to adjusted net debt@ | | | |
|  | 2022  £m | 2021  £m | 2020  £m |
| Total borrowings (including lease liabilities) | (43,139) | (39,658) | (43,968) |
| Derivatives in respect of net debt | (167) | 91 | 346 |
| Cash and cash equivalents | 3,446 | 2,809 | 3,139 |
| Current investments held at fair value | 579 | 456 | 242 |
| Net debt | (39,281) | (36,302) | (40,241) |
| Purchase price adjustment (PPA) to  Reynolds American Inc. debt | 798 | 754 | 790 |
| Net debt items in assets held-for-sale | 352 | — | — |
| Adjusted net debt | (38,131) | (35,548) | (39,451) |

@Adjusted Net Debt

to Adjusted EBITDA

The Group uses adjusted net debt to

adjusted EBITDA, as defined on page [336](#i49422b2b471646dabd086f354630c16e_68558),

to assess its level of adjusted net debt in

comparison to the earnings generated by

the Group. This is deemed by management

to reflect the Group’s ability to service and

repay borrowings.

In 2022, the ratio of adjusted net debt to

adjusted EBITDA was 2.89x, representing a

decrease from 2.99x at the end of 2021,

itself an improvement from 3.26x at the

end of 2020.

The Group’s adjusted net debt to adjusted

EBITDA ratio is subject to the fluctuations

in the foreign exchange markets. In 2022,

due to the relative movement in sterling,

the sterling value of adjusted net debt

increased by £2,406 million.

Refer to page [336](#i49422b2b471646dabd086f354630c16e_68558) for a full reconciliation

from borrowings to adjusted net debt,

profit for the year to adjusted EBITDA and

the ratio of adjusted net debt to adjusted

EBITDA, at both current and constant rates

of exchange.@

@Return on Capital Employed (ROCE)

The Group’s ROCE, calculated in

accordance with our reported numbers,

was 8.2% (2021: 8.4%), with the movement

in 2022 largely due to the foreign exchange

headwind on borrowings and higher

adjusting items impacting profit from

operations.

On an adjusted basis, as defined on page

[337](#i49422b2b471646dabd086f354630c16e_68559), including dividends from associates

and joint ventures (as a proxy to a return

in the period, given the inclusion of the

investment in associates and joint

ventures in the Group’s calculation

of capital employed), adjusted ROCE

declined from 9.6% in 2020 to 9.4% in 2021,

and grew to 9.9% in 2022. This was due to

the movement in adjusted profit from

operations in the year and translational

foreign exchange described earlier.@

@Denotes phrase, paragraph or similar that does not form

part of BAT's Annual Report on Form 20-F as filed with

the SE-38,131C.

Retirement Benefit Schemes

The Group’s subsidiary undertakings

operate defined benefit schemes, including

pension and post-retirement healthcare

schemes, and defined contribution

schemes. The most significant

arrangements are in the U.S., the UK,

Canada, Germany, Switzerland and the

Netherlands. Together, schemes in these

territories account for over 90% of the total

underlying obligations of the Group’s

defined benefit arrangements and over

70% of the current service cost. Benefits

provided through defined contribution

schemes are charged as an expense as

payments fall due. The liabilities arising in

respect of defined benefit schemes are

determined in accordance with the advice

of independent, professionally qualified

actuaries, using the projected unit credit

method. It is Group policy that all schemes

are formally valued at least every three

years. Contributions to the defined benefit

schemes are determined after consultation

with the respective trustees and actuaries

of the individual externally funded schemes,

taking into account regulatory

environments.

The present total value of funded scheme

liabilities as at 31 December 2022 was

£6,515 million (2021: £10,084 million), while

unfunded scheme liabilities amounted to

£797 million (2021: £1,037 million). The

schemes’ assets decreased to £7,424

million from £10,816 million in 2021, itself a

decrease from £12,576 million in 2020. The

overall position for all pension and

healthcare schemes in Group subsidiaries

amounted to a net asset of £51 million at

the end of 2022, compared to a net liability

of £321 million at the end of 2021, driven by

the impact of higher discount rates applied

in the U.S. (2022: 5.5%; 2021: 3.0%) and

elsewhere, offset by inflation-related

experience adjustments and increases in

the assumptions for the impact of future

inflation on pensions across the Group.

In addition, during 2022 and 2021, the risk

profiles and values of amounts relating to

retirement benefit arrangements were

impacted by partial buy-outs in the U.S.

and through buy-ins in the UK.

Furthermore, in 2021, there was also a buy-

in in Canada. Please refer to note 15 in the

Notes on the Accounts for further details.

Litigation and Settlements

As discussed in note 31 in the Notes on the

Accounts, various legal proceedings or

claims are pending or may be instituted

against the Group.

Government Activity

The marketing, sale, taxation and use of

tobacco products have been subject to

substantial regulation by government and

health officials for many years.

For information about the risks related

to regulation, see page [119](#i5664363aa5e1437fbf641ea66037072b_1-0-1-22-205163) and pages

[349](#i366eb35ac5d946d1a2cd9e4042347e88_0-0-1-1-338625) to [357](#ibcccba13e24945d28d241c8fc215b96b_4-0-1-1-395104).

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106

Off-balance Sheet Arrangements and

Contractual Obligations

Except for certain indemnities, the Group

has no significant off-balance sheet

arrangements other than in respect of

leaf purchase obligations. The Group has

contractual obligations to make future

payments on debt guarantees. In the

normal course of business, it enters into

contractual arrangements where the

Group commits to future purchases of

goods and services from unaffiliated and

related parties. See page [339](#i1287057486f04e6b858626e2ea186532_153979) for a

summary of the contractual obligations

as at 31 December 2022.

Accounting Policies

The application of the accounting

standards and the accounting policies

adopted by the Group are set out in the

Group Manual of Accounting Policies and

Procedures (GMAPP).

GMAPP includes the Group instructions

in respect of the accounting and reporting

of business activities, such as revenue

recognition, asset valuations and

impairment testing, adjusting items, the

accrual of obligations and the appraisal of

contingent liabilities, which include taxes

and litigation. Formal processes are in

place whereby central management and

end-market management confirm

adherence to the principles and the

procedures and to the completeness of

reporting. Central analyses and revision of

information are also performed to ensure

and confirm adherence.

In order to prepare the Group’s

consolidated financial information in

accordance with IFRS, management has

used estimates and assumptions that

affect the reported amounts of revenue,

expenses and assets, and the disclosure

of contingent liabilities, at the date of the

financial statements.

The critical accounting estimates are

described in note 1 in the Notes on the

Accounts and include:

–review of asset values, including

goodwill and impairment testing;

–estimation and accounting for

retirement benefit costs; and

–estimation of provisions, including as

related to taxation and legal matters.

The critical accounting judgements are

described in note 1 in the Notes on the

Accounts and include:

–identification and quantification of

adjusting items;

–the identification of disposal groups,

including assets classified as held-for-

sale and liabilities associated with assets

classified as held-for-sale;

–determination as to whether to recognise

provisions and the exposures to

contingent liabilities related to pending

litigation or other outstanding claims;

–determination as to whether control

(subsidiaries), joint control (joint

arrangements), or significant influence

(associates) exist in relation to

investments held by the Group;

–review of applicable exchange rates

for transactions with and translation

of entities in territories where there are

restrictions on the free access to foreign

currency or multiple exchange rates; and

–the determination as to whether

perpetual hybrid bonds should be

classified as equity instead of borrowings.

Foreign Exchange Rates

The principal exchange rates used to

convert the results of the Group's foreign

operations to sterling, for the purposes of

inclusion and consolidation within the

Group's financial statements, are indicated

in the table below.

Where the Group has provided results at

constant rates of exchange, this refers to

the translation of the results from the

foreign operations at rates of exchange

prevailing in the prior period - thereby

eliminating the potentially distorting

impact of the movement in foreign

exchange on the reported results.

Going Concern

A description of the Group’s business

activities, its financial position, cash flows,

liquidity position, facilities and borrowings

position, together with the factors likely

to affect its future development,

performance and position, are set out in

this Annual Report and Form 20‑F.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| Foreign exchange rates | | | | | | | |
|  | Average | | |  | Closing | | |
|  | 2022 | 2021 | 2020 |  | 2022 | 2021 | 2020 |
| Australian dollar | 1.779 | 1.832 | 1.862 |  | 1.774 | 1.863 | 1.771 |
| Bangladeshi taka | 115.040 | 117.023 | 108.977 |  | 123.502 | 116.212 | 115.849 |
| Brazilian real | 6.384 | 7.421 | 6.616 |  | 6.351 | 7.544 | 7.100 |
| Canadian dollar | 1.607 | 1.724 | 1.720 |  | 1.630 | 1.711 | 1.741 |
| Chilean peso | 1,076.291 | 1,045.816 | 1,015.016 |  | 1,024.811 | 1,153.991 | 971.218 |
| Euro | 1.173 | 1.164 | 1.125 |  | 1.127 | 1.191 | 1.117 |
| Indian rupee | 97.030 | 101.702 | 95.097 |  | 99.516 | 100.684 | 99.880 |
| Japanese yen | 161.842 | 151.124 | 137.017 |  | 158.717 | 155.972 | 141.131 |
| Romanian leu | 5.783 | 5.727 | 5.442 |  | 5.577 | 5.894 | 5.438 |
| Russian ruble | 87.184 | 101.388 | 92.844 |  | 87.812 | 101.592 | 101.106 |
| South African rand | 20.176 | 20.335 | 21.099 |  | 20.467 | 21.617 | 20.079 |
| Swiss franc | 1.179 | 1.258 | 1.204 |  | 1.113 | 1.234 | 1.208 |
| U.S. dollar | 1.236 | 1.376 | 1.284 |  | 1.203 | 1.354 | 1.367 |

The key Group risks include analyses of

financial risk and the Group’s approach

to financial risk management.

Notes 23 and 26 in the Notes on the

Accounts provide further detail on the

Group’s borrowings and management

of financial risks.

The Group has, at the date of this report,

sufficient existing financing available for

its estimated requirements for at least the

next 12 months and beyond in respect of

general corporate purposes, including in

respect of the Master Settlement

Agreement due in the U.S. in 2023 and

other known liabilities or future payments

(including interim dividends).

The Group has £80 million of future

contractual commitments (2021: £90

million) related to property, plant and

equipment, as discussed in note 13 in the

Notes on the Accounts.

This, together with the ability to generate

cash from trading activities, the

performance of the Group’s Strategic

Portfolio and its leading market positions in

a number of countries, as well as numerous

contracts with established customers and

suppliers across different geographical

areas and industries, provides the Directors

with the confidence that the Group is well

placed to manage its business risks

successfully in the context of current

financial conditions and the general outlook

in the global economy.

After reviewing the Group’s annual budget,

plans and financing arrangements, the

Directors consider that the Group has

adequate resources to continue operating

and that it is therefore appropriate to

continue to adopt the going concern basis

in preparing the Annual Report

and Form 20‑F.

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107

|  |
| --- |
|  |
|  |
|  |
| Our transformation continued  at speed, with Vuse driving  69% growth in New  Categories revenue. This was  despite macro-economic  pressures and an inventory  unwind impacting  combustibles volumes.  Guy Meldrum  President and CEO  (Reynolds American Inc.) |

2022 revenue by category

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Revenue by category as % of total Region | | | |
|  |  |  |  |
|  | | 2022 | 2021 |
|  |  |  |  |
|  | New Categories | 7.5% | 4.8% |
|  |  |  |  |
|  |  |  |  |
|  | Traditional oral | 9.3% | 9.2% |
|  |  |  |  |
|  |  |  |  |
|  | Combustibles | 82.8% | 85.7% |
|  |  |  |  |
|  |  |  |  |
|  | Other | 0.4% | 0.3% |
|  |  |  |  |

|  |
| --- |
|  |
|  |
|  |
| Key markets  Our products are available in all regions of the U.S. |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Volume |  |  |  |  |  |
|  | 2022  units | vs 2021  % | 2021  units | vs 2020  % | 2020  units |
| New Categories: |  |  |  |  |  |
| Vapour (10ml units / pods mn) | 320 | +10.0% | 291 | +66.7% | 174 |
| THP (sticks bn) | — | — | — | — | — |
| Modern Oral (pouches mn) | 301 | -50.1% | 602 | +272% | 162 |
| Traditional Oral (stick eq bn) | 7 | -8.1% | 7 | -5.1% | 8 |
| Cigarettes (bn sticks) | 59 | -15.4% | 70 | -5.0% | 73 |
| Other (bn sticks eq)\* | — | -17.8% | — | — | — |
| Total Combustibles | 59 | -15.5% | 70 | -5.0% | 73 |

\* Other includes MYO/RYO.

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Revenue |  |  |  |  |  |  |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| New Categories: |  |  |  |  |  |  |
| Vapour | 913 | +62.9% | +46.4% | 561 | +46.4% | +56.9% |
| THP | — | -69.1% | -72.3% | 1 | -21.8% | -16.2% |
| Modern Oral | 36 | n/m | n/m | 2 | -81.5% | -80.1% |
| Total New Categories | 949 | +68.7% | +51.6% | 564 | +43.0% | +53.3% |
| Traditional Oral | 1,174 | +8.9% | -2.1% | 1,077 | -4.3% | +2.6% |
| Combustibles | 10,470 | +4.5% | -6.1% | 10,015 | +0.9% | +8.1% |
| Other | 46 | +27.9% | +14.9% | 35 | +26.9% | +36.0% |
| Revenue | 12,639 | +8.1% | -2.8% | 11,691 | +1.9% | +9.2% |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Profit from operations/operating margin | | | | | | |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| Profit from operations | 6,205 | +11.5% | +3.5% | 5,566 | +11.9% | +9.7% |
| Operating margin (%) | +49.1% | +150 bps | +330 bps | +47.6% | +420 bps | +20 bps |

|  |  |  |
| --- | --- | --- |
|  |  |  |
| +10 bps | +69% |  |
| Cigarette value share change | Revenue growth in New  Categories |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Regional Review |  |  |  |  |  |  |  |
| U.S.  United States | | | | | | | |

108

Revenue and Profit from Operations

In 2022, reported revenue grew 8.1% to

£12,639 million, with 2021 up 1.9% to

£11,691 million. Excluding the impact of

translational foreign exchange, this was a

decline of 2.8% in 2022 (2021: up 9.2%).

Continued growth in New Categories and

pricing in combustibles in both years was

more than offset, in 2022, by lower

cigarette volume. 2022 was also negatively

impacted by the 2021 movements in trade

inventory. This benefited 2021 by an

estimated £200 million and was partially

unwound in 2022, and was mainly linked to

the timing of price increases and

uncertainty about a potential excise

increase.

Reported profit from operations increased

11.5% to £6,205 million in 2022 (2021: up

11.9% to £5,566 million). This was driven by

a continued improvement in the financial

performance of Vuse in both years and, in

2022, the translational foreign exchange

tailwind of 12.9%. Adjusting items were

higher in 2022, largely in respect of our

restructuring programme (Quantum),

including the factory rationalisation. Both

2022 and 2021 benefited from credits

related to the partial buy-out of the pension

fund (2022: £16 million; 2021: £35 million).

2021 also benefited from the finalisation of

the dissenting shareholders litigation

(£59 million).

Excluding the adjusting items and the

impact of a translational foreign exchange

headwind, adjusted profit from operations

increased by 3.5% (2021: 9.7%) on a

constant currency basis.

New Categories

In 2022, Vuse performed well, becoming

the market leader by Vapour value share

(up 840 bps to 40.9% from 32.5% in 2021

and 24.9% in 2020) and Vapour volume

share (up to 64.4% from 57.3% in 2021).

During 2022, the Group also maintained

device leadership, up 700 bps to reach 64.4%

volume share, a strong lead indicator for

future consumable volume and revenue

growth.

Vapour consumable volume increased

10.0% (2021: up 67%), with revenue

increasing 62.9% to £913 million (2021: up

46.4% to £561 million). This was an increase

of 46.4% (2021: increase of 56.9%) at

constant rates of exchange, with pricing

on consumables supporting the growth

in volume.

Industry Vapour volumes declined 3.3% in

2022, following an increase of 19.1%\* in 2021.

While the Group does not sell synthetic

nicotine disposables in the U.S., the

category continues to grow driven by the

availability of flavours. However, since

March 2022, these products are now under

FDA regulatory control and are required to

receive PMTA authorization to remain on

the market. We continue to innovate

across our Vuse portfolio to drive increased

satisfaction for consumers.

Having received the first marketing

authorisation from the FDA (for Vuse Solo)

in October 2021, in May 2022, the FDA

issued marketing authorisations for

tobacco flavoured Vuse Vibe and Ciro. This

confirmed that the marketing of the

authorised Vuse Solo, Vuse Vibe, and Vuse

Ciro products are appropriate for the

protection of the public health, the

culmination of years of scientific study and

research. The Vuse Alto PMTA, which was

submitted nearly a year after Vuse Solo,

shares the same foundational science and

we are confident in the quality of our

applications. We have received and are

challenging the FDA's Market Denial Order

dated January 2023 related to Vibe and

Ciro (menthol variants) and are seeking a

permanent stay\*\*.

In Modern Oral, volume declined by 50.1%

(2021: 272% higher) with volume share

down 580 bps in 2022, having grown 410

bps in 2021, as the Group pivoted to drive

for value after a period of investment in

awareness and trial. Revenue increased to

£36 million (2021: £2 million). The market

remains highly competitive, with current

low moisture product formulations

continuing to result in low levels of average

daily consumption and high poly-usage.

As a result, we have submitted a PMTA for

a new Velo product, leveraging our

international insights.

Combustibles

Combustibles revenue was 4.5% higher in

2022 at £10,470 million (2021: up 0.9% to

£10,015 million). However, excluding a

translational foreign exchange tailwind in

2022 (2021: headwind), this was a decrease

of 6.1% (2021: 8.1% higher) at constant rates

of exchange. Pricing was more than offset

by a decline in volume of 15.5% to 59 billion

sticks in 2022.

In 2021, cigarette volume decreased 5.0%

to 70 billion sticks as the Group benefited

from trade inventory movements (mainly

linked to the timing of price increases

and uncertainty about a potential excise

increase and which partially unwound in

2022), impacting revenue by an estimated

£200 million.

Industry volume was down 10% (2021:

down 6%), driven by rising gas prices,

inflation and macro-economic pressures

impacting consumer disposable income. To

offset early signs of accelerated

downtrading, we have activated

commercial plans in specific brands,

channels, and states.

Value share of cigarettes increased 10 bps

(2021: up 60 bps), driven by our strategic

brands (up 10 bps) including Newport and

Natural American Spirit. Total volume share

declined 30 bps (2021: 40 bps decrease) as

we continued to focus on value generation

from combustibles in 2022.

The strategic portfolio performed well,

partly due to Lucky Strike which reached

2.2% national volume share, having been

reintroduced in 2020.

On 29 April 2021, the FDA announced it is

setting into motion the process of

advancing two tobacco product standards

regarding menthol in cigarettes and all

flavoured cigars. The Group’s U.S. business

will evaluate any proposed regulation and

will continue to participate in any

consultation and rulemaking processes by

submitting robust comments grounded in

science-based evidence, submitting

comments in August 2022. The weight of

published science does not support

regulating menthol cigarettes differently

from non-menthol. The weight of scientific

evidence neither shows a difference in

health risks between menthol and non-

menthol cigarettes, nor indicates that

menthol cigarettes adversely affect

initiation, dependence, or cessation. In

December 2022, the sale of all tobacco

products with characterising flavours

(including menthol) other than tobacco

were banned in the State of California. The

Group will continue to monitor the impact

in the coming periods.

Traditional Oral

Traditional Oral revenue increased 8.9%

(2021: down 4.3%), being a decline of 2.1%

(2021: up 2.6%) at constant rates of

exchange, driven by strong pricing in both

years, while volume declined 8.1% in 2022,

and 5.1% in 2021.

Value share of moist was down 60 bps

(2021: up 10 bps), while volume share was

down 70 bps (2021: down 50 bps). The

decline in 2022 was driven by strong

macro-economic headwinds leading to

consumer changing behaviour, impacting

our premium skewed portfolio.

During 2022, the decision was taken to

withdraw the MRTP applications for Camel

Snus, as we have adjusted our near-term

priorities and are focusing on providing a

diverse portfolio of New Category products

in line with our global harm reduction

strategy.

Note:

\*U.S. industry Vapour growth was rebased in 2022,

leading to a revision to the growth previously reported

for 2021, from +21.2% to +19.1%

\*\*  Menthol variants accounted for approximately 75% of

total Vuse consumables in 2022

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

109

|  |
| --- |
|  |
|  |
|  |
| An increase in profit from  operations was fuelled by  continued growth in New  Categories, coupled with  strong combustibles pricing,  which enabled further  investment in our  transformation.  Luciano Comin  Regional Director |

2022 revenue by category

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Revenue by category as % of total Region | | | |
|  |  |  |  |
|  |  | 2022 | 2021 |
|  |  |  |  |
|  | New Categories | 5.2% | 3.7% |
|  |  |  |  |
|  |  |  |  |
|  | Traditional oral | — | — |
|  |  |  |  |
|  |  |  |  |
|  | Combustibles | 89.2% | 90.4% |
|  |  |  |  |
|  |  |  |  |
|  | Other | 5.6% | 5.9% |
|  |  |  |  |

|  |
| --- |
|  |
|  |
|  |
| Key markets  Argentina, Brazil, Canada, Chile,  Colombia, Mexico, Nigeria, South Africa |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Volume |  |  |  |  |  |
|  | 2022  units | vs 2021  % | 2021  units | vs 2020  % | 2020  units |
| New Categories: |  |  |  |  |  |
| Vapour (10ml units / pods mn) | 83 | +33.3% | 62 | +102% | 31 |
| THP (sticks bn) | — | n/m | — | — | — |
| Modern Oral (pouches mn) | 10 | n/m | — | -100% | 19 |
| Traditional Oral (stick eq bn) | — | — | — | — | — |
| Cigarettes (bn sticks) | 148 | +0.7% | 147 | +0.1% | 147 |
| Other (bn sticks eq)\* | 1 | -5.1% | 1 | -7.7% | 2 |
| Total Combustibles | 149 | +0.7% | 148 | 0.0% | 149 |

\* Other includes MYO/RYO.

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Revenue |  |  |  |  |  |  |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| New Categories: |  |  |  |  |  |  |
| Vapour | 218 | +55.1% | +47.0% | 141 | +115% | +115.0% |
| THP | — | — | — | — | — | — |
| Modern Oral | 1 | n/m | -99.3% | — | -100% | -100.0% |
| Total New Categories | 219 | +55.6% | +47.5% | 141 | +114% | +113.8% |
| Traditional Oral | — | — | — | — | — | — |
| Combustibles | 3,751 | +9.2% | +3.8% | 3,435 | -2.8% | +4.1% |
| Other | 233 | +3.2% | -8.7% | 225 | +32.3% | +44.7% |
| Revenue | 4,203 | +10.6% | +4.7% | 3,801 | +0.8% | +7.8% |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Profit from operations/operating margin | | | | | | |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| Profit from Operations | 2,022 | +35.2% | +4.3% | 1,496 | -3.7% | +4.3% |
| Operating Margin (%) | +48.1% | +880 bps | -10 bps | +39.3% | -190 bps | -140 bps |

|  |  |  |
| --- | --- | --- |
|  |  |  |
| -60 bps | +56% |  |
| Cigarette value share change | Revenue growth in  New Categories |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Regional Review |  |  |  |  |  |  |  |
| AmSSA  Americas and Sub-Saharan Africa | | | | | | | |

110

Revenue and Profit from Operations

In 2022, reported revenue increased 10.6%

to £4,203 million (2021: 0.8% increased to

£3,801 million). Excluding the translational

tailwind (2021: headwind), on a constant

currency basis, revenue grew by 4.7% in

2022 (2021: increase of 7.8%), driven by

combustibles pricing and growth in New

Categories in both years. The reported

results are impacted by translational

foreign exchange due to the relative

movement of sterling against a number

of currencies, particularly the Brazilian real,

Argentinian peso, Nigerian naira and

Kenyan shilling.

Reported profit from operations increased

35.2% to £2,022 million, mainly due to the

recognition (in the second half of 2022) of

£460 million in Brazil in relation to the

calculation of VAT on social contributions in

prior periods (as the Group's litigation was

successfully concluded in the year). This

was partly offset by a charge of £79 million

(related to the conclusion of the

investigation into alleged violations of the

Nigerian Competition and Consumer

Protection Act and National Tobacco

Control Act).

In 2021, reported profit from operations

declined by 3.7% to £1,496 million, partly

due to the recognition of a £54 million

charge related to goodwill in Peru and by

the impact of translational foreign

exchange on our reported results.

Excluding the adjusting items (largely

related to credit of the VAT on social

contributions in Brazil and charges in

respect of the Nigerian investigation in

2022, Peru in 2021 and Quantum in both

periods) and the impact of foreign

exchange in both periods, adjusted profit

from operations increased 4.3% (2021:

increase of 4.3%) on a constant currency

basis, largely driven by the growth in

revenue.

New Categories

In 2022, New Categories revenue grew

56% to £219 million (2021: up 114% to £141

million) driven by the growth of Vapour

(notably in Canada and South Africa) in

both years.

In Canada, Vuse consolidated its leadership

position with total value share up 8.9 ppts

in 2022 (to 89.5%), having grown 34.3 ppts

in 2021. This was driven by the launch of the

Group's first connected Vapour device

(Vuse ePod2+).

In Kenya, after the category was reinstated

as regulated under the Tobacco Control

Act, we reintroduced Velo to a limited retail

universe with positive early momentum, as

we focus on driving guided trial.

In South Africa, we have expanded our pilot

in Johannesburg, with guided trial and

expansion into key accounts, delivering

encouraging early results.

We continue to believe that Modern Oral

represents an exciting opportunity to offer

affordable New Category alternatives\* to

adult nicotine consumers in emerging

markets, given the absence of an electronic

device and a pre-existing ritual of oral

product consumption in a number

of markets.

Combustibles

Combustibles revenue increased 9.2% to

£3,751 million (2021: 2.8% decrease to

£3,435 million). Excluding a translational

foreign exchange tailwind in 2022 (2021:

headwind) revenue, on a constant currency

basis, was up 3.8% in 2022 and 4.1% in

2021.

Combustibles pricing was strong in both

years. An improvement in mix in 2022 was

supported by marginally higher

combustibles volume (up 0.7% in 2022 to

149 billion sticks), as volume benefited from

a reduction in illicit trade in Brazil. This is in

comparison to 2021 where regional

revenue fell, partly due to a negative mix as

volume recovered from the impact of

COVID-19 in a number of markets including

in South Africa (impacted by the sales

suspension in 2020, with the market still

recovering from the growth in illicit trade in

2020) and Colombia. In 2021, combustible

volume in AmSSA was flat compared to

2020.

Value share declined 60 bps driven by

Canada, Brazil, Mexico and South Africa.

This compared to a decline in 2021 of

70 bps.

Note:

\*Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

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111

|  |
| --- |
|  |
|  |
|  |
| With revenue growth across  all New Categories now  representing 18.5% of total  revenue, we are  demonstrating how the  investments behind our  ambitious change agenda are  delivering results.  Johan Vandermeulen  Regional Director |

2022 revenue by category

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Revenue by category as % of total Region | | | |
|  |  |  |  |
|  |  | 2022 | 2021 |
|  |  |  |  |
|  | New Categories | 18.5% | 13.6% |
|  |  |  |  |
|  |  |  |  |
|  | Traditional oral | 0.6% | 0.7% |
|  |  |  |  |
|  |  |  |  |
|  | Combustibles | 78.7% | 83.7% |
|  |  |  |  |
|  |  |  |  |
|  | Other | 2.2% | 2.0% |
|  |  |  |  |

|  |
| --- |
|  |
|  |
|  |
| Key markets  Belgium, Bulgaria, Czech Republic, Denmark, France, Germany, Greece, Hungary, Italy,  Kazakhstan, Netherlands, Poland, Romania, Russia, Spain, Switzerland, Turkey, Ukraine, the  UK  From 1 January 2022, Algeria, Sudan, Libya, Morocco, Tunisia and Egypt moved to APME  and ENA has been renamed Europe. No restatement of prior year figures has been made as  the impact was not material to either Europe or APME. |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Volume |  |  |  |  |  |
|  | 2022  units | vs 2021  % | 2021  units | vs 2020  % | 2020  units |
| New Categories: |  |  |  |  |  |
| Vapour (10ml units / pods mn) | 197 | +13.9% | 173 | +29.8% | 133 |
| THP (sticks bn) | 13.0 | +33.8% | 9.8 | +195% | 3.3 |
| Modern Oral (pouches mn) | 3,169 | +29.9% | 2,440 | +46.4% | 1,667 |
| Traditional Oral (stick eq bn) | 1 | -9.8% | 1 | +6.1% | 1 |
| Cigarettes (bn sticks) | 193 | -9.9% | 214 | -2.7% | 220 |
| Other (bn sticks eq)\* | 13 | -11.1% | 15 | -8.7% | 16 |
| Total Combustibles | 206 | -10.0% | 229 | -3.1% | 236 |

\* Other combustibles includes MYO/RYO.

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Revenue |  |  |  |  |  |  |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| New Categories: |  |  |  |  |  |  |
| Vapour | 286 | +37.9% | +38.5% | 207 | +40.2% | +43.8% |
| THP | 537 | +57.3% | +53.3% | 341 | +150% | +167% |
| Modern Oral | 348 | +30.8% | +32.3% | 266 | +43.9% | +45.6% |
| Total New Categories | 1,171 | +43.7% | +42.7% | 814 | +73.6% | +80.3% |
| Traditional Oral | 35 | -12.3% | -7.7% | 41 | +18.2% | +18.1% |
| Combustibles | 4,996 | -0.6% | +1.2% | 5,024 | -6.2% | +1.1% |
| Other | 144 | +16.9% | +15.1% | 122 | -8.9% | -4.9% |
| Revenue | 6,346 | +5.7% | +7.0% | 6,001 | +0.1% | +7.3% |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Profit from operations/operating margin | | | | | | |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| Profit from Operations | 1,270 | -32.6% | +7.5% | 1,885 | -3.9% | -1.0% |
| Operating Margin (%) | +20.0% | -1,140 bps | +10 bps | +31.4% | -130 bps | -270 bps |

|  |  |  |
| --- | --- | --- |
|  |  |  |
| -10 bps | +44% |  |
| Cigarette value share change | Revenue growth in  New Categories |  |

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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112

Revenue and Profit from Operations

Reported revenue in 2022 was 5.7% higher

than 2021 (2021: up 0.1%) driven by pricing

in combustibles and the continued growth

in New Categories revenue (2022: up 44%,

2021: up 74%). This was, in 2022, partly

offset by lower combustible volume (down

10.0% in 2022 (impacted by the regional re-

allocation of North Africa to APME) and

3.1% lower in 2021). While translational

foreign exchange was a marginal headwind

in 2022 of 1.3%, in 2021 it was a headwind

of 7.2%.

Excluding the impact of currency, revenue

grew 7.0% on an adjusted constant rates

basis (2021: up 7.3%), driven by higher

revenue in Romania, Poland, Italy and the

Czech Republic.

Reported profit from operations declined

by 32.6% to £1,270 million, largely due to

the charges recognised in respect of the

proposed transfer of the Group's

operations in Russia and Belarus (which

have been classified as held-for-sale at 31

December 2022, with an associated charge

of £612 million in the period) and charges

related to Quantum and the factory

rationalisation programme.

In 2021, reported profit from operations

decreased 3.9% to £1,885 million, as the

strong New Category revenue growth, in

combination with tight control of

overheads and Quantum cost savings,

were more than offset by incremental

investment in New Categories and foreign

exchange headwinds (2020: up 19%).

Excluding the impact of currency and

adjusting items (in respect of Russia and

Belarus, Quantum and the factory

rationalisation programme), adjusted profit

from operations at constant rates was up

7.5% in 2022 (2021: down 1.0%) driven by

the performance of New Categories,

together with tight control of overheads

and Quantum cost savings. The decline in

2021 was largely driven by the net

investment in New Categories in that year.

New Categories

In 2022, revenue from Vapour was up

37.9% reflecting volume growth (up 13.9%)

and pricing. In 2021, revenue from Vapour

was 40.2% higher as volume grew 29.8%,

driven by an increase in industry volume

and higher consumables pricing.

However, the growth of the disposable

segment in 2022 has impacted our value

share of total Vapour across a number of

markets. For example:

–In France, we maintained value share

leadership despite a decline of 6.3 ppts to

38.8%;

–In Germany, we also maintained value

share leadership despite a decline of 37.9

ppts to 21.4%; and

–In the UK, having been value share leader

in previous periods, Vuse's value share

declined 14.7 ppts to 14.8%, but stabilised

in the final quarter post Vuse Go launch

(May 2022) .

We rapidly rolled out our new modern

disposable product, Vuse Go, over the

second half through our broad distribution

footprint and consumer reach in multiple

markets including the UK, France, Spain,

Germany, Greece and Ireland.

In 2022, Vuse won the Gold award at the

Transform Awards Europe 2022 for "Best

Use of Sustainable Packaging", as well as

the SEAL business sustainability award.

In 2022, THP volume grew by 33.8% (2021:

up 195%), with revenue 57.3% higher at

£537 million (2021: up 150% to £341 million).

The region now represents over 54% of our

global THP volume (or 43% excluding

Russia) and 51% of our global THP revenue

(or 41% excluding Russia). glo continued to

grow category volume share across all key

European markets, with aggregate

category volume share in key THP markets

reaching 20.2%, up 380 bps on 2021.

Excluding Russia, our aggregate share of

the category reached 18.7% up 470 bps.

Driven by Hyper, glo performed well across

the top European markets:

–Poland (up 14.4 ppts to 31.2%);

–Italy (up 170 bps to 14.5%);

–Greece (up 470 bps to 13.2%); and

–Hungary (up 740 bps to 14.4%).

Hyper also continued to make good

progress in Kazakhstan, the Czech Republic

and across other smaller European launch

markets. In the final quarter of 2022, we

launched the new Hyper X2 device in our

THP markets with encouraging early

results.

In 2022, Modern Oral revenue grew 30.8%

(2021: up 43.9%), led by 29.9% volume

growth (2021: 46.4% increase).

We remain the clear market leaders (by

volume share) in 15 Modern Oral markets.

From a high base, volume share was marginally

lower at 68.8%, down 60 bps. As the

Modern Oral category continues to grow

and become more established in Europe,

we continue to see strong growth in

average daily consumption, including in

Sweden which reached 11 pouches (per

consumer) in November 2022\*\*\*.

Specifically in respect of the key markets:

–In Sweden, where Modern Oral has

grown to represent 19.0% of the total oral

category, our volume share of the

Modern Oral category was 58.1%, a

decrease of 170 bps on 2021, impacted by

heavy competitor discounting, with

volume share stabilising in the final

quarter;

–In Norway, where Modern Oral now

represents 33.5% of the total oral category,

we maintained our leadership position

with volume share of the Modern Oral

reaching 64.1%, up 20 bps vs 2021;

–In Denmark (with volume share

marginally lower than 2021, down 40 bps

at 92.2%) and in Switzerland (volume

share up 160 bps to 93.2%), we

maintained our volume share leadership

position in the Modern Oral category

from a high base; and

–In the UK, we gained market leadership

with volume share reaching 51.6%, an

increase of 2,220 bps from 29.4% in 2021.

Combustibles

In 2022, revenue was 0.6% lower,

compared to a decline of 6.2% in 2021.

Good price/mix in both years (of 11.2% in

2022 and 4.2% in 2021) was offset by the

impact of lower combustible volume, down

10.0% in 2022 and 3.1% in 2021. In both

years revenue was impacted by the foreign

exchange headwind described earlier. At

constant rates of exchange, revenue

increased 1.2% (2021: 1.1%).

The decrease in combustible volume in

2022 was driven by the move of the North

African markets to APME and lower

volume in Turkey, Germany, Denmark and

France. The decrease in combustible

volume in 2021 was driven by lower volume

in Ukraine, Russia and Kazakhstan, in part

due to industry contraction in those

markets.

Cigarette value share was down 10 bps in

2022, while 2021 was down 20 bps.

Cigarette volume share declined 20 bps

(2021: down 30 bps) with volume share up

in Spain, the UK, Denmark, France and the

Ukraine, which was more than offset by

reductions in Russia, Poland, Romania,

Germany, Hungary, Italy, the Netherlands,

Switzerland, Greece and Belgium.

Note:

\*\*\* Source: Kantar New Category Tracker.

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113

|  |
| --- |
|  |
|  |
|  |
| Higher revenue across all  New Categories and pricing in  combustibles contributed to a  strong year and more than  offset the headwind from the  sale of our Iranian business  partway through 2021.  Michael (Mihovil) Dijanosic  Regional Director |

2022 revenue by category

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Revenue by category as % of total Region | | | |
|  |  |  |  |
|  |  | 2022 | 2021 |
|  |  |  |  |
|  | New Categories | 12.4% | 12.8% |
|  |  |  |  |
|  |  |  |  |
|  | Traditional oral | — | — |
|  |  |  |  |
|  |  |  |  |
|  | Combustibles | 85.4% | 84.8% |
|  |  |  |  |
|  |  |  |  |
|  | Other | 2.2% | 2.4% |
|  |  |  |  |

|  |
| --- |
|  |
|  |
|  |
| Key markets  Algeria, Australia, Bangladesh, Egypt, Gulf Cooperation Council (inc the Kingdom of Saudi  Arabia (Saudi Arabia)), Japan, Malaysia, Morocco, New Zealand, Pakistan, South Korea,  Taiwan, Vietnam  From 1 January 2022, Algeria, Sudan, Libya, Morocco, Tunisia and Egypt moved to APME.  No restatement of prior year figures has been made as the impact was not material to  either Europe or APME. |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Volume |  |  |  |  |  |
|  | 2022  units | vs 2021  % | 2021  units | vs 2020  % | 2020  units |
| New Categories: |  |  |  |  |  |
| Vapour (10ml units / pods mn) | 12 | +31.1% | 9 | +65.6% | 6 |
| THP (sticks bn) | 11.0 | +17.0% | 9.3 | +26.5% | 7.4 |
| Modern Oral (pouches mn) | 530 | +108.4% | 254 | +197% | 86 |
| Traditional Oral (stick eq bn) | — | — | — | — | — |
| Cigarettes (bn sticks) | 205 | -0.8% | 206 | +4.6% | 198 |
| Other (bn sticks eq)\* | 2 | -6.8% | 2 | -14.1% | 2 |
| Total Combustibles | 207 | -0.8% | 208 | +4.4% | 200 |

\* Other combustibles includes MYO/RYO.

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Revenue |  |  |  |  |  |  |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| New Categories: |  |  |  |  |  |  |
| Vapour | 19 | +4.3% | +1.7% | 18 | +26.0% | +27.5% |
| THP | 523 | +2.3% | +9.1% | 511 | +2.8% | +13.0% |
| Modern Oral | 13 | +117.0% | +121.2% | 6 | +179% | +199% |
| Total New Categories | 555 | +3.7% | +10.1% | 535 | +4.2% | +14.2% |
| Traditional Oral | — | — | — | — | — | — |
| Combustibles | 3,813 | +7.3% | +7.8% | 3,555 | -9.6% | -2.3% |
| Other | 99 | -0.9% | -7.8% | 101 | +13.0% | +20.1% |
| Revenue | 4,467 | +6.6% | +7.7% | 4,191 | -7.6% | 0.0% |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Profit from operations/operating margin | | | | | | |
|  | 2022  £m | vs 2021  % | vs 2021  (adj at cc)  % | 2021  £m | vs 2020  % | vs 2020  (adj at cc)  % |
| Profit from Operations | 1,026 | -20.3% | +3.0% | 1,287 | -12.6% | -1.1% |
| Operating Margin (%) | +23.0% | -770 bps | -180 bps | +30.7% | -170 bps | -40 bps |

|  |  |  |
| --- | --- | --- |
|  |  |  |
| +10 bps | +3.7% |  |
| Cigarette value share change | Revenue growth in  New Categories |  |

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Regional Review |  |  |  |  |  |  |  |
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114

Revenue and Profit from Operations

Reported revenue increased 6.6% to £4,467

million (2021: declined 7.6% to £4,191 million).

The performance in 2022 was driven by the

continued growth in New Categories and

pricing in combustibles, which more than

offset marginally lower combustibles volume

(down 0.8%). Volume benefited from the

continuing emerging market recovery from

COVID-19 and the regional re-allocation of

North Africa, partly offset by the sale of the

Group's Iranian business midway through

2021.

Revenue in 2021 (when compared to 2020)

was impacted by the structural excise

changes in Australia and New Zealand, and

competitive pricing dynamics in Australia

(in combination, an estimated headwind of

£260 million), and negative geographic mix

due to volume share growth and recovery

from COVID-19 in emerging markets,

leading to a growth in combustible volume

of 4.4% (largely due to Bangladesh,

Vietnam and Pakistan). Revenue in 2021

was also negatively impacted by the sale of

the Group's Iranian business partway

through the year.

Excluding the impact of translational

foreign exchange, in 2022 revenue was up

7.7% against 2021 (2021: in line with 2020)

on an adjusted constant rate basis.

Reported profit from operations declined

20.3% to £1,026 million, while 2021 was

down 12.6% to £1,287 million. 2022 was

impacted by increased one-off charges

related to the allegations of historical

breaches of sanctions (£450 million) and

the exit from Egypt (£118 million). In 2021,

the Group recognised a charge of £358

million in relation to the disposal of the

Group's Iranian business (mainly in respect

of foreign exchange previously charged to

other comprehensive income).

Excluding adjusting items and the impact

of translational foreign exchange, adjusted

profit from operations at constant rates of

exchange increased 3.0% in 2022 (2021: fell

1.1%), driven by the top line growth (despite

negative mix due to volume growth in

lower margin markets) and efficiencies

delivered through Quantum, which more

than offset a transactional foreign

exchange headwind of 4.5%. Furthermore,

the sale of the Iranian business, due to its

timing in 2021, acted as a drag on adjusted

profit from operations in both years.

New Categories

Total revenue from New Categories

increased 3.7% to £555 million (2021:

increased 4.2% to £535 million).

In 2022, this was driven by a 17.0% increase

in THP consumable volume to 11 billion

sticks, compared to an increase of 26.5% to

9 billion sticks in 2021. This was driven by

the success of glo Hyper including the new

variant Hyper X2. glo Hyper is powered by

Advanced Induction Heating and provides a

step change in consumer satisfaction with

30% more tobacco and a boost function.

THP revenue increased 2.3% (2021: increase

of 2.8%), or 9.1% (2021: up 13.0%) excluding

the impact of translational foreign exchange.

The growth in both years was driven by

increased Hyper volume, while the growth in

2021 was also due to a £50 million charge to

revenue in 2020, that did not repeat in 2021,

in respect of the withdrawal of glo Sens.

In Japan, the largest THP market in the

world, glo performed well, maintaining the

momentum of 2021 with volume share of

total tobacco (being FMC and THP

combined) increasing to 7.4% in 2022, up

60 bps, having grown 140 bps in 2021.

However, in 2022, glo's volume share of the

THP category declined 120 bps to 20.1%

from 21.2% in 2021 as glo volume grew at a

slower rate than the category due to

competitive competitor pricing.

In Modern Oral, revenue grew 117% (or 121%

at constant rates of exchange) with volume

up 108% to 530 million pouches.

We believe that Modern Oral is an exciting

longer-term opportunity to unlock reduced

risk products\*† in Emerging Markets. We

are particularly proud of Velo’s

performance in Pakistan, now our third

largest Modern Oral market by volume,

where we have rapidly achieved national

coverage. Enabled by powerful, consumer-

centric digital activations, Velo has reached

a monthly volume in the country of over 40

million pouches.

Combustibles

Revenue from combustibles increased by

7.3% to £3,813 million (2021: down 9.6% to

£3,555 million), or by 7.8% (2021: down

2.3%) at constant rates of exchange.

In 2022, this was driven by improved

pricing and a partial recovery of Global

Travel Retail following the COVID-19

restrictions of 2020 and 2021. These more

than offset a decrease in combustible

volume of 0.8% and the negative impact of

the sale of the Group's Iranian business

partway through 2021.

The sale of the Iranian business also

impacted 2021 (versus 2020) which

contributed to the decline in combustibles

revenue despite an increase in combustible

volume (up 4.4%) as emerging markets

recovered from COVID-19. However, this

led to a negative geographic mix which,

combined with structural excise changes in

Australia and New Zealand and

competitive pricing dynamics in Australia

(totalling approximately £260 million),

drove revenue down.

In 2022, value share increased 10 bps (2021:

down 20 bps), with volume share flat (2021:

20 bps higher), as volume share gains

(including in Japan, Pakistan and Saudi

Arabia) were offset by losses in Bangladesh

and South Korea.

Notes:

\*Based on the weight of evidence and assuming a

complete switch from cigarette smoking. These

products are not risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims

will be made as to these products without agency

clearance.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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115

Overview

The Principal Risks that may affect the

Group are set out on the following pages.

Each risk is considered in the context of the

Group’s strategy and business model, as

set out in this Strategic Report beginning

on page [2](#id739eb8a094346e4a1dd9989c862058f_5444) and page [12](#id739eb8a094346e4a1dd9989c862058f_6844). On the following

pages is a summary of each Principal Risk,

its potential impact @and management by

the Group@. The Group defines the

Principal Risks as those assessed with a

high impact and probable likelihood.

Additionally, "Litigation" and "Solvency and

liquidity" risks are also recognised as

Principal Risks; they are not assessed as

having high impact and probable likelihood

but are material to the delivery of the

Group's strategic objectives.

@The Group has identified risks and is

actively monitoring and mitigating these

risks, including those related to climate

change and other sustainability matters.@

This section focuses on those risks that the

Directors believe to be the Principal Risks to

the Group. Not all of these risks are within

the control of the Group and other risks

besides those listed may affect the Group’s

performance. Some risks may be unknown

at present. Other risks, currently regarded

as less material, could become material in

the future. Clear accountability is attached

to each risk through the risk owner.

The risks listed in this section @and

the activities being undertaken to

manage them@ should be considered

in the context of the Group’s internal

control framework.

This is described in the section on risk

management and internal control in the

corporate governance statement from

page [151](#id739eb8a094346e4a1dd9989c862058f_10128). This section should also be read in

the context of the cautionary statement on

page [374](#id739eb8a094346e4a1dd9989c862058f_5309).

A summary of all the risk factors (including

the Principal Risks) which are monitored by

the Board through the Group’s risk register

is set out in the Additional Disclosures

section from page [341](#id739eb8a094346e4a1dd9989c862058f_3217).

Assessment of Group Principal Risks@

During the year, the Directors carried out

a robust assessment of the Principal Risks,

uncertainties and emerging risks facing the

Group, including those that could impact

delivery of its strategic objectives, business

model, future performance, solvency

or liquidity.

ESG is core to the Group's long-term

business strategy and ESG risk factors are

embedded across the Group's risks in

accordance with how risks are managed

within the Group.

The Double Materiality Assessment

conducted during 2022 highlighted the

existing ESG focus areas of Harm

Reduction, Climate Change and Circular

Economy for the Group. Harm Reduction is

captured as part of “Inability to develop,

commercialise and deliver the New

Categories strategy”. The Board further

highlighted “Climate and circularity” as a

Principal Risk to the Group, recognising the

Group's existing commitments in relation

to climate change and circular economy

matters and mitigation of associated risks.

Due to the embeddedness of ESG across the

Group, other elements of environmental,

social and governance are captured across

other risks.

The viability statement below provides a

broader assessment of long-term solvency

and liquidity. The Directors considered a

number of factors that may affect the

resilience of the Group. Except for the risk

“Injury, illness or death in the workplace”,

the Directors also assessed the potential

impact of the Principal Risks that may

impact the Group’s viability.

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|  |  | Consumers | | | | | | |  |
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|  |  | Society | | | | | | |  |
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|  |  | Our people | | | | | | |  |
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|  | Considered in viability statement | | | | | | | |  |
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|  |  | Yes | | | | | | |  |
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|  |  | No | | | | | | |  |
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|  | @   Denotes phrase, paragraph or similar that does  not form part of BAT’s Annual Report on Form  20-F as filed with the SEC. | | | | | | | |  |
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| --- | --- | --- |
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|  | Viability statement@  The Board has assessed the viability of the Group taking into account the current position and principal risks, in accordance with provision 31 of the UK  Corporate Governance Code 2018. Whilst the Board believes the Group will be viable over a longer period, owing to the inherent uncertainty arising due to  ongoing litigation and regulation, the period over which the Board considers it possible to form a reasonable expectation as to the Group’s longer-term viability  (that it will continue in operation and meet its liabilities as they fall due) is three years.  In making this assessment, the Board considered the Group’s:  –strong cash generation from operating activities;  –access to, and ability to raise, external sources of financing, including the removal, in prior years, of any financial covenants in such credit facilities; and  –the current macro-economic environment, including the impact of inflation and higher interest rates.  This assessment included a robust review of the Group’s operational and financial processes, (which cover both short-term financial forecasts and capacity  plans) and the Principal Risks (as indicated on pages [118](#i4e407941bd5c4be08fae83d3878feccd_1-0-1-22-228132) to [122](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718)) that may impact the Group’s viability. These are considered, with the mitigating actions, at  least once a year. The assessment included a reverse stress test of the principal risks and did not identify any individual risk, based upon a prudent annual  forecast, that would, if arising in isolation and without mitigation, impact the Group’s viability within the three-year confirmation period. Furthermore, the  Board recognised that even if all the principal risks arose simultaneously, given the underlying strong free cash flow generation before the payment of  dividends (2022: £8.0 billion), the Group would be able to undertake mitigating actions to meet the liabilities as they fall due. The assessment also reviewed the  potential impact of inflation on the Group's delivery and the impact of climate-related risks and concluded that these, including the potential cost implications  and noting the mitigating actions, would not impact the Group’s viability (see discussion commencing on page [70](#i7c7e7a36d5cd44e3b2457d24f26ded77_0-0-1-7-228200) with respect to TCFD).  The Board noted that the Group has access to a £5.7 billion credit facility (2022: undrawn), US (US$4 billion) and Euro (£3 billion) commercial paper  programmes (2022: £27 million drawn) and £3.0 billion of bilateral agreements which may be utilised to support the Group's ability to operate. However, the  Group is subject to inherent uncertainties with regards to regulatory change and litigation, the outcome of which may have a bearing on the Group’s viability.  The Group maintains, as referred to in note 31 in the Notes on the Accounts ‘[Contingent Liabilities and Financial Commitments](#id739eb8a094346e4a1dd9989c862058f_70),’ that, whilst it is impossible to  be certain of the outcome of any particular case, the defences of the Group’s companies to all the various claims are meritorious on both law and the facts. If  an adverse judgment is entered against any of the Group’s companies in any case, an appeal may be made, the duration of which can be reasonably expected  to last for a number of years. |  |
|  |  |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Group Principal Risks |  |  |  |  |  |  |  |
| Group Principal Risks | | | |  |  |  |  |

116

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Risks | | | | | | | | | | | | | | | | | | | | | |
| Competition from illicit trade | | | | | | | | | | | | | | | | | | | | | |
| Increased competition from illicit trade and illegal products – either local duty evaded, smuggled, counterfeits, or non-regulatory  compliant, including products diverted from one country to another. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | | |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-/long-term | | | | | | |  | Simplification/New Categories/  Combustibles | | | | | | | | Consumers, Society,  Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Erosion of goodwill, with lower volumes and/or increased  operational costs (e.g. track and trace costs) and reduced profits.  Reduced ability to take price increases.  Investment in trade marketing and distribution is undermined  and the product is commoditised.  Counterfeit products (especially in New Categories) and other illicit  products could harm consumers, damaging goodwill, and/or the  category (with lower volumes and reduced profits), potentially  leading to misplaced claims against BAT, further regulation and  a failure to deliver the corporate harm reduction objective.  Breach of legislation, criminal offences, contract breaches under  the EU Cooperation Agreement, allegations of facilitating  smuggling and reputational damage, including negative  perceptions of our governance.  Existence of illicit trade reduces our ability to reduce the health  impact of our business. | | | | | | | | | | | | | | | | Dedicated Anti-Illicit Trade (AIT) teams operating at regional  and country levels; internal cross-functional levels; compliance  procedures, toolkit and best practice shared.  Active engagement with key external stakeholders.  Cross-industry and multi-sector cooperation on a range  of AIT issues.  Regional AIT strategy supported by a research programme to  further the understanding of the size and scope of the problem.  AIT Engagement Teams (including a dedicated analytical  laboratory and a forensic and compliance team) work with  enforcement agencies in pursuit of priority targets. | | | | | |

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| Geopolitical tensions | | | | | | | | | | | | | | | | | | | | | |
| Geopolitical tensions, civil unrest, economic policy changes, global health crises, terrorism and organised crime have the potential  to disrupt the Group’s business in multiple markets. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
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| Short-/medium-term | | | | | | |  | Simplification/New Categories/  Combustibles | | | | | | | | Society, Our people,  Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Potential injury or loss of life, loss of assets and disruption to  supply chains and normal business processes.  Increased costs due to more complex supply chain and security  arrangements and/or the cost of building new facilities  or maintaining inefficient facilities.  Lower volumes as a result of not being able to trade in a country.  Higher taxes or other costs of doing business as a foreign  company or the loss of assets as a result of nationalisation.  Reputational damage, including negative perceptions of our  governance and protection of our people and our ESG credentials.  Disruption to the supply chain impacts our ability to reduce the  health impact of our business. | | | | | | | | | | | | | | | | Physical and procedural security controls are in place, and  regularly reviewed in accordance with our Security Risk  Management process, for all field force and supply chain  operations, with an emphasis on the protection of Group  employees.  Globally integrated sourcing strategy and contingency  sourcing arrangements are in place.  Security risk modelling, including external risk assessments  and the monitoring of geopolitical and economic policy  developments worldwide.  Insurance coverage and business continuity planning, including  scenario planning and testing, and risk awareness training.  Geopolitical assessment and monitoring by the Group Security  Centre of Excellence and regions inform the Business Continuity  Management organisation plans and responses to geopolitical  risks, including readiness of Crisis Management Teams at all levels. | | | | | |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
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|  | | | | | | | |

117

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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Risks continued | | | | | | | | | | | | | | | | | | | | | |
| Tobacco, New Categories and other regulation interrupts growth strategy | | | | | | | | | | | | | | | | | | | | | |
| The enactment of, proposals for, or rumours of, regulation that significantly impairs the Group’s ability to communicate,  differentiate, market or launch its products, and/or the lack of appropriate regulation for New Categories. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | | |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-/long-term | | | | | | |  | New Categories/Combustibles | | | | | | | | Consumers, Society,  Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| A lack of acceptance or rejection of tobacco harm reduction  as a tobacco control policy could prevent a balanced regulatory  framework for New Categories.  Restricted ability to sell and communicate New Categories could  lead to failure of the harm reduction objective and loss  of confidence in the Group’s ESG performance.  Disproportionate regulations for New Categories, such as  questionable regulatory classifications or total bans, that may not be  science-based and/or risk-proportionate and that neither recognise  unintended consequences nor respect legal rights (e.g. wrong  regulatory classifications or total bans).  Reduced ability to make scientific claims and compete in future  product categories and make new market entries.  Erosion of brand value through commoditisation and the inability to  launch innovations may negatively affect our ability to generate  value growth.  Regulation with respect to bans or severe restrictions on menthol  flavours, product design & features and nicotine levels may  adversely impact individual brand portfolios.  Reduced consumer acceptability of new product specifications,  leading to consumers seeking alternatives in illegal markets or  irresponsible operators exploiting regulatory loopholes.  Shocks to share price on rumours of, or the announcement or  enactment of, restrictive regulation (e.g. sales ban to future  generations).  Failure to deliver appropriate and proportionately costed Extended  Producer Responsibility (EPR) schemes. | | | | | | | | | | | | | | | | Establishment of Management Board Regulatory Committee.  Engagement and litigation strategy coordinated and aligned  across the Group to drive a balanced global policy framework for  combustibles and New Categories.  Stakeholder mapping and prioritisation, developing robust  compelling advocacy materials (with supporting evidence and  data) and regulatory engagement programmes.  Regulatory risk assessment of marketing plans to ensure  decisions are informed by an understanding of the potential  regulatory environments.  Advocating the application of integrated regulatory proposals to  governments and public health regulators and practitioners based  on the harm reduction potential of New Categories.  Development of an integrated regulatory strategy that spans  conventional combustibles and New Categories.  Training and capability programmes for End Markets to upskill  Legal and External Affairs managers on combustible and New  Categories regulatory engagement, including product knowledge.  Direct access to online portal providing latest position and  advocacy material for End Market engagement on combustibles  and New Categories.  Working to define a sustainable EPR model and markets  negotiating to implement effective EPR schemes. | | | | | |
| Please refer to the to the description of the tobacco and nicotine regulatory regimes under which the Group’s businesses operate set out from page [363](#id739eb8a094346e4a1dd9989c862058f_4392) | | | | | | | | | | | | | | | | | | | | | |

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| Litigation | | | | | | | | | | | | | | | | | | | | | |
| Product liability, regulatory or other significant cases (including investigations) may be lost or settled resulting in a material loss or  other consequence. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |  |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-/long-term | | | | | | |  | New Categories/Combustibles | | | | | | | | Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Damages and fines, negative impact on reputation (including ESG  credentials), disruption and loss of focus on the business.  Consolidated results of operations, cash flows and financial  position could be materially affected by an unfavourable outcome  or settlement of pending or future litigation, criminal prosecution or  other contentious action, or by the costs associated with bringing  proceedings or defending claims.  Inability to sell products as a result of an injunction arising out of a  patent infringement action against the Group may restrict growth  plans and competitiveness.  Potential share price impact.  ESG-related litigation could also result in a reduction in the investor base  due to sustainability and ESG-related concerns. | | | | | | | | | | | | | | | | Consistent litigation and patent management strategy across  the Group.  Expertise and legal talent maintained both within the Group and  external partners, including for New Categories and ESG-related  matters.  Ongoing monitoring of key legislative and case law developments  related to our business.  Delivery with Integrity compliance programme. | | | | | |
| Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group. | | | | | | | | | | | | | | | | | | | | | |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Group Principal Risks |  |  |  |  |  |  |  |
| Group Principal Risks  Continued | | | |  |  |  |  |

118

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| Risks continued | | | | | | | | | | | | | | | | | | | | | |
| Significant increases or structural changes in tobacco, nicotine and New Categories related taxes | | | | | | | | | | | | | | | | | | | | | |
| The Group is exposed to unexpected and/or significant increases or structural changes in tobacco, nicotine and New Categories  related taxes in key markets. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-/long-term | | | | | | |  | New Categories/Combustibles | | | | | | | | Consumers, Society,  Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Consumers reject the Group’s legitimate tax-paid products for  products from illicit sources or cheaper alternatives.  Reduced legal industry volumes.  Reduced sales volume and/or portfolio erosion leading to inability  to invest in, develop, commercialise and deliver New Category  products.  Partial absorption of excise increases leading to lower profitability. | | | | | | | | | | | | | | | | Formal pricing and excise strategies, including Revenue Growth  Management using a data science-led approach, with annual risk  assessments and contingency plans across all products.  Pricing, excise and trade margin committees in markets, with  global support.  Engagement with relevant local and international authorities  where appropriate, in particular in relation to the increased risk  to excise revenues from higher illicit trade.  Portfolio reviews to ensure appropriate balance and coverage  across price segments.  Monitoring of economic indicators, government revenues  and the political situation. | | | | | |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Inability to develop, commercialise and deliver the New Categories strategy | | | | | | | | | | | | | | | | | | | | | |
| Risk of not capitalising on the opportunities in developing and commercialising successful, safe and consumer-appealing innovations. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | | |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-/long-term | | | | | | |  | Simplification/New Categories/  Combustibles | | | | | | | | Consumers, Society,  Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Failure to deliver Group strategic imperative, 2025 growth  ambition and 2030 consumer targets.  Potentially missed opportunities, unrecoverable costs and/or  erosion of brand, with lower volumes and reduced profits.  Reputational damage and recall costs may arise in the event  of defective product design or manufacture.  Loss of market share due to non-compliance of product  portfolio with regulatory requirements.  Loss of investor confidence in ESG performance.  Failure to deliver our corporate purpose of harm reduction. | | | | | | | | | | | | | | | | Focus on product stewardship to ensure high-quality standards  across the portfolio.  Brand Expression, which sets out how our brand expresses itself  (including through its logo, name, product, packaging, etc.) deployed to  lead End Markets via activation workshops and best practices shared.  Generating sufficient IP to develop competitive and sustainable products.  Accelerating digital and consumer analytics along with data  management platforms for enhanced methodologies, insight  generation and line of sight across the Group.  R&D is accredited to ISO9001 standard and laboratories are  accredited to ISO17025 for key methods. | | | | | |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
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|  | | | | | | | |

119

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Risks continued | | | | | | | | | | | | | | | | | | | | | |
| Injury, illness or death in the workplace | | | | | | | | | | | | | | | | | | | | | |
| The risk of injury, death or ill health to employees and those who work with the business is a fundamental concern of the Group  and can have a significant effect on our operations. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |  |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-term | | | | | | |  | Simplification/New Categories/  Combustibles | | | | | | | | Our people | | | No | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Serious injuries, ill health, disability or loss of life suffered by  employees and the people who work with the Group.  Exposure to civil and criminal liability and the risk of prosecution  from enforcement bodies and the cost of associated legal costs,  fines and/or penalties.  Interruption of Group operations if issues are not addressed  promptly.  High staff turnover or difficulty recruiting employees if perceived  to have a poor Environment, Health and Safety (EHS) record.  Reputational damage to the Group and negative impact on our  ESG credentials. | | | | | | | | | | | | | | | | Risk control systems in place to ensure equipment  and infrastructure are provided and maintained.  EHS strategy aims to ensure that employees at all levels receive  appropriate EHS training and information.  Behavioural-based safety programme to drive operations’ safety  performance, culture and closer to zero accidents.  Analysis of incidents undertaken regionally and globally by a  dedicated team to identify increasing incident trends or high  potential risks that require coordinated action.  Global monthly Health & Safety (H&S) Committee established,  formed by senior members from the H&S and Operations  Sustainability leadership team. | | | | | |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Disputed taxes, interest and penalties | | | | | | | | | | | | | | | | | | | | | |
| The Group may face significant financial penalties, including the payment of interest, in the event of an unfavourable ruling  by a tax authority in a disputed area. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |  |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-term | | | | | | |  | Simplification/New Categories/  Combustibles | | | | | | | | Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Significant fines and potential legal penalties.  Disruption and loss of focus on the business due to diversion  of management time.  Impact on profit and dividend. | | | | | | | | | | | | | | | | End market tax committees.  Internal tax function provides dedicated advice and guidance,  and external advice sought where needed.  Engagement with tax authorities at Group, regional and  individual market level. | | | | | |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Foreign exchange rates exposures | | | | | | | | | | | | | | | | | | | | | |
| The Group faces translational and transactional foreign exchange (FX) rate exposure for earnings/cash flows from its  global businesses. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |  |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-term | | | | | | |  | New Categories/Combustibles | | | | | | | | Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Fluctuations in FX rates of key currencies against sterling introduce  volatility in reported earnings per share (EPS), cash flow and the  balance sheet driven by translation into sterling of our financial  results and these exposures are not normally hedged.  The dividend may be impacted if the payout ratio is not adjusted.  Differences in translation between earnings and net debt may  affect key ratios used by credit rating agencies.  Volatility and/or increased costs in our business, due to  transactional FX, may adversely impact financial performance. | | | | | | | | | | | | | | | | While translational FX exposure is not hedged, its impact  is identified in results presentations and financial disclosures;  earnings are restated at constant rates for comparability.  Debt and interest are matched to assets and cash flows to  mitigate volatility where possible and economic to do so.  Hedging strategy for transactional FX is defined  in the treasury policy, a global policy approved by the Board.  Illiquid currencies of many markets where hedging is either not  possible or uneconomic are reviewed on a regular basis. | | | | | |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Group Principal Risks |  |  |  |  |  |  |  |
| Group Principal Risks  Continued | | | |  |  |  |  |

120

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Solvency and liquidity | | | | | | | | | | | | | | | | | | | | | |
| Liquidity (access to cash and sources of finance) is essential to maintaining the Group as a going concern in the short-term  (liquidity) and medium-term (solvency). | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |  |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-term | | | | | | |  | Simplification/New Categories/  Combustibles | | | | | | | | Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Inability to access the Group’s cash resources and to fund the  business under the current capital structure resulting in missed  strategic opportunities or inability to respond to threats.  Decline in our creditworthiness and increased funding costs  for the Group.  Requirement to issue equity or seek new sources of capital.  Reputational risk of failure to manage the financial risk profile  of the business, resulting in an erosion of shareholder value  reflected in an underperforming share price.  Inability to mitigate accounting and economic exposures.  Economic loss as a result of devaluation/revaluation of assets  (including cash) valued or held in local currency, and additional  costs as a result of paying premiums to obtain hard currency. | | | | | | | | | | | | | | | | Group policies include a set of financing principles and key  performance indicators, including the monitoring of credit ratings,  interest cover, solvency and liquidity with regular reporting to the  Corporate Finance Committee and the Board.  Controls in place to ensure full compliance with Sanctions regimes.  Plans implemented to manage the risk in key geographies.  The Group targets an average centrally managed debt maturity  of at least five years with no more than 20% of centrally managed  debt maturing in a single rolling year.  The Group holds a two-tranche revolving credit facility of £5.7bn  syndicated across a wide banking group, consisting of a 364-day tranche  (with a one-year term-out option remaining) and a five-year tranche.  Liquidity pooling structures are in place to ensure that there  is maximum mobilisation of cash liquidity within the Group.  Going concern and viability support papers are presented  to the Board on a regular basis. | | | | | |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Climate and circularity | | | | | | | | | | | | | | | | | | | | | |
| Direct and indirect adverse impacts associated with Climate Change and the move towards a Circular Economy. | | | | | | | | | | | | | | | | | | | | | |
| Time frame | | | | | | |  | Strategic impact | | | | | | | | Key Stakeholders | | | Considered in viability statement@ | | |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | | |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Short-/medium-/long-term | | | | | | |  | New Categories/Combustibles | | | | | | | | Consumers, Society,  Shareholders & Investors | | | Yes | | |
| Impact | | | | | | | | | | | | | | | | Mitigation activities across all categories@ | | | | | |
| Poor ESG ratings by investors or platforms/indices used by them  may lead to reduced access to capital, increased cost of capital or  impact the share price.  Loss or damage to reputation may reduce market share and  revenue, due to retail customers and/or consumers having a  reduced or negative perception of BAT and its products in  comparison to its competitors, or of specific products/product  categories overall.  Failure to adequately manage supply chain risks associated with  transitional and operational impacts (of Climate Change  particularly) may cause increased volatility in supply volume, quality  or cost of raw materials and services necessary for the effective  and efficient operation of BAT’s business across its value chain.  Negative impact upon the attraction, retention and motivation of  skilled employees and contractors.  Punitive actions against the Group or an inability to sell its products  in key markets, due to failure to comply in an effective, competitive  or economic manner with evolving regulations and requirements  relevant to business operations, products and supply chain, and  reporting. | | | | | | | | | | | | | | | | The Group has a well-established Environmental Sustainability  Committee and Operations Sustainability Forum. ESG matters  overall, and Climate Change and Circular Economy specifically, are  under the governance remit of the Audit Committee.  Life Cycle Assessment is used in the development and approval  processes for new products to understand and improve their  Climate Change and Circular Economy impacts.  Monitoring of Climate Change- and Circular Economy-related  governmental policy and regulations, and taking proactive actions  to meet and/or surpass it.  Working to mitigate Climate Change impacts and optimise  Circular Economy alignment across the value chain by designing  for the reuse and recycling of end-of-life products and increasing  the use of recycled and environmentally preferable materials.  2022 review of future ESG reporting requirements and frameworks,  globally, and increasing alignment with them, ahead of required  timescales. Including public provision to financial actors of information  required by investors for their own reporting.  Internal and external goals and targets related to the risks and  opportunities posed by Climate Change and Circular Economy to  the Group's business and wider society, along with comprehensive  programmes for review of progress against these goals.  Climate Change- and Circular Economy-related objectives,  targets and metrics publicly reported and externally assured and  integrated into personal performance objectives of those  functionally responsible for their delivery.  In 2022, the Group proactively engaged with over 200 top  suppliers on Climate Change and Circular Economy matters. | | | | | |

The Strategic Report was approved by the Board of Directors on 08 February 2023 and signed on its behalf by Paul McCrory, Company Secretary.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

121

|  |
| --- |
|  |
|  |
|  |
| The Board has been forward-  focused in the steps we took  in 2022 to maintain the  Group's financial flexibility  and optimise our capital  allocation.  Luc Jobin  Chair |

Dear Shareholder,

The stability and responsiveness of our

corporate governance framework prove

their worth in less certain times.

Our business had to respond to external

volatility this year, from inflationary

pressures to regional conflict. Whilst

navigating these challenges, we have also

accelerated our transformation towards

A Better TomorrowTM.

From my perspective, BAT's established

governance and control environment,

overseen by the Board, has given us the

stability to mitigate the impact of this

volatility on our business. It has also

enabled us to remain focused on

promoting strategic delivery, including

our ambitious ESG objectives.

Strategic focus

This year the Board continued its support

of management's drive to deliver QUEST,

which we discuss in detail on pages [28](#id739eb8a094346e4a1dd9989c862058f_5852) to

[29](#id739eb8a094346e4a1dd9989c862058f_17882). As this programme accelerates our

transformation towards A Better

TomorrowTM, the Board has been forward-

focused in the steps we took in 2022 to

maintain the Group's financial flexibility and

optimise our capital allocation.

The Board oversees an active capital

allocation framework for reinvesting in

our business and growing New Categories,

maintaining a sound balance sheet within

our target leverage, continuing to grow

the dividend, exploring bolt-on M&A

opportunities and considering share

buybacks. Within this framework, we

continue to take account of macro and

fiscal influences, and potential regulatory

and litigation outcomes.

Our approach to ESG reporting has been

informed this year by an ESG Double

Materiality Assessment which helped

us to sharpen our ESG metrics in view

of evolving shareholder and broader

stakeholder expectations. This is

discussed further on pages [46](#id739eb8a094346e4a1dd9989c862058f_15528) and [140](#i9c5bb655a1da4d89ac69a65ea4032c99_2-1-1-5-205543).

This is also the first year that our Annual

Report and Form 20-F incorporates all

of the principal components of our ESG

reporting, reflecting the integral nature

of ESG objectives within our strategy.

The Board continues to monitor the

Group's performance against our climate

and other ESG metrics regularly through

the year. You can read more about our ESG

performance on page [6](#id739eb8a094346e4a1dd9989c862058f_15378), and how ESG now

features in our Group principal risks

on page [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718).

Culture and ethos

As a Board, we understand the important

role we play in shaping and overseeing

Group culture. Our ethos is now well-

embedded, and we are seeing the ways

in which it is empowering our organisation

as we accelerate our transformation.

I was pleased to join several of my Board

colleagues on visits to trade marketing,

R&D and operational sites in the US this

year, including the Reynolds Operations

Center in North Carolina. You can read

more about the resumption of the Board's

programme of market and site visits

on page [133](#id739eb8a094346e4a1dd9989c862058f_14254).

Acting with integrity is core to our ethos,

and the Board ensures that we maintain

focus on integrity across our business.

Following the launch of our revised

Standards of Business Conduct (SoBC)

and Supplier Code of Conduct in January

2022, our Chief Executive Jack Bowles

gave a personal introduction to our

Group-wide awareness campaign called

'Delivering A Better TomorrowTM

responsibly and with integrity'.

Our standards mandate responsible

business practices without compromise

and compliance with legal obligations.

Our SoBC and Delivery with Integrity

programme are discussed on page [66](#id739eb8a094346e4a1dd9989c862058f_15661).

Stakeholder engagement

We conducted an extensive shareholder

and investor engagement programme in

2022, with a good balance of face to face

and virtual dialogue.

I met with a number of shareholders in

the year. Dimitri Panayotopoulos, as our

Remuneration Committee Chair, also

engaged on executive remuneration which

he discusses on page [160](#id739eb8a094346e4a1dd9989c862058f_2192). Your Directors

look forward to further dialogue with you

ahead of the 2023 Annual General Meeting

(AGM).

The Board keeps our approach to

engagement with our wider stakeholders

across the Group under review to ensure

dialogue remains effective and that we

understand stakeholders' perspectives.

You can read about how we engage with

our stakeholders and take their views into

account on pages [134](#id739eb8a094346e4a1dd9989c862058f_10005) and [137](#id739eb8a094346e4a1dd9989c862058f_9987) to [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429).

Our people

The safety and wellbeing of our people

has consistently been our top priority.

The Board has maintained close oversight

of the support made available to colleagues

in Ukraine and across the wider region, and

to colleagues across the world who have

continued to face challenges presented

by COVID-19.

I am proud of the commitment

demonstrated by our people across the

organisation and their willingness to

implement transformation at pace despite

the challenges.

The Board maintains effective engagement

with our people worldwide through a range

of channels, discussed on pages [88](#iecb80c297bcf49878ca96946d0f9b1c3_95480), [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429) and

[170](#iff8934d3734b44f4b1d79b07b59bc890_252488).

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Governance |  |  |  |  |  |  |  |
| Chair’s Introduction  on Governance | | | | | | | |

122

Board efficacy

We made several changes to the non-

executive membership of the Board in

2022, bringing new perspectives and

experience to support successful delivery

of our strategy.

Following our commitment to improve

the gender balance of the Board, I am

pleased to report that women now

represent 36% of the Board. In addition,

three of our Directors are from an ethnic

minority background. At the close of our

AGM in 2023, it is anticipated that women

will represent 40% of the Board, with two

Directors from an ethnic minority

background.

This year, the evaluation of the Board, its

Committees and each individual Director,

was externally facilitated to provide an

objective opinion on our performance

and effectiveness.

This external review concluded that the

Board and its Committees continue to

function effectively. It also highlighted

some opportunities to enhance our

effectiveness and the Board and its

Committees have developed an action plan

for implementation in 2023. You can read

about the review on pages [144](#id739eb8a094346e4a1dd9989c862058f_10092) to [145](#id739eb8a094346e4a1dd9989c862058f_14483).

I would like to express my thanks to both

Dimitri, who stepped down as our Senior

Independent Director in August, and to

Sue Farr for taking on this important role.

Dimitri remains Chair of our Remuneration

Committee and a valued member of

the Board. Savio Kwan will step down from

the Board at the close of the 2023 AGM

and I would also like to thank him for his

valuable contribution to the Board over his

nine years of service.

On behalf of the Board, I confirm that we

consider that this Annual Report and Form

20-F is fair, balanced and understandable,

and presents the information necessary to

assess the Company’s position,

performance, business model and strategy.

Luc Jobin

Chair

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  |  |  |
|  | Throughout the year  ended 31 December 2022,  we applied the Principles  of the UK Corporate  Governance Code 2018.  The Company was  compliant with all  provisions of the Code  during the year. The  Board considers that this  Annual Report and Form  20-F, and notably this  Governance section,  provides the information  shareholders need to  evaluate how we have  complied with our  obligations under  the Code.  Pages noted opposite refer to  particular discussion on the  application of Principles of the Code  in this Annual Report and Form 20-F.  Disclosure guidance and  transparency rules  We comply with the Disclosure  Guidance and Transparency Rules  requirements for corporate  governance statements by virtue  of the information included in this  section, together with the information  contained in the Other Information  section.  The UK Corporate Governance Code  2018 is available at frc.org.uk.  US corporate governance  As a result of the listing of the  Company’s American Depositary  Shares (ADSs) on the NYSE, the  Company is required to meet certain  NYSE requirements relating to  corporate governance matters.  Certain exceptions to these  requirements apply to the Company  as a foreign private issuer. For details  of the significant differences between  the NYSE requirements and the  Company’s practices, please see  page [371](#id739eb8a094346e4a1dd9989c862058f_4910). | |  |
|  |  |  |  |

|  |
| --- |
|  |
| Board Leadership and Company Purpose |
| Principle |
| A. Long-Term Sustainable Success  pages [2](#id739eb8a094346e4a1dd9989c862058f_5462) to [115](#i48429a5b09ac424497da538f0e334a68_32962), [122](#id739eb8a094346e4a1dd9989c862058f_8918) to [145](#id739eb8a094346e4a1dd9989c862058f_14483)  B. Purpose, Values and Culture  pages [2](#id739eb8a094346e4a1dd9989c862058f_5462) to [27](#i7eb69ab859464a3d9e5adc613ebbed03_79623), [82](#id739eb8a094346e4a1dd9989c862058f_8819) to [91](#i575a4c9e0b3245bca2b51c079b91e1ec_2231), [122](#id739eb8a094346e4a1dd9989c862058f_8918), [132](#id739eb8a094346e4a1dd9989c862058f_9951), [133](#id739eb8a094346e4a1dd9989c862058f_14254), [136](#id739eb8a094346e4a1dd9989c862058f_21169), [145](#id739eb8a094346e4a1dd9989c862058f_14483), [149](#i37e5279ba8e24f9dadbd3d8adb977221_20258)  C. Resources and Control Framework  pages [4](#id739eb8a094346e4a1dd9989c862058f_5736) to [18](#id739eb8a094346e4a1dd9989c862058f_7047), [116](#id739eb8a094346e4a1dd9989c862058f_8875) to [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718), [131](#id739eb8a094346e4a1dd9989c862058f_10023), [132](#id739eb8a094346e4a1dd9989c862058f_9951), [136](#id739eb8a094346e4a1dd9989c862058f_21169), [151](#id739eb8a094346e4a1dd9989c862058f_10128) to [159](#i063086bbd4724f0a917bdd6df645c957_441325)  D. Shareholder and Stakeholder Engagement  pages [20](#id739eb8a094346e4a1dd9989c862058f_6183) to [21](#id739eb8a094346e4a1dd9989c862058f_14373), [88](#iecb80c297bcf49878ca96946d0f9b1c3_95480), [137](#id739eb8a094346e4a1dd9989c862058f_9987) to [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429), [160](#id739eb8a094346e4a1dd9989c862058f_8489) and [170](#iff8934d3734b44f4b1d79b07b59bc890_252488)  E. Workforce Engagement, Policies, Practices  pages [66](#id739eb8a094346e4a1dd9989c862058f_15661) to [67](#i61464e4022874402ab39d55c5876c2d6_112799), [82](#id739eb8a094346e4a1dd9989c862058f_8819) to [91](#i575a4c9e0b3245bca2b51c079b91e1ec_2231), [132](#id739eb8a094346e4a1dd9989c862058f_9951), [133](#id739eb8a094346e4a1dd9989c862058f_14254), [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429), [168](#iff8934d3734b44f4b1d79b07b59bc890_252487), [170](#iff8934d3734b44f4b1d79b07b59bc890_252488) |
|  |
| Division of Responsibilities |
| Principle |
| F. Leadership of the Board  pages [122](#id739eb8a094346e4a1dd9989c862058f_8918) to [145](#id739eb8a094346e4a1dd9989c862058f_14483)  G. Board Composition and Division  of Responsibilities  pages [123](#id739eb8a094346e4a1dd9989c862058f_13968) to [128](#i560602a6d5294756818d147a85ebeed8_0-0-13-3-205410), [142](#id739eb8a094346e4a1dd9989c862058f_10074) to [143](#ice6738f14daf48db97ac9037654f1a1f_204145)  H. Role and Commitment of  Non-Executive Directors  pages [125](#id739eb8a094346e4a1dd9989c862058f_9915) to [128](#i560602a6d5294756818d147a85ebeed8_0-0-13-3-205410), [142](#id739eb8a094346e4a1dd9989c862058f_10074) to [143](#ice6738f14daf48db97ac9037654f1a1f_204145), [147](#id739eb8a094346e4a1dd9989c862058f_14565)  I. Board Support  pages [142](#id739eb8a094346e4a1dd9989c862058f_10074) to [144](#id739eb8a094346e4a1dd9989c862058f_10092) |
|  |
| Composition, Succession, Evaluation |
| Principle |
| J. Board Appointments, Succession and Diversity  pages [123](#id739eb8a094346e4a1dd9989c862058f_13968) to [128](#i560602a6d5294756818d147a85ebeed8_0-0-13-3-205410), [136](#id739eb8a094346e4a1dd9989c862058f_21169), [146](#id739eb8a094346e4a1dd9989c862058f_10110) to [150](#i37e5279ba8e24f9dadbd3d8adb977221_19977)  K. Board Skills and Experience  pages [125](#id739eb8a094346e4a1dd9989c862058f_9915) to to [128](#i560602a6d5294756818d147a85ebeed8_0-0-13-3-205410), [146](#id739eb8a094346e4a1dd9989c862058f_10110) to [147](#id739eb8a094346e4a1dd9989c862058f_14565)  L. Board Evaluation  pages [144](#id739eb8a094346e4a1dd9989c862058f_10092) to [145](#id739eb8a094346e4a1dd9989c862058f_14483) |
|  |
| Audit, Risk, Internal Control |
| Principle |
| M. Internal and External Audit Functions  pages [154](#i063086bbd4724f0a917bdd6df645c957_445275) to [159](#i063086bbd4724f0a917bdd6df645c957_455577)  N. Fair, Balanced and Understandable Assessment  pages [158](#i063086bbd4724f0a917bdd6df645c957_445274) and [182](#id739eb8a094346e4a1dd9989c862058f_9334)  O. Risk Management and Internal Controls  pages [116](#id739eb8a094346e4a1dd9989c862058f_8875) to [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718), [136](#id739eb8a094346e4a1dd9989c862058f_21169), [151](#id739eb8a094346e4a1dd9989c862058f_10128) to [159](#i063086bbd4724f0a917bdd6df645c957_441325), [372](#iad2f765ab0404a10ab92badf3569e79e_25109) |
|  |
| Remuneration |
| Principle |
| P. Remuneration Policies and Practices  pages [160](#id739eb8a094346e4a1dd9989c862058f_2192) to [181](#i1831158e35f74cc988db478d232fe873_78357)  Q. Development of Policy on Remuneration  pages [160](#id739eb8a094346e4a1dd9989c862058f_2192) to [181](#i1831158e35f74cc988db478d232fe873_78357)  R. Judgement and Discretion  pages [160](#id739eb8a094346e4a1dd9989c862058f_2192) to [181](#i1831158e35f74cc988db478d232fe873_78357) |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | For reference, we prepare a separate voluntary  annual compliance report by reference to each  Principle and Provision of the Code, available at  bat.com/governance |
|  |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

123

|  |
| --- |
|  |
|  |
| Luc Jobin |
| Chair (63) |
|  |
| Nationality: Canadian  Appointed: Chair since April 2021; Non-  Executive Director since July 2017.  Experience: Luc was President and Chief  Executive Officer of Canadian National  Railway Company from July 2016 until  March 2018, having served as Executive  Vice President and Chief Financial Officer  since 2009. Previously, he was Executive  Vice President of Power Corporation of  Canada (an international financial  services company) from 2005 to 2009.  Luc was Chief Executive Officer of  Imperial Tobacco Canada from 2003 to  2005 and Executive Vice President and  Chief Financial Officer from 1998 to 2003.  Luc previously served as an independent  Non-Executive Director of Reynolds  American Inc. from 2008 until its  acquisition by the Group.  Relevant skills and contribution to the  Board: Luc brings significant financial,  regulatory and consumer business  experience to the Board, together with  extensive North American knowledge and  experience of enterprise transformation.  External appointments: Independent  Director and Chair of the Audit and Finance  Committee of Gildan Activewear Inc.. |

Balance of Non-Executive Directors

and Executive Directors

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Chair | 1 |
|  |  |  |
|  |  |  |
|  | Executive Directors | 2 |
|  |  |  |
|  |  |  |
|  | Independent Non-Executive Directors | 8 |
|  |  |  |

|  |
| --- |
|  |
|  |
| Jack Bowles |
| Chief Executive (59) |
|  |
| Nationality: French  Appointed: Chief Executive since  April 2019; Executive Director since  January 2019.  Experience: Jack joined the Group in  2004 and was appointed as Chairman of  British American Tobacco France in 2005,  before becoming Managing Director of  British American Tobacco Malaysia in  2007. He joined the Management Board  as Regional Director for Western Europe  in 2009, becoming Regional Director for  the Americas in 2011, then Regional  Director for Asia-Pacific in 2013. He  became Chief Operating Officer in 2017  and Chief Executive Designate in  November 2018, before being appointed  to the Board in January 2019.  Relevant skills and contribution to the  Board: Jack brings significant  management, innovation, and strategic  leadership to the Board, developed  through his previous roles across many of  the Group’s key geographies and areas of  business. This enables him to effectively  lead the Group and deliver our ambition  to build A Better TomorrowTM.  External appointments: No external  appointments. |

Length of tenure of

Non-Executive Directors

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 0–3 Years | 4 |
|  |  |  |
|  |  |  |
|  | 4–6 Years | 2 |
|  |  |  |
|  |  |  |
|  | 7+ Years | 3 |
|  |  |  |

|  |
| --- |
|  |
|  |
| Tadeu Marroco |
| Finance and Transformation Director (56) |
|  |
| Nationality: Brazilian  Appointed: August 2019  Experience: Tadeu joined the Group in  Brazil in 1992 and joined the Management  Board as Director, Business Development  in 2014, later becoming Regional Director,  Western Europe in 2016, then Regional  Director, Europe and North Africa in  January 2018. He was appointed Director,  Group Transformation in January 2019  and, in addition to this role, he was  appointed Deputy Finance Director in  March 2019, before joining the Board as  Finance Director in August 2019. As  Finance and Transformation Director,  Tadeu’s role includes leadership of the  design and delivery of the Group’s QUEST  transformation programme to accelerate  delivery of the Group's strategy.  Relevant skills and contribution to the  Board: Tadeu brings broad experience  gained in various national, regional and  global finance and general leadership  roles, through his previous roles across  the Group. These experiences make  Tadeu particularly well-placed to  contribute to the Group’s transformation  and broader strategic agenda.  External appointments: No external  appointments. |

Nationality of Directors

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | American | 3 |  |  | Canadian | 1 |
|  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |
|  | Brazilian | 1 |  |  | French | 2 |
|  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |
|  | British | 4 |  |  |  |  |
|  |  |  |  |  |  |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Governance |  |  |  |  |  |  |  |
| Board of Directors  As at 08 February 2023 | | | | | | | |

124

|  |
| --- |
|  |
|  |
| Krishnan (Kandy) Anand |
| Non-Executive Director (65) |
|  |
| Nationality: American  Appointed: February 2022  Experience: Kandy previously held  several senior positions at Molson Coors  Brewing Company, including Chief  Growth Officer and CEO of Molson Coors  International and Head of Strategy, M&A  and Transformation. He also held senior  positions at the Coca-Cola Company,  including President, Coca-Cola  Philippines and Vice President, Global  Commercial Leadership. Prior to joining  Coca-Cola, Kandy held several senior  marketing leadership positions at  Unilever plc. Kandy previously served on  the Boards of Popeyes Louisiana Kitchen  Inc. and Empower Acquisition Company.  Relevant skills and contribution to the  Board: Kandy brings valuable  international experience to the Board,  particularly in the marketing and  consumer goods sectors.  External appointments: Director of  Wingstop Inc. and Chairman and Chief  Executive Officer of Igniting Business  Growth L.L.C.. |

Directors’

gender balance

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Male | 7 |
|  |  |  |
|  |  |  |
|  | Female | 4 |
|  |  |  |

|  |
| --- |
|  |
|  |
| Sue Farr |
| Senior Independent Director (66) |
|  |
| Nationality: British  Appointed: Non-Executive Director since  February 2015; Senior Independent  Director since August 2022.  Experience: Sue’s extensive career  includes Director, Strategic and Business  Development of Chime Group and a  number of senior marketing and  communications positions, including  Director of Marketing BBC, Corporate  Affairs Director of Thames Television and  Director of Communications of Vauxhall  Motors. Sue is a former Chairwoman of  both the Marketing Society and the  Marketing Group of Great Britain.  Relevant skills and contribution to the  Board: Sue contributes considerable  expertise in relation to marketing,  branding and consumer matters, which  are key areas of focus for the Board.  External appointments: Non-Executive  Director and Chair of the Remuneration  Committee of Helical PLC; Non-Executive  Director of Accsys Technologies PLC and  Unlimited Group Ltd and Senior  Independent Director of Lookers plc. |

Directors’

ethnicity balance

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | White | 8 |
|  |  |  |
|  |  |  |
|  | Ethnic minorities1 | 3 |
|  |  |  |

|  |  |
| --- | --- |
|  |  |
|  | Audit Committee |
|  | Nominations Committee |
|  | Remuneration Committee |
|  | Committee Chair |
|  |
|  |
|  | Executive Director |
|  |
|  |
|  | Non-Executive Director |
|  |
|  |

Note:

1. Applying UK Office for National Statistics ethnicity

categories of: Asian; Black; Mixed/Multiple Ethnic

Groups; Other Non-White Ethnic Group, in alignment

with the UK Listing Rules.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

125

|  |
| --- |
|  |
|  |
| Karen Guerra |
| Non-Executive Director (66) |
|  |
| Nationality: British  Appointed: September 2020  Experience: Karen has held a variety of  executive roles, including President and  Director General of Colgate Palmolive  France, and Chairman and Managing  Director of Colgate Palmolive UK Limited.  She was formerly a Non-Executive  Director of RS Group plc (formerly  Electrocomponents p.l.c.), Davide  Campari-Milano S.p.A, Paysafe PLC,  Inchcape PLC, Samlerhuset BV and  Swedish Match AB.  Relevant skills and contribution to the  Board: Karen brings valuable  international experience, particularly in  marketing, sales and consumer goods  insight to the Board.  External appointments: Independent  Non-Executive Director and Chair of the  Nominating and Corporate Governance  Committee of Amcor plc. |

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Attendance at Board meetings in 2022 | | |
|  |  | Attended/Eligible to attend1 |
| Name | Director since | Meetings4 |
| Luc Jobin | 2017 | 9/9 |
| Jack Bowles | 2019 | 9/9 |
| Tadeu Marroco | 2019 | 9/9 |
| Kandy Anand3(a) | 2022 | 8/8 |
| Sue Farr2 | 2015 | 8/9 |
| Karen Guerra | 2020 | 9/9 |
| Holly Keller Koeppel | 2017 | 9/9 |
| Savio Kwan | 2014 | 9/9 |
| Véronique Laury3(b) | 2022 | 2/2 |
| Dimitri Panayotopoulos | 2015 | 9/9 |
| Darrell Thomas | 2020 | 9/9 |
| Dr Marion Helmes3(c) | 2016-2022 | 4/4 |

|  |
| --- |
|  |
|  |
| Holly Keller Koeppel |
| Non-Executive Director (64) |
|  |
| Nationality: American  Appointed: July 2017  Experience: Up until April 2018, Holly  was a Senior Advisor to Corsair Capital  LLC, where she had previously served as  Managing Partner and Co-Head of  Infrastructure from 2015 until her  retirement in 2017. From 2010 to 2015,  she served as Co-Head of Citi  Infrastructure Investors. Prior to 2010,  she held financial and executive  management roles with Consolidated  Natural Gas Company and American  Electric Power Company, Inc. (AEP),  ultimately serving as Chief Financial  Officer of AEP. Holly previously served as  an independent Non-Executive Director  of Reynolds American Inc. from 2008  until its acquisition by the Group.  Relevant skills and contribution to the  Board: Holly’s extensive international  operational and financial management  experience in a range of industry sectors  enables her to make important  contributions to the Board.  External appointments: Non-Executive  Director and Chair of Audit Committee of  the Flutter Entertainment plc; Director  and the Chair of the Governance  Committee of AES Corporation; and  Director of Arch Resources Inc.. |

|  |
| --- |
|  |
|  |
| Savio Kwan |
| Non-Executive Director (74) |
|  |
| Nationality: British  Appointed: January 2014  Experience: During his extensive career  Savio has worked broadly in technology  for General Electric, BTR plc and Alibaba  Group, China’s largest internet business,  where he was both Chief Operating  Officer and later, a Non-Executive  Director.  Relevant skills and contribution to the  Board: Savio brings significant business  leadership experience to the Board,  together with a deep knowledge of  Greater China and Asia, an important  region for the Group.  External appointments: Co-Founder and  CEO of A&K Consulting Co Ltd; Member  of the Governing Body of the London  Business School, Alibaba Hong Kong  Entrepreneur Fund, and Crossborder  Innovative Ventures International Limited;  Non-Executive Director of Southern  England Wines Ltd and Jasper Morris in  Burgundy - CN; Non-Executive Director  and Advisory Board member of Homaer  Financial. |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Governance |  |  |  |  |  |  |  |
| Board of Directors  Continued | | | | | | | |

126

|  |
| --- |
|  |
|  |
| Véronique Laury |
| Non-Executive Director (57) |
|  |
| Nationality: French  Appointed: September 2022  Experience: Over the course of her  career, Véronique has held several  leadership roles. From September 2014 to  September 2019, she was Chief Executive  Officer of Kingfisher plc, an international  home improvement company across  Europe operating under several brands  including B&Q, Castorama, Brico Dépôt,  Screwfix and Koçtaş. She spent over 16  years at Kingfisher and during her tenure  she also served as Chief Executive Officer  and Commercial Director at both B&Q  and Castorama. Most recently she served  as a member of the Tarkett SA  Supervisory Board.  Relevant skills and contribution to the  Board: Véronique brings extensive  international consumer goods, strategic,  transformation and digital experience to  the Board.  External appointments: Board member  of WeWork Inc.; Sodexo SA; Inter IKEA  Holding B.V.; and Eczacıbaşı Holding  Company. |

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Notes:  1.  Number of meetings in 2022: The Board held nine meetings in 2022, three of which were ad hoc, to review: (a) a new  Management Board appointment; (b) planning in respect of the transfer of the Group's business in Russia; and (c) an  update on Group legal matters.  2. Sue Farr did not attend the ad hoc meeting in February convened at short notice due to prior commitments. Directors  that are unable to attend Board or Committee meetings have the opportunity to provide their comments to the Chair  in advance of the meeting.  3.  Composition: The Board of Directors is shown as at the date of this Annual Report and Form 20-F; (a) Kandy Anand  joined the Board on his appointment as a Non-Executive Director on 14 February 2022;  (b) Véronique Laury joined the  Board on her appointment as a Non-Executive Director on 19 September 2022; and (c) Marion Helmes stepped down  from the Board with effect from the conclusion of the AGM on 28 April 2022.  4.  Number of meetings in 2023: Five Board meetings are scheduled for 2023, with ad hoc meetings convened as may be  required. | | |  |
|  |
|  |
|  |
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|  |
|  |
|  |
|  |
|  |
|  |
|  |
|  |

|  |
| --- |
|  |
|  |
| Dimitri Panayotopoulos |
| Non-Executive Director (71) |
|  |
| Nationality: British  Appointed: Non-Executive Director  since February 2015; stepped down as  Senior Independent Director in August  2022.  Experience: Dimitri was Vice Chairman  and Advisor to the Chairman and CEO of  Procter & Gamble (P&G), where he started  his career in 1977. During his time at P&G,  Dimitri led on significant breakthrough  innovations and continued to focus on this,  speed-to-market and scale across all of  P&G’s businesses while Vice Chairman of  all the Global Business Units.  Relevant skills and contribution to the  Board: Dimitri has extensive general  management and international sales and  brand building expertise, which enables  him to make valuable contributions to  Board discussions on these important  topics.  External appointments: Independent  Director and Chair of the Compensation  Committee of North Atlantic Acquisitions  Corporation; Senior Advisor at The Boston  Consulting Group; Advisory Board  member of JBS USA; Board Member of IRI;  and Chairman of Airway Therapeutics Inc.. |

|  |
| --- |
|  |
|  |
| Darrell Thomas |
| Non-Executive Director (62) |
|  |
| Nationality: American  Appointed: December 2020  Experience: Most recently, Darrell served  as Vice President and Treasurer for  Harley-Davidson, Inc., a position which he  held from June 2010 to April 2022, having  previously held several senior finance  positions, including Interim Chief  Financial Officer for Harley-Davidson, Inc.,  Chief Financial Officer for Harley  Davidson Financial Services, Inc. and Vice  President and Assistant Treasurer,  PepsiCo, Inc.. Prior to joining PepsiCo, Inc.  Darrell had a 19-year career in banking  with Commerzbank Securities, Swiss Re  New Markets, ABN Amro Bank and  Citicorp/Citibank where he held various  capital markets and corporate finance  roles.  Relevant skills and contribution to the  Board: Darrell brings invaluable  experience to the Board, particularly in  finance and treasury, in addition to his  extensive operational and management  skills and knowledge of capital markets.  External appointments: Independent  Director of Dorman Products Inc.; Non-  Executive Director of Scotia Holdings (US)  Inc. and Board member of Sojourner  Family Peace Center, Inc.. |

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127

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| --- |
|  |
|  |
| Jack Bowles |
| Chief Executive (59) |
|  |
|  |
| Tadeu Marroco |
| Finance and Transformation  Director (56) |

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| --- | --- | --- |
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|  |  | Read more on page [124](#id739eb8a094346e4a1dd9989c862058f_9915) |

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| Jerome Abelman |
| Director, Legal and External  Affairs and General Counsel (59) |
|  |
| Nationality: American  Jerome was appointed  General Counsel and Director,  Legal and External Affairs in  May 2015 after joining the  Management Board as  Director, Corporate and  Regulatory Affairs in January  2015. He served as a Director  on the Board of Reynolds  American Inc. from February  2016 until July 2017. |

|  |
| --- |
|  |
|  |
| Luciano Comin |
| Regional Director, Americas  and Sub-Saharan Africa (53) |
|  |
| Nationality: Italian/Argentinian  Luciano joined the  Management Board as  Regional Director, Americas  and Sub-Saharan Africa in  January 2019. He joined the  Group in 1992 and has held a  wide range of roles, including  Marketing Director in  Venezuela, Marketing  Director in Mexico and  General Manager of BAT  Mexico. Luciano was also  Regional Marketing Manager  for Western Europe and then  Regional Head of Marketing,  Americas and Sub-Saharan  Africa before his appointment  to the Management Board. |

|  |
| --- |
|  |
|  |
| Michael Dijanosic |
| Regional Director, Asia-  Pacific and Middle East (51) |
|  |
| Nationality: Australian  Michael was appointed  Regional Director for Asia-  Pacific and Middle East in  September 2020 and joined  the Management Board at  the same time. Previously, he  was Area Director for Asia-  Pacific and Global Travel  Retail. Michael joined the  Group in 1999 and has held  several senior roles in the  Group including General  Manager (Papua New Guinea  and Cambodia) and Regional  Manager, Asia-Pacific. |

|  |
| --- |
|  |
|  |
| Javed Iqbal |
| Director, Digital and  Information (50) |
|  |
| Nationality: Pakistani  Javed joined the Group as a  Management Trainee,  Finance in 1996 having  previously held a number of  senior roles, most recently as  the Area Director for Middle  East, South Asia and North  Africa. He joined the  Management Board as  Director, Digital and  Information in April 2022 to  lead the next phase of BAT’s  strategic digital  transformation. |

|  |
| --- |
|  |
|  |
| Zafar Khan |
| Director, Operations (50) |
|  |
| Nationality: Pakistani  Zafar was appointed Director,  Operations in February 2021  and became a member of the  Management Board at the  same time. Previously, he was  Group Head of New  Categories Operations. Zafar  joined BAT in 1996 and has  held several senior roles in the  Group, including Regional  Head of Operations Asia  Pacific & Middle East, Group  Head of Plan, Service &  Logistics, Regional Head of  Plan and Service for Western  Europe and Head of  Operations, Bangladesh. |

|  |
| --- |
|  |
|  |
| Hae In Kim |
| Director, Talent, Culture and  Inclusion (48) |
|  |
| Nationality: Korean  Hae In joined the  Management Board as  Director, Talent and Culture  Designate in January 2019  and became Director, Talent  and Culture in April 2019,  subsequently the role title  changed to Talent, Culture  and Inclusion. She was  previously Group Head of  Talent and Organisational  Effectiveness and has held  several other senior HR roles  in the Group. Prior to joining  the Group in 2008, she gained  experience at Samsung, IBM  Consulting Services and  PricewaterhouseCoopers. |

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| Management Board  As at 08 February 2023 | | | | | | | |

128

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| --- |
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| Paul Lageweg |
| Director, New Categories (53) |
|  |
| Nationality: Dutch  Paul joined the Management  Board as Director, New  Categories in January 2019.  He has been with the Group  for 14 years in various senior  roles, including Regional  Marketing Manager, Asia-  Pacific and Middle East, Area  Director, East Asia and Global  Head of Marketing Futures. |

|  |
| --- |
|  |
|  |
| Guy Meldrum |
| President and CEO, Reynolds  American Inc. (51) |
|  |
| Nationality: New Zealander  Guy was appointed President  and CEO of Reynolds  American Inc. in September  2020, having joined the  Management Board as  Regional Director, Asia-  Pacific and Middle East in  January 2019. Previously, he  was Area Director,  Australasia Area. Guy joined  the Group in 1993 and has  held several senior roles in the  Group including Area  Director, North Asia Area and  Marketing Director, Russia. |

|  |
| --- |
|  |
|  |
| Dr James Murphy |
| Director, Research and  Science Designate (47) |
|  |
| Nationality: Irish  James was appointed  Director, Research and  Science Designate in  February 2023 and became a  member of the Management  Board at the same time. He  has been with the Group for  more than 17 years in various  senior roles in the Group,  including EVP U.S. Scientific  Research & Development  based in the US, as well as  Group Head of PRRP Science  and Regional Product  Manager for Americas and  Sub-Saharan Africa. |

|  |
| --- |
|  |
|  |
| Dr David O’Reilly |
| Director, Research and  Science  (56) |
|  |
| Nationality: British  David was appointed  Director, Research and  Science in January 2019,  having joined the  Management Board as Group  Scientific Director in 2012,  leading R&D’s focus on  potentially reduced-risk  products. He has been with  the Group for more than 20  years and was previously  Head of International Public  Health and Scientific Affairs,  responsible for engagement  with scientific, medical and  public health communities. |

|  |
| --- |
|  |
|  |
| Johan Vandermeulen |
| Regional Director, Europe (55) |
|  |
| Nationality: Belgian  Johan was appointed  Regional Director, Europe and  North Africa in January 2019.  From 1 January 2022, his role  title is Regional Director,  Europe. Johan joined the  Management Board in 2014  as Regional Director for  Eastern Europe, Middle East  and Africa, then became  Regional Director, Asia-  Pacific and Middle East in  January 2018. He has been  with the Group for more than  30 years and his previous  roles include General  Manager in Russia and Turkey  and Global Brand Director for  the Kent brand. |

|  |
| --- |
|  |
|  |
| Kingsley Wheaton |
| Chief Growth Officer (49) |
|  |
| Nationality: British  In September 2022, Kingsley  was appointed Chief Growth  Officer. He joined the Group  in 1996 and has held various  senior marketing positions,  most recently as Chief  Marketing Officer. He was  appointed to the  Management Board as  Corporate and Regulatory  Affairs Director in 2012. In  January 2015, he became  Managing Director, Next  Generation Products and  then Regional Director,  Americas and Sub-Saharan  Africa in January 2018. |

Note:

Effective 28 February 2023, Dr David

O'Reilly will step down from the

Management Board. David will be

succeeded by Dr. James Murphy who

joined the Management Board as the

Director, Research and Science

Designate with effect from 1 February

2023, before assuming the role of

Director, Research and Science,

reporting to the Chief Executive, on 1

March 2023.

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129

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| Our Board | | | | | | | | |
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|  | Primary Board responsibilities include: | | | |  |  |  |  |
|  | –Group strategy (including ESG) and ensuring  resources are in place to meet objectives  –Setting Group performance objectives  and monitoring performance  –Group budget  –Effective risk management and internal  control systems  –Periodic financial reporting  –Annual Report & Accounts and Form  20-F approval | | –Dividend policy (including declaration of  dividends) and returns to shareholders  –Significant investments, disposals, corporate  financing and other corporate activities  –Board, Management Board and Company  Secretary appointments and succession planning  –Establishing appropriate systems of corporate  governance within the Group  –Group policies  –Effective engagement with shareholders,  our workforce and wider stakeholders | | | –Assessing and monitoring culture and its  alignment with Group purpose, values and strategy  –Ensuring workplace policies and practices align  with values and support sustainable success  –Monitoring compliance with the Standards  of Business Conducts and review of Speak Up  channels and reports arising  –Considering annual review of Board effectiveness | |  |
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|  |  | The statement of matters reserved for the Board  is available at bat.com/governance |  |  |  |  | Board oversight of M&A transactions  See page [321](#id739eb8a094346e4a1dd9989c862058f_2599) |  |
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|  |  | Delegation of Authorities: As part of our internal  controls framework, the Board delegates certain  authorities to executive management through the  Group Statement of Delegated Authorities to enable  effective delivery of Group strategy (see page [132](#id739eb8a094346e4a1dd9989c862058f_9951)) | |  |  |  |  |  |
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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |
| Board Committees | | | | | | | | | | |
|  |  |  |  |  |  |  |  |  |  |  |
|  | Audit Committee | |  | Nominations Committee | | |  | Remuneration Committee | |  |
|  | Monitors the integrity of financial reporting,  independence and effectiveness of the external  auditors, assurance of ESG metrics, internal  controls and risk management | |  | Recommends Board and Management Board  appointments; oversees development of executive  talent pipeline | | |  | Establishes the Directors’ Remuneration Policy;  determines remuneration for the Chair and  executive management | |  |
|  |  |  |  |  |  |  |  |  |  |  |
|  |  | See page [151](#id739eb8a094346e4a1dd9989c862058f_10128) for role and activities  Terms of reference at bat.com/governance |  |  | See page [146](#id739eb8a094346e4a1dd9989c862058f_10110) for role and activities  Terms of reference at bat.com/governance | |  |  | See page [179](#i1831158e35f74cc988db478d232fe873_22157) for role and activities  Terms of reference at bat.com/governance |  |
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|  | The Board has three principal Board Committees to which it has delegated  certain responsibilities. The roles, memberships and activities of these  Committees are described in their individual reports in this section.  Each Committee has its own terms of reference, available at bat.com/  governance. These are regularly reviewed and updated where necessary. | | | | | Following each Committee meeting, the Chair of each Committee provides a  full briefing to the Board, including on decisions made and key matters discussed.  Copies of the minutes of all Committee meetings are circulated to all Board  members to the extent appropriate. | | | |  |
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| --- | --- | --- | --- | --- |
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| Management Board | | | | |
|  |  |  |  |  |
|  | Management Board Structure |  | Management Board Responsibilities |  |
|  | The Management Board is chaired by the Chief Executive and comprises the  Executive Directors and 12 senior Group executives\* whose names and roles  are described on pages [128](#id739eb8a094346e4a1dd9989c862058f_9933) to [129](#i44a28bcf2c9448a6b3cb3bc975de91d9_2-0-1-1-376253).  Javed Iqbal was appointed as Director, Digital & Information, with effect from  1 April 2022. Marina Bellini stepped down from the Management Board with  effect from 31 March 2022. Kingsley Wheaton's role was redesignated as  Chief Growth Officer with effect from 1 September 2022.  Dr James Murphy was appointed as Director, Research and Science  Designate on 1 February 2023 and then as Director, Research and Science  with effect from 1 March 2023. Dr David O'Reilly will step down from the  Management Board with effect from 28 February 2023.  Further changes to the structure and composition of the Management Board  to drive accelerated transformation were announced on 31 January 2023.  These changes will take effect on 1 April 2023 and will be discussed in the  Annual Report and Form 20-F for 2023. |  | The Management Board is responsible for overseeing the implementation of  Group strategy and policies set by the Board, and creating the framework for  Group subsidiaries’ day-to-day operations.  Primary responsibilities of the Management Board include:  –Developing Group strategy for the Group’s product portfolio for approval by  the Board  –Monitoring Group operating performance  –Ensuring Group, regional and functional strategies and resources  are effective and aligned  –Managing the central functions  –Overseeing the management and development of Group talent  Note:  \*  11 senior Group executives from 1 March 2023. |  |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Board Leadership and Purpose |  |  |  |  |  |  |  |
| Governance Framework | | | | | | | |

An

#### overview of our governance framework is set out below.

There is a clear and

#### effective division of responsibility established between our Board, i

#### ts Committees

#### and operational management.

130

Board Leadership

The Board is collectively responsible to our shareholders for

the long-term sustainable success of the Company and for the

Group’s strategic direction, purpose, values and governance.

The Board provides the leadership necessary for the Group to

meet its business objectives within a robust framework of internal

controls, and is also responsible for ensuring the Group has an

effective executive leadership team in place to execute the

Group's strategy.

The Board maintains oversight of the Group's operations,

performance, governance and compliance with regulatory

obligations. The Board’s primary responsibilities are summarised

on page [130](#id739eb8a094346e4a1dd9989c862058f_10023).

Board activities

The Board has a comprehensive annual programme of meetings

to review the Group’s strategy and monitor performance across

all elements of the Group’s business model.

The Board’s strategic priorities for 2022 are identified within the

key performance indicators set out on page [7](#id739eb8a094346e4a1dd9989c862058f_6649). Its key activities

during the year are set out on pages [135](#id739eb8a094346e4a1dd9989c862058f_9969) to [136](#id739eb8a094346e4a1dd9989c862058f_21169). The Chair sets

structured meeting agendas in consultation with the Chief

Executive and the Company Secretary.

The Board considers stakeholder interests in its decision-making

on an ongoing basis. Examples of principal decisions made by

the Board during the year, and consideration given to the long-

term consequences of decisions, stakeholder interests, the impact

of operations on the environment and corporate reputation in

those contexts, are discussed on page [134](#id739eb8a094346e4a1dd9989c862058f_10005).

As part of the Board meetings in October 2022, the Board held

three full-day strategy sessions with executive management to

assess the Group's strategy and long-term growth opportunities,

strategic priorities, progress on key initiatives including QUEST,

and key challenges, risks and mitigation plans.

Oversight of the impact of the conflict between Russia and

Ukraine was an important focus for the Board throughout 2022.

Particular attention was given to the impact on colleagues in the

region, other affected stakeholders and Group operations, and the

Group’s response taking into account reputational and regulatory

considerations. The Board continues to oversee plans for the

transfer of the Group's business in Russia (together with the

Belarusian business) (see page [134](#id739eb8a094346e4a1dd9989c862058f_10005)).

How our governance framework supports our strategy

Our governance framework, including the structure of the Board

and its principal Committees, is set out on page [130](#id739eb8a094346e4a1dd9989c862058f_10023).

Certain key decisions and matters are reserved for the Board

and not delegated to any Committees or executive management.

As part of our internal controls framework, the Board has

delegated certain authorities to executive management through

our Group Statement of Delegated Authorities (SoDA) to enable

effective delivery of our strategy.

Our SoDA is designed to empower management at the right level

of our organisation and promote accountability and ownership.

Overseeing the implementation of Group strategy through our

SoDA is one of the ways that the Board promotes robust

corporate governance, risk management and internal controls

across the Group.

Our SoDA also supports our Board members in managing their

responsibility for promoting the success of the Company, in line

with their directors’ duties.

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|  |  | Matters reserved to the Board  bat.com/governance |

Members of the Board with US business colleagues at the Bowman Gray Tech

Center in North Carolina, US

Our purpose, ethos and culture

Our purpose, to build A Better TomorrowTM for all our stakeholders,

is underpinned by our ethos. Our ethos guides our culture and

behaviours, enabling an organisation that is future fit for sustainable

growth. We believe our ethos empowers our people and fosters a

vibrant, rewarding and responsible workplace. Its focus on diversity

and inclusion enables better understanding, connectivity and

insights across our business.

The Board is responsible for ensuring that our culture is aligned

with the Group's purpose, ethos and strategy. The Board is

committed to supporting the Management Board in continuing

to promote our ethos in every area of our business.

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|  |  |  |  |  |  |  |
|  | Our Ethos | |  | We are  Bold |  | We are  Diverse |
|  |  | We are  Fast |  | We are  Empowered |  | We are  Responsible |
|  |  |  |  |  |  |  |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our ethos on page [84](#id739eb8a094346e4a1dd9989c862058f_9644)  Read more about our purpose on page [25](#id739eb8a094346e4a1dd9989c862058f_14517) |

Delivery with integrity

How we execute our strategy is as important as its successful

delivery. It is essential to the Group’s long-term, sustainable

success that all our people act with high standards of behaviour.

We articulate this through our Group Standards of Business

Conduct (SoBC). Compliance with our SoBC, in letter and spirit,

is mandatory for all our people worldwide.

Our SoBC includes our Speak Up policy, reflecting the Speak Up

channels for raising any concerns in confidence (anonymously if

preferred) and without fear of reprisal. It also includes our Lobbying

and Engagement policy, reinforcing that all our engagement

activities with governments, regulators and other external

stakeholders must be conducted with transparency, openness

and integrity.

Our SoBC is regularly reviewed and updated. A revised SoBC was

introduced in January 2022 (discussed on page [66](#id739eb8a094346e4a1dd9989c862058f_15661)), supported by

a Group-wide awareness campaign with emphasis on environmental

sustainability, information security, and line managers' responsibilities.

The Audit Committee is kept updated on SoBC allegations, and

reports to the Board to enable Board oversight of behaviour falling

short of our standards and the corrective action taken.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | Read more about our commitment to delivery with integrity and  our Group Standards of Business Conduct on pages [66](#id739eb8a094346e4a1dd9989c862058f_15661) to [67](#i61464e4022874402ab39d55c5876c2d6_112799) |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Leadership Overview | | | | | | | |

131

Shaping and Overseeing Culture

The Board considers the Group’s culture and initiatives promoting

our ethos in a range of contexts throughout the year, including

through workforce engagement.

Key examples of the Board’s oversight of culture in 2022 and

primary indicators used by the Board to gauge organisational

culture are set out below.

How the Board oversees and monitors culture is considered as part

of the annual review of Board effectiveness, discussed on page [145](#id739eb8a094346e4a1dd9989c862058f_14483).

Connecting directly with our people

The Directors typically participate in visits to trade marketing, R&D

and operational sites during the year. This gives them first-hand

experience of the Group's organisational culture in context,

enables them to hear directly from colleagues across different

levels of the organisation and gain a broader understanding of

current sentiment.

In June 2022, Luc Jobin and Jack Bowles joined Darrell Thomas,

Holly Keller Koeppel and Kandy Anand for a visit to trade marketing,

R&D and operational sites in the U.S., including the Reynolds

Operations Centre in North Carolina, to see how our US business

is working to drive transformation.

The Directors had the opportunity to hear from colleagues on a

range of topics, from science and innovation to sustainable waste

management and recycling initiatives. The Directors also toured

a variety of retail outlets to better understand how our New

Categories products meet evolving consumer trends.

In July 2022, Karen Guerra, with Darrell and Kandy, visited our R&D

Centre in Southampton, UK. The Directors met with scientists,

technicians, engineers and developers and visited our biotech and

prototyping laboratories, and our blending and liquids studios, to

better understand our New Categories innovation and product

safety science.

In October 2022, all the Directors attended a U.S. market visit as

part of the Board's strategy sessions. The Directors visited a range

of retail outlets in California to see local trade marketing operations,

consumer touchpoints and examples of how we engage with

retailers to promote responsible marketing practices, including

age verification.

Understanding feedback and perspectives

Insights from workforce engagement channels, including our

global Your Voice employee survey, support the Directors'

understanding of the views and sentiments of our people.

Our Your Voice survey is conducted every two years and includes

questions to gain feedback on employees' perceptions of culture,

leadership, inclusion and wellbeing and to identify opportunities for

improvement.

Members of the Board on site with colleagues at the Reynolds Operations

Centre in North Carolina, U.S.

Luc Jobin and Kandy Anand meeting with scientific research and product

development colleagues at the Bowman Gray Tech Center, North Carolina, US

How our Board engages with our people through our workforce

engagement channels, and is kept informed of their interests and

perspectives, is discussed further on pages [88](#iecb80c297bcf49878ca96946d0f9b1c3_95480), [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429) and [170](#iff8934d3734b44f4b1d79b07b59bc890_252488).

Keeping informed

The Board discussed organisational culture with the Chief

Executive and executive management regularly in 2022, including

as part of the Chief Executive's report at scheduled board

meetings. They also discussed reports from the Director, Talent,

Culture & Inclusion, on topics including talent strategy, workforce

engagement insights and initiatives to support the health and

wellbeing of our people.

The Director, Operations, reported to the Board twice during the

year on workforce health and safety and the ongoing impact of

COVID-19 in certain markets.

The Remuneration Committee reviewed key aspects of workforce

remuneration policies, compensation frameworks and incentive

schemes, and their alignment with the culture and strategy of the

Group. The Committee also considers the Group's gender and

ethnicity pay reporting on an annual basis.

Oversight of business integrity and compliance

The Audit Committee reviewed quarterly reports from the Group

Head of Business Integrity & Compliance on the Group's Delivery

with Integrity programme, compliance with the SoBC and reports

from Speak Up channels, and reported to the Board on these topics.

The Audit Committee also received regular reports from the

Group Head of Internal Audit on the outcomes of internal audits

conducted in 2022, and action plans agreed with management

where areas for improvement were identified.

Culture insights and trends

The Board reviews the Group culture dashboard every year.

The dashboard presents a series of insights and indicators related

to culture and engagement, measured across the organisation

over time, to support the Board in monitoring trends.

Topics include diversity at different levels of the organisation,

employee engagement and empowerment (measured through our

global Your Voice employee survey), leadership stability, employee

retention, voluntary turnover, new capabilities hires, environmental

management, health and safety, and business conduct (including

Speak Up reports).

Following review, the Board is satisfied that our culture is aligned

with the Group’s purpose, strategy and ethos, and reflected

consistently in our workplace policies and practices.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Board Leadership and Purpose |  |  |  |  |  |  |  |
| Cultural Oversight | | | | | | | |

132

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| Capital Allocation Fit for Growth | | | | |  |
| Through its review and approval of the 2023 budget, the Board assessed capital  allocation priorities to support the Group's long-term, sustainable growth in the context  of a volatile macro-economic environment and inflationary pressures. The 2023 budget  enables acceleration of New Categories performance towards our targets for revenue  and profitability, supports EPS growth and continued deleveraging in accordance with  our guidance and shareholder expectations, and takes account of the importance of  maintaining financial flexibility and focus on dividend distribution.  Capital allocation decisions made as part of the budget also take account of continued  investment in robust product stewardship and scientific research, delivery of ESG  targets including those aimed at reducing the environmental impact of our operations,  workforce remuneration in an inflationary environment, and commercial arrangements  with suppliers and customers. | | | |  | Key stakeholder perspectives taken into account |
|  | Shareholders and Investors |
|  | Consumers |
|  | Customers |
|  | Suppliers |
|  | Our people |
|  | Governments and wider society |
|  |  |

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| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Quantum Phase 4 Strategic Review | | | | |  |
| The Board reviewed plans to commence a strategic review of the Group's regional and  business unit structures under Phase 4 of Quantum to support acceleration of the  Group's transformation.  The Board considered the longer-term benefits anticipated through restructuring,  including enhanced resource allocation, potential to build new capabilities and  development of the Group's marketing, product and science functions to steward world-  class brands. In view of some anticipated reduction in headcount associated with the  restructuring, the Board also took into account the impact on Group company  employees and the importance of adopting a responsible approach to restructuring,  including applicable information and consultation requirements in relevant markets. | | | |  | Key stakeholder perspectives taken into account |
|  | Shareholders and Investors |
|  | Our people |
|  | Consumers |
|  | Governments and wider society |
|  |  |

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| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Transfer of the Group's Business in Russia | | | | |  |
| The Board has closely monitored the impact of the evolving conflict in Ukraine on the  Group and its operations, with the safety and wellbeing of Group company employees  across the region as the first priority.  In March 2022, the Board concluded that ownership of the Russian business was no  longer sustainable and we announced initiation of the process to transfer that business.  In reaching this conclusion, the Board considered the interests of our people in the  region and measures taken to safeguard their physical security and welfare,  expectations across all our stakeholders for high standards of business conduct,  compliance with applicable sanctions and other regulatory considerations, and the  impact on the Group's broader supply chain. Subsequently, the Board has overseen  progress of activities towards transfer of the Russian business (together with the  Belarusian business) within a complex and volatile context. | | | |  | Key stakeholder perspectives taken into account |
|  | Shareholders and Investors |
|  | Our people |
|  | Consumers |
|  | Customers |
|  | Suppliers |
|  | Governments and wider society |
|  |  |

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| --- | --- | --- | --- | --- | --- |
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| Global Product Stewardship Framework Policy | | | | |  |
| The Board approved a revised Global Product Stewardship Framework Policy with effect  from 1 January 2023. The revised policy articulates our approach to robust product  stewardship across our multi-category portfolio and our commitment to scientific  engagement. Updates to the policy were informed by input from our research scientists,  external benchmarking, current industry best practice and evolving product regulation.  In approving the revised policy, the Board took into account the expectations of our consumers  and wider stakeholders for consistently high standards of product stewardship and the  importance of maintaining those standards as part of our long-term sustainable success. The  Board also took account of our commitment to offer adult consumers brands they can trust  that are manufactured to high quality and safety standards. | | | |  | Key stakeholder perspectives taken into account |
|  | Shareholders and Investors |
|  | Consumers |
|  | Customers |
|  | Suppliers |
|  | Governments and wider society |
|  |  |

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| --- | --- | --- |
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|  | | |
|  | We define principal decisions as those decisions and discussions by the Board that are strategic or material to the Group and those of significance to any  of our key stakeholders. |  |
|  |  |  |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Principal Decisions  Made by the Board | | | | | | | |

Outlined below are some of the principal decisions made by the Board over the year,

#### highlighting how the Board considered relevant

factors,

#### including key stakeholder

perspectives, the environment, reputation for high standards of business conduct,

#### and the long-term



#### impact

#### of decisions.

#### Our key stakeholders and how the Board engages with them are discussed further on pages

[137](#id739eb8a094346e4a1dd9989c862058f_9987) to [141](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429). Board activities in 2022 are set out in pages [135](#id739eb8a094346e4a1dd9989c862058f_9969) to [136](#id739eb8a094346e4a1dd9989c862058f_21169).

133

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| Simplify the Business | | | | | | | | | | | |
| The Board understands our business is  enabled by simplifying our structures,  embracing digital transformation, and  rigorous cost management | | | | | | | | | | | |

Activities in 2022

–reviewing progress of Quantum

implementation (part of QUEST), across

Phase 1 organisational design and business

simplification; Phase 2 End Market

operating model optimisation; and Phase 3

head office restructuring and leverage of

Global Business Solutions to increase

efficiencies, and savings delivered against

target to release funds for investment;

–reviewing design and planning activities

for Quantum Phase 4 operating model

to optimise the Group's geographical

footprint and develop foundations for

a multi-category future;

–oversight of broader QUEST programme

implementation to accelerate enterprise

capabilities and enablers, highlighted

below;

–reviewing plans to further drive Global

Business Solutions efficiency and

effectiveness in delivering end-to-end

business processes; and

–oversight of New Categories initiatives

to optimise cost of goods, drive

marketing spend efficiencies and reduce

portfolio complexity as part of the

Group’s focus on stronger, global brands.

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| Step change in New Categories  Performance | | | | | | | | | | | |
| Continued investment and development  of New Categories to accelerate growth  is a strategic focus of the Board’s agenda | | | | | | | | | | | |

Activities in 2022

–reviewing Group and regional performance

against strategy to accelerate New

Categories growth and key performance

indicators, including New Categories

revenue, contribution and market share;

–reviewing industry, Group and regional

performance outlook and the competitive

environment;

–reviewing our New Categories investment

glidepath and innovation pipeline across

product portfolios, with focus on the new

glo Hyper X2 product;

–evaluating consumer adoption, trading

environment and competitor landscape

across New Categories portfolios;

–reviewing the Group’s New Categories

supply chain, its resilience, sourcing

footprint, impact of inflationary pressures

and optimisation strategies developed

to mitigate impacts;

–overseeing the development of strategic

opportunities beyond nicotine, including

Btomorrow Ventures’ strategic mandate

and portfolio investments;

–reviewing the regulatory landscape in New

Categories and beyond nicotine across key

markets, with deep dive reviews on Europe

and the US; and

–assessing strategic options for developing

beyond nicotine foundations in wellbeing

and stimulation.

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| Drive value from Combustibles | | | | | | | | | | | |
| Driving value from combustibles is a  core priority for the Board, to deliver  today and build A Better Tomorrow™ | | | | | | | | | | | |

Activities in 2022

–assessing strategic approach to drive

value from combustibles to fund New

Categories investment, including review

of market archetypes, portfolio

complexity reduction, revenue growth

management and marketing spend

efficiency initiatives;

–reviewing Group and regional performance

against strategy and key performance

indicators, including value share growth

and stock-keeping unit rationalisation;

–reviewing industry outlook, trading

environment and competitor landscape

through a global and regional lens;

–reviewing combustible product portfolios,

product development pipelines and leaf

blend optimisation across the Group’s

global drive brand portfolio;

–understanding the impact of growth

in illicit trade, particularly in developing

markets;

–reviewing evolving global product

regulation, including regulation of menthol

and flavours, particularly in the US; and

–reviewing the impact of evolving tax

regimes, with focus in particular on

excise tax developments in the US.

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|  |  |  | The five QUEST enablers are:  Quantum  Quantum’s objective is to simplify the  organisation and generate funds through cost  savings to reinvest in New Categories. Board  oversight of Quantum in 2022 is discussed  above.  Unleash Innovation  Strategy to sharpen BAT's R&D innovation model,  including focus for investment, partnering with  external innovation partners and development of  talent capabilities.  Empowered organisation  Building an engaged, agile and high performing  organisation, with winning capabilities,  accountable and empowered leaders, and a fit-for-  growth organisational design with an ambitious  diversity and inclusion agenda. |  | Shaping Sustainability  Accelerating our path to becoming a truly  sustainable enterprise through transparent  engagement with scientists, regulators and  policy-makers so that our strategy takes account  of their views, developing our New Categories  science programmes while advocating for  appropriate standards and regulations and  evolving our approach to ESG reporting in line  with stakeholder expectations.  Technology and digital  Driving digital transformation across our  organisation, using data and analytics and  developing enhanced digital capabilities. | |
|  | Fit for future growth  The Board oversees the implementation of our  QUEST programme, which lays the foundations  for the Group's multi-category future.  The Finance and Transformation Director is the  programme director for Quest and responsible  for QUEST implementation.  In 2022, the Board reviewed progress on  QUEST’s five capability accelerators with the  Management Board, including in depth reviews  at the Board's strategy sessions in October. |  |  |
|  |  |  |
|  |  |  |  | Read more about our QUEST programme  and capability accelerators on pages [24](#id739eb8a094346e4a1dd9989c862058f_7481) to [25](#id739eb8a094346e4a1dd9989c862058f_14517) |
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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Board Leadership and Purpose |  |  |  |  |  |  |  |
| Board Activities | | | | | | | |

134

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| Financial and Risk | | | | | | | | | | | |
| The Board pays close attention to Group  performance and financial matters,  internal control, and integrity of  reporting and risk management | | | | | | | | | | | |

Activities in 2022

–approving the Group budget, reviewing

the application of the Group's flexible

capital allocation strategy, and oversight

of resource allocation activities to

support strategy execution;

–reviewing Group financial performance

against key performance metrics, current

outlook, challenges and opportunities for

growth in each region, and FX impacts;

–reviewing Group half-year results, trading

updates, year-end results and the Annual

Report and Form 20-F;

–approving the share buyback programme

for 2022;

–reviewing share price performance

and investor and broker perspectives;

–approving interim dividend proposals

and assessing distributable reserves of

the Company prior to dividend payments;

–determining Group viability, taking into

account current position and principal risks;

–reviewing compliance with Group

financing principles, including liquidity,

capital allocation and net debt/EBITDA;

–reviewing the Group’s revolving credit

facilities, refinancings, the Euro hybrid

bond issuance, and debt issuance

programmes;

–reviewing Group cash flow performance

and opportunities to optimise the

balance sheet to enable investment,

while reducing the carrying value of debt;

–assessing the impact of macro-economic

trends on Group performance, outlook

and operations due to geopolitical

instability, increasing inflation and rising

interest rates;

–reviewing the Group risk register, and

risk appetite in the context of strategic

objectives and emerging risks, with focus

on the impacts of the conflict in Ukraine

and inflationary pressures on supply chains;

–reviewing status of litigation involving

Group companies;

–reviewing Group insurance coverage; and

–reviewing financial performance of

associates of the Group periodically.

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| Environmental,  Social, Governance | | | | | | | | | | | |
| The Board emphasises that our  strategy, business, and product  portfolio be sustainable for the long  term and meet our evolving societal  responsibilities | | | | | | | | | | | |

Activities in 2022

–assessing the impact of the evolving

conflict in Ukraine on Group company

personnel in the region and other

affected stakeholders, reputational and

regulatory considerations, and Group

business continuity structures and

plans to manage the Group’s response;

–overseeing the Group's ESG strategy,

including climate-related issues and

opportunities for the Group, and

reviewing performance against the

Group's ESG metrics;

–reviewing environmental performance for

the preceding year and progress against

glidepaths towards achieving the Group’s

environmental targets, including in

relation to climate (targets aligned to

net zero emissions by 2050), renewable

energy, water stewardship and recycling;

–approving revised versions of the Group's

Environment and Health & Safety Policies,

effective from July 2022;

–approving the Group's new Global Product

Stewardship Framework, effective from

January 2023;

–reviewing the perspectives of the Group’s

key stakeholders, the Group’s response

to stakeholder perspectives, and the

effectiveness of engagement mechanisms;

–reviewing the outcomes of the Investor

Perception Survey conducted in 2022;

–reviewing the outcomes of the ESG

Double Materiality Assessment conducted

in 2022 and oversight of the creation of a

new leadership role of Chief Sustainability

Officer as a resulting action;

–approving the annual Modern Slavery

Act statement and annual Conflict

Minerals Report;

–approving revised Articles of Association

for the Company, to be proposed to

shareholders for approval at the 2023

AGM; and

–reviewing updates on compliance matters,

including allegations of misconduct,

reports from Speak Up channels and

investigations, and the Group’s Delivery

with Integrity programme initiatives.

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| Ethos, Culture, People | | | | | | | | | | | |
| The Board shapes and oversees the  Group’s culture and ethos. Setting the  ‘tone from the top’ is an important part  of the Board’s role | | | | | | | | | | | |

Activities in 2022

–approving the appointment of

Kandy Anand and Véronique Laury as

Non-Executive Directors, on the

recommendation of the Nominations

Committee;

–approving changes to Management

Board composition, on the

recommendations of the Nominations

Committee;

–approving a revised version of the

Board Diversity Policy, effective from

November 2022;

–determining the independence of

Non-Executive Directors prior to

proposing them for appointment

at the Company’s AGM;

–approving revisions to Non-Executive

Director fees;

–monitoring corporate culture and its

alignment with the Group’s purpose,

ethos and strategy;

–reviewing the Group’s talent strategy,

diversity and inclusion agenda, and

progress against objectives;

–reviewing feedback from the Group’s

workforce engagement mechanisms;

–overseeing measures implemented to

prioritise and protect the health, safety

and wellbeing of the Group's workforce,

including support for colleagues based

in Ukraine and the wider region,

strategies for safe and engaging returns

to workplaces as COVID-19 restrictions

eased, and provision of vaccination

support in various markets;

–reviewing health and safety performance

for the preceding year, outcomes of

Environment, Health & Safety roadmap

assessments, targets for the coming year

and action plans;

–reviewing the effectiveness of Speak

Up channels;

–reviewing the outcomes of the externally-

facilitated Board evaluation in 2022;

–reviewing the funding positions relating

to the Group’s post-employment benefit

schemes; and

–approving amendments to share and

incentive plan rules to update malus and

clawback provisions in alignment with

the 2022 Directors' Remuneration Policy.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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135

Shareholder and Investor

Engagement

The Board is committed to open and

transparent dialogue with shareholders

and investors to ensure their views are

understood and considered.

The Chair and Executive Directors’ annual

engagement programme is discussed

below. The Senior Independent Director

and other Non-Executive Directors are also

available to meet with major shareholders

on request.

Annual investor relations programme

A global engagement programme is

conducted annually with shareholders,

investors, potential investors and analysts.

This is led by the Chair and Executive

Directors, supported by the Investor

Relations team. The Executive Directors

presented our Full and Half-Year results

and pre-close statements with investor

Q&A calls. Presentations and transcripts

are published on bat.com.

In total we hosted 533 investor meetings in

2022, covering 70% of our shareholder

base with broad geographic coverage.

As the year progressed there was a steady

return to physical conferences, investor

meetings and roadshows as travel

restrictions eased. Investor interaction in

physical and virtual event formats included

attendance at five investor conferences,

nine investor roadshows and two salesforce

briefings.

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|  |  |  |  |  |  |  |
|  | Spotlight | | | |  |  |
|  |  |  |  |  |  |  |
|  | Investor Perception Study  In 2022, we completed an investor perception study, supported by Rivel, an  independent external consultancy. This followed a benchmark study conducted  in 2019. Our study provided insights on the focus and priorities of our investor  base, their views on BAT and how perceptions have changed since 2019. Around  50 interviews were conducted by the consultancy on a confidential basis with a  sample of key investors. The study results were peer reviewed on a quantitative  basis, using external normative data from similar exercises over the last 5 years  across peer organisations.  Results show that significant progress has been made, with perceptions improving  across most measures (including management, strategy, capital deployment and  communications). Key takeaways for what investors would like to see more of in  the future include greater disclosure on New Category performance and further  progress on ESG and execution of strategic priorities. | | | | |  |
|  |  |  |  |  |  |  |

In February 2022, Jack Bowles, Tadeu

Marroco and Kingsley Wheaton presented

at the Consumer Analyst Group of New York

(CAGNY) conference via a live webcast and

Q&A to over 150 investors. BAT also

participated in two flagship investor

conferences, Deutsche Bank Consumer

Conference in Paris in June and Barclays

Global Consumer Staples Conference in

Boston in September. Tadeu joined 'fire-side'

discussions, hosted by each bank’s sector

analysts, and investor meetings.

ESG engagement remains an important

focus. Investors were engaged in the

context of our ESG Double Materiality

Assessment to ensure their expectations

and perspectives were taken into account.

We also completed a stakeholder mapping

exercise, to support development of more

targeted ESG engagement with investors,

special interest groups and asset owners.

Shareholder Communications

Our investor website enhances our digital

interaction with investors. It includes our

investment case, our approach to ESG,

shareholder FAQ and regular consensus

sharing. Our Investor News hub pulls our

press releases, news and features together

in one place for investors, with an automated

news alerts service available to keep

investors up to date. Our investor website

covers live broadcasts of events, including

results and conferences, and playback

slides and transcript available online.

Investor meetings 2022

Geographic scope (%)

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|  | United Kingdom | 54 |
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|  | United States | 25 |
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|  | South Africa | 10 |
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|  | Europe (ex UK) | 4 |
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|  | Rest of world | 8 |
|  |  |  |

533

Meetings in 2022

(2021: 678, primarily virtual format)

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Board Leadership and Purpose |  |  |  |  |  |  |  |
| Board Engagement  with Stakeholders | | | | | | | |

We understand the strategic importance of stakeholders to our business.

Our Directors value engagement with our shareholders and wider stakeholders to understand

their views and inform the Board’s decision-making, strategy development and risk assessment.

136

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How the Board considers shareholder

and investor views

The Chair, the Executive Directors and

Remuneration Committee Chair regularly

update the Board on their dialogue with

shareholders and investors. The Board also

receives updates from the Head of Investor

Relations and our brokers on stock

performance and on our shareholders' key

issues, perspectives, and expectations.

Shareholder and investor perspectives

considered by the Board in 2022 included

transformation, New Categories strategy

and performance, approach to addressing

inflationary pressures, deleveraging, capital

allocation, ESG strategy and targets, and

key regulatory developments.

@To provide further transparency and

insight into the progress being made in

building a sustainable New Category

business, the category contribution from

New Categories is disclosed (see page

[330](#i49422b2b471646dabd086f354630c16e_68562) for the reconciliation from profit from

operations) separately for the first time this

year to demonstrate our progress towards

our target for reaching profitability .@

The Board takes shareholder feedback into

account in decision-making and developing

Group strategy. This is discussed further

on page [133](#id739eb8a094346e4a1dd9989c862058f_10005), including in relation to capital

allocation decisions, and on page [160](#id739eb8a094346e4a1dd9989c862058f_8489) in

relation to executive remuneration.

Annual General Meeting (AGM)

Our AGM is an opportunity for further

shareholder engagement, for the Chair

to set out progress, and for the Board to

answer questions.

Following restrictions on attendance at our

2020 and 2021 AGMs as a result of the UK

Government’s measures to manage the

impact of COVID-19, we were delighted

to welcome our shareholders in person to

attend our 2022 AGM. Shareholders were

also given the opportunity to submit

questions about AGM business in advance

of the meeting and responses to the

queries received were published at

bat.com/agm.

All Directors are expected to attend AGMs.

All Directors attended our 2022 AGM other

than Holly Keller Koeppel due to prior

commitments.

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|  |  | For disclosures required by paragraph 7.2.6 of  the Disclosure Guidance and Transparency Rules  and the UK Companies Act 2006 see  Other Information section |
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137

Wider Stakeholder Engagement

A broad range of stakeholders are important to the Group at local,

regional and functional levels. Key stakeholders are strategically

important to our business and essential to our ability to generate

long-term, sustainable value. We identify them by applying an

established stakeholder engagement framework, which takes into

account strategic objectives and risks to the Group. In 2022, the

Board's assessment of key stakeholders was further informed by

the outcomes of an ESG Double Materiality Assessment

(discussed further on pages [46](#id739eb8a094346e4a1dd9989c862058f_15528) to [48](#id739eb8a094346e4a1dd9989c862058f_17148) and [140](#i9c5bb655a1da4d89ac69a65ea4032c99_2-1-1-5-205543)).

Our key stakeholders are referenced in our business model on

page [18](#id739eb8a094346e4a1dd9989c862058f_7047), with an overview of their importance, what matters

to them, and how we engage and respond to them on pages [20](#id739eb8a094346e4a1dd9989c862058f_6183) to [21](#id739eb8a094346e4a1dd9989c862058f_14373).

Transparency of engagement is woven into our Group policies,

such as our Standards of Business Conduct and specific

frameworks for stakeholder engagement.

The Board conducted a review of key stakeholders in 2022.

This included how engagement is conducted across the Group,

stakeholders’ perspectives, and how the Board is kept informed

of those perspectives where engagement is not at Board level.

Following its review, the Board remains satisfied there is well-

established and effective engagement with the Group’s key

stakeholders, enabling the Board to understand their perspectives.

The Board will continue to monitor the ongoing effectiveness of

stakeholder engagement.

Where the Board does not engage directly with our stakeholders,

it is kept updated by reports from management so Directors

maintain an effective understanding of what matters to them and

can draw on these perspectives, including in Board decision-

making and strategy development.

An overview of how the Board engaged with wider stakeholders

and maintained its understanding of their interests during the year

is set out below.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
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|  |  | Consumers |  |  |  | Suppliers |  |
|  | Our consumers are at the core of everything we do. Consumer-  led innovation and product development are central to  achieving our purpose of building A Better TomorrowTM.  We believe that our multi-category approach is the most  effective way to appeal to the diverse preferences of adult  consumers worldwide.  The Board is regularly briefed by the Executive Directors and  senior management on product performance across all portfolio  categories and how our product innovation is focused on  satisfying adult consumer preferences underpinned by  consumer insights and foresights.  In 2022, the Board was updated on how consumer insights  continuously inform our plans for product development and  roll-out, for example understanding how sustainability concepts  such as reduced plastics and increased recyclability resonate  with consumers and reflecting insights into packaging  development; how consumer perceptions on nicotine risks are  used to monitor the relevance of information provided to inform  consumers about New Categories products; and how the  Group has responded to consumer expectations for responsible  product marketing.  Through its strategy sessions in 2022, the Board reviewed how  we continue to act on the depth of our consumer insights to  support innovation in New Category product pipelines and drive  a step change in New Categories performance. | |  |  | Our relationships with suppliers and contracted farmers are  managed day-to-day by the Group’s Operations function and at  local market level. The Board oversees the Group’s supply chain  strategies and progress on sustainable agriculture and farmer  livelihoods programmes.  In 2022, the Board was regularly updated on the impact of  the conflict in Ukraine on our operations and our suppliers,  and the business continuity plans developed to avoid supply  chain disruption.  The Board reviewed the evolving impact of inflationary pressures  on the Group’s supply chain network and key drivers, including  geopolitical uncertainties and continued COVID-19 impacts.  The Board reviewed our annual Modern Slavery Statement  (available at www.bat.com/msa), which reports on our progress  to ensure that our operations are free from labour exploitation,  and on human rights impact assessments and monitoring  programmes conducted in support of this commitment.  The Board also reviewed the annual conflict minerals statement  and continuous improvement efforts implemented with  our New Categories material suppliers to mitigate supply  chain risks.  The Board was updated on the deployment of supplier water  and emissions assessments to support efforts to reduce  carbon emissions and promote best practice in water  stewardship in our supply chain. | |  |
|  |  |  |  |  |  |  |  |
|  |  | Read more about our approach to engaging with consumers  Pages [14](#id739eb8a094346e4a1dd9989c862058f_6792) to [21](#id739eb8a094346e4a1dd9989c862058f_14373) and [30](#id739eb8a094346e4a1dd9989c862058f_8228) to [38](#i052a31193134442399c7971683aefbb1_43621) |  |  |  | Read more about our approach to engaging with suppliers  Pages [20](#id739eb8a094346e4a1dd9989c862058f_6183) to [21](#id739eb8a094346e4a1dd9989c862058f_14373). [43](#id739eb8a094346e4a1dd9989c862058f_15520), [48](#id739eb8a094346e4a1dd9989c862058f_17148), [53](#i5766d4bc4f8844cbb799ee97e2a1a6eb_169798), [57](#i17489da235a5454bafe322e1cbc87714_123229), and [60](#id739eb8a094346e4a1dd9989c862058f_15617) to [65](#i7a6a54557f164cfea83eb7ad47950be6_258087) |  |
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|  |  | Customers |  |  |  |  |  |
|  | Whilst retailer, wholesaler and distributor relationships are managed at local market and business unit levels, the Board is briefed  regularly on the global retail environment, promotion of responsible marketing practices and Youth Access Prevention (YAP) controls  including in New Categories online channels. In 2022, the Board was also updated on progress in New Categories recycling take  back schemes and how increased digitalisation enhances customer engagement through B2B service models.  The Audit Committee reviews the development of the Group’s responsible marketing and YAP procedures  and approach to embedding these with retail customers across our product portfolios on a regular basis. | | | | | |  |
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|  |  | Read more about customers and our approach to responsible marketing  Pages [20](#id739eb8a094346e4a1dd9989c862058f_6183) to [21](#id739eb8a094346e4a1dd9989c862058f_14373) and [64](#id739eb8a094346e4a1dd9989c862058f_15649) to [65](#i7a6a54557f164cfea83eb7ad47950be6_258087) |  |  |  |  |  |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Board Leadership and Purpose |  |  |  |  |  |  |  |
| Board Engagement with Stakeholders  Continued | | | | | | | |

138

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|  |  | Society |  |
|  | As a global organisation, we recognise our responsibility to  wider society to reduce the health, environmental and social  impacts of our business and seek to play a positive role in  debates that shape the regulatory environment in which we  operate.  The Board is briefed on scientific engagement with regulators,  public health bodies, and scientific communities. In 2022, this  included updates on the status of our applications to the FDA  relating to our Vapour products and on our contributions to  industry and governmental efforts to develop Vapour and  Modern Oral product standards in various markets. The Board  was also briefed on progress in the Group's clinical studies  relating to glo and to nicotine perceptions, on roundtable  events attended with public health advocates, such as the  Global Forum on Nicotine, and on the work of the External  Scientific Panel which enables a discussion forum with  scientific and public health experts.  At every regular board meeting, the Board reviews a report  from our Legal & External Affairs Director that includes  updates on our regulatory engagement and collaborative anti-  illicit trade activities. For example, in 2022 these updates covered  our engagement on New Categories product regulation, excise,  single use plastics and other environmental issues.  The Board considered the Group’s range of responses to  stakeholder feedback on the environmental impact of our  products. Examples included the publication of the Group's  first Low-Carbon Transition Plan, detailing the Group's  roadmap to reach net zero emissions by 2050.  The Non-Executive Directors regularly attend the Corporate  Audit Committee and Regional Audit & CSR Committees,  where societal and community perspectives at regional and  local levels are discussed. The Audit Committee also reviews  feedback from these Committees.  The Audit Committee is regularly updated on our engagement  with tax authorities on material Group tax matters, and is  briefed annually on our investment in community and  charitable initiatives. | |  |
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|  |  | Read more about our engagement with governments and wider society  Pages [20](#id739eb8a094346e4a1dd9989c862058f_6183) to [21](#id739eb8a094346e4a1dd9989c862058f_14373), [32](#iedaab7ef453849a0bc31d5b8a528bef2_2306829) to [38](#i052a31193134442399c7971683aefbb1_43621), and [42](#id739eb8a094346e4a1dd9989c862058f_8800) to [81](#i238db1b8b3d540b68cf1e1287e5ce401_12610) |  |
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|  | UK Companies Act: Business relationships  This section summarises how the Directors have regard to the need to  foster business relationships with customers, suppliers and other external  stakeholders. Further information is provided on pages [18](#id739eb8a094346e4a1dd9989c862058f_7047) to [21](#id739eb8a094346e4a1dd9989c862058f_14373). Information  regarding the effect of that regard is provided on page [133](#id739eb8a094346e4a1dd9989c862058f_10005). |
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|  | Spotlight | | | |  |  |
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|  | ESG Double Materiality Assessment^ (DMA)  In 2022, we conducted a DMA with the support of a specialist  external consultancy. The assessment spanned both impact  and financial materiality and required the Group to examine  its impact on society and the environment, and the impact of  society and the environment on the sustainability of the Group.  The scope of the assessment is discussed further on page [46](#i39d2f67bc00f46c5a7980e4203884f6b_46971).  Extensive engagement was conducted as part of the  assessment with external and internal stakeholders,  summarised below. | | | | |  |
|  | >95 | | | | |  |
|  | Dialogues with key external and internal stakeholders.  External stakeholders included investors, suppliers,  workforce representative groups, labour unions and  Non-Governmental Organisations | | | | |  |
|  | >75 | | | | |  |
|  | Structured interviews with internal stakeholders, including  the Chair, Chief Executive, Finance and Transformation  Director, several Non-Executive Directors, the Chief Growth  Officer and other members of senior management | | | | |  |
|  | >2,600 | | | | |  |
|  | Group company employees participated in a focus survey  to provide their perspectives on ESG priorities | | | | |  |
|  | Outcomes  The outcomes of the DMA were reviewed by the Board and  played an important role in shaping our ESG reporting  framework, including more focused definition of ESG  metrics, combining all principal components of our ESG  reporting into the Annual Report and Form 20-F, and  preparing for alignment with future requirements under the  EU Corporate Sustainability Reporting Directive.  In view of feedback on our governance structures, the Group  appointed its first Chief Sustainability Officer in September  2022. The outcomes also informed the Board's assessment  of the Group's key stakeholders and their ESG priorities. | | | | |  |
|  | Stages of ESG double materiality Assessment | | | | |  |
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Note:

^Although financial materiality has been considered in the development of our Double

Materiality Assessment (DMA), our DMA and any related conclusions as to the

materiality of sustainability or ESG matters do not imply that all topics discussed therein

are financially material to our business taken as a whole, and such topics may not

significantly alter the total mix of information available about our securities

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139

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|  |  | Our People |  |  |  |
|  | Our people are critical to our success and the Board is  committed to having regular and meaningful engagement  with our workforce and to taking their perspectives into  account in decision-making and strategy development.  The Board keeps up to date with the current views of our  workforce through a combination of engagement methods,  across multiple channels at different levels of our organisation.  These channels are well-established and include direct  engagement through Directors’ market and site visits and  Executive Director participation in internal webcasts. Indirect  engagement is enabled through feedback from town halls,  works councils, webcast Q&A, our global Your Voice employee  survey, and Speak Up channels.  Given the spread, scale and diversity of the Group’s workforce,  the Board considers it effective to use this combination of  established channels, augmented by structured reporting  to the Board twice during the year.  This enables the Board as a whole to understand the perspectives  of our workforce received through the full breadth of engagement  channels at all levels.  These engagement channels, combined with Group-wide  reporting structures to capture workforce feedback, cover  all Group company employees and fixed-term contractors  undertaking permanent roles. Focus and action areas are  reviewed by the Board and fed back to our workforce.  In 2022, Non-Executive Directors participated in several market  and site visits, discussed on page [132](#id739eb8a094346e4a1dd9989c862058f_14254). The Board reviewed our  workforce engagement channels across the Group and the  consolidated feedback. The key themes related to continuation of  regular updates to employees on transformation, including  sustainability and innovation, and continued focus on  prioritisation. Examples of initiatives in response to this feedback  are discussed further below.  The Board was also briefed on a variety of initiatives to enable a  safe and engaging return to our workplaces across the globe,  where COVID-19 restriction were relaxed in 2022. | |  | Our Executive Directors led a series of market visits and other  in person and virtual forums in 2022 to connect regularly with  regional, local and functional teams.  As part of the Directors' site visit to North Carolina in July 2022,  Jack Bowles joined an employee town hall with over 1,000 US  colleagues and took a range of questions from the audience.  Our Executive Directors also presented in real time on global,  functional and market webcasts including discussions and Q&A  on our purpose, ethos, strategy, accelerated transformation,  performance and business outlook.  Overall, there were 32 market visits or other engagement forums  attended by one or more Directors in 2022, comprising 6 in the  US, 4 in the Americas and Sub-Saharan Africa region, 5 in the  Europe region, 6 in the Asia-Pacific and Middle East region and 11  with central functions.  The Board continues to assess the effectiveness of engagement  with our people and how its engagement informs Board  decision-making and strategy development. |  |
|  |  | Karen Guerra and Darrell Thomas on site with colleagues at our R&D  laboratories in Southampton, UK |  |
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|  |  | Read more about our approach to engaging with our people  Pages [88](#id739eb8a094346e4a1dd9989c862058f_16840) and [170](#iff8934d3734b44f4b1d79b07b59bc890_252488) |  |  |  |
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| --- | --- |
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| 2022: Key priorities from workforce feedback and examples of resulting initiatives | |
| Transformation, including  sustainability | –Sustainability week in July 2022, with live broadcasts available across the Group enabling employees to actively contribute  their comments and views. Over 14,000 attendees participated in virtual events covering topics across sustainable  operations, diversity, brands with purpose and innovation.  –News features explaining QUEST and its role in the Group's transformation, with senior leadership highlighting the building  block of each accelerator. |
| Innovation | –Regular news updates on New Categories product launches, innovation, achievements in category leadership  and innovation hub development in Italy.  –Btomorrow newsletter highlighting venturing and collaborative innovation initiatives and latest investments. |
| Continued our focus on  prioritisation | –Full Year and Half Year performance broadcasts by the Chief Executive and Finance and Transformation Director,  with live Q&A.  –New capabilities training, including focused programmes on global marketing in a digital era and revenue growth  management, to promote a continuous learning culture enabled through our online learning platform, The Grid.  –Management Board 'Unplugged' virtual broadcasts featuring interviews with Management Board members hosted  by employees at different levels of the organisation and Management Board virtual learning 'playlists' on The Grid. |

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|  | UK Companies Act: Employee engagement  This section summarises the Directors' approach to engaging with the Group's workforce, including employees of UK Group companies, and how the Directors  have regard to their interests. Further information is provided on pages [84](#id739eb8a094346e4a1dd9989c862058f_9644) to [92](#ib7f6c2fd07b14abe9855c51cf71be497_67035) and pages [160](#id739eb8a094346e4a1dd9989c862058f_8489) and [168](#iff8934d3734b44f4b1d79b07b59bc890_252487) to [170](#iff8934d3734b44f4b1d79b07b59bc890_252488) in relation to remuneration matters. Further  details regarding the effect of that regard are provided on page [131](#id739eb8a094346e4a1dd9989c862058f_9951). |  |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Board Leadership and Purpose |  |  |  |  |  |  |  |
| Board Engagement with Stakeholders  Continued | | | | | | | |

140

The Board comprises the Non-Executive Chair, two Executive

Directors and eight independent Non-Executive Directors.

This section sets out the roles and division of responsibilities between

the Chair, Executive Directors and Non-Executive Directors.

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| Roles and Division of Responsibilities | |
| Role | Responsibilities |
| Chair | –Leadership of the Board and its overall effectiveness  –Promotes constructive debate and effective decision-making  –Sets the Board agenda  –Facilitates Directors’ contributions  –Interfaces with shareholders  –Ensures effective shareholder engagement  –Representational duties on behalf of the Company |
| Chief Executive | –Overall responsibility for Group performance  –Leadership of the Group  –Enables planning and execution of Group objectives and strategies  –Stewardship of Group assets  –Drives the cultural tone of the organisation |
| Finance and Transformation Director | –Leadership of the Group in respect of financial matters  –Enables planning and execution of Group financial objectives and strategies  –Leadership of the design and delivery of the QUEST programme to accelerate delivery of Group strategy  –Provision of accurate, timely and clear information to the Board on the Group's financial performance |
| Senior Independent Director | –Leads review of the Chair’s performance  –Presides at Board meetings in the Chair’s absence  –Chairs the Nominations Committee when Chair succession considered  –Sounding board for the Chair  –Intermediary for other Directors  –Available to meet with shareholders |
| Non-Executive Directors | –Oversee Group strategy and resource allocation  –Monitor Group performance and delivery of Group strategy  –Oversee systems of control and risk management  –Review management proposals and provide strategic guidance  –Scrutinise and hold to account performance against objectives  –Bring external judgement, perspective and effective challenge to management |

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| --- | --- |
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|  | The responsibilities of the Chair, Executive Directors and Senior Independent Directors  are available at bat.com/governance |
|  |  |

Board Efficacy

Scheduled board meetings during the year were convened in

person. Board strategy sessions in October 2022 were held in

the US. Feedback from the annual Board evaluation confirmed

that board meetings continued to operate well and are considered

to be chaired effectively.

The Chair facilitates constructive Board relations, supporting

effective contribution from Non-Executive Directors and

promoting a culture of openness and debate. The Chair seeks

a consensus at Board meetings but, if necessary, decisions are

taken by majority decision. If any Director has concerns on any

issues that cannot be resolved, such concerns are noted in the

Board minutes. No such concerns arose in 2022.

Non-Executive Director meetings

The Non-Executive Directors, led by the Chair, meet following

Board meetings on a regular basis. Additional meetings led by the

Chair, and without the Executive Directors present, are scheduled

in the Board calendar.

The Executive and the Non-Executive Directors also meet annually,

led by the Senior Independent Director and without the Chair

present, to discuss the Chair’s performance.

Independence

The Board considers all Non-Executive Directors to be independent,

as they are free from any business or other relationships that

could interfere materially with, or appear to affect, their judgement.

Luc Jobin was determined by the Board to be independent on his

appointment as Chair, as reported in the Company’s Annual

Report and Form 20-F for 2020.

The Board has determined Holly Keller Koeppel to be independent,

having taken into account her service on the board of Reynolds

American Inc. (Reynolds American) as an independent, non-

executive director.

Luc and Holly were originally appointed to the Board in 2017

following the acquisition of Reynolds American and pursuant

to the Agreement and Plan of Merger with Reynolds American.

The Board has also considered the independence requirements

outlined in the NYSE’s listing standards and has determined

that these are met by the Chair and all the Non-Executive

Directors. The Board considers that it includes an appropriate

combination of Executive and Non-Executive Directors.

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| Our Approach to Division  of Responsibilities | | | | | | | |

141

Commitment

Before appointing new Directors, the Board takes into account

their other commitments and significant time commitments are

disclosed prior to appointment. The letters of appointment for

the Chair and Non-Executive Directors set out their expected time

commitment to the Company (see page [148](#id739eb8a094346e4a1dd9989c862058f_14636)).

Any additional external appointments following appointment to

the Board require prior approval by the Board in accordance with

the UK Corporate Governance Code (the Code).

The Board assesses the significance of any additional external

appointment notified by a Director, supported by the Company

Secretary. During 2022, the Board considered the following

external appointments:

–Sue Farr’s appointment as a non-executive director of Lookers

plc, a company listed on the London Stock Exchange. This

additional appointment was considered by the Board to be

significant in accordance with the Code, however the Board

concluded that the appointment would not impair Sue's ability to

serve as a Non-Executive Director in view of the anticipated time

commitment.

–Dimitri Panayotopoulos' appointment as Chair of Airway

Therapeutics Inc., a non-listed US company, and Savio Kwan's

appointment as an independent non-executive director of

GOGOX, a company listed on the Hong Kong Stock Exchange.

The Board considered that neither of these additional

appointments were significant for the purposes of the Code and

concluded that both Dimitri and Savio would continue to be able

to meet the commitments expected of them as Non-Executive

Directors. Savio has since stepped down as a director of GOGOX

and will step down from the Board at the close of the 2023 AGM.

Conflicts of Interests

The Board has formal procedures for managing conflicts of interest.

Directors are required to give advance notice of any conflict issues

to the Company Secretary. These are considered either at the next

Board meeting or, if timing requires, at a meeting of the Board’s

Conflicts Committee.

Each year, the Board considers afresh all previously authorised

situational conflicts. Directors are excluded from the quorum and

vote in respect of any matters in which they have an interest.

The Board's authorisation of a potential situational conflict in

relation to Darrell Thomas' appointment as a non-executive

director of Scotia Holdings (US) Inc. in February 2022 was reported

in the Annual Report and Form 20-F for 2021. The Board

determined that this appointment did not impact Darrell's

independence as a Non-Executive Director.

Directors' Information and Advice

Directors receive effective support to assist them in meeting

their responsibilities under the UK Corporate Governance Code

and discharging their directors’ duties, both individually and

collectively:

–Directors receive papers for review in good time ahead of each

Board and Committee meeting.

–Papers and presentations to the Board and its Committees

include discussion of specific stakeholder considerations

as applicable.

–The Company Secretary ensures effective information flow

within and between the Board and its Committees, and between

the Non-Executive Directors and senior management.

–The Company Secretary, in conjunction with external advisers

where appropriate, advises the Board on all governance matters.

–All Directors have access to the advice and services of the

Company Secretary. The appointment and replacement of the

Company Secretary is a matter for the Board.

–A procedure is in place for all Directors to take independent

professional advice at the Company’s expense if required.

–Each Board Committee may obtain independent legal or other

professional advice, at the Company’s expense, and secure

attendance at meetings of external participants if needed.

Board Induction

All Directors receive a comprehensive and personalised induction

programme on joining the Board, tailored to their skills, experience,

background, committee membership and requirements of their role.

Kandy Anand and Véronique Laury completed their Non-Executive

Director inductions in 2022, as highlighted below.

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|  | Spotlight | | | |  |  |
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|  | Non-Executive Directors' Induction  Kandy Anand and Véronique Laury  Sessions were conducted through virtual and in-person  briefings to enable efficient delivery of a comprehensive  programme for each of them.  The programme included meetings with the Chair and each  of the Directors and a thorough series of briefings with senior  management covering Group strategy, business regions,  product portfolios, digital transformation, our ethos and  culture, ESG agenda, shareholder and wider stakeholder  engagement, corporate governance and directors' duties,  treasury, risk and evolving legal and regulatory matters.  In preparation for their Committee roles, Kandy's induction  also included specific focus on executive remuneration  matters and he met with the Remuneration Committee’s  UK and US consultants.  Véronique's induction also covered accounting and  reporting matters in depth and she met with the external  audit partner. | | | | |  |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Division of Responsibilities |  |  |  |  |  |  |  |
| Directors’ Commitment and  Board Support | | | | | | | |

142

Professional Development

Non-Executive Directors receive a full programme of briefings

during the year across all areas of the Group’s activities from the

Executive Directors, members of the Management Board, the

Company Secretary, other senior executives and outside advisors.

During 2022, key briefings for the Board included the status of

rapidly evolving international sanctions during the year and the

governance in place to support sanctions compliance.

Briefings were also provided to the Board on developments in

product regulation, particularly in the US and Europe, and other

regulatory developments impacting the Group’s business and

governance arrangements, for example, revisions to the UK Listing

Rules to introduce new requirements for the disclosure of the

diversity of boards and executive management.

The Audit Committee was briefed on key developments in the

ESG reporting landscape, including the UK Financial Conduct

Authority's guidance on TCFD reporting, and consultations

conducted by the US Securities and Exchange Commission (SEC)

and the International Sustainability Standards Board on enhanced

ESG reporting.

The Remuneration Committee was kept updated by its external

consultants on UK and US corporate governance developments

impacting executive remuneration and wider workforce

remuneration.

Non-Executive Directors regularly attended meetings of the

Group’s Regional Audit and Corporate and Social Responsibility

Committees and Corporate Audit Committee to gain a better

understanding of the Group’s regions and central functions

and the risks faced by the business at market, regional and

functional levels.

The Chair met with each Non-Executive Director individually

towards the end of the year to discuss their individual training

and development plans.

Board Review Process

Annually, the Board undertakes a rigorous review of its

effectiveness and performance, and that of its Committees and

individual Directors. The Chair is responsible for the overall review

process and each Committee Chair is responsible for the review

of the performance and effectiveness of their Committee.

An externally-facilitated review of the performance and

effectiveness of the Board, its Committees, each of the Directors

was conducted in 2022. The review was conducted by Dr Tracy

Long of Boardroom Review Limited (Boardroom Review) following

a competitive tender process led by the Chair. Dr Long and

Boardroom Review have no other connection with the Company,

its Directors or the Company Secretary.

The review included a series of interviews conducted by Dr Long

individually with each of the Directors, the Company Secretary

and several members of senior management. Dr Long observed

meetings of the Board and the Audit and Remuneration

Committees and Board strategy sessions in October 2022. In

addition, Dr Long reviewed corporate governance arrangements

and relevant Board and Committee meeting minutes and papers.

All Directors participated fully in the review in 2022, with the

exception of Véronique Laury who joined the Board in September,

shortly before the review was conducted. Véronique participated

in the Board discussion and feedback sessions.

A report setting out the findings of the review and

recommendations for consideration was prepared by Boardroom

Review. The Board then reviewed and discussed the report with

Dr Long and identified action areas for 2023, taking into account

the review findings.

The Chair received feedback from Dr Long on the performance

and effectiveness of all Executive and Non-Executive Directors

(other than himself). Both the Chair and Dr Long provided

individual feedback to each Director.

The Senior Independent Director received feedback from Dr Long

on the Chair’s performance and effectiveness, and led a discussion

reviewing the Chair’s effectiveness with the other Directors

(without the Chair present). Both the Senior Independent Director

and Dr Long provided feedback to the Chair.

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|  | 2022: Externally facilitated Board review process | |  |  |
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|  | Plan and Evaluate | Reporting | Review and Action |  |
|  | –The facilitator conducted initial briefing  sessions with the Chair and Company  Secretary  –The facilitator conducted a series of  interviews with each of the Directors,  the Company Secretary and several  members of senior management  –The facilitator observed Board, Audit  and Remuneration Committee meetings  and Board strategy sessions over two  days in October 2022 | –The facilitator assessed feedback and  prepared a report for the Board  –The facilitator discussed overall findings  with the Chair  –The facilitator held feedback sessions with  each of the Directors | –The Board reviewed evaluation  outcomes and recommendations, and  identified action areas  –The Chair provided feedback to the  other Directors  –The Senior Independent Director  provided feedback to the Chair |  |
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| Board Effectiveness | | | | | | | |

143

2022

#### Board review

Overview of Outcomes

The outcomes of the review support the overall conclusion

that the Board is effective and has a sound working relationship

with its Committees.

The Board has diversity of tenure, voice and experience and

its relationships are based on positive dynamics. It is recognised

that the Board has a shared strategic perspective, is

appropriately engaged and focused, and is well informed by the

Chair, the Committee Chairs, Chief Executive and Finance and

Transformation Director.

The review found the Board’s time to be planned effectively,

with an appropriate balance of formal and informal meetings

enabled through easing of travel restrictions in 2022 (such as

informal in person meetings and site visits, in addition to

physical board meetings).

Significant attention is given to risk, control and compliance

matters and there is increased focus on digital and cyber security,

with appropriate oversight provided by Committees.

Committees were noted to be well-chaired, composed and

attended, delivering thorough and professional scrutiny

on their specific areas of focus. Committee Chairs provide

effective and pertinent reporting to the Board.

The review confirmed that the Chair is supported by all

Directors, and is respected for his knowledge and experience

and his collaborative and open style. The strong,

complementary partnership between the Chief Executive and

the Finance and Transformation Director is also recognised by

the Board.

Non-Executive Directors were noted to have an independent

and professional mindset, and a sense of collective

responsibility towards providing constructive challenge.

Organisational culture is considered to be an important asset

for long-term success. It is perceived to be results-oriented

and talent-driven, yet evolving as the pace of transformation

remains rapid.

Forward-looking considerations

The review acknowledged that acceleration of the Group's

strategic transformation in a challenging external environment

would influence the composition, dynamics and work of the

Board in the future.

Considerations and recommendations arising from the

review aim to help the Board optimise its effectiveness

and contribution looking ahead.

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|  | Dr Long of Boardroom Review Limited has reviewed the discussion  of the Board review process on pages [143](#id739eb8a094346e4a1dd9989c862058f_10092) to [144](#id739eb8a094346e4a1dd9989c862058f_14483) and has confirmed  that it presents a fair summary of the review process and its  outcomes.  Boardroom Review Limited is a signatory to the voluntary UK Code  of Practice for Independent Board Reviewers. |  |
|  |  |  |

Key Actions for 2023

Following the review, the Board plans to implement forward-

focused actions across the following four key themes:

Strategy

–Recognising the importance of continued oversight of the

transformation strategy, board agenda to maintain focus

on strategic discussion and development, with additional

emphasis on scenario planning for external challenges,

assessment of the competitive environment, and

understanding evolving consumer preferences.

Board Leadership and Contribution

–In view of evolving Board composition, continue to develop

the depth of relationships between Board members through

blended use of the Directors’ professional time (formal

meetings, site visits and informal engagements).

–Further improve efficiency of information flows between the

Board and management in advance of Board and Committee

meetings, with consistent application of a strategic

emphasis for board papers.

–While the current skill sets of the Board are found to be

aligned to corporate strategy, Director succession planning

for the longer term to focus on strategic assessment of

future requirements to help maintain an effective balance of

skills, knowledge and experience. In view of the findings of

the review and changes to Board composition implemented

during the year, it is not anticipated that the review will have

an immediate impact on Board composition.

Risk management

–Continue to develop and test appetite for business risk in

the context of accelerated organisational transformation,

supported by additional time on the Board agenda for in

depth strategic discussion of business risk appetite.

–Support continuous improvement in the Board's

understanding and oversight of digital technology and cyber

security risks through regular briefings on digital risk topics.

–Maintain the Board’s emphasis on robust development

of the Group’s ESG agenda, including through the Audit

Committee’s ongoing oversight of the Group’s ESG metrics

and reporting.

People and Culture

–Enhance focus on long-term executive management succession

planning and develop further Management Board and senior

management diversity, with emphasis on improving gender

diversity.

–In the context of the Group's transformation, continue Board

activities to monitor corporate culture and the impact of

significant change programmes.

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144

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|  | Nominations Committee  current members |  |
|  | Luc Jobin (Chair) |  |
|  | Kandy Anand |  |
|  | Sue Farr |  |
|  | Karen Guerra |  |
|  | Holly Keller Koeppel |  |
|  | Savio Kwan |  |
|  | Véronique Laury |  |
|  | Dimitri Panayotopoulos |  |
|  | Darrell Thomas |  |
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|  | Luc Jobin  Chair of the Nominations Committee |

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|  | Role  As set out in the Terms of Reference, the Nominations Committee is responsible for: | | |  |
|  | –reviewing the structure, size and composition of the Board and Management Board  on a regular basis to ensure both have an appropriate balance of skills, expertise,  knowledge and, in relation to the Board, independence;  –reviewing the succession plans for appointments to the Board, the Management Board  and Company Secretary to maintain an appropriate balance of skills and experience and  to ensure progressive refreshing of both the Board and the Management Board;  –making recommendations to the Board on suitable candidates for appointments  to the Board, the Management Board and Company Secretary, ensuring that the  procedure for those appointments is rigorous, transparent, objective and merit-  based and has regard for diversity;  –assessing the time needed to fulfil the roles of Chair, Senior Independent Director  and Non-Executive Director, and ensuring Non-Executive Directors have sufficient  time to fulfil their duties;  –overseeing the development of a pipeline of diverse, high-performing potential  Executive Directors, Management Board members and other senior managers; and  –implementing the Board Diversity Policy and monitoring progress towards the  achievement of its objectives, summarised on page [149](#i37e5279ba8e24f9dadbd3d8adb977221_20258). | | |  |
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Key Activities in 2022

–Making recommendations to the Board

in respect of Non-Executive Director

and Board Committee appointments,

including appointment of Kandy Anand as

a Non-Executive Director and member

of the Remuneration and Nominations

Committees and Véronique Laury as a

Non-Executive Director and a member of

the Audit and Nominations Committees,

discussed on page [147](#id739eb8a094346e4a1dd9989c862058f_14565).

–Recommending to the Board the

appointment of Sue Farr as Senior

Independent Director with effect

from 1 August 2022.

–Recommending to the Board the

appointment of a new Director, Digital

& Information, to the Management

Board, with effect from 1 April 2022.

–Recommending to the Board the

appointment of a new Director,

Combustibles, to the Management Board

and reviewing plans to restructure the

Management Board to align with

Quantum Phase 4 strategic objectives.

–Continuing analysis of the profile, skills

and experience required of future Non-

Executive Directors in the context of the

Group’s strategy, to support Board

succession planning activities.

–Making recommendations to the Board in

relation to Directors’ annual appointment

and re-election at the AGM, discussed

further on page [147](#id739eb8a094346e4a1dd9989c862058f_14565).

–Reviewing the Executive Directors’ and

Management Board members’ annual

performance assessments and assessing

development of candidates for

Management Board roles.

–Overseeing the Group’s diversity and

inclusion agenda, its role in promoting

an inclusive and high-performing culture

as part of the Group’s talent strategy,

and progress in building diverse talent

pipelines and creating enablers across

the organisation.

Balance and Diversity

The Board appreciates the benefits of

diversity in all of its forms, within its own

membership and at all levels across our

organisation. Our Non-Executive Directors

come from a broad range of industry and

professional backgrounds, with varied

experience and expertise aligned to the

Group’s strategy.

Biographies of the Directors, including

a summary of their skills, experience and

contribution to the Board, are set out on

pages [124](#id739eb8a094346e4a1dd9989c862058f_9915) to [127](#i560602a6d5294756818d147a85ebeed8_0-0-13-3-205410) with details of the

representation of key diversity attributes

on our Board.

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|  |  |  | Nominations Committee terms of reference  The Committee’s terms of reference align with the requirements of the Code.  No changes were made to the Committee’s terms of reference in 2022. | | |  |
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|  |  |  |  | For the Committee’s terms of reference see  www.bat.com/governance |  |  |
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| Nominations Committee | | | | | | | |

145

Currently three Directors on our Board are

from an ethnic minority background (as

defined by the UK Office of National

Statistics), the representation of women on

the Board is 36% and the senior board

position of Senior Independent Director is

held by Sue Farr.

At the close of the 2023 AGM, it is

anticipated that there will be two Directors

from an ethnic minority background on the

Board and that the representation of

women on the Board will increase to 40%

The Board remains committed to

enhancing its diversity and the

Nominations Committee continues to

actively progress Non-Executive Director

succession supported by our Board

Diversity Policy. Our Board Diversity Policy

and its revision in 2022 is discussed on

below and on page [149](#i37e5279ba8e24f9dadbd3d8adb977221_20258).

Board Diversity Policy Update

A revised Board Diversity Policy was

approved by the Board and took effect from

1 November 2022. Details of our revised

Board Diversity Policy are on page [149](#i37e5279ba8e24f9dadbd3d8adb977221_20258).

Our ethos is at the core of our revised policy

and its terms align with the new UK Listing

Rules diversity targets for the Board (and

associated disclosure requirements for the

Board and executive management)

applicable to the Company from January

2023.

We voluntarily report Board and executive

management diversity data in accordance

with the new UK Listing Rules

requirements on page [150](#i37e5279ba8e24f9dadbd3d8adb977221_19977).

Board Succession Planning

The Board considers the length of service

of the Board members as a whole and the

need for it to refresh its membership

progressively over time.

The Committee is responsible for regularly

reviewing the composition of the Board

and Management Board to ensure both

have an appropriate balance of skills,

expertise and knowledge.

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Attendance at meetings in 20222(a), 3(a) | | |
|  | Meeting attendance4 | |
| Name | Member since | Attended/Eligible to attend |
| Luc Jobin | 2017 | 4/4 |
| Kandy Anand3(b) | 2022 | 3/3 |
| Sue Farr2(b) | 2015 | 3/4 |
| Karen Guerra | 2020 | 4/4 |
| Holly Keller Koeppel | 2017 | 4/4 |
| Savio Kwan | 2014 | 4/4 |
| Véronique Laury3(c) | 2022 | 1/1 |
| Dimitri Panayotopoulos | 2015 | 4/4 |
| Darrell Thomas | 2020 | 4/4 |
| Dr Marion Helmes3(d) | 2016 - 2022 | 2/2 |

The Committee is also responsible for

identifying candidates for Board positions

and ensuring that all appointments are

made on merit, against objective criteria,

and with due regard for our Board Diversity

Policy.

This process includes a full evaluation of

candidates’ attributes and how these

would augment the Board’s mix of skills,

expertise and knowledge and involves

interviews with a range of candidates.

In 2022, the Committee identified and

recommended to the Board the

appointment of Kandy Anand and

Véronique Laury as Non-Executive

Directors. Heidrick & Struggles

International1 supported the selection

process leading to Kandy's appointment

and Egon Zehnder1 supported the selection

process leading to Véronique's

appointment.

The executive search firm supporting each

appointment process reviewed the Board's

requirements, including for consumer and

digital expertise, and developed specific

criteria for candidate selection.

Short lists of candidates were presented to

the Committee and preferred candidates

were interviewed by members of the

Board, who reported their feedback on

candidates to the Committee. Thorough

consideration was given to candidates'

skills, experience, diversity of attributes

and their fit with the role criteria. The

Committee then recommended the

preferred candidates to the Board.

Kandy brings marketing and consumer

goods expertise, and Véronique brings

international consumer products,

transformation and digital experience to

the Board. Their biographies are set out on

pages 125 and [127](#i560602a6d5294756818d147a85ebeed8_0-0-13-3-205410).

The Committee's approach to succession

planning for Executive Directors is set out

on page [148](#id739eb8a094346e4a1dd9989c862058f_14636).

Annual General Meeting 2023

With the exception of Savio Kwan, the

Company will submit all eligible Directors

for re-election and, in the case of

Véronique, election for the first time.

Prior to making recommendations to the

Board in respect of Directors’ submissions

for re-election, the Committee carried out

an assessment of each Director, including

their performance, contribution to the

long-term sustainable success of the

Company and, in respect of each of the

Non-Executive Directors, their continued

independence (discussed on page [141](#id739eb8a094346e4a1dd9989c862058f_10074)).

In relation to the proposed reappointment

of Sue Farr and Dimitri Panayotopoulos,

both of whom will have served as Non-

Executive Directors for just over eight years

at the time of the 2023 AGM, the

Committee conducted a rigorous review,

taking into account relevant considerations

including their performance and

attendance record.

The Committee concluded that Sue and

Dimitri each continued to challenge

management constructively, make

effective use of their experience and

maintain independence of thought and

approach, and accordingly considered it

appropriate to recommend to the Board

that both Sue and Dimitri be submitted for

re-election at the 2023 AGM.

The Chair’s letter accompanying the 2023

AGM Notice confirms that all Non-

Executive Directors being proposed for

re-election are effective and that they

continue to demonstrate commitment

to their roles.

Board Retirements

Dr Marion Helmes stepped down from the

Board with effect from the conclusion of

the Company’s AGM on 28 April 2022.

Savio Kwan will step down from the Board

with effect from the conclusion of the

Company’s AGM on 19 April 2023.

Notes:

1.Heidrick & Struggles International, Inc. and Egon

Zehnder Limited are independent executive search

firms, which apply the Standard and Enhanced Codes of

Conduct for Executive Search Firms. Neither firm has

any connection with the Company or its Directors other

than in respect of the provision of executive search

services.

2.Number of meetings in 2022: (a) the Committee held

four meetings, two of which were ad hoc; and (b) Sue

Farr did not attend the ad hoc meeting in February,

which was convened at short notice, due to prior

commitments.

3.Membership: (a) all members of the Committee are

independent Non-Executive Directors in accordance

with UK Corporate Governance Code 2018 Provisions

10 and 17, applicable US federal securities laws and

NYSE listing standards; (b) Kandy Anand joined the

Committee on appointment to the Board on 14 February

2022; (c) Véronique Laury joined the Committee on

appointment to the Board on 19 September 2022; and

(d) Marion Helmes ceased to be a member of the

Committee on stepping down from the Board at the

conclusion of the AGM on 28 April 2022.

4.Other attendees: the Chief Executive, the Director,

Talent, Culture & Inclusion, and Group Head of Talent &

Organisation Effectiveness regularly attend meetings

by invitation but are not members.

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146

Terms of Appointment to the Board

Details of the Directors’ terms of

appointment to the Board and the

Company’s policy on payments for loss

of office are contained in the current

Directors’ Remuneration Policy, which is

set out in full in the Remuneration Report

in the Company’s Annual Report and

Form 20-F for 2021 available on bat.com.

The Executive Directors have rolling one-

year contracts. Non-Executive Directors

do not have service contracts with the

Company but instead have letters of

appointment for one year, with an

expected time commitment of 25

to 30 days per year.

Executive Succession Planning

As part of the Committee’s responsibility

to oversee the development of a pipeline

of diverse, high-performing senior

management, it reviews succession plans

and talent pools at short-term, mid-term

and long-term time horizons for the

Executive Directors, other Management

Board members, and certain other

members of senior management.

The Committee takes into account the

importance of growing an executive talent

pipeline reflecting the ambition to increase

executive management diversity and to

support requirements for transformation,

digital and key functional capabilities.

Talent Pipeline Development

The Board regularly reviews talent

development more broadly, including

progress on our talent strategy to develop

an engaged, agile and high-performing

organisation through:

–talent with winning capabilities,

including attracting fit for future talent,

development of a compelling employer

brand and accelerating digital

transformation capabilities;

–culture and leadership behaviour,

including leaders role modelling our

ethos, accelerating leadership capability

development and accountable and

empowered leadership teams;

–fostering diversity and inclusion,

through diverse leadership and delivering

the Group's bold diversity and inclusion

agenda; and

–fit for purpose organisation design,

including proactive organisational design

effectiveness to enable strategic delivery

and continuous focus on accountabilities

and efficient ways of working.

Progress against our objective to develop

a pipeline of diverse, high-performing

senior managers is set out on page [149](#i37e5279ba8e24f9dadbd3d8adb977221_20258).

Diversity and Inclusion Agenda

Our talent strategy is underpinned by

our diversity and inclusion agenda, which

focuses on the core areas of driving

ownership and accountability, building

diverse talent pipelines and creating enablers.

The Board oversees and monitors progress

of our diversity and inclusion agenda. In

2022, this included:

–reviewing progress against the Group’s

diversity and inclusion ambitions through

to 2025, including to have women in 40%

of senior leadership team roles and 45%

of management roles, and a 50% spread

of nationalities in key leadership team roles;

–extension of voluntary ethnicity reporting

to employees in Australia, Brazil, Canada,

Malaysia, South Africa and the U.S., in

addition to the UK;

–progress of the Group's Women in

Leadership programme, coaching more

than 1,000 women managers over nine

years;

–UK accreditation as a Level 2 Disability

Confident Employer, recognising the

measures in place to attract, develop and

support colleagues with disabilities and

long-term health conditions;

–introduction of a practical allyship guide

on disability, integrated into leadership

development programmes;

–global roll-out of the 'IGNITE' return

to work programme; and

–extension of our participation in Mission

Gender Equity, a cross-company

mentoring programme focused on

building an internal pipeline of female

managers, to other markets in addition to

the UK, and piloting Mission Include in the

UK, a similar cross-company mentoring

programme focused on talent from

ethnic minority groups.

Our Strategic Report discusses our

diversity and inclusion agenda and

initiatives further, and provides details

on the representation of women and

nationalities in our workforce, and in our

senior management population, on pages

[83](#id739eb8a094346e4a1dd9989c862058f_15676) to [91](#i575a4c9e0b3245bca2b51c079b91e1ec_2231).

Executive Management Balance

as at 31 December 2022

Management Board:

Nationality

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|  |  |  |  |
|  | American | 1 |  |
|  |  |  |  |
|  |  |  |  |
|  | Australian | 1 |  |
|  |  |  |  |
|  |  |  |  |
|  | Belgian | 1 |  |
|  |  |  |  |
|  |  |  |  |
|  | Brazilian | 1 |  |
|  |  |  |  |
|  |  |  |  |
|  | British | 2 |  |
|  |  |  |  |
|  |  |  |  |
|  | Dutch | 1 |  |
|  |  |  |  |
|  |  |  |  |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | French | 1 |
|  |  |  |
|  |  |  |
|  | Italian/  Argentinian |  |
|  | 1 |
|  |  |  |
|  |  |  |
|  | Korean | 1 |
|  |  |  |
|  |  |  |
|  | New Zealander | 1 |
|  |  |  |
|  |  |  |
|  | Pakistani | 2 |
|  |  |  |
|  |  |  |

Senior Management1

and their direct reports:

Gender balance

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | Male | 79 | 74% |
|  |  |  |  |
|  |  |  |  |
|  | Female | 27 | 26% |
|  |  |  |  |
|  |  |  |  |

Note:

1.   Senior Management comprises the Management

Board and the Company Secretary, in accordance

with the UK Corporate Governance Code.

|  |  |
| --- | --- |
|  |  |
|  |  |
|  | Management Board ethnicity and  gender balance is reported on page  [150](#i37e5279ba8e24f9dadbd3d8adb977221_19977) as part of our diversity reporting  for executive management as at 31  December 2022. |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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147

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  |  |  |  |
|  | Our revised Board Diversity Policy |  |  |  |
|  | We are proud to be a diverse global organisation that encourages our  people to value their differences.  Our ongoing commitment to fostering a diverse and inclusive culture is  underpinned by our ethos: to be Bold, Fast, Empowered, Responsible and  Diverse. Our commitment to diversity across BAT is also embedded  through our Group Standards of Business Conduct, applicable to all  employees of the Group.  Our Board Diversity Policy sets out our approach to diversity applicable to  the Board, its Committees1 and the Management Board2. This policy is  intended to support the Board, through the activities of its Nominations  Committee, in maintaining the effectiveness and balance of the Board, its  Committees and the Management Board.  Diversity is a key principle of our ethos and a critical enabler for our  strategic objectives, providing better understanding, connectivity and  insight to our consumers and our employees. We think of diversity in its  widest sense, as those attributes that make each of us unique. These  include our race, ethnicity, cultural and social backgrounds, geographical  origin, nationality, gender, age, any disability, sexual orientation, religion,  skills, experience, education, socio-economic and professional background,  perspectives and thinking styles. |  | We recognise that diversity is a critical component of board effectiveness  and we are committed to promoting diversity in the composition of the  Board, its Committees and the Management Board.  The Nominations Committee is responsible for regularly reviewing the  composition of the Board, its Committees and the Management Board to  ensure these have an appropriate balance of skills, expertise, and knowledge,  and for ensuring that all appointments are made on merit against objective  criteria and with due regard for the benefits of diversity. This includes our  Board Diversity Policy objectives set out below.  The Nominations Committee is responsible for implementing this policy and  monitoring progress against its objectives. This policy and progress against  its objectives is reviewed annually by the Nominations Committee, in addition  to other BAT initiatives that promote diversity in all its forms across BAT.  As part of the annual evaluation of the effectiveness of the Board,  consideration is given to the balance of experience, skills, knowledge,  independence and all attributes of diversity of the Board. |  |
|  |  |  |  |  |

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Board Diversity Objectives and Progress Updates | | | |
| The objectives of our revised Board Diversity Policy and progress against these objectives in the year are set out below. | | | |
|  | Considering all aspects of diversity when reviewing the  composition of, and succession planning for, the Board,  its Committees1 and the Management Board2 |  | The Nominations Committee has regard to diversity in its widest sense, including  attributes such as gender, race, ethnicity, cultural and social backgrounds, and other  personal attributes referred to in our Board Diversity Policy above, when undertaking  these activities. |
|  | Considering a wide and gender-balanced pool of candidates  for appointment to the Board |  | Executive search firms are engaged to support Board and Management Board  succession planning where applicable and are required to provide gender-balanced  shortlists of candidates. Succession planning for Executive Directors and  Management Board members takes into account potential internal candidates  from across the Group and potential external candidates. |
|  | Maintain at least 40% representation of women on  the Board3 |  | The representation of women on the Board was 36% as at 31 December 2022  (2021: 40%). At the close of the 2023 AGM, it is anticipated that women will  represent 40% of the Board. The Board is committed to furthering the proportion of  women on our Board. |
|  | At least one of the following senior positions on the Board  to be held by a woman: Chair; Senior Independent Director;  Chief Executive; Finance Director4 |  | The role of Senior Independent Director is held by Sue Farr. Sue was appointed as  Senior Independent Director with effect from 1 August 2022. Other senior positions  on the Board are held by Luc Jobin (Chair); Jack Bowles (Chief Executive); and Tadeu  Marroco (Finance & Transformation Director). |
|  | At least one Director of a minority ethnic background on  the Board5 |  | As at 31 December 2022, there were three Directors on our Board from an ethnic  minority background (2021: two). At the close of the 2023 AGM, it is anticipated that  there will be two Directors from an ethnic minority background on the Board, The  Board complies with the recommendations on ethnic diversity made by the UK  Parker Review. |
|  | Giving preference, where appropriate, to engagement of  executive search firms accredited under the Standard and  Enhanced Code of Conduct for Executive Search Firms |  | Where executive search firms are engaged to provide executive search services to  support Board succession planning, preference is given to those that are accredited  under the Standard and Enhanced Code of Conduct for Executive Search Firms. |
|  | Oversight of the development of a pipeline of diverse,  high-performing potential Executive Directors, Management  Board Members and other senior managers. |  | The representation of women on the Management Board was 7.7% as at  31 December 2022 (2021: 15.4%).  Management Board succession planning takes into account the ambition to  progress towards improved gender diversity.  Emphasis is placed on building diverse talent pools at all levels of the organisation  through recruiting, developing and retaining diverse and high-performing talent.  In 2022, 47% of the Group’s external management recruits were women (2021: 47%)  and women comprised 57% of our new graduate intake in 2022 (2021: 51%).  Further information about the Group’s diversity and inclusion agenda is set out on  pages [83](#id739eb8a094346e4a1dd9989c862058f_15676) to [91](#i575a4c9e0b3245bca2b51c079b91e1ec_2231). |

Notes to Board Diversity Policy Objectives:

1.The principal committees of the Board comprise the Audit, Remuneration and Nominations Committees.

2.The Management Board is the executive level committee of the Group.

3.Enhanced objective introduced under revised Board Diversity Policy from 1 November 2022 (previous objective to maintain at least 30% female Board representation, with the ambition

of progressing towards further gender diversity).

4.New objective introduced under revised Board Diversity Policy from 1 November 2022.

5.New objective introduced under revised Board Diversity Policy from 1 November 2022, applying UK Office for National Statistics ethnicity categories of: Asian; Black; Mixed/Multiple

Ethnic Groups; Other Non-White Ethnic Group, in alignment with the UK Listing Rules.

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Composition, Succession, Evaluation | |  |  |  |  |  |  |
| Nominations Committee  Continued | | | | | | | |

148

Reporting in alignment with new UK Listing Rules provisions on diversity and inclusion

We voluntarily report our Board and executive management diversity data as at 31 December 2022 in accordance with the new UK

Listing Rules disclosure requirements and our progress in meeting the new UK Listing Rules board diversity targets.

As at 31 December 2022, one of the four senior positions on the Board was held by a woman, Board composition included three Directors

from an ethnic minority background and the representation of women on the Board was 36% (this remains the case as at the date of this

Annual Report and Form 20-F).

The Board recognises that the representation of women on the Board does not currently meet the UK Listing Rules target of 40%,

however, it is anticipated that the representation of women on the Board will increase to 40% at the close of the 2023 AGM (following

Savio Kwan stepping down from the Board). The Board is committed to continued enhancement of its diversity, supported by the

succession planning activities conducted by the Nominations Committee, discussed on pages [145](#id739eb8a094346e4a1dd9989c862058f_10110) to [148](#i37e5279ba8e24f9dadbd3d8adb977221_20258).

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Gender Representation: Board & Executive Management as at 31 December 2022 | | | | | |
|  | Number of Board  members | Percentage of  the Board | Number of senior positions  on the Board (CEO, CFO, SID  and Chair) | Number in  executive management1 | Percentage of  executive management1 |
| Men | 7 | 64% | 3 | 13 | 93% |
| Women | 4 | 36% | 1 | 1 | 7% |
| Other categories | 0 | — | 0 | 0 | — |
| Not specified/prefer not to say | 0 | — | 0 | 0 | — |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Ethnic Background: Board & Executive Management as at 31 December 2022 | | | | | |
|  | Number of Board  members | Percentage of  the Board | Number of senior  positions on the  Board (CEO, CFO,  SID and Chair) | Number in  executive  management1 | Percentage  of executive  management1 |
| White British or other White (including  minority-white groups) | 8 | 73% | 4 | 11 | 79% |
| Mixed/Multiple Ethnic Groups | — | — | — | — | — |
| Asian/Asian British | 1 | 9% | — | 2 | 14% |
| Black/African/Caribbean/Black British | 1 | 9% | — | — | — |
| Other ethnic group, including Arab | 1 | 9% | — | 1 | 7% |
| Not specified/prefer not to say | — | — | — | — | — |

1.Executive management includes the Management Board (most senior executive body below the Board) and the Company Secretary, excluding administrative and support staff, as

defined by the UK Listing Rules.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  |  |  |
|  | Approach to data collection | | |
|  | Gender and ethnicity data relating to the Board, Management Board and  Company Secretary is collected on an annual basis applying a standardised  process managed by the Company Secretary.  Each Board member, Management Board member and the Company Secretary  is requested to complete a standard form questionnaire on a strictly confidential  and voluntary basis, through which the individual self-reports their ethnicity and  gender identity (or specifies they do not wish to report such data).  The criteria of the standard form questionnaire are fully aligned to the definitions  specified in the UK Listing Rules, with individuals requested to specify:  (1) Self-reported gender identity. Selection from [a] male; [b] female]; [c] other  category/please specify; [d] not specified (due to local data privacy laws); or [e]  prefer not to say. | | (2) Self-reported ethnic background (classifications as designated by the UK  Office of National Statistics). Selection from: [a] White British or other  White; [b] Mixed or Multiple Ethnic Groups; [c] Asian or Asian British; [d]  Black; [e] Other Ethic Group/please specify [f] not specified (due to local  data privacy laws); or [g] prefer not to say.  (3) Consent is provided for data collection and processing of that data in  accordance with the applicable privacy notice set out in the questionnaire  and in accordance with the Group Data Privacy Procedure.  This approach to data collection is consistently applied across all members  of the Board, Management Board and Company Secretary in relation to the  collection and reporting of their gender and ethnicity data in this Annual  Report and Form 20-F. |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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149

|  |
| --- |
|  |
|  |
|  |
| Our oversight of ESG  reporting takes account of  developing regulation and  both shareholder and wider  stakeholder expectations.  Holly Keller Koeppel  Audit Committee Chair |

|  |
| --- |
|  |
|  |
| Audit Committee Current  Members |
| Holly Keller Koeppel (Chair) |
| Karen Guerra |
| Véronique Laury |
| Darrell Thomas |

Introduction

On behalf of the Audit Committee, I am

pleased to introduce our report for 2022

setting out the Committee’s role and

reviewing our activities during the year.

We welcomed Véronique Laury to the

Committee in September. Her experience

in digital and business transformation

aligns well with the Committee’s evolving

oversight in these areas.

We met six times in the year, including

a meeting in May convened for an initial

assessment of a series of complex

accounting matters following the decision

to transfer the Group’s business in Russia.

In view of the unstable local environment

and international sanctions introduced, the

Committee has maintained a high degree

of engagement with management and our

external auditors to evaluate and respond

to the rapid pace of developments in

the year.

Our ESG reporting framework has been

another focus area for the Committee.

Our oversight of ESG reporting takes

account of developing regulation and both

shareholder and wider stakeholder

expectations. Following a Double

Materiality Assessment conducted in 2022,

the Committee reviewed its outcomes and

analysis of our reporting environment.

This led us to sharpen the definition of the

Group’s ESG metrics and the Committee

oversees external assurance activities for

reporting against them. All principal

components of our ESG reporting are now

drawn together in this Annual Report and

Form 20-F.

The Committee closely examined a range of

key risk areas through the year, maintaining

our commitment to safeguarding a sound

risk and control environment. Our 2022

agenda emphasised digital infrastructure

and cyber security, critical business change

initiatives such as Quantum and the

Group's response to climate change, to

ensure robust processes are in place to

identify, assess and manage risks. We

monitored progress on the internal audit

plan during the year and approved the 2023

plan, which has been mapped against the

Group’s risk register and designed to

respond to emerging risks.

Looking ahead, we have commenced

planning activities for an external audit

tender in respect of the 2025 financial year.

The Committee will lead a rigorous and

objective tender process that we expect

to conclude in 2023, giving adequate time

for an orderly handover of our complex

and geographically diverse audit footprint

should that be the outcome of the process.

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|  |  |  | Role  As set out in its terms of reference, the Audit Committee monitors and reviews:  –integrity of the Group’s financial statements and any formal announcements  relating to the Company’s performance, considering any significant financial  reporting issues, significant judgements and estimates reflected in them, before  their submission to the Board;  –consistency of the Group’s accounting policies;  –effectiveness of, and makes recommendations to the Board on, the Group’s  accounting, financial controls, auditing matters and business risk management  systems;  –effectiveness of the Group’s internal audit function;  –independence, performance, effectiveness and objectivity of the Company’s  external auditors, makes recommendations to the Board as to their reappointment  (or for a tender of audit services where appropriate), and approves their terms of  engagement and the level of audit, audit-related and non-audit fees; and  –assurance activities conducted by the external assurance provider in relation to  Group ESG reporting and scope of assurance activities, makes recommendations  for their appointment, and approves their terms of engagement and fees. | | |  |
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|  |  |  | Audit Committee terms of reference  The Committee’s terms of reference align with the requirements of the Code.  No changes were made to the Committee’s terms of reference in 2022. | | |  |
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|  |  |  |  | For the Committee’s terms of reference see  www.bat.com/governance |  |  |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Audit, Risk, Internal Control | |  |  |  |  |  |  |
| Audit Committee | | | | | | | |

150

Key Activities in 2022

Regular work programme includes reviewing:

|  |
| --- |
|  |
| –the Group’s annual results, half-year results, the application of  accounting standards, and the external auditors’ reports where  results are audited; |
| –the Group’s external auditors’ year-end audit, including the key  audit matters, critical audit matters, assessments of  materiality and the Group’s control environment, and  confirming the independence of the Group’s external auditors; |
| –the basis of preparation and accounting judgements; |
| –adjusting items, applicable accounting treatments and the use  of alternative performance measures; |
| –the annual assessment of goodwill and intangibles impairment; |
| –the steps taken to validate the Group’s ‘going concern’  assessment at half-year and year-end and agreeing on the  process and steps taken to determine the Group’s viability  statement at year-end; |
| –the Group’s liquidity position, including current facilities and  financing needs; |
| –the accounting applicable to post-employment benefits  liabilities and assets; |
| –the internal processes followed for the preparation of the  Annual Report and Form 20-F and confirming that the  processes appropriately facilitated the preparation of an  Annual Report and Form 20-F that is ‘fair, balanced and  understandable’; |
| –the Group’s risk register, including prioritisation and  categorisation of Group risks, relevant mitigating factors and  emerging risks to the Group; |
| –oversight of management’s activities to ensure ongoing  compliance with the US Sarbanes-Oxley Act of 2002 (SOx)  (discussed on pages [158](#i063086bbd4724f0a917bdd6df645c957_441326) to [159](#i063086bbd4724f0a917bdd6df645c957_441327)); |
| –the Company’s status as a Foreign Private Issuer for the  purposes of US securities laws; |
| –regular reports from the Group Head of Internal Audit on the  internal audits of markets, business units, processes,  operations and major change initiatives, management  responses to internal audit findings and action plans put in  place to address any issues raised; |
|  |

|  |
| --- |
|  |
| –progress against the 2022 plan and design of the 2023 internal  audit plan; |
| –annual and interim reports on the Group’s Delivery with  Integrity compliance programme (discussed on pages [66](#id739eb8a094346e4a1dd9989c862058f_15661) to  [67](#i61464e4022874402ab39d55c5876c2d6_112799)), monitoring compliance with the SoBC, and monitoring  SoBC incident reporting and the effectiveness of Speak Up  channels prior to review by the Board; |
| –the Group’s ESG performance on an annual basis, including  performance against the Group’s ESG targets, the Group’s  responsible marketing and youth access prevention activities,  and the Group’s community investment activities under the  Group's Community Investment Framework (discussed on  page [45](#id739eb8a094346e4a1dd9989c862058f_9518)); |
| –external assurance activities conducted in respect of defined  ESG metrics and related information conducted by the  external assurance provider and assessing the outcome of  assurance with the external provider; |
| –the outcomes of human rights assessments of countries in  which Group companies operate that are identified to have  a higher degree of exposure to human rights risks in 2022,  including local compliance with Group policies, standards and  controls and local measures in place to enhance human rights  risk management; |
| –periodic reports from the Group’s Corporate Audit Committee  and Regional Audit and Corporate Social Responsibility  Committees; |
| –the annual report from the Group Head of Security on security  risks, losses and fraud arising during the preceding year; |
| –half-year and year-end reports on the Group’s political  contributions (discussed on page [159](#i063086bbd4724f0a917bdd6df645c957_441325)); and |
| –the Committee's effectiveness, following the annual evaluation  of the Committee. |

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Attendance at meetings in 20221 | | |
|  |  | Meeting attendance3,4 |
| Name | Member since | Attended/Eligible to attend |
| Holly Keller Koeppel2(a),(b) | 2017 | 6/6 |
| Karen Guerra2(a) | 2021 | 6/6 |
| Véronique Laury2(a),(c) | 2022 | 2/2 |
| Darrell Thomas2(a),(b) | 2020 | 6/6 |

Notes:

1.Meetings: the Committee held six meetings in 2022. Five meetings of the Committee are scheduled for 2023. Additional meetings are convened on an ad hoc basis as required during

the year.

2.Membership: (a) all members of the Committee are independent Non-Executive Directors in accordance with the UK Corporate Governance Code 2018 Provisions 10 and 24 and

applicable US federal securities laws and NYSE listing standards. The Board has determined each Committee member to meet the financial literacy requirements applicable under NYSE

listing standards. Each member of the Committee has recent and relevant financial experience in accordance with the UK Corporate Governance Code 2018. The Committee members

as a whole have competence relevant to the sectors the Group operates in; (b) Holly Keller Koeppel and Darrell Thomas are each designated as an audit committee financial expert in

accordance with applicable US federal securities laws and NYSE listing standards; (c) Véronique Laury became a Committee member on 19 September 2022 on her appointment to the

Board.

3.The Finance and Transformation Director attends all Committee meetings but is not a member. Other Directors may attend by invitation. The Director, Legal & External Affairs and

General Counsel, the Group Head of Internal Audit and the external auditors attend all meetings.

4.The Committee meets alone with the external auditors, and, separately with the Group Head of Internal Audit, at the end of every Committee meeting. The Committee also meets

periodically with management.

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151

|  |
| --- |
|  |
| Further specific matters considered by the Committee in relation  to the financial statements: |
| –approach to disclosure of New Categories Contribution  metric: the Committee reviewed the approach to disclosure of  the new key performance indicator, New Categories  Contribution, and determined its presentation as a non-GAAP  measure and its reconciliation from the IFRS Profit from  Operations measure to be appropriate >> within the  Remuneration Report and related non-GAAP metrics discussion >>.  The Committee concluded that such disclosure would not  constitute a change in segmental reporting in accordance with  IFRS 8 (Operating Segments) (see note 2 in the Notes on the  Accounts). |
| –share buyback programme 2022: the Committee monitored  the status of the Company’s share buyback programme  launched in February 2022. |
| –Euro Hybrid Bond issuance: the Committee reviewed the  accounting treatment applicable to the Group’s hybrid bond  issuance programme and determined its continued  classification as equity in accordance with IAS 32 (Financial  Instruments) to be appropriate. |

Significant accounting judgements and estimates

considered by the Committee in relation to the 2022

financial statements:

The significant accounting judgements and estimates considered

in relation to the financial statements for the year ended

31 December 2022 are summarised below.

|  |
| --- |
|  |
| –the Group’s significant tax exposures: the Committee  reviewed updates on corporate tax matters and reports from  the Group Head of Tax on the status of the Franked Investment  Income Group Litigation Order (FII GLO) and issues in various  markets, including tax disputes in the Netherlands. The  Committee concurred with management’s assessments and  disclosures in respect of these (see note 31 in the Notes on the  Accounts); |
| –contingent liabilities, provisions and deposits in connection  with ongoing litigation:  Imperial Tobacco Canada (ITCAN): the Committee continued  to monitor the status of the ongoing Canadian Companies’  Creditors Arrangement Act (CCAA) proceedings under which  Group subsidiary ITCAN filed for protection in 2019 following  the judgment of the Quebec Court of Appeal in the Quebec  Class Action lawsuits, with stays currently in place until March  2023. The Committee also reassessed the accounting  treatment in respect of other ongoing tobacco-related  litigation to which ITCAN is a defendant and confirmed that it  continued to be appropriate to make no provision in respect of  that litigation, as it is not possible to reasonably estimate the  amount of any potential settlement (see note 31 in the Notes  on the Accounts) and that, whilst ITCAN is subject to the CCAA  proceedings, it continued to be appropriate to consolidate  ITCAN’s financial results in the Group financial statements; |
| Fox and Kalamazoo Rivers: the Committee reassessed the  provision in respect of the Fox River clean-up costs and related  legal expenses and confirmed that the provision would  continue to be retained at the prior year level, although  inherent uncertainties remain (see note 24 in the Notes on the  Accounts). The Committee reviewed the position in respect of  the Kalamazoo River claim and assessed that no provision  should be recognised on the basis set out at note 31 in the  Notes on the Accounts; |
| Reynolds American Companies: the Committee endorsed  management’s approach to accounting for the Master Settlement  Agreement and the Engle class-action and progeny cases as  consistent with the prior year (see note 31 in the Notes on the Accounts); |

|  |
| --- |
|  |
| DOJ/OFAC investigation: the Committee assessed and  endorsed management’s recognition of a provision in respect  of investigations by the the DOJ and OFAC, noting that  uncertainty remains as to the final timing and value of any  future outcome (see note 31 in the Notes on the Accounts); |
| –income and receivable related to VAT on social  contributions in Brazil: the Committee reassessed the  accounting treatment applicable to claims made by a Group  subsidiary in Brazil related to the calculation of VAT on social  contributions made in Brazil, including in relation to the sale of  tranches of the potential claim and recognition of a receivable  following the culmination of the legal process (see note 17 in  the Notes on the Accounts); |
| –changes in the Group - transfer of the Group’s businesses in  Russia and Belarus: the Committee assessed the accounting  treatment applicable to the anticipated transfer of the Group’s  businesses in Russia and Belarus, including the classification of  those businesses as ‘held-for-sale’ prior to transfer, the basis  for their anticipated deconsolidation from the Group financial  statements on transfer and the recognition of impairment  charges and associated costs as a non-cash adjusting item  (see note 6(j) in the Notes on the Accounts); |
| –foreign exchange and hyperinflation: as the Group has  operations in certain jurisdictions with severe currency  restrictions where foreign currency is not readily available,  including in hyperinflationary territories such as Venezuela, the  Committee assessed management’s approach to applicable  accounting treatment and confirmed that methodologies used  to determine relevant exchange rates for accounting purposes  were appropriate (see note 1 in the Notes on the Accounts); |
| –goodwill and intangibles impairment review: the Committee  reviewed management’s assessments of the carrying value of  intangibles including goodwill (see note 12 in the Notes on the  Accounts), with particular focus on: |
| US Business: the Committee considered evolving US  regulatory proposals in relation to menthol in cigarettes and,  following assessment, concluded that no impairment was  required for US business goodwill or intangible assets, while  noting the disclosure of possible impairments under IAS 36  (Impairment of Assets). The Committee also endorsed  management's view that retaining indefinite-life designation for  the Newport and Camel brand intangibles continued to be  appropriate; |
| Imperial Tobacco Canada (ITCAN): the Committee assessed  that, notwithstanding ongoing proceedings (including the  CCAA process) in respect of Group subsidiary ITCAN, there  was no indication of impairment to goodwill; |
| –associates and joint ventures review: the Committee  concurred with management’s assessment that  it was appropriate to recognise an impairment against the  carrying value of the Group’s investment in Organigram  Holdings Inc. as a result of a reduction in its market capitalisation; |
| –adjusting items: the Committee conducted a rigorous  assessment of all adjusting items, including the appropriate  application of adjusting items treatment to Quantum  programme implementation costs (such as multiple market  exits and the planned factory closure in the U.S., Singapore and  Switzerland) (see note 7 in the Notes on the Accounts). |

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152

|  |
| --- |
|  |
| Risk topics considered by the Committee included:  –climate change risks and their impact on the Group, to ensure  robust processes are in place to manage both physical and  transitional climate change risks, and annual reporting on the  identification, assessment and management of those risks,  in alignment with the TCFD framework; |
| –risks related to ESG and the approach to incorporating ESG  risks into existing risks managed under the Group’s risk  register, to ensure appropriate internal standards, strategic  plans, governance, monitoring and reporting mechanisms are  in place to align with recognised international standards, meet  external expectations and identify emerging issues; |
| –current and emerging risks in relation to the Group’s digital  strategy and technology architecture and data management,  with particular focus on digital transformation, cyber security,  protection of the Group’s information systems and data, and  the approach to managing those risks; |
| –revisions to the Group’s risk appetite framework as it relates to  the Group’s strategic objectives, and review of emerging risks  to the Group twice per year prior to Board assessment; |
| –the report on the effectiveness of the Company’s risk  management system; |
| –risks associated with continued exposure to interest rate  changes on net finance costs arising from existing, new and  refinanced debt and restricted cash in the Group; and |
| –Group anti-bribery and anti-corruption, sanctions and supply  chain controls and compliance programme. |

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|  |  | For further information please refer to the Group Principal Risks on pages [116](#id739eb8a094346e4a1dd9989c862058f_8875)  to [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718) and the Group risk factors on pages [342](#id739eb8a094346e4a1dd9989c862058f_3328) to [362](#i4d4dc756e245431cb56d014c49f68d4c_3-0-1-1-347146) |

External Auditors

The Committee, on behalf of the Board, is responsible for the

relationship with the external auditors.

KPMG LLP (KPMG) were appointed as the Company’s auditors

with effect from 23 March 2015, following a competitive tender

process carried out in 2015.

KPMG reports to the Committee in depth on the scope and

outcomes of the annual audit, including their procedures in relation

to internal controls over financial reporting. The Committee

reviews and discusses the external audit plan and the external

auditors’ assessments of management's proposed treatment of

significant transactions and accounting judgements. During the

year, the Committee also met independently with the external

audit partner after every Committee meeting.

Outside of Committee meetings, the Committee Chair, the

Finance and Transformation Director, the Director, Legal &

External Affairs and General Counsel, the Group Head of Internal

Audit and the Company Secretary all meet with the external

auditors regularly throughout the year to discuss relevant issues

as well as the progress of the external audit. Any significant issues

are included on the Committee’s agenda.

External auditor effectiveness

The Committee carries out an annual assessment of the external

auditors, covering qualification, expertise and resources, objectivity

and independence, and the quality and effectiveness of the audit

process. This assessment takes into account the Committee’s

interactions with, and observations of, the external auditors and

considers a range of factors, including:

–experience and expertise of the external auditors in their direct

communication with the Committee;

–their mindset, professional scepticism and approach to

challenging management’s assumptions where necessary;

–their effectiveness and efficiency in completing the agreed

external audit plan;

–their approach to handling significant audit and accounting

judgements;

–content, quality and robustness of the external auditors’ reports;

–their provision of non-audit services, as referenced below, and

other matters that may impact independence; and

–relevant reviews and reports issued by external regulatory bodies

including the UK Financial Reporting Counsel and the US Public

Company Accounting Oversight Board.

The Committee’s assessment is also informed by an external audit

satisfaction survey completed by members of the Group’s senior

management to obtain their perspectives on the effectiveness and

quality of the external auditors’ work. No material issues were

identified during the external auditor effectiveness review in 2022.

Certain opportunities for improvement were identified, which have

been discussed between the external auditors and management

and taken into account for planning for the following annual audit.

The Committee is satisfied with the qualification, expertise and

resources of its external auditors, that they have demonstrated

an appropriate degree of professional scepticism and that the

objectivity and independence of its external auditors are not in

any way impaired by the non-audit services which they provide.

The Committee has recommended to the Board the proposed

reappointment of KPMG at the 2023 AGM.

External auditor tender

The Committee continually reviews its relationship with the

external auditors, including consideration as to when it next intends

to complete a competitive tender process for the external audit,

taking into account its assessment of external auditor effectiveness.

As the Committee considers the relationship with the external

auditors to continue to work well and the Committee remains

satisfied with the external auditors’ effectiveness, and having

considered the continued independence and objectivity of the

auditors, the Committee considers it to be in the best interests

of the Company’s shareholders for KPMG to remain as auditors

for the following financial year. The Committee will continue

to monitor this, taking into account the effectiveness and

independence of the auditors and the best interests of shareholders.

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153

As set out in the Company’s FY 2022 Preliminary Announcement,

the Committee has commenced planning for an audit tender

process to be conducted in 2023 in respect of the audit for the

2025 financial year, in compliance with applicable regulations.

The timetable for the external audit tender process is designed

to permit time to plan for the transition of any non-audit services

if there is a change of auditor and to enable any new auditor to fully

prepare to assume responsibility for a complex and international

audit across the Group.

The audit tender process will be overseen by the Committee and is

expected to conclude later in 2023. It is intended that a resolution

proposing the appointment of the selected auditor would be put

to shareholders at the 2025 Annual General Meeting.

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|  | UK Competition and Markets Authority Audit Order  The Company has complied with the Statutory Audit Services  Order issued by the UK Competition and Markets Authority for  the financial year ended 31 December 2022. |  |
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Audit Partner Rotation

The tenure of the current external audit partner, Mr Philip Smart,

commenced from the start of the 2021 year-end audit. Audit

Partner rotation is implemented in accordance with the

requirements of the UK Financial Reporting Council (FRC) Ethical

Standard and the SEC independence rules on partner rotation.

Group Auditor Independence Policy (AIP)

The Group has an established AIP, reflecting the requirements

of applicable laws, to safeguard the independence and objectivity

of the Group’s external auditors and to specify the approval

processes for the engagement of the Group’s external auditors

to provide audit, audit-related and other non-audit services.

The key principle of the AIP is that the Group’s external auditors

may only be engaged to provide services in cases where the

provision of those services does not impair auditor independence

and objectivity.

The Committee recognises that using the external auditors to

provide services can be beneficial given their detailed knowledge

of our business. However, the AIP does not permit the Committee

to delegate its responsibilities to the external auditors and the

external auditors are only permitted to provide audit, audit-related

and non-audit services in accordance with the AIP.

The AIP does not permit the external auditors to maintain a

financial, employment or business relationship with any Group

company, or provide services to any Group company, which:

–creates a mutual or conflicting interest with any Group company;

–places the external auditors in the position of auditing their

own work;

–results in the external auditors acting as a manager or employee

of any Group company; or

–places the external auditor in the position of advocate for any

Group company.

Audit services are approved in advance by the Committee on the

basis of an annual engagement letter and the scope of audit

services is agreed by the Committee with the external auditors.

Subject to the restrictions specified in the AIP, the external

auditors may also provide certain non-audit services with the prior

approval of the Committee. The requirement for the Committee’s

pre-approval of non-audit services may be waived only if the

aggregate amount of all non-audit services provided is less than

5% of the total amount paid to the external auditors during the

reporting year, where those services were not recognised to be

non-audit services at the time of engagement, and provided those

services are promptly brought to the attention of the Committee

and their provision is approved prior to completion of the audit in

the relevant reporting year.

The provision of permitted non-audit services must be put to

tender if expected spend exceeds limits specified in the AIP, unless

a waiver of this requirement, in accordance with the terms of the

AIP, is agreed by the Finance and Transformation Director and

notified to the Committee.

The AIP:

–requires Committee pre-approval for all audit, audit-related and

other non-audit services, except in respect of non-audit services

falling within the exceptions described above;

–prohibits the provision of certain types of services by the external

auditors, including those with contingent fee arrangements, expert

services unrelated to audit and other services prohibited by US

securities laws and the Public Company Accounting Oversight Board;

–prohibits the Chief Executive, Finance and Transformation

Director, Group Financial Controller and Group Chief Accountant

(or any person serving in an equivalent position) from having

been employed by the external auditors in any capacity in

connection with the Group audit for two years before initiation of

an audit;

–specifies requirements in respect of audit partner rotation,

including for both the lead and the concurring external audit

partners to rotate off the Group audit engagement at least every

five years, and not to recommence provision of audit or audit-

related services to the Group for a further five years; and

–provides authority for the Committee to oversee any allegations

of improper influence, coercion, manipulation or purposeful

misleading in connection with any external audit, and to review

any issues arising in the course of engagement with the external

auditors.

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154

External audit fees

The Committee reviews a schedule identifying the total fees for all

audit and audit-related services, tax services and other non-audit

services expected to be undertaken by the external auditors in the

following year. Tax services and other non-audit services in excess

of the tender thresholds referred to above must be itemised.

Updated schedules are also submitted to the Committee at mid-

year and year-end, so that it has full visibility of the Group spend

on services provided by the Group’s external auditors.

A breakdown of audit, audit-related, tax and other non-audit fees

paid to KPMG firms and associates in 2022 is provided in note 6(k)

in the Notes on the Accounts and is summarised as follows:

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| --- | --- | --- |
|  |  |  |
| Services provided by KPMG and associates 2022 | | |
|  | 2022  £m | 2021  £m |
| Audit services | 20.4 | 18.2 |
| Audit of defined benefit schemes | 0.2 | 0.4 |
| Audit-related assurance services | 7.1 | 8.0 |
| Total audit and audit-related  services | 27.7 | 26.6 |
| Other assurance services | 0.9 | 0.3 |
| Tax advisory services | — | — |
| Tax compliance | — | — |
| Other non-audit services | — | — |
| Total non-audit services | 0.9 | 0.3 |

Note: In 2022, non-audit fees paid to KPMG amounted to 3.2% of the audit and

audit‑related assurance fees paid to them (2021: 1.1%). All audit and non-audit services

provided by the external auditors in 2022 were pre-approved by the Committee. The

Committee noted that KPMG identified that three member firms have provided preparation

of local GAAP financial statement services and that one member firm has additionally

provided language translation services for residual out of scope components. The

Committee concurred with KPMG’s assessment that their integrity and objectivity as

auditor has not been compromised and that an objective, reasonable and informed third

party would conclude that the provision of these services would not impair KPMG’s

integrity or objectivity.

Risk Management and Internal Control

Overview

The Company maintains its system of risk management and

internal control with a view to safeguarding shareholders’

investment and the Company’s assets. It is designed to identify,

evaluate and manage risks that may impede the Company’s

objectives. It cannot, and is not designed to, eliminate them

entirely. The system therefore provides a reasonable, not absolute,

assurance against material misstatement or loss. A description of

the principal risks that may affect the Group’s business is provided

in our Strategic Report on pages [116](#id739eb8a094346e4a1dd9989c862058f_8875) to [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718).

The main features of the risk management processes and system

of internal control operated within the Group are described below.

These have been in place throughout the year under review and

remain in place to date. These do not cover associates of the Group.

Risk management

Risk registers, based on a standardised methodology, are used

at Group, functional, directly-reporting business unit (DRBU) and

individual market levels to identify, assess and monitor the risks

(both financial and non-financial) faced by the business at each

level. Risks are assessed and prioritised at three levels by reference

to their residual impact (high/medium /low) and likelihood (probable/

possible/unlikely). Mitigation plans are required to be in place to

manage the risks identified, and progress against those plans is

monitored. The risk registers are reviewed on a regular basis.

The SAP Enterprise Risk Management module is used across the

Group to record and track risk management activity. This system

is subject to ongoing management review to identify opportunities

for increased efficiency and effectiveness.

Functional and regional risk registers are reviewed biannually by

the relevant Regional Audit and CSR Committee or the Corporate

Audit Committee, as appropriate. DRBU risk registers are reviewed

as part of DRBU Risk and Controls meetings. At the Group level,

specific responsibility for managing each identified risk is allocated

to a member of the Management Board.

The Group risk register is reviewed twice yearly by the Group Risk

Management Committee, a committee of senior managers chaired by

the Finance and Transformation Director. In addition, it is reviewed

annually by the Board and twice yearly by the Committee. The Board

and the Committee review changes in the status of identified risks and

assess the changes in impact and likelihood. Any delayed mitigations

are also presented to the Committee. In addition, the Committee

conducts detailed reviews on selected risks, meeting senior managers

responsible for managing and mitigating them, so that it can consider

those risks at a more granular level.

Board oversight

During the year, the Board considered the nature and extent of Group

risks (irrespective of their impact or likelihood) which are material to

the Group and the delivery of its strategic objectives (its ‘risk

appetite’), and the Group's framework for maintaining sound risk

management and internal control systems.

As part of the Board's assessment of risks faced by the Group,

the Board considered the material climate-related risks and

opportunities discussed in the context of our TCFD reporting on

pages [70](#id739eb8a094346e4a1dd9989c862058f_9626) to [80](#id739eb8a094346e4a1dd9989c862058f_17549) and other climate-related risks to the Group.

As at 31 December 2022, the Group has identified Climate and

Circularity as a principal risk to the Group, recognising the Group's

existing commitments in relation to climate change and circular

economy matters and mitigation of associated risks.

Risk appetite is reviewed annually by the Board to ensure that it is

appropriate. Alongside a robust assessment of the principal risks

and uncertainties facing the Group (including those that would

threaten its business model, future performance, solvency, liquidity

and viability), the Board also considers emerging risks which may

challenge the Group’s ability to achieve its strategic objectives in

the future. Each emerging risk is assessed by the Board on its

potential impact and likelihood and, where applicable, incorporated

into the Group’s risk register with appropriate mitigating activities.

Emerging risks are kept under regular review by the Committee,

prior to Board assessment.

The ongoing conflict in Ukraine continues to represent a very

complex, fast-moving and volatile situation. The primary focus of

the Group remains the safety and wellbeing of Group company

employees. The Board maintains close oversight of the Group’s

response to critical external uncertainties that have arisen during

the year, including the impact of the ongoing conflict in Ukraine.

Risks are actively assessed and mitigated at Group, functional,

DRBU and market levels, in compliance with international

sanctions. These uncertainties, taken together with inflationary

pressures and rising interest rates, present a challenging external

environment for the Group. Liquidity (access to cash and sources

of finance) is essential to maintaining the Group as a going

concern in the short-term (liquidity) and medium-term (solvency).

With the support of the Committee, the Board conducts an annual

review of the effectiveness of the Group’s risk management and

internal control systems. This review covers all material controls

including financial, operational and compliance controls and risk

management systems, with the Committee continuing to have a

strong focus on cyber security, sanctions compliance, IT systems

and controls. In conducting the oversight responsibilities of the

Board and the Committee, both forums meet regularly with senior

management during the year to assess key judgements applied.

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|  |  | The Board also considered the Group Viability Statement  see page [116](#i41d1c56d02c243aa87bd0e2ba5e62a16_58777) of the Strategic Report@ |
|  |  |  |
|  |  | Refer to the Group Principal Risks on pages [116](#id739eb8a094346e4a1dd9989c862058f_8875) to [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718) and  Group risk factors on pages [342](#id739eb8a094346e4a1dd9989c862058f_3328) to [362](#i4d4dc756e245431cb56d014c49f68d4c_3-0-1-1-347146) |
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155

Regional Audit and Corporate Social Responsibility

(CSR) Committee framework

The Group’s Regional Audit and CSR Committee framework

underpins the Audit Committee. It provides a flexible channel

for the structured flow of information through the Group, with

committees for each of the three Group regions, for the US

business, and for locally-listed Group entities and specific

markets where considered appropriate.

The Regional Audit and CSR Committees are supported by Risk

and Control Committees established at business unit level, and

within certain Group functions where applicable.

This framework ensures that significant financial, social,

environmental, governance and reputational risks faced by the Group

are appropriately managed and that any failings or weaknesses are

identified so that remedial action may be taken. The Group’s Regional

Audit and CSR Committees are all chaired by an Executive Director,

comprise members of the Management Board and regularly

attended by one or more Non-Executive Directors.

In addition, the Corporate Audit Committee focuses on the

Group’s risks and control environment that fall outside the

regional committees’ remit, such as central functions, and global

programmes, processes and projects. It comprises members

of the Management Board and is chaired by a Regional Director.

One or more of the Non‑Executive Directors also regularly attend

meetings of the Corporate Audit Committee.

External and internal auditors attend meetings of these

committees and regularly have private audiences with members

of the committees after meetings. Additionally, central, regional

and individual market management, along with Internal Audit,

support the Board in its role of ensuring a sound control environment.

Internal control

Group operating companies and other business units are annually

required to complete a controls self-assessment, called Control

Navigator, of the key controls that they are expected to have in

place. Its purpose is to enable them to self-assess their internal

control environment, assist them in identifying any controls that

may need strengthening and support them in implementing and

monitoring action plans to address control weaknesses.

The Control Navigator assessment is reviewed annually to ensure

that it remains relevant to the business and covers all applicable

key controls. In addition, at each year-end, Group operating

companies and other business units are required to:

–review their system of internal control, confirm whether it

remains effective, and report on any specific control deficiencies

and the action being taken to address them; and

–review and confirm that policies and procedures to promote

compliance with the SoBC are fully embedded and identify any

material instances of non-compliance.

The results of these reviews are reported to the relevant Regional

Audit and CSR Committees or to the Corporate Audit Committee,

and to the Audit Committee, to ensure that appropriate remedial

action has been, or will be, taken where necessary. They are also

considered by the SOx Steering Committee and the Disclosure

Committee in determining management’s opinion on the internal

controls over financial reporting (ICFR).

Annual review

The Financial Reporting Council’s ‘Guidance on Risk Management,

Internal Control and Related Financial and Business Reporting’

provides guidance in relation to issues of risk and internal control

management and related reporting.

The processes described above, and the reports that they give

rise to, enable the Board and the Committee to monitor risk and

internal control management on a continuing basis throughout

the year and to review its effectiveness at the year-end. The Board,

with advice from the Committee, has completed its annual review

of the effectiveness of that system for 2022.

The Board is satisfied that the system of risk and internal control

management accords with the UK Corporate Governance Code

and satisfies the requirements for internal controls over financial

reporting.

Internal Audit function

The Group’s Internal Audit function is responsible for carrying out

risk-based audits of Group companies, business units, factories,

global processes and major change initiatives. A separate Business

Controls Team provides advice and guidance on controls to the

Group’s business units.

The purpose, authority and responsibilities of the Group’s Internal

Audit function are defined by the Committee through the Group’s

Internal Audit Charter, which is kept under review by the

Committee and refreshed at least every three years.

The Group’s Internal Audit function works to a rolling 18-month

audit plan, prioritising principal risk areas aligned to the Group’s

risk register. During 2022, the Internal Audit plan was kept under

regular review with the Committee, enabling the Committee to

monitor the ongoing effectiveness of audit work and allowing

flexibility to augment coverage of audit assignments in response

to emerging risks where appropriate.

In 2022, internal audits covered various markets and business

units, manufacturing facilities in a range of locations and a

balanced cross-section of other business activities mapped

to Group risks, including digital infrastructure; cyber security

programme assurance; business continuity management; supply

chain logistics; global leaf pool; critical business transformation

programmes; environment; health and safety management

processes; responsible product marketing procedures;

implementation of SAP in the US business; and the transfer

of various activities to shared services hubs.

Audits were conducted using a combination of on-site and remote

auditing, with continued focus on the use of data analytics and

virtual communications to optimise audit efficiency, effectiveness

and coverage.

The Committee reviews regular summary reports provided

by the Group Head of Internal Audit in respect of internal audits

conducted during the year and findings from those audits,

together with management feedback and agreed action plans

established where areas for improvement are identified.

The scope of each internal audit is assessed for SOx impact

and audit of applicable SOx controls is included where relevant.

Reviews of SOx controls and their effectiveness are primarily

conducted by the Group’s Business Controls Team. Assurance

is also undertaken by the Group’s external auditors, as referred

to on page [159](#i063086bbd4724f0a917bdd6df645c957_441325).

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156

The Committee has approved the 2023 Internal Audit plan and

assessed its alignment with the Group’s risk register to ensure

robust coverage of Group risks and material coverage of Group

activities (measured by value and volume). The design of the 2023

Internal Audit plan builds on digital capabilities developed in 2022,

using enhanced data analytics, and balanced application of remote

fieldwork and focused site visits. The scope of the 2023 plan

remains risk-focused, reflecting the Group’s evolving risk profile.

Emphasis is placed on the growth of New Categories, ESG

priorities, digital infrastructure and cyber security, critical change

initiatives including QUEST, and geopolitical and other emerging

risks, whilst maintaining thorough coverage of core business

activities, lines of defence and IT controls.

The Committee reviews the effectiveness of the Group’s internal

audit function annually, supported by an effectiveness review

conducted periodically by an independent third party. The last

external effectiveness review was conducted in 2019. The

Committee considers the Internal Audit function to be effective

and to have the necessary resources to enable it to fulfil its

mandate.

Financial reporting controls

The Group maintains a series of policies, practices and controls

in relation to the financial reporting and consolidation process,

designed to address key financial reporting risks, including risks

arising from changes in the business or accounting standards

and to provide assurance of the completeness and accuracy of

the Annual Report and Form 20-F.

A key area of focus is to assess whether the Annual Report and

Form 20-F and financial statements are ‘fair, balanced and

understandable’ in accordance with the UK Corporate Governance

Code, with particular regard to:

–Fair: Consistency of reporting between the financial statements

and narrative reporting of Group performance and coverage of

an overall picture of the Group’s performance;

–Balanced: Consistency of narrative reporting of significant

accounting judgements and key matters considered by the

Committee with disclosures of material judgements and

uncertainties noted in the financial statements; appropriate use,

prominence and explanation of primary and adjusted

performance measures; and

–Understandable: Clarity and structure of the Annual Report and

Form 20-F and financial statements, appropriate emphasis of

key messages, and use of succinct and focused narrative with

strong linkage throughout the report, to provide shareholders

with the information needed to assess the Group’s business,

performance, strategy and financial position.

The Group Manual of Accounting Policies and Procedures sets

out the Group accounting policies, its treatment of transactions

and its internal reporting requirements.

The internal reporting of financial information to prepare the

Group’s annual and half-year financial statements is signed off

by the heads of finance responsible for the Group’s markets and

business units. The heads of finance responsible for the Group’s

markets and all senior managers must also confirm annually that

all information relevant to the Group audit has been provided to

the Directors and that reasonable steps have been taken to ensure

full disclosure in response to requests for information from the

external auditors.

The Committee Chair participated in the 2022 Annual Report and

Form 20-F drafting and review processes, and engaged with the

Finance and Transformation Director and the Group Head of

Internal Audit during the drafting process.

FRC review of the Company's Annual Report and Accounts

to 31 December 2021

The UK Financial Reporting Council (FRC) carried out a limited

scope review of TCFD and climate disclosures in the Company's

Annual Report and Accounts to 31 December 2021. The FRC's

correspondence with the Company regarding that review

confirmed there were no questions or queries that the FRC wished

to raise with the Company. The outcomes of the FRC's limited

scope review were reviewed by the Committee and have been

taken into account in the preparation of this Annual Report and

Form 20-F for 2022.

The limited scope review conducted by the FRC was based solely

on the Company's Annual Report and Accounts to 31 December

2021. The FRC's review does not provide any assurance that the

Company's Annual Report and Accounts to 31 December 2021

are correct in all material respects; the FRC's role is to consider

compliance with reporting requirements, not to verify the

information provided.

External assurance of ESG metrics and related information

Robust procedures are maintained for reporting ESG metrics and

related information for the Group in the Annual Report and Form

20-F, supported by external assurance over defined ESG metrics

and related information conducted by the external assurance

provider KPMG LLP.

ESG metrics and related information subject to external assurance

are identified in the assurance report set out at pages [94](#id739eb8a094346e4a1dd9989c862058f_17703) to 95.

The work of the external assurance provider is overseen by the

Committee during the year. In 2022, this included the Committee’s

review of KPMG’s report on assurance over ESG metrics and

related information reported for the prior financial year and

discussion of findings with the ESG Assurance Partner, review

of planning activities and scoping for assurance to be conducted

over ESG metrics in 2022, and monitoring progress of assurance

activities against the work plan in preparation for reporting of

ESG metrics in the Annual Report and Form 20-F.

The Committee has approved KPMG’s provision of assurance

services in accordance with the requirements of the Group Auditor

Independence Policy.

SOx compliance oversight

The Company is subject to certain rules and regulations of US

securities laws, including the US Securities Exchange Act 1934

and SOx. SOx places specific responsibility on the Chief Executive

and Finance and Transformation Director to certify or disclose

information applicable to the financial statements, disclosure

controls and procedures (DCP) and internal controls over financial

reporting (ICFR). This includes our Chief Executive and Finance

and Transformation Director giving attestations in respect of

ICFR effectiveness under §404 of SOx.

The Committee has oversight of processes established to ensure

full and ongoing compliance with applicable US securities laws,

including SOx. Two committees provided assurance during 2022

with regard to applicable SOx certifications. The Disclosure

Committee reviews the Company’s financial statements for

appropriate disclosure, designs and maintains DCPs, and reports

to, and is subject to the oversight of, the Chief Executive and the

Finance and Transformation Director.

A sub-committee of the Disclosure Committee, the SOx Steering

Committee, provides assurance that ICFR have been designed,

and are being operated, implemented, evaluated and disclosed

appropriately, in accordance with applicable requirements and

subject to the oversight of the Chief Executive and Finance and

Transformation Director. The activities of this sub-committee

are directly reported to the Disclosure Committee.

The outputs from the Disclosure Committee and SOx Steering

Committee were presented to and reviewed by the Committee.

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157

No material weaknesses were identified and the Committee

is satisfied that, where areas for improvement were identified,

processes are in place to ensure that remedial action is taken

and progress is monitored.

In 2022, the Committee also reviewed the scope of the external

auditors’ SOx procedures, and received reports on their progress

with their independent assessment of ICFR across the Group.

Code of Ethics for the Chief Executive

and Senior Financial Officers

The Company has adopted a Code of Ethics applicable to the

Chief Executive, the Finance and Transformation Director, and

other senior financial officers, as required by US securities laws

and NYSE listing standards. No waivers or exceptions to the Code

of Ethics were granted in 2022.

Group Standards of Business Conduct (SoBC)

The Committee is responsible for monitoring compliance with the

SoBC, and reports on this to the Board. The SoBC requires all staff

to act with a high degree of business integrity, comply with

applicable laws and regulations, and ensure that standards are

never compromised for the sake of results. Every Group company

and all staff worldwide, including senior management and the

Board, are expected to adhere to the SoBC. The SoBC and the

Group’s Delivery with Integrity compliance programme are

discussed on pages [66](#id739eb8a094346e4a1dd9989c862058f_15661) to [67](#i61464e4022874402ab39d55c5876c2d6_112799).

All Group companies have adopted the SoBC or local equivalent.

Information on compliance with the SoBC is gathered at a regional

and global level and reports of SoBC allegations, including details

of the channels through which allegations are reported, are provided

on a regular basis to the Regional Audit and CSR Committees,

Corporate Audit Committee, and to the Committee. A breakdown

of SoBC contacts and SoBC allegations reported across the Group

in 2022 is set out on page [66](#id739eb8a094346e4a1dd9989c862058f_15661).

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|  |  | The SoBC and information on the total number of SoBC contacts  and SoBC allegations reported in 2022 (including established  breaches) is available at bat.com/sobc |
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Speak Up

The Group maintains Speak Up channels which enable concerns

regarding SoBC compliance matters, including concerns about

possible improprieties in financial reporting, to be raised in

confidence (and anonymously should an individual wish) without

fear of reprisal.

The SoBC includes the Group’s Speak Up policy, which is

supplemented by local procedures throughout the Group that

provide staff with further guidance on reporting matters and

raising concerns, and the channels through which they can do so.

The Board periodically reviews the Group’s Speak Up policy and

reports arising from Speak Up channels. The Speak Up policy was

revised with effect from 1 January 2022 (as part of the revised

SoBC). The Board is satisfied that the Group’s Speak Up policy and

procedures enable proportionate and independent investigation of

matters raised, and ensure that appropriate follow-up action is taken.

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Political contributions

The Group does not make contributions to UK or European Union

(EU) political organisations or incur UK or EU political expenditure.

The total amount of political contributions made to non-UK

political parties in 2022 was £4,576,059 (2021: £4,339,371) as

follows:

Reynolds American Companies reported political contributions

totalling £4,576,059 (US$5,656,010) for the full year 2022 to US

political organisations and to non-federal-level political party and

candidate committees in accordance with their contributions

programme. No corporate contributions were made to federal

candidates or party committees and all contributions were made

in accordance with applicable laws.

All political contributions made by Reynolds American Companies

are assessed and approved in accordance with Reynolds

American’s policies and procedures to ensure appropriate

oversight and compliance with applicable laws.

In accordance with the US Federal Election Campaign Act,

Reynolds American Companies continue to support an employee-

operated Political Action Committee (PAC), a non-partisan

committee registered with the US Federal Election Commission

that facilitates voluntary political donations by eligible employees

of Reynolds American Companies. According to US federal finance

laws, the PAC is a separate segregated fund and is controlled by

a governing board of individual employee-members of the PAC.

In 2022, Reynolds American Companies incurred expenses, as

authorised by US law, in providing administrative support to the PAC.

No other political contributions were reported.

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158

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| The 2022 Remuneration Policy  strengthens the link between  remuneration and BAT 's  strategy – A Better  Tomorrow™ and provides  further alignment with  shareholders and our  ambitious ESG agenda.  Dimitri Panayotopoulos  Chair of the Remuneration Committee |

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| Remuneration Committee  current members |
| Dimitri Panayotopoulos (Chair) |
| Kandy Anand |
| Sue Farr |
| Savio Kwan |

Dear Shareholders,

On behalf of the Board, I am pleased to

introduce our 2022 Directors’ Remuneration

Report. In 2022, we continued to accelerate

our transformation and deliver results in

line with our guidance, while navigating a

more challenging macro-economic environment

exacerbated by the conflict in Ukraine. This

was driven by the hard work and commitment

of Group employees across the world,

and their focus on the delivery of our

three strategic priorities, demonstrating

once again the strength and resilience of

our business.

With the COVID-19 crisis having been a

persistent theme at the start of the year,

we maintained our position of no

furloughing of employees, no compulsory

redundancies, and no pay reductions

related to the COVID-19 pandemic.

Shareholder Engagement

Earlier in 2022, we concluded our

engagement process by writing to our

major shareholders, representing 60% of

our issued share capital together with the

Investment Association, Institutional

Shareholder Services and Glass Lewis, to

share the outcomes of the extensive

engagement process we undertook in the

latter part of 2021. In that communication

we outlined the final 2022 Remuneration

Policy proposals following refinements

made by the Committee to incorporate the

feedback we received from our shareholders.

There was a wide range of views on the

detail of the proposals with most shareholders

recognising that the changes proposed

were appropriate for the Group and

support the delivery of our corporate

purpose, ESG and transformation agendas.

At the 2022 Annual General Meeting, we

presented our new Directors’ Remuneration

Policy, which was very well received and

supported by shareholders (94.85% votes

in favour). On behalf of the Remuneration

Committee, I would like to thank

shareholders and their advisory bodies for

taking the time to engage with us and for

their feedback, which provided valuable

input and assisted the Committee in

developing the new Remuneration Policy.

Remuneration Policy and ESG

The new Remuneration Policy strengthens

the link between remuneration and BAT's

strategy - A Better Tomorrow™ - and

provides further alignment with shareholders

and our ambitious ESG agenda.

We are putting ESG at the heart of our

strategy and corporate purpose by delivering

sustainable growth, encouraging more

consumers to transition to reduced risk

products\*† and reducing the health impact

of our business. As more fully described in

the new Remuneration Policy, this has been

firmly embedded into our Executive

Directors’ remuneration through new

quantifiable performance measures in the

Short-Term and Long-Term Incentive Plans

with greater focus on revenue growth and

improving profitability in New Categories (further

details are on pages [50](#id739eb8a094346e4a1dd9989c862058f_15538) and [51](#id739eb8a094346e4a1dd9989c862058f_19555)).

Wider Workforce Context

In 2022, the Remuneration Committee has

considered pay decisions against the

backdrop of the inflationary pressures

faced by all our employees to ensure that

pay decisions reflect the principles of

fairness and equitable treatment. The

Remuneration Committee noted the work

undertaken by the Group to support

employees during this difficult period, such

as off-cycle salary increases targeting

lower paid employee groups, additional

budgets allocated by the Group for wider

workforce salary increases in the UK and

globally, and changes to enhance benefits

and wellbeing programmes.

Notes:

\*Based on the weight of evidence and assuming a complete

switch from cigarette smoking. These products are not

risk free and are addictive.

†Our Vapour product Vuse (including Alto, Solo, Ciro and

Vibe), and certain products including Velo, Grizzly,

Kodiak, and Camel Snus, which are sold in the U.S., are

subject to FDA regulation and no reduced-risk claims will

be made as to these products without agency clearance.

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|  |  |  | The 2022 Annual Report on Remuneration has been prepared in accordance with the  relevant provisions of the Companies Act 2006 and as prescribed in The Large and  Medium-sized Companies and Group (Accounts and Reports) (Amendment) Regulations  2013 (the UK Directors’ Remuneration Report Regulations). Where required and for the  purpose of the audit conducted in accordance with International Standards on Auditing  (ISA), data has been audited by KPMG and this is indicated appropriately. | | |  |
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|  |  |  | Remuneration Committee terms of reference  The Committee’s terms of reference align with the requirements of the Code.  No changes were made to the Committee’s terms of reference in 2022. | | |  |
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|  |  |  |  | For the Committee’s terms of reference see  www.bat.com/governance |  |  |
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159

Our Performance and Remuneration

Outcomes for 2022

The new “At a Glance” section provides an

overview of our financial performance and

how it translates into outcomes under the

Short-Term and Long-Term Incentive plans,

with further details provided on pages [166](#iff8934d3734b44f4b1d79b07b59bc890_231668)

and [167](#iff8934d3734b44f4b1d79b07b59bc890_231669). After reflecting on a range of

considerations as described further in this

report, the Committee was satisfied that

the Remuneration Policy had operated

as intended.

2022 Target Setting

The performance targets set by the

Committee early in the year have remained

unchanged throughout the 2022 performance

period. Target setting was focused on

ensuring continued delivery towards the

Group’s £5 billion of New Category revenue

and profitability targets by 2025, continuing

to drive value through our combustibles

business, and generating cash to support

our Capital Allocation Agenda.

In setting the 2022 targets, the Committee

also considered the expectations around our

further growth in Non-Combustible product

consumer base, strong New Category

revenue and volume growth and

improvement in New Category contribution

(refer to page [330](#i49422b2b471646dabd086f354630c16e_68562)). In order to meet profit

objectives, ambitious cost savings were also

embedded in the targets, aiming to mitigate

some of the pressures arising from the

inflation in our cost base.

The inclusion of New Categories revenue

growth in both the Short-Term and Long-

Term Incentives is an important step given

that New Categories growth is a critical

part of our long-term strategy and ESG

agenda. The STI measure will continue to

provide focus on in year delivery, while the

LTIP measure will focus on cumulative and

sustained performance over a three-year

period.

2022 Short-Term Incentive

Our 2022 performance demonstrated our

continued focus on delivery against our

three priorities – Step Change in New

Categories, Combustibles Value Growth

and Simplify the Company, with New

Categories becoming a greater driver of

Group performance and, from 2022, a key

component of the Short-Term Incentive

and the Long-Term Incentive.

In 2022, strong revenue growth continued,

led by pricing and New Category revenue

growth which increased by 37.0% to £2,813

million (at constant rates of exchange).

New Categories contribution, a new

performance measure included in 2022 to

incentivise delivery of the New Category

profitability targets by 2025, improved by

£578 million through volume growth,

strong pricing and cost of sales

productivity savings. We have

outperformed the 2022 targets, which

were set in relation to the original 2025

ambition, enabling the Group to accelerate

progress early in this critical area of our

business. Adjusted profit from operations

(at constant rates of exchange) improved

by 4.3%, driven by accelerated growth in

New Categories, strong pricing, optimised

resource allocation, productivity savings,

and further costs saving initiatives

including the actualisation of Quantum

benefits. Cash delivery continued to be

strong realising over £7.4 billion of adjusted

cash generated from operations. Group

volume share (of cigarette and THP) in key

markets reduced by 10 bps. The above

performance translates into a result of

77.7% of maximum opportunity.

2020 Long-Term Incentive

The performance results of the last 3 years

(2020, 2021 and 2022) are reflected in the

outcomes for the 2020 LTIP award:

–Total shareholder return (TSR) relative to

peers (20%): Over the performance

period, we returned more than £6.9

billion to shareholders in the form of

dividends and share buy-backs. This,

together with our share price

performance, reflecting our focus on

delivering our strategy, as well as robust

financial results and the resilience of our

business model, resulted in BAT TSR

ranking 4th amongst our TSR peer group

of 24 companies (page [167](#iff8934d3734b44f4b1d79b07b59bc890_231669)).

–Adjusted diluted earnings per share (EPS)

(40%): We measure adjusted diluted EPS

at current and constant rates of

exchange (equally weighted). The 3-year

adjusted diluted EPS compound annual

growth rate (CAGR) was 4.7% and

5.9%, respectively.

–Group revenue (20%): The 3-year Group

revenue CAGR was 4.1% at constant

rates of exchange.

–Operating cash flow conversion (20%):

We have continued to demonstrate the

ongoing strength of the Group in turning

operating performance into cash,

resulting in a 102.2% operating cash flow

conversion ratio at current rates over the

last 3 years.

As previously announced, we are working

towards transferring our Russian business

in full compliance with international and

local laws and have suspended all planned

capital investment into Russia in 2022. In

addition, the Group’s subsidiary in Belarus

will form part of the transaction. As Russia

and Belarus have been part of the Group

throughout 2022, it was decided not to

make any adjustments to the 2022 STI and

LTI targets set at the beginning of the year

- both targets and the results are inclusive

of contribution from our Russian and

Belarusian businesses. The full treatment

of our Russian and Belarusian businesses

under IFRS rules, including impairment

charges and associated costs, are detailed

on pages [216](#id739eb8a094346e4a1dd9989c862058f_725), [267](#iacbff9ba8d0e4b02b352fd6515a4315e_53084) and [268](#iacbff9ba8d0e4b02b352fd6515a4315e_53085).

The above performance translates into a

result of 58.9% of maximum for the 2020

LTIP. Following evaluation of the formulaic

outcomes for both the STI plan and LTIP,

the Committee considered the results

against the underlying performance of the

Group and the experience of our

shareholders. The Committee concluded

that the outcomes were a fair reflection of

performance delivered in what continues

to be challenging and volatile market

conditions and no adjustments were

required. In addition, share price fluctuation

is reflected throughout the Executive

Directors’ remuneration in the vesting and

holding periods as well as their individual

shareholdings.

The Committee also considered whether

there were any potential windfall gains for

the LTIP award granted in March 2020 in

the immediate aftermath of the COVID-19

outbreak. Consideration was given to

several factors including the share price at

the point of grant which was within the

range of share price performance during

FY2019; the share price following grant,

which remained around the grant price for

the 2020/2021 period, and the share price

growth since grant, which was delivered

almost entirely over 2022, reflecting the

Group's performance over that period. The

Remuneration Committee also noted that

the value of the 2020 awards is indicative

at this stage, as awards are subject to the

additional two-year holding period and will

not vest to the Executive Directors until

March 2025. Based on consideration of the

above factors, amongst others, it was

concluded that an adjustment to the size of

the awards was not warranted. More

details are provided on page [167](#iff8934d3734b44f4b1d79b07b59bc890_231669).

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160

Executive Directors Remuneration

In determining the 2023 salary increases

for the Chief Executive and Finance and

Transformation Director, the Remuneration

Committee noted that in the UK, salary

increases for the majority of employees are

expected to be around 5.5% on average.

In addition, the Remuneration Committee

also considered the underlying company

performance for the financial year and

individual contribution of the Executive

Directors, including continued strong

growth in New Categories revenue and

New Categories contribution, continued

growth in consumer acquisition, as well as

further improvements in the Group’s cost

structure through Quantum delivery while

ensuring the Group navigated through a

complex and deteriorating macro-

economic environment during the year.

The Committee also reviewed the market

data provided by external consultants to

reference the competitive positioning of

the Executive Directors' total remuneration

in relation to our pay comparator group and

wider market, noting that there were no

salary increases granted to either

Executive Director in 2022 and that the

Finance and Transformation Director’s

last salary adjustment was in 2020.The

Remuneration Committee also reviewed

the impact of salary adjustments on total

compensation of the Executive Directors to

ensure the overall potential quantum

remains reasonable. Taking the above

points into account, the Remuneration

Committee decided to approve a salary

increase of 4.5% for the Chief Executive

and 5.0% for the Finance and

Transformation Director, which are below

the level of the wider UK workforce.

Wider Workforce Activities

The Remuneration Committee continued to

engage in matters related to all employees,

ensuring a robust understanding of the

issues affecting the wider workforce,

drawing from a range of well-established

engagement channels worldwide covering

the Group’s global workforce.

The Committee remains mindful of

executive pay in the broader context,

ensuring the Remuneration Policy is

implemented with the desired attributes of

fairness, transparency, proportionality, and

alignment to broader organisational culture

and societal expectations.

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|  | Building a diverse and  inclusive culture  We want to be confident that our pay  practices are delivering equal pay  globally and that any differences in pay  between employees performing similar  work are for objective reasons.  More information is available in our 2022  People, Diversity and Culture Report  starting on page [84](#id739eb8a094346e4a1dd9989c862058f_9644). |

Equal Pay for Equal Work

In 2022, we extended the scope of our Pay

Equity Review to include approximately

40,000 employees across 44 markets,

covering approximately 80% of our people

from a gender pay equity perspective. For

the first time, we also included data for

approximately 14,000 employees across

7 countries covering approximately 30%

of our workforce for our Ethnicity Pay

Equity Review.

The Group results show that pay difference

between men and women, and between

ethnically diverse and non-ethnically

diverse groups is within 1% (on

consolidated basis), for doing work of equal

value. This demonstrates that our pay

practices are founded on fair and

legitimate drivers of pay.

For the second year in succession, we

gained independent accreditation for our

Pay Equity Review from Fair Pay Workplace,

demonstrating our commitment to pay

equity in order to create a more equitable

and inclusive workplace.

Looking Ahead to 2023

We continued to accelerate our

transformation journey towards A Better

TomorrowTM in 2022 and creating value for

all stakeholders. Our new Remuneration

Policy drives pay for performance and

provides strong alignment with the Group

strategy and our ambitious ESG agenda.

We have determined that the measures

and weightings used in our incentive plans

remain relevant, therefore, we will not

make any changes to the STI and LTI

performance measures for the 2023

performance year.

We hope you find this report informative.

We continue to maintain an open dialogue

on remuneration matters and welcome

your further comments and feedback and

respectfully ask for your support at the

forthcoming Annual General Meeting.

Dimitri Panayotopoulos

Chair, Remuneration Committee

8 February 2023

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Step Change in New Categories

Performance

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| --- | --- | --- | --- | --- | --- |
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|  |  |  |  |  |  |
|  |  |  |  |  |  |

Drive Value From Combustibles

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
|  |  |  |  |  |  |

Simplify the Business

|  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
|  | 2022 Business performance highlights | | |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | |  |  |
|  | +37.0% |  | £578m |  | +2.3% |  |  | 100% | |  | +4.3% |
|  | New Categories  revenue growth | | Change in New Categories  contribution |  | Revenue |  |  | Operating cash flow  conversion ratio | |  | Adjusted profit from  operations growth |
|  |  |  |  |  |  |  |  |  |  |  |  |
| STI | |  | STI |  | LTI |  | LTI | | |  | STI |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Performance outcomes | |  |  | Delivery | | |
|  |  |
| Short-Term Incentive 2022 (STI) | |  |  | 50% Cash | | |
|  |
|  |
|  | 50% Shares | | |
|  |
| Strong business performance translated into STI and LTI  outcomes as  shown in the chart below. Full details can be found on pages 165 and 166. | | |  |
|  |  |  |  |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | (0%) Threshold | | | | | | | | | | | | | | | | | | | | | | | | |  |  |  | Maximum (100%) | | | | | | | | | | | | | | | | | | | | | |  | Outcome as % of  maximum (£'000) |
| Group's volume share  growth (10%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 77.7% |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| New Categories revenue  growth (15%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Chief Executive |
| Change in New Categories  contribution (20%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |  | £2,575 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Finance and  Transformation  Director |
| Adjusted profit from  operations growth (25%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Adjusted cash generated  from operations (30%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | £1,186 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Long-Term Incentive 2020-2022 (LTI) | |  |  |  |  |  |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | (15%) Threshold | | | | | | | | | | | | | | | | | | | | |  |  |  |  |  |  |  | Maximum (100%) | | | | | | | | | | | | | | | | | | | | | |  | Outcome as % of  maximum (£'000) |
| Relative total shareholder  return (20%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 58.9% |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Adjusted diluted EPS  (current) (20%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Chief Executive |
| Adjusted diluted EPS  (constant) (20%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | £5,222 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Finance and  Transformation  Director |
| Revenue  (20%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Operating cash flow  conversion ratio (20%) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | £2,666 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

|  |  |
| --- | --- |
|  |  |
| Current Shareholding as % of salary | |
| Chief Executive | 928% |
| Finance and Transformation Director | 523% |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  |  | At risk – unvested subject to performance |
|  |  |  |
|  |  |  |
|  |  | Unvested subject to continued employment |
|  |  |  |
|  |  |  |
|  |  | Ordinary Shares |
|  |  |  |
| l |  |  |
|  | Shareholding requirement |
|  |  | –Current shareholding includes: ordinary shares  owned outright and shares subject to continued  employment on a net-of-tax basis (estimated).  –Shares "at risk" include unvested LTI awards  subject to performance. |
|  |  |
|  |  |
|  |  |
|  |  |
|  |  |
|  |  |  |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| 2022 Remuneration (£'000) | |  | |  | No salary increases were granted to Executive Directors in 2022.  The majority of the Executive Directors’ remuneration packages are made up of  variable at-risk pay, linked to stretching targets that align with our strategy and  shareholder value creation, and are largely delivered in shares. | |
| Base salary | | Total Remuneration | |  |
| Chief Executive | £1,326 |  | £9,617 |  |
| Finance and  Transformation Director | £803 |  | £4,936 |  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Remuneration Report | |  |  |  |  |  |  |
| 2022 Remuneration at a Glance | | | | | | | |

Remuneration at the Group is designed to reward performance in line with the delivery

of the Group's strategy – A Better Tomorrow™ and provides alignment with shareholders

and our ambitious ESG agenda. In 2022, we continued to accelerate our transformation

journey towards A Better Tomorrow™. The below summary highlights how our business

performance translated into the remuneration of our Executive Directors.

162

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| The Remuneration Policy was approved by shareholders at the AGM on 28 April 2022. The full Directors’ Remuneration Policy is set out  in the Remuneration Report 2021 contained in the Annual Report and Form 20-F for the year ended 31 December 2021 (pages 152-157),  which is available at www.bat.com. | | | | | | |
|  | Directors’ Remuneration Policy – Summary | | |  |  |  |
|  |  | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|  | Fixed Pay – Salary  Attracts and retains high-calibre individuals to deliver the Group's long-term  strategy.  Reviewed annually, taking into account factors including individual performance,  experience and business performance, as well as reference versus appropriate  market data and the approach taken for the general UK employee population. |  |  |  |  |  |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
|  | Fixed Pay – Pensions and Benefits  Pension provides competitive post-retirement benefits arrangements in form of  Defined Contribution benefit equivalent to a maximum of 15% of salary, aligned  with the rate applicable to the wider UK workforce.  Market competitive benefits are provided which are consistent with the role. |  |  |  |  |  |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
|  |  |  |  |  |  |
|  | Short-Term Incentive1  Incentivises the attainment of corporate targets aligned to the Group's strategic  objectives on an annual basis, with a deferred element to ensure alignment with  shareholders' interests. The Chief Executive's on-target opportunity is 125% of  salary and maximum is 250% of salary. The Finance and Transformation  Director's on-target opportunity is 95% of salary and maximum is 190% of salary. |  |  |  |  |  |
|  |  |  | | |  |
|  | 50% cash | 50% shares deferred for 3 years | | |  |
|  |  |  |  |  |  |
|  | Long-Term Incentive1  A combination of stretching targets aligned with long-term strategy delivery  that provides a balance relevant to the Group's business and market conditions  as well as alignment between Executive Directors' and shareholders' interests.  Awards granted under the Group's LTIP - Performance Share Plan vest after a 5-  year extended vesting period from the grant date, and only to the extent that the  performance conditions are satisfied at the end of the 3-year performance  period, and employment continues for an additional 2-year period from the third  anniversary of the grant date. Annual award of 500% of salary for the Chief  Executive and 400% of salary for the Finance and Transformation Director. |  |  |  |  |  |
|  |  | | |  | |
|  | 3-year performance period | | | 2-year holding period | |
|  |  |  |  |  |  |
|  | Shareholding (including post-employment)  Strengthens the long-term alignment between the interests of Executive  Directors and shareholders.  Executive Directors are required to hold BAT shares equal to the value of 500%  of salary for the Chief Executive and 400% for the Finance and Transformation  Director during their service, and post-employment are required to maintain the  same level of shareholding until second anniversary of cessation of employment. |  |  |  |  |  |
|  |  | | | | |
|  | Minimum shareholding requirement | | | | |
|  |  |  |  |  |  |

Note:

1.Further details on the performance measures for the performance period ended 31 December 2022 can be found on pages [166](#iff8934d3734b44f4b1d79b07b59bc890_231668) and [167](#iff8934d3734b44f4b1d79b07b59bc890_231669).

Remuneration Policy and the Corporate Governance Code

When setting the Remuneration Policy, the Committee has

ensured that the provision 40 disclosures from the UK Corporate

Governance Code are considered, as summarised below.

Clarity and simplicity

Our Remuneration Policy provides an overall remuneration

package that is transparent for our Executive Directors and

shareholders alike; its simple structure has a clear and

straightforward link to the delivery of the Group’s long-term

strategy. Principles driving fixed remuneration (salary, benefits,

pension) are closely aligned with the wider workforce and variable

remuneration (STI and LTI) rewards delivery of financial and

strategic objectives both in the short- and long-term.

Risk

The combination of performance target setting for the STI and LTI,

the inclusion of provisions for discretionary adjustments and malus

and clawback provisions ensure that we remunerate our Executive

Directors in accordance with high standards of governance while

mitigating, as far as possible, reputational and other risks arising

from remuneration that are not proportionate to outcomes.

Predictability and proportionality

There is a clear link between the operation of our short and long-

term incentive plan awards and the delivery of our strategy and long-

term performance. Variable remuneration at the Company accounts

for between 80%-90% of an Executive Director’s total remuneration,

ensuring that poor performance is not rewarded.

Alignment to culture

The Remuneration Committee has worked extensively to develop

a policy that closely aligns the Executive Directors to the wider

workforce and rewards long-term sustainable performance. The

Remuneration Committee continually reviews the Remuneration

Policy, taking into account any feedback received from engagement

with the wider workforce and shareholders, to ensure it is aligned to

the Company’s purpose and values, and promotes the long-term

success of the Company. The current Remuneration Policy was

approved at the 2022 AGM with 94.85% of votes in favour.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | |  |  |  |  |  |  |
| Summary of Current Remuneration Policy | | | | | | | |

163

The below section of the Remuneration Report sets out the Executive Directors’ remuneration for the year ended 31 December 2022.

Executive Director remuneration earned in the year ended 31 December 2022 – @Audited@

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Single figure of remuneration | | | | | | |
|  |  | Executive Directors | | | | |
|  |  | Jack Bowles | |  | Tadeu Marroco5 | |
| £’000 |  | 2022 | 2021 |  | 2022 | 2021 |
| Salary1 |  | 1,326 | 1,316 |  | 803 | 803 |
| Pension |  | 199 | 197 |  | 121 | 121 |
| Taxable Benefits |  | 292 | 320 |  | 157 | 100 |
| Other emoluments2 |  | 3 | 3 |  | 3 | 3 |
| Short-Term Incentives |  | 2,575 | 2,820 |  | 1,186 | 1,308 |
| Long-Term Incentives3,4 |  | 5,222 | 3,407 |  | 2,666 | 706 |
| Total Remuneration |  | 9,617 | 8,063 |  | 4,936 | 3,041 |
| Total Fixed Pay |  | 1,817 | 1,833 |  | 1,081 | 1,024 |
| Total Variable Pay |  | 7,800 | 6,230 |  | 3,855 | 2,017 |

Notes:

1.The 2021 salary figure for Jack Bowles reflects a salary of £1,287,000 for the period of 1 January 2021 to 31 March 2021 and a salary of £1,325,610 for the period of 1 April 2021 to

31 December 2021.

2.The amounts included as Other emoluments relate to the Share Reward Scheme and indicate the value of ordinary shares awarded in line with the Directors' Remuneration Policy. The

Executive Directors did not receive options during the year.

3.The 2020 LTIP award is due to vest, by reference to performance, on 30 March 2023, based on completion of the three-year performance period on 31 December 2022. The value shown

is based on the average share price for the three-month period ended 31 December 2022 of 3,328p and includes accumulated notional dividends. The indicative amounts of £913,000 for

Jack Bowles and £466,000 for Tadeu Marroco are attributable to share price appreciation during the three-year period based on the average share price for the three-month period

ended 31 December 2022 of 3,328p. The actual value of shares to vest will be the value on 28 March 2025, when the awards fully vest after the additional two-year extended vesting

period and are finally released to the Executive Directors.

4.LTIP values shown for 2021 have been restated to reflect the actual closing BAT share price of 3,299p on the date the awards were adjusted for performance and include accumulated

dividends.

5.The 2021 LTIP value for Tadeu Marroco relates to his 2019-2021 award (vested in March 2022) which was granted prior to his appointment to the Board in August 2019.

The following sections provide further detail on the figures in the above table, including the underlying calculations and assumptions and

the Committee’s performance assessment for variable remuneration.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Salary |  |  |  |  |
| Salaries are normally reviewed annually in February with salary changes effective  from April. Jack Bowles' salary was last increased in April 2021 and Tadeu Marroco's  salary was last increased in October 2020. There were no salary increases awarded  to the Executive Directors in 2022. | £'000 | As of April  2021 salary | As of April  2022 salary | 2022  increase |
| Jack Bowles | £1,326 | £1,326 | —% |
| Tadeu Marroco | £803 | £803 | —% |
|  |  |  |  |

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Pension |  |  |
| The pension values shown in the table represent company contributions of 15% of an  annual base salary to the Defined Contribution arrangements in line with the  contribution level for the wider UK workforce. No excess retirement benefits have been  paid to, or receivable by, the Executive Directors in 2022 and neither was entitled to  defined benefits pension arrangements. | £'000 | Employer pension  contributions |
| Jack Bowles | £199 |
| Tadeu Marroco | £121 |

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
| Benefits |  |  |  |  |  |  |  |  |  |
| The table below summarises the benefits provided to the Executive Directors in 2022. Where relevant, the costs include VAT and a  gross-up for tax. | | | | | | | | | |
| £'000 | Car or car  allowance | Health  insurance | Life &  Accident  insurance | Tax  advice | Company  driver | Security1 | Tax  equalisation2 | Other | Total Benefits |
| Jack Bowles | £10 | £15 | £10 | £28 | £39 | £33 | £123 | £34 | £292 |
| Tadeu Marroco | £20 | £13 | £4 | £40 | £33 | £7 | £0 | £40 | £157 |

Notes:

1.Security costs are related to annual maintenance and monitoring of the personal and home security system.

2.The amount for tax equalisation for Jack Bowles relates to overseas taxes paid by the Company in respect of employment income in order to protect Jack Bowles to his UK tax position in

line with the Company policy for the wider workforce.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Remuneration Report | |  |  |  |  |  |  |
| 2022 Annual Report on Remuneration  Continued | | | | | | | |

164

Short-Term Incentive outcomes for the Year Ended 31 December 2022

In 2022, we further strengthened the link between remuneration and BAT strategy by introducing the New Categories contribution

(20%) performance measure in addition to the New Categories revenue growth performance measure (15%), bringing New Categories

to a 35% weighting overall.

2022 performance demonstrated our continued focus on delivery against our three priorities – Step Change in New Categories,

Combustibles Value Growth and Simplify the Company, with New Categories becoming a greater driver of Group performance.

–Group volume share growth (10%) – The Volume Share is based on duty-paid cigarettes and THP consumables. The Group’s share

of key markets reduced in 2022, resulting in 0% outcome as threshold performance for this performance measure was not achieved.

–New Categories revenue growth (15%) (at constant rates) – Strong New Categories revenue growth which increased by 37% to

£2,813 million in revenue, resulting in maximum outcome for this performance measure.

–New Categories contribution (20%) – Measures year-on-year improvement (at constant rates) in New Categories Contribution

in line with the Group’s original break-even expectation by 2025. In 2022, New Categories losses reduced by £578 million, resulting in

maximum outcome for this performance measure.

–Adjusted profit from operations growth (25%) (at constant rates) – 4.3% improvement, mainly driven by strong revenue growth,

and an improvement in the financial performance of New Categories, resulting in a 12.7% outcome out of a 25% maximum for this

performance measure.

–Adjusted cash generated from operations (30%) – Cash delivery continued to be strong, realising over £7.4 billion of adjusted cash

generated from operations, achieving maximum outcome for this performance measure.

The chart below illustrates performance compared to the targets.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | STI performance measures, weightings and outcomes for the year ended 31 December 2022 – @audited@ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Measure1 |  | Weighting | Threshold (0%) | | | | | | | | | | |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Maximum (100%) | | | | | | | | | | | | | | | Result | Outcome |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Group's volume share  growth2 | Year on year % growth of Group share of  key markets, including THP | 10% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | -10 bps | 0% (10%) |  |
|  | 0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 10% |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | New Categories  revenue | Year on year % growth in revenue from  Vapour, THP and Modern Oral at constant  rates | 15% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | +37.0% | 15% (15%) |  |
|  | 20% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 35% |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | New Categories  contribution | Year on year improvement in New  Categories contribution (loss reduction  vs prior year) | 20% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | £578m | 20% (20%) |  |
|  | 150m |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 250m |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Adjusted profit from  operations | Year on year % growth at constant rates  of exchange | 25% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | +4.3% | 12.7% (25%) |  |
|  | 3% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 5.5% |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Adjusted cash generated  from operations | Annual adjusted cash generated from  operations (at constant rates) | 30% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | £7.4bn | 30% (30%) |  |
|  | £6.4bn |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | £7.0bn |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Total outcome as %  of maximum |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 77.7%  (100%) |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

Notes:

1.Non-GAAP measures: Adjusted profit from operations, New Categories revenue, New Categories contribution,and adjusted cash generated from operations are non-GAAP measures

used by the Remuneration Committee to assess performance. Please refer to pages [325](#id739eb8a094346e4a1dd9989c862058f_10316) to [337](#i49422b2b471646dabd086f354630c16e_68557) for definitions of these measures and a reconciliation of these measures to the most

directly comparable IFRS measure where applicable.

2.Group volume share is presented as a rounded movement to the nearest 10 bps. Payout is based upon the actual performance of -14 bps in 2022.

Following evaluation of the formulaic outcomes for STI, the Committee considered the results against the underlying performance of the

Group and concluded that the outcomes were a fair reflection of performance delivered in what continues to be challenging and volatile

market conditions and no adjustments were required.

Under the Remuneration Policy, 50% of the annual STI will be delivered as an award of BAT shares which will be deferred for a three-year

period. The 2022 STI outcomes for the Executive Directors are as follows:

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
| STI outcome for the year ended 31 December 2022 | | | | | | | |  |  |
| £'000 | Base salary for  2022 |  | Maximum  opportunity as %  of base salary |  | STI outcome (out  of 100%) |  | STI award  achieved  £’0001 | 50% delivered in  cash | 50% deferred in  shares2 |
| Jack Bowles | £1,326 | x | 250% | x | 77.7% | = | £2,575 | £1,287 | £1,287 |
| Tadeu Marroco | £803 | x | 190% | x | 77.7% | = | £1,186 | £593 | £593 |

Notes:

1.Malus and clawback provisions apply.

2.Deferred share awards will be released in March 2026, subject to leaver and malus and clawback conditions. No further performance conditions apply.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | |  |  |  |  |  |  |
|  | | | | | | | |

165

Long-Term Incentive Plan (LTIP) 2020 - 2022

The LTI is designed to align participants with shareholders through making awards which are subject to stretching performance

conditions. The measures below were set under the terms of our 2019 policy. The performance results were assessed over the three

years 2020 - 2022 as follows:

–Total shareholder return (TSR) (20%): Over the performance period, we returned more than £6.9 billion to shareholders in the form of

dividends and share buy-backs. This, together with our share price growth of circa 26% over the past 3 years, reflected our

commitment to deliver our new strategy, as well as robust financial results and the resilience of our business model. BAT TSR ranked

4th amongst our 24 TSR peers resulting in a full vesting for this measure.

–Earnings per share (EPS) (40%): EPS growth is an important indicator that underpins the Group’s ability to grow dividends. We

measure EPS at current and constant rates of exchange (equally weighted). The 3-year EPS compound annual growth rate (CAGR) was

4.7% and 5.9%, respectively, resulting in 0% and 6.2% vesting for this measure.

–Group revenue (20%): The 3-year Group revenue CAGR was 4.1% at constant rates of exchange, resulting in 12.7% vesting for this

measure.

–Operating cash flow conversion (20%): We have continued to demonstrate the ongoing strength of the Group in turning operating

performance into cash, resulting in a 102.2% operating cash flow conversion ratio at current rates over the 3 years, resulting in a full

vesting for this measure.

The chart below illustrates performance compared to the targets.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | LTIP performance measures, weightings and results for year ended 31 December 2022 – @audited@ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Measure1 |  | Weighting | Threshold (15%) | | | | | | | | | | |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Maximum (100%) | | | | | | | | | | | | | | | Result | Outcome |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Relative TSR2 | Relative to a peer group of international  FMCG companies | 20% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 4th | 20% (20%) |  |
|  | Median |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | UQ |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | EPS growth at current  rates of exchange | Compound annual growth in adjusted  diluted EPS measured at current rates of  exchange | 20% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 4.7% | 0% (20%) |  |
|  | 5% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 10% |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | EPS growth at constant  rates of exchange | Compound annual growth in adjusted  diluted EPS measured at constant rates  of exchange | 20% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 5.9% | 6.2% (20%) |  |
|  | 5% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 10% |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Revenue | Compound annual growth measured  at constant rates of exchange | 20% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 4.1% | 12.7% (20%) |  |
|  | 3% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 5% |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Operating cash flow  conversion ratio | Ratio over the performance period  at current rates of exchange | 20% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 102.2% | 20% (20%) |  |
|  | 85% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 95% |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Total vesting as % of maximum | | |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 58.9%  (100%) |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

Notes:

1.Non-GAAP measures: Adjusted diluted EPS (at current and constant rates of exchange) and operating cash flow conversion ratio are non-GAAP measures used by the Remuneration

Committee to assess performance. Please refer to pages [325](#id739eb8a094346e4a1dd9989c862058f_10316) to [337](#i49422b2b471646dabd086f354630c16e_68557) for definitions of these measures and a reconciliation of these measures to the most directly comparable IFRS

measure where applicable.

2.Relative TSR: the constituents of the FMCG peer group for the 2020-2022 LTIP were: Altria Group, Anheuser-Busch InBev, Campbell Soup, Carlsberg, Coca-Cola, Colgate-Palmolive,

Danone, Diageo, Heineken, Imperial Brands, Japan Tobacco, Johnson & Johnson, Kellogg, Kimberly-Clark, LVMH, Mondelēz International, Nestlé, PepsiCo, Pernod Ricard, Philip Morris

International, Procter & Gamble, Reckitt Benckiser and Unilever.

Having considered underlying company performance, the Committee concluded that there was no reason to apply a discretionary

adjustment to the formulaic vesting outcome for the Executive Directors, and that the awards should vest in line with the outcome at

58.9% of maximum. The Committee also considered whether there were any potential windfall gains for the LTIP award granted in

March 2020 in the immediate aftermath of the COVID-19 outbreak. Consideration was given to several factors, including:

– the share price on grant is within the range of share price movements over FY2019;

–the share price in the 2020/2021 period following the grant remained close to the 2020 grant price, with no observable appreciation

driven by wider movements in the markets;

–share price growth over the 2020 to 2022 performance period has largely occurred during 2022, reflecting the Company's specific

performance over the period;

–while the absolute share price growth of circa 26% over the performance period is positive, it is not higher than would be considered

realistic within a 3-year time frame;

–the vesting value of the 2020 awards is at this stage indicative, as awards are subject to an additional 2-year holding period and will not

vest to the Executive Directors until 2025; and

–despite the macro-economic events over the period, no adjustments have been made to either performance targets or outcomes

under the performance conditions, which were set before the outbreak of the pandemic and assumed a ‘business as usual’

environment.

The Committee concluded that no adjustment should be made to the 2020 LTIP vesting outcome, taking all of the above into account

but in particular the fact that the share price growth was almost entirely delivered in 2022, based on BAT specific performance and not

due to wider market factors. The value of vested shares reflects the share price changes all shareholders have experienced over the

three-year period.

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Remuneration Report | |  |  |  |  |  |  |
| 2022 Annual Report on Remuneration  Continued | | | | | | | |

166

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| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| 2020-2022 LTIP outcome @audited@ | | | | | |  |
|  | Shares awarded | Vesting % | Number of shares  to vest1 | Dividend equivalent  £'0002 | Total value to vest  £’0003 | Impact of share  price change  £'0004 |
| Jack Bowles | 223,129 | 58.9% | 131,422 | £849 | £5,222 | £913 |
| Tadeu Marroco | 113,938 | 58.9% | 67,109 | £433 | £2,666 | £466 |

Notes:

1.Shares will not be released until after the two-year additional extended vesting period which will end on 28 March 2025.

2.Value of the dividend equivalents accrued on the proportion of the award that is due to vest only. Dividend equivalent will be delivered as shares following the expiry of the two-year

extended vesting period on 28 March 2025.

3.The value of ordinary shares to vest is calculated using average share price for the three-month period ended 31 December 2022 of 3,328p. The actual value of shares to vest will be the

value on 28 March 2025, when the awards fully vest and are finally released to the Directors.

4.The figures shown reflect the indicative value attributable to share price appreciation. This is calculated by multiplying the increase in the share price at grant of 2,633 to the average

share price for the three-month period ended 31 December 2022 of 3,328p by the number of shares that are due to vest, excluding dividend equivalents.

The below table details the shares awarded under the LTIP and Deferred Share Bonus Scheme (DSBS) during the 2022 financial year.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| Further details in relation to scheme interests granted during the year ended 31 December 2022 | | | | | | | |
|  | Plan | Date of award | Shares  awarded1 | Market price  at award  (pence)2 | Face value  £’000 | Performance  period3 | Date from which  shares will be released |
| Jack Bowles | LTIP | 25 Mar 2022 | 205,967 | 3,218 | 6,628 | 2022-2024 | 25 Mar 2027 |
| DSBS4 | 25 Mar 2022 | 43,811 |  |  | n/a | 25 Mar 2025 |
| Tadeu Marroco | LTIP | 25 Mar 2022 | 99,863 | 3,218 | 3,214 | 2022-2024 | 25 Mar 2027 |
| DSBS4 | 25 Mar 2022 | 20,325 |  |  | n/a | 25 Mar 2025 |

Notes:

1.Shares awarded represents potential maximum opportunity.

2.The award share price was calculated as the average of the closing mid-market price of an ordinary share over the three dealing days preceding the date of grant.

3.The performance period is from 1 January 2022 - 31 December 2024. Performance conditions for the LTIP award can be found on page [178](#i8df7c9fc51354a96b01d638977127c62_0-0-1-8-344741). The proportion of the award that will vest for

achieving threshold performance is 15% of maximum opportunity and 100% of award will vest at maximum.

4.DSBS awards relate to the 2021 performance as disclosed in the Annual Report and Form 20-F for the year ended 31 December 2021.

Remuneration in the context of the wider workforce

The Group’s remuneration policies and practices are founded on a high degree of alignment and consistency across the organisation.

Accordingly, remuneration for senior management is determined considering the remuneration principles that apply to the Executive

Directors, and similar principles also form the basis of the remuneration arrangements for the wider workforce.

The reward strategy for all employees is built around and designed to deliver the following objectives:

–Attract, retain and engage a diverse talent pool for competitive advantage

–Offer a reward that is externally competitive and internally equitable as well as being commercially sustainable

–Alignment with short-term and long-term shareholder interests

The key difference between Executive Directors’ remuneration and the wider employee population is the increased emphasis on long-

term performance in respect of Executive Directors, with a greater percentage of their total remuneration being performance-related

and delivered in BAT shares. This includes an additional two-year extended vesting period on LTIPs, and post-employment shareholding

requirements which do not apply to other employees.

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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167

The table below summarises the remuneration structure for the wider workforce.

|  |  |
| --- | --- |
|  |  |
| Element | Wider workforce remuneration |
| Salary | –Salary ranges across all grades are set by reference to external market data, and individual positioning  within the set salary ranges will depend on level of experience, responsibility and individual performance  –A globally consistent Pay Comparator Group, derived from the peer group used by the Remuneration Committee  for executive pay benchmarking, is utilised across all levels of the organisation for pay benchmarking purposes,  with an appropriate level of flexibility provided to the other employing entities |
| Pension &  Benefits | –Retirement benefits and other benefit arrangements are provided to employees based on and to reflect local  market practice  –Company pension contribution rates for Executive Directors and the wider UK workforce are aligned |
| Short-Term  Incentive | –Our International Executive Incentive Scheme (IEIS) is operated consistently across the organisation and has more  than 1,700 employees participating. It is designed to reward employees for the delivery of financial, strategic and  operational targets  –IEIS is globally aligned for all managers in senior management roles, including Executive Directors, with a portion of  any award receivable deferred in BAT shares for three years and the remaining portion delivered in cash. Both cash  and deferred share awards are subject to malus and clawback. Approximately 1,400 employees globally participate  in the deferred share plan  –Corporate annual bonus plans are in operation for employees in corporate functions designed to mirror  the basic construct of the IEIS and with performance metrics which align with the IEIS  –Functional incentive schemes are in operation in non-corporate functions with functional performance metrics  incorporated to ensure line of sight for participants |
| Long-Term  Incentive | –The Group operates two globally aligned discretionary LTI plans designed to reward and retain our senior talent  while incentivising long-term business results and shareholder value creation, aligning interests of our senior  leaders with those of shareholders  –LTIP - Performance Share Plan (PSP) awards are granted to the Group's most senior leaders (circa 150), including  the Management Board, which are subject to the same performance measures and three-year performance  period as for the Executive Directors. Executive Directors' awards are also subject to the additional 2-year  extended vesting period.  –Restricted Share Plan (RSP) awards are granted to circa 1,000 senior leaders globally and are subject to continuous  employment conditions during the 3-year vesting period. The Executive Directors do not participate in the RSP.  –Discretionary share awards are subject to malus and clawback for all participants |
| All-employee  share  schemes | –Our all-employee share schemes are key to fostering a culture of ownership amongst our employees. In the UK, all  employees (circa 2,100) are eligible to participate in the Company's all-employee share schemes, the Partnership  Share Scheme, the Sharesave Scheme and the Share Incentive Plan |

Process in setting Executive Directors’ remuneration

The Remuneration Committee considers the budgeted salary increases for the UK-based employee population, the guidance given to

managers on the range of salary increases and other remuneration arrangements and employment conditions for all UK-based

employees when determining remuneration for the Executive Directors.

It is expected that salary reviews for the Executive Directors will be in line with the approach taken for the general UK employee

population, except in exceptional circumstances, such as where a recently appointed Executive Director’s salary is increased to reflect his

or her growth in the role over time or where significant additional responsibilities are added to the role.

As a key principle, management provides the Remuneration Committee with visibility of the potential impact of proposed changes to

the Executive Directors’ Remuneration Policy on the wider employee population.

Pay Equality

The Committee reviewed the Pay Equality Reporting suite, which was further expanded in 2022. The intention of our Pay Equality

Reporting is to complement the Group's focus on gender balance, and diversity and inclusion, as part of the Group’s Diversity & Inclusion

(D&I) and Environmental, Social and Governance agendas.

We are going beyond the requirements of the UK Regulations and voluntarily publishing additional data. The truly global scope of our Pay

Equality Reporting reflects our commitment to Pay Equity. Through building a more comprehensive picture of gender, ethnicity and pay,

we can more accurately measure the progress we are making in advancing a diverse and inclusive culture and ensuring the delivery of

fair pay across the Group.

We want to be confident that our pay practices are delivering equal pay globally and that any differences in pay between employees

performing equal work are for objective reasons and not related to gender or ethnicity. We are pleased to confirm that the consolidated

results of our global pay equity assessment show:

–Women and men are paid within 1% of one another for doing the same work or work of equal value; and

–Ethnically diverse groups and non-ethnically diverse groups are paid within 1% of one other for doing the same work or work of equal

value.

This confirms that our global efforts for providing consistent and fair compensation are working.

In October 2022, we received accreditation against the Fair Pay Workplace standard for all countries included in our pay equity reporting.

For more information, see page [89](#iecb80c297bcf49878ca96946d0f9b1c3_85982).

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Remuneration Report | |  |  |  |  |  |  |
| 2022 Annual Report on Remuneration  Continued | | | | | | | |

168

Workforce engagement

The Board keeps up to date with the current views of our workforce and provides the workforce with information, including on how

executive pay and the pay of the wider workforce are aligned, through a combination of engagement methods across multiple channels

at different levels of our organisation. These include town halls, works councils, webcasts, global independently managed Speak Up

channels, our biennial Your Voice global employee survey, and direct engagement through Directors’ market and site visits, where possible.

Feedback from these channels is collected across the Group and are independently analysed to define the priority themes. The

consolidated feedback and themes are reviewed by our Board each year as part of our Workforce Voice in the Boardroom programme.

This focuses on ensuring the Board understands the views of our workforce, and reviews details of the key themes identified and how

we have responded.

The views of our workforce are a key consideration for the Remuneration Committee when reviewing the reward priorities of the

organisation. In 2021, we conducted our latest Your Voice global employee survey, with the results of this survey also serving as a factor in

shaping the reward agenda of the organisation. The employees' views from the survey were collated and presented to the Remuneration

Committee. There continues to be an ongoing dialogue with employees, through a variety of channels, about the Company’s pay

practices. Through share ownership as a result of our all-employee share schemes, our employees are invited to vote on the Directors'

Remuneration Policy and Report at our Annual General Meeting in the same way as our wider shareholders.

In addition to the Workforce Voice in the Boardroom programme (discussed on pages [88](#iecb80c297bcf49878ca96946d0f9b1c3_95480) and [140](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429)), the Remuneration Committee also

receives updates from management on feedback received during the year where relevant to remuneration matters considered by the

Remuneration Committee and takes feedback into account as applicable in determining executive remuneration.

The Remuneration Committee is regularly updated on the pay principles and practices in operation across the Group and considers

them in relation to the implementation of the Directors’ Remuneration Policy, and in ensuring there is an appropriate degree of alignment

throughout the Group.

Other Information Relating to Executive Directors' Remuneration for the Year Ended 31 December 2022

Executive Directors’ shareholding requirements

Executive Directors are encouraged to build up a high level of personal shareholding to ensure a continuing alignment of interests with

shareholders. The shareholding guidelines require Executive Directors to hold ordinary shares equal to the value of a percentage of salary

as set out in the table below. The shareholding requirement extends post employment, such that Executive Directors will be required to

maintain their shareholding requirement for a period of two years post employment, with a sale restriction mechanism in place for this period.

If, at any time, an Executive Director does not meet the requirements of the shareholding guidelines, the individual may, generally, only

sell a maximum of up to 50% of any ordinary shares vesting (after tax) under the Company share plans until the threshold required under

the shareholding guidelines has been met. Waiver of compliance with guidelines is permitted with the approval of the Remuneration

Committee in circumstances where a restriction on a requested share sale could cause undue hardship. No such applications were

received from the Executive Directors during 2022.

Non-Executive Directors are expected to purchase shares in the Company on the open market to build up shareholding in the Company

during the term of their appointment.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | No. of eligible  ordinary shares  held at  31 Dec 20221 | Value of eligible  ordinary shares  held at  31 Dec 20222  £m | Actual  percentage (%)  of base salary at  31 Dec 2022 | Shareholding  requirements  (% of base salary  31 Dec 2022) | Compliant with  shareholding  requirement |
| Jack Bowles3 | 374,926 | 12,305 | 928% | 500% | Yes |
| Tadeu Marroco | 128,054 | 4,203 | 523% | 400% | Yes |

Notes:

1.Eligibility of shares: (a) unvested ordinary shares under the DSBS, which represent deferral of earned bonus, are eligible and count towards the requirement on a net-of-tax basis; (b)

unvested ordinary shares under the LTIP are not eligible and do not count towards the requirement during the performance period, but the estimated notional net number of ordinary

shares held during the LTIP Extended Vesting Period are eligible and will count towards the requirement; and (c) ordinary shares held in trust under the all-employee share plan are not

eligible and do not count towards the shareholding requirement.

2.Value of ordinary shares shown above: this is based on the closing mid-market share price on 31 December 2022 of 3,282p.

3. Included within the number of eligible ordinary shares held at 31 December 2022 are 213,279 shares which have been pledged as security against a personal bank loan by Mr Bowles.

The legal title of the shares is not affected by the security arrangement.

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|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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169

The below table details the comparative figures for Chief Executive remuneration for the performance years 2013 to 2022.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| Chief Executive’s pay – Comparative figures 2013 to 2022 | | | | | | | | | | | | |
|  | Nicandro Durante | | | | | | |  | Jack Bowles | | | |
|  | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 20191 |  | 20191 | 2020 | 2021 | 2022 |
| Chief Executive's  ‘single figure’ of total  remuneration (£’000) | 6,674 | 3,617 | 4,543 | 8,313 | 10,244 | 8,651 | 3,054 |  | 3,512 | 4,954 | 8,063 | 9,617 |
| STI paid against maximum  opportunity (%) | 81.3% | 73.2% | 100.0% | 100.0% | 97.2% | 100.0% | 50.0% |  | 96.0% | 71.1% | 85.7% | 77.7% |
| LTI paid against maximum  opportunity (%) | 49.2% | —% | 8.7% | 46.0% | 96.1% | 70.5% | 69.3% |  | 69.9% | 54.2% | 49.1% | 58.9% |

Note:

1.For 2019, the 'single figure' has been time-apportioned to reflect the period Jack Bowles and Nicandro Durante served as Chief Executive. Nicandro Durante retired as Chief Executive on

1 April 2019. Historical data is taken from the Directors’ Remuneration Reports for the relevant years and is presented (as appropriate) on the basis of the ‘single figure’ calculation as

prescribed in the UK Directors’ Remuneration Report Regulations.

Performance graph

The graph below shows the TSR of the Company and the FTSE 100 index over the 10-year period 1 January 2013 to 31 December 2022.

The chart shows the growth in value of a hypothetical £100 invested on 31 December 2012. The FTSE 100 index was selected as an

appropriate comparator group by the Committee due to the Company's position within the FTSE.

Total shareholder return (TSR) performance: 1 January 2013 to 31 December 2022

Relative importance of spend on pay

The chart below sets out distributions to shareholders by way of dividends and share buy-backs, and total remuneration paid to

employees for the years 2021 and 2022. In 2022, there was a 41.3% increase in distributions to shareholders and a 9.4% increase in

total employee remuneration costs.

Notes:

2.  Remuneration: represents the total employee remuneration costs for the Group, set out on page [213](#id739eb8a094346e4a1dd9989c862058f_31) within note 3 in the Notes on the Accounts.

3.  Shareholder distributions represent the total dividends paid and share buybacks made in 2022 (for 2021, the amount represents the total dividends paid in 2021).

For further details please refer to page [104](#id739eb8a094346e4a1dd9989c862058f_9700).

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Remuneration Report | |  |  |  |  |  |  |
| 2022 Annual Report on Remuneration  Continued | | | | | | | |

170

Chief Executive Pay Ratio Disclosure

The below table reflects the Chief Executive pay ratio when compared to employees at the 25th percentile, median and 75th percentile

of the Group’s UK workforce pay for the years 2019, 2020, 2021 and 2022. The table also includes the salary and total remuneration

figures for the employees at each percentile for 2022.

Option A uses the total full-time equivalent remuneration for all UK employees for the financial year ended 31 December 2022 and has

been used to calculate the ratio as this is viewed to be the most robust and comprehensive means of assessment and is also reflective of

shareholder preferences. For the Chief Executive, the total remuneration as provided in the single figure of remuneration table on page

[164](#iff8934d3734b44f4b1d79b07b59bc890_58945) has been used.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Year | Method | 25th percentile pay ratio | Median pay ratio | 75th percentile pay ratio |
| 2022 | Option A | 175:1 | 113:1 | 44:1 |
| 20211 | Option A | 149:1 | 97:1 | 40:1 |
| 2020 | Option A | 103:1 | 66:1 | 29:1 |
| 2019 | Option A | 144:1 | 86:1 | 36:1 |
| Employees remuneration for 2022 |  | 25th percentile | Median | 75th percentile |
| Salary |  | £36,797 | £57,051 | £106,678 |
| Total Remuneration2 |  | £54,841 | £85,058 | £217,176 |

Notes:

1.2021 pay ratio figures have been updated to reflect the updated 2021 LTI amounts for the Chief Executive as per the updated single figure on page [164](#iff8934d3734b44f4b1d79b07b59bc890_58945).

2.Total Remuneration for the employees is based on the UK employees' data as at 31 December 2022, and is calculated as far as possible on the same basis as the Chief Executive single

figure calculation and includes salary, taxable benefits, short-term incentive, long-term incentive, dividends, pension benefits and any other remuneration receivable. For the purposes of

this analysis, the following methodology and assumptions have been used:

–Remuneration is annualised, where applicable, for the earnings period 1 January 2022 to 31 December 2022;

–For all employees that are eligible for a car benefit, the applicable car allowance amounts have been used;

–For all employees that participate in the global International Executive Incentive Scheme or equivalent corporate incentive scheme, incentive pay-outs are calculated based on the

same metrics;

–For all employees that participate in the UK DC scheme, Company contributions of 15% of salary have been used;

–Employees on international assignment into and out of the UK have been included; however, assignment benefits, such as housing support, education support, home leave allowance

or relocation costs, have not been included as these are not consistent with the benefits included in the Chief Executive single figure calculation, which is consistent with the

approach taken last year;

–For hourly paid employees who are not full time, total pay and benefits have been pro-rated based on full-time employee hours.

The figures above show that there has been an increase in the Chief Executive's remuneration: Employees pay ratio across all quartiles

from 2021 to 2022. The increase is mainly attributable to the Chief Executive's higher 2020 LTIP vesting amount, which reflects delivering

better performance against the 2020 LTIP targets as well as circa 26% share price growth over the 3 years. The majority of the UK

employees do not participate in a similar type of long-term incentive plan and their overall remuneration is less leveraged compared to

the Chief Executive's remuneration with variable pay opportunity accounting for 80% to 90% of total remuneration. As such the Chief

Executive pay ratio is likely to continue to vary over time.

Fixed remuneration remained aligned with that of the wider UK-based workforce, with the pension contribution percentage for the Chief

Executive remaining aligned with the wider workforce at 15%.

The Company believes the median pay ratio for 2022 reflects the diversity of our business footprint and employee population across the

UK. The Group’s remuneration policies and practices are founded on a high degree of alignment and consistency, with total remuneration

at all levels providing competitive compensation that enables the attraction and retention of talent while also providing equitable

differentiated remuneration based on grade, performance and experience. Further details on all-employee remuneration at BAT can be

found on page [167](#iff8934d3734b44f4b1d79b07b59bc890_329467).

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171

Chair and Non-Executive Directors’ Remuneration for the Year Ended 31 December 2022 – @Audited@

The following table shows a single figure of remuneration for the Chair and Non-Executive Directors in respect of qualifying services for

the year ended 31 December 2022, together with comparative figures for 2021.

|  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Base fee  £’000 | |  | Chair/Committee  membership fees1  £’000 | |  | Taxable benefits2  £’000 | |  | Total remuneration  £’000 | |
|  |  | 2022 | 2021 |  | 2022 | 2021 |  | 2022 | 2021 |  | 2022 | 2021 |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| Luc Jobin (Chair)3 |  | 670 | 523 |  | — | 9 |  | 59 | 20 |  | 729 | 552 |
| Kandy Anand (14/02/2022) |  | 85 | — |  | 24 | — |  | 20 | — |  | 129 | — |
| Sue Farr4 |  | 114 | 97 |  | 27 | 27 |  | 4 | — |  | 145 | 124 |
| Karen Guerra |  | 97 | 97 |  | 27 | 27 |  | 6 | — |  | 130 | 124 |
| Holly Keller Koeppel5 |  | 97 | 97 |  | 55 | 54 |  | 15 | — |  | 167 | 152 |
| Savio Kwan |  | 97 | 97 |  | 27 | 27 |  | 14 | — |  | 138 | 124 |
| Véronique Laury (19/09/2022) |  | 28 | — |  | 8 | — |  | — | — |  | 36 | — |
| Dimitri Panayotopoulos6 |  | 121 | 138 |  | 55 | 54 |  | 4 | 1 |  | 180 | 193 |
| Darrell Thomas |  | 97 | 104 |  | 27 | 29 |  | 13 | — |  | 137 | 133 |
| Former Non-Executive Directors |  |  |  |  |  |  |  |  |  |  |  |  |
| Marion Helmes (28/04/2022) |  | 32 | 97 |  | 9 | 27 |  | 2 | 1 |  | 43 | 125 |
| Total |  | 1,438 | 1,250 |  | 259 | 254 |  | 137 | 22 |  | 1,834 | 1,527 |

Notes:

1.Committee memberships are shown, together with changes during the year, in the reports of the respective committees in the Governance sections of the Directors’ Report.

2.Benefits for the Chair in 2022 comprised health insurance and ‘walk-in’ medical services £8,000 (2021: £8,000), the commuting flights to London £47,000 (2021: £3,000), the hotel

accommodation £3,600 (2021: £8,300), and the use of a company driver. The benefits for the other Non-Executive Directors principally comprised travel-related expenses incurred in

connection with individual and/or accompanied attendance at certain business functions and/or events and ‘walk-in’ medical services. The figures shown are grossed-up for tax (as

appropriate) as, in line with the UK market, it is the normal practice for the Company to pay the tax that may be due on any benefits.

3.Pension: Luc Jobin receives a pension in respect of prior service to Imasco Limited (acquired in 2000 by the Group) and Imperial Tobacco Canada Limited, a subsidiary of BAT. In 2022,

this amount was CAD$ 150,228.00(£94,232.00) (2021:CAD$150,228.00 (£87,139.21).

4.The 2022 fees reflect Sue Farr's appointment as the Senior Independent Director on 1 August 2022.

5.Deferred Compensation Plan for Directors of Reynolds American Inc. (DCP): as a former outside director of Reynolds American Inc. Holly Keller Koeppel participated in the DCP under

which she elected to defer payment of a portion of her Reynolds American retainers and meeting attendance fees to a Reynolds American stock account. Following the acquisition of

Reynolds American by BAT, amounts deferred to a stock account (Deferred Stock Units or DSUs) mirror the performance of, and receive dividend equivalents based on, BAT American

Depository Shares (ADSs). The DSUs of Holly Keller Koeppel are disclosed as a note to ‘Summary of Directors’ share interests'. DSUs deferred under the DCP will be paid in accordance

with the terms of the DCP, section 409A of the US Internal Revenue Code of 1986, as amended, and the Director’s existing deferral elections.

6.The 2022 and 2021 fees reflect Dimitri Panayotopoulos's tenure as the Senior Independent Director (May 2020 -July 2022).

As described in the Annual Report on Remuneration for the year ended 31 December 2021, the Chair’s fee was £670,000 from

28 April 2022.

Payments to past Directors or for loss of office @audited@

There were no payments to past Directors or for loss of office.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
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| Remuneration Report | |  |  |  |  |  |  |
| 2022 Annual Report on Remuneration  Continued | | | | | | | |

172

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | Remuneration policy implementation for 2023 | | | |  |  |  |
|  | Base Salary for 2023  The Remuneration Committee has determined the  following salaries for the Executive Directors.  The Remuneration Committee has considered a number of  factors in determining the appropriate salary review for the  Executive Directors, including: the average salary increase  for the wider workforce in the UK, the contribution of the  Executive Directors, and the underlying Company  performance in 2022. |  | Executive Directors | Base salary from  1 Apr 2022  £ | Base salary from  1 Apr 2023  £ | Percentage  change % |  |
|  |  | Jack Bowles | £1,325,610 | £1,385,300 | 4.5% |  |
|  |  | Tadeu Marroco | £803,400 | £843,600 | 5.0% |  |
|  |  |  |  |  |  |  |
|  | Pensions and Benefits  No changes have been made to the pension and benefits provision for Executive Directors, noting that the pension provision for  Executive Directors has been aligned with the wider UK workforce since 2019. | | | | | |  |
|  |  |
|  |  |
|  |  |
|  | Short-Term Incentive for 2023  STI opportunity levels for Executive Directors will be in line  with those set out in our Directors’ Remuneration Policy.  STI performance measures and weightings are set out to  the right.  The STI performance measures and weightings will remain  unchanged for 2023. The performance measures continue  to support the prioritisation of New Categories  performance aligning with our transformation strategy  whilst also incentivising continued strong financial  performance for the Group. |  | 2023 STI performance measures and weightings | | | |  |
|  |  | Volume share growth1 (inc THP) | | | 10% |  |
|  |  | New Categories revenue2 | | | 15% |  |
|  |  | New Categories contribution3 | | | 20% |  |
|  |  | Adjusted profit from operations | | | 25% |  |
|  |  | Adjusted cash generated from operations4 | | | 30% |  |
|  |  | Total | | | 100% |  |
|  |  |  | | | |  |
|  | Notes:  1.  Group share of key markets will include THP performance for all major markets (markets included are Japan, South Korea, Italy, the Czech Republic, Poland, Greece, Hungary,  Romania, Malaysia, Kazakhstan and Switzerland).  2.  New Categories revenue is the revenue derived from the Vapour, THP and Modern Oral product categories. This performance measure is assessed at constant rates of exchange.  3.  New Categories contribution is the contribution to APFO from Vapour, THP and Modern Oral products. It is stated after deduction of directly attributable costs and allocated  cross-category shared costs, before the deduction of administrative overheads and excluding the impact of adjusting items in line with the policy for APFO. The measure is  assessed at constant rates of exchange.  4.  Net cash generated from operating activities, less net finance costs, net capital expenditure, dividends from associates and dividends paid to non-controlling interests and before  cash paid/received in respect of litigation. Adjusted CGFO is measured at constant rates of exchange.  Due to the commercial sensitivity of the targets, details for the year ending 31 December 2023 will be disclosed retrospectively in the  Annual Report on Remuneration for the year ending 31 December 2023. | | | | | |  |
|  | Long-Term Incentive for 2023  The Chief Executive and Finance and Transformation  Director will be granted an LTIP - Performance Share Plan  award equal to a maximum of 500% of salary and 400% of  salary, respectively. The measures and targets for the  2023 LTIP - Performance Share awards are set out to the  right.  The changes made to performance measures in 2022  remain relevant for the Group. They are aimed to reflect  more directly our corporate purpose, and our  transformation and ESG agendas, with the New Categories  revenue growth measure as an imperative for delivery of  long-term sustainable growth. Relative TSR remains an  important measure, helping to maintain alignment with  shareholder interests. For 2023, Swedish Match has been  removed from the TSR peer group following its acquisition  by Philip Morris International.  The performance measures, weightings and targets will  remain unchanged for the 2023 LTIP - Performance Share  Plan awards. |  | LTIP measures | Weighting | Threshold (15%) | Maximum (100%) |  |
|  |  | Relative TSR1 | 20% | Median | Upper Quartile |  |
|  |  | EPS growth (at  constant and current  rates of exchange) | 30% | 5% | 10% |  |
|  |  | Revenue growth | 15% | 3% | 5% |  |
|  |  | Growth in New  Categories revenue | 15% | 20% | 30% |  |
|  |  | Operating cash flow  conversion ratio | 20% | 85% | 95% |  |
|  |  | Total | 100% |  |  |  |
|  |  | Note:  1.  The 2023 TSR peer group constituents (14 companies) are: Altria Group, Anheuser-Busch InBev,  Carlsberg, Coca-Cola, Diageo, Heineken, Imperial Brands, Japan Tobacco, PepsiCo, Pernod  Ricard, Philip Morris International, Procter & Gamble, Reckitt Benckiser, and Unilever. | | | |  |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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173

The 2023 Non-Executive Directors’ fees structure is set out in the table

The Chair's fee and the fees for Non-Executive Directors have been reviewed with the changes below to apply in May 2023. Adjustments

to fees have taken into consideration the increasing demands placed on the Board, the strategic agenda of the business, the complexity

of the sector and the approach to salary adjustments among the wider UK workforce. The Chair's fee will be adjusted by 4% and the fees

of Non-Executive Directors, when viewed in aggregate, will be adjusted by 5%.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Fees from 1 May 2023  £ | Fees to 30 April 2022  £ |
| Chair's fee | 697,000 | 670,000 |
| Base fee | 101,700 | 96,850 |
| Senior Independent Director – supplement | 41,500 | 41,500 |
| Audit Committee: Chair | 42,000 | 42,000 |
| Audit Committee: Member | 15,400 | 14,400 |
| Nominations Committee: Chair | — | – |
| Nominations Committee: Member | 13,200 | 12,800 |
| Remuneration Committee: Chair | 42,000 | 42,000 |
| Remuneration Committee: Member | 15,400 | 14,400 |

Other disclosures

Annual change in remuneration of Directors and employees

The following table shows the percentage change in the Directors’ remuneration measured against a comparator group comprising the

UK employee population across all UK entities. This comparator group is considered to be the most appropriate group due to the limited

number of employees employed under BAT p.l.c. contracts outside of the Director group. In addition, using a more widely-drawn group

encompassing the worldwide nature of the Group’s business would also present practical difficulties in collation and a less relevant

comparator given the significant variations in employee pay across the Group, the differing economic conditions and wide variations

in gross domestic product per capita.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
|  | % change in salary/fees | | |  | % change in taxable benefits1 | | |  | % change in STI | | |
|  | 2021 to 2022 | 2020 to 2021 | 2019 to 2020 |  | 2021 to 2022 | 2020 to 2021 | 2019 to 2020 |  | 2021 to 2022 | 2020 to 2021 | 2019 to 2020 |
| Executive Directors |  |  |  |  |  |  |  |  |  |  |  |
| Jack Bowles | 1% | 5% | 7% |  | (9%) | (37%) | 84% |  | (9%) | 26% | (21%) |
| Tadeu Marroco2 | 0% | 4% | 5% |  | 57% | (33%) | 22% |  | (9%) | 25% | (24%) |
| Chair |  |  |  |  |  |  |  |  |  |  |  |
| Luc Jobin3 | 28% | 334% | 2% |  | 197% | 24% | (79%) |  | n/a | n/a | n/a |
| Non-Executive  Directors |  |  |  |  |  |  |  |  |  |  |  |
| Darrell Thomas4 | (6%) | n/a | n/a |  | 0% | n/a | n/a |  | n/a | n/a | n/a |
| Dimitri Panayotopoulos | (12%) | 9% | 21% |  | 591% | (78%) | (88%) |  | n/a | n/a | n/a |
| Holly Keller Koeppel | 0% | 1% | 2% |  | 4907% | (99%) | (82%) |  | n/a | n/a | n/a |
| Karen Guerra5 | 0% | 0% | n/a |  | 4177% | 0% | n/a |  | n/a | n/a | n/a |
| Kandy Anand6 | 0% | 0% | 0% |  | 0% | 0% | 0% |  | n/a | n/a | n/a |
| Dr Marion Helmes | (67%) | 1% | 2% |  | 138% | (72%) | (77%) |  | n/a | n/a | n/a |
| Savio Kwan | 0% | 1% | 2% |  | 4667% | (97%) | (84%) |  | n/a | n/a | n/a |
| Sue Farr | 18% | 1% | 2% |  | 931% | 0% | (100%) |  | n/a | n/a | n/a |
| Véronique Laury7 | n/a | n/a | n/a |  | n/a | n/a | n/a |  | n/a | n/a | n/a |
| Average UK-based  employee8 | 5% | 6% | 3% |  | 2% | (1%) | 1% |  | 2% | 20% | (5%) |

Notes:

1.Changes in taxable benefit values for 2022 vs 2021 and 2021 vs 2020 for Non-Executive Directors were primarily a result of COVID-related travel restrictions in 2021 and 2020 with

minimum or no travel compared to 2022 when COVID-related restrictions were lifted, as well as subsistence costs associated with business functions due to COVID-related travel

restrictions throughout 2020 and 2021. Further details of the taxable benefits figures can be found in the table on page [172](#i1831158e35f74cc988db478d232fe873_120494).

2.Tadeu Marroco was appointed as an Executive Director from 5 August 2019. For the period 5 August 2019 to 31 December 2019, annualised figures have been used to calculate the year-

on-year change.

3.Luc Jobin was appointed Chair from 28 April 2021. The change in fees from 2020 to 2021 is due to the increase in fees received following the appointment.

4.Darrell Thomas was appointed to the Board on 7 December 2020, receiving no fees or taxable benefits in 2020. Accordingly, no year-on-year change figures have been included.

5.Karen Guerra was appointed to the Board on 14 September 2020. For the period 14 September 2020 to 31 December 2020, annualised figures have been used to calculate the year-on-

year change.

6.Kandy Anand was appointed to the Board on 14 February 2022. Accordingly, no year-on-year change figures have been included.

7.Véronique Laury was appointed to the Board on 19 September 2022. Accordingly, no year-on-year change figures have been included.

8.The data for the UK-based employees comparator group are made up as follows as at 31 December 2022: (1) the weighted average base salaries; (2) the average taxable benefits per

grade; and (3) the weighted average bonus result based on that population as at that date.

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|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Remuneration Report | |  |  |  |  |  |  |
| 2022 Annual Report on Remuneration  Continued | | | | | | | |

174

Directors’ Share Interests

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
| Summary of Directors’ Share Interests – @Audited@ | | | | | | |
|  | Ordinary  shares held at  31 Dec 2022 | Outstanding scheme interests 31 Dec 2022 | | | | Total of all  interests in  ordinary shares  at 31 Dec 2022 |
| Unvested  awards subject  to performance  conditions and  continued  employment  (LTIP) | Unvested  awards  subject to  continued  employment  only  (DSBS) | Unvested  interests  (Sharesave) | Total ordinary  shares subject  to outstanding  scheme interests |
| Executive Directors |  |  |  |  |  |  |
| Jack Bowles1 | 257,093 | 746,087 | 137,481 | – | 883,568 | 1,140,661 |
| Tadeu Marroco2 | 96,013 | 328,818 | 63,440 | 1,057 | 393,315 | 489,328 |
| Chair |  |  |  |  |  |  |
| Luc Jobin3 | 90,236 |  |  |  |  | 90,236 |
| Non-Executive Directors |  |  |  |  |  |  |
| Sue Farr | – | – | – | – | – | – |
| Véronique Laury | – | – | – | – | – | – |
| Holly Keller Koeppel4 | – | – | – | – | – | – |
| Savio Kwan | 17,028 | – | – | – | – | 17,028 |
| Karen Guerra | 8000 | – | – | – | – | 8,000 |
| Darrell Thomas3 | 4,600 | – | – | – | – | 4,600 |
| Dimitri Panayotopoulos | 3,300 | – | – | – | – | 3,300 |
| Kandy Anand3 | 3,605 | – | – | – | – | 3,605 |
| Marion Helmes5 | 4,500 | – | – | – | – | 4,500 |

Changes from 31 December 2022: Tadeu Marroco: purchases of 4 ordinary shares on 4 January 2023 and 5 ordinary shares on 1 February 2023 under the SIP. Jack Bowles and Tadeu

Marroco: delivery of 675 and 311 ordinary shares respectively on 6 February 2023, representing dividend equivalents due on outstanding DSBS awards in respect of the quarterly dividend

paid to shareholders on 2 February 2023. There were no changes in the interests of the Chair and the other Non-Executive Directors.

Notes:

1.Jack Bowles: ordinary shares held include 968 held by the trustees of the BAT Share Incentive Plan (SIP). The unvested LTIP awards figure include 86,677 shares which are no longer

subject to performance conditions but are still within the two-year extended vesting period.

2.Tadeu Marroco: ordinary shares held include 1,581 held by the trustees of the SIP.

3.American Depositary Shares (ADSs): each of the interests in ordinary shares held by Luc Jobin, Darrell Thomas and Kandy Anand consists of an equivalent number of BAT ADSs each of

which represents one ordinary share in the Company.

4.Holly Keller Koeppel: at the date of this report Holly Keller Koeppel, being a former director of Reynolds American Inc. and a participant in the Deferred Compensation Plan for Directors

of Reynolds American (DCP), holds Deferred Stock Units (DSUs) which were granted prior to becoming a Director of BAT. In accordance with an election made by Holly Keller Koeppel in

December 2016, a proportion of her DSUs representing her fees as a director of Reynolds American Inc. for 2017 are payable from January 2023 over a period of 10 years, with the

remainder of her DSUs (representing her fees as a director of Reynolds American Inc. in prior years) becoming payable following her cessation as a Director of BAT. Each DSU entitles

the holder to receive a cash payment equal to the value of one BAT ADS. The number of DSUs increases on each dividend date by reference to the value of dividends declared on the

ADSs underlying the DSUs. Ms Koeppel currently holds 28,928 DSUs (2021: 26,660.09 DSUs).

5.Marion Helmes: holdings are as of the date of departure (28/04/2022).

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
| Executive Directors’ outstanding scheme interests – @Audited@ | | | | | | | | | |
|  | Plan | At 1 Jan  2022 | Awarded in  2022 | Lapsed  in 2022 | Exercised/  released in  2022 | At 31 Dec  2022 | Exercise/  vest  price (p) | End of  performance  period | Date from which  award is  exercisable or  shares released |
| Jack Bowles | 2019 LTIP1,2 | 176,532 | – | 89,855 | – | 86,677 | – | 31-Dec-21 | 28-Mar-24 |
|  | 2020 LTIP1,3 | 223,129 | – | – | – | 223,129 | – | 31-Dec-22 | 30-Mar-25 |
|  | 2021 LTIP1,4 | 230,314 | – | – | – | 230,314 | – | 31-Dec-23 | 30-Mar-26 |
|  | 2022 LTIP1,4 | – | 205,967 | – | – | 205,967 | – | 31-Dec-24 | 25-Mar-27 |
|  | 2019 DSBS | 26,192 | – | – | 26,192 | – | 3,299 | – | 28-Mar-22 |
|  | 2020 DSBS | 53,618 | – | – | – | 53,618 | – | – | 30-Mar-23 |
|  | 2021 DSBS | 40,052 | – | – | – | 40,052 | – | – | 29-Mar-24 |
|  | 2022 DSBS | – | 43,811 | – | – | 43,811 | – | – | 25-Mar-25 |
|  | Sharesave | – | – | – | – | – | – | – | – |
|  | Sharesave | – | – | – | – | – | – | – | – |
| Tadeu Marroco | 2019 LTIP1,2 | 36,057 | – | 18,101 | 17,956 | – | 3,294 | 31-Dec-21 | 26-Mar-22 |
|  | 2020 LTIP1,3 | 113,938 | – | – | – | 113,938 | – | 31-Dec-22 | 30-Mar-25 |
|  | 2021 LTIP1,4 | 115,017 | – | – | – | 115,017 | – | 31-Dec-23 | 30-Mar-26 |
|  | 2022 LTIP1,4 | – | 99,863 | – | – | 99,863 | – | 31-Dec-24 | 25-Mar-27 |
|  | 2019 DSBS | 13,233 | – | – | 13,233 | – | 3,299 | – | 28-Mar-22 |
|  | 2020 DSBS | 24,388 | – | – | – | 24,388 | – | – | 30-Mar-23 |
|  | 2021 DSBS | 18,727 | – | – | – | 18,727 | – | – | 29-Mar-24 |
|  | 2022 DSBS | – | 20,325 | – | – | 20,325 | – | – | 25-Mar-25 |
|  | Sharesave | 433 | – | – | – | 433 | – | – | 01-May-24 |
|  | Sharesave | 624 | – | – | – | 624 | – | – | 01-May-25 |

Notes:

1.LTIP awards granted in 2019 take the form of performance-related nil-cost options which may be exercised following vesting. LTIP awards granted in 2020 and subsequently take the

form of performance-related conditional awards (referred to as "LTIP - Performance Share Plan awards") under which shares are released automatically following vesting.

2.Details of the performance condition for the LTIP awards granted in 2019 (which vested during 2022), and of achievement against that condition in the period to 31 December 2021,

were set out in the Annual Report on Remuneration for the year ended 31 December 2021.

3.Details of the performance condition attached to 2020 LTIP awards, and of achievement against that condition in the period to 31 December 2022, are set out on page [166](#iff8934d3734b44f4b1d79b07b59bc890_231669).

4.Details of the performance condition attached to 2021 and 2022 LTIP awards are set out in the table below, on page [178](#i8df7c9fc51354a96b01d638977127c62_0-0-1-8-344741).

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176

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| Further details in relation to performance conditions attaching to outstanding scheme interests | | | | | | | |
|  | LTIP awards granted in 2021 | | |  | LTIP awards granted in 2022 | | |
|  | 1 January 2021–31 December 2023 | | |  | 1 January 2022–31 December 2024 | | |
|  | Weighting | Threshold  (15% vests) | Maximum  (100% vests) |  | Weighting | Threshold  (15% vests) | Maximum  (100% vests) |
| Relative TSR1  Ranking against a peer group of  international FMCG companies | 20% | Median | Upper quartile |  | 20% | Median | Upper quartile |
| EPS growth at current rates of exchange  Compound annual growth (CAGR) in  adjusted diluted EPS measured at current  rates of exchange | 20% | 5% CAGR | 10% CAGR |  | 15% | 5% CAGR | 10% CAGR |
| EPS growth at constant rates of  exchange  Compound annual growth (CAGR) in  adjusted diluted EPS measured at constant  rates of exchange | 20% | 5% CAGR | 10% CAGR |  | 15% | 5% CAGR | 10% CAGR |
| Revenue growth  Compound annual growth (CAGR)  measured at constant rates of exchange | 20% | 3% CAGR | 5% CAGR |  | 15% | 3% CAGR | 5% CAGR |
| New Categories revenue growth  Compound annual growth (CAGR)  measured at constant rates of exchange | n/a | n/a | n/a |  | 15% | 20% CAGR | 30% CAGR |
| Operating cash flow conversion ratio  Measured at current rates of exchange,  as a percentage of APFO | 20% | 85% | 95% |  | 20% | 85% | 95% |

Note:

1.Following Philip Morris International's acquisition of Swedish Match and the delisting of Swedish Metch, the TSR peer group for the LTIP award granted in 2022 has been updated

to remove Swedish Match as a constituent. The relative TSR peer group constituents for the LTIP award in 2022 will therefore be: Altria Group, Anheuser-Busch InBev, Carlsberg,

Coca-Cola, Diageo, Heineken, Imperial Brands, Japan Tobacco, PepsiCo, Pernod Ricard, Philip Morris International, Procter & Gamble, Reckitt Benckiser, and Unilever.

Directors and Management Board

No Directors or Management Board Members own more than 1% of the ordinary shares in issue. At 6 February 2023, the Directors and

Management Board collectively held interests (or their calculated equivalents) under the Company share options schemes of: 1,185,455

ordinary shares, 821,363 restricted share units, 2,049,463 performance share units, 99,368 options over ordinary shares and 28,928

deferred share units.

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| --- | --- |
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| Shareholder dilution – Options and awards outstanding | |
| Satisfaction of Company share plan awards in accordance with the Investment  Association’s Principles of Remuneration | New ordinary shares issued by the Company during the year ended  31 December 2022 |
| –by the issue of new ordinary shares;  –ordinary shares issued from treasury only up to a maximum  of 10% of the Company’s issued share capital in a rolling  10-year period;  –within this 10% limit, the Company can only issue (as newly  issued ordinary shares or from treasury) 5% of its issued share  capital to satisfy awards under discretionary or executive plans;  and  –the rules of the Company’s DSBS do not allow for the satisfaction  of awards by the issue of new ordinary shares. | –249,632 ordinary shares issued by the Company in relation to the  Sharesave Scheme;  –a total of 825,031 Sharesave Scheme options over ordinary  shares in the Company were outstanding at 31 December 2022,  representing 0.04% of the Company’s issued share capital  (excluding shares held in treasury); and  –options outstanding under the Sharesave Scheme are  exercisable until 1 June 2028 at option prices ranging from  2,076p to 4,056p. |

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177

The Remuneration Committee Governance

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| --- |
|  |
| Remuneration Committee current members |
| Dimitri Panayotopoulos (Chair) |
| Kandy Anand |
| Sue Farr |
| Savio Kwan |

Role

As set out in the Terms of Reference, the Remuneration Committee is responsible for:

–determining and proposing the Directors’ Remuneration Policy (covering salary, benefits, performance-based variable rewards and

retirement benefits) for shareholder approval;

–determining, within the terms of the approved Directors’ Remuneration Policy, the specific remuneration packages for the Chair and

the Executive Directors, on appointment, on review and, if appropriate, any compensation payment due on termination of appointment;

–the setting of targets applicable for the Company’s performance-based variable reward schemes and determining achievement

against those targets, exercising discretion where appropriate and as provided by the applicable scheme rules and the Directors’

Remuneration Policy;

–reviewing Group workforce remuneration and related policies, and the alignment of incentives and rewards with Group culture, taking

these into account when setting the policy for Executive Director remuneration. Providing feedback to the Board on workforce reward,

incentives and conditions applicable across the Group and supporting the Board’s monitoring of the Group’s culture and its alignment

with the Group’s purpose, values and strategy;

–setting remuneration for members of the Management Board and the Company Secretary; and

–monitoring and advising the Board on any major changes to the policy on employee benefit structures for the Group.

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| --- | --- | --- |
|  |  |  |
| Attendance at meetings in 20221 | | |
| Name | Member  since | Meeting attendance  Attended/Eligible to attend |
| Dimitri Panayotopoulos | 2015 | 6/6 |
| Kandy Anand2(b) | 2022 | 5/5 |
| Sue Farr1(b) | 2016 | 5/6 |
| Savio Kwan2(c) | 2016 | 6/6 |
| Marion Helmes2(d) | 2019 - 2022 | 2/2 |

Notes:

1.Number of meetings in 2022: (a) the Committee held six meetings in 2022, two of which were ad hoc: (b) Sue Farr did not attend the ad hoc meeting in February 2022 convened

at short notice due to prior commitments.

2.Membership: (a) all members of the Committee are independent Non-Executive Directors in accordance with the UK Corporate Governance Code 2018 Provisions 10 and 32

and applicable NYSE listing standards; (b) Kandy Anand became a Committee member on 14 February 2022 upon his appointment to the Board; (c) Savio Kwan will step down from the

Committee with effect from the conclusion of the AGM on 19 April 2023; and (d) Marion Helmes stepped down from the Committee with effect from the conclusion of the AGM on 28

April 2022.

Other attendees: the Chair, the Chief Executive, the Director, Talent, Culture and Inclusion, the Group Head of Reward and other senior

management, including the Company Secretary, may be consulted and provide advice, guidance and assistance to the Remuneration

Committee. They may also attend Committee meetings (or parts thereof) by invitation. None of the Chair, any Executive Director or

member of senior management plays any part in determining their own respective remuneration.

Independence and advice

PricewaterhouseCoopers LLP (PwC): Appointed in January 2020 as one of the Remuneration Committee’s remuneration consultants.

PwC continued to provide independent advice to the Committee in 2022 and a representative of PwC attended Remuneration

Committee meetings in 2022. PwC advice included, for example, support with market trends and comparator group analysis, updates on

market practice, shareholder engagement perspectives and independent measurement of the relative TSR performance conditions.

PwC is a member of the Remuneration Consulting Group and, as such, operates under the code of conduct in relation to executive

remuneration consulting in the UK. The Committee is satisfied that the advice received is objective and independent. The Committee is

comfortable that the PwC advisory team is not involved in any other services PwC group provides to the Company, such as tax,

corporate finance and consulting services to Group companies worldwide excluding the US. Total fees for the provision of remuneration

advice to the Committee in 2022 were £112,746.

Meridian Compensation Partners (Meridian): Appointed in January 2020 as one of the Remuneration Committee’s remuneration

consultants. Meridian is a U.S. based advisory firm, continued to provide advice to the Committee in 2022 and a representative of Meridian

attended Remuneration Committee's meeting in 2022. Meridian advice included general advice on remuneration matters including market

trends, shareholder engagement perspectives and comparator group analysis from the U.S. perspective. The Committee is satisfied that

the advice received is objective and independent. Meridian did not provide any other services to the Company. Total fees for the provision

of remuneration advice to the Committee in 2022 were $35,520.

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178

Regular work programme 2022

The Remuneration Committee:

–reviewed the Chair's fee from 1 April 2022, with specific consideration of market positioning, external market environment and the level

of salary increases awarded to UK employees;

–reviewed salaries for the Executive Directors to take effect from 1 April 2022, taking into account market positioning, external market

environment and the level of salary increases awarded to UK employees. A programme of shareholder engagement on executive

remuneration was conducted, led by the Committee Chair, and the Committee considered feedback from shareholders (discussed

on page [159](#ida856e84a2c74b1280a26293040319de_403712));

–reviewed salaries for members of the Management Board and the Company Secretary from 1 April 2022, taking into account market

positioning, the external market environment and the level of salary increases awarded to UK employees;

–assessed the achievement against the targets for the 2021 STI award and set the STI targets for 2022;

–reviewed updates on performance against the 2022 STI target measures and for outstanding LTIP awards;

–assessed the achievement against the performance conditions for the vesting of the 2019 LTIP award, determined the contingent

level of LTIP awards for March 2022 and reviewed the associated performance conditions;

–assessed the achievement against the targets for the 2021 Share Reward Scheme and set the targets for the 2022 award;

–reviewed and assessed the target ranges across STI and LTI plans to ensure there is an appropriate level of stretch within the target

range to drive performance in alignment with the Group's strategic objectives and shareholder interests;

–reviewed the Annual Statement and the Annual Report on Remuneration for the year ended 31 December 2021 prior to its approval

by the Board and subsequent proposal to shareholders at the Company’s AGM on 28 April 2022;

–reviewed the 2022 AGM voting results relating to remuneration resolutions, market trends in the context of that annual general

meeting season and corporate governance developments in the UK and the U.S.;

–monitored the continued application of the Company’s shareholding guidelines for the Executive Directors and members of the

Management Board; and

–reviewed the Committee’s effectiveness following the Board and Committee evaluation process.

Other activities in 2022

The Remuneration Committee:

–determined the revised Directors' Remuneration Policy to be proposed to shareholders at the Company's 2022 AGM, discussed in

detail in the Company’s Annual Report and Form 20-F for 2021 available on bat.com;

–reviewed the terms of appointment and associated remuneration, and terms of termination of employment, in connection with

Management Board changes during the year;

–reviewed elements of the Group’s workforce remuneration strategy and their alignment with Executive Directors’ remuneration

and with the Group’s culture, with specific focus on the incentive scheme architecture for management grade employees across

the Group;

–considered the broader range of benefits available to UK-based employees, initiatives implemented in the year to enhance those

benefits including to support employee health and wellbeing, and feedback from employees on the initiatives implemented;

–approved changes to the methodology for calculating the share of market read for the STI volume share metric in a limited number

of markets, based on the local market environment and reporting capabilities;

–reviewed the Pay Equality reporting suite, including UK gender pay reporting for 2021 for applicable UK Group companies, prior to

publication in March 2022, as well as voluntary reporting on international gender pay and UK ethnicity pay reporting, and noted the

Group's progress on fair pay certification; and

–reviewed the Group's response to the economic environment in 2022, including additional interventions made by the Group to support

employees in high inflationary environments.

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179

Voting on Remuneration and Engagement with Shareholders

At the AGM on 28 April 2022, shareholders considered and voted on the 2021 Directors’ Remuneration Report and the new Directors'

Remuneration Policy as set out in the table below. Both resolutions were approved by shareholders at the AGM on 28 April 2022. A

summary of this policy is provided on page [163](#ib83a7b63593b4e9c99c5e7a6814f1798_1-1-1-3-281708). No other resolutions in respect of Directors’ remuneration or incentives were considered

at the 2022 AGM. Further information regarding shareholder engagement in relation to remuneration matters is set out in the Annual

Statement on Remuneration on page [159](#ida856e84a2c74b1280a26293040319de_403712) and in the discussion of Board engagement with shareholders on pages [136](#id739eb8a094346e4a1dd9989c862058f_9987) and [137](#i08dece8aeb2d4b27a88b611187b6dab2_43097).

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| --- | --- | --- |
|  |  |  |
| Approval of Directors' Remuneration Report1 and Policy2 | | |
|  | Directors Remuneration  Report 2022 AGM | Directors Remuneration  Policy 2022 AGM |
| Percentage for | 95.61 | 94.85 |
| Votes for (including discretionary) | 1,659,386,864 | 1,663,434,518 |
| Percentage against | 4.39 | 5.15 |
| Votes against | 76,194,044 | 90,313,970 |
| Total votes cast excluding votes withheld | 1,735,580,908 | 1,753,748,488 |
| Votes withheld³ | 20,978,332 | 2,811,496 |
| Total votes cast including votes withheld | 1,756,559,240 | 1,756,559,984 |

Notes:

1.Directors’ Remuneration Report: does not include the part of the Remuneration Report containing the Directors' Remuneration Policy (see note 2 below).

2.Directors’ Remuneration Policy: was approved by shareholders at the 2022 AGM held on 28 April 2022 and is set out in full in the 2021 Annual Report on Remuneration.

3.Votes withheld: these are not included in the final proxy figures as they are not recognised as a vote in law.

The Directors’ Remuneration Report has been approved by the Board on 08 February 2023 and signed on its behalf by:

Dimitri Panayotopoulos

Chair, Remuneration Committee

08 February 2023

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180

Statement of Directors’ Responsibilities in Respect of the

Annual Report and the Financial Statements@

The Directors are responsible for preparing the Annual Report and

the Group and Parent Company financial statements in

accordance with applicable law and regulations. Under company

law, directors must not approve the Financial Statements unless

they are satisfied that they give a true and fair view of the state of

affairs of the Parent Company and the Group for that period.

Under the law, directors are required to prepare the financial

statements in accordance with UK-adopted international

accounting standards and applicable law. The Directors have

elected to prepare the Parent Company financial statements in

accordance with UK Accounting Standards and applicable law,

including FRS 101 'Reduced Disclosure Framework'. In preparing

these Group financial statements, the Directors have also elected

to comply with International Financial Reporting Standards (IFRS)

as issued by the International Accounting Standards Board (IASB).

In preparing each of the Group and Parent Company financial

statements, the Directors are required to:

–select suitable accounting policies and then apply them

consistently;

–make judgements and estimates that are reasonable, relevant,

reliable and prudent;

–state whether Group financial statements have been prepared

in accordance with UK-adopted international accounting

standards;

–state whether, for the Parent Company financial statements,

applicable UK Accounting Standards have been followed, subject

to any material departures disclosed and explained in the those

statements;

–assess the Group and Parent Company’s ability to continue as a

going concern, disclosing, as applicable, matters related to going

concern; and

–use the going concern basis of accounting unless the Directors

either intend to liquidate the Group or the Parent Company or

to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting

records that are sufficient to show and explain the Parent

Company’s transactions and disclose with reasonable accuracy at

any time the financial position of the Parent Company and enable

them to ensure that its financial statements comply with the

Companies Act 2006. They are responsible for such internal

control as they determine is necessary to enable the preparation

of financial statements that are free from material misstatement,

whether due to fraud or error, and have general responsibility for

taking such steps as are reasonably open to them to safeguard

the assets of the Group and to prevent and detect fraud and

other irregularities.

Under applicable law and regulations, the Directors are also

responsible for preparing a Strategic Report, Directors’ Report,

Directors’ Remuneration Report and Corporate Governance

Statement that comply with applicable law and regulations.

The Directors are responsible for the maintenance and integrity of

the Annual Report included on the Company’s website. Legislation

in the UK governing the preparation and dissemination of financial

statements may differ from legislation in other jurisdictions.

In accordance with Disclosure Guidance and Transparency Rule

4.1.14R, the financial statements will form part of the annual

financial report prepared using the single electronic reporting

format under the TD ESEF Regulation. The auditor’s report on

these financial statements provides no assurance over the ESEF

format.

Directors’ Declaration in Relation to Relevant

Audit Information@

Having made appropriate enquiries, each of the Directors who held

office at the date of approval of this Annual Report confirms that:

–to the best of his or her knowledge and belief, there is no

relevant audit information of which the Company’s auditors

are unaware; and

–he or she has taken all steps that a Director might reasonably

be expected to have taken in order to make himself or herself

aware of relevant audit information and to establish that the

Company’s auditors are aware of that information.

Responsibility Statement of the Directors in Respect

of the Annual Financial Report@

We confirm that to the best of our knowledge:

–the financial statements, prepared in accordance with the

applicable set of accounting standards, give a true and fair view

of the assets, liabilities, financial position and profit or loss of

the Company and the undertakings included in the consolidation

taken as a whole; and

–the Strategic Report and the Directors’ Report include a fair

review of the development and performance of the business

and the position of the Company and the undertakings included

in the consolidation taken as a whole, together with a description

of the principal risks and uncertainties that they face.

This responsibility statement has been approved and is signed

by order of the Board by:

Luc JobinTadeu Marroco

ChairFinance and

Transformation Director

08 February 2023

British American Tobacco p.l.c.

Registered in England and Wales No. 3407696

@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report

on Form 20-F as filed with the SEC.

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181

1 Our Opinion is Unmodified

In our opinion:

–the financial statements of British American Tobacco p.l.c. give a true and fair view of the state of the Group’s and of the parent

Company’s affairs as at 31 December 2022, and of the Group’s profit for the year then ended;

–the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards;

–the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101

Reduced Disclosure Framework; and

–the Group and parent Company financial statements have been prepared in accordance with the requirements of the Companies Act

2006.

Additional opinion in relation to IFRS as issued by the IASB

As explained in the note to the Group financial statements, the Group, in addition to complying with its legal obligation to apply UK-

adopted international accounting standards, has also applied International Financial Reporting Standards as issued by the International

Accounting Standards Board (IASB).

In our opinion, the Group financial statements have been properly prepared in accordance with IFRS as issued by the IASB.

What our opinion covers

We have audited the Group and parent Company financial statements of British American Tobacco p.l.c. (“the Company”) for the year

ended 31 December 2022 ("2022") included in the Annual Report, which comprise:

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| --- | --- |
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| Group | Parent Company (British American Tobacco p.l.c.) |
| Group Income Statement  Group Statement of Comprehensive Income  Group Statement of Changes in Equity  Group Balance Sheet  Group Cash Flow Statement  Notes to the Group financial statements, including the accounting  policies in note 1. | Balance Sheet  Statement of Changes in Equity  Notes to the parent Company financial statements, including the  accounting policies in note 1. |

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities

are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit

opinion and matters included in this report are consistent with those discussed and included in our reporting to the Audit Committee.

We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements,

including the FRC Ethical Standard as applied to listed public interest entities.

2 Overview of Our Audit

Factors driving our view of risks

As a result of the 2017 acquisition of Reynolds American Inc. (“Reynolds American”), the Group has goodwill, trademarks and similar

intangibles with indefinite lives where a high degree of estimation uncertainty exists with regards to assumptions and estimates used in

the Group’s analysis of the recoverable amount, which include projected net revenue, long-term growth rates, post-tax discount rates

and the impact of the proposed menthol ban. The effect of these matters could result in a potential range of reasonable outcomes

greater than our materiality for the financial statements as a whole, and possibly many times that amount. There is significant auditor

judgement involved in evaluating these assumptions and our assessment of the risk associated with this Key Audit Matter has remained

the same in the current year.

The Group is also subject to a large number of claims, including class actions, which could have a significant impact on the results if

potential exposures were to materialise. For our 2022 audit, in our judgement, the most significant risk and area of uncertainty continues

to relate to ongoing litigation in Canada. The amounts involved are significant, and the Group’s application of accounting standards to

determine the amount, if any, to be provided as a liability or disclosed as a contingent liability, is inherently subjective and significant

judgement was involved in auditing this determination. Our assessment of the risk associated with this Key Audit Matter has remained

the same in the current year.

Due to the materiality of investments in subsidiaries in the context of the parent Company financial statements, investments in

subsidiaries is considered to be an area that had the greatest effect on our overall parent Company audit and our assessment of this Key

Audit Matter has remained the same in the current year.

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Key Audit Matters | Vs 2021 | Item |
| Goodwill, trademarks and similar intangibles with indefinite lives impairment analysis – arising from the Reynolds American  Inc. acquisition in 2017 | ← → | 4.1 |
| Contingent liabilities arising from litigation in Canada | ← → | 4.2 |
| Recoverability of parent Company’s investment in subsidiaries | ← → | 4.3 |

Audit Committee interaction

During the year, the Audit Committee met six times. KPMG are invited to attend all Audit Committee meetings and are provided with an

opportunity to meet with the Audit Committee in private sessions without the Executive Directors being present. For each Key Audit

Matter, we have set out communications with the Audit Committee in section 4, including matters that required particular judgement

for each.

The matters included in the Audit Committee report on page 152 are materially consistent with our observations of those meetings.

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| Independent Auditor’s Report@  To the Members of British American Tobacco p.l.c. | | | | | |  |  |

182

Our independence

We have fulfilled our ethical responsibilities and remain independent of the Group in accordance with UK ethical requirements, including

the FRC Ethical Standard as applied to listed public interest entities.

Apart from the matters noted below, we have not performed any non-audit services during the financial year ended 31 December 2022 or

subsequently which are prohibited by the FRC Ethical Standard.

In early 2023, we identified that three KPMG member firms had provided preparation of local GAAP financial statement services over the

period 2016 to 2022 to entities which were residual components and therefore not in scope for the Group audit. One of those member

firms had additionally provided language translation services in respect of the financial statements during 2020 to 2022. The services

were administrative in nature and did not involve any management decision-making or bookkeeping. The work was undertaken after the

Group audit opinion was signed by KPMG LLP for each of the impacted financial years and had no direct or indirect effect on British

American Tobacco p.l.c.’s consolidated financial statements.

In our professional judgement, we confirm that based on our assessment of the breach, our integrity and objectivity as auditor has not been

compromised and we believe that an objective, reasonable and informed third party would conclude that the provision of these services would not

impair our integrity or objectivity for any of the impacted financial years.  The Audit Committee have concurred with this view.

We were first appointed as auditor by the Directors for the year ended 31 December 2015. The period of total uninterrupted engagement

is for the 8 financial years ended 31 December 2022.

The Group engagement partner is required to rotate every 5 years. Philip Smart became the Group engagement partner for the 2021

audit and will be required to rotate off the engagement following the 2025 audit.

The average tenure of partners responsible for component audits as set out in section 7 below is 3 years, with the shortest being 1 and the longest being 7.

|  |  |
| --- | --- |
|  |  |
| Total audit fee | £20.4 m |
| Audit related fees (including interim review) | £7.3 m |
| Other services | £0.9 m |
| Non-audit fee as a % of total audit and audit related fee % | 3.2% |
| Date first appointed | 23 March 2015 |
| Uninterrupted audit tenure | 8 years |
| Next financial period which requires a tender | 2025 |
| Tenure of Group engagement partner | 2 years |
| Average tenure of component signing partners | 3 years |

Materiality

The scope of our work is influenced by our view of materiality and our assessed risk of material misstatement.

We have determined overall materiality for the Group financial statements as a whole at £450 million (2021: £425 million) and for the

parent Company financial statements as a whole at £221 million (2021: £55 million).

Consistent with 2021, materiality for the Group financial statements was determined with reference to a benchmark of Group profit

before taxation, normalised to exclude costs that do not represent the normal, continuing operations of the Group. As such, our Group

materiality represents 4.8% (2021: 4.6%) of Group profit before taxation.

Materiality for the parent Company financial statements was determined with reference to a benchmark of parent Company total assets

of which it represents 0.55% (2021: 0.15%).

Materiality levels used in our audit (£m)

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| Group | Group Materiality | PLC | Parent Company Materiality |
| GPM | Group Performance Materiality | LCM | Lowest Reporting Component Materiality |
| HCM | Highest Reporting Component Materiality | AMPT | Audit Misstatement Posting Threshold |

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183

Group scope

We have performed risk assessment and planning procedures to determine which of the Group’s components are likely to include risks

of material misstatement to the Group financial statements, the type of procedures to be performed at these components and the

extent of involvement required from our component auditors around the world.

The Group has 32 (2021: 35) in-scope reporting components which we required procedures to be performed to provide us with the

evidence we required in order to conclude on the Group financial statements as a whole. We performed full scope audits at 20

components (2021: 23), audits of one or more account balances at 10 components (2021: 10), and performed specified audit procedures at

2 components (2021: 2).

The components within the scope of our work accounted for the percentages illustrated below.

In addition, we have performed a Group level analysis on the residual components to determine whether further risks of material

misstatement exist in those components.

The Group operates three shared service centres (2021: three) in Romania, Malaysia and Costa Rica, and each of the shared service

centres is subject to specified risk-focused testing of transaction processing and review controls.

The Group audit team has also performed testing of centrally managed controls (manual and automated) on behalf of the components.

We consider the scope of our audit, as communicated to the Audit Committee, to be an appropriate basis for our audit opinion.

|  |
| --- |
|  |
|  |
| Group revenue |
| 80% |
| (2021: 83%) |

|  |  |
| --- | --- |
|  |  |
|  | Full scope audits |
|  |  |
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|  | Audits of one or more account balances |
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|  |  |
|  | Residual components |
|  |  |

|  |
| --- |
|  |
|  |
| Group profit before taxation |
| 77% |
| (2021: 79%) |

|  |
| --- |
|  |
|  |
| Group total assets |
| 94% |
| (2021: 96%) |

The impact of climate change on our audit

In planning our audit, we considered the impacts of climate change on the Group’s business and its financial statements.

The Group has set its targets under the Paris Agreement to be net carbon neutral in scope 1 and scope 2 emissions by 2030, and to reach

net zero emissions by 2050. Further information has been provided in the Group’s Strategic Report on page 79. The Group continues to

align its climate-related disclosures with the recommendations of the Task Force on Climate Related Financial Disclosure (“TCFD”).

These disclosures are included on pages 70 to 81 of the Annual Report.

Climate change risk could have a significant impact on the Group’s business as it adapts its strategy and operations to address the

potential financial risks which could arise from both the physical and transition risks associated with climate change. To evaluate and

assess the resilience of its business to climate change, the Group assessed the impact of climate change on its agricultural supply chain

and the risk of increased climate-related regulation in relation to new regulation on products, higher insurance premiums and higher cost

of capital. These are the areas where the Group foresees the greatest potential for disruption. Further information can be found on pages

76 to 77.

As part of our audit, we have made enquiries of management to understand the extent of the potential impact of climate change risk on

the Group’s financial statements. We have performed a risk assessment of how climate risks facing the Group, particularly those relating

to its agricultural supply chain and emerging regulations, and the Group’s strategy to mitigate these risks, may affect the financial

statements and our audit. Our risk assessment focused on the risk climate change may pose to the determination of future cash flows,

as well as the impact on the carrying amount and useful lives of property, plant and equipment. We also held discussions with our own

climate change professionals to challenge our risk assessment.

On the basis of our risk assessment, we determined that while climate change poses a risk to the determination of future cash flows, the

risk to this year’s financial statements from climate change alone is not significant taking into account the extent of headroom available

on the Reynolds American cash-generating unit. As such, there was no impact on our Key Audit Matter.

We have read the climate-related information in the front half of the Annual Report, and considered consistency with the financial

statements and our audit knowledge.

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| Independent Auditor’s Report@  Continued | | | | | | | |

184

3 Going Concern, Viability and Principal Risks and Uncertainties

The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the

parent Company or to cease their operations, and as they have concluded that the Group’s and the parent Company’s financial position

means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over

their ability to continue as a going concern for at least twelve months from the date of approval of the financial statements (“the going

concern period”).

Going concern

We used our knowledge of the Group, its industry, and the general economic environment to identify the inherent risks to its business

model and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over

the going concern period. The risks that we considered most likely to adversely affect the Group’s and Company’s available financial

resources over this period were:

–The enactment of regulation that significantly impairs the Group’s ability to communicate, differentiate, market or launch its products;

and

–Product liability, regulatory or other significant cases (including investigations) may be lost or compromised resulting in a material loss

or other consequence.

We also considered less predictable but realistic second order impacts, such as the erosion of customer or supplier confidence, which

could result in a rapid reduction of available financial resources.

We considered whether these risks could plausibly affect the liquidity in the going concern period by comparing severe, but plausible,

downside scenarios that could arise from these risks individually and collectively against the level of available financial resources

indicated by the Group’s financial forecasts.

We considered whether the going concern disclosure in note 1 to the financial statements gives a full and accurate description of the

Directors’ assessment of going concern.

Accordingly, based on those procedures, we found the Directors’ use of the going concern basis of preparation without any material

uncertainty for the Group and parent Company to be acceptable. However, as we cannot predict all future events or conditions and as

subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the

above conclusions are not a guarantee that the Group or the parent Company will continue in operation.

Our conclusion

–We consider that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is

appropriate;

–We have not identified, and concur with the Directors’ assessment that there is not, a material uncertainty related to events or

conditions that, individually or collectively, may cast significant doubt on the Group’s or parent Company's ability to continue as a going

concern for the going concern period;

–We have nothing material to add or draw attention to in relation to the Directors’ statement in note 1 to the financial statements on the

use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and parent

Company’s use of that basis for the going concern period, and we found the going concern disclosure in note 1 to be acceptable; and

–The related statement under the Listing Rules set out on page 107 is materially consistent with the financial statements and our audit

knowledge.

Disclosures of emerging and principal risks and longer-term viability

Our responsibility

We are required to perform procedures to identify whether there is a material inconsistency between the Directors’ disclosures in

respect of emerging and principal risks and the viability statement, and the financial statements and our audit knowledge.

Based on those procedures, we have nothing material to add or draw attention to in relation to:

–the Directors’ confirmation within the viability statement on page 116 that they have carried out a robust assessment of the emerging

and principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;

–the Group Principal Risks disclosures describing these risks and how emerging risks are identified and explaining how they are being

managed and mitigated; and

–the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have

done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation

that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including

any related disclosures drawing attention to any necessary qualifications or assumptions.

We are also required to review the viability statement set out on page 116 under the Listing Rules.

Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As

we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with

judgements that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee

as to the Group’s and parent Company’s longer-term viability.

Our reporting

We have nothing material to add or draw attention to in relation to these disclosures.

We have concluded that these disclosures are materially consistent with the financial statements and our audit knowledge.

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185

4 Key Audit Matters

Key Audit Matters are those matters that, in our professional judgement, were of most significance in the audit of the financial

statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us,

including those which had the greatest effect on:

–the overall audit strategy;

–the allocation of resources in the audit; and

–directing the efforts of the engagement team.

We include below the Key Audit Matters in decreasing order of audit significance together with our key audit procedures to address

those matters and our results from those procedures. These matters were addressed, and our results are based on procedures

undertaken, for the purpose of our audit of the financial statements as a whole. We do not provide a separate opinion on these matters.

4.1 Goodwill, trademarks and similar intangibles with indefinite lives impairment analysis – arising from the Reynolds American Inc.

acquisition in 2017 (Group)

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Financial Statement Elements | | | Our assessment of risk vs 2021 | | Our results |
|  | 2022 | 2021 | ← → | Our assessment  is that the risk is  similar to 2021. | 2022: Acceptable  2021: Acceptable |
| Goodwill – arising from the Reynolds  American Inc. acquisition | £47,956m | £33,021m |
| Trademarks and similar intangibles with  indefinite lives with indefinite lives – arising  from the Reynolds American Inc.  acquisition | £78,228m | £69,475m |

Description of the Key Audit Matter

Forecast-based assessment: As a result of the 2017 acquisition of Reynolds American Inc. (“Reynolds American”), the Group, as at 31

December 2022 has goodwill, trademarks and similar intangibles with indefinite lives of £47,956 million and £78,228 million, respectively

(2021: goodwill of £33,021 million and trademarks and similar intangibles with indefinite lives of £69,475 million). There is inherent

uncertainty with regard to assumptions and estimates involved in the Group’s forecast-based assessment of the recoverable amount of

the trademarks with indefinite lives and goodwill.

There is significant auditor judgement involved in evaluating the below assumptions:

–the projected net revenue, long-term growth rates and post-tax discount rates used in the analysis of the recoverable amount of

trademarks and similar intangibles with indefinite lives and goodwill allocated to the Reynolds American cash-generating unit; and

–the timing and magnitude of the impact of the proposed menthol ban on the assumptions listed above for the Newport and Camel

indefinite lived trademarks and similar intangibles and goodwill allocated to the Reynolds American cash-generating unit.

The effect of these matters is that, as part of our risk assessment for audit planning purposes, we determined that the value-in-use

calculations of both trademarks and similar intangibles with indefinite lives and goodwill had a high degree of estimation uncertainty,

with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many

times that amount. In conducting our final audit work, we concluded that reasonably possible changes to key assumptions could lead to a

material impairment in goodwill.

The financial statements (note 12) disclose the sensitivity of the recoverable amount of relevant trademarks and similar intangibles with

indefinite lives and goodwill estimated by the Group.

Our response to the risk

Control design and operation: Evaluating the design and testing the operating effectiveness of certain internal controls within the

goodwill, trademarks and similar intangibles with indefinite lives impairment testing process, including controls related to the

development of the projected net revenue, and the Group’s determination of the applicable long-term growth rates and post-tax

discount rates;

Benchmarking and assessing assumptions: Assessing and challenging Reynolds American’s projected net revenue and long-term growth

rates against externally derived publicly available data, including broker and analyst reports, industry reports, media reports, macro-

economic assumptions, academic and scientific studies, and regulatory changes.

Critically evaluating the Group’s assessment of the potential timing and magnitude of the impact of the proposed menthol ban by

evaluating the FDA rulemaking process and recent litigations. In addition, assessing and challenging the impact of the proposed menthol

ban on the projected net revenue, long-term growth rates and post-tax discount rates used in the value-in-use based assessment of the

recoverable amount of the goodwill allocated to the Reynolds American cash-generating unit and the Newport and Camel indefinite-

lived brands by comparing the Group’s projected brand retention rates against actual brand retention rates in other markets where a

menthol ban has been implemented;

Historical comparisons: Challenging the projected net revenue by comparing the historical projections to actual results to assess the

Group’s ability to accurately forecast;

Sensitivity analysis: Performing sensitivity analysis on the projected net revenue, long-term growth rates and post-tax discount rates to

assess their impact on the Group’s determination that the value-in-use of the Reynolds American goodwill, trademarks and similar

intangibles with indefinite lives exceed their carrying value;

Our valuation expertise: Involving a valuation professional with specialised skills and knowledge, who assisted in independently

developing a range of post-tax discount rates using publicly available market data for comparable companies and comparing these rates

to those utilised by Reynolds American to assess their reasonableness; and

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186

Assessing transparency:  Assessing whether the Group’s disclosures detail the key estimates and sensitivities including any impact of

reasonable possible changes with regard to the impairment testing of trademarks and similar intangibles with indefinite lives and the

goodwill arising from the Reynolds American acquisition.

Communications with the British American Tobacco p.l.c.’s Audit Committee

Our discussions with and reporting to the Audit Committee included:

–Our approach to the audit of trademarks and similar intangibles with indefinite lives and goodwill arising from the Reynolds American

acquisition, including details of our planned substantive procedures and the extent of our control reliance;

–Our conclusions on the appropriateness of the Group’s impairment assessment, including assumptions used by the Group in their

value-in-use based assessment to calculate the recoverable amount of trademarks and similar intangibles with indefinite lives and

goodwill and whether the projected net revenue, long-term growth rates and post-tax discount rates, the impact of the proposed

menthol ban taken into account, by the Group were reasonable; and

–The adequacy of disclosures, particularly as it relates to the key estimates and sensitivities with regard to the impairment testing.

Areas of significant auditor judgement

The evaluation of the assumptions used by the Group in the analysis of the recoverable amount of trademarks and similar intangibles

with indefinite lives and goodwill allocated to the Reynolds American cash-generating unit is an area requiring significant auditor

judgement. These assumptions are the projected net revenue, long-term growth rates, post-tax discount rates, and timing and

magnitude of the impact of the proposed menthol ban for the Newport and Camel indefinite lived trademarks.

Our results

We found the conclusion that there is no impairment of trademarks and similar intangibles with indefinite lives and goodwill arising from

the Reynolds American acquisition to be acceptable (2021: acceptable).

Further information in the Annual Report: See the Audit Committee Report on page 152 for details on how the Audit Committee

considered goodwill, trademarks and similar intangibles with indefinite lives impairment analysis arising from the Reynolds American Inc.

acquisition in 2017 as an area of significant attention, page 206 for the accounting policy on goodwill, and intangible assets other than

goodwill, and pages 227 to 231 for the financial disclosures.

4.2 Contingent Liabilities arising from Litigation in Canada (Group)

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Financial Statement Elements | Our assessment of risk vs 2021 | | Our results |
| Contingent liabilities disclosures | ← → | Our assessment is that the risk is  similar to 2021. | 2022: Acceptable  2021: Acceptable |

Description of the Key Audit Matter

Dispute outcome: The Group is subject to a large number of claims, including class actions, which could have a significant impact on the

results if potential exposures were to materialise. For our 2022 audit, in our judgement, the most significant risk and area of uncertainty,

continues to relate to ongoing litigation in Canada. Imperial Tobacco Canada Limited (“Imperial”) has received an unfavourable

judgement on the smoking and health class actions certified by the Quebec Superior Court. As a result of this judgement, Imperial has

filed for creditor protection under the Companies’ Creditors Arrangement Act (the “CCAA”). In seeking protection under the CCAA,

Imperial will look to resolve not only the Quebec case but also all other tobacco litigation in Canada under an efficient and court

supervised process, while continuing to trade in the normal course of business.

The amounts involved are significant, and the Group’s application of accounting standards to determine the amount, if any, to be

provided as a liability or disclosed as a contingent liability, is inherently subjective. Significant judgement was involved in auditing this

determination, including evaluating the Group’s assessment of the relevant law, historical and pending court rulings, and the Group’s

ability to estimate the likelihood and extent of any future economic outflow arising from the ultimate resolution of the Canadian litigation.

The effect of these matters is that, as part of our risk assessment, we determined that the potential exposure to litigation requires a high

degree of judgement, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole,

and possibly many times that amount.

Our response to the risk

Control design and operation: Evaluating the processes and controls within the legal exposure process, including controls over the

interpretation of relevant law and related court rulings and estimation of the likelihood and extent of any future economic outflow arising

from the ultimate resolution of the Canadian litigation;

Enquiry of lawyers: Reading letters received directly from the Group’s external and internal legal counsel that evaluated the current

status of the Canadian legal proceedings. We also inquired of internal legal counsel to evaluate their basis for conclusions in their letter,

including challenging that it is not possible to reliably estimate any potential liability based on the current status of the proceedings;

Assess local legal precedents: Assessing relevant historical and recent judgements passed by the judicial court authorities in relation to

the Canadian litigation and reading the related Canadian court rulings in order to challenge Imperial’s interpretation of the Canadian legal

proceedings and the related contingent liability disclosures; and

Assessing transparency:  Assessing whether the Group’s disclosures in relation to the Canadian litigation adequately disclose the

potential liabilities.

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187

Communications with the British American Tobacco p.l.c.’s Audit Committee

Our discussions with and reporting to the Audit Committee included:

–Our approach to the audit of contingent liabilities arising from ongoing litigation in Canada, including details of our planned substantive

procedures and the extent of our control reliance;

–Our conclusion on the appropriateness of the Group’s assessment to either disclose a contingent liability or to recognise a provision

based on the latest developments associated with the litigation and whether it is in conformity with relevant accounting standards;

and

–The adequacy of disclosures in the Contingent Liability Statement in relation to the Canadian litigation within the Annual Report.

Areas of significant auditor judgement

Our evaluation of the Group’s assessment of the relevant law, historical and pending court rulings, and the Group’s ability to estimate the

likelihood and extent of any future economic outflow arising from the ultimate resolution of the Canadian litigation, as well as the Group's

application of accounting standards to determine the amount, if any, to be provided as a liability or disclosed as a contingent liability is an

area requiring significant auditor judgement.

Our results

From the evidence obtained, we found the Group’s treatment of the contingent liabilities and related disclosures arising from litigation in

Canada to be acceptable (2021: acceptable).

Further information in the Annual Report: See the Audit Committee Report on page 152 for details on how the Audit Committee

considered contingent liabilities arising from litigation in Canada as an area of significant attention, page 209 for the accounting policy on

contingent liabilities and contingent assets, and pages 283 to 284 for the financial disclosures.

4.3 Recoverability of the Company's investment in subsidiaries (Parent Company)

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Financial Statement Elements | | | Our assessment of risk vs 2021 | | Our results |
|  | 2022 | 2021 | ← → | Our assessment is that the  risk is similar to 2021. | 2022: Acceptable  2021: Acceptable |
| Investment in  subsidiaries | £27,798m | £27,809m |

Description of the Key Audit Matter

Low risk, high value: The carrying amount of the parent Company's investments in subsidiaries is £27,798 million (2021: £27,809 million)

which represents 70% (2021: 71%) of the Company's total assets. Their recoverability is not a high risk of significant misstatement or

subject to significant judgement.

However, due to the materiality of investments in subsidiaries in the context of the parent Company financial statements, this is

considered to be the area that had the greatest effect on our overall parent Company audit.

Our response to the risk

Tests of detail: Comparing the carrying amount of the parent Company’s direct investments, representing 100% (2021: 100%) of the total

investment balance with the relevant subsidiary’s draft balance sheet to identify whether their net assets, being an approximation of

their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically

been profit-making.

We performed the tests above rather than seeking to rely on any of the parent Company's controls because the nature of the balance is

such that we would expect to obtain audit evidence primarily through the detailed procedures described.

Communications with the British American Tobacco p.l.c.’s Audit Committee

Our discussions with and reporting to the Audit Committee included:

–Our approach to the audit of the parent Company’s investment in subsidiaries including details of our planned substantive procedures;

and

–Our conclusion whether the carrying amount of the Company’s investment in subsidiaries remains recoverable based on our audit

procedures.

Our results

We found the conclusion that there is no impairment of the investment in subsidiaries to be acceptable (2021: acceptable).

Further information in the Annual Report: See page 314 for the accounting policy on investments in Group companies, and page 315 for

the financial disclosures.

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| Independent Auditor’s Report@  Continued | | | | | | | |

188

5 Our Ability to Detect Irregularities, and our Response

Fraud - Identifying and responding to risks of material misstatement due to fraud

Fraud risk assessment

To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or

pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:

–Enquiring of Directors, the Audit Committee, and internal audit whether they have knowledge of any actual, suspected or alleged fraud,

and inspection of policy documentation as to the Group’s high-level policies and procedures to prevent and detect fraud, including the

internal audit function, and the Group’s channel for “whistleblowing”.

–Reading minutes of the Board of Directors, Audit Committee, Remuneration Committee, Nominations Committee, Transactions

Committee and Corporate Committee.

–Considering the International Executive Incentive Scheme and performance targets for senior management.

–Using analytical procedures to identify any unusual or unexpected relationships.

–Our forensic specialists assisted us in identifying key fraud risk factors. This included attending the Risk Assessment and Planning

Discussion and participating in meetings with management to discuss matters relating to ongoing criminal investigations. With

regards to anti-bribery and corruption, they assisted us in developing our audit approach to address fraud risk factors and reviewed

reporting deliverables submitted by component audit teams that were scoped in for additional anti-bribery and corruption audit

procedures.

Risk communications

We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit.

This included communication from the Group to component audit teams of relevant fraud risks identified at the Group level and requests

to component audit teams to report to the Group audit team any instances of fraud that could give rise to a material misstatement at

the Group level.

Fraud risks

As required by auditing standards, and taking into account possible pressures to meet profit targets, we performed procedures to

address the risk of management override of controls, in particular the risk that Group and component management may be in a position

to make inappropriate accounting entries and the risk of bias in accounting estimates. On this audit we do not believe there is a fraud risk

related to revenue recognition as the revenue model is non-complex with no material estimation or manual intervention, revenue is

disaggregated between a significant number of End Markets and remuneration targets are based on Group performance rather than

End Market  performance.

We did not identify any additional fraud risks.

Procedures to address fraud risks

In determining the audit procedures, we took into account the results of our evaluation and testing of the operating effectiveness of the

Group-wide fraud risk management controls.

We also performed procedures including:

–Identifying journal entries to test from a Group perspective based on risk criteria and comparing the identified entries to supporting

documentation. These included those posted to revenue accounts, those approved by an individual not authorised to approve postings,

those posted to accounts that are seldomly used and those posted to accounts which could drive certain key metrics such as the

bonus calculation.

–Identifying journal entries to test for all components based on risk criteria and comparing the identified entries to supporting

documentation. These included those posted by senior finance management or Directors, journal entry posted by a user who only

posted one entry for the fiscal year and those posted with an unusual account combination.

–Assessing whether the judgements made in making accounting estimates are indicative of a potential bias.

Laws and regulations - Identifying and responding to risks of material misstatement relating to compliance with laws and

regulations

Laws and regulations risk assessment

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from

our general commercial and sector experience, through discussion with the Directors and other management (as required by auditing

standards), and from inspection of the Group’s regulatory and legal correspondence and discussed with the Directors and other

management the policies and procedures regarding compliance with laws and regulations.

As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s

procedures for complying with regulatory requirements.

Risk communications

We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance

throughout the audit. This included communication from the Group to component audit teams of relevant laws and regulations identified

at the Group level, and a request for component auditors to report to the Group team any instances of non-compliance with laws and

regulations that could give rise to a material misstatement at the Group level.

The potential effect of these laws and regulations on the financial statements varies considerably.

Direct laws context and link to audit

The Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation

(including related companies legislation), distributable profits legislation, taxation legislation and pension legislation and we assessed the

extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.

Most significant indirect law/regulation areas

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The Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on

amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following

areas as those most likely to have such an effect: health and safety, anti-bribery and corruption, money-laundering, sanctions,

environmental protection legislation, food and drug administration, data privacy, competition and contract legislation recognising the

financial and regulated nature of the Group’s activities.

Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the

Directors and other management and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational

regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach.

Known actual or suspected matters

In relation to the criminal investigations into allegations of misconduct by the governmental authorities and competition investigations

discussed in note 31, we performed inquiries, obtained legal confirmations, and assessed disclosures against our understanding from

legal correspondence.

Context of the ability of the audit to detect fraud or breaches of law or regulation

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in

the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For

example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial

statements, the less likely the inherently limited procedures required by auditing standards would identify it.

In addition, as with any audit, there remained a higher risk of non-detection of fraud, as these may involve collusion, forgery, intentional

omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement.

We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws and

regulations.

6 Our Determination of Materiality

The scope of our audit was influenced by our application of materiality. We set quantitative thresholds and overlay qualitative

considerations to help us determine the scope of our audit and the nature, timing and extent of our procedures, and in evaluating the

effect of misstatements, both individually and in the aggregate, on the financial statements as a whole.

Materiality for the Group financial statements as a whole £450m (2021: £425m)

What we mean

A quantitative reference for the purpose of planning and performing our audit.

Basis for determining materiality and judgements applied

Materiality for the Group financial statements as a whole was set at £450 million (2021: £425 million). Consistent with 2021, Group

materiality was determined with reference to a benchmark of Group profit before taxation, normalised to exclude restructuring cost of

the Group, charges in respect of the proposed sale of the Group’s operations in Russia and Belarus, and other one-off litigation expenses

(2021: restructuring cost of the Group and loss on disposal of the Group’s Iranian subsidiary), of £10,546 million (2021: £9,604 million). We

adjusted for these items because they do not represent the normal, continuing operations of the Group.

Our Group materiality of £450 million was determined by applying a percentage to Group profit before taxation, normalised to exclude

items described above, and KPMG’s approach for listed/public interest entities considers a guideline range of 3% to 5% of the measure.

Our Group materiality represents 4.8% (2021: 4.6%) of Group profit before taxation.

Materiality for the parent Company financial statements as a whole was set at £221 million (2021: £55 million), determined with reference

to a benchmark of the parent Company total assets, of which it represents 0.55% (2021: 0.15%). In 2021, materiality for the parent

Company financial statements as a whole was set at £55 million which was the component materiality for the parent Company

determined by the Group audit engagement team. This was lower than the materiality we would otherwise have determined by

reference to the parent Company’s total assets, of which it represents 0.15%.

Performance materiality £337m (2021: £318m)

What we mean

Our procedures on individual account balances and disclosures were performed to a lower threshold, performance materiality, so as to

reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material

amount across the financial statements as a whole.

Basis for determining performance materiality and judgements applied

We have considered performance materiality at a level of 75% (2021: 75%) of materiality for British American Tobacco p.l.c. Group

financial statements as a whole to be appropriate.

The parent Company performance materiality was set at £165 million (2021: £41.2 million), which equates to 75% (2021: 75%) of

materiality for the parent Company financial statements as a whole.

We applied this percentage in our determination of performance materiality because we did not identify any factors indicating an

elevated level of risk.

Audit misstatement posting threshold £22.5m (2021: £21m)

What we mean

This is the amount below which identified misstatements are considered to be clearly trivial from a quantitative point of view. We may

become aware of misstatements below this threshold which could alter the nature, timing and scope of our audit procedures, for

example if we identify smaller misstatements which are indicators of fraud.

This is also the amount above which all misstatements identified are communicated to British American Tobacco p.l.c.’s Audit

Committee.

Basis for determining the audit misstatement posting threshold and judgements applied

We set our audit misstatement posting threshold at 5% (2021: 5%) of our materiality for the Group and parent Company financial

statements. We also report to the Audit Committee any other identified misstatements that warrant reporting on qualitative grounds.

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|  | Group revenue | |  | Group profit before taxation | |  | Group total assets | |
|  | 2022 | 2021 |  | 2022 | 2021 |  | 2022 | 2021 |
| Financial statement caption | £27,655m | £25,684m |  | £9,324m | £9,163m |  | £153,546m | £137,365m |
| Group Materiality as % of caption | 1.63% | 1.65% |  | 4.83% | 4.63% |  | 0.29% | 0.31% |

7 The Scope of our Audit

What we mean

How the Group audit team determined the procedures to be performed across the Group.

Group scope

The Group has 32 (2021: 35) in-scope reporting components. In order to determine the work performed at the reporting component level,

we identified those components which we considered to be of individual financial significance, those which were significant due to risk

and those remaining components on which we required procedures to be performed to provide us with the evidence required in order to

conclude on the group financial statements as a whole.

We determined individually financially significant components as those contributing at least 3% and 5% (2021: 3% and 5%) of net revenue

or profit before taxation, respectively. We selected net revenue and profit before taxation as these are the most representative of the

relative size of the components.

We performed full scope audits for Group reporting purposes of 20 components (2021: 23). Audits of these components were performed

using materiality levels assigned by the group audit team, which were lower than the materiality level for the Group as a whole, ranging

from £65 million to £240 million (2021: £55 million to £220 million), and determined by reference to the size and risk profile of the

components.

Audits of one or more account balances were performed in respect of a further 10 components (2021: 10), using a materiality ranging

from £50 million to £100 million (2021: £45 million to £90 million) assigned by the Group audit team. Specified audit procedures have been

performed at 2 components (2021: 2) using a materiality of £50 million (2021: £45 million). These 12 components for which we performed

work other than full scope audits for group reporting purposes were not individually significant but were included in the scope of Group

reporting work in order to provide further coverage over the Group’s results. This is consistent with the approach that was adopted in

2021.

The work on 28 of the 32 components (2021: 30 of the 35 components) was performed by component auditors and the work on the

remaining components as well as on the parent Company, was performed by the Group team. For those items excluded to normalise

Group profit before taxation, the component teams performed procedures on items relating to their components. The Group team

performed procedures on the remaining excluded items.

The components within the scope of our work accounted for the following percentages of the Group’s results, with the prior year

comparatives indicated in brackets:

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| Component type | Work performed | Number of components | Percentage of Group: | | |
| Revenue | Profit before taxation | Total assets |
| Individually  financially  significant | Audit | 5  (2021: 5) | 60%  (2021: 60%) | 41%  (2021: 40%) | 32%  (2021: 31%) |
| Other  components on  which work was  performed | Audit | 15  (2021: 18) | 15%  (2021: 19%) | 24%  (2021: 20%) | 60%  (2021: 62%) |
| Audits of one or more account  balances | 10  (2021: 10) | 5%  (2021: 4%) | 12%  (2021: 19%) | 2%  (2021: 3%) |
| Specific risk-focused audit  procedures | 2  (2021: 2) | 0%  (2021: 0%) | 0.3%  (2021: 0.3%) | 0%  (2021: 0.2%) |
| Total |  | 32  (2021: 35) | 80%  (2021: 83%) | 77%  (2021: 79%) | 94%  (2021 96%) |

The remaining 20% (2021: 17%) of Group revenue, 23% (2021: 21%) of Group profit before taxation, and 6% (2021: 4%) of total Group

assets is represented by 348 (2021: 274) reporting components, none of which individually represented more than 4% (2021: 2%) of any of

total Group revenue, Group profit before taxation or total Group assets. For these residual components, we performed analysis at an

aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these.

The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and

the information to be reported back.

We were able to rely upon the Group’s internal control over financial reporting in all areas of our audit, and where our controls testing

supported this approach, which enabled us to reduce the scope of our substantive audit work.

The Group operates three shared service centres (2021: three) in Romania, Malaysia and Costa Rica, the outputs of which are included in

the financial information of the reporting components they service and therefore they are not separate reporting components. The

Group team instructed auditors of the shared service centres to perform specified risk-focused audit procedures, predominantly the

testing of transaction processing and review controls, and the information to be reported back. Additional procedures are performed at

certain reporting components to address the audit risks not covered by the work performed over the shared service centres.

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The Group audit team has also performed audit procedures on the following areas on behalf of the components:

–Testing of manual controls operated from the Group’s shared service centres;

–Testing of automated controls and system generated information within centrally managed IT systems; and

–Testing of general IT controls over centrally managed IT systems.

These items were audited by the Group team because the processes and controls were operated and managed centrally at the Group

level. The Group team communicated the results of these procedures to the component teams.

Group audit team oversight

What we mean

The extent of the Group audit team’s involvement in component audits.

Group audit team oversight

The Group audit team visited four (2021: one) components and two (2021: nil) shared service centres in-person for the purpose of

business understanding, risk assessment and challenging the audit approach.

The Group audit team also held an audit risk planning and strategy global conference which in-scope component auditors attended.

Online and/or telephone planning meetings were held with in-scope component audit teams to explain our audit instructions and to

discuss the significant areas of the audit relevant to the components.

Further to these visits and conference, the Group team also performed detailed remote file reviews upon the completion of the

component auditors’ engagements. The findings reported to the Group team were discussed in more detail, and any further work

required by the Group team was then performed by the component auditor.

8 Other Information in the Annual Report

The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our

opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except

as explicitly stated below, any form of assurance conclusion thereon.

All other information

Our responsibility

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work,

the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge.

Our reporting

Based solely on that work we have not identified material misstatements or inconsistencies in the other information.

Strategic report and Directors’ report

Our responsibility and reporting

Based solely on our work on the other information described above we report to you as follows:

–we have not identified material misstatements in the strategic report and the Directors’ report;

–in our opinion the information given in those reports for the financial year is consistent with the financial statements; and

–in our opinion those reports have been prepared in accordance with the Companies Act 2006.

Directors’ Remuneration Report

Our responsibility

We are required to form an opinion as to whether the part of the Directors’ Remuneration Report to be audited has been properly

prepared in accordance with the Companies Act 2006.

Our reporting

In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the

Companies Act 2006.

Corporate governance disclosures

Our responsibility

We are required to perform procedures to identify whether there is a material inconsistency between the financial statements and our

audit knowledge, and:

–the Directors’ statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and

understandable, and provides the information necessary for shareholders to assess the Group’s position and performance, business

model and strategy;

–the section of the Annual Report describing the work of the Audit Committee, including the significant issues that the Audit Committee

considered in relation to the financial statements, and how these issues were addressed; and

–the section of the Annual Report that describes the review of the effectiveness of the Group’s risk management and internal control

systems.

Our reporting

Based on those procedures, we have concluded that each of these disclosures is materially consistent with the financial statements and

our audit knowledge.

We are also required to review the part of the Corporate Governance Statement relating to the Group’s compliance with the provisions

of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in this respect.

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Other matters on which we are required to report by exception

Our responsibility

Under the Companies Act 2006, we are required to report to you if, in our opinion:

–adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received

from branches not visited by us; or

–the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with

the accounting records and returns; or

–certain disclosures of Directors’ remuneration specified by law are not made; or

–we have not received all the information and explanations we require for our audit.

Our reporting

We have nothing to report in these respects.

9 Respective Responsibilities

Directors’ responsibilities

As explained more fully in their statement set out on page 181, the Directors are responsible for: the preparation of the financial

statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the

preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and

parent Company’s ability to continue as a going concern; disclosing, as applicable, matters related to going concern; and using the going

concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no

realistic alternative but to do so.

Auditor’s responsibilities

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of

assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement

when it exists.  Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could

reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

The Company is required to include these financial statements in an annual financial report prepared using the single electronic reporting

format specified in the TD ESEF Regulation. This auditor’s report provides no assurance over whether the annual financial report has

been prepared in accordance with that format.

10 The Purpose of our Audit Work and to Whom We Owe our Responsibilities

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006

and the terms of our engagement by the Company. Our audit work has been undertaken so that we might state to the Company’s

members those matters we are required to state to them in an auditor’s report and the further matters we are required to state to them

in accordance with the terms agreed with the Company, and for no other purpose. To the fullest extent permitted by law, we do not

accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this

report, or for the opinions we have formed.

Philip Smart (Senior Statutory Auditor)

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

15 Canada Square

London

E14 5GL

8 February 2023

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To the Shareholders and Board of Directors of British American Tobacco p.l.c.

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|  |  | For the years ended 31 December | | |
|  | Notes | 2022  £m | 2021  £m | 2020  £m |
| Revenue1 | 2 | 27,655 | 25,684 | 25,776 |
| Raw materials and consumables used |  | (4,781) | (4,542) | (4,583) |
| Changes in inventories of finished goods and work in progress |  | 227 | 160 | 445 |
| Employee benefit costs | 3 | (2,972) | (2,717) | (2,744) |
| Depreciation, amortisation and impairment costs | 4 | (1,305) | (1,076) | (1,450) |
| Other operating income | 5 | 722 | 196 | 188 |
| Loss on reclassification from amortised cost to fair value |  | (5) | (3) | (3) |
| Other operating expenses | 6 | (9,018) | (7,468) | (7,667) |
| Profit from operations | 2 | 10,523 | 10,234 | 9,962 |
| Net finance costs | 8 | (1,641) | (1,486) | (1,745) |
| Share of post-tax results of associates and joint ventures | 2,9 | 442 | 415 | 455 |
| Profit before taxation |  | 9,324 | 9,163 | 8,672 |
| Taxation on ordinary activities | 10 | (2,478) | (2,189) | (2,108) |
| Profit for the year |  | 6,846 | 6,974 | 6,564 |
| Attributable to: |  |  |  |  |
| Owners of the parent |  | 6,666 | 6,801 | 6,400 |
| Non-controlling interests |  | 180 | 173 | 164 |
|  |  | 6,846 | 6,974 | 6,564 |
| Earnings per share |  |  |  |  |
| Basic | 11 | 293.3 | 296.9 | 280.0 |
| Diluted | 11 | 291.9 | 295.6 | 278.9 |

Note:

1.Revenue is net of duty, excise and other taxes of £38,527 million, £38,595 million and £39,172 million for the years ended 31 December 2022, 2021 and 2020, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

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|  |  | For the years ended 31 December | | |
|  | Notes | 2022  £m | 2021  £m | 2020  £m |
| Profit for the year |  | 6,846 | 6,974 | 6,564 |
| Other comprehensive income/(expense) |  |  |  |  |
| Items that may be reclassified subsequently to profit or loss: |  | 8,506 | 509 | (2,997) |
| Foreign currency translation and hedges of net investments in foreign operations |  |  |  |  |
| – differences on exchange from translation of foreign operations |  | 8,923 | 32 | (2,597) |
| – reclassified and reported in profit for the year | 22(c) | 5 | 291 | — |
| – net investment hedges - net fair value (losses)/gains on derivatives |  | (578) | 75 | (16) |
| – net investment hedges - differences on exchange on borrowings |  | (21) | 24 | (163) |
| Cash flow hedges |  |  |  |  |
| – net fair value gains/(losses) |  | 81 | 95 | (257) |
| – reclassified and reported in profit for the year |  | 101 | 32 | 90 |
| – tax on net fair value (gains)/losses in respect of cash flow hedges | 10(f) | (17) | (32) | 44 |
| Investments held at fair value |  |  |  |  |
| – net fair value gains | 18 | 6 | 9 | — |
| Associates – share of OCI, net of tax | 9 | 6 | (17) | (98) |
| Items that will not be reclassified subsequently to profit or loss: |  | 201 | 313 | 55 |
| Retirement benefit schemes |  |  |  |  |
| – net actuarial gains | 15 | 316 | 382 | 105 |
| – surplus recognition | 15 | (39) | (1) | 10 |
| – tax on actuarial gains in respect of subsidiaries | 10(f) | (95) | (82) | (26) |
| Associates – share of OCI, net of tax | 9 | 19 | 14 | (34) |
|  |  |  |  |  |
| Total other comprehensive income/(expense) for the year, net of tax |  | 8,707 | 822 | (2,942) |
| Total comprehensive income for the year, net of tax |  | 15,553 | 7,796 | 3,622 |
| Attributable to: |  |  |  |  |
| Owners of the parent |  | 15,370 | 7,622 | 3,474 |
| Non-controlling interests |  | 183 | 174 | 148 |
|  |  | 15,553 | 7,796 | 3,622 |

The accompanying notes are an integral part of these consolidated financial statements.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Group Statement of Comprehensive Income | | | | | | | |

197

|  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |
|  |  | Attributable to owners of the parent | | | | | |  |  |  |
|  | Notes | Share  capital  £m | Share  premium,  capital  redemption  and merger  reserves  £m | Other  reserves  £m | Retained  earnings  £m | In respect  of assets  held-for-  sale  £m | Total  attributable  to owners of  parent  £m | Perpetual  hybrid  bonds  £m | Non-  controlling  interests  £m | Total  equity  £m |
| Balance at 1 January 2022 |  | 614 | 26,622 | (6,032) | 44,212 | — | 65,416 | 1,685 | 300 | 67,401 |
| Total comprehensive income  for the year comprising: |  | — | — | 8,521 | 6,849 | — | 15,370 | — | 183 | 15,553 |
| Profit for the year |  | — | — | — | 6,666 | — | 6,666 | — | 180 | 6,846 |
| Other comprehensive income  for the year |  | — | — | 8,521 | 183 | — | 8,704 | — | 3 | 8,707 |
| Other changes in equity |  |  |  |  |  |  |  |  |  |  |
| Cash flow hedges reclassified  and reported in total assets |  | — | — | (129) | — | — | (129) | — | — | (129) |
| Employee share options |  |  |  |  |  |  |  |  |  |  |
| –value of employee services | 28 | — | — | — | 81 | — | 81 | — | — | 81 |
| –proceeds from new  shares issued |  | — | 5 | — | — | — | 5 | — | — | 5 |
| –treasury shares used for  share option schemes |  | — | 1 | — | (1) | — | — | — | — | — |
| Dividends and other  appropriations |  |  |  |  |  |  |  |  |  |  |
| –ordinary shares | 22(c),(f) | — | — | — | (4,915) | — | (4,915) | — | — | (4,915) |
| –to non-controlling interests |  | — | — | — | — | — | — | — | (141) | (141) |
| Purchase of own shares |  |  |  |  |  |  |  |  |  |  |
| –held in employee share  ownership trusts |  | — | — | — | (80) | — | (80) | — | — | (80) |
| –share buy-back programme | 22(c)(vi) | — | — | — | (2,012) | — | (2,012) | — | — | (2,012) |
| Perpetual hybrid bonds |  |  |  |  |  |  |  |  |  |  |
| –coupons paid |  | — | — | — | (59) | — | (59) | — | — | (59) |
| –tax on coupons paid |  | — | — | — | 11 | — | 11 | — | — | 11 |
| Non-controlling interests –  acquisitions | 27(b) | — | — | — | (1) | — | (1) | — | — | (1) |
| Reclassification of  equity in respect of assets  classified as held-for-sale | 27(d) | — | — | 295 | — | (295) | — | — | — | — |
| Other movements |  | — | — | — | (4) | — | (4) | — | — | (4) |
| Balance at  31 December 2022 |  | 614 | 26,628 | 2,655 | 44,081 | (295) | 73,683 | 1,685 | 342 | 75,710 |

The accompanying notes are an integral part of these consolidated financial statements.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Statement of Changes in Equity | | | | | | | |

198

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  | Attributable to owners of the parent | | | | |  |  |  |
|  | Notes | Share  capital  £m | Share  premium,  capital  redemption  and merger  reserves  £m | Other  reserves  £m | Retained  earnings  £m | Total  attributable  to owners of  parent  £m | Perpetual  hybrid  bonds  £m | Non-  controlling  interests  £m | Total equity  £m |
| Balance at 1 January 2021 |  | 614 | 26,618 | (6,600) | 42,041 | 62,673 | — | 282 | 62,955 |
| Total comprehensive income for the  year comprising: |  | — | — | 523 | 7,099 | 7,622 | — | 174 | 7,796 |
| Profit for the year |  | — | — | — | 6,801 | 6,801 | — | 173 | 6,974 |
| Other comprehensive income for the  year |  | — | — | 523 | 298 | 821 | — | 1 | 822 |
| Other changes in equity |  |  |  |  |  |  |  |  |  |
| Cash flow hedges reclassified and  reported in total assets |  | — | — | 45 | — | 45 | — | — | 45 |
| Employee share options |  |  |  |  |  |  |  |  |  |
| –value of employee services | 28 | — | — | — | 76 | 76 | — | — | 76 |
| –treasury shares used for  share option schemes |  | — | 4 | — | (4) | — | — | — | — |
| Dividends and other appropriations |  |  |  |  |  |  |  |  |  |
| –ordinary shares | 22(c),(f) | — | — | — | (4,904) | (4,904) | — | — | (4,904) |
| –to non-controlling interests |  | — | — | — | — | — | — | (162) | (162) |
| Purchase of own shares |  |  |  |  |  |  |  |  |  |
| –held in employee share  ownership trusts |  | — | — | — | (82) | (82) | — | — | (82) |
| Perpetual hybrid bonds |  |  |  |  |  |  |  |  |  |
| –proceeds, net of issuance fees | 22(d) | — | — | — | — | — | 1,681 | — | 1,681 |
| –tax on issuance fees |  | — | — | — | — | — | 4 | — | 4 |
| –coupons paid |  | — | — | — | (6) | (6) | — | — | (6) |
| –tax on coupons paid |  | — | — | — | 1 | 1 | — | — | 1 |
| Non-controlling interests –  acquisitions | 27(b) | — | — | — | (5) | (5) | — | — | (5) |
| Other movements - non-controlling  interests | 27(b) | — | — | — | — | — | — | 6 | 6 |
| Other movements |  | — | — | — | (4) | (4) | — | — | (4) |
| Balance at 31 December 2021 |  | 614 | 26,622 | (6,032) | 44,212 | 65,416 | 1,685 | 300 | 67,401 |

The accompanying notes are an integral part of these consolidated financial statements.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

199

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | Attributable to owners of the parent | | | | |  |  |
|  | Notes | Share  capital  £m | Share  premium,  capital  redemption  and merger  reserves  £m | Other  reserves  £m | Retained  earnings  £m | Total  attributable  to owners of  parent  £m | Non-  controlling  interests  £m | Total  equity  £m |
| Balance at 1 January 2020 |  | 614 | 26,609 | (3,555) | 40,234 | 63,902 | 258 | 64,160 |
| Total comprehensive (expense)/income for the year  comprising: |  | — | — | (3,012) | 6,486 | 3,474 | 148 | 3,622 |
| Profit for the year |  | — | — | — | 6,400 | 6,400 | 164 | 6,564 |
| Other comprehensive (expense)/income for the year |  | — | — | (3,012) | 86 | (2,926) | (16) | (2,942) |
| Other changes in equity |  |  |  |  |  |  |  |  |
| Cash flow hedges reclassified and reported in total  assets |  | — | — | (33) | — | (33) | — | (33) |
| Employee share options |  |  |  |  |  |  |  |  |
| –value of employee services | 28 | — | — | — | 88 | 88 | — | 88 |
| –proceeds from new shares issued |  | — | 2 | — | — | 2 | — | 2 |
| –treasury shares used for share option schemes |  | — | 7 | — | (7) | — | — | — |
| Dividends and other appropriations |  |  |  |  |  |  |  |  |
| –ordinary shares | 22(c),(f) | — | — | — | (4,747) | (4,747) | — | (4,747) |
| –to non-controlling interests |  | — | — | — | — | — | (141) | (141) |
| Purchase of own shares |  |  |  |  |  |  |  |  |
| –held in employee share ownership trusts |  | — | — | — | (17) | (17) | — | (17) |
| Other movements non-controlling interests | 27(b) | — | — | — | — | — | 17 | 17 |
| Other movements |  | — | — | — | 4 | 4 | — | 4 |
| Balance at 31 December 2020 |  | 614 | 26,618 | (6,600) | 42,041 | 62,673 | 282 | 62,955 |

The accompanying notes are an integral part of these consolidated financial statements.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Statement of Changes in Equity  Continued | | | | | | | |

200

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  | 31 December | |
|  | Notes | 2022  £m | 2021  £m |
| Assets |  |  |  |
| Intangible assets | 12 | 129,075 | 115,625 |
| Property, plant and equipment | 13 | 4,867 | 4,953 |
| Investments in associates and joint ventures | 14 | 2,020 | 1,948 |
| Retirement benefit assets | 15 | 1,000 | 918 |
| Deferred tax assets | 16 | 682 | 611 |
| Trade and other receivables | 17 | 241 | 210 |
| Investments held at fair value | 18 | 121 | 50 |
| Derivative financial instruments | 19 | 131 | 243 |
| Total non-current assets |  | 138,137 | 124,558 |
| Inventories | 20 | 5,671 | 5,279 |
| Income tax receivable |  | 149 | 117 |
| Trade and other receivables | 17 | 4,367 | 3,951 |
| Investments held at fair value | 18 | 579 | 456 |
| Derivative financial instruments | 19 | 430 | 182 |
| Cash and cash equivalents | 21 | 3,446 | 2,809 |
|  |  | 14,642 | 12,794 |
| Assets classified as held-for-sale | 27(d) | 767 | 13 |
| Total current assets |  | 15,409 | 12,807 |
| Total assets |  | 153,546 | 137,365 |
| Equity – capital and reserves |  |  |  |
| Share capital | 22(a) | 614 | 614 |
| Share premium, capital redemption and merger reserves | 22(b) | 26,628 | 26,622 |
| Other reserves | 22(c) | 2,655 | (6,032) |
| Retained earnings | 22(c) | 44,081 | 44,212 |
| In respect of assets held-for-sale | 22(c) | (295) | — |
| Owners of the parent |  | 73,683 | 65,416 |
| Perpetual hybrid bonds | 22(d) | 1,685 | 1,685 |
| Non-controlling interests | 22(e) | 342 | 300 |
| Total equity |  | 75,710 | 67,401 |
| Liabilities |  |  |  |
| Borrowings | 23 | 38,726 | 35,666 |
| Retirement benefit liabilities | 15 | 949 | 1,239 |
| Deferred tax liabilities | 16 | 18,428 | 16,462 |
| Other provisions for liabilities | 24 | 434 | 392 |
| Trade and other payables | 25 | 944 | 982 |
| Derivative financial instruments | 19 | 502 | 79 |
| Total non-current liabilities |  | 59,983 | 54,820 |
| Borrowings | 23 | 4,413 | 3,992 |
| Income tax payable |  | 1,049 | 879 |
| Other provisions for liabilities | 24 | 1,087 | 461 |
| Trade and other payables | 25 | 10,449 | 9,577 |
| Derivative financial instruments | 19 | 427 | 235 |
|  |  | 17,425 | 15,144 |
| Liabilities associated with assets classified as held-for-sale | 27(d) | 428 | — |
| Total current liabilities |  | 17,853 | 15,144 |
| Total equity and liabilities |  | 153,546 | 137,365 |

The accompanying notes are an integral part of these consolidated financial statements.

On behalf of the Board

Luc Jobin

Chair

08 February 2023

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Group Balance Sheet | | | | | | | |

201

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  | For the years ended 31 December | | |
|  | Notes | 2022  £m | 2021  £m | 2020  £m |
| Profit for the year |  | 6,846 | 6,974 | 6,564 |
| Taxation on ordinary activities |  | 2,478 | 2,189 | 2,108 |
| Share of post-tax results of associates and joint ventures |  | (442) | (415) | (455) |
| Net finance costs |  | 1,641 | 1,486 | 1,745 |
| Profit from operations |  | 10,523 | 10,234 | 9,962 |
| Adjustments for |  |  |  |  |
| – depreciation, amortisation and impairment costs | 4 | 1,305 | 1,076 | 1,450 |
| – (increase)/decrease in inventories |  | (246) | 433 | (144) |
| – (increase)/decrease in trade and other receivables |  | (42) | (393) | 300 |
| – (decrease)/increase in Master Settlement Agreement payable | 6 | (145) | (36) | 369 |
| – increase/(decrease) in trade and other payables |  | 3 | 183 | (320) |
| – decrease in net retirement benefit liabilities |  | (110) | (104) | (96) |
| – increase/(decrease) in other provisions for liabilities |  | 643 | (145) | — |
| – other non-cash items | 27(d) | 606 | 430 | 46 |
| Cash generated from operating activities |  | 12,537 | 11,678 | 11,567 |
| Dividends received from associates |  | 394 | 353 | 351 |
| Tax paid |  | (2,537) | (2,314) | (2,132) |
| Net cash generated from operating activities |  | 10,394 | 9,717 | 9,786 |
| Cash flows from investing activities |  |  |  |  |
| Interest received |  | 85 | 33 | 48 |
| Purchases of property, plant and equipment |  | (523) | (527) | (511) |
| Proceeds on disposal of property, plant and equipment |  | 31 | 31 | 44 |
| Purchases of intangibles |  | (133) | (218) | (244) |
| Proceeds on disposals of intangibles |  | 3 | — | — |
| Purchases of investments |  | (257) | (369) | (343) |
| Proceeds on disposals of investments |  | 128 | 141 | 184 |
| Investment in associates and acquisitions of other subsidiaries net of cash acquired |  | (39) | (133) | 39 |
| Disposal of subsidiary, net of cash disposed of | 27(d) | — | (98) | — |
| Net cash used in investing activities |  | (705) | (1,140) | (783) |
| Cash flows from financing activities |  |  |  |  |
| Interest paid on borrowings and financing related activities |  | (1,578) | (1,479) | (1,737) |
| Interest element of lease liabilities |  | (25) | (23) | (26) |
| Capital element of lease liabilities |  | (161) | (154) | (164) |
| Proceeds from increases in and new borrowings |  | 3,267 | 978 | 9,826 |
| Reductions in and repayments of borrowings |  | (3,044) | (4,843) | (10,633) |
| (Outflows)/inflows relating to derivative financial instruments |  | (117) | 229 | (283) |
| Purchases of own shares - share buy-back programme | 22(c) | (2,012) | — | — |
| Purchases of own shares held in employee share ownership trusts |  | (80) | (82) | (18) |
| Proceeds from the issue of perpetual hybrid bonds, net of issuance costs | 22(d) | — | 1,681 | — |
| Coupon paid on perpetual hybrid bonds |  | (60) | (6) | — |
| Dividends paid to owners of the parent |  | (4,915) | (4,904) | (4,745) |
| Capital injection from and purchases of non-controlling interests | 30 | (1) | 1 | 17 |
| Dividends paid to non-controlling interests |  | (158) | (150) | (136) |
| Other |  | 6 | 3 | 2 |
| Net cash used in financing activities |  | (8,878) | (8,749) | (7,897) |
| Net cash flows generated from/(used in) operating, investing and financing activities |  | 811 | (172) | 1,106 |
| Transferred to held-for-sale |  | (368) | — | — |
| Differences on exchange |  | 431 | (253) | (253) |
| Increase/(decrease) in net cash and cash equivalents in the year |  | 874 | (425) | 853 |
| Net cash and cash equivalents at 1 January |  | 2,463 | 2,888 | 2,035 |
| Net cash and cash equivalents at 31 December | 21 | 3,337 | 2,463 | 2,888 |

The accompanying notes are an integral part of these consolidated financial statements.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Cash Flow Statement | | | | | | | |

202

1 Accounting policies

Basis of preparation

The consolidated financial statements have been prepared in

accordance with International Financial Reporting Standards

(IFRS) as issued by the International Accounting Standards Board

(IASB) and UK-adopted international accounting standards@, and

in accordance with the provisions of the UK Companies Act

2006@. UK-adopted international accounting standards differ in

certain respects from IFRS as issued by the IASB. The differences

have no impact on the Group’s consolidated financial statements

for the periods presented.

The consolidated financial statements have been prepared on a going

concern basis under the historical cost convention except as described

in the accounting policy below on financial instruments. In performing

its going concern assessment, management considered forecasts and

liquidity requirements covering a period of at least twelve months from

the date of approval of the financial statements and including the

Group’s ability to fund its operations and generate cash to pay for debt

as it falls due and takes into account the payments arising from the

Master Settlement Agreement due in the U.S. in 2023 and other known

liabilities or future payments (including interim dividends), as they fall

due. This assessment includes consideration of geopolitical events in

Europe and the general outlook in the global economy, as well as

plausible downside scenarios after taking into account the Group’s

Principal Risks @(as indicated on page 119)@ and how they could

impact the Group’s operations. Any mitigating actions, should they be

required, are all within management’s control and could include

reductions in discretionary spending such as acquisitions and capital

expenditure, or drawdowns on committed facilities. After reviewing the

Group’s annual budget, plans and financing arrangements, the

Directors consider that the Group has adequate resources to continue

operating and that it is therefore appropriate to continue to adopt the

going concern basis in preparing the Annual Report and Form 20‑F.

Management have, in preparing the financial statements, considered

the impact of climate change@, particularly in the context of the risks

identified in the TCFD disclosure@. Management has considered the

impact of climate change and determined that the impact is not

expected to be material:

–On the going concern @and viability@ of the Group, over the

next three years;

–On the Group’s assessment of future cash flows (including as

related to the capital expenditure plans as related to the Group’s

emission commitments) as used in impairment assessments for

the value in use of non-current assets including goodwill (note

12(e)); and

–In respect of factors including useful lives and residual values

that determine the carrying value of non-financial current assets.

There has been no material impact identified on the financial reporting

judgements and estimates. Management is aware that the risks

related to climate change are developing and ever changing.

Accordingly, these judgements and estimates will be kept under review

as the future impacts of climate change on the Group’s financial

statements depend on environmental, regulatory and other factors

outside of the Group’s control which are not all currently known.

The preparation of the consolidated financial statements requires

management to make estimates and assumptions that affect the

reported amounts of revenues, expenses, assets and liabilities, and

the disclosure of contingent liabilities at the date of the financial

statements. The key estimates and assumptions are set out in

the accounting policies below, together with the related notes

to the accounts.

The critical accounting judgements include:

–the identification and quantification of adjusting items, which are

separately disclosed as memorandum information, is explained

below and the impact of these on the calculation of adjusted

earnings per share is described in note 11;

–the presentation of disposal groups, including assets classified as

held-for-sale and liabilities associated with assets classified as

held-for-sale, including the assessment as to whether control

would be lost based on the proposed terms of the sale and the

impact of regulatory procedures, where applicable, to approve the

sale, including amounts in respect of the proposed disposal of the

Group’s businesses in Russia and Belarus (note 27(d));

–the determination as to whether to recognise provisions and the

exposures to contingent liabilities related to pending litigation or

other outstanding claims, as well as other contingent liabilities.

The accounting policy on contingent liabilities, which are not

provided for, is set out below and the contingent liabilities of the

Group are explained in note 31. Judgement is necessary to assess

the likelihood that a pending claim is probable (more likely than

not to succeed), possible or remote;

–the determination as to whether control (subsidiaries), joint

control (joint arrangements), or significant influence (associates)

exists in relation to the investments held by the Group. This is

assessed after taking into account the Group’s ability to appoint

Directors to the entity’s Board, its relative shareholding compared

with other shareholders, any significant contracts or arrangements

with the entity or its other shareholders and other relevant facts

and circumstances. The application of these policies to Group

subsidiaries in territories including Canada is explained in note 32;

–the review of applicable exchange rates for transactions with and

translation of entities in territories where there are restrictions on

free access to foreign currency, or multiple exchange rates; and

–the determination as to whether perpetual hybrid bonds should

be classified as equity instead of borrowings (note 22(d)).

The critical accounting estimates include:

–the review of asset values, including indefinite life assets, such as

goodwill and certain trademarks and similar intangibles. The key

assumptions used in respect of the impairment testing are the

determination of cash-generating units, the budgeted and forecast

cash flows of these units, the long-term growth rate for cash flow

projections and the rate used to discount the cash flow projections.

These are described in note 12;

–the estimation of value ascribed to held-for-sale assets and disposal

groups, which are measured at the lower of carrying amount and

fair value of expected consideration less costs to sell, reflecting

management’s best estimates after taking into account the amount

and anticipated timing of sales proceeds less any costs to sell;

–the estimation of and accounting for retirement benefit costs.

The determination of the carrying value of assets and liabilities,

as well as the charge for the year, and amounts recognised in

other comprehensive income, involves judgements made in

conjunction with independent actuaries. These involve estimates

about uncertain future events based on the environment in different

countries, including life expectancy of scheme members, salary and

pension increases, inflation, as well as discount rates and asset

values at the year-end. The assumptions used by the Group and

sensitivity analysis are described in note 15; and

–the estimation of amounts to be recognised in respect of

taxation and legal matters, and the estimation of other

provisions for liabilities and charges are subject to uncertain

future events, may extend over several years and so the amount

and/or timing may differ from current assumptions. The

accounting policy for taxation is explained below. The recognised

deferred tax assets and liabilities, together with a note of

unrecognised amounts, are shown in note 16, and a contingent

tax asset is explained in note 10(b). Other provisions for liabilities

and charges are as set out in note 24. Litigation related deposits

are shown in note 17. The application of these accounting policies

to the payments made and credits recognised under the Master

Settlement Agreement by Reynolds American Inc. (Reynolds

American) is described in note 6(b).

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203

Such estimates and assumptions are based on historical

experience and various other factors that are believed to be

reasonable in the circumstances and constitute management’s

best judgement at the date of the financial statements. In the

future, actual experience may deviate from these estimates and

assumptions, which could affect the financial statements as the

original estimates and assumptions are modified, as appropriate,

in the year in which the circumstances change.

These consolidated financial statements were authorised for

issue by the Board of Directors on 8 February 2023.

Basis of consolidation

The consolidated financial information includes the financial

statements of British American Tobacco p.l.c. and its subsidiary

undertakings, collectively ‘the Group’, together with the Group’s

share of the results of its associates and joint arrangements.

A subsidiary is an entity controlled by the Group. The Group

controls an entity when the Group is exposed to, or has rights to,

variable returns from its involvement with the entity and has the

ability to affect those returns through its power over the entity.

Non-controlling interests represent the share of earnings or equity

in subsidiaries that is not attributable, directly or indirectly, to

shareholders of the Group. Business combinations are accounted

for using the acquisition method with identifiable assets, liabilities

and contingent liabilities acquired measured at fair value at the

date of acquiring control. Disposals of subsidiaries and businesses

due to sale or market withdrawal are accounted for as disposals

from the date of losing control and may be classified as held-for-

sale disposal groups at the balance sheet date if specific tests

under IFRS 5 Non-current Assets Held For Sale and Discontinued

Operations are met.

A disposal group is a group of assets to be disposed of, by sale or

otherwise, together in a single transaction. Discontinued

operations, where applicable, comprise material disposal groups

representing a significant geographical area of operations or

business activities.

Associates comprise investments in undertakings, which are not

subsidiary undertakings or joint arrangements, where the Group’s

interest in the equity capital is long-term and over whose

operating and financial policies the Group exercises significant

influence. They are accounted for using the equity method.

Joint arrangements comprise contractual arrangements where

two or more parties have joint control and where decisions regarding

the relevant activities of the entity require unanimous consent.

Joint operations are jointly-controlled arrangements where the

parties to the arrangement have rights to the underlying assets

and obligations for the underlying liabilities relating to the

arrangement. The Group accounts for its share of the assets,

liabilities, income and expenses of any such arrangement.

Joint ventures comprise arrangements where the parties to the

arrangement have rights to the net assets of the arrangement.

They are accounted for using the equity method.

Foreign currencies and hyperinflationary territories

The functional currency of the Parent Company is sterling and this

is also the presentation currency of the Group. The income and

cash flow statements of Group undertakings expressed in

currencies other than sterling are translated to sterling using

exchange rates applicable to the dates of the underlying transactions.

Average rates of exchange in each year are used where the average

rate approximates the relevant exchange rate at the date of the

underlying transactions. Assets and liabilities of Group undertakings

are translated at the applicable rates of exchange at the end of

each year. In territories where there are restrictions on free access

to foreign currency or multiple exchange rates, the applicable rates

of exchange are regularly reviewed.

The differences between retained profits translated at average

and closing rates of exchange are taken to reserves, as are

differences arising on the retranslation to sterling (using closing

rates of exchange) of overseas net assets at the beginning of the

year, and are presented as a separate component of equity in the

Translation reserve within Other reserves, as shown in note 22.

They are recognised in the income statement when the gain or

loss on disposal of a Group undertaking is recognised.

Foreign currency transactions are initially recognised in the

functional currency of each entity in the Group using the exchange

rate ruling at the date of the transaction. Foreign exchange gains

and losses resulting from the settlement of such transactions and

from the translation of foreign currency assets and liabilities at

year-end rates of exchange are recognised in the income

statement, except when deferred in equity as qualifying cash flow

hedges, on intercompany net investment loans and qualifying net

investment hedges. Foreign exchange gains or losses recognised

in the income statement are included in profit from operations or

net finance costs depending on the underlying transactions that

gave rise to these exchange differences.

In addition, for hyperinflationary countries where the effect on the

Group results would be significant, the financial statements in

local currency are adjusted to reflect the impact of local inflation

prior to translation into sterling, in accordance with IAS 29

Financial Reporting in Hyperinflationary Economies. Where

applicable, IAS 29 requires all transactions to be indexed by an

inflationary factor to the balance sheet date, potentially leading

to a monetary gain or loss on indexation. In addition, the Group

assesses the carrying value of fixed assets after indexation and

applies IAS 36 Impairment of Assets, where appropriate, to ensure

that the carrying value correctly reflects the economic value of

such assets.

The results and balance sheets of operations in hyperinflationary

territories are translated at the period end rate.

Revenue

Revenue principally comprises sales of cigarettes, other tobacco

products, and nicotine products, to external customers. Revenue

excludes duty, excise and other taxes related to sales in the period

and is stated after deducting rebates, returns and other similar

discounts and payments to direct and indirect customers. For the

vast majority of the Group’s sales, revenue is recognised when

control of the goods is transferred to a customer at a point in time;

this is usually evidenced by a transfer of the significant risks and

rewards of ownership upon delivery to the customer, which in

terms of timing is not materially different to the date of shipping.

For certain e-commerce subscription sales, revenue is allocated to

each component of the subscription, with revenue recognised as

each component is delivered to the customer. These sales are not

material to the Group’s results.

Retirement benefit costs

The Group operates both defined benefit and defined contribution

schemes including post-retirement healthcare schemes. For

defined benefit schemes, the actuarial cost charged to profit from

operations consists of current service cost, net interest on the net

defined benefit liability or asset, past service cost and the impact

of any settlements. The net deficit or surplus for each defined

benefit pension scheme is calculated in accordance with IAS 19

Employee Benefits based on the present value of the defined

benefit obligation at the balance sheet date less the fair value of

the scheme assets adjusted, where appropriate, for any surplus

restrictions or the effect of minimum funding requirements. Some

benefits are provided through defined contribution schemes and

payments to these are charged as an expense as they fall due.

@Denotes phrase, paragraph or similar that does not form part of BAT's Annual Report on

Form 20-F as filed with the SEC.

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204

Share-based payments

The Group has equity-settled and cash-settled share-based

compensation plans.

Equity-settled share-based payments are measured at fair value at

the date of grant. The fair value determined at the grant date of

the equity-settled share-based payments is expensed over the

vesting period, based on the Group’s estimate of awards that will

eventually vest. For plans where vesting conditions are based on

total shareholder returns, the fair value at date of grant reflects

these conditions, whereas earnings per share vesting conditions

are reflected in the calculation of awards that will eventually vest

over the vesting period.

For cash-settled share-based payments, a liability equal to the

portion of the services received is recognised at its current fair

value determined at each balance sheet date.

Fair value is measured by the use of the Black-Scholes option

pricing model, except where vesting is dependent on market

conditions when the Monte-Carlo option pricing model is used.

The expected life used in the models has been adjusted, based on

management’s best estimate, for the effects of non-transferability,

exercise restrictions and behavioural considerations.

Research and development

Research expenditure is charged to profit or loss in the year in

which it is incurred. Development expenditure is charged to profit

or loss in the year it is incurred, unless it meets the recognition

criteria of IAS 38 Intangible Assets to be capitalised as an

intangible asset.

Taxation

Tax is chargeable on the profits for the period, together with

deferred tax. The current income tax charge is calculated

on the basis of tax laws enacted or substantively enacted

at the balance sheet date in the countries where the Group’s

subsidiaries, associates and joint arrangements operate and

generate taxable income.

Deferred tax is provided in full using the liability method for

temporary differences between the carrying amount of assets and

liabilities for financial reporting purposes and the amount used for

taxation purposes. A deferred tax asset is recognised only to the

extent that it is probable that future taxable profits will be available

against which the asset can be utilised.

Deferred tax is determined using the tax rates that have been

enacted or substantively enacted by the balance sheet date and

are expected to apply when the related deferred tax asset is

realised or deferred tax liability is settled.

Tax is recognised in the income statement except to the extent

that it relates to items recognised in other comprehensive income

or directly in equity, in which case it is recognised in the statement

of other comprehensive income or the statement of changes in

equity.

The Group has exposures in respect of the payment or recovery of

taxes and applies IFRIC 23 Uncertainty over Income Tax

Treatments which requires that, where there is uncertainty as to

whether a particular tax treatment will be accepted by the relevant

taxation authority, the financial statements reflect the probable

outcome with estimated amounts determined based on the most

likely amount or expected value, depending on which method is

expected to better predict the resolution of the uncertainty.

Goodwill

Goodwill arising on acquisitions is capitalised and any impairment

of goodwill is recognised immediately in the income statement

and is not subsequently reversed.

Goodwill in respect of subsidiaries is included in intangible assets.

In respect of associates and joint ventures, goodwill is included in

the carrying value of the investment in the associated company or

joint venture. On disposal of a subsidiary, associate or joint

venture, the attributable amount of goodwill is included in the

determination of the profit or loss on disposal.

Intangible assets other than goodwill

The intangible assets shown on the Group balance sheet consist

mainly of trademarks and similar intangibles, including certain

intellectual property, acquired by the Group’s subsidiary

undertakings and computer software.

Acquired trademarks and similar assets are carried at cost less

accumulated amortisation and impairment. Trademarks with

indefinite lives are not amortised but are reviewed annually for

impairment. Other trademarks and similar assets are amortised on

a straight-line basis over their remaining useful lives, consistent

with the pattern of economic benefits expected to be received,

which do not exceed 20 years. Any impairments of trademarks are

recognised in the income statement, but increases in trademark

values are not recognised.

Computer software is carried at cost less accumulated

amortisation and impairment, and, with the exception of global

software solutions, is amortised on a straight-line basis over

periods ranging from three years to five years.

Global software solutions are software assets designed to be

implemented on a global basis and used as a standard solution by

all of the operating companies in the Group. Prior to 2021, these

assets were amortised on a straight-line basis over periods not

exceeding 10 years and are currently amortised on a straight-line

basis over periods not exceeding 13 years due to ongoing use of

the assets and the extension of third-party supplier support. In

2021 and 2022, the impact of this change in accounting estimate

was a reduction in annual amortisation expense of £26 million and,

in 2023, is estimated to be a reduction in annual amortisation

expense of £12 million.

Property, plant and equipment

Purchased property, plant and equipment are stated at cost less

accumulated depreciation and impairment. Depreciation is

calculated on a straight-line basis to write off the assets over their

useful economic life. No depreciation is provided on freehold land

or assets classified as held-for-sale. Non-current assets are

classified as held-for sale if their carrying value will be recovered

principally through a sale transaction rather than through

continuing use and if all of the conditions of IFRS 5 are met.

Purchased freehold and leasehold property are depreciated at

rates between 2.5% and 4% per annum, and plant and equipment

at rates between 3% and 25% per annum.

Capitalised interest

Borrowing costs which are directly attributable to the acquisition,

construction or production of intangible assets or property, plant

and equipment that takes a substantial period of time to get ready

for its intended use or sale, are capitalised as part of the cost of

the asset.

Leased assets

The Group applies IFRS 16 Leases to contractual arrangements

which are, or contain, leases of assets. Lease liabilities are initially

recognised at an amount equal to the present value of estimated

contractual lease payments at the inception of the lease, after

taking into account any options to extend the term of the lease.

Lease commitments are discounted to present value using the

interest rate implicit in the lease if this can be readily determined,

or the applicable incremental rate of borrowing, as appropriate.

Right-of-use lease assets are initially recognised at an amount

equal to the lease liability, adjusted for initial direct costs in relation

to the assets, then depreciated over the shorter of the lease term

and their estimated useful lives. Right-of-use assets are included

as part of property, plant and equipment in note 13, with the lease

liabilities included as part of borrowings in note 23.

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205

The Group has adopted several practical expedients available

under the Standard including not applying the requirements of

IFRS 16 to leases of intangible assets, applying the portfolio

approach where appropriate to do so, and to not apply the

recognition and measurement requirements of IFRS 16 to short-

term leases (leases of less than 12 months maximum duration) or

leases of low-value assets. Except for property-related leases, non-

lease components have not been separated from lease

components.

Impairment of non-financial assets

Assets are reviewed for impairment whenever events indicate that

the carrying amount of a cash-generating unit may not be

recoverable. In addition, assets that have indefinite useful lives are

tested annually for impairment. An impairment loss is recognised

to the extent that the carrying value exceeds the higher of the

asset’s fair value less costs to sell and its value-in-use.

A cash-generating unit is the smallest identifiable group of assets

that generates cash flows which are largely independent of

the cash flows from other assets or groups of assets. At the

acquisition date, any goodwill acquired is allocated to the relevant

cash-generating unit or group of cash-generating units expected

to benefit from the acquisition for the purpose of impairment

testing of goodwill.

Impairment of financial assets held at amortised cost

Loss allowances for expected credit losses on financial assets

which are held at amortised cost are recognised on initial

recognition of the underlying asset. As permitted by IFRS 9

Financial Instruments, loss allowances on trade receivables arising

from the recognition of revenue under IFRS 15 Revenue from

Contracts with Customers are initially measured at an amount

equal to lifetime expected losses. Allowances in respect of loans

and other receivables are initially recognised at an amount equal

to 12-month expected credit losses. Allowances are measured at

an amount equal to the lifetime expected credit losses where

the credit risk on the receivables increases significantly after

initial recognition.

Inventories

Inventories are stated at the lower of cost and net realisable value.

Cost is based on the weighted average cost incurred in acquiring

inventories and bringing them to their existing location and

condition, which will include raw materials, direct labour and

overheads, where appropriate. Net realisable value is the

estimated selling price less costs to completion and sale. Tobacco

inventories which have an operating cycle that exceeds 12 months

are classified as current assets, consistent with recognised

industry practice.

Biological Assets

The investments in associates and joint ventures shown in the

Group balance sheet include biological assets held by Organigram

Holdings Inc. In accordance with IAS 41 Agriculture, the Group

measures biological assets at fair value less costs to sell up to the

point of harvest, at which point this becomes the basis for the cost

of finished goods inventories after harvest with subsequent

expenditures incurred on these being capitalised, where

applicable, in accordance with IAS 2 Inventories. Unrealised fair

value gains and losses arising during the growth of biological

assets are recognised immediately in the income statement.

Equity instruments

Instruments are classified as either financial liabilities or as equity

in accordance with the substance of the contractual

arrangements. Instruments that cannot be settled in the Group’s

own equity instruments and that include no contractual obligation

to deliver cash or another financial asset are classified as equity.

Equity instruments issued by the Group are recognised at the

proceeds received, net of issuance costs.

On 27 September 2021, the Group issued two €1 billion perpetual

hybrid bonds. As the Group has the unconditional right to avoid

transferring cash or another financial asset in relation to these

bonds, they are classified as equity instruments in the

consolidated financial statements.

Financial instruments

The Group’s business model for managing financial assets is set

out in the Group Treasury Manual which notes that the primary

objective with regard to the management of cash and investments

is to protect against the loss of principal. Additionally, the Group

aims: to maximise Group liquidity by concentrating cash at the

Centre, to align the maturity profile of external investments with

that of the forecast liquidity profile, to wherever practicable, match

the interest rate profile of external investments to that of debt

maturities or fixings, and to optimise the investment yield within the

Group’s investment parameters. The majority of financial assets are

held in order to collect contractual cash flows (typically cash and

cash equivalents and loans and other receivables), but some assets

(typically investments) are held for investment potential.

Financial assets and financial liabilities are recognised when the

Group becomes a party to the contractual provisions of the

relevant instrument and derecognised when it ceases to be a party

to such provisions. Such assets and liabilities are classified as

current if they are expected to be realised or settled within 12

months after the balance sheet date. If not, they are classified as

non-current. In addition, current liabilities include amounts where

the entity does not have an unconditional right to defer settlement

of the liability for at least 12 months after the balance sheet date.

The Group early adopted the phase one and phase two

Amendments to IFRS 9 Financial Instruments and IFRS 7 Financial

Instruments: Disclosures regarding Interest Rate Benchmark

Reform in 2019 and 2020, respectively. The Amendments provide

an exemption for certain hedging relationships directly affected by

changes in interest rate benchmarks where the reform gives rise

to uncertainties regarding the interest rate designated as a

hedged risk, or the timing or amount of interest rate cash flows of

either the hedged item or of the hedging instrument, such that

without the exemption the relationship might not qualify for hedge

accounting. In addition, the Amendments provide a practical

expedient for financial assets and financial liabilities that are

modified or have existing contractual terms activated that change

the basis for determining the contractual cash flows as a result of

Interest Rate Benchmark Reform, such that the change to the

contractual cash flows is applied prospectively by revising the

effective interest rate.

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206

Non-derivative financial assets are classified on initial

recognition in accordance with the Group’s business model as

investments, loans and receivables, or cash and cash equivalents

and accounted for as follows:

–Investments: these are non-derivative financial assets that

cannot be classified as loans and other receivables or cash

and cash equivalents. Dividend and interest income on these

investments are included within finance income when the

Group’s right to receive payments is established. This category

includes financial assets at fair value through profit and loss

and financial assets at fair value through other comprehensive

income.

–Loans and other receivables: these are non-derivative financial

assets with fixed or determinable payments that are solely

payments of principal and interest on the principal amount

outstanding, that are primarily held in order to collect

contractual cash flows. These balances include trade and

other receivables, which are measured at amortised cost,

using the effective interest rate method, and stated net of

allowances for credit losses, and deposits with banks and

other financial institutions which cannot be classified as cash

and cash equivalents. In addition, as explained in note 17,

certain litigation related deposits are recognised as assets within

loans and other receivables where management has determined

that these payments represent a resource controlled by the

entity as a result of past events. These deposits are held at the

fair value of consideration transferred less impairment, if

applicable, and have not been discounted.

–Cash and cash equivalents: cash and cash equivalents include

cash in hand and deposits held on call, together with other short-

term highly liquid investments including investments in certain

money market funds. Cash equivalents normally comprise

instruments with maturities of three months or less at their

date of acquisition. In the cash flow statement, cash and cash

equivalents are shown net of bank overdrafts, which are included

as current borrowings in the liabilities section on the balance sheet.

Fair values for quoted investments are based on observable

market prices. If there is no active market for a financial asset, the

fair value is established by using valuation techniques principally

involving discounted cash flow analysis.

Non-derivative financial liabilities, including borrowings and

trade payables, are stated at amortised cost using the effective

interest method. For borrowings, their carrying value includes

accrued interest payable, as well as unamortised issue costs.

Drawdowns and repayments of short-term borrowings which

have a maturity period of three months or less are stated net in the

cash flow statement; drawdowns and repayments on all other

borrowings are stated gross in the cash flow statement. As shown

in note 23, certain borrowings are subject to fair value hedges, as

defined below.

Derivative financial assets and liabilities are initially recognised,

and subsequently measured, at fair value, which includes accrued

interest receivable and payable where relevant. Changes in their

fair values are recognised as follows:

–for derivatives that are designated as cash flow hedges, the

changes in their fair values are recognised directly in other

comprehensive income, to the extent that they are effective,

with the ineffective portion being recognised in the income

statement. Where the hedged item results in a non-financial

asset, the accumulated gains and losses, previously recognised

in other comprehensive income, are included in the initial

carrying value of the asset (basis adjustment) and recognised in

the income statement in the same periods as the hedged item.

Where the underlying transaction does not result in such an

asset, the accumulated gains and losses are reclassified to the

income statement in the same periods as the hedged item;

–for derivatives that are designated as fair value hedges, the

carrying value of the hedged item is adjusted for the fair value

changes attributable to the risk being hedged, with the

corresponding entry being made in the income statement. The

changes in fair value of these derivatives are also recognised in

the income statement;

–for derivatives that are designated as hedges of net investments

in foreign operations, the changes in their fair values are

recognised directly in other comprehensive income, to the

extent that they are effective, with the ineffective portion being

recognised in the income statement. Where non-derivatives

such as foreign currency borrowings are designated as net

investment hedges, the relevant exchange differences are

similarly recognised. The accumulated gains and losses are

reclassified to the income statement when the foreign operation

is disposed of; and

–for derivatives that do not qualify for hedge accounting or are not

designated as hedges, the changes in their fair values are

recognised in the income statement in the period in which they

arise. These are referred to as ‘held-for-trading’.

In order to qualify for hedge accounting, the Group is required to

document prospectively the economic relationship between the

item being hedged and the hedging instrument. The Group is also

required to demonstrate an assessment of the economic

relationship between the hedged item and the hedging instrument,

which shows that the hedge will be highly effective on an ongoing

basis. This effectiveness testing is re-performed periodically to

ensure that the hedge has remained, and is expected to remain,

highly effective.

Hedge accounting is discontinued when a hedging instrument is

derecognised (e.g. through expiry or disposal), or no longer

qualifies for hedge accounting. Where the hedged item is a highly

probable forecast transaction, the related gains and losses remain

in equity until the transaction takes place, when they are

reclassified to the income statement in the same manner as for

cash flow hedges as described above. When a hedged future

transaction is no longer expected to occur, any related gains and

losses, previously recognised in other comprehensive income, are

immediately reclassified to the income statement.

Derivative fair value changes recognised in the income statement

are either reflected in arriving at profit from operations (if the

hedged item is similarly reflected) or in finance costs.

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207

Dividends

The Company pays interim quarterly dividends, and the Group

recognises the interim dividend in the period in which it is paid.

Segmental analysis

The Group is organised and managed on the basis of its

geographic regions. These are the reportable segments for the

Group as they form the focus of the Group’s internal reporting

systems and are the basis used by the chief operating decision

maker, identified as the Management Board, for assessing

performance and allocating resources. While the Group has clearly

differentiated brands, global segmentation between a wide

portfolio of brands is not part of the regular internally reported

financial information. The results of New Category products are

reported as part of the results of each geographic region.

The prices agreed between Group companies for intra-group

sales of materials, manufactured goods, charges for royalties,

commissions, services and fees, are based on normal commercial

practices which would apply between independent businesses.

Royalty income, less related expenditure, is included in the region

in which the licensor is based.

Adjusting items

Adjusting items are significant items of income or expense in

revenue, profit from operations, net finance costs, taxation and

the Group’s share of the post-tax results of associates and joint

ventures which individually or, if of a similar type, in aggregate, are

relevant to an understanding of the Group’s underlying financial

performance because of their size, nature or incidence. In

identifying and quantifying adjusting items, the Group consistently

applies a policy that defines criteria that are required to be met for

an item to be classified as adjusting. These items are separately

disclosed in the segmental analyses or in the notes to the

accounts as appropriate.

The Group believes that these items are useful to users of the Group

financial statements in helping them to understand the underlying

business performance and are used to derive the Group’s principal

non-GAAP measures of adjusted profit from operations, adjusted

diluted earnings per share and @operating cash flow conversion

ratio@, all of which are before the impact of adjusting items and

which are reconciled from profit from operations, diluted earnings

per share, @cash conversion ratio and net cash generated from

operating activities@.

Provisions

Provisions are recognised when either a legal or constructive

obligation as a result of a past event exists at the balance sheet

date, it is probable that an outflow of economic resources will be

required to settle the obligation and a reasonable estimate can be

made of the amount of the obligation.

@Denotes phrase, paragraph or similar that does not form part of BAT's Annual Report on

Form 20-F as filed with the SEC.

Contingent liabilities and contingent assets

Subsidiaries and associate companies are defendants in tobacco-

related and other litigation. These exposures are regularly reviewed

on an on-going basis and provision for this litigation (including legal

costs) is made at such time as an unfavourable outcome becomes

probable and the amount can be reasonably estimated.

Contingent assets are possible assets whose existence will only

be confirmed by future events not wholly within the control of the

entity and are not recognised as assets until the realisation of

income is virtually certain.

Where a provision has not been recognised, the Group records its

external legal fees and other external defence costs for tobacco-

related and other litigation as these costs are incurred.

As explained in note 17, certain litigation-related deposits are

recognised as assets within loans and other receivables where

management has determined that these payments represent a

resource controlled by the entity. These deposits are held at the

fair value of consideration transferred less impairment, if applicable,

and have not been discounted.

Repurchase of share capital

When share capital is repurchased, the amount of consideration

paid, including directly attributable costs, is recognised as a

deduction from equity. Repurchased shares which are not

cancelled, or shares purchased for the employee share ownership

trusts, are classified as treasury shares and presented as a

deduction from total equity.

Future changes to accounting policies

Certain changes to IFRS will be applicable to the Group financial

statements in future years, but are not expected to have a material

effect on reported profit or equity or on the disclosures in the

financial statements.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
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| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

208

2 Segmental analyses

The chief operating decision maker, the Management Board, reviews adjusted profit from operations at constant currencies to

evaluate segment performance and allocate resources to the overall business on a geographic region basis, including the results of

New Categories (comprising Vapour products, Tobacco Heating products and Modern Oral products), which are reported to the

Management Board as part of the results of each geographic region. The Management Board also reviews, at constant currencies,

revenues on a geographic region basis, which are included within adjusted profit from operations.

The four geographic regions are the reportable segments for the Group as they form the focus of the Group’s internal reporting systems

and are the basis used by the Management Board for assessing performance and allocating resources. Transactions between Group

subsidiaries are conducted on arm’s length terms in accordance with appropriate transfer pricing rules and Organisation for Economic

Cooperation & Development (OECD) principles. Net finance costs (comprising interest income and interest expense), share of post-tax

results of associates and joint ventures and taxation are centrally managed, and accordingly, such items are not presented by segment

as they are excluded from the measure of segment profitability.

Regional Directors are responsible for delivering the operating and financial results of their Region inclusive of all product categories.

Therefore, the results of New Categories (comprising Vapour products, Tobacco Heating products and Modern Oral products) are

reported to the Management Board as part of the results of each geographic region.

However, additional information has been provided to disaggregate revenue based on product category to enable investors to better

compare the Group’s business performance across periods and by reference to the Group’s investment activity.

In respect of the U.S. region, all financial statements and financial information provided by or with respect to the U.S. business or

Reynolds American Inc. (RAI) (and/or RAI and its subsidiaries (collectively, the ‘Reynolds Group’)) are prepared on the basis of US GAAP

and constitute the primary financial statements or financial information of the U.S. business or RAI (and/or the Reynolds Group). Solely for

the purpose of consolidation within the results of BAT p.l.c. and the BAT Group, this financial information is then converted to IFRS. To the

extent any such financial information provided in these financial statements relates to the U.S. business or RAI (and/or the Reynolds

Group), it is provided as an explanation of the U.S. business’s or RAI’s (and/or the Reynolds Group’s) primary US GAAP based financial

statements and information.

Effective 1 January 2022, the North African markets of Algeria, Egypt, Libya, Morocco, Sudan and Tunisia, which formed part of the

Europe and North Africa (ENA) region were moved to the Africa and Middle East (APME) region. From 2022, the ENA region has been

renamed Europe. The impact of this is not considered material to the understanding of the regional results of the Europe and APME

regions and therefore the prior year comparative information has not been restated.

As part of plans to reduce complexity and drive efficiency in management structures and achieve a better balance in the scale of our

regions, it was decided to reduce the management structure from four regions to three regions, with the new organisational structures

expected to be in place by early April 2023. The markets which comprise the Americas and Sub-Saharan Africa (AmSSA) region will be

distributed to the Asia-Pacific and Middle East (APME) and Europe regions. The new regional structure will be:

–Americas and Europe (AME), comprising the old Europe region with the inclusion of markets in Latin America and Canada;

–Asia-Pacific, Middle East and Africa (APMEA) comprising the old APME region with the inclusion of markets in Sub-Saharan Africa; and

–the U.S.

The change to our segment reporting is a subsequent event and therefore does not affect the historical results, discussion or

presentation of our consolidated results as set forth in this Report.

The results of 2023 will be presented in the above structure, with comparator data restated accordingly.

The following table shows 2022 revenue at current rates, and 2022 revenue translated using 2021 rates of exchange. The 2021 figures are

stated at the 2021 rates of exchange.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  | 2022 |  | 2021 |
|  |  |  | Revenue  Constant rates  £m | Translation  exchange  £m | Revenue  Current Rates  £m |  | Revenue  £m |
| U.S. |  |  | 11,358 | 1,281 | 12,639 |  | 11,691 |
| AmSSA |  |  | 3,979 | 224 | 4,203 |  | 3,801 |
| Europe |  |  | 6,423 | (77) | 6,346 |  | 6,001 |
| APME |  |  | 4,513 | (46) | 4,467 |  | 4,191 |
| Revenue |  |  | 26,273 | 1,382 | 27,655 |  | 25,684 |

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

209

The following table shows 2021 revenue at current rates, and 2021 revenue translated using 2020 rates of exchange. The 2020 figures are

stated at the 2020 rates of exchange.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  | 2021 |  | 2020 |
|  |  |  | Revenue  Constant rates  £m | Translation  exchange  £m | Revenue  Current Rates  £m |  | Revenue  £m |
| U.S. |  |  | 12,530 | (839) | 11,691 |  | 11,473 |
| AmSSA |  |  | 4,067 | (266) | 3,801 |  | 3,772 |
| Europe |  |  | 6,429 | (428) | 6,001 |  | 5,994 |
| APME |  |  | 4,535 | (344) | 4,191 |  | 4,537 |
| Revenue |  |  | 27,561 | (1,877) | 25,684 |  | 25,776 |

The following table shows 2022 profit from operations and adjusted profit from operations at current rates, and 2022 adjusted profit

from operations translated using 2021 rates of exchange. The 2021 figures are stated at the 2021 rates of exchange.

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | 2022 |  |  |  | 2021 |
|  | Adjusted\*  segment  result  Constant  rates  £m | Translation  exchange  £m | Adjusted\*  segment  result  Current  rates  £m | Adjusting\*  items  £m | Segment  result  Current  rates  £m |  | Adjusted\*  segment  result  £m | Adjusting\*  items  £m | Segment  result  £m |
| U.S. | 6,095 | 740 | 6,835 | (630) | 6,205 |  | 5,887 | (321) | 5,566 |
| AmSSA | 1,659 | 83 | 1,742 | 280 | 2,022 |  | 1,590 | (94) | 1,496 |
| Europe | 2,103 | (21) | 2,082 | (812) | 1,270 |  | 1,956 | (71) | 1,885 |
| APME | 1,769 | (20) | 1,749 | (723) | 1,026 |  | 1,717 | (430) | 1,287 |
| Profit from operations | 11,626 | 782 | 12,408 | (1,885) | 10,523 |  | 11,150 | (916) | 10,234 |
| Net finance costs |  |  |  |  | (1,641) |  |  |  | (1,486) |
| Share of post-tax results of associates  and joint ventures |  |  |  |  | 442 |  |  |  | 415 |
| Profit before taxation |  |  |  |  | 9,324 |  |  |  | 9,163 |
| Taxation on ordinary activities |  |  |  |  | (2,478) |  |  |  | (2,189) |
| Profit for the year |  |  |  |  | 6,846 |  |  |  | 6,974 |

Note:

\*The adjustments to profit from operations are explained in notes 3, 4, 6(d), 6(f), 6(g), 6(h), 6(i), 6(j), and 7.

The following table shows 2021 profit from operations and adjusted profit from operations at current rates, and 2021 adjusted profit from

operations translated using 2020 rates of exchange. The 2020 figures are stated at the 2020 rates of exchange.

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | 2021 |  |  |  | 2020 |
|  | Adjusted\*  segment  result  Constant  rates  £m | Translation  exchange  £m | Adjusted\*  segment  result  Current  rates  £m | Adjusting\*  items  £m | Segment  result  Current  rates  £m |  | Adjusted\*  segment  result  £m | Adjusting\*  items  £m | Segment  result  £m |
| U.S. | 6,343 | (456) | 5,887 | (321) | 5,566 |  | 5,784 | (809) | 4,975 |
| AmSSA | 1,688 | (98) | 1,590 | (94) | 1,496 |  | 1,618 | (65) | 1,553 |
| Europe | 2,088 | (132) | 1,956 | (71) | 1,885 |  | 2,110 | (148) | 1,962 |
| APME | 1,833 | (116) | 1,717 | (430) | 1,287 |  | 1,853 | (381) | 1,472 |
| Profit from operations | 11,952 | (802) | 11,150 | (916) | 10,234 |  | 11,365 | (1,403) | 9,962 |
| Net finance costs |  |  |  |  | (1,486) |  |  |  | (1,745) |
| Share of post-tax results of associates  and joint ventures |  |  |  |  | 415 |  |  |  | 455 |
| Profit before taxation |  |  |  |  | 9,163 |  |  |  | 8,672 |
| Taxation on ordinary activities |  |  |  |  | (2,189) |  |  |  | (2,108) |
| Profit for the year |  |  |  |  | 6,974 |  |  |  | 6,564 |

Note:

\*The adjustments to profit from operations are explained in notes 3, 4, 6(d), 6(f), 6(g), 6(h), 6(i), 6(j), and 7.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

210

Adjusted profit from operations at constant rates of £11,626 million (2021: £11,952 million; 2020: £11,661 million) excludes adjusting

depreciation, amortisation and impairment charges as explained in notes 4 and 7. These are excluded from segmental adjusted profit

from operations at constant rates as follows:

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | 2022 |  |  |  | 2021 |
|  | Adjusted  depreciation,  amortisation  and  impairment  Constant  rates  £m | Translation  exchange  £m | Adjusted  depreciation,  amortisation  and  impairment  Current rates  £m | Adjusting  items  £m | Depreciation,  amortisation  and  impairment  Current rates  £m |  | Adjusted  depreciation,  amortisation  and  impairment  £m | Adjusting  items  £m | Depreciation,  amortisation  and  impairment  £m |
| U.S. | 221 | 16 | 237 | 322 | 559 |  | 203 | 276 | 479 |
| AmSSA | 151 | 11 | 162 | 24 | 186 |  | 123 | 56 | 179 |
| Europe | 251 | — | 251 | 98 | 349 |  | 252 | — | 252 |
| APME | 147 | 3 | 150 | 61 | 211 |  | 146 | 20 | 166 |
|  | 770 | 30 | 800 | 505 | 1,305 |  | 724 | 352 | 1,076 |

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | 2021 |  |  |  | 2020 |
|  | Adjusted  depreciation,  amortisation  and  impairment  Constant rates  £m | Translation  exchange  £m | Adjusted  depreciation,  amortisation  and  impairment  Current rates  £m | Adjusting  items  £m | Depreciation,  amortisation  and  impairment  Current rates  £m |  | Adjusted  depreciation,  amortisation  and  impairment  £m | Adjusting  items  £m | Depreciation,  amortisation  and  impairment  £m |
| U.S. | 210 | (7) | 203 | 276 | 479 |  | 204 | 272 | 476 |
| AmSSA | 131 | (8) | 123 | 56 | 179 |  | 121 | 34 | 155 |
| Europe | 266 | (14) | 252 | — | 252 |  | 259 | 119 | 378 |
| APME | 154 | (8) | 146 | 20 | 166 |  | 167 | 274 | 441 |
|  | 761 | (37) | 724 | 352 | 1,076 |  | 751 | 699 | 1,450 |

Additional information by product category

Although the Group’s operations are managed on a Regional basis, additional information for revenue is provided based on product

category as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| Revenue |  | 2022  £m |  | 2021  £m | 2020  £m |
| New Categories |  | 2,894 |  | 2,054 | 1,443 |
| Vapour |  | 1,436 |  | 927 | 611 |
| THP |  | 1,060 |  | 853 | 634 |
| Modern Oral |  | 398 |  | 274 | 198 |
| Traditional Oral |  | 1,209 |  | 1,118 | 1,160 |
| Combustibles |  | 23,030 |  | 22,029 | 22,752 |
| Other |  | 522 |  | 483 | 421 |
| Revenue |  | 27,655 |  | 25,684 | 25,776 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

211

External revenue and non-current assets other than financial instruments, deferred tax assets and retirement benefit assets are analysed

between the UK and all foreign countries at current rates of exchange as follows:

|  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
|  | United Kingdom | | |  | All foreign countries | | |  | Group | | |
| Revenue is based on location of sale | 2022  £m | 2021  £m | 2020  £m |  | 2022  £m | 2021  £m | 2020  £m |  | 2022  £m | 2021  £m | 2020  £m |
| External revenue | 228 | 209 | 188 |  | 27,427 | 25,475 | 25,588 |  | 27,655 | 25,684 | 25,776 |

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | United Kingdom | |  | All foreign countries | |  | Group | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Intangible assets | 529 | 481 |  | 128,546 | 115,144 |  | 129,075 | 115,625 |
| Property, plant and equipment | 215 | 339 |  | 4,652 | 4,614 |  | 4,867 | 4,953 |
| Investments in associates and joint ventures | — | 8 |  | 2,020 | 1,940 |  | 2,020 | 1,948 |

The consolidated results of the Reynolds Group operating in the U.S. met the criteria for separate disclosure under the requirements of

IFRS 8 Operating Segments. Revenue arising from the operations of the Reynolds Group, inclusive of the sales made to fellow Group

companies, in 2022, 2021 and 2020 was £12,635 million, £11,707 million and £11,481 million, respectively. The majority of sales are to

customers based in the U.S.. Non-current assets attributable to the operations of the Reynolds Group were £119,597 million (2021:

£106,495 million).

The main acquisitions comprising the goodwill balance of £47,956 million (2021: £43,194 million), included in intangible assets, are

provided in note 12. Included in investments in associates and joint ventures are amounts of £ 1,865 million (2021: £1,759 million)

attributable to the investment in ITC Ltd. Further information is provided in notes 9 and 14.

3 Employee benefit costs

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Note |  | 2022  £m |  | 2021  £m | 2020  £m |
| Wages and salaries | | | |  |  | 2,553 |  | 2,315 | 2,277 |
| Social security costs | | | |  |  | 201 |  | 185 | 194 |
| Other pension and retirement benefit costs | | | | 15 |  | 133 |  | 139 | 182 |
| Share-based payments - equity and cash-settled | | | | 28 |  | 85 |  | 78 | 91 |
|  |  |  |  |  |  | 2,972 |  | 2,717 | 2,744 |

Included within employee benefits costs are expenses in relation to the Group’s restructuring and integration initiatives of £315 million

(2021: £160 million; 2020: £91 million), as explained in note 7.

Following a partial buy-out in 2021, in 2022, a second partial buy-out was concluded in the U.S. with approximately US$1.6 billion

(£1.3 billion) (2021: US$1.9 billion (£1.4 billion)) of plan liabilities being removed from the balance sheet, resulting in a settlement gain of

£16 million (2021: £35 million), which was reported in the income statement, and recognised as an adjusting item.

4 Depreciation, amortisation and impairment costs

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022  £m | 2021  £m | 2020  £m |
| Intangibles – amortisation and impairment of trademarks and similar intangibles | 317 | 333 | 360 |
| – amortisation and impairment of computer software | 142 | 129 | 129 |
| – impairment of goodwill | — | 57 | 209 |
| Property, plant and equipment - depreciation and impairment | 846 | 557 | 752 |
|  | 1,305 | 1,076 | 1,450 |

Enumerated below are movements in costs that have impacted depreciation, amortisation and impairment in 2022, 2021 and 2020.

These include changes in our underlying business performance, as well as impact of adjusting items, as defined in note 1.

Intangibles – amortisation and impairment of trademarks and similar intangibles

Acquisitions in previous years have resulted in the capitalisation of trademarks and similar intangibles, including those which are

amortised over their expected useful lives, which do not exceed 20 years. The amortisation and impairment of these acquired

trademarks and similar intangibles are charged to the income statement of which the adjusting element is £288 million (2021:

£306 million; 2020: £339 million). Also included under amortisation and impairment of trademarks and similar intangibles is a £3 million

gain (2021: £nil, 2020:£nil) related to a trademark disposal, which has been treated as adjusting.

Impairment of goodwill

The impairment of goodwill is charged to the income statement as adjusting.

During 2022, the Group made no impairments of goodwill.

During 2021, the Group impaired £3 million of goodwill held in Myanmar as a result of the decision to cease activities in the market.

The Group also recognised a goodwill impairment charge of £54 million in 2021 due to continued difficult trading conditions in Peru as

a consequence of the COVID-19 pandemic.

During 2020, the Group impaired the goodwill arising from Malaysia amounting to £197 million, goodwill arising from the acquisition of

Twisp of £11 million and goodwill arising from the acquisition of Blue Nile of £1 million.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

212

Property, plant and equipment – depreciation and impairment

The following items are included within depreciation and impairment of property, plant and equipment:

–Restructuring and integration related depreciation and impairment costs and reversals were a net cost of £220 million (2021: £11 million

net credit; 2020: £151 million net cost) resulting from obsolete machines in relation to downsizing and factory rationalisation as

mentioned in note 7; and

–Gains and losses recognised on disposal of property, plant and equipment.

5 Other operating income

Other operating income of £722 million (2021: £196 million; 2020: £188 million) comprises income that is associated with the Group’s

normal activities, but which falls outside the definition of turnover and includes one-off capital profits on property sales and one-off

disposals of fixed assets.

In 2022, other operating income mainly related to the calculation of historical VAT on social contributions in Brazil, where the Group

recognised £472 million. This has been treated as an adjusting item.

In addition, £78 million of the contingent asset in respect of historical VAT on social contributions claims was sold to financial institutions

for £38 million.

In 2021 and 2020, the Group recognised £5 million and £58 million, respectively, in respect of a tax case in Brazil. In addition, during 2021,

£130 million of the unrecognised contingent asset in respect of historical VAT on social contributions claims was sold to financial

institutions for £45 million.

In 2022, as disclosed in note 7, certain items of operating income have been recognised as part of the Group’s restructuring and

integration activities.

Also, in 2021, R.J. Reynolds Tobacco Company (RJRT) reached an agreement with several Master Settlement Agreement (MSA) states to

waive RJRT’s claims under the MSA in connection with a settlement between those MSA states and a non-participating manufacturer,

S&M Brands, Inc. (S&M Brands), under which the states released certain claims against S&M Brands in exchange for receiving a portion

of the funds S&M Brands had deposited into escrow accounts in those states pursuant to the states’ escrow statutes. In consideration

for waiving claims, RJRT, together with Santa Fe Natural Tobacco Company, received approximately £40 million from the escrow funds

paid to those MSA states under their settlement with S&M Brands.

6 Other operating expenses

(a) Items included within other operating expenses

The following items are included within other operating expenses:

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  | Notes | 2022  £m | 2021  £m | 2020  £m |
| Other operating expenses |  | 9,018 | 7,468 | 7,667 |
| The following items are included within other operating expenses: |  |  |  |  |
| Master settlement agreement | 6(b),(d) | 2,387 | 2,486 | 2,783 |
| Marketing costs in operating expenses | 6(c) | 1,160 | 1,242 | 1,096 |
| Inventory write-offs | 20 | 250 | 215 | 309 |
| Research and development expenses (excluding employee benefit costs  and depreciation) | 6(e) | 138 | 141 | 121 |
| Loss on disposal of businesses | 6(f) | (6) | 358 | — |
| Excise, VAT and penalties in respect of disputes in Turkey, South Korea  and Russia | 6(g) | — | 26 | (40) |
| Charges in respect of DOJ investigation | 6(h) | 450 | — | — |
| Charges in respect of assets held-for-sale | 6(j) | 612 | — | — |
| Charges in respect of Nigerian FCCPC case | 6(i) | 79 | — | — |
| Social contribution expense related to Brazil VAT case |  | 12 | — | — |
| Exchange differences |  | 92 | 19 | (29) |
| Hedge ineffectiveness within operating profit |  | 36 | (5) | (3) |
| Expenses relating to short-term leases |  | 11 | 8 | 10 |
| Expenses relating to leases of low-value assets |  | 1 | 1 | 1 |
| Gains arising from sale and leaseback transactions |  | — | — | (1) |
| Auditor’s remuneration | 6(k) | 29 | 27 | 28 |

(b) Master Settlement Agreement

In 1998, the major U.S. cigarette manufacturers (including the R.J. Reynolds Tobacco Company, Lorillard and Brown & Williamson, businesses

which are now part of the Reynolds Group) entered into the Master Settlement Agreement (MSA) with attorneys general representing most U.S.

states and territories. The MSA imposes a perpetual stream of future payment obligations on the major U.S. cigarette manufacturers. The

amounts of money that the participating manufacturers are required to annually contribute are based upon, amongst other things, the volume of

cigarettes sold and market share (based on cigarette shipments in that year).

During 2012, R.J. Reynolds Tobacco Company, Santa Fe Natural Tobacco Company (SFNTC), various other tobacco manufacturers, 17 states, the

District of Columbia and Puerto Rico reached an agreement related to the Non-Participating Manufacturer (NPM) adjustment under the MSA,

and three more states joined the agreement in 2013. Under this agreement, R.J. Reynolds Tobacco Company has received credits of more than

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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213

US$1 billion, in respect of its Non-Participating Manufacturer (NPM) Adjustment claims related to the period from 2003 to 2012. These credits

have been applied against the companies’ MSA payments over a period of five years from 2013, subject to, and dependent upon, meeting the

various ongoing performance obligations. During 2014, two additional states agreed to settle NPM disputes related to claims for the period

2003 to 2012. R.J. Reynolds Tobacco Company has received US$170 million in credits, which has been applied over a five-year period from 2014.

During 2015, another state agreed to settle NPM disputes related to claims for the period 2004 to 2014 and included a method to determine

future adjustments from 2015 forward. R.J. Reynolds Tobacco Company has received US$285 million in credits, which was applied over a four-

year period from 2016. During 2016, no additional states agreed to settle NPM disputes. During 2017, two more states agreed to settle NPM

disputes related to claims for the period 2004 to 2014. It is estimated that R.J. Reynolds Tobacco Company will receive US$61 million in credits,

which will be applied over a five-year period from 2017. During 2018, nine more states agreed to settle NPM disputes related to claims for the

period 2004 to 2019, with an option through 2022, subject to certain conditions. It is estimated that R.J. Reynolds Tobacco Company will receive

US$182 million in credits for settled periods through 2017, which will be applied over a five-year period from 2018. Also, in 2018, one additional

state agreed to settle NPM disputes related to claims for the period 2004 to 2024, subject to certain conditions. It is estimated that R.J.

Reynolds Tobacco Company will receive US$205 million in credits for settled periods through 2017, which will be applied over a five-year period

from 2019. In the first quarter of 2020, certain conditions set forth in the 2017 and 2018 agreements were met for those 10 states. In 2022, an

additional state settled NPM disputes related to claims for the period 2005 to 2018. It is estimated that R.J. Reynolds Tobacco Company will

receive a credit of US$130 million for settled periods through 2018, which will be applied over a five-year period from 2022. Credits in respect of

future years’ payments and the NPM Adjustment claims would be accounted for in the applicable year and will not be treated as adjusting

items. Only credits in respect of prior year payments are included as adjusting items.

In 2020, R.J. Reynolds Tobacco Company recognised additional expenses under the state settlement agreements in the States of Mississippi,

Florida, Texas and Minnesota. R.J. Reynolds Tobacco Company recognised US$241 million of expense for payment obligations to the State of

Florida for the ITG Brands, LLC acquired brands from the date of divestiture, June 12, 2015, as a result of an unfavourable judgment. In addition,

R.J. Reynolds Tobacco Company recognised US$264 million related to the resolution of claims against it in the States of Texas, Minnesota and

Mississippi for payment obligations to those states for the ITG Brands, LLC acquired brands from the date of divestiture. Finally, R.J. Reynolds

Tobacco Company settled certain related claims with Phillip Morris USA under the state settlement agreements in the states of Mississippi,

Texas and Minnesota for US$8 million. Additional information related to the resolution of these claims is included in notes 6(d) and 31. During

2021, an additional US$17 million expense was recognised in relation to the final resolution of the Texas and Minnesota claims. In 2022, R.J.

Reynolds Tobacco Company recognised US$37 million in additional expenses related to a settlement with Philip Morris USA resolving prior

operating profit disputes under the MSA related to the ITG Brands, LLC acquired brands.

The BAT Group is subject to substantial payment obligations under the MSA and the state settlement agreements with the States of

Mississippi, Florida, Texas and Minnesota (such settlement agreements, collectively State Settlement Agreements). Reynolds Group’s

operating subsidiaries’ expenses and payments under the MSA and the State Settlement Agreements for 2022 amounted to US$2,951 million

(2021: US$3,420 million; 2020: US$3,572 million) in respect of settlement expenses and US$3,129 million (2021: US$3,744 million; 2020:

US$2,848 million) in respect of settlement cash payments.

(c) Marketing costs recognised as operating expenses

Certain marketing activities, such as discounts or allowances provided to customers, are required to be deducted from revenue as explained in

note 1. Other marketing expenses, such as point of sale and promotional materials, media advertising and sponsorship, and consumer research,

are reported as operating expenses and have been shown in the table above.

(d) Litigation costs

Litigation costs included within other operating expenses, and reported as an adjusting item, were £170 million (2021: £54 million; 2020:

£87 million) predominantly related to litigation costs including Engle progeny with the remainder relating to immaterial other health related

claims.

In 2022, the Group received £26 million of NPM credits related to a favourable resolution in respect of MSA litigation in the state of Illinois.

In 2020, also included as an adjusting item was a charge of £400 million incurred largely in respect of charges following the development in

cases regarding payment obligations under the state settlement agreements with Florida, Texas, Minnesota and Mississippi for brands

previously sold to a third party. The Group recognised a charge of £188 million in the period for a final judgment of a case in the Florida court.

The Group continues to pursue indemnification remedies in a Delaware court for payments made to Florida as a result of this judgment, as

explained in note 31. During 2020, the Group also recognised a provision of £212 million related to the settlement discussions with other

manufacturers and the States of Texas, Minnesota and Mississippi for payment obligations related to these brands in prior years. During 2021,

an additional £12 million expense was recognised in relation to the final resolution of the Texas and Minnesota claims.

(e) Research and development

Total research and development costs, including employee benefit costs and depreciation, are £323 million (2021: £304 million; 2020:

£307 million).

(f) Loss on disposal of businesses

On 6 August 2021, the Group disposed of its Iranian subsidiary, B.A.T. Pars Company PJSC (BAT Pars). Included within other operating expenses,

and recognised as an adjusting item in 2021, was a charge of £358 million comprising £272 million of foreign exchange reclassified from other

comprehensive income (note 22(c)(i)) and an impairment charge and associated costs of £88 million. In 2022, as a result of the unwind of

discounting on the deferred proceeds and a true-up on the completion of accounts, a credit of £6 million (2021: £2 million) was recognised.

(g) Tax disputes in Turkey, South Korea and Russia

The settlement of tax disputes in Turkey, South Korea and Russia were recognised as adjusting items.

Turkey

British American Tobacco Tutun Mamulleri Sanayi ve Ticaret Anonim Sirketi (BAT Tutun) was subject to a series of tax audits mainly on

inventory movements for the years 2015, 2016 and 2019. In August 2021, BAT Tutun applied under the relevant tax amnesty law to settle its

retrospective tax assessments. Based on the settlement through the tax amnesty procedure, in 2021, BAT Tutun agreed to pay £47 million in 18

instalments from 1 November 2021 until 31 July 2024. Of the £47 million, £30 million of excise and penalties were recognised and charged to

operating profit, £11 million as interest in net finance costs (note 8(b)) and £6 million in taxation.

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214

South Korea

As explained in note 31, on 16 September 2021, Rothmans Far East B.V. Korea Branch Office received £4 million in relation to a VAT case.

In line with the treatment of the associated expense incurred in 2016, the cash received was recognised as an adjusting item in 2021.

Russia

In August 2019, the Russian tax authority issued a final audit report to JSC British American Tobacco-SPb (BAT SpB) related to the

application of legislation introduced in 2017 that prospectively limited the amount of production that could take place prior to excise tax

increases, without being subject to higher excise tax rates. The final audit report sought to retrospectively apply the legislation to the

years 2015 to 2017. BAT SpB submitted an appeal to the Federal Tax Services (FTS) objecting to the findings. The FTS accepted some of

BAT SpB’s arguments and, on 27 January 2020, a final claim was issued by the FTS. As a consequence, the Group recognised a charge of

£202 million.

In 2020, a credit of £40 million was recognised in relation to the 2019 charge discussed above, of which £14 million was offset in the

adjusting items included in taxation (note 10(d)).

(h) Charges in respect of DOJ and OFAC investigations

From time to time, the Group investigates, and becomes aware of governmental authorities’ investigations into, allegations of

misconduct, including alleged breaches of sanctions and allegations of corruption, against Group companies. The Group cooperates with

the authorities’ investigations, where appropriate.

For example, the Group has been cooperating with investigations by the DOJ and OFAC into suspicions of breaches of sanctions. The

Group is currently engaged in discussions with both agencies to find a resolution through settlement. A provision of £450 million has

been recognised in 2022, however it cannot be excluded that the amount of any potential settlement with the DOJ and OFAC may vary

from this amount.

(i) Charges in respect of Nigerian FCCPC case

In 2022, a charge of £79 million was recognised, related to the conclusion of the investigation into alleged violations of the Nigerian

Competition and Consumer Protection Act and National Tobacco Control Act.

(j) Charges in respect of assets held-for-sale

On 11 March 2022, the Group announced the intention to transfer its Russian business in full compliance with international and local laws.

The Group has two subsidiaries in Russia (BAT Russia), being JSC British American Tobacco-SPb and JSC International Tobacco

Marketing Services (ITMS). In addition, the Group's subsidiary in Belarus, International Tobacco Marketing Services BY, will form part of

the transaction. Upon completion, it is intended that the Group will no longer have a presence in Russia (or Belarus).

In accordance with IFRS 5, the assets and liabilities of these subsidiaries have been classified as held-for-sale at 31 December 2022 and

presented as such on the balance sheet at an estimated fair value less costs to sell. An impairment charge of £554 million and associated

costs of £58 million have been recognised in Other operating expenses as adjusting items. Refer to note 27(d)(i) for further details.

(k) Auditor’s remuneration

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022  £m | 2021  £m | 2020  £m |
| Auditor’s remuneration |  |  |  |
| Total expense for audit services pursuant to legislation: |  |  |  |
| –fees to KPMG LLP for Parent Company and Group audit | 9.4 | 8.7 | 8.7 |
| –fees to KPMG LLP firms and associates for local statutory and Group  reporting audits | 11.0 | 9.5 | 9.9 |
| Total audit fees expense - KPMG LLP firms and associates | 20.4 | 18.2 | 18.6 |
| Audit fees expense to other firms | 0.2 | 0.2 | 0.2 |
| Total audit fees expense | 20.6 | 18.4 | 18.8 |
| Fees to KPMG LLP firms and associates for other services: |  |  |  |
| –audit-related assurance services | 7.1 | 8.0 | 8.5 |
| –other assurance services | 0.9 | 0.3 | 0.5 |
| –tax advisory services | — | — | — |
| –tax compliance | — | — | — |
| –audit of defined benefit schemes of the Company | 0.2 | 0.4 | 0.5 |
| –other non-audit services | — | — | — |
|  | 8.2 | 8.7 | 9.5 |

The total auditor’s remuneration to KPMG firms and associates included above are £28.6 million (2021: £26.9 million; 2020: £28.1 million).

Under SEC regulations, the remuneration to KPMG firms and associates of £28.6 million in 2022 (2021: £26.9 million; 2020: £28.1 million)

is required to be presented as follows: audit fees £27.5 million (2021: £26.2 million; 2020: £27.5 million), audit-related fees £0.2 million

(2021: £0.4 million; 2020: £0.5 million), tax fees £nil (2021: £nil; 2020: £nil) and all other fees £0.9 million (2021: £0.3 million; 2020: £0.1

million). Audit-related fees are in respect of services provided to associated pension schemes. All other fees are in respect of other

assurance services, including those provided over information derived from the financial information systems subject to audit or over the

controls over those systems.

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215

7 Restructuring and integration costs

Restructuring costs reflect the costs incurred as a result of initiatives to improve the effectiveness and the efficiency of the Group as a globally

integrated enterprise. These costs represent additional expenses incurred that are not related to the normal business and day-to-day activities.

These initiatives include the costs associated with Quantum, being a review of the Group’s organisational structure announced in 2019 to simplify

the business and create a more efficient, agile and focused company. In 2020 and 2022, these also included a review of the Group’s manufacturing

operations. Restructuring initiatives (including as related to Quantum) have largely been announced to those that will be impacted, although the

delivery of such programmes is expected to be substantially completed by the end of 2023.

The costs of the Group’s initiatives are included in profit from operations under the following headings:

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  | Notes | 2022  £m | 2021  £m | 2020  £m |
| Employee benefit costs | 3 | 315 | 160 | 91 |
| Depreciation, amortisation and impairment costs | 4 | 220 | (11) | 151 |
| Other operating income | 5 | (1) | — | — |
| Other operating expenses |  | 237 | 1 | 166 |
|  |  | 771 | 150 | 408 |

The adjusting charge in 2022, 2021 and 2020 relates to the cost of employee packages in respect of Quantum and the ongoing costs associated

with initiatives to improve the effectiveness and efficiency of the Group as a globally integrated organisation. In addition, Quantum initiatives in

certain countries have resulted in the move to above market business models utilising local distributors as importers. As a consequence, with the

cessation of a physical presence in these markets, foreign exchange previously recognised in Other Comprehensive Income for these countries

has been reclassified to the income statement and reported within other operating expenses (note 22(c)(i)).

The restructuring costs in 2022 include costs related to factory closures or rationalisation in APME, Europe and the U.S. and costs

recognised as part of the Group's announced exit from Egypt.

In 2021, included under the Quantum initiatives above is a charge of £27 million, including £4 million for foreign exchange reclassified from

equity (note 22(c)(i)), related to the Group's withdrawal from Myanmar. In addition, as set out in note 4, goodwill in relation to Myanmar

was impaired and charged to the income statement.

The depreciation, amortisation and impairment costs in 2021 included a credit of £25 million due to a partial reversal of previously

estimated impairment following the revision of factory rationalisation initiatives.

Also, in 2021, included within other operating expenses is a credit of £59 million representing the release of an accrual on the successful

conclusion of the dispute with former shareholders of Reynolds American, as explained in note 31.

The adjusting charges in 2020 are mainly in relation to Quantum and the downsizing and factory rationalisation activities in the

Netherlands, Hungary, Russia and APME.

Also, in 2020, as a consequence of a reduction in volumes due to the significant increase in excise in Indonesia, the Group announced a

restructuring programme which included the partial closure of the factory operations in Indonesia. As a result of this decision, a

£69 million impairment was recognised in respect of machinery. This impairment charge related to some of the machinery in use as well

as machinery held for future use which, following the significant changes in consumer preferences, is not expected to be brought in to

manufacturing in the future.

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216

8 Net finance costs

(a) Net finance costs/(income)

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | | | | 2022  £m | 2021  £m | 2020  £m |
| Interest expense | | | | 1,602 | 1,436 | 1,605 |
| Interest expense on lease liabilities | | | | 25 | 24 | 26 |
| Facility fees | | | | 21 | 33 | 23 |
| Interest and fair value related to early repurchase of bonds (note 8(b)) | | | | — | — | 142 |
| Interest related to adjusting tax payables (note 8(b)) | | | | 36 | 31 | 11 |
| Fair value changes on derivative financial instruments and hedged items | | | | (473) | 252 | (217) |
| Fair value change on other financial items (note 8(b)) | | | | (2) | 24 | — |
| Exchange differences | | | | 524 | (279) | 205 |
| Finance costs | | | | 1,733 | 1,521 | 1,795 |
| Interest under the effective interest method | | | | (92) | (35) | (50) |
| Finance income | | | | (92) | (35) | (50) |
| Net finance costs | | | | 1,641 | 1,486 | 1,745 |

The Group manages foreign exchange gains and losses and fair value changes on a net basis excluding adjusting items, which are

explained in note 8(b). The derivatives that generate the fair value changes are explained in note 19.

Facility fees principally relate to the Group’s central banking facilities.

In October 2020, the Group completed a tender offer to repurchase sterling-equivalent £2,653 million of bonds, including £24 million

of accrued interest. Following this, in November 2020, the Group also completed a ‘make-whole’ bond redemption exercise of sterling-

equivalent £462 million of bonds, including £6 million of accrued interest. Other costs directly associated with the early repurchase of

bonds, including the premium paid, were treated as adjusting items, as detailed in note 8(b).

(b) Adjusting items included in net finance costs

Adjusting items are significant items in net finance costs which individually or, if of a similar type, in aggregate, are relevant to an

understanding of the Group’s underlying financial performance.

The Group recognised interest on adjusting tax payables of £36 million (2021: £31 million; 2020: £11 million), which included interest of

£33 million (2021: £20 million; 2020: £21 million) in relation to the Franked Investment Income Group Litigation Order (FII GLO) (note 10(b)),

£3 million in respect of a potential tax claw back due to the factory closure in Switzerland in 2022, an amnesty tax payment of £11 million

in Turkey in 2021 and a net credit of £10 million in 2020 in respect of the excise dispute (note 6(g)) and withholding tax in Russia.

Included within £2 million of fair value changes on other financial items are:

(i) £15 million of foreign exchange arising on the revaluation of foreign currency balances held in Russia that no longer qualify for hedge

accounting, due to the proposed transfer of the Group's Russian business as detailed in note 27(d)(i); and

(ii) In 2021, as part of the disposal of the Group’s operations in Iran (note 27(d)), a provision of £24 million was charged to net finance costs

against non-current investments held at fair value due to the uncertainty around recovery of these funds. In 2022, part of these funds

were recovered and therefore a reversal of the provision of £17 million is recognised in net finance costs.

In 2020, the Group incurred additional interest costs of £157 million and fair value gains of £15 million in relation to the early repurchase of bonds.

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217

9 Associates and joint ventures

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |  |  | 2020 |
|  | Total  £m | Group’s  share  £m |  | Total  £m | Group's share  £m |  | Total  £m | Group's share  £m |
| Revenue | 9,486 | 2,675 |  | 7,668 | 2,164 |  | 7,001 | 1,983 |
| Profit from operations | 1,971 | 622 |  | 1,911 | 567 |  | 2,006 | 591 |
| Net finance costs | 21 | 4 |  | 13 | 2 |  | (6) | (2) |
| Profit on ordinary activities  before taxation | 1,992 | 626 |  | 1,924 | 569 |  | 2,000 | 589 |
| Taxation on ordinary activities | (595) | (176) |  | (499) | (147) |  | (421) | (125) |
| Profit on ordinary activities after taxation | 1,397 | 450 |  | 1,425 | 422 |  | 1,579 | 464 |
| Non-controlling interests | (27) | (8) |  | (22) | (7) |  | (30) | (9) |
| Post-tax results of associates and joint  ventures | 1,370 | 442 |  | 1,403 | 415 |  | 1,549 | 455 |

Enumerated below are movements that have impacted the post-tax results of associates and joint ventures in 2022, 2021 and 2020.

The amounts below were reported as adjusting items under the share of profit from associates in the income statement.

(a) Adjusting items

In 2022, the Group’s interest in ITC Ltd. (ITC) decreased from 29.38% to 29.19% (2021: 29.42% to 29.38%; 2020: 29.46% to 29.42%) as a

result of ITC issuing ordinary shares under the ITC Employee Share Option Scheme. The issue of these shares and change in the Group’s

share of ITC resulted in a loss of £3 million (2021: £6 million gain; 2020: £17 million gain), which is treated as a deemed partial disposal and

included in the income statement.

Also, in the first half of 2022, the Group impaired the investment in Organigram by £59 million (net of tax), driven by the decrease in the

company’s share price.

In addition to this, the Group incurred a £2 million charge (2021: £2 million; 2020: £nil) in relation to the amortisation of acquired

intangibles associated with the acquisition of Organigram in March 2021, as described in note 14.

During 2022, the Group decided to cease business activities altogether in Yemen, due to the challenging operating environment in the

country. This led to the full impairment of the investment in the Group's remaining associate in Yemen, United Industries Company

Limited, with a charge of £18 million to the income statement.

In 2021, the Group had already impaired the investment in Kamaran Industry & Investment Company, the Group’s other associate in

Yemen. This resulted in a charge of £18 million to the income statement.

As detailed in note 14, also in 2021, as a result of the liquidation of Tisak d.d., the Group reclassified the foreign exchange previously

recognised in other comprehensive income to the income statement. This resulted in a credit of £2 million to the income statement.

In 2020, ITC recognised a charge in respect of the cost of leaf tobacco stocks destroyed in a third-party warehouse fire, the Group’s

share of which was £4 million.

(b) Other financial information

The Group’s share of the results of associates and joint ventures is shown in the table below.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022 | 2021 | 2020 |
|  | Group’s  share  £m | Group’s  share  £m | Group’s  share  £m |
| Profit on ordinary activities after taxation |  |  |  |
| – attributable to owners of the parent | 442 | 415 | 455 |
| Other comprehensive income: |  |  |  |
| Items that may be reclassified to profit and loss | 6 | (17) | (98) |
| Items that will not be reclassified to profit and loss | 19 | 14 | (34) |
| Total comprehensive income | 467 | 412 | 323 |

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218

Summarised financial information of the Group’s associates and joint ventures is shown below.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  |  | 2022 |
|  | ITC  £m | Others  £m | Total  £m |
| Revenue | 7,126 | 2,360 | 9,486 |
| Profit on ordinary activities before taxation | 2,395 | (403) | 1,992 |
| Post-tax results of associates and joint ventures | 1,761 | (391) | 1,370 |
| Other comprehensive income | 56 | 32 | 88 |
| Total comprehensive income | 1,817 | (359) | 1,458 |

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  |  | 2021 |
|  | ITC  £m | Others  £m | Total  £m |
| Revenue | 5,312 | 2,356 | 7,668 |
| Profit on ordinary activities before taxation | 1,931 | (7) | 1,924 |
| Post-tax results of associates and joint ventures | 1,427 | (24) | 1,403 |
| Other comprehensive income | (11) | — | (11) |
| Total comprehensive income | 1,416 | (24) | 1,392 |

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  |  |  | 2020 |
|  | ITC  £m | Others  £m | Total  £m |
| Revenue | 4,892 | 2,109 | 7,001 |
| Profit on ordinary activities before taxation | 1,930 | 70 | 2,000 |
| Post-tax results of associates and joint ventures | 1,495 | 54 | 1,549 |
| Other comprehensive income | (450) | — | (450) |
| Total comprehensive income | 1,045 | 54 | 1,099 |

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219

10 Taxation on ordinary activities

(a) Summary of taxation on ordinary activities

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022  £m | 2021  £m | 2020  £m |
| UK corporation tax | (3) | (25) | 38 |
| Comprising: |  |  |  |
| – current year tax expense | 2 | 1 | 38 |
| – adjustments in respect of prior periods | (5) | (26) | — |
| Overseas tax | 2,721 | 2,401 | 2,387 |
| Comprising: |  |  |  |
| – current year tax expense | 2,675 | 2,418 | 2,369 |
| – adjustments in respect of prior periods | 46 | (17) | 18 |
| Total current tax | 2,718 | 2,376 | 2,425 |
| Deferred tax | (240) | (187) | (317) |
| Comprising: |  |  |  |
| – deferred tax relating to origination and reversal of temporary differences | (174) | (29) | (184) |
| – deferred tax relating to changes in tax rates | (66) | (158) | (133) |
|  | 2,478 | 2,189 | 2,108 |

(b) Franked Investment Income Group Litigation Order

The Group is the principal test claimant in an action in the United Kingdom against HM Revenue and Customs (HMRC) in the Franked

Investment Income Group Litigation Order (FII GLO). There were 17 corporate groups in the FII GLO as at 31 December 2022. The case

concerns the treatment for UK corporate tax purposes of profits earned overseas and distributed to the UK.

The original claim was filed in 2003. The trial of the claim was split broadly into issues of liability and quantification. The main liability

issues were heard by the High Court, Court of Appeal and Supreme Court in the UK and the European Court of Justice in the period to

November 2012. The detailed technical issues of the quantification mechanics of the claim were heard by the High Court during May and

June 2014 and the judgment handed down on 18 December 2014. The High Court determined that in respect of issues concerning the

calculation of unlawfully charged corporation tax and advance corporation tax, the law of restitution including the defence on change of

position and questions concerning the calculation of overpaid interest, the approach of the Group was broadly preferred. The conclusion

reached by the High Court would, if upheld, produce an estimated receivable of £1.2 billion for the Group. Appeals on a majority of the

issues were made to the Court of Appeal, which heard the arguments in June 2016. The Court of Appeal determined in November 2016

on the majority of issues that the conclusion reached by the High Court should be upheld. The Supreme Court gave permission for a

number of issues to be appealed in two separate hearings. The first, in February 2020, concerned the time limit for bringing claims.

HMRC sought to challenge existing case law. In November 2020, the Supreme Court handed down its judgment. The Supreme Court

agreed to overturn existing case law partially but introduced a new test for determining whether claims of this type are in time. The case

has been remitted to the High Court to apply that new test to the facts. The second hearing was heard in December 2020 and concerned

issues relating to the type of claims BAT is entitled to bring. The judgment from the second hearing was handed down in July 2021.

Applying that judgment reduces the value of the FII claim to approximately £0.3 billion, mainly as the result of the application of simple

interest and the limitation to claims for advance corporation tax offset against lawful corporation tax charges, which is subject to the

determination of the timing issue by the High Court and any subsequent appeal.

During 2015, HMRC paid to the Group a gross amount of £1,224 million in two separate payments. The payments made by HMRC have

been made without any admission of liability and are subject to refund were HMRC to succeed on appeal. The second payment in

November 2015 followed the introduction of a new 45% tax on the interest component of restitution claims against HMRC. HMRC held

back £261 million from the second payment contending that it represents the new 45% tax on that payment, leading to total cash

received by the Group of £963 million. Actions challenging the legality of the withholding of the 45% tax have been lodged by the Group.

The First Tier Tribunal found in favour of HMRC in July 2017 and the Group’s appeal to the Upper Tribunal was heard in July 2018 and

judgment has not yet been handed down.

The net £0.9 billion held by the Group is higher than the current value of the claim referred to above. Due to the uncertainty of the

amounts and eventual outcome, the Group has not recognised any impact in the Income Statement in the current or prior period. The

receipt, net of the deduction by HMRC, is held within trade and other payables as disclosed in note 25. Any future recognition as income

will be treated as an adjusting item, due to the size of the amount, with interest of £33 million for the 12 months to 31 December 2022

(2021: £20 million; 2020: £21 million) accruing on the balance, which was also treated as an adjusting item.

The final resolution of all issues in the litigation is likely to take a number of years. The Group made an interim repayment to HMRC of

£50 million in 2022 and intends to make further interim repayments in future periods.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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220

(c) Factors affecting the taxation charge

The taxation charge differs from the standard rate of corporation tax in the UK of 19% for 2022, 2021 and 2020. The major causes of this

difference are listed below;

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | 2022 | |  | 2021 | |  | 2020 | |
|  | £m | % |  | £m | % |  | £m | % |
| Profit before tax | 9,324 |  |  | 9,163 |  |  | 8,672 |  |
| Less: share of post-tax results of associates and joint  ventures (see note 9) | (442) |  |  | (415) |  |  | (455) |  |
|  | 8,882 |  |  | 8,748 |  |  | 8,217 |  |
| Tax at 19% (2021: 19% and 2020: 19%) on the above | 1,688 | 19.0 |  | 1,662 | 19.0 |  | 1,561 | 19.0 |
| Factors affecting the tax rate: |  |  |  |  |  |  |  |  |
| Tax at standard rates other than UK corporation tax rate | 397 | 4.5 |  | 319 | 3.6 |  | 368 | 4.5 |
| Other national tax charges | 244 | 2.7 |  | 184 | 2.1 |  | 142 | 1.7 |
| Permanent differences | 83 | 0.9 |  | 87 | 1.0 |  | 20 | 0.3 |
| Overseas withholding taxes | 156 | 1.8 |  | 189 | 2.2 |  | 155 | 1.9 |
| Double taxation relief on UK profits | (26) | (0.3) |  | (23) | (0.3) |  | (22) | (0.3) |
| Unutilised/(utilised) tax losses | 12 | 0.1 |  | (10) | (0.1) |  | 5 | 0.1 |
| Adjustments in respect of prior periods | 41 | 0.5 |  | (43) | (0.5) |  | 18 | 0.2 |
| Deferred tax relating to changes in tax rates | (66) | (0.7) |  | (158) | (1.8) |  | (133) | (1.6) |
| Additional net deferred tax (credits)/charges | (51) | (0.6) |  | (18) | (0.2) |  | (6) | (0.1) |
|  | 2,478 | 27.9 |  | 2,189 | 25.0 |  | 2,108 | 25.7 |

(d) Adjusting items included in taxation

In 2022, adjusting items in taxation included a net credit of £27 million mainly relating to the revaluation of deferred tax liabilities arising

on trademarks recognised in the Reynolds American acquisition in 2017 due to changes in U.S. state tax rates and a potential clawback of

tax reliefs arising on the closure of the Group's factory in Switzerland.

In 2021, adjusting items in taxation included a net credit of £91 million mainly relating to the revaluation of deferred tax liabilities arising on

trademarks recognised in the Reynolds American acquisition in 2017 due to changes in U.S. state tax rates.

In 2020, adjusting items in taxation included a net credit of £35 million mainly relating to the release of a provision regarding the

application of overseas withholding tax, the revaluation of deferred tax liabilities arising on trademarks recognised in the Reynolds

American acquisition in 2017 due to changes in U.S. state tax rates and the excise dispute in Russia (note 6(g)).

(e) Tax on adjusting items

In addition, the tax on adjusting items, separated between the different categories, as per note 11, amounted to £176 million (2021: £119

million; 2020: £287 million). The adjustment to the adjusted earnings per share (note 11) also includes £5 million (2021: £6 million; 2020: £8

million) in respect of the non-controlling interests’ share of the adjusting items net of tax.

(f) Tax on items recognised directly in other comprehensive income

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022  £m | 2021  £m | 2020  £m |
| Current tax | (6) | (4) | (5) |
| Deferred tax | (106) | (110) | 23 |
| (Charged)/credited to other comprehensive income | (112) | (114) | 18 |

(g) Tax on items recognised directly in equity

In relation to the perpetual hybrid bonds issued on 27 September 2021 (note 22(d)), tax relief of £11 million (2021: £5 million) has been

recognised, principally in relation to the coupon incurred.

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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221

11 Earnings per share

Earnings used in the basic, diluted and headline earnings per share calculation represent the profit attributable to the ordinary equity

shareholders after deducting amounts representing the coupon on perpetual hybrid bonds on a pro-rata basis regardless of whether

coupons have been deferred or paid in the period. Below is a reconciliation of the earnings used to calculate earnings per share:

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022  £m | 2021  £m | 2020  £m |
| Earnings attributable to owners of the parent | 6,666 | 6,801 | 6,400 |
| Coupon on perpetual hybrid bonds | (60) | (15) | — |
| Tax on coupon on perpetual hybrid bonds | 11 | 3 | — |
| Earnings | 6,617 | 6,789 | 6,400 |

Below is a reconciliation from basic to diluted earnings per share:

|  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  | 2022 |  |  |  | 2021 |  |  |  | 2020 |
|  | Earnings  £m | Weighted  average  number of  shares  m | Earnings  per share  pence |  | Earnings  £m | Weighted  average  number of  shares  m | Earnings  per share  pence |  | Earnings  £m | Weighted  average  number of  shares  m | Earnings  per share  pence |
| Basic earnings per share (ordinary  shares of 25p each) | 6,617 | 2,256 | 293.3 |  | 6,789 | 2,287 | 296.9 |  | 6,400 | 2,286 | 280.0 |
| Share options | — | 11 | (1.4) |  | — | 10 | (1.3) |  | — | 9 | (1.1) |
| Diluted earnings per share | 6,617 | 2,267 | 291.9 |  | 6,789 | 2,297 | 295.6 |  | 6,400 | 2,295 | 278.9 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

222

Adjusted earnings per share calculation

Earnings have been affected by a number of adjusting items, which are described in notes 3 to 10. Adjusting items are significant items in

the profit from operations, net finance costs, taxation and the Group’s share of the post-tax results of associates and joint ventures

which individually or, if of a similar type, in aggregate, are relevant to an understanding of the Group’s underlying financial performance.

The Group believes that these items are useful to users of the Group financial statements in helping them to understand the underlying

business performance. To illustrate the impact of these items, an adjusted earnings per share calculation is shown below.

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Basic |
|  |  | 2022 | |  | 2021 | |  | 2020 | |
|  | Notes | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |
| Basic earnings per share |  | 6,617 | 293.3 |  | 6,789 | 296.9 |  | 6,400 | 280.0 |
| Effect of amortisation and impairment of  goodwill, trademarks and similar intangibles | 4 | 285 | 12.6 |  | 363 | 15.9 |  | 548 | 24.0 |
| Tax and non-controlling interests on  amortisation and impairment of goodwill,  trademarks and similar intangibles | 10(e) | (67) | (3.0) |  | (71) | (3.1) |  | (77) | (3.4) |
| Effect of Brazil VAT case | 5,6(a) | (460) | (20.4) |  | — | — |  | — | — |
| Tax on Brazil VAT case | 10(e) | 72 | 3.2 |  | — | — |  | — | — |
| Effect of disposal of subsidiaries | 6(f) | (6) | (0.3) |  | 358 | 15.7 |  | — | — |
| Effect of excise and VAT disputes | 6(g) | — | — |  | 26 | 1.1 |  | (40) | (1.7) |
| Tax on excise and VAT disputes | 10(d) | — | — |  | (3) | (0.1) |  | 14 | 0.6 |
| Effect of charges in respect of DOJ and OFAC  investigations | 6(h) | 450 | 19.9 |  | — | — |  | — | — |
| Effect of charges in respect of Nigerian FCCPC  case | 6(i) | 79 | 3.5 |  | — | — |  | — | — |
| Effect of impairment on held-for-sale assets  and associated costs | 6(j) | 612 | 27.2 |  | — | — |  | — | — |
| Tax effect of impairment of assets held-for-sale  and associated costs | 10(e) | (10) | (0.4) |  | — | — |  | — | — |
| Effect of restructuring and integration costs | 7 | 771 | 34.2 |  | 150 | 6.5 |  | 408 | 17.8 |
| Tax and non-controlling interests on  restructuring and integration costs | 10(d)(e) | (116) | (5.1) |  | (39) | (1.7) |  | (64) | (2.8) |
| Other adjusting items | 3,6(d) | 154 | 6.8 |  | 19 | 0.8 |  | 487 | 21.2 |
| Tax effect on other adjusting items | 10(e) | (37) | (1.6) |  | (5) | (0.2) |  | (104) | (4.5) |
| Effect of early repurchase of bonds | 8(b) | — | — |  | — | — |  | 142 | 6.2 |
| Tax effect of early repurchase of bonds | 10(e) | — | — |  | — | — |  | (32) | (1.4) |
| Effect of interest on FII GLO settlement and  other | 8(b) | 34 | 1.5 |  | 55 | 2.4 |  | 11 | 0.5 |
| Tax effect of interest on FII GLO settlement and  other | 10(e) | (6) | (0.3) |  | — | — |  | (4) | (0.2) |
| Effect of associates' adjusting items net of tax | 9(a) | 92 | 4.1 |  | 12 | 0.5 |  | (13) | (0.6) |
| Deferred tax relating to changes in tax rates | 10(d) | (44) | (2.0) |  | (98) | (4.3) |  | (21) | (0.9) |
| Effect of retrospective guidance on WHT | 10(d) | — | — |  | — | — |  | (42) | (1.8) |
| Adjusted earnings per share (basic) |  | 8,420 | 373.2 |  | 7,556 | 330.4 |  | 7,613 | 333.0 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
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|  | | | | | | | |

223

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Diluted |
|  |  | 2022 | |  | 2021 | |  | 2020 | |
|  | Notes | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |
| Diluted earnings per share |  | 6,617 | 291.9 |  | 6,789 | 295.6 |  | 6,400 | 278.9 |
| Effect of amortisation and impairment of  goodwill, trademarks and similar intangibles | 4 | 285 | 12.6 |  | 363 | 15.8 |  | 548 | 23.9 |
| Tax and non-controlling interests on  amortisation and impairment of goodwill,  trademarks and similar intangibles | 10(e) | (67) | (3.0) |  | (71) | (3.1) |  | (77) | (3.4) |
| Effect of Brazil VAT case | 5,6(a) | (460) | (20.3) |  | — | — |  | — | — |
| Tax on Brazil VAT case | 10(e) | 72 | 3.2 |  | — | — |  | — | — |
| Effect of disposal of subsidiaries | 6(f) | (6) | (0.3) |  | 358 | 15.6 |  | — | — |
| Effect of excise and VAT disputes | 6(g) | — | — |  | 26 | 1.1 |  | (40) | (1.7) |
| Tax on excise and VAT disputes | 10(d) | — | — |  | (3) | (0.1) |  | 14 | 0.6 |
| Effect of charges in respect of DOJ and OFAC  investigations | 6(h) | 450 | 19.9 |  | — | — |  | — | — |
| Effect of charges in respect of Nigerian FCCPC  case | 6(i) | 79 | 3.5 |  | — | — |  | — | — |
| Effect of impairment on held-for-sale assets  and associated costs | 6(j) | 612 | 26.8 |  | — | — |  | — | — |
| Tax effect of impairment of assets held-for-sale  and associated costs | 10(e) | (10) | (0.4) |  | — | — |  | — | — |
| Effect of restructuring and integration costs | 7 | 771 | 34.0 |  | 150 | 6.6 |  | 408 | 17.7 |
| Tax and non-controlling interests on  restructuring and integration costs | 10(d)(e) | (116) | (5.1) |  | (39) | (1.7) |  | (64) | (2.8) |
| Other adjusting items | 3,6(d) | 154 | 6.8 |  | 19 | 0.8 |  | 487 | 21.2 |
| Tax effect on other adjusting items | 10(e) | (37) | (1.6) |  | (5) | (0.2) |  | (104) | (4.5) |
| Effect of early repurchase of bonds | 8(b) | — | — |  | — | — |  | 142 | 6.2 |
| Tax effect of early repurchase of bonds | 10(e) | — | — |  | — | — |  | (32) | (1.4) |
| Effect of interest on FII GLO settlement and  other | 8(b) | 34 | 1.5 |  | 55 | 2.4 |  | 11 | 0.5 |
| Tax effect of interest on FII GLO settlement and  other | 10(e) | (6) | (0.3) |  | — | — |  | (4) | (0.2) |
| Effect of associates' adjusting items net of tax | 9(a) | 92 | 4.1 |  | 12 | 0.5 |  | (13) | (0.6) |
| Deferred tax relating to changes in tax rates | 10(d) | (44) | (1.9) |  | (98) | (4.3) |  | (21) | (0.9) |
| Effect of retrospective guidance on WHT | 10(d) | — | — |  | — | — |  | (42) | (1.8) |
| Adjusted earnings per share (diluted) |  | 8,420 | 371.4 |  | 7,556 | 329.0 |  | 7,613 | 331.7 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

224

Headline earnings per share as required by the JSE Limited

The presentation of headline earnings per share, as an alternative measure of earnings per share, is mandated under the JSE Listing

Requirements. It is calculated in accordance with Circular 1/2021 ‘Headline Earnings’, as issued by the South African Institute of

Chartered Accountants.

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  | Basic |
|  | 2022 | |  | 2021 | |  | 2020 | |
|  | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |
| Basic earnings per share | 6,617 | 293.3 |  | 6,789 | 296.9 |  | 6,400 | 280.0 |
| Effect of impairment of intangibles, property, plant and  equipment, associates and assets held-for-sale | 429 | 19.0 |  | 138 | 6.0 |  | 465 | 20.3 |
| Tax and non-controlling interests on intangibles, property,  plant and equipment, associates and assets held-for-sale | (77) | (3.4) |  | (42) | (1.8) |  | (74) | (3.3) |
| Effect of gains on disposal of property, plant and equipment,  trademarks, held-for-sale assets, partial/full termination of  IFRS 16 leases, and sale and leaseback | (21) | (0.9) |  | (10) | (0.4) |  | (26) | (1.1) |
| Tax and non-controlling interests on disposal of property,  plant and equipment, held-for-sale assets, partial/full  termination of IFRS 16 leases, and sale and leaseback | 5 | 0.2 |  | 2 | 0.1 |  | 8 | 0.3 |
| Effect of impairment of subsidiaries | 548 | 24.2 |  | 83 | 3.6 |  | — | — |
| Tax on impairment of subsidiaries | (10) | (0.4) |  | — | — |  | — | — |
| Effect of foreign exchange reclassification from reserves to  the income statement |  |  |  |  |  |  |  |  |
| – Subsidiaries | 6 | 0.3 |  | 291 | 12.7 |  | — | — |
| – Associates | (1) | — |  | (2) | (0.1) |  | — | — |
| Issue of shares and change in shareholding in associate | 3 | 0.1 |  | (6) | (0.3) |  | (17) | (0.7) |
| Headline earnings per share (basic) | 7,499 | 332.4 |  | 7,243 | 316.7 |  | 6,756 | 295.5 |

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  | Diluted |
|  | 2022 | |  | 2021 | |  | 2020 | |
|  | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |  | Earnings  £m | Earnings  per share  pence |
| Diluted earnings per share | 6,617 | 291.9 |  | 6,789 | 295.6 |  | 6,400 | 278.9 |
| Effect of impairment of intangibles, property, plant and  equipment, associates and assets held-for-sale | 429 | 18.9 |  | 138 | 6.0 |  | 465 | 20.3 |
| Tax and non-controlling interests on intangibles, property,  plant and equipment, associates and assets held-for-sale | (77) | (3.4) |  | (42) | (1.8) |  | (74) | (3.3) |
| Effect of gains on disposal of property, plant and equipment,  trademarks, held-for-sale assets, partial/full termination of  IFRS 16 leases, and sale and leaseback | (21) | (0.9) |  | (10) | (0.4) |  | (26) | (1.1) |
| Tax and non-controlling interests on disposal of property,  plant and equipment, held-for-sale assets, partial/full  termination of IFRS 16 leases, and sale and leaseback | 5 | 0.2 |  | 2 | 0.1 |  | 8 | 0.3 |
| Effect of impairment of subsidiaries | 548 | 24.1 |  | 83 | 3.6 |  | — | — |
| Tax on impairment of subsidiaries | (10) | (0.4) |  | — | — |  | — | — |
| Effect of foreign exchange reclassification from reserves to  the income statement |  |  |  |  |  |  |  |  |
| – Subsidiaries | 6 | 0.3 |  | 291 | 12.6 |  | — | — |
| – Associates | (1) | — |  | (2) | (0.1) |  | — | — |
| Issue of shares and change in shareholding in associate | 3 | 0.1 |  | (6) | (0.3) |  | (17) | (0.7) |
| Headline earnings per share (diluted) | 7,499 | 330.8 |  | 7,243 | 315.3 |  | 6,756 | 294.4 |

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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225

12 Intangible assets

(a) Overview of intangible assets

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  | 2022 |
|  | Goodwill  £m | Computer  software  £m | Trademarks  and similar  intangibles  £m | Assets in  the course of  development  £m | Total  £m |
| 1 January |  |  |  |  |  |
| Cost | 43,194 | 1,266 | 74,227 | 156 | 118,843 |
| Accumulated amortisation and impairment |  | (858) | (2,360) |  | (3,218) |
| Net book value at 1 January | 43,194 | 408 | 71,867 | 156 | 115,625 |
| Differences on exchange | 4,762 | 5 | 9,033 | 2 | 13,802 |
| Additions |  |  |  |  |  |
| – internal development | — | — | — | 37 | 37 |
| – separately acquired | — | — | — | 85 | 85 |
| Reallocations | — | 96 | 29 | (125) | — |
| Amortisation charge | — | (128) | (309) | — | (437) |
| Impairment | — | (3) | (10) | (11) | (24) |
| Disposals | — | — | (7) | — | (7) |
| Held for sale | — | (4) | — | (2) | (6) |
| 31 December |  |  |  |  |  |
| Cost | 47,956 | 1,379 | 83,454 | 153 | 132,942 |
| Accumulated amortisation and impairment |  | (1,005) | (2,851) | (11) | (3,867) |
| Net book value at 31 December | 47,956 | 374 | 80,603 | 142 | 129,075 |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  | 2021 |
|  | Goodwill  £m | Computer  software  £m | Trademarks  and similar  intangibles  £m | Assets in  the course of  development  £m | Total  £m |
| 1 January |  |  |  |  |  |
| Cost | 43,319 | 1,307 | 73,598 | 120 | 118,344 |
| Accumulated amortisation and impairment |  | (885) | (2,116) |  | (3,001) |
| Net book value at 1 January | 43,319 | 422 | 71,482 | 120 | 115,343 |
| Differences on exchange | (68) | (3) | 640 | — | 569 |
| Additions |  |  |  |  |  |
| – internal development | — | — | — | 139 | 139 |
| – separately acquired | — | — | 60 | 33 | 93 |
| Reallocations | — | 118 | 18 | (136) | — |
| Amortisation charge | — | (116) | (319) | — | (435) |
| Impairment | (57) | (13) | (14) | — | (84) |
| 31 December |  |  |  |  |  |
| Cost | 43,194 | 1,266 | 74,227 | 156 | 118,843 |
| Accumulated amortisation and impairment |  | (858) | (2,360) |  | (3,218) |
| Net book value at 31 December | 43,194 | 408 | 71,867 | 156 | 115,625 |

(b) Goodwill

Goodwill of £47,956 million (2021: £43,194 million) is included in intangible assets in the balance sheet of which the following are the

significant acquisitions: Reynolds American £37,181 million (2021: £33,021 million); Rothmans Group £4,704 million (2021: £4,408 million);

Imperial Tobacco Canada £2,460 million (2021: £2,345 million); ETI (Italy) £1,461 million (2021: £1,384 million) and ST (principally

Scandinavia) £1,102 million (2021: £1,043 million). The principal allocations of goodwill in the Rothmans’ acquisition are to the cash-

generating units of Europe and South Africa, with the remainder mainly relating to operations in APME.

During 2022, there was no goodwill impairment (2021: £57 million) as explained in note 12(e)(iv) below.

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| Notes on Accounts  Continued | | | | | | | |

226

(c) Trademarks and similar intangibles

Trademarks and similar intangibles with indefinite lives

The net book value of trademarks and similar intangibles with indefinite lives is £78,228 million (2021: £69,475 million) and relates to the

acquisition of Reynolds American. The trademarks acquired, including Newport, Camel, Natural American Spirit, Grizzly and Pall Mall, all of

which are part of the Group’s Strategic Portfolio of key brands, form the core focus of the U.S. business and receive significant support in

the form of dedicated internal resources, forecasting and, where appropriate, marketing investment. These trademarks have significant

market share and positive cashflow growth expectations. There are no regulatory or contractual restrictions on the use of the trademarks,

and there are no plans by management to significantly redirect resources elsewhere. Consequently, in the view of management, these

trademarks do not have a foreseeable and definite end to their ability to generate future cash flows and hence are not amortised.

Trademarks and similar intangibles with definite lives

The majority of trademarks and similar intangibles with definite lives relate to trademarks acquired in previous years. These trademarks

are amortised over their expected useful lives, which do not exceed 20 years. Included in the net book value of trademarks and similar

intangibles are trademarks relating to the acquisition of Reynolds American £2,071 million (2021: £2,038 million).

(d) Computer software and assets in the course of development

Included in computer software and assets in the course of development are internally developed assets with a carrying value of £423

million (2021: £517 million). The costs of internally developed assets include capitalised expenses of employees working full time on

software development projects, third-party consultants and software licence fees from third-party suppliers.

The Group has £1 million of future contractual commitments (2021: £2 million) related to intangible assets.

(e) Impairment testing

(i) Overview

a. Estimation uncertainty

As described in note 1, the critical accounting estimates used in the preparation of the consolidated financial statements include the

review of asset values, especially indefinite life assets such as goodwill and certain trademarks and similar intangibles.

There is significant judgement with regard to assumptions and estimates involved in the forecasting of future cash flows, which form the

basis of the assessment of the recoverability of these assets, with the effect that the value-in-use of calculations incorporate estimation

uncertainty, particularly for certain assets held in relation to the Canadian and U.S. markets.

b. Impact of climate change

The impact of climate change on the future cash flows has been considered for scenarios analysed in terms of future access to tobacco

and nicotine. The climate change scenario analyses – conducted in line with TCFD recommendations – undertaken this year did not

identify any material financial impact.

(ii) Impairment testing – Trademarks and similar intangibles with indefinite lives (brands)

The trademarks and similar intangibles with indefinite lives (brands) have been tested for impairment on a value-in-use basis. The value-

in-use calculations use cash flows based on detailed brand budgets prepared by management using projected sales volumes and pricing

(net revenue) and projected brand profitability covering a five-year horizon and, thereafter, grown into perpetuity. Corporate costs are

allocated to the brand budgets based on either specific allocations, where appropriate, or based on revenue. The discount rates and long-

term growth rates applied to the brand value-in-use calculations have been determined by local management based on experience,

specific market and brand trends and pricing and cost expectations. As the trademarks and similar intangibles with indefinite lives relate

to the acquisition of Reynolds American, the brand budgets used in the value-in-use calculations have also been incorporated into the

budget information used in the impairment testing of Reynolds American goodwill.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Carrying  amount  £m | Pre-tax  discount rate  %\* |  | Carrying  amount  £m | Pre-tax  discount rate  % |
| Indefinite-lived intangibles |  |  |  |  |  |
| Newport | 33,236 | 9.2 |  | 29,517 | 9.9 |
| Camel | 14,058 | 8.9 |  | 12,485 | 9.4 |
| Pall Mall | 6,252 | 8.6 |  | 5,552 | 8.8 |
| Natural American Spirit | 13,019 | 8.6 |  | 11,562 | 8.7 |
| Camel Snus | 1,355 | 8.6 |  | 1,203 | 8.7 |
| Grizzly | 10,308 | 8.6 |  | 9,155 | 8.7 |
| Total | 78,228 |  |  | 69,474 |  |

Note:

\*The pre-tax discount rates for all indefinite-lived intangibles have declined in comparison to 2021 primarily as the result of a change in U.S. federal tax rate assumption in 2022. On a

post-tax basis the discount rates for all the indefinite-lived intangibles have increased when compared with 2021, except for Newport which, as the most exposed brand to mentholated

products, saw a greater shift in risk for the discount rate into the cash flows, in 2022, in relation to the proposed product standard to prohibit menthol as a characterising flavour in

cigarettes (outlined further in note 12(e)(v).

Refer to note 12(e)(v) for further information on brand impairment testing.

(iii) Cash-generating units and information on goodwill impairment testing

In 2022, goodwill was allocated for impairment testing purposes to 17 (2021: 17) individual cash-generating units (CGUs) – one in the U.S.

(2021: one), six in AmSSA (2021: six), four in Europe (2021: four) and six in APME (2021: six).

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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227

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Carrying  amount  £m | Pre-tax  discount rate  % |  | Carrying  amount  £m | Pre-tax  discount rate  % |
| Cash-generating unit |  |  |  |  |  |
| Reynolds American | 37,181 | 8.8 |  | 33,021 | 8.4 |
| Europe | 5,670 | 7.5 |  | 5,362 | 6.1 |
| Canada | 2,460 | 19.4 |  | 2,345 | 19.3 |
| Australia | 755 | 8.2 |  | 719 | 6.8 |
| South Africa\* | 541 | 10.4 |  | 512 | 14.6 |
| Singapore | 398 | 7.9 |  | 352 | 8.2 |
| GTR | 264 | 7.6 |  | 233 | 7.7 |
| Malaysia | 240 | 11.4 |  | 226 | 11.2 |
| Peru\* | 103 | 7.5 |  | 91 | 10.7 |
| Other | 344 | 8.0 |  | 333 | 6.8 |
| Total | 47,956 |  |  | 43,194 |  |

Note:

\*Due to difficult trading conditions and uncertainties resulting from the COVID-19 pandemic in the prior year, a more granular market-led approach was adopted in formulating the CGUs

financial forecast and value-in-use assumptions. However, given these risk factors have now dissipated, the CGUs have been assessed through the established Group approach in the

current year.

Included within ‘Other’ above is goodwill arising on various acquisitions that have been allocated to eight cash-generating units which

are, individually, insignificant. The pre-tax discount rate represents the weighted average pre-tax discount rate.

The recoverable amounts of all cash-generating units have been determined on a value-in-use basis. The key assumptions for the

recoverable amounts of all units are the projected sales volumes and pricing (net revenues), operating margins and long-term growth

rates, which directly impact the cash flows, and the discount rates used in the calculation. The long-term growth rate is used purely for

the impairment testing of goodwill under IAS 36 Impairment of Assets and does not reflect long-term planning assumptions used by the

Group for investment proposals or for any other assessments.

Post-tax discount rates were used in the impairment testing, based on the Group’s weighted average cost of capital, taking into account

the cost of capital and borrowings, to which specific market-related premium adjustments are made. These adjustments are derived

from external sources and are based on the spread between bonds (or credit default swaps, or similar indicators) issued by the relevant

local (or comparable) government, adjusted for the Group’s own credit market risk. For ease of use and consistency in application, these

results are periodically calibrated into bands based on internationally recognised credit ratings. This applies to all CGUs with the

exception of Reynolds which had its discount rate independently determined based on its own weighted average cost of capital and U.S.

market-related premiums. In general, an overall increase in post-tax discount rates in 2022 has been observed, primarily driven by higher

interest rates and bond yields. In relation to Reynolds, this has been partially offset by a reduction in the risk-adjustment incorporated

into the 2021 discount rates which has now been incorporated directly into the cash flows.

The long-term growth rates and discount rates have been applied to the budgeted cash flows of each cash-generating unit. These cash

flows have been determined by local management based on experience, specific market and brand trends, as well as pricing and cost

expectations. These have been endorsed by Group management as part of the consolidated Group’s budget.

(iv) Impairment testing – Goodwill (excluding Reynolds American and Canada)

The value-in-use calculations use cash flows based on detailed financial budgets prepared by management covering a one-year period

extrapolated over a 10-year horizon with growth of 3% (2021: 3%) in years 2 to 10, after which a growth rate of 1% (2021: 1%) having been

assumed as the long-term volume decline is more than offset by pricing to drive revenue growth. A 10-year horizon is considered appropriate

based on the Group’s history of profit and cash growth, its well-balanced portfolio of brands and the industry in which it operates.

For the Malaysian cash-generating unit, as a result of regulatory and macro-economic conditions, the above assumptions were amended

to reflect the short- to medium-term plans of the country or area management spanning up to a period of five years after which a long-

term growth rate of 0% has been assumed. For the Malaysian cash-generating units headroom to reduce to £nil, the forecasted cash

flows would need to reduce by 11.5% year on year or the pre-tax discount rate would have to increase by 1.5%, both of which

management does not consider to be reasonably possible. The Group will continue to monitor Malaysia's performance going forward to

identify if any impairment triggers materialise.

South Africa is positively recovering from the COVID-19 pandemic and the five-month sales ban in 2020, with the forecasted cashflows

prepared to reflect the continued expected recovery with no further indication of impairment.

The Group had recognised an impairment charge of £54 million in 2021 for its Peruvian cash generating unit due to continued difficult

trading conditions as a consequence of the COVID-19 pandemic and its impact on the forecasted operating cashflows which partially

reduced the carrying value of goodwill to £91 million. As a result of the assessment, in 2022, no further deterioration in performance was

identified requiring further impairment consideration.

In 2021, the Group also impaired in full the goodwill of Myanmar resulting in an impairment charge of £3 million.

Following the application of a reasonable range of sensitivities to all cash-generating units, there was no reasonably possible scenario

identified that would lead to a potential impairment charge.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Notes on Accounts  Continued | | | | | | | |

228

(v) Impairment testing – Reynolds American

Goodwill relating to Reynolds American and the indefinite-lived brand intangibles

On 28 April 2022, the FDA announced a proposed product standard to prohibit menthol as a characterising flavour in cigarettes,

consistent with their previously stated timeline. Management notes that the proposal of a product standard does not itself constitute a

ban on menthol in cigarettes given the proposed standard is still required to go through the established U.S. comprehensive rule-making

process, the timetable and outcome for which was, and remains, uncertain. Further to this, on 21 June 2022, the FDA announced plans to

develop a proposed product standard that would establish a maximum nicotine level in cigarettes and certain other combustible tobacco

products to reduce addictiveness. Management notes that the FDA announcement does not itself constitute restrictions on nicotine

levels in cigarettes, and any proposed regulation of nicotine in cigarettes would need to be introduced through the established U.S.

comprehensive rule-making process, the timetable and outcome for which was, and remains, uncertain. Management do not deem this

to be a new development but rather a continuation of the rulemaking process that the FDA initiated in 2017 that was later put on hold.

In December 2022, the sale of most tobacco products with characterising flavours (including menthol) other than tobacco were banned

in the state of California. The impact of such ban does not present an indicator of a potential impairment for Reynolds American goodwill

or any of the indefinite-lived intangibles. The Group has a long-standing track record of managing regulatory shifts and, in the event of

regulatory change, the Group remains confident in its ability to navigate that environment successfully. Since 2018, having considered

the combination of the risk of implementation and impact of any change in regulations, the Group has not recognised any impairment on

either the Newport or Camel brands or the Reynolds American cash-generating unit.

In 2022, the value-in-use calculations have been determined based on probability weighted scenarios to derive a risk-adjusted cash flow

forecast applied within the valuations. Management incorporated the following scenarios into the valuation:

–Management’s internal forecast (risk of the proposed product standard to prohibit menthol as a characterising flavour in cigarettes

incorporated into the long-term growth rate).

–Assuming a final product standard to prohibit menthol as a characterising flavour in cigarettes becomes effective in the final year of

the discrete forecast period (Management’s best estimate of the ban’s effective date, if a final rule is published).

–No product standard to prohibit menthol as a characterising flavour in cigarettes ultimately ends up being introduced.

This is a change in valuation methodology from 2021 where management prepared one cash flow forecast with the potential impact/risk of a

proposed product standard to prohibit menthol as a characterising flavour in cigarettes incorporated into the long-term growth rate and discount

rate. This change was a result of the timing of a proposed product standard narrowing given we have moved one year further forward.

The value-in-use calculations for brands, as described in note 12(e)(ii) above, have been incorporated in the probability weighted

scenarios used in the Reynolds American goodwill model. The value-in-use calculations have been prepared based on a five-year risk-

adjusted cash flow forecast which assumes a long-term volume decline of cigarettes generally offset by pricing. After this forecast, a

probability weighted growth rate of 1.05% has been assumed for the Reynolds American cash-generating unit, 0.89% for Newport,

0.93% for Camel, and 1.0%for all remaining indefinite life intangibles.

The excess of value-in-use earnings over the carrying values (headroom) of the Reynolds American cash-generating unit and the

Newport, Camel, Pall Mall, Grizzly and Camel Snus brand intangibles would be reduced to nil if the following individual changes were

made to the key assumptions used in the impairment model.

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Reynolds  American  goodwill  % | Newport  % | Camel  % | Pall Mall  % | Grizzly  % | Camel Snus  % |
| Assumptions |  |  |  |  |  |  |
| Decrease in revenue by\* | 6.1 | 21.0 | 28.6 | 14.1 | 8.9 | 5.1 |
| Increase in pre-tax discount rate by | 0.8 | 3.4 | 5.5 | 2.2 | 0.8 | 0.4 |
| Decrease in long-term growth rate by | 0.8 | 4.0 | 7.0 | 2.4 | 1.0 | 0.5 |

Note:

\*Revenue sensitivities are performed in isolation and do not include the removal of the corresponding variable cost of sales.

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229

The change in revenue assumption is based on revenue in the five-year forecast reducing by the stated percentage in each year without

any future recovery and assumes that other assumptions are not changed. Management concluded that such reduction would not be

reasonably possible for either Reynolds American goodwill or the indefinite-lived intangibles.

As a result of a reduction in the excess of value-in-use earnings over the carrying values (headroom) on Reynolds American goodwill in

2022, reasonably possible changes to key assumptions, within the value-in-use model, could result in an impairment charge. The

following movements in key assumptions are deemed to be reasonably possible and would result in the following:

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Current headroom (£m) | Assumptions | Reasonable possible change | Impact  (£m) | Possible impairment  (£m) |
| 11,826 | Pre-tax discount rate | Increase of 0.93% | (13,355) | (1,529) |
| Long-term growth rates | Decrease of 0.85% | (13,036) | (1,210) |

Reasonably possible changes to key assumptions, within the value-in-use model, which could result in an impairment charge were also identified

for Camel Snus. The following movements in key assumptions are deemed to be reasonably possible and would result in the following:

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Current headroom (£m) | Assumptions | Reasonable possible change | Impact  (£m) | Possible impairment  (£m) |
| 95 | Pre-tax discount rate | Increase of 0.94% | (165) | (70) |
| Long-term growth rates | Decrease of 1.00% | (175) | (80) |

The sensitivities relating to the pre-tax discount rates above are based upon a change in the risk-free rate only, as a directional potential

impact. It is recognised that such changes may arise in a combination of assumptions within the discount rate calculation.

Apart from Camel Snus, management concluded that no reasonably possible scenarios were identified that resulted in any of the

indefinite-lived intangibles requiring an impairment charge. However, it is noted that if adverse movement occurred in a combination of

the above key assumptions for the Pall Mall brand intangible this may result in an impairment charge.

(vi) Impairment testing – Canada

Goodwill relating to Imperial Tobacco Canada Ltd (ITCAN)

In March 2019, ITCAN obtained an Initial Order from the Ontario Superior Court of Justice granting it protection under the Companies’

Creditors Arrangement Act (CCAA). If the CCAA creditor protection were to end, significant liabilities might crystallise. As a

consequence, to reflect the risk to future operating cash flows, the value-in-use calculations have been prepared based on a five-year

cash flow forecast, after which a growth rate of -2.5% and a pre-tax discount rate of 19.4% (2021: 19.3%) have been assumed. Further

information on the Quebec Class Actions and CCAA can be found in note 31.

In addition to the increase in discount rate, a reasonable range of sensitivities was applied to the value-in-use calculation, and there was

no risk of an impairment charge identified.

The excess of value-in-use earnings over the carrying values (headroom) of the ITCAN goodwill would be reduced to nil if the following

individual changes, none of which are considered reasonably possible by management, were made to the key assumptions used in the

impairment model. The change in revenue assumption is based on combustibles revenue in the five-year forecast reducing by 20.6% in

each year and assumes that other assumptions are not changed.

|  |  |
| --- | --- |
|  |  |
|  | Canada  goodwill  % |
| Assumptions |  |
| Decrease in revenue by | 20.6 |
| Increase in pre-tax discount rate by | 10.2 |

Note:

\*Revenue sensitivities are performed in isolation and do not include the removal of the corresponding variable cost of sales.

The £2,460 million of goodwill relating to ITCAN on the Group’s balance sheet at 31 December 2022 will continue to be reviewed on a

regular basis. Any future impairment charge would result in a non-cash charge to the income statement that will be treated as an

adjusting item.

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230

13 Property, plant and equipment

(a) Overview of property, plant and equipment, including right-of-use assets

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  |  |  |  |  |  | 2022 |
|  | Freehold  property  £m | Leasehold  property  £m | Plant,  equipment and  other owned  £m | Plant,  equipment and  other leased  £m | Assets in the  course of  construction  £m | Total  £m |
| 1 January |  |  |  |  |  |  |
| Cost | 1,421 | 847 | 5,750 | 247 | 706 | 8,971 |
| Accumulated depreciation and impairment | (388) | (370) | (3,130) | (130) |  | (4,018) |
| Net book value at 1 January | 1,033 | 477 | 2,620 | 117 | 706 | 4,953 |
| Differences on exchange | 68 | 30 | 164 | 9 | 48 | 319 |
| Additions |  |  |  |  |  |  |
| – right-of-use assets | — | 117 | — | 117 | — | 234 |
| – separately acquired | — | — | 32 | — | 471 | 503 |
| Reallocations | 44 | 21 | 374 | 2 | (441) | — |
| Depreciation | (36) | (112) | (323) | (68) | — | (539) |
| Impairment | (62) | (39) | (210) | (4) | (4) | (319) |
| Right-of-use assets - reassessments,  modifications and terminations | — | (16) | — | 4 | — | (12) |
| Disposals | (4) | (2) | (15) | — | 3 | (18) |
| Net reclassifications as held-for-sale | (41) | (10) | (187) | — | (16) | (254) |
| 31 December |  |  |  |  |  |  |
| Cost | 1,475 | 940 | 5,962 | 362 | 767 | 9,506 |
| Accumulated depreciation  and impairment | (473) | (474) | (3,507) | (185) |  | (4,639) |
| Net book value at 31 December | 1,002 | 466 | 2,455 | 177 | 767 | 4,867 |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  |  |  |  |  |  | 2021 |
|  | Freehold  property  £m | Leasehold  property  £m | Plant,  equipment and  other owned  £m | Plant,  equipment and  other leased  £m | Assets in the  course of  construction  £m | Total  £m |
| 1 January |  |  |  |  |  |  |
| Cost | 1,518 | 798 | 5,807 | 217 | 764 | 9,104 |
| Accumulated depreciation  and impairment | (444) | (315) | (3,175) | (110) |  | (4,044) |
| Net book value at 1 January | 1,074 | 483 | 2,632 | 107 | 764 | 5,060 |
| Differences on exchange | (23) | (22) | (135) | (5) | (18) | (203) |
| Additions |  |  |  |  |  |  |
| – right-of-use assets | — | 88 | — | 76 | — | 164 |
| – separately acquired | — | 1 | 45 | — | 508 | 554 |
| Reallocations | 44 | 51 | 441 | 1 | (537) | — |
| Depreciation | (35) | (110) | (303) | (57) | — | (505) |
| Impairment | (4) | (2) | (37) | — | (11) | (54) |
| Right-of-use assets - reassessments,  modifications and terminations | — | (11) | — | (5) | — | (16) |
| Disposals | (7) | (1) | (12) | — | — | (20) |
| Net reclassifications as held-for-sale | (16) | — | (11) | — | — | (27) |
| 31 December |  |  |  |  |  |  |
| Cost | 1,421 | 847 | 5,750 | 247 | 706 | 8,971 |
| Accumulated depreciation  and impairment | (388) | (370) | (3,130) | (130) |  | (4,018) |
| Net book value at 31 December | 1,033 | 477 | 2,620 | 117 | 706 | 4,953 |

Refer to notes 4 and 7 for more information on property, plant and equipment impairments. The £254 million (2021: £27 million) of assets

reclassified as held-for-sale in 2022 primarily relates to the Group's operations in Russia and Belarus and in 2021, the Group's Iranian

subsidiary, BAT Pars, as disclosed in note 27(d).

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231

ESG Investments: Included in additions in 2022 is an amount of £27.1 million related to investments directed towards equipment to drive

energy efficiency and renewable energy generation, water recycling and efficiency projects, waste reduction, and product innovation-led

specification improvements to drive recyclability and reduce waste.

The Group has £80 million of future contractual commitments (2021: £90 million) related to property, plant and equipment.

(b) Right-of-use assets

In accordance with IFRS 16 Leases, the right-of-use assets related to leased properties have been included in the asset class ‘Leasehold

Property’ (note 13(c)) and other right-of-use assets have been reported under ‘Plant, equipment and other leased’.

The Group leases various offices, warehouses, retail spaces, equipment and vehicles through its subsidiaries across the globe.

Arrangements are entered into in the course of ordinary business, and lease terms are negotiated on an individual basis and contain a

wide range of different terms and conditions reflecting local commercial practice. The lease agreements do not impose any covenants

other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing

purposes.

Assets representing ‘plant, equipment and other’ relate to leases of various assets including tobacco vending machines, industrial

equipment and distribution vehicles in Brazil, Japan, Pakistan, Poland, Romania, Switzerland, the U.S. and other countries.

(c) Leasehold property

As of 31 December 2022, the Group holds £152 million (2021: £165 million) of leasehold properties acquired and another £314 million (2021:

£312 million) of right-of-use leased properties.

Assets representing ‘leasehold property’ relate to leases in respect of offices, retail space, warehouses and manufacturing facilities

occupied by Group subsidiaries and include property leases with lease terms of more than five years in Bangladesh, Brazil, China,

Germany, Italy, Mexico, Romania, Singapore, the UK and the U.S., amongst other countries. In addition, capitalised expenditure

representing leasehold improvements is included in this asset class.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Leasehold land and property comprises |  |  |
| - net book value of long leasehold | 15 | 14 |
| - net book value of short leasehold | 451 | 463 |
|  | 466 | 477 |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
| 2022 | | | | | |
| Leasehold property net book value movements for the year  ended 31 December 2022 | Net book value  at 1 January  £m | Differences on  exchange  £m | Depreciation  and impairment  £m | Other net  movements\*  £m | Net book value  at 31 December  £m |
| - Property acquired (IAS 16) | 165 | 11 | (41) | 17 | 152 |
| - Right-of-use properties (IFRS 16) | 312 | 19 | (110) | 93 | 314 |
|  | 477 | 30 | (151) | 110 | 466 |

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| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  |  |  |  | 2021 |
| Leasehold property net book value movements for the year  ended 31 December 2021 | Net book value  at 1 January  £m | Differences on  exchange  £m | Depreciation and  impairment  £m | Other net  movements\*  £m | Net book value  at 31 December  £m |
| - Property acquired (IAS 16) | 132 | (8) | (13) | 54 | 165 |
| - Right-of-use properties (IFRS 16) | 351 | (14) | (99) | 74 | 312 |
|  | 483 | (22) | (112) | 128 | 477 |

Note:

\*Property acquired (IAS 16 Property, plant and equipment) other net movements for leasehold improvements represent additions (directly acquired and/or transferred from assets in the

course of construction) net of disposals, whereas other net movements for right-of-use properties (IFRS 16) relate to new leases net of reassessments, modifications and terminations

as reported in the Property, plant and equipment movement table in note 13(a).

(d) Freehold property

As of 31 December 2022, the Group owns freehold property amounting to £1,002 million (2021: £1,033 million), representing factories,

warehouses and office buildings together with adjoining land, mainly in the U.S., the UK, Bangladesh, Indonesia and South Korea.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Cost of freehold land within freehold property on which no depreciation is provided | 246 | 242 |

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14 Investments in associates and joint ventures

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| 1 January | 1,948 | 1,796 |
| Total comprehensive income (note 9) | 467 | 412 |
| Dividends | (438) | (392) |
| Additions (note 27(c)) | 39 | 130 |
| Other equity movements | 4 | 2 |
| 31 December | 2,020 | 1,948 |
| Non-current assets | 1,400 | 1,286 |
| Current assets | 1,138 | 1,144 |
| Non-current liabilities | (75) | (83) |
| Current liabilities | (443) | (399) |
|  | 2,020 | 1,948 |
| ITC Ltd. (Group’s share of the market value is £12,059 million (2021 £7,839 million)) | 1,865 | 1,759 |
| Other listed associates (Group’s share of the market value is £206 million (2021: £232 million)) | 106 | 154 |
| Unlisted associates | 49 | 35 |
|  | 2,020 | 1,948 |

The principal associate undertaking of the Group is ITC Ltd. (ITC). Included within the dividends amount of £438 million

(2021: £392 million) are £427 million (2021: £383 million) attributable to dividends declared by ITC.

As explained in note 27(c), acquisitions during the year included mostly investments in Sanity Group GmbH and Steady State LLC.

In 2021, acquisitions largely related to investments in Organigram Holdings Inc.

Organigram

On 11 March 2021, the Group announced a strategic collaboration agreement with Organigram Inc., a wholly owned subsidiary of publicly

traded Organigram Holdings Inc. (collectively, Organigram). Under the terms of the transaction, a Group subsidiary acquired a 19.9%

(2022: 19.4%) equity stake in Organigram Holdings Inc. (listed on both the Nasdaq and Toronto Stock Exchange under the symbol ‘OGI’) to

become its largest shareholder.

The Group’s share of the fair value of net assets acquired included £49 million of intangibles and £30 million of goodwill, representing a

strategic premium to enter the legal cannabis market in North America.

During 2022, management reassessed the carrying value of the Group’s investment in Organigram Holdings Inc. due to a reduction in the

entity's share price being identified as a trigger for a detailed impairment assessment to be undertaken. As part of this exercise,

management took into consideration Organigram’s share price, internal value-in-use calculations, external trading multiples and broker

forecasts. As a result of this analysis, it was concluded that an impairment charge of £65 million (or £59 million net of tax) was required

against the carrying value of the investment in associate, with the recoverable amount as at 31 December 2022 being £73 million (2021: £125

million). Management will continue to monitor the carrying value, in line with IAS 36, over the course of future periods.

Tisak d.d.

The Group’s investment in Tisak d.d. (Tisak) was acquired as part of the TDR Group in 2015. During 2016, the Group entered into an

agreement with Tisak’s parent Agrokor d.d. (Agrokor) to convert certain outstanding trading balances into long-term loans and an

additional shareholding in Tisak. As part of the agreement, Agrokor had the right to reacquire the additional shareholding in Tisak. As a

consequence of this, while the Group had legal ownership of the additional shareholding, it did not consider that the shares provided any

additional equity interest and continued to account for 26% of the equity of Tisak. In 2017, due to the financial difficulties of Agrokor and

Tisak, the Group fully impaired this investment resulting in a charge of £27 million to the income statement in that year that was reported

as an adjusting item. In July 2018, Agrokor’s creditors approved a settlement plan proposed by Agrokor’s administrators. The settlement

plan has not returned any value to the Group, and Tisak was liquidated on 21 September 2021.

Charlotte’s Web Holdings Inc.

In November 2022, the Group announced a £48 million investment in Charlotte’s Web Holdings, Inc. (Charlotte's Web). Based in

Colorado, USA, and listed on the Toronto Stock Exchange, Charlotte’s Web holds a prominent position in innovative hemp extract

wellness products. The Group’s investment has been made via a 7-year convertible debenture which is convertible at the Group’s

discretion into a non-controlling equity stake in Charlotte’s Web of around 19.9%. As part of the investment agreement, the Group has

the right to appoint directors to the Board of Charlotte’s Web. However, given the investment does not give the Group any current right

to a share of the earnings or net assets of the investee, the investment has been classified as an investment at fair value through profit

and loss (see note 18). On conversion of the loan note, the Group would equity account for its investment.

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233

ITC Ltd.

ITC is an Indian conglomerate based in Kolkata and maintains a presence in cigarettes, hotels, paper and packaging, agri-business

and other fast-moving goods (e.g. confectionery, branded apparel, personal care, stationery and safety matches). BAT’s interest in ITC

is 29.19%.

ITC prepares accounts on a quarterly basis with a 31 March year-end. As permitted by IAS 28 Investments in associates and joint

ventures, results up to 30 September 2022 have been used in applying the equity method. This is driven by the availability of information

at the half-year, to be consistent with the treatment in the Group’s interim accounts. Any further information available after the date

used for reporting purposes is reviewed and any material items adjusted for in the final results. The latest published information available

is at 31 December 2022.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Non-current assets | 4,402 | 3,889 |
| Current assets | 3,465 | 3,391 |
| Non-current liabilities | (233) | (231) |
| Current liabilities | (1,244) | (1,061) |
|  | 6,390 | 5,988 |
| Group’s share of ITC Ltd. (2022: 29.19%; 2021: 29.38%) | 1,865 | 1,759 |

15 Retirement benefit schemes

The Group operates various funded and unfunded defined benefit schemes, including pension and post-retirement healthcare schemes,

and defined contribution pension schemes through its subsidiary undertakings in multiple jurisdictions, with its most significant

arrangements being in the U.S., the UK, Canada, Germany, Switzerland and the Netherlands. Together, schemes in these territories

account for over 90% of the total underlying obligations of the Group’s defined benefit arrangements and over 70% of the current service

cost.

Pension obligations consist mainly of final salary pension schemes which provide benefits to members in the form of a guaranteed level

of pension payable for life. The level of benefits provided depends on members’ length of service and their salary in the final years leading

up to retirement. In addition, the Group operates several healthcare benefit schemes, of which the most significant are in the U.S. and

Canada. The majority of defined benefit schemes allow for the future accrual of benefits. With the exception of arrangements required

under local regulations, most of the Group’s arrangements are closed to new entrants.

Benefits provided through defined contribution schemes are charged as an expense as payments fall due. The liabilities arising in respect

of defined benefit schemes are determined in accordance with the advice of independent, professionally qualified actuaries, using the

projected unit credit method. It is Group policy that all schemes are formally valued at least every three years.

Through its defined benefit pension schemes and healthcare benefit schemes, the Group is exposed to a number of risks, including:

–Asset volatility: The scheme liabilities are calculated using discount rates set by reference to bond yields. If scheme assets

underperform this yield, e.g. due to stock market volatility, this may create a deficit. However, most funded schemes hold a proportion

of assets which are expected to outperform bonds in the long term, and the majority of schemes by value are subject to local

regulation regarding funding deficits. In addition, schemes in the UK and Canada have purchased insurance contracts which exactly

match valuation volatility of all or part of the scheme liabilities.

–Changes in bond yields: A decrease in corporate bond yields will increase scheme liabilities, although this will be partially offset by an

increase in the value of the schemes’ bond holdings, ‘buy-in’ insurance assets or other hedging instruments.

–Inflation risk: Some of the Group’s pension obligations are linked to inflation, and higher inflation will lead to higher liabilities, although in

most cases, caps on the level of inflationary increases are in place in the scheme rules, while some assets and derivatives provide

specific inflation protection.

–Life expectancy: The majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life

expectancy will result in an increase in the plans’ liabilities. Assumptions regarding mortality and mortality improvements are regularly

reviewed in line with actuarial tables and scheme specific experience.

The Group has an internal body, the Pensions Executive Committee (PEC), that is chaired by the Finance and Transformation Director.

The PEC sets and oversees a set of philosophies, policies and practices in respect of post-employment benefits including, but not limited

to, design, funding, investment strategy, risk management and governance. It also reviews significant changes to defined benefit

schemes in the countries with the most significant liabilities, and defined contribution schemes in the countries with the most significant

costs. Significant changes to defined benefit arrangements include scheme closures to future accrual and risk management exercises

such as the ‘buy-in’ and ‘buy-out’ transactions referred to below.

A ‘buy-out’ transaction is where a pension scheme derecognises all (or part) of its liabilities, removing it from the balance sheet, by

permanently transferring those obligations from the sponsoring employer to a third-party provider and eliminating all further legal or

constructive obligation to the pension scheme or to the sponsoring employer. By contrast, with a ‘buy-in’ transaction the scheme

liabilities remain on the balance sheet and the sponsoring employer remains responsible for the fulfilment of the pension obligations.

However, these obligations are de-risked through the purchase of an insurance product designed to match the underlying cash flows of

the pension liability reducing the risks associated with improved longevity and interest and discount rate movements. The Group

consequently benefits from the ‘buy-in’ as it reduces the individual scheme’s reliance on the Group for future cash funding requirements.

All of the Group’s arrangements, including funded schemes where formal trusts or equivalents are required, have been developed and are

operated in accordance with local practices and regulations where applicable in the countries concerned. Responsibility for the

governance of these schemes, including specific investment decisions and funding contribution schedules, generally lies with the

trustees, or equivalent bodies, of each arrangement. The trustees will usually consist of representatives appointed by both the

sponsoring company and the beneficiaries.

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234

The funded arrangements in the Group have policies on investment management, including strategies over a preferred long-term

investment profile, and schemes in certain territories including Canada and the Netherlands manage their bond portfolios to match the

weighted average duration of scheme liabilities. In addition, as noted below, certain arrangements in the UK and Canada have been de-

risked through the purchase of insurance policies. The majority of funded schemes are subject to local regulations regarding funding

requirements. Contributions to defined benefit schemes are determined after consultation with the respective trustees and actuaries of

the individual externally funded schemes, and after taking into account regulatory requirements in each territory. The Group’s

contributions to funded defined benefit schemes in 2023 in total are expected to be £110 million compared to £74 million in 2022.

U.S.

In the U.S., the main funded pension plan is the Reynolds and Affiliates Pension Plan which was formed at the end of 2022 through a

merger of the Reynolds American Retirement Plan (PEP) and the Retirement Income Plan for Certain RAI Affiliates (Affiliates). The only

funded healthcare scheme is the Brown & Williamson Tobacco Corporation Welfare & Fringe Benefit Plan. Each of the above were

established with corporate trustees that are required to run the plan in accordance with the plan’s rules and to comply with all relevant

legislation, including the Employee Retirement Income Security Act of 1974.

The corporate trustees act as custodians with a committee of local management acting in a fiduciary capacity with regard to investment

decisions, risk mitigation and administration of the arrangements. Contributions to the various funded plans are agreed with the named

fiduciary, scheme actuaries and the committee of local management after taking account of statutory requirements including the

Pension Protection Act of 2006, as amended. Through its U.S. subsidiaries, the Group may make significant contributions, either as

required by statutory requirements or at the discretion of the Group, with the aim of maintaining a funding status of at least 90% and

remaining fully funded in the long term. During 2022, the Group did not contribute to its funded pension and post-retirement plans in the

U.S. and does not expect to do so in 2023.

For funded plans in the U.S., the trustees employ a risk mitigation strategy which seeks to balance pension plan returns with a reasonable

level of funded status volatility. Based on this framework, the asset allocation has two primary components. The first component is the

hedging portfolio, which uses extended duration fixed income holdings (typically U.S. Government and investment grade corporate

bonds) and, to a lesser extent, derivatives to match a significant portion of the interest rate risk associated with the benefit obligations,

thereby reducing expected funded status volatility. The second component is the return-seeking portfolio, which is designed to enhance

portfolio returns. The return-seeking portfolio is broadly diversified across asset classes.

On 7 October 2021, the Group concluded a transaction affecting portions of the membership of the former PEP and former Affiliates

plans referred to above, allowing the Group to fully settle portions of its liability by transferring the obligations to the Metropolitan Tower

Life Insurance Company in a buy-out. Approximately US$1.9 billion (£1.4 billion) of plan liabilities were removed from the balance sheet,

resulting in a settlement gain of £35 million. A further partial buy-out affecting portions of the membership of the former PEP and former

Affiliates plans was concluded on 7 June 2022, with approximately US$1.6 billion (£1.3 billion) of plan liabilities removed from the balance

sheet, resulting in a settlement gain of £16 million.

At 31 December 2022, the Reynolds and Affiliates Pension Plan was reporting a surplus under IAS 19 in total of £567 million (2021: £463

million). Under the rules of this plan, after assuming the gradual settlement of the plan liabilities over the lives of the arrangements, any

surplus would be returnable to the Group in the event of a termination or could otherwise be repurposed for other existing or

replacement benefit plans, and accordingly, no surplus restriction has been recognised.

United Kingdom

In the UK, the main pension arrangement is the British American Tobacco UK Pension Fund (UKPF), which is established under trust law

and has a corporate trustee that is required to run the scheme in accordance with the UKPF’s Trust Deed and Rules and to comply with

the Pension Scheme Act 1993, Pensions Act 1995, Pensions Act 2004 and all other relevant legislation. With effect from 1 July 2020, UKPF

was closed to further accrual of benefits with all active members becoming deferred members. A past service credit was recognised on

the difference between the salary increase assumption for active members and the inflation assumption for deferred members at the

date of the plan amendment and curtailment of benefits.

The formal triennial actuarial valuation of the UKPF was last carried out with an effective date of 31 March 2020. This showed that UKPF

had a surplus of £139 million on a Technical Provisions basis, in accordance with the statutory funding objective. The Trustee also has a

Long-Term Funding Target to be fully funded on a Solvency Liabilities basis by 2026, and on this basis UKPF had a surplus of £7 million at

the valuation date. Under IAS 19, this was reported as a net retirement benefit asset of £143 million (2021: £293 million).

Under the UKPF scheme rules, the Trustee does not have a unilateral power to commence a wind up of UKPF, and the Group has

recognised a surplus as an unconditional right to a refund assuming the gradual settlement of the UKPF liabilities over the life of the

scheme with any future surplus returnable to the Group at the end of the life of the scheme. The funding commitment is not considered

onerous, and no additional liabilities or surplus restrictions have been recognised.

Following the completion of the valuation noted above, the Trustee and the Group agreed a new Schedule of Contributions with an

effective date of 5 October 2020. This schedule was subsequently replaced with a new Schedule with an effective date of 30 March 2021,

such that the Group made no contributions in 2021 but was committed to pay £18 million in July 2022 and £18 million in July 2023 as

contributions towards further de-risking of UKPF’s assets and securing members’ benefits. The Schedule of Contributions was further

amended on 8 August 2022 such that the Group would make no contributions in 2022 but would commit to pay £36 million in July 2023.

However, the Trustee retained the right to require an interim payment of up to £18 million at any time before 19 August 2023 should it

consider this, in all the circumstances, to be necessary and appropriate. Consequently, no contributions were made to UKPF in 2022 or 2021.

On 26 October 2022, the Group entered into an agreement with the Trustee to provide a temporary liquidity facility capped at £40 million

for up to two years. The facility will be used for the purposes of providing short-term liquidity for UKPF, should this be necessary, in

meeting capital calls in respect of the certain residual investments held by UKPF. Once borrowed and repaid, amounts cannot be

redrawn. Interest will accrue on the amounts borrowed under the facility at SONIA plus 2.25% p.a. A commitment charge of 0.56% will be

paid by the Trustee. As at 31 December 2022 this facility was undrawn.

As part of its risk management strategy, on 31 May 2019, the UK Trustee entered into a buy-in agreement with Pension Insurance

Corporation plc (‘PIC’) to acquire an insurance policy with the intent of matching a specific part of UKPF’s future cash flows arising from

the accrued pension liabilities of retired and deferred members and improving the security to the UKPF and its members. On an IAS 19

basis, the subsequent fair value of the insurance policy matches the present value of the liabilities being insured. On 19 May 2021, the

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235

Trustee entered into an agreement with PIC to acquire a second buy-in policy which involved the transfer of £383 million of assets held

by UKPF to PIC, and on 26 October 2022, a third and final buy-in policy was acquired with PIC. £198 million of assets were transferred

immediately with £35 million of the premium deferred until 2023 and 2024.

As a result of these transactions, approximately 94% of the assets held by UKPF (2021: 84%) are represented by the buy-in contracts,

covering 100% of UKPF’s retirement liabilities (2021: 91%). On an IAS 19 basis, the subsequent fair value of the insurance policies matches

the present value of the liabilities being insured.

For the residual assets held by UKPF, the current allocation is broadly split as 75% in risk reducing assets and 25% in return seeking

assets. The return seeking portfolio is invested in illiquid assets which, in the normal course of events, will wind down naturally over time,

with their value being realised as the investments mature. This is consistent with the Trustee’s ultimate target which is to be 100%

invested in risk reducing assets or matching assets. Given the strong funding position of UKPF as shown in the 31 March 2020 actuarial

valuation, the Trustee will continue to review the investment strategy and may look to increase the proportion of risk-reducing or

matching assets, commensurate with their ultimate target to further reduce UKPF’s exposure to asset volatility.

Other territories

Payments made to pensioners by the operating companies in Germany, net of income on scheme assets, are deemed to be company

contributions to the Contractual Trust Arrangements and are anticipated to be around £40 million in 2023 and £39 million per annum for

the four years after that. Contributions to pension schemes in Canada, Netherlands and Switzerland in total are anticipated to be around

£17 million in 2023 and then also around £9 million per annum for the four years after that.

For schemes in the Netherlands reporting surpluses of £46 million (2021: £77 million), these surpluses have been recognised as an

unconditional right to a refund assuming the gradual settlement of the pension liabilities over the life of the scheme, with any future

surplus returnable to the Group at the end of the life of the scheme, and similarly for the surplus relating to schemes in Germany of £150

million (2021: £nil). For schemes in surplus in Canada of £35 million (2021: £27 million), the economic benefit has been calculated as a

combination of the expected level of administration expenses which may be charged to the plan assets in accordance with the plan rules,

which economically represents a potential surplus refund, and the value of the employer reserve account as defined in legislation, which

represents a potential reduction in contributions on an ongoing basis or a surplus refund at the end of the life of the scheme.

On 2 September 2021, the Group through its Canadian subsidiaries entered into a buy-in agreement with five insurers to acquire

insurance policies that operate as assets of its largest Canadian scheme, the Imasco Pension Fund Society Plan (Society Plan), by

transferring plan assets of CAD $766 million (£451 million). The transaction was met entirely from the pension plan assets with no further

funding required from the Group. The buy-in covered all the Society Plan’s liabilities in relation to pensioners and deferred members as

well as the pensions accrued up to 31 December 2021 for active members. The Group consequently benefits from the buy-in as it

reduces the Society Plan’s reliance on the Group for future cash funding requirements. For the residual assets, the Society Plan is 100%

invested in risk reducing assets, consistent with the Canadian subsidiary’s ultimate de-risking target.

Unfunded arrangements

The majority of benefit payments are from trustee administered funds, however, there are also a number of unfunded schemes where

the sponsoring company meets the benefit payment obligation as it falls due, including UK-based Defined Benefit and Defined

Contribution Unapproved Unfunded Retirement Benefit Schemes (DB UURBS and DC UURBS respectively). The DC UURBS credits

accrued in the year are increased in line with the Company’s Weighted Average Cost of Debt and the scheme is therefore treated as a

defined benefit scheme under IAS 19. For unfunded pension schemes in the U.S. and UK, 50% of the liabilities reported at year-end are

expected to be settled by the Group within 10 years, 29% between 10 and 20 years, 14% between 20 and 30 years, and 7% thereafter. For

unfunded healthcare schemes in the U.S. and Canada, 71% of the liabilities reported at year-end are expected to be settled by the Group

within 10 years, 23% between 10 and 20 years, 5% between 20 and 30 years, and 1% thereafter.

The amounts recognised in the balance sheet are determined as follows:

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|  | Pension schemes | |  | Healthcare schemes | |  | Total | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Present value of funded scheme liabilities | (6,310) | (9,859) |  | (205) | (225) |  | (6,515) | (10,084) |
| Fair value of funded scheme assets | 7,271 | 10,644 |  | 153 | 172 |  | 7,424 | 10,816 |
|  | 961 | 785 |  | (52) | (53) |  | 909 | 732 |
| Unrecognised funded scheme surpluses | (61) | (16) |  | — | — |  | (61) | (16) |
|  | 900 | 769 |  | (52) | (53) |  | 848 | 716 |
| Present value of unfunded scheme liabilities | (387) | (555) |  | (410) | (482) |  | (797) | (1,037) |
|  | 513 | 214 |  | (462) | (535) |  | 51 | (321) |
|  |  |  |  |  |  |  |  |  |
| The above net asset/(liability) is recognised in the balance sheet as follows: | | | | |  |  |  |  |
| – retirement benefit scheme liabilities | (483) | (702) |  | (466) | (537) |  | (949) | (1,239) |
| – retirement benefit scheme assets | 996 | 916 |  | 4 | 2 |  | 1,000 | 918 |
|  | 513 | 214 |  | (462) | (535) |  | 51 | (321) |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

236

The net assets/(liabilities) of funded pension schemes by territory are as follows:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | Liabilities | |  | Assets | |  | Total | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| – U.S. | (1,552) | (3,378) |  | 2,046 | 3,748 |  | 494 | 370 |
| – UK | (2,114) | (3,357) |  | 2,256 | 3,645 |  | 142 | 288 |
| – Germany | (711) | (913) |  | 861 | 896 |  | 150 | (17) |
| – Canada | (574) | (706) |  | 613 | 724 |  | 39 | 18 |
| – Netherlands | (693) | (769) |  | 739 | 846 |  | 46 | 77 |
| – Switzerland | (279) | (317) |  | 308 | 311 |  | 29 | (6) |
| – Rest of Group | (387) | (419) |  | 448 | 474 |  | 61 | 55 |
| Funded schemes | (6,310) | (9,859) |  | 7,271 | 10,644 |  | 961 | 785 |

Of the Group’s unfunded pension schemes, 47% (2021: 57%) relate to arrangements in the UK and 39% (2021: 32%) relate to

arrangements in the U.S., while 86% (2021: 85%) of the Group’s unfunded healthcare arrangements relate to arrangements in the U.S.

The amounts recognised in the income statement are as follows:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | Pension schemes | |  | Healthcare schemes | |  | Total | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Defined benefit schemes |  |  |  |  |  |  |  |  |
| Service cost |  |  |  |  |  |  |  |  |
| – current service cost | 50 | 60 |  | 1 | 2 |  | 51 | 62 |
| – past service credit, curtailments  and settlements | (14) | (29) |  | 1 | — |  | (13) | (29) |
| Net interest on the net defined benefit  liability |  |  |  |  |  |  |  |  |
| – interest on scheme liabilities | 224 | 226 |  | 23 | 19 |  | 247 | 245 |
| – interest on scheme assets | (240) | (226) |  | (6) | (5) |  | (246) | (231) |
| – interest on unrecognised funded scheme  surpluses | 1 | 1 |  | — | — |  | 1 | 1 |
|  | 21 | 32 |  | 19 | 16 |  | 40 | 48 |
| Defined contribution schemes | 93 | 91 |  | — | — |  | 93 | 91 |
| Total amount recognised in the income  statement (note 3) | 114 | 123 |  | 19 | 16 |  | 133 | 139 |

The above charges are recognised within employee benefit costs in note 3 and include a credit of £9 million in 2022 (2021: £23 million) in

respect of settlements, past service costs and defined contribution costs reported as part of the restructuring costs and other adjusting

items charged in arriving at profit from operations (note 7). Included in current service cost in 2022 is £13 million (2021: £15 million) of

administration costs. Current service cost is stated after netting employee contributions, where applicable.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

237

The movements in scheme liabilities are as follows:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | Pension schemes | |  | Healthcare schemes | |  | Total | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Present value at 1 January | 10,414 | 12,572 |  | 707 | 798 |  | 11,121 | 13,370 |
| Differences on exchange | 567 | (122) |  | 78 | 5 |  | 645 | (117) |
| Current service cost | 50 | 60 |  | 1 | 2 |  | 51 | 62 |
| Past service (credit)/cost and settlements | (1,308) | (1,426) |  | 1 | — |  | (1,307) | (1,426) |
| Interest on scheme liabilities | 224 | 226 |  | 23 | 19 |  | 247 | 245 |
| Contributions by scheme members | 3 | 3 |  | — | — |  | 3 | 3 |
| Benefits paid | (586) | (705) |  | (59) | (55) |  | (645) | (760) |
| Actuarial (gains)/losses |  |  |  |  |  |  |  |  |
| – arising from changes in demographic  assumptions | (18) | 147 |  | — | 3 |  | (18) | 150 |
| – arising from changes in financial  assumptions | (2,775) | (394) |  | (145) | (18) |  | (2,920) | (412) |
| Experience losses/(gains) | 126 | 53 |  | 9 | (47) |  | 135 | 6 |
| Present value at 31 December | 6,697 | 10,414 |  | 615 | 707 |  | 7,312 | 11,121 |

Changes in financial assumptions principally relate to discount rate movements in both years, offset by changes in inflation. Experience

losses/(gains) relates to variations from previous assumptions for inflationary increases for pensions-in-payment and deferred pensions

as well as adjustments for membership data. Past service (credit)/cost and settlements in the table above includes amounts relating to

the U.S. buy-out transaction in both years.

Scheme liabilities by scheme membership:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | Pension schemes | |  | Healthcare schemes | |  | Total | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Active members | 756 | 1,090 |  | 31 | 41 |  | 787 | 1,131 |
| Deferred members | 1,055 | 1,750 |  | 1 | 1 |  | 1,056 | 1,751 |
| Retired members | 4,886 | 7,574 |  | 583 | 665 |  | 5,469 | 8,239 |
| Present value at 31 December | 6,697 | 10,414 |  | 615 | 707 |  | 7,312 | 11,121 |

Approximately 95% of scheme liabilities in both years relate to guaranteed benefits.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

238

The movements in funded scheme assets are as follows:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | Pension schemes | |  | Healthcare schemes | |  | Total | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Fair value of scheme assets  at 1 January | 10,644 | 12,403 |  | 172 | 173 |  | 10,816 | 12,576 |
| Differences on exchange | 606 | (116) |  | 21 | — |  | 627 | (116) |
| Settlements | (1,294) | (1,397) |  | — | — |  | (1,294) | (1,397) |
| Interest on scheme assets | 240 | 226 |  | 6 | 5 |  | 246 | 231 |
| Company contributions | 74 | 74 |  | — | — |  | 74 | 74 |
| Contributions by scheme members | 3 | 3 |  | — | — |  | 3 | 3 |
| Benefits paid | (546) | (668) |  | (15) | (13) |  | (561) | (681) |
| Actuarial (losses)/gains | (2,456) | 119 |  | (31) | 7 |  | (2,487) | 126 |
| Fair value of scheme assets  at 31 December | 7,271 | 10,644 |  | 153 | 172 |  | 7,424 | 10,816 |

The actuarial losses and gains in both years principally relate to movements in the fair values of scheme assets including revaluations on

initial recognition and subsequent remeasurement of insurance assets acquired in the buy-in transactions referred to above. Actual

returns are stated net of applicable taxes and fund management fees. Past service and settlements in the table above includes amounts

relating to the U.S. buy-out transactions in both years.

Scheme assets have been diversified into equities, bonds and other assets and are typically invested via fund investment managers into

both pooled and segregated mandates of listed and unlisted equities and bonds.

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | Pension schemes | |  | Healthcare schemes | |  | Total | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Equities ‒ listed | 623 | 741 |  | 5 | 6 |  | 628 | 747 |
| Equities ‒ unlisted | 756 | 892 |  | 50 | 65 |  | 806 | 957 |
| Bonds ‒ listed | 1,167 | 1,929 |  | 18 | 5 |  | 1,185 | 1,934 |
| Bonds ‒ unlisted | 768 | 1,924 |  | 64 | 72 |  | 832 | 1,996 |
| Other assets ‒ listed | 473 | 543 |  | 7 | 15 |  | 480 | 558 |
| Other assets ‒ unlisted | 3,484 | 4,615 |  | 9 | 9 |  | 3,493 | 4,624 |
| Fair value of scheme assets  at 31 December | 7,271 | 10,644 |  | 153 | 172 |  | 7,424 | 10,816 |

In the above analysis, investments via equity-based investment funds are shown under listed equities, and investments via bond-based

investment funds are shown under listed bonds. Other assets include insurance contracts, cash and other deposits, derivatives and other

hedges, recoverable taxes, infrastructure investments and investment property. The fair values of listed scheme assets were derived

from observable data including quoted market prices and other market data, including market values of individual segregated

investments and of pooled investment funds where quoted.

Insurance policies of £2,453 million (2021: £3,473 million), acquired in buy-in transactions in the UK and Canada are included within ‘other

assets-unlisted’ in the table above. The fair value of these assets was estimated as the present value of the underlying obligations

covered by the insurance policy and consequently the valuation of these assets at each balance sheet date is subject to the same

measurement uncertainty as for the related scheme liabilities. The fair values of other unlisted assets, excluding buy-in insurance policies,

were determined using an income approach that utilised cash flow models utilising observable inputs and comparing these valuations to

benchmark valuations of similar assets. In addition, the fair value of a proportion of the unlisted bonds is estimated by reference to daily

broker auctions.

In the U.S, pension plan assets are invested using active investment strategies and multiple investment management firms. Managers

within each asset class cover a range of investment styles and approaches. Allowable investment types include public equity, fixed

income, real assets, private equity and hedge funds. The range of allowable investment types utilised for pension assets provides

enhanced returns and more widely diversifies the plan.

As noted above, during 2022, 2021 and 2019, the UKPF Trustee acquired insurance policies that operate as a UK Fund investment asset in

a buy-in transaction. The residual assets of this fund of £143 million (2021: £586 million) now predominantly consist of cash and a

proportion of illiquid investments, such as private equity and infrastructure investments, as well as certain liability-driven investments

and absolute return funds.

The recognition of retirement benefit surpluses on the balance sheet is restricted where the economic benefit, in the form of a potential

refund or reduction in future contributions, has a present value which is less than the net assets of the scheme. The movements in the

unrecognised scheme surpluses, recognised in other comprehensive income, are as follows:

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

239

|  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
|  | Pension schemes | | |  | Healthcare schemes | | |  | Total | | |
|  | 2022  £m | 2021  £m | 2020  £m |  | 2022  £m | 2021  £m | 2020  £m |  | 2022  £m | 2021  £m | 2020  £m |
| Unrecognised funded  scheme surpluses at  1 January | (16) | (16) | (28) |  | — | — | — |  | (16) | (16) | (28) |
| Differences  on exchange | (4) | 2 | 3 |  | — | — | — |  | (4) | 2 | 3 |
| Interest on  unrecognised funded  scheme surpluses | (1) | (1) | (1) |  | — | — | — |  | (1) | (1) | (1) |
| Movement in year  (note 22) | (39) | (1) | 10 |  | — | — | — |  | (39) | (1) | 10 |
| Unrecognised funded  scheme surpluses at  31 December | (60) | (16) | (16) |  | — | — | — |  | (60) | (16) | (16) |

The principal actuarial assumptions (weighted to reflect individual scheme differences) used in the following territories are shown below.

In both years, discount rates are determined by reference to normal yields on high quality corporate bonds at the balance sheet date.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  | 2022 |  |  |  |  |  |  | 2021 |
|  | U.S. | UK | Germany | Canada | Netherlands | Switzerland |  | U.S. | UK | Germany | Canada | Netherlands | Switzerland |
| Rate of increase in  salaries (%) | 3.3 | Nil | 2.5 | 2.5 | 1.4 | 1.5 |  | 3.4 | — | 2.5 | 2.5 | 1.4 | 1.2 |
| Rate of increase in  pensions in payment  (%) | 2.4 | 3.2 | 2.3 | Nil | 2.2 | Nil |  | 2.5 | 3.4 | 1.8 | Nil | 1.1 | Nil |
| Rate of increase in  deferred pensions (%) | 0.1 | 2.8 | 2.3 | Nil | 2.2 | — |  | 0.1 | 3.0 | 1.8 | Nil | 1.1 | — |
| Discount rate (%) | 5.5 | 5.0 | 4.2 | 5.0 | 3.7 | 2.1 |  | 3.0 | 1.8 | 1.3 | 2.8 | 1.0 | 0.2 |
| General inflation (%) | 2.5 | 3.2 | 2.3 | 2.0 | 2.0 | 1.2 |  | 2.5 | 3.4 | 1.8 | 2.0 | 2.0 | 1.0 |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  | 2022 |  |  |  |  |  |  | 2021 |
|  | U.S. | UK | Germany | Canada | Netherlands | Switzerland |  | U.S. | UK | Germany | Canada | Netherlands | Switzerland |
| Weighted average  duration of liabilities  (years) | 10.7 | 12.4 | 10.9 | 9.0 | 14.4 | 10.2 |  | 12.3 | 16.7 | 13.6 | 11.0 | 17.1 | 13.3 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

240

For healthcare inflation in the U.S., the assumption is 7.5% for 2022 (2021: 7.0%) and in Canada, the assumption is 5.0% for both years.

Mortality assumptions are subject to regular review. The principal schemes used the following tables:

|  |  |  |
| --- | --- | --- |
|  |  |  |
| U.S. | PRI-2012 mortality tables without collar or amount, projected with MP-2021 generational projection except for a specific  group of retired members for which the mortality assumption is 99.5% of the RP-2006 table with white collar  adjustment, projected with MP-2021 generational projection (both years) | |
| UK | S3PA (YOB) with the CMI (2021) improvement model with a 1.25% long-term improvement rate (2021: S3PA (YOB) with  the CMI (2020) improvement model with a 1.25% long-term improvement rate) | |
| Germany | RT Heubeck 2018 G (both years) | |
| Canada | CPM-2014 Private Table (both years) | |
| Netherlands | AG Prognosetafel 2022 (2021: AG Prognosetafel 2020) | |
| Switzerland | LPP/BVG 2020 base table with CMI projection factors for mortality improvements with a 1.5% long-term improvement  rate (2021: LPP/BVG 2020 base table with CMI projection factors for mortality improvements with a 1.5% long-term  improvement rate) | |
|  |  |  |

Based on the above, the weighted average life expectancy, in years, for mortality tables used to determine benefit obligations is as

follows:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | U.S. | |  | UK | |  | Germany | |  | Canada | |  | Netherlands | |  | Switzerland | |
|  | Male | Female |  | Male | Female |  | Male | Female |  | Male | Female |  | Male | Female |  | Male | Female |
| 31 December 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Member age 65 (current life  expectancy) | 22.1 | 23.6 |  | 22.9 | 24.2 |  | 20.6 | 24.0 |  | 22.0 | 24.4 |  | 21.0 | 24.4 |  | 22.0 | 23.7 |
| Member age 45 (life  expectancy at age 65) | 22.2 | 24.1 |  | 24.5 | 26.0 |  | 23.4 | 26.3 |  | 23.0 | 25.3 |  | 23.2 | 26.3 |  | 23.9 | 25.6 |
| 31 December 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Member age 65 (current life  expectancy) | 21.6 | 23.5 |  | 22.9 | 24.2 |  | 20.5 | 23.9 |  | 22.0 | 24.3 |  | 20.7 | 24.1 |  | 21.9 | 23.6 |
| Member age 45 (life  expectancy at age 65) | 22.1 | 24.0 |  | 24.5 | 25.9 |  | 23.2 | 26.2 |  | 23.0 | 25.3 |  | 22.8 | 25.8 |  | 23.8 | 25.5 |

For the remaining territories, typical assumptions are that real salary increases will be from 0% to 8.0% (2021: 0% to 8.0%) per annum

and discount rates will be from 0% to 7.5% (2021: 0% to 11.0%) above inflation. Pension increases, where allowed for, are generally

assumed to be in line with inflation. Assumptions of life expectancy are in line with best practice in each territory. For countries where

there is not a deep market in such corporate bonds, the yield on government bonds is used.

The valuation of retirement benefit schemes involves judgements about uncertain future events. Sensitivities in respect of the key

assumptions used to measure the principal pension schemes as at 31 December 2022 are set out below. These sensitivities show the

hypothetical impact of a change in each of the listed assumptions in isolation, with the exception of the sensitivity to inflation which

incorporates the impact of certain correlating assumptions such as salary increases and pension increases. While each of these

sensitivities holds all other assumptions constant, in practice such assumptions rarely change in isolation, while asset values also change,

and the impacts may offset to some extent.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  | 1 year  increase  £m | 1 year  decrease  £m | percentage  increase  £m | percentage  decrease  £m |
| Average life expectancy – increase/(decrease) of scheme liabilities | 170 | (171) |  |  |
| Rate of inflation (+/- 25bps) – increase/(decrease) of scheme liabilities |  |  | 95 | (91) |
| Discount rate (+/- 50bps) – (decrease)/increase of scheme liabilities |  |  | (309) | 328 |

A one percent increase in healthcare inflation would increase healthcare scheme liabilities by £25 million, and a one percent decrease

would decrease liabilities by £19 million. The income statement effect of this change in assumption is not material.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

241

16 Deferred tax

Net deferred tax (liabilities)/assets comprise:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  | Stock  relief  £m | Excess of  capital  allowances  over  depreciation  £m | Tax  losses  £m | Undistributed  earnings of  associates and  subsidiaries  £m | Retirement  benefits  £m | Trademarks  £m | Other  temporary  differences  £m | Total  £m |
| 1 January 2022 | (4) | (151) | 94 | (221) | 139 | (16,779) | 1,071 | (15,851) |
| Differences on exchange | (8) | (20) | 5 | (8) | 7 | (2,109) | 126 | (2,007) |
| Credited/(charged) to the  income statement | 46 | 50 | 77 | — | (18) | 70 | (51) | 174 |
| Credited/(charged) relating  to changes in tax rates | — | (3) | 34 | — | (1) | 45 | (9) | 66 |
| Charged to other  comprehensive income | — | — | — | — | (89) | — | (17) | (106) |
| Net reclassifications as held-for-  sale | (4) | 9 | — | — | — | — | (27) | (22) |
| 31 December 2022 | 30 | (115) | 210 | (229) | 38 | (18,773) | 1,093 | (17,746) |
| 1 January 2021 | (13) | (189) | 58 | (231) | 246 | (16,784) | 1,133 | (15,780) |
| Differences on exchange | (3) | 5 | (3) | 2 | (4) | (149) | 4 | (148) |
| Credited/(charged) to the  income statement | 12 | (16) | 34 | 8 | (22) | 63 | (50) | 29 |
| Credited/(charged) relating  to changes in tax rates | — | 49 | 5 | — | (3) | 91 | 16 | 158 |
| Charged to other  comprehensive income | — | — | — | — | (78) | — | (32) | (110) |
| 31 December 2021 | (4) | (151) | 94 | (221) | 139 | (16,779) | 1,071 | (15,851) |

The net deferred tax liabilities are reflected in the Group balance sheet as follows: deferred tax asset of £682 million and deferred tax

liability of £18,428 million (2021: deferred tax asset of £611 million and deferred tax liability of £16,462 million), after offsetting assets and

liabilities where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred income taxes relate

to the same fiscal authority.

At the balance sheet date, the Group has not recognised a deferred tax asset in respect of unused tax losses of £364 million (2021: £342

million) which have no expiry date and unused tax losses of £429 million (2021: £452 million) which will expire within the next 20 years.

In 2022 and 2021 the Group has not recognised any deferred tax asset in respect of deductible temporary differences which have no

expiry date and has not recognised £41 million (2021: £148 million) in respect of deductible temporary differences which will expire within

the next 10 years.

At the balance sheet date, the Group has unused tax credits of £80 million (2021: £80 million) which have no expiry date. No amount of

deferred tax has been recognised in respect of these unused tax credits.

At the balance sheet date, the aggregate amount of undistributed earnings of subsidiaries which would be subject to dividend

withholding tax and for which no withholding tax liability has been recognised was £1.6 billion (2021: £0.9 billion).

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242

17 Trade and other receivables

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Trade receivables | 2,609 | 2,998 |
| Loans and other receivables | 1,568 | 755 |
| Prepayments and accrued income | 431 | 408 |
|  | 4,608 | 4,161 |
| Current | 4,367 | 3,951 |
| Non-current | 241 | 210 |
|  | 4,608 | 4,161 |

The majority of receivables are held in order to collect contractual cash flows, in accordance with the Group’s business model for

managing financial assets, and hence are measured at amortised cost. In certain countries, however, the Group has entered into

factoring arrangements and periodically sells certain trade receivables to banks and other financial institutions, without recourse, for

cash. These trade receivables have been derecognised from the statement of financial position to reflect the transfer by the Group of

substantially all of the risks and rewards of the receivables, including credit risk. Consequently, the cash inflows have been recognised

within operating cash flows. Typically in these arrangements, the Group also acts as a collection agent for the bank. At 31 December

2022, the value of trade receivables derecognised through the factoring arrangements where the Group acts as a collection agent was

£533 million (2021: £562 million) and where the Group does not act as a collection agent was £22 million (2021: £8 million). Included in

trade receivables above is £164 million (2021: £110 million) of trade debtor balances which were available for factoring under these

arrangements. In addition, the Group participates in certain supply chain finance programmes utilised by our customers allowing us to

receive payment for invoices earlier than the agreed due date at a discounted value. At 31 December 2022, the value of trade receivables

derecognised through these arrangements was £81 million (2021: £171 million).

Included in loans and other receivables are £114 million of litigation related deposits (2021: £84 million). Management has determined that

these payments represent a resource controlled by the entity, as a result of past events and from which future economic benefits are

expected to flow to the entity either by being recoverable on conclusion of ongoing appeal processes or by reducing amounts potentially

payable should the appeal process fail. These deposits are held at the fair value of consideration transferred less impairment, if

applicable. The effect of discounting would be immaterial.

In March 2017, the Brazilian Supreme Court ruled that for all taxpayers VAT should not be included in the calculation of social contribution

taxes (PIS/Cofins) which are levied based on revenue. In August 2022, Souza Cruz achieved the favourable final and unappealable decision

in its individual lawsuit in respect of overpaid taxes to the government. Accordingly, an asset has been recognised in the amount of

£624 million (principal amount plus interest) . Furthermore, the Group has a right related to an earn-out linked to the timing of the credit

compensation of £97 million.

Also included in loans and other receivables are deposits that do not meet the definition of cash and cash equivalents as well as loans

provided to farmers. The cash flows arising from these transactions are included in investing activities and have been reconciled, in note

18, to the cash flow statement.

Prepayments and accrued income include £21 million (2021: £24 million) of accrued income primarily in relation to rebates.

Amounts receivable from related parties including associated undertakings are shown in note 30.

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243

Trade and other receivables have been reported in the balance sheet net of allowances as follows:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Trade receivables – gross | 2,660 | 3,035 |
| Trade receivables – allowance | (51) | (37) |
| Loans and other receivables – gross | 1,568 | 755 |
| Loans and other receivables – allowance | — | — |
| Prepayments and accrued income | 431 | 408 |
| Net trade and other receivables per balance sheet | 4,608 | 4,161 |

The movements in the allowance account are as follows:

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  |  |  | 2022 |  |  |  | 2021 |
|  | Trade  receivables  £m | Loans  and other  receivables  £m | Total  £m |  | Trade  receivables  £m | Loans  and other  receivables  £m | Total  £m |
| 1 January | 37 | — | 37 |  | 41 | — | 41 |
| Differences on exchange | 2 | — | 2 |  | (2) | — | (2) |
| Provided in the year | 28 | — | 28 |  | 7 | — | 7 |
| Released | (16) | — | (16) |  | (9) | — | (9) |
| 31 December | 51 | — | 51 |  | 37 | — | 37 |

As permitted by IFRS 9, the loss allowance on trade receivables arising from the recognition of revenue under IFRS 15 is initially measured

at an amount equal to lifetime expected losses. Allowances in respect of loans and other receivables are initially recognised at an amount

equal to 12-month expected credit losses. Allowances are measured at an amount equal to the lifetime expected credit losses where the

credit risk on the receivables increases significantly after initial recognition.

The Group holds bank guarantees, other guarantees and credit insurance in respect of some of the past due debtor balances.

Trade and other receivables are predominantly denominated in the functional currencies of subsidiary undertakings apart from the

following: U.S. dollar: 1.9% (2021: 2.2%), UK sterling: 0.0% (2021: 0.1%), Euro: 5.7% (2021: 3.6%) and other currencies: 2.4% (2021: 0.9%).

There is no material difference between the above amounts for trade and other receivables and their fair value due to the short-term

duration of the majority of trade and other receivables as determined using discounted cash flow analysis. There is no concentration of

credit risk with respect to trade receivables as the Group has a large number of internationally dispersed customers.

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244

18 Investments held at fair value

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  |  |  | 2022 |  |  |  | 2021 |
|  | Fair value  through P&L  £m | Fair value  through OCI  £m | Total  £m |  | Fair value  through P&L  £m | Fair value  through OCI  £m | Total  £m |
| 1 January | 469 | 37 | 506 |  | 255 | 9 | 264 |
| Difference on exchange | 18 | 1 | 19 |  | 3 | 1 | 4 |
| Additions | 209 | 19 | 228 |  | 327 | 18 | 345 |
| Disposals | (93) | (3) | (96) |  | (98) | — | (98) |
| Provisions | 17 | — | 17 |  | (24) | — | (24) |
| Other fair value movements | 20 | 6 | 26 |  | 6 | 9 | 15 |
| 31 December | 640 | 60 | 700 |  | 469 | 37 | 506 |
| Current | 579 | — | 579 |  | 456 | — | 456 |
| Non-current | 61 | 60 | 121 |  | 13 | 37 | 50 |
|  | 640 | 60 | 700 |  | 469 | 37 | 506 |

The Group’s investments principally consist of non-derivative financial assets that cannot be classified as loans and other receivables

or cash and cash equivalents, as well as investments made by the Group’s corporate venture capital unit, Btomorrow Ventures, and other

Group companies.

Investments held at fair value through profit and loss principally consist of government securities, indexed deposits, treasury bills or other

treasury products with maturities of more than three months which, if held for less than 12 months, form part of the Group’s definition

of net debt. Investments held at fair value through profit and loss also includes the Group’s investment in Charlotte’s Web (see note 14).

Investments held at fair value through other comprehensive income (OCI) include equity investments in various start-up businesses

which are held for their strategic value.

Investments held at fair value through profit and loss above include restricted amounts of £396 million (2021: £351 million) due to

investments held by subsidiaries in CCAA protection (note 32), as well as £78 million (2021: £61 million) subject to potential exchange

control restrictions.

In 2021, as part of the disposal of the Group’s operations in Iran (note 27(d)), a provision of £24 million against non-current investments

held at fair value was charged to net finance costs as recoverability of these funds was not certain. During 2022, £17 million was

recovered with some progress on resolving issues over the release of the remaining funds.

Investments held at fair value are predominantly denominated in the functional currencies of subsidiary undertakings with less than

5% in other currencies (2021: less than 4% in other currencies). There is no material difference between the investments held at fair value

and their gross contractual values.

The classification of these investments under the IFRS 13 Fair Value Measurement fair value hierarchy is given in note 26. Fair values for

quoted investments are based on observable market prices. If there is no active market for a financial asset, the fair value is established

by using valuation techniques, including discounted cash flow analyses and share of net assets. The fair value of the 7-year convertible

debenture in Charlotte’s Web has been determined using a binomial option pricing model.

Included in the values in the table above are £186 million (2021: £101 million) of level 3 assets. Movements in these assets in 2022 included

£133 million (2021: £73 million) of additions, £82 million (2021: £56 million) of disposals and £26 million (£9 million) of net fair value gains.

Below is a reconciliation of the fair value investments cash flows to the cash flow statement – investing activities:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Cash outflow from investments held at fair value | 228 | 345 |
| Cash outflow from loans and other receivables | 29 | 24 |
| Cash outflows from investments per cash flow statement | 257 | 369 |
| Cash inflow from investments held at fair value | (96) | (98) |
| Cash inflow from loans and other receivables | (32) | (43) |
| Cash inflows from investments per cash flow statement | (128) | (141) |

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245

19 Derivative financial instruments

The fair values of derivatives are determined based on market data (primarily yield curves, implied volatilities and exchange rates) to

calculate the present value of all estimated flows associated with each derivative at the balance sheet date. In the absence of sufficient

market data, fair values would be based on the quoted market price of similar derivatives. The classification of these derivative assets and

liabilities under the IFRS 13 fair value hierarchy is given in note 26.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Assets  £m | Liabilities  £m |  | Assets  £m | Liabilities  £m |
| Fair value hedges |  |  |  |  |  |
| –interest rate swaps | 27 | 435 |  | 5 | 2 |
| – cross-currency swaps | 126 | — |  | 114 | — |
| Cash flow hedges |  |  |  |  |  |
| –interest rate swaps | 5 | — |  | — | — |
| – cross-currency swaps | 127 | 121 |  | 107 | 35 |
| – forward foreign currency contracts | 70 | 71 |  | 81 | 35 |
| Net investment hedges |  |  |  |  |  |
| – forward foreign currency contracts | 45 | 247 |  | 62 | 81 |
| Held-for-trading\* |  |  |  |  |  |
| – interest rate swaps | 12 | 14 |  | 28 | 34 |
| – forward foreign currency contracts | 149 | 41 |  | 28 | 127 |
| Total | 561 | 929 |  | 425 | 314 |
| Current | 430 | 427 |  | 182 | 235 |
| Non-current | 131 | 502 |  | 243 | 79 |
|  | 561 | 929 |  | 425 | 314 |
| Derivatives |  |  |  |  |  |
| – in respect of net debt\*\* | 438 | 605 |  | 273 | 182 |
| – other | 123 | 324 |  | 152 | 132 |
|  | 561 | 929 |  | 425 | 314 |

Notes:

\*Derivatives which do not meet the tests for hedge accounting under IFRS 9 or which are not designated as hedging instruments are referred to as ‘held-for-trading’. These derivatives

principally consist of interest rate swaps and forward foreign currency contracts which have not been designated as hedges due to their value changes offsetting with other

components of net finance costs relating to financial assets and financial liabilities. The Group does not use derivatives for speculative purposes. All derivatives are undertaken for risk

management purposes.

\*\*Derivatives in respect of net debt are in a net liability position of £167 million as at 31 December 2022 (2021: net asset position of £91 million). The Group’s net debt is presented in note

23.

For cash flow hedges, the timing of expected cash flows is as follows: assets of £202 million (2021: £188 million) of which £72 million

(2021: £78 million) is expected within one year and £nil million (2021: £107 million) beyond five years and liabilities of £192 million (2021: £70

million) of which £134 million (2021: £33 million) is expected within one year and £nil (2021: £nil) beyond five years.

The Group’s cash flow hedges are principally in respect of sales or purchases of inventory and certain debt instruments. A certain

number of forward foreign currency contracts were used to manage the currency profile of external borrowings and are reflected in the

currency table in note 23. Interest rate swaps have been used to manage the interest rate profile of external borrowings and are reflected

in the re-pricing table in note 23.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
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| Notes on Accounts  Continued | | | | | | | |

246

The tables below set out the maturities of the Group’s derivative financial instruments on an undiscounted contractual basis, based on

spot rates.

The maturity dates of all gross-settled derivative financial instruments are as follows:

|  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | 2022 |  |  |  |  |  | 2021 |
|  | Assets | |  | Liabilities | |  | Assets | |  | Liabilities | |
|  | Inflow  £m | Outflow  £m |  | Inflow  £m | Outflow  £m |  | Inflow  £m | Outflow  £m |  | Inflow  £m | Outflow  £m |
| Within one year |  |  |  |  |  |  |  |  |  |  |  |
| –forward foreign currency  contracts | 12,506 | (12,249) |  | 8,691 | (9,049) |  | 5,743 | (4,727) |  | 12,407 | (12,096) |
| – cross-currency swaps | 731 | (608) |  | 689 | (767) |  | 14 | (22) |  | 17 | (36) |
| Between one and two years |  |  |  |  |  |  |  |  |  |  |  |
| –forward foreign currency  contracts | 199 | (193) |  | 243 | (247) |  | 807 | (779) |  | 143 | (113) |
| – cross-currency swaps | 9 | (15) |  | 10 | (17) |  | 705 | (592) |  | 665 | (689) |
| Between two and three years |  |  |  |  |  |  |  |  |  |  |  |
| – cross-currency swaps | 9 | (15) |  | 460 | (502) |  | 9 | (15) |  | 10 | (15) |
| Between three and four years |  |  |  |  |  |  |  |  |  |  |  |
| – cross-currency swaps | 9 | (15) |  | — | — |  | 9 | (15) |  | 460 | (445) |
| Between four and five years |  |  |  |  |  |  |  |  |  |  |  |
| – cross-currency swaps | 756 | (579) |  | — | — |  | 9 | (15) |  | — | — |
| Beyond five years |  |  |  |  |  |  |  |  |  |  |  |
| – cross-currency swaps | — | — |  | — | — |  | 726 | (579) |  | — | — |
|  | 14,219 | (13,674) |  | 10,093 | (10,582) |  | 8,022 | (6,744) |  | 13,702 | (13,394) |

The maturity dates of net-settled derivative financial instruments, which primarily relate to interest rate swaps, are as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Assets  Inflow/  (outflow)  £m | Liabilities  Outflow/  (inflow)  £m |  | Assets  Inflow/  (outflow)  £m | Liabilities  Outflow/  (inflow)  £m |
| Within one year | 263 | 531 |  | 127 | 225 |
| Between one and two years | 30 | 134 |  | 25 | 19 |
| Between two and three years | — | 84 |  | 23 | 11 |
| Between three and four years | — | 66 |  | (2) | 11 |
| Between four and five years | — | 7 |  | — | 12 |
| Beyond five years | 23 | 460 |  | — | (17) |
|  | 316 | 1,282 |  | 173 | 261 |

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| --- | --- | --- | --- | --- | --- | --- | --- |
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247

The items designated as hedging instruments are as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Nominal  amount of  hedging  instrument  £m | Changes in  fair value used for  calculating hedge  ineffectiveness  £m |  | Nominal  amount of hedging  instrument  £m | Changes in  fair value used for  calculating hedge  ineffectiveness  £m |
| Interest rate risk exposure: |  |  |  |  |  |
| Fair value hedges |  |  |  |  |  |
| – interest rate swaps | 4,657 | (417) |  | 4,413 | (35) |
| – cross-currency swaps | 710 | 11 |  | 672 | (52) |
| Cash flow hedges |  |  |  |  |  |
| – interest rate swaps | 1,247 | (5) |  | — | — |
| – cross-currency swaps | 1,825 | 60 |  | 1,751 | 69 |
| Foreign currency risk exposure: |  |  |  |  |  |
| Cash flow hedges |  |  |  |  |  |
| – forward foreign currency contracts | 3,695 | (2) |  | 3,573 | 49 |
| Net investment hedges (derivative related) |  |  |  |  |  |
| – forward foreign currency contracts | 6,407 | (208) |  | 6,120 | (27) |
| Net investment hedges (non-derivative related) |  |  |  |  |  |
| – debt (carrying value) in borrowings designated as net  investment hedges of net assets | 389 | 21 |  | 368 | (24) |

20 Inventories

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Raw materials and consumables | 2,370 | 2,100 |
| Finished goods and work in progress | 3,159 | 3,046 |
| Goods purchased for resale | 142 | 133 |
|  | 5,671 | 5,279 |

Write-offs taken to other operating expenses in the Group income statement were £250 million (2021: £215 million; 2020: £309 million).

Goods purchased for resale include Group brands produced under third-party contract manufacturing arrangements.

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| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

248

21 Cash and cash equivalents

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Cash and bank balances | 3,116 | 2,529 |
| Cash equivalents | 330 | 280 |
|  | 3,446 | 2,809 |

The carrying value of cash and cash equivalents approximates their fair value.

Cash and cash equivalents are denominated in the functional currency of the subsidiary undertaking or other currencies as shown below:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Functional currency | 2,979 | 2,422 |
| U.S. dollar | 207 | 170 |
| Euro | 129 | 92 |
| Other currencies | 131 | 125 |
|  | 3,446 | 2,809 |

In the Group cash flow statement, net cash and cash equivalents are shown after deducting bank overdrafts and accrued interest where

applicable, as follows:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Cash and cash equivalents as above | 3,446 | 2,809 |
| Less overdrafts and accrued interest | (109) | (346) |
| Net cash and cash equivalents | 3,337 | 2,463 |

Cash and cash equivalents also include £34 million (2021: £42 million) of cash that is held as a hedging instrument.

Restricted cash

Cash and cash equivalents include restricted amounts of £1,411 million (2021: £1,024 million) due to subsidiaries in CCAA protection (note

32), as well as £324 million (2021: £305 million) principally due to exchange control restrictions.

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249

22 Capital and reserves

(a) Share capital

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | Ordinary  shares of 25p each  Number of shares |  | £m |
| Allotted and fully paid |  |  |  |
| 1 January 2022 | 2,456,617,788 |  | 614.15 |
| Changes during the year |  |  |  |
| – share option schemes | 249,632 |  | 0.06 |
| 31 December 2022 | 2,456,867,420 |  | 614.21 |
| Allotted and fully paid |  |  |  |
| 1 January 2021 | 2,456,591,597 |  | 614.14 |
| Changes during the year |  |  |  |
| – share option schemes | 26,191 |  | 0.01 |
| 31 December 2021 | 2,456,617,788 |  | 614.15 |
| Allotted and fully paid |  |  |  |
| 1 January 2020 | 2,456,520,738 |  | 614.12 |
| Changes during the year |  |  |  |
| – share option schemes | 70,859 |  | 0.02 |
| 31 December 2020 | 2,456,591,597 |  | 614.14 |

Share capital

The Company’s ordinary shares are fully paid and no further contribution of capital may be required by the Company from the

shareholders. All ordinary shares rank equally with regard to participation in dividends and to share in the proceeds of the Company’s

residual assets upon a winding up of the Company. Shareholders may, by ordinary resolution, declare final dividends, but not in excess of

the amount recommended by the Directors. Holders of ordinary shares have no pre-emptive rights.

On a show of hands every shareholder who is present in person at a general meeting is entitled to one vote regardless of the number of

shares held by the shareholder, unless a poll is demanded. On a poll, every shareholder who is present in person or by proxy has one vote

for every share held by the shareholder. The Company’s Annual General Meeting voting is undertaken by way of a poll.

All rights attached to the Company’s shares held by the Group as treasury shares are suspended until those shares are reissued.

(b) Share premium account, capital redemption reserves and merger reserves comprise:

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  | Share  premium  account  £m | Capital  redemption  reserves  £m | Merger  reserves  £m | Total  £m |
| 31 December 2022 | 113 | 101 | 26,414 | 26,628 |
| 31 December 2021 | 107 | 101 | 26,414 | 26,622 |
| 31 December 2020 | 103 | 101 | 26,414 | 26,618 |

Share premium account

The share premium account includes the difference between the value of shares issued and their nominal value. The share premium

increase includes £5 million (2021: £nil; 2020: £2 million) in respect of ordinary shares issued under the Company’s share option schemes.

A further £1 million (2021: £4 million; 2020: £7 million) increase in share premium is related to shares repurchased and not cancelled that

have been transferred from the Company to other Group undertakings, to be granted to certain employees on vesting of awards, and

represents the excess of transfer price of the share over the original weighted average cost of shares.

Capital redemption account

On the purchase of own shares as part of the share buy-back programme for shares which are cancelled, a transfer is made from

retained earnings to the capital redemption reserve equivalent to the nominal value of shares purchased. Purchased shares which are

not cancelled are classified as treasury shares and presented as a deduction from total equity.

Merger reserve account

The merger reserve comprises:

a.In 1999, shares were issued for the acquisition of the Rothmans International B.V. Group and the difference between the fair value of

shares issued and their nominal value of £3,748 million was credited to merger reserves; and

b.On 25 July 2017, the Group announced the completion of the acquisition of the remaining 57.8% of RAI not already owned by the Group.

Shares were issued for the acquisition and the difference between the fair value of shares issued and their nominal value of

£22,666 million was credited to merger reserves.

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(c) Equity attributed to owners of the parent - movements in other reserves and retained earnings (which are after

deducting treasury shares) comprise:

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | Retained earnings | |
|  | Translation  reserve  (i)  £m | Hedging  reserve  (ii)  £m | Fair  value  reserve  (iii)  £m | Revaluation  reserve  (iv)  £m | Other  (v)  £m | Total  other  reserves  £m | Treasury  shares  (vi)  £m | Other  £m |
| 1 January 2022 | (6,427) | (363) | 6 | 179 | 573 | (6,032) | (5,122) | 49,334 |
| Comprehensive income and expense |  |  |  |  |  |  |  |  |
| Profit for the year | — | — | — | — | — | — | — | 6,666 |
| Foreign currency translation and hedges of net  investments in foreign operations |  |  |  |  |  |  |  |  |
| –differences on exchange from translation of foreign  operations | 8,920 | — | — | — | — | 8,920 | — | — |
| – reclassified and reported in profit for the year | 5 | — | — | — | — | 5 | — | — |
| – net investment hedges - net fair value  gains on derivatives | (578) | — | — | — | — | (578) | — | — |
| –net investment hedges - differences on exchange  on borrowings | (21) | — | — | — | — | (21) | — | — |
| Cash flow hedges |  |  |  |  |  |  |  |  |
| – net fair value gains | — | 81 | — | — | — | 81 | — | — |
| – reclassified and reported in profit for the year | — | 101 | — | — | — | 101 | — | — |
| –tax on net fair value gains in respect of cash flow  hedges (note 10(f)) | — | (17) | — | — | — | (17) | — | — |
| Investments held at fair value |  |  |  |  |  |  |  |  |
| – net fair value gains | — | — | 6 | — | — | 6 | — | — |
| Associates - share of OCI, net of tax (note 9) | 6 | — | — | — | — | 6 | — | — |
| Retirement benefit schemes |  |  |  |  |  |  |  |  |
| – net actuarial gains (note 15) | — | — | — | — | — | — | — | 316 |
| – surplus recognition (note 15) | — | — | — | — | — | — | — | (39) |
| –tax on actuarial gains in respect of subsidiaries  (note 10(f)) | — | — | — | — | — | — | — | (95) |
| Associates - share of OCI, net of tax (note 9) | — | — | 18 | — | — | 18 | — | 1 |
| Other changes in equity |  |  |  |  |  |  |  |  |
| Cash flow hedges reclassified and  reported in total assets | — | (129) | — | — | — | (129) | — | — |
| Employee share options |  |  |  |  |  |  |  |  |
| – value of employee services | — | — | — | — | — | — | — | 81 |
| – treasury shares used for share option schemes | — | — | — | — | — | — | 14 | (15) |
| Dividends and other appropriations |  |  |  |  |  |  |  |  |
| – ordinary shares | — | — | — | — | — | — | — | (4,915) |
| Purchase of own shares |  |  |  |  |  |  |  |  |
| – held in employee share ownership trusts | — | — | — | — | — | — | (80) | — |
| – share buy-back programme | — | — | — | — | — | — | (2,012) | — |
| Perpetual hybrid bonds |  |  |  |  |  |  |  |  |
| – coupons paid | — | — | — | — | — | — | — | (59) |
| – tax on coupons paid | — | — | — | — | — | — | — | 11 |
| Non-controlling interests - acquisitions (note 27(b)) | — | — | — | — | — | — | — | (1) |
| Reclassification of equity related to assets held-for-  sale | 295 | — | — | — | — | 295 | — | — |
| Other movements | — | — | — | — | — | — | 84 | (88) |
| 31 December 2022 | 2,200 | (327) | 30 | 179 | 573 | 2,655 | (7,116) | 51,197 |

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|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | Retained earnings | |
|  | Translation  reserve  (i)  £m | Hedging  reserve  (ii)  £m | Fair  value  reserve  (iii)  £m | Revaluation  reserve  (iv)  £m | Other  (v)  £m | Total  other  reserves  £m | Treasury  shares  (vi)  £m | Other  £m |
| 1 January 2021 | (6,830) | (504) | (18) | 179 | 573 | (6,600) | (5,150) | 47,191 |
| Comprehensive income and expense |  |  |  |  |  |  |  |  |
| Profit for the year | — | — | — | — | — | — | — | 6,801 |
| Foreign currency translation and hedges of net  investments in foreign operations |  |  |  |  |  |  |  |  |
| –differences on exchange from translation of  foreign operations | 31 | — | — | — | — | 31 | — | — |
| – reclassified and reported in profit for the year | 291 | — | — | — | — | 291 | — | — |
| –net investment hedges – net fair value gains on  derivatives | 75 | — | — | — | — | 75 | — | — |
| –net investment hedges – differences on exchange  on borrowings | 24 | — | — | — | — | 24 | — | — |
| Cash flow hedges |  |  |  |  |  |  |  |  |
| – net fair value gains | — | 95 | — | — | — | 95 | — | — |
| – reclassified and reported in profit for the year | — | 32 | — | — | — | 32 | — | — |
| –tax on net fair value gains in respect of cash flow  hedges (note 10(f)) | — | (32) | — | — | — | (32) | — | — |
| Investments held at fair value |  |  |  |  |  |  |  |  |
| – net fair value gains | — | — | 9 | — | — | 9 | — | — |
| Associates – share of OCI, net of tax (note 9) | (18) | 1 | — | — | — | (17) | — | — |
| Retirement benefit schemes |  |  |  |  |  |  |  |  |
| – net actuarial gains (note 15) | — | — | — | — | — | — | — | 382 |
| – surplus recognition (note 15) | — | — | — | — | — | — | — | (1) |
| –tax on actuarial gains in respect of subsidiaries  (note 10(f)) | — | — | — | — | — | — | — | (82) |
| Associates - share of OCI, net of tax (note 9) | — | — | 15 | — | — | 15 | — | (1) |
| Other changes in equity |  |  |  |  |  |  |  |  |
| Cash flow hedges reclassified and reported in total  assets | — | 45 | — | — | — | 45 | — | — |
| Employee share options |  |  |  |  |  |  |  |  |
| – value of employee services | — | — | — | — | — | — | — | 76 |
| – treasury shares used for share option schemes | — | — | — | — | — | — | 13 | (17) |
| Dividends and other appropriations |  |  |  |  |  |  |  |  |
| – ordinary shares | — | — | — | — | — | — | — | (4,904) |
| Purchase of own shares |  |  |  |  |  |  |  |  |
| – held in employee share ownership trusts | — | — | — | — | — | — | (82) | — |
| Perpetual hybrid bonds |  |  |  |  |  |  |  |  |
| – coupons paid | — | — | — | — | — | — | — | (6) |
| – tax on coupons paid | — | — | — | — | — | — | — | 1 |
| Non-controlling interests – acquisitions  (note 27(b)) | — | — | — | — | — | — | — | (5) |
| Other movements | — | — | — | — | — | — | 97 | (101) |
| 31 December 2021 | (6,427) | (363) | 6 | 179 | 573 | (6,032) | (5,122) | 49,334 |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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252

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | Retained earnings | |
|  | Translation  reserve  (i)  £m | Hedging  reserve  (ii)  £m | Fair  value  reserve  (iii)  £m | Revaluation  reserve  (iv)  £m | Other  (v)  £m | Total  other  reserves  £m | Treasury  shares  (vi)  £m | Other  £m |
| 1 January 2020 | (3,974) | (346) | 13 | 179 | 573 | (3,555) | (5,261) | 45,495 |
| Comprehensive income and expense |  |  |  |  |  |  |  |  |
| Profit for the year | — | — | — | — | — | — | — | 6,400 |
| Foreign currency translation and hedges of net  investments in foreign operations |  |  |  |  |  |  |  |  |
| –differences on exchange from translation of  foreign operations | (2,582) | — | — | — | — | (2,582) | — | — |
| –net investment hedges – net fair value  losses on derivatives | (16) | — | — | — | — | (16) | — | — |
| –net investment hedges – differences on exchange  on borrowings | (163) | — | — | — | — | (163) | — | — |
| Cash flow hedges |  |  |  |  |  |  |  |  |
| – net fair value losses | — | (256) | — | — | — | (256) | — | — |
| – reclassified and reported in profit for the year | — | 90 | — | — | — | 90 | — | — |
| –tax on net fair value losses in respect of cash flow  hedges (note 10(f)) | — | 44 | — | — | — | 44 | — | — |
| Associates – share of OCI, net of tax (note 9) | (95) | (3) | — | — | — | (98) | — | — |
| Retirement benefit schemes |  |  |  |  |  |  |  |  |
| – net actuarial gains (note 15) | — | — | — | — | — | — | — | 105 |
| – surplus recognition (note 15) | — | — | — | — | — | — | — | 10 |
| –tax on actuarial gains in respect of subsidiaries  (note 10(f)) | — | — | — | — | — | — | — | (26) |
| Associates - share of OCI, net of tax (note 9) | — | — | (31) | — | — | (31) | — | (3) |
| Other changes in equity |  |  |  |  |  |  |  |  |
| Cash flow hedges reclassified and reported in total  assets | — | (33) | — | — | — | (33) | — | — |
| Employee share options |  |  |  |  |  |  |  |  |
| –value of employee services | — | — | — | — | — | — | — | 88 |
| –treasury shares used for share option schemes | — | — | — | — | — | — | 9 | (16) |
| Dividends and other appropriations |  |  |  |  |  |  |  |  |
| –ordinary shares | — | — | — | — | — | — | — | (4,747) |
| Purchase of own shares |  |  |  |  |  |  |  |  |
| –held in employee share ownership trusts | — | — | — | — | — | — | (17) | — |
| Other movements | — | — | — | — | — | — | 119 | (115) |
| 31 December 2020 | (6,830) | (504) | (18) | 179 | 573 | (6,600) | (5,150) | 47,191 |

(i) Translation reserve:

The translation reserve is explained in the accounting policy on foreign currencies in note 1.

In 2022, included within the differences on exchange from translation of foreign operations is £5 million (2021: £291 million; 2020: £nil)

which has been reclassified from reserves to the income statement and recognised in other operating expenses as an adjusting item.

This amount includes £4 million in respect of the exit from Egypt and £2 million (2021: £19 million; 2020: £nil) from other Quantum-related

initiatives. In addition, in certain markets, the Group has moved to above market business models utilising local distributors as importers.

As a consequence, with the cessation of a physical presence in these markets, foreign exchange previously recognised in other

comprehensive income for these entities has been reclassified to the income statement.

In 2022, as detailed in note 14, as a result of the liquidation of Yemen, the Group reclassified to the income statement the foreign

exchange previously recognised in associates other comprehensive income. This resulted in a credit of £1 million to the income

statement.

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253

(ii) Hedging reserve:

The hedging reserve is explained in the accounting policy on financial instruments in note 1.

Of the amounts reclassified from the hedging reserve and reported in profit for the year, a loss of £16 million (2021: £29 million loss; 2020:

£16 million gain) and a loss of £2 million (2021: £6 million gain; 2020: £19 million gain) were reported within revenue and raw materials and

consumables, respectively, together with a gain of £46 million (2021: £4 million loss; 2020: £2 million loss) reported in other operating

expenses, and a gain of £73 million (2021: £59 million gain; 2020: £57 million gain) reported within net finance costs.

The Group hedges certain foreign currency denominated borrowings with cross-currency interest rate swaps. As permitted by IFRS 9

Financial Instruments, the foreign currency basis spreads have been separated from the hedging instrument and are recognised in

reserves as a ‘cost of hedging’ and are reclassified to the income statement in the same period in which profit and loss is affected by the

hedged expected cashflows as a component of the associated interest expense. The basis spreads are included within hedging reserves

as they are not material. Included within the balance of hedging reserves at 31 December 2022 is an accumulated gain of £5 million (2021:

£4 million; 2020: £9 million) in respect of the cost of hedging.

(iii) Fair value reserve:

The fair value reserve is explained in the accounting policy on financial instruments in note 1. Fair value gains and losses arising from

investments held at fair value through other comprehensive income are recognised in this reserve.

(iv) Revaluation reserve:

The revaluation reserve relates to the acquisition of the cigarette and snus business of ST in 2008.

(v) Other reserves:

Other reserves comprise:

(a) £483 million which arose in 1998 from merger accounting in a Scheme of Arrangement and Reconstruction whereby British American

Tobacco p.l.c. acquired the entire share capital of B.A.T Industries p.l.c. and the share capital of that company’s principal financial services

subsidiaries was distributed, so effectively demerging them; and

(b) In the 1999 Rothmans transaction, convertible redeemable preference shares were issued as part of the consideration. The discount

on these shares was amortised by crediting other reserves and charging retained earnings. The £90 million balance in other reserves

comprises the accumulated balance in respect of the preference shares converted during 2004.

(vi) Treasury shares:

Total equity attributable to owners of the parent is stated after deducting the cost of treasury shares which include £6,821 million (2021:

£4,823 million; 2020: £4,836 million) for shares repurchased and not cancelled and £295 million (2021: £299 million; 2020: £314 million) in

respect of the cost of own shares held in employee share ownership trusts. The increase in the shares repurchased and not cancelled is

primarily due to the Group’s share buy-back programme net of shares reissued to satisfy the vesting of U.S. share options.

On 10 February 2022, the Board approved a proposed £2 billion share buy-back programme for 2022. The previous share buy-back

programme was suspended from 30 July 2014. As at 31 December 2022, treasury shares include 5,920,638 (2021: 6,269,959; 2020:

6,053,158) shares held in trust and 221,000,192 (2021: 161,930,217; 2020: 162,347,246) shares repurchased and not cancelled as part of the

Company’s share buy-back programme. From March 2020, the Company has utilised shares acquired in the share buy-back programme

to satisfy shared-based payment awards made to certain employees.

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(d) Perpetual hybrid bonds

On 27 September 2021, the Group issued two €1 billion perpetual hybrid bonds amounting to £1,703 million, which have been classified

as equity. Issuance costs of these bonds, amounting to €26 million (£22 million), have been recognised within equity.

These bonds include redemption options exercisable at the Group’s discretion from September 2026 to December 2026 (the

3% perpetual hybrid bond) and June 2029 to September 2029 (the 3.75% perpetual hybrid bond), on specified dates thereafter, or in

the event of specific circumstances (such as a change in IFRS or tax regime) as set out in the individual terms of each issue.

The coupons associated with these perpetual hybrid bonds are fixed at 3% until 2026 and 3.75% until 2029, respectively, and would reset

to rates determined by the contractual terms of each instrument on certain dates thereafter. The bonds are perpetual in nature and do

not have maturity dates for the repayment of principal. The contractual terms of the perpetual hybrid bonds allow the Group to defer

coupon payments, however certain contingent events could trigger mandatory payments of such deferred coupons, including the

payment of dividends on, and the repurchase of, ordinary shares, subject to certain exceptions in each case. The full terms and conditions

of such events can be found in the prospectus dated 27 September 2021 which is available under the debt facilities section of the Group’s

debt microsite (bat.com/debt).

As the Group has the unconditional right to avoid transferring cash or another financial asset in relation to these bonds, they are

classified as equity instruments in the consolidated financial statements.

During the year, the Group did not defer any eligible coupon payments and paid a coupon of £33 million in September 2022 on the

3.75% September 2029 bond and £27 million in December 2022 (December 2021: £6 million) on the 3% December 2026 bond which has

been recognised within equity.

The fair value of these bonds at 31 December 2022 is £1,331 million (2021: £1,651 million).

(e) Non-controlling interests

Movements in non-controlling interests primarily relate to profit for the year and dividends (reported as a movement in retained

earnings) and differences on exchange arising from the translation into sterling (reported as a movement in other reserves). Information

on subsidiaries with material non-controlling interests is provided in note 32.

(f) Dividends and other appropriations

The interim quarterly dividend payment for the year ended 31 December 2021 of 217.8p per ordinary share (31 December 2020: 215.6p per

ordinary share) was payable in four equal instalments: amounts payable in May 2022 of £1,239 million (May 2021: £1,241 million), August

2022 of £1,223 million (August 2021: £1,228 million), November 2022 of £1,219 million (November 2021: £1,232 million) and £1,211 million in

February 2023 (February 2022: £1,236 million) respectively. The total dividends recognised as an appropriation from reserves in 2022 was

£4,915 million (2021: £4,904 million; 2020: £4,747 million).

The Board has declared an interim dividend of 230.9p per ordinary share of 25p, for the year ended 31 December 2022, payable in four

equal quarterly instalments of 57.72p per ordinary share in May 2023, August 2023, November 2023 and February 2024. These payments

will be recognised as appropriations from reserves in 2023 and 2024. The total amount payable is estimated to be £5,163 million based on

the number of shares outstanding at the date of these accounts.

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23 Borrowings

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Currency | Maturity dates | Interest rates | 2022  £m | 2021  £m |
| Eurobonds | Euro | 2023 to 2045 | 0.9% to 3.1% | 7,149 | 7,316 |
|  | UK sterling | 2024 to 2055 | 2.1% to 7.3% | 3,884 | 4,086 |
|  | Swiss franc | 2026 | 1.4% | 226 | 203 |
| Bonds issued pursuant to Rules under the  U.S. Securities Act (as amended) | U.S. dollar | 2023 to 2052 | 1.7% to 8.1% | 30,152 | 25,625 |
|  | U.S. dollar\* | 2022 | USD3m LIBOR + 0.88 bps | — | 554 |
| Bonds and notes |  |  |  | 41,411 | 37,784 |
| Commercial paper |  |  |  | 27 | 269 |
| Other loans |  |  |  | 875 | 500 |
| Bank loans |  |  |  | 203 | 313 |
| Bank overdrafts |  |  |  | 106 | 346 |
| Lease liabilities |  |  |  | 517 | 446 |
|  |  |  |  | 43,139 | 39,658 |

Note:

\*As at 31 December 2022, there were no outstanding floating rate U.S. dollar bonds (2021: £554 million, 3M LIBOR +88bps)

Perpetual hybrid bonds issued by the Group have been classified as equity (note 22(d)) and are therefore excluded from borrowings.

Other loans comprise £875 million (2021: £500 million) relating to a bilateral facility. Commercial paper is issued at competitive rates to

meet short-term borrowing requirements as and when needed.

Current borrowings per the balance sheet include interest payable of £524 million at 31 December 2022 (2021: £460 million). Included

within borrowings are £9,223 million (2021: £9,197 million) of borrowings subject to fair value hedges where their amortised cost has

been decreased by £355 million (2021: £101 million increase).

The fair value of borrowings is estimated to be £37,170 million (2021: £40,557 million) of which £35,440 million (2021: £38,683 million)

has been calculated using quoted market prices and is within level 1 of the fair value hierarchy and £1,730 million (2021: £1,874 million)

has been calculated based on discounted cash flow analysis and is within level 3 of the fair value hierarchy.

Amounts secured on Group assets including property, plant and equipment, inventory and receivables as at 31 December 2022 are

£9 million (2021: £10 million). The majority of lease liabilities are also secured against the associated assets.

Borrowings are repayable as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Per balance sheet | |  | Contractual gross maturities | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Within one year | 4,413 | 3,992 |  | 5,426 | 4,860 |
| Between one and two years | 4,253 | 2,484 |  | 5,763 | 3,740 |
| Between two and three years | 4,406 | 3,853 |  | 5,673 | 5,092 |
| Between three and four years | 3,013 | 4,090 |  | 4,141 | 5,034 |
| Between four and five years | 4,077 | 2,739 |  | 5,494 | 3,675 |
| Beyond five years | 22,977 | 22,500 |  | 33,806 | 32,203 |
|  | 43,139 | 39,658 |  | 60,303 | 54,604 |

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256

The contractual gross maturities in each year include the borrowings maturing in that year together with forecast interest payments on

all borrowings which are outstanding for all or part of that year.

Borrowings are denominated in the functional currency of the subsidiary undertaking or other currencies as shown below:

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Functional  currency  £m | U.S.  dollar  £m | UK  sterling  £m | Euro  £m | Other  currencies  £m | Total  £m |
| 31 December 2022 |  |  |  |  |  |  |
| Total borrowings | 33,438 | 3,383 | 452 | 5,579 | 287 | 43,139 |
| Effect of derivative financial instruments |  |  |  |  |  |  |
| – cross-currency swaps | 2,356 | — | (450) | (2,085) | — | (179) |
| – forward foreign currency contracts | (40) | (998) | — | 590 | 454 | 6 |
|  | 35,754 | 2,385 | 2 | 4,084 | 741 | 42,966 |
| 31 December 2021 |  |  |  |  |  |  |
| Total borrowings | 30,363 | 2,837 | 453 | 5,775 | 230 | 39,658 |
| Effect of derivative financial instruments |  |  |  |  |  |  |
| – cross-currency swaps | 2,219 | — | (450) | (1,973) | — | (204) |
| – forward foreign currency contracts | (24) | (464) | — | 58 | 432 | 2 |
|  | 32,558 | 2,373 | 3 | 3,860 | 662 | 39,456 |

The exposure to interest rate changes when borrowings are re-priced is as follows:

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | Within  1 year  £m | Between  1-2 years  £m | Between  2-3 years  £m | Between  3-4 years  £m | Between  4-5 years  £m | Beyond  5 years  £m | Total  £m |
| 31 December 2022 |  |  |  |  |  |  |  |
| Total borrowings | 4,398 | 4,246 | 4,407 | 3,013 | 4,077 | 22,998 | 43,139 |
| Effect of derivative financial instruments |  |  |  |  |  |  |  |
| – interest rate swaps | 4,657 | (500) | (1,247) | — | (2,910) | — | — |
| – cross-currency swaps | (77) | — | 36 | — | (138) | — | (179) |
|  | 8,978 | 3,746 | 3,196 | 3,013 | 1,029 | 22,998 | 42,960 |
| 31 December 2021 |  |  |  |  |  |  |  |
| Total borrowings | 3,999 | 2,477 | 3,853 | 4,090 | 2,739 | 22,500 | 39,658 |
| Effect of derivative financial instruments |  |  |  |  |  |  |  |
| – interest rate swaps | 4,192 | — | (500) | (1,107) | — | (2,585) | — |
| – cross-currency swaps | 566 | (652) | — | (19) | — | (99) | (204) |
|  | 8,757 | 1,825 | 3,353 | 2,964 | 2,739 | 19,816 | 39,454 |

Lease liabilities are repayable as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Per balance sheet | |  | Contractual gross maturities | |
|  | 2022  £m | 2021  £m |  | 2022  £m | 2021  £m |
| Within one year | 142 | 126 |  | 161 | 142 |
| Between one and two years | 109 | 93 |  | 122 | 106 |
| Between two and three years | 76 | 66 |  | 85 | 76 |
| Between three and four years | 58 | 49 |  | 65 | 56 |
| Between four and five years | 50 | 38 |  | 54 | 43 |
| Beyond five years | 82 | 74 |  | 112 | 103 |
|  | 517 | 446 |  | 599 | 526 |

For more information on leasing arrangements, refer to note 13(b).

As at 31 December 2022, the Group’s undrawn committed borrowing facilities (note 26) amount to £7,828 million (2021: £7,850 million)

with £4,828 million maturing within one year (2021: £4,850 million maturing within one year), £150 million maturing between two and

three years (2021: £nil maturing between two and three years), £350 million maturing between three and four years (2021: £150 million

maturing between three and four years) and £2,500 million maturing between four and five years (2021: £2,850 million maturing between

four and five years).

The Group’s composition and movements in net debt are presented below along with a reconciliation to the financing activities in the

Group Cash Flow Statement:

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257

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | 2022  £m |
|  | Notes | Opening  balance | Cash flow | Foreign  exchange | Fair value,  accrued  interest and  other | Held for Sale | Closing  balance |
| Borrowings (excluding lease liabilities)\* |  | 39,212 | (17) | 3,881 | (454) | — | 42,622 |
| Lease liabilities |  | 446 | (161) | 30 | 218 | (16) | 517 |
| Derivatives in respect of net debt | 19 | (91) | 348 | (435) | 345 | — | 167 |
| Cash and cash equivalents | 21 | (2,809) | (571) | (431) | (3) | 368 | (3,446) |
| Current investments held at fair value | 18 | (456) | (86) | (15) | (22) | — | (579) |
|  |  | 36,302 | (487) | 3,030 | 84 | 352 | 39,281 |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | 2021  £m |
|  | Notes | Opening  balance | Cash flow | Foreign  exchange | Fair value,  accrued  interest and  other | Held for Sale | Closing  balance |
| Borrowings (excluding lease liabilities)\* |  | 43,493 | (3,768) | (387) | (126) | — | 39,212 |
| Lease liabilities |  | 475 | (154) | (22) | 147 | — | 446 |
| Derivatives in respect of net debt | 19 | (346) | (22) | 277 | — | — | (91) |
| Cash and cash equivalents | 21 | (3,139) | 75 | 258 | (3) | — | (2,809) |
| Current investments held at fair value | 18 | (242) | (205) | (2) | (7) | — | (456) |
|  |  | 40,241 | (4,074) | 124 | 11 | — | 36,302 |

Note:

\*Borrowings as at 31 December 2022 include £798 million (2021: £754 million) in respect of the purchase price adjustments relating to the acquisition of Reynolds American.

In the table above, movements in accrued interest relate to the net movement year on year and cash flows related to interest payments

are not included.

'Fair value, accrued interest and other’ movements in lease liabilities in 2022 mainly comprise additions of £218 million (2021: £147 million)

(net of reassessments, modifications and terminations), see note 13(a). The movement of £22 million (2021: £7 million) in current

investments held at fair value represents the fair value gains for these investments.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Cash flows per net debt statement | (487) | (4,074) |
| Non-financing cash flows included in net debt | 897 | 33 |
| Interest paid | (1,578) | (1,479) |
| Interest element of lease liabilities | (25) | (23) |
| Remaining cash flows relating to derivative financial instruments | (465) | 251 |
| Purchases of own shares held in employee share ownership trusts | (80) | (82) |
| Purchase of own shares | (2,012) | — |
| Proceeds from issue of perpetual hybrid bonds | — | 1,681 |
| Coupon paid on perpetual hybrid bonds | (60) | (6) |
| Dividends paid to owners of the parent | (4,915) | (4,904) |
| Capital injection from and purchase of non-controlling interests | (1) | 1 |
| Dividends paid to non-controlling interests | (158) | (150) |
| Other | 6 | 3 |
| Net cash used in financing activities per cash flow statement | (8,878) | (8,749) |

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258

24 Provisions for liabilities

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Restructuring  of existing  businesses  £m | Employee-  related  benefits  £m | Fox River  £m | DOJ and OFAC  investigations  £m | Other  provisions  £m | Total  £m |
| 1 January 2022 | 179 | 41 | 62 | — | 571 | 853 |
| Differences on exchange | 9 | 2 | — | — | 15 | 26 |
| Provided in respect of the year (\*) | 198 | 10 | — | 450 | 187 | 845 |
| Transferred to liabilities associated with  assets held for sale | (20) | — | — | — | (6) | (26) |
| Utilised during the year | (69) | (9) | (8) | — | (91) | (177) |
| 31 December 2022 | 297 | 44 | 54 | 450 | 676 | 1,521 |
| Analysed on the balance sheet as |  |  |  |  |  |  |
| – current | 240 | 14 | 10 | 450 | 373 | 1,087 |
| – non-current | 57 | 30 | 44 | — | 303 | 434 |
|  | 297 | 44 | 54 | 450 | 676 | 1,521 |

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Restructuring  of existing  businesses  £m | Employee-  related  benefits  £m | Fox River  £m | Other  provisions  £m | Total  £m |
| 1 January 2021 | 241 | 38 | 70 | 636 | 985 |
| Differences on exchange | (13) | (3) | — | (23) | (39) |
| Provided in respect of the year (\*) | 32 | 27 | — | 199 | 258 |
| Utilised during the year | (81) | (21) | (8) | (241) | (351) |
| - in respect of MSA litigation (Texas, Minnesota,  Mississippi) | — | — | — | (199) | (199) |
| - in respect of other | (81) | (21) | (8) | (42) | (152) |
| 31 December 2021 | 179 | 41 | 62 | 571 | 853 |
| Analysed on the balance sheet as |  |  |  |  |  |
| – current | 123 | 14 | 8 | 316 | 461 |
| – non-current | 56 | 27 | 54 | 255 | 392 |
|  | 179 | 41 | 62 | 571 | 853 |

Note:

\*Amounts provided above are shown net of reversals of unused provisions which include reversals of £35 million (2021: £20 million) for restructuring of existing businesses,

£10 million (2021: £1 million) for employee benefits and £225 million (2021: £147 million) for other provisions, of which £74 million (2021: £34 million) was reclassified to trade and other

payables.

The restructuring provisions relate to the restructuring and integration costs incurred and are reported as adjusting items. The principal

restructuring activities in 2022 and 2021 are as described in note 7 and primarily include the cost of employee packages and long-term

social plans associated with redundancy programmes from previous years. Provisions associated with redundancy packages are

determined based on termination packages offered in each country. The long-term social plans primarily relate to social plans in

Germany, which span over several years and are based on actuarial calculations. These are discounted to present value using Central

Bank rates. We do not consider the effect of discounting to be material. The provisions for long-term social plans include future

payments related to contracts that are already fixed. Given that there is little or no variability expected in the timing and amount of the

payments, no additional risk has been incorporated in the discounting. While some elements of the non-current provisions of £57 million

will unwind over several years, as termination payments are made over extended periods in some countries, it is estimated that

approximately 97% of these non-current provisions will unwind within five years.

Employee-related benefits mainly relate to employee benefits other than post-employment benefits. The principal components of these

provisions are gratuity and termination awards, ‘jubilee’ payments due after a certain service period and expected payments associated

with long-term disability. The majority of these provisions are calculated by actuaries. It is estimated that approximately 81% of the non-

current provisions of £30 million will unwind within five years.

A provision of £274 million was made in 2011 for a potential claim under a 1998 settlement agreement entered into by a Group subsidiary

in respect of the clean-up of sediment in the Fox River. On 30 September 2014, the Group, NCR, Appvion and Windward Prospects

entered into a funding agreement; the details of this agreement are explained in note 31. This agreement led to payments of £1 million in

2022 (2021: £2 million). In addition, the Group incurred legal costs of £7 million (2021: £6 million), which were also charged against the

provision. It is expected that the non-current provision will unwind within five years.

As discussed earlier (in note 6(h) Other Operating Expenses), the Group has been cooperating with investigations by the DOJ and OFAC

into suspicions of breaches of sanctions. The Group is engaged in discussions with both agencies to find a resolution through settlement.

A provision of £450 million has been recognised in 2022, however it cannot be excluded that the amount of any potential settlement with

the DOJ and OFAC may vary from this amount.

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259

Other provisions comprise balances set up in the ordinary course of general business that cannot be classified within the other

categories, such as sales returns and onerous contracts, together with amounts in respect of supplier, excise and other disputes. The

nature of the amounts provided in respect of disputes is such that the extent and timing of cash flows are difficult to estimate and the

ultimate liability may vary from the amounts provided. Other provisions also include a provision for interest of £183 million in relation to

the Franked Investment Income Group Litigation Order (FII GLO), as mentioned in notes 8(b) and 10(b). The provision is calculated based

on the UK central bank base rate plus 2% and has been charged to net finance costs. As there is uncertainty over the potential timing

of the utilisation, as explained in note 10(b), the provision has been reported as a non-current provision.

In 2020, the Group recognised a provision of US$272 million (£212 million) in relation to the ITG Brands, LLC MSA litigation agreements

with the States of Texas, Minnesota and Mississippi which was utilised in 2021. Further details are provided in note 31.

On 1 March 2019, the Quebec Court of Appeal in Montreal upheld the Superior Court’s decision of May 2015 (reducing ITCAN’s share of

the judgment due to a change in interest computation to a maximum of CAD$9.2 billion). The Court of Appeal also upheld the previously

stated requirements for the defendants to deposit CAD$1.1 billion into an escrow account. The Board of Directors of ITCAN reassessed

the recoverability of the litigation related deposit and, accordingly, the Group recognised a charge against the income statement of

CAD$758 million (£436 million) in 2019, reflecting the amount of the judgment that is considered to be probable and estimable in line with

IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Consequently, the Group utilised the litigation related deposit which was

shown as a receivable at 31 December 2018 (within trade and other receivables) against the current estimate of the liability and both the

provision and litigation related deposit were reduced accordingly. Further details are provided in note 31.

25 Trade and other payables

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Trade payables | 4,055 | 3,923 |
| Duty, excise and other taxes | 3,104 | 3,148 |
| Accrued charges and deferred income | 2,713 | 2,095 |
| FII GLO (note 10(b)) | 913 | 963 |
| Social security and other taxation | 61 | 55 |
| Sundry payables | 547 | 375 |
|  | 11,393 | 10,559 |
| Current | 10,449 | 9,577 |
| Non-current | 944 | 982 |
|  | 11,393 | 10,559 |

As explained in note 17, the Group acts as a collection agent for banks and other financial institutions in certain debt factoring

arrangements. The cash collected in respect of these arrangements that has not yet been remitted amounts to £119 million (2021: £137

million) and is included in sundry payables.

In addition, the Group has certain Supply Chain Financing (SCF) or ‘reverse factoring’ arrangements in place. The principal purpose of

these arrangements is to provide the supplier with the option to access liquidity earlier through the sale of its receivables due from the

Group to a bank or other financial institution prior to their due date. Management has determined that the Group’s payables to these

suppliers have neither been extinguished nor have the liabilities been significantly modified by these arrangements. The value of amounts

payable, invoice due dates and other terms and conditions applicable, from the Group’s perspective, remain unaltered, with only the

ultimate payee being changed. At 31 December 2022, the value of amounts payable under the SCF programmes was £257 million (2021:

£251 million). The cash outflows in respect of these arrangements have been recognised within operating cash flows. Included in this

amount is £161 million (2021: £156 million) of leaf payables where the standard payment terms with the vendor is 150 days, consistent

with credit terms normally available in certain markets.

During 2022, following an investigation by the Nigerian Federal Competition and Consumer Protection Commission (FCCPC) into alleged

violations of the Nigerian Competition and Consumer Protection Act and National Tobacco Control Act, a consent order was entered

into between the FCCPC and British American Tobacco (Holdings) Limited, British American Tobacco (Nigeria) Limited and British

American Tobacco Marketing (Nigeria) Limited in December 2022 terminating the investigation and associated proceedings. A penalty

equivalent to US$110 million has been accrued for and will be paid in Naira in instalments, among other measures.

Accrued charges and deferred income include £20 million of deferred income (2021: £1 million) relating to certain customer deposits in

advance of shipments and £66 million (2021: £58 million) in respect of interest payable mainly related to tax matters. FII GLO of £913

million (2021: £963 million) relates to receipts in 2015, in respect of the Franked Investment Income Government Litigation Order (note

10(b)). Amounts payable to related parties including associated undertakings are shown in note 30.

There is no material difference between the above amounts for trade and other payables and their fair value due to the short-term

duration of the majority of trade and other payables, as determined using discounted cash flow analysis.

Trade and other payables are predominantly denominated in the functional currencies of subsidiary undertakings with less than 7% in

other currencies (2021: less than 6% in other currencies).

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260

26 Financial instruments and risk management

Management of financial risks

One of the principal responsibilities of Treasury is to manage

the financial risks arising from the Group’s underlying

operations. Specifically, Treasury manages, within an overall

policy framework set by the Group’s Main Board and Corporate

Finance Committee (CFC), the Group’s exposure to funding and

liquidity, interest rate, foreign exchange and counterparty risks.

The Group’s treasury position is monitored by the CFC which

meets regularly throughout the year and is chaired by the Group

Finance Director. The approach is one of risk reduction within an

overall framework of delivering total shareholder return.

The Group defines capital as net debt (note 23) and equity (note 22).

There are no externally imposed capital requirements for the

Group. Group policies include a set of financing principles that

provide a framework within which the Group’s capital base is

managed and, in particular, the policies on dividends (as a

percentage of long-term sustainable earnings) and share buy-back

are decided. The key objective of the financing principles is to

appropriately balance the interests of equity and debt holders in

driving an efficient financing mix for the Group. The Group’s

average cost of debt in 2022 is 4.0% (2021: 3.5%).

The Group manages its financial risks in line with the classification

of its financial assets and liabilities in the Group’s balance sheet

and related notes. The Group’s management of specific risks is

dealt with as follows:

Liquidity risk

It is the policy of the Group to maximise financial flexibility

and minimise refinancing risk by issuing debt with a range of

maturities, generally matching the projected cash flows of the

Group and obtaining this financing from a wide range of sources.

The Group has a target average centrally managed debt maturity

of at least five years with no more than 20% of centrally managed

debt maturing in a single rolling year. As at 31 December 2022, the

average centrally managed debt maturity was 9.9 years (2021: 10.1

years) and the highest proportion of centrally managed debt

maturing in a single rolling year was 18.6% (2021: 18.6%). Perpetual

hybrid bonds are treated as equity (note 22(d)) and therefore not

included within the debt maturity analysis.

The Group utilises cash pooling and zero balancing bank account

structures in addition to intercompany loans and borrowings to

mobilise cash efficiently within the Group. The key objectives of

Treasury in respect of cash and cash equivalents are to protect

their principal value, to concentrate cash at the centre, to minimise

the required debt issuance and to optimise the yield earned. The

amount of debt issued by the Group is determined by forecasting

the net debt requirement after the mobilisation of cash.

The Group continues to target a solid investment-grade credit

rating. Moody’s and S&P's current ratings for the Group are Baa2

(stable outlook) and BBB+ (negative outlook), respectively. The

Group’s strategy is to continue deleveraging @and is seeking to

recover to Baa1/BBB+ in the medium term@. The Group is

confident of its continued ability to successfully access the debt

capital markets for future refinancing requirements.

As part of its short-term cash management, the Group invests in a

range of cash and cash equivalents, including money market funds,

which are regarded as highly liquid and are not exposed to significant

changes in fair value. These are kept under continuous review as

described in the credit risk section below. At 31 December 2022,

the Group does not have any investments in money market funds

(2021: £nil).

As part of its working capital management, in certain countries,

the Group has entered into factoring arrangements and supply

chain financing arrangements. These are explained in further detail

in note 17 and note 25.

@Denotes phrase, paragraph or similar that does not form part of BAT's Annual Report on

Form 20-F as filed with the SEC.

Subsidiary companies are funded by share capital and retained

earnings, loans from the central finance companies on commercial

terms, or through local borrowings by the subsidiaries in appropriate

currencies to predominantly fund short- to medium-term working

capital requirements.

Available facilities in current year:

It is Group policy that short-term sources of funds (including

drawings under both the Group US$4 billion U.S. commercial

paper (U.S. CP) programme and the Group £3 billion euro

commercial paper (ECP) programme) are backed by undrawn

committed lines of credit and cash. Commercial paper is issued

by B.A.T. International Finance p.l.c, B.A.T. Netherlands Finance B.V.

and B.A.T Capital Corporation and guaranteed by British American

Tobacco p.l.c. At 31 December 2022, commercial paper of £27

million was outstanding (2021: £269 million). Cash flows relating to

commercial paper that have maturity periods of three months or

less are presented on a net basis in Group’s cash flow statement.

At 31 December 2022, the Group had access to a £5.69 billion

revolving credit facility. In February 2022, the Group exercised the

second of the one-year extension options.Therefore,

the £2.85 billion  364-day tranche was extended to March 2023 at

the reduced amount of £2.7 billion and £2.5 billion of the five-year

tranche was extended from March 2026 to March 2027 (with

£3.0 billion of this tranche remaining available until March 2025 and

£2.85 billion remaining available from March 2025 to March 2026).

The Group anticipates to refinance the £2.7 billion 364-day tranche

in the first half of the 2023 financial year.

During 2022, the Group extended short-term bilateral facilities

totalling £3.0 billion. As at 31 December 2022, £875 million was

drawn on a short-term basis with £2.1 billion undrawn and still

available under such bilateral facilities. Cash flows relating to

bilateral facilities that have maturity periods of three months or less

are presented on a net basis in the Group’s cash flow statement.

Issuance, drawdowns and repayments in current year:

–In March 2022, the Group accessed the US dollar market under

its SEC Shelf Programme, raising a total of US$2.5 billion across

two tranches;

–In May 2022, the Group repaid a €600 million bond at maturity;

–In June 2022, the Group repaid US$419 million and £180 million

bonds at maturity;

–In August 2022, the Group repaid US$750 million and

US$601 million bonds at maturity; and

–In October 2022, the Group raised US$600 million in the US

dollar market under its SEC Shelf Programme.

In January 2023, the Group repaid a  €750 million bond at maturity.

Available facilities in prior year:

At 31 December 2021, the Group had access to a £5.85 billion

revolving credit facility. This facility was undrawn at

31 December 2021.

During 2021, the Group extended short-term bilateral facilities

totalling £2.5 billion until March or April 2022, some with extension

options to extend for further periods. As at 31 December 2021,

£500 million was drawn on a short-term basis.

Issuance, drawdowns and repayments in prior year:

–In February 2021, the Group repaid a €650 million bond at maturity;

–In June 2021, the Group repaid £500 million of the £1,929 million

term loan that has a maturity date in January 2022; the

remaining £1,429 million was repaid in September 2021;

–In July, August, September and November 2021, the Group repaid

£500 million, €1,100 million, CHF 400 million and €500 million of

bonds at maturity, respectively; and

The Group issued perpetual hybrid bonds totalling €2 billion in

September 2021. Please refer to note 22(d) for further details.

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261

Currency risk

The Group is subject to exposure on the translation of the net

assets of foreign currency subsidiaries and associates into its

reporting currency, sterling. The Group’s primary balance sheet

translation exposures are to the US dollar, Euro, Canadian dollar,

Australian dollar, Indian rupee, South African rand, Indonesian

rupiah, Danish krone, Brazilian real, Russian rouble, Singaporean

dollar and Swiss franc. These exposures are kept under continuous

review. The Group’s policy on borrowings is to broadly match the

currency of these borrowings with the currency of cash flows

arising from the Group’s underlying operations. Within this overall

policy, the Group aims to minimise all balance sheet translation

exposure where it is practicable and cost-effective to do so

through matching currency assets with currency borrowings. The

main objective of these policies is to protect shareholder value by

increasing certainty and minimising volatility in earnings per share.

At 31 December 2022, the currency profile of the Group’s gross

debt, after taking into account derivative contracts, was 71% U.S.

dollar (2021: 68%), 13% euro (2021: 13%), 12% sterling (2021: 13%)

and 4% other currencies (2021: 6%).

The Group faces currency exposures arising from the translation

of profits earned in foreign currency subsidiaries and associates

and joint arrangements; these exposures are not normally hedged.

Exposures also arise from:

(i) foreign currency denominated trading transactions undertaken

by subsidiaries. These exposures comprise committed and highly

probable forecast sales and purchases, which are offset wherever

possible. The remaining exposures are hedged within the Treasury

policies and procedures with forward foreign exchange contracts

and options, which are designated as hedges of the foreign

exchange risk of the identified future transactions; and

(ii) forecast dividend flows from subsidiaries to the centre. To

ensure cash flow certainty, the Group enters into forward foreign

exchange contracts which are designated as net investment

hedges of the foreign exchange risk arising from the investments

in these subsidiaries.

IFRS 7 requires a sensitivity analysis that shows the impact on the

income statement and on items recognised directly in other

comprehensive income of hypothetical changes of exchange rates

in respect of non-functional currency financial assets and liabilities

held across the Group. All other variables are held constant

although, in practice, market rates rarely change in isolation.

Financial assets and liabilities held in the functional currency of the

Group’s subsidiaries, as well as non-financial assets and liabilities

and translation risk, are not included in the analysis. The Group

considers a 10% strengthening or weakening of the functional

currency against the non-functional currency of its subsidiaries as

a reasonably possible change. The impact is calculated with

reference to the financial asset or liability held as at the year-end,

unless this is unrepresentative of the position during the year.

A 10% strengthening of functional currencies against non-

functional currencies would result in pre-tax profit being £49 million

lower (2021: £53 million lower; 2020: £61 million lower) and items

recognised directly in other comprehensive income being £445

million higher (2021: £144 million higher; 2020: £57 million higher). A

10% weakening of functional currencies against non-functional

currencies would result in pre-tax profit being £60 million higher

(2021: £65 million higher; 2020: £74 million higher) and items

recognised directly in other comprehensive income being £543

million lower (2021: £177 million lower; 2020: £70 million lower).

The exchange sensitivities on items recognised directly in other

comprehensive income relate to hedging of certain net asset

currency positions in the Group, as well as on cash flow hedges in

respect of future transactions, but do not include sensitivities in

respect of exchange on non-financial assets or liabilities.

Interest rate risk

The objectives of the Group’s interest rate risk management policy

are to lessen the impact of adverse interest rate movements on

the earnings, cash flow and economic value of the Group.

Additional objectives are to minimise the cost of hedging and the

associated counterparty risk.

In order to manage its interest rate risk, the Group maintains both

floating rate and fixed rate debt. The Group sets targets (within

overall guidelines) for the desired ratio of floating to fixed rate debt

on a net basis (at least 50% fixed on a net basis in the short to

medium term) as a result of regular reviews of market conditions

and strategy by the Corporate Finance Committee and the board

of the main central finance company. Underlying borrowings are

arranged on both a fixed rate and a floating rate basis and, where

appropriate, the Group uses derivatives, primarily interest rate

swaps to vary the fixed and floating mix, or forward starting swaps

to manage the refinancing risk. The interest rate profile of liquid

assets included in net debt are considered to offset floating rate

debt and are taken into account in determining the net interest

rate exposure. At 31 December 2022, the relevant ratio of floating

to fixed rate borrowings after the impact of derivatives was 12:88

(2021: 18:82). On a net debt basis, after offsetting liquid assets, the

relevant ratio of floating to fixed rate borrowings was 3:97 (2021:

10:90). Excluding cash and other liquid assets in Canada, which are

subject to certain restrictions under CCAA protection, the ratio of

floating to fixed rate borrowings was 7:93 (2021: 13:87).

IFRS 7 requires a sensitivity analysis that shows the impact on the

income statement and on items recognised directly in other

comprehensive income of hypothetical changes of interest rates in

respect of financial assets and liabilities of the Group. All other

variables are held constant although, in practice, market rates

rarely change in isolation. For the purposes of this sensitivity

analysis, financial assets and liabilities with fixed interest rates are

not included. The Group considers a 100 basis point change in

interest rates a reasonably possible change except where rates are

less than 100 basis points. In these instances, it is assumed that

the interest rates increase by 100 basis points and decrease to

zero for the purpose of performing the sensitivity analysis. The

impact is calculated with reference to the financial asset or liability

held as at the year-end, unless this is unrepresentative of the

position during the year.

A 100 basis point increase in interest rates would result in pre-tax

profit being £50 million lower (2021: £44 million lower; 2020: £31

million lower). A 100 basis point decrease in interest rates, or less

where applicable, would result in pre-tax profit being £50 million

higher (2021: £47 million higher; 2020: £29 million higher). The

effect of these interest rate changes on items recognised directly

in other comprehensive income is not material in either year.

In accordance with the UK Financial Conduct Authority’s

announcement on 27 July 2017, and following the decision taken by

global regulators in 2018 to replace Interbank Offered Rates with

alternative nearly risk-free rates, such benchmark rates were

expected to be largely discontinued after 2021. The IASB addressed

the effects of interest rate benchmark reform on financial

reporting, with two phases of Amendments to IFRS 9 Financial

Instruments (and other Standards) which the Group adopted in its

2019 and 2020 accounts, respectively, as explained in the

accounting policies (note 1). The impact on the Group’s profit or

equity from the application of these amendments was not material.

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262

In January 2021, the Group confirmed adherence to the ISDA 2020

IBOR Fallbacks Protocol as published by the International Swaps

and Derivatives Association, Inc. (ISDA) on 23 October 2020 (the

Protocol), ensuring that appropriate fallback rates can apply to

derivatives in the event of LIBOR discontinuation.

As at 31 December 2022, the Group had no outstanding floating

rate bonds using historical benchmark rates (2021: US$750 million

(£554 million)). The Group’s syndicated revolving credit facility

(undrawn at 31 December 2022 and 2021) has historically had

references to USD London Interbank Offered Rate (''LIBOR''),

EURIBOR and GBP LIBOR. This facility includes market standard

LIBOR replacement language, and with effect from June 2021 the

agreement has adopted SOFR and SONIA as the alternative

benchmark rates in respect of USD LIBOR and GBP LIBOR,

respectively.

Following announcements by the respective regulators, EURIBOR

is expected to continue for the foreseeable future, with USD LIBOR

rates potentially discontinued only after June 2023.

The Group is party to the ISDA fallback protocol and in January

2022, it automatically replaced the GBP LIBOR with economically

equivalent interest rate derivatives referencing SONIA on their

reset date. The four impacted derivatives (cross currency interest

rate swaps) with nominal values totalling €800 million

(£672 million) maturing in October 2023 are in fair value hedge

relationships which were indexed to GBP LIBOR interest rates. The

Group has updated the respective hedge documentation

accordingly since the uncertainty regarding the transition for these

four derivatives has ceased. The hedge relationships on these

derivatives continue with resulting ineffectiveness expected to be

immaterial.

Credit risk

The Group has no significant concentrations of customer credit

risk. Subsidiaries have policies in place requiring appropriate credit

checks on potential customers before sales commence. The

process for monitoring and managing credit risk once sales to

customers have been made varies depending on local practice in

the countries concerned.

Certain territories have bank guarantees, other guarantees or

credit insurance provided in the Group’s favour in respect of Group

trade receivables, the issuance and terms of which are dependent

on local practices in the countries concerned. All derivatives are

subject to ISDA agreements or equivalent documentation.

Cash deposits and other financial instruments give rise to credit

risk on the amounts due from the related counterparties.

Generally, the Group aims to transact with counterparties with

strong investment grade credit ratings. However, the Group

recognises that due to the need to operate over a large geographic

footprint, this will not always be possible. Counterparty credit risk

is managed on a global basis by limiting the aggregate amount and

duration of exposure to any one counterparty, taking into account

its credit rating. The credit ratings of all counterparties are

reviewed regularly.

The Group ensures that it has sufficient counterparty credit

capacity of requisite quality to undertake all anticipated

transactions throughout its geographic footprint, while at the

same time ensuring that there is no geographic concentration in

the location of counterparties.

With the following exceptions, the maximum exposure to the

credit risk of financial assets at the balance sheet date is reflected

by the carrying values included in the Group’s balance sheet. The

Group has entered into short-term risk participation agreements

in relation to certain leaf supply arrangements and the maximum

exposure under these would be £90 million (2021: £89 million). In

addition, the Group has entered into a guarantee arrangement to

support a short-term bank credit facility with a supply chain

partner. The maximum exposure under the arrangement would be

£1 million (2021: £1 million).

Price risk

The Group is exposed to price risk on investments held by the

Group, which are included in investments held at fair value on the

consolidated balance sheet, but the quantum of such is not

material.

Hedge accounting

In order to qualify for hedge accounting, the Group is required to

document prospectively the economic relationship between the

item being hedged and the hedging instrument. The Group is also

required to demonstrate an assessment of the economic

relationship between the hedged item and the hedging

instrument, which shows that the hedge will be highly effective on

an ongoing basis. This effectiveness testing is repeated

periodically to ensure that the hedge has remained, and is

expected to remain, highly effective. The prospective effectiveness

testing determines that an economic relationship between the

hedged item and the hedging instrument exists.

In accordance with the Group Treasury Policy, the exact hedge

ratios and profile of a hedge relationship will depend on several

factors, including the desired degree of certainty and reduced

volatility of net interest costs and market conditions, trends and

expectations in the relevant markets. The sources of

ineffectiveness include spot and forward differences, impact of

time value and timing differences between periods in the hedged

item and hedging instrument.

The Group’s risk management strategy has been explained in

further detail under the interest rate risk and currency risk sections

of this note.

Fair value estimation

The fair values of financial assets and liabilities with maturities of

less than one year, other than derivatives, are assumed to

approximate their book values. For other financial instruments

which are measured at fair value in the balance sheet, the basis for

fair values is described below.

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263

Fair value hierarchy

In accordance with IFRS 13 classification hierarchy, the following table presents the Group’s financial assets and liabilities that are

measured at fair value:

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|  |  |  |  |  | 2022 |  |  |  |  | 2021 |
|  | Notes | Level 1  £m | Level 2  £m | Level 3  £m | Total  £m |  | Level 1  £m | Level 2  £m | Level 3  £m | Total  £m |
| Assets at fair value |  |  |  |  |  |  |  |  |  |  |
| Investment held at fair value | 18 | 514 | — | 186 | 700 |  | 405 | — | 101 | 506 |
| Derivatives relating to |  |  |  |  |  |  |  |  |  |  |
| – interest rate swaps | 19 | — | 43 | — | 43 |  | — | 33 | — | 33 |
| – cross-currency swaps | 19 | — | 254 | — | 254 |  | — | 221 | — | 221 |
| – forward foreign currency contracts | 19 | — | 264 | — | 264 |  | — | 171 | — | 171 |
| Assets at fair value |  | 514 | 561 | 186 | 1,261 |  | 405 | 425 | 101 | 931 |
| Liabilities at fair value |  |  |  |  |  |  |  |  |  |  |
| Derivatives relating to |  |  |  |  |  |  |  |  |  |  |
| – interest rate swaps | 19 | — | 450 | — | 450 |  | — | 36 | — | 36 |
| – cross-currency swaps | 19 | — | 121 | — | 121 |  | — | 35 | — | 35 |
| – forward foreign currency contracts | 19 | — | 358 | — | 358 |  | — | 243 | — | 243 |
| Liabilities at fair value |  | — | 929 | — | 929 |  | — | 314 | — | 314 |

Level 2 financial instruments are not traded in an active market, but the fair values are based on quoted market prices, broker/dealer

quotations, or alternative pricing sources with reasonable levels of price transparency. The Group’s level 2 financial instruments include

OTC derivatives.

Netting arrangements of derivative financial instruments

The gross fair value of derivative financial instruments as presented in the Group balance sheet, together with the Group’s rights of

offset associated with recognised financial assets and recognised financial liabilities subject to enforceable master netting

arrangements and similar agreements, is summarised as follows:

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|  |  |  | 2022 |  |  |  | 2021 |
|  | Amount  presented in  the Group  balance  sheet\*  £m | Related  amounts not  offset in the  Group  balance  sheet  £m | Net amount  £m |  | Amount  presented in  the Group  balance  sheet\*  £m | Related  amounts not  offset in the  Group  balance  sheet  £m | Net amount  £m |
| Financial assets |  |  |  |  |  |  |  |
| – Derivative financial instruments (note 19) | 561 | (405) | 156 |  | 425 | (184) | 241 |
| Financial liabilities |  |  |  |  |  |  |  |
| – Derivative financial instruments (note 19) | (929) | 405 | (524) |  | (314) | 184 | (130) |
|  | (368) | — | (368) |  | 111 | — | 111 |

Note:

\*No financial instruments have been offset in the Group balance sheet.

The Group is subject to master netting arrangements in force with financial counterparties with whom the Group trades derivatives.

The master netting arrangements determine the proceedings should either party default on their obligations. In case of any event of

default, the non-defaulting party will calculate the sum of the replacement cost of outstanding transactions and amounts owed to it by

the defaulting party. If that sum exceeds the amounts owed to the defaulting party, the defaulting party will pay the balance to the non-

defaulting party. If the sum is less than the amounts owed to the defaulting party, the non-defaulting party will pay the balance to the

defaulting party.

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264

The hedged items by risk category are presented below:

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|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | 2022 |
|  | Carrying amount of  the hedged item  £m |  | Accumulated amount  of fair value hedge  adjustments on the  hedged item included  in the carrying  amount of the  hedged item  £m |  | Line item in the  statement of  financial position  where the hedged  item is included |  | Changes in fair  value used for  calculating hedge  ineffectiveness  £m |  | Cash flow hedge  reserve (gross  of tax)  £m |
| Fair value hedges |  |  |  |  |  |  |  |  |  |
| Interest rate risk |  |  |  |  |  |  |  |  |  |
| – borrowings (liabilities) | 9,223 |  | (355) |  | Borrowings |  | 399 |  |  |
| Cash flow hedges |  |  |  |  |  |  |  |  |  |
| Interest rate risk |  |  |  |  |  |  |  |  |  |
| – borrowings (liabilities) | 1,824 |  |  |  | Borrowings |  | (55) |  | (464) |

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | 2021 |
|  | Carrying amount of  the hedged item  £m |  | Accumulated amount  of fair value hedge  adjustments on the  hedged item included  in the carrying  amount of the  hedged item  £m |  | Line item in the  statement of  financial position  where the hedged  item is included |  | Changes in fair  value used for  calculating hedge  ineffectiveness  £m |  | Cash flow hedge  reserve (gross  of tax)  £m |
| Fair value hedges |  |  |  |  |  |  |  |  |  |
| Interest rate risk |  |  |  |  |  |  |  |  |  |
| – borrowings (liabilities) | 9,197 |  | 101 |  | Borrowings |  | 87 |  | — |
| Cash flow hedges |  |  |  |  |  |  |  |  |  |
| Interest rate risk |  |  |  |  |  |  |  |  |  |
| – borrowings (liabilities) | 2,132 |  | — |  | Borrowings |  | (69) |  | (538) |

£389 million (2021: £368 million) of the Group’s borrowings are designated as net investment hedge instruments of the Group’s net

investments in foreign operations. In line with the Group’s risk management policies, the net investment hedge relationships are

reviewed periodically. The change in the value used for calculating hedge ineffectiveness for hedged items designated under net

investment hedge relationships is £21 million (2021: £24 million).

As at 31 December 2022, the accumulated balance of the cash flow hedge reserve was a loss of £327 million (2021: loss of £363 million)

including an accumulated loss of £464 million (2021: loss of £538 million) in relation to interest rate exposure and foreign currency

exposure arising from borrowings held by the Group, and an accumulated gain of £99 million (2021: gain of £116 million) in relation to

deferred tax arising from cash flow hedges. The remainder related to the Group’s foreign currency exposure on forecasted transactions

and cost of hedging (note 22(c)(ii)).

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265

27 Changes in the Group

(a) Acquisitions

The Group acquired certain businesses and other tobacco assets as noted below. The financial impact of these transactions to the

Group were immaterial individually and in aggregate. Except as noted, there were no material differences between the fair value and

book values of net assets acquired in business combinations.

On 12 November 2020, the Group acquired 100% of the share capital in Eastern Tobacco Company for Trading, subsequently renamed

as BAT Arabia for Trading, for £50 million. Goodwill of £36 million, representing anticipated synergies, and trademarks and similar

intangibles of £39 million, as well as £96 million of cash and cash equivalents, were recognised on acquisition.

On 30 September 2019, the Group acquired control of Twisp Proprietary Limited, a South African e-cigarette/nicotine Vapour company

for a purchase price of £25 million of which £6 million was deferred and contingent upon future performance in the market. Goodwill of

£12 million, representing a strategic premium to enter this segment of the South African Vapour market, and trademarks and similar

intangibles of £15 million were recognised on acquisition. Due to difficult trading conditions, the goodwill and intangibles were fully

impaired in 2020. The final payment of deferred consideration of £3 million was paid in 2021.

(b) Non-controlling interests

In 2022, the Group acquired a further 3.3% in Hrvatski Duhani d.d. Tobacco Leaf Processing at a cost of £1 million, following the

acquisition of an additional 2.7% in Hrvatski Duhani d.d. Tobacco Leaf Processing in 2021 at a cost of £1 million.

In 2021, the Group made a capital contribution to Brascuba Cigarrillos S.A. at a cost of £6 million (2020: £17 million). This contribution

was in proportion to a capital contribution made by the non-controlling interest to the company and as such, the Group’s shareholding

remains unchanged.

Also in 2021, as part of a Voluntary Tender Offer for the non-controlling interests of the Group’s Indonesian subsidiary, the Group

acquired 0.2% additional shares at a cost of £4 million as explained in note 30.

(c) Other transactions

(i) Organigram

On 11 March 2021, the Group announced a strategic collaboration agreement with Organigram Inc., a wholly owned subsidiary of publicly

traded Organigram Holdings Inc. (collectively, Organigram). Under the terms of the transaction, a Group subsidiary acquired a 19.9%

equity stake in Organigram Holdings Inc. to become its largest shareholder, with the ability to appoint two directors to Organigram

Holdings Inc.’s board of directors and representation on its investment committee. The Group accounts for the investment as an

associate.

The Group’s initial investment of £129 million was allocated against the Group’s share of Organigram’s net assets, including the

recognition of £49 million of intangibles, and goodwill of £30 million, which represents a strategic premium to enter the legal cannabis

market in North America.

During 2021, Organigram acquired all of the issued and outstanding shares of The Edibles & Infusions Corporation (EIC) for an initial

consideration of CAD$22 million, payable in shares. Organigram also acquired all of the issued and outstanding shares of Laurentian

Organic Inc. for consideration of CAD$36 million, payable in cash and shares. The impact of these transactions on the Group was not

material. As a result of these transactions, the Group’s shareholding was reduced to 18.8%. In 2022, the Group exercised its top-up rights

and invested a further £4 million to maintain its ownership stake.

(ii) Other acquisitions

On 26 September 2022, the Group announced a £32 million investment in exchange for 16% of Sanity Group GmbH (Sanity Group), a

German based cannabis company which has a well-established product portfolio of CBD consumer brands and medical cannabis brands

and is actively engaged in the research, development, and marketing of cannabis products. The Group’s investment was part of a series-

B investment round. As part of the investment agreement, the Group has the right to appoint directors to the Sanity Group's board and

will account for the investment as an associate. The Group’s investment was allocated against the Group’s share of Sanity Group’s net

assets, including the recognition of £4 million of intangibles, and goodwill of £28 million, which represents a strategic premium in

expectation of the legalisation of cannabis in Germany and elsewhere in Europe.

In November 2022, the Group announced that it had invested in Charlotte’s Web Holdings, Inc. (Charlotte’s Web), via a convertible

debenture of £48 million. Charlotte's Web is based in Colorado, USA, listed on the Toronto Stock Exchange, and holds a prominent

position in innovative hemp extract wellness products across major retail channels, including food/drug/mass retail, and natural grocery

and vitamin retailers. Their product formats include tinctures, capsules, chews and topicals. The debenture is currently convertible into a

non-controlling equity stake in Charlotte’s Web of approximately 19.9% and is convertible at BAT’s discretion. Given that the nature of the

investment as a convertible loan note does not give the Group any current right to a share of the earnings or net assets of the investee,

despite the ability to appoint directors, the investment will be recognised at fair value through profit and loss with fair value changes in

the investment recognised in net finance costs. On conversion of the loan note, the Group will equity account for its investment.

During 2022, the Group increased its ownership of a wholesale producer and distributor operating in the agriculture sector based in

Uzbekistan, FE “Samfruit” JSC by 2.8% to 45.4%, for £1 million. During 2021, the ownership was increased by 4%, for £1 million and in

2020, by 28.4%, for £5 million. The Group accounts for the investment as an associate.

In addition, during 2022, the Group made a non-controlling investment in Steady State LLC, a U.S. based cGMP certified manufacturer

and distributor of cannabinoid ingredients, food products and nutraceuticals, for £4 million. The Group accounts for the investment as an

associate.

(d) Assets held for sale and business disposals

(i) BAT Russia

On 11 March 2022, the Group announced the intention to transfer its Russian business in full compliance with international and local laws.

The Group has two subsidiaries in Russia (BAT Russia), being JSC British American Tobacco-SPb and JSC International Tobacco

Marketing Services (ITMS). In addition, the Group’s subsidiary in Belarus, International Tobacco Marketing Services BY, will form part

of the transaction. Upon completion, it is intended that the Group will no longer have a presence in Russia (or Belarus).

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266

It is intended that, as a result of a potential sale of its shares to an acquirer, the Group will have neither voting rights nor the ability or

means to direct day-to-day activities, appoint management, or make business decisions. Since the Group will not own any shares in the

transferred businesses, and is not providing any financing to the proposed buyer, the Group will not have any exposure to returns from

the business, having no rights to dividends, royalties or amendments to the agreed-upon consideration to take account of post-disposal

trading. Consequently, management have classified the assets and liabilities of these entities as a disposal group in accordance with

IFRS 5.

At 30 June 2022, £387 million of property, plant and equipment and other non-current assets, £696 million of trade and other receivables,

£240 million of cash and cash equivalents and £144 million of other current assets principally relating to inventories, were classified as

held-for-sale in respect of this anticipated disposal and presented as such on the balance sheet at an estimated fair value less costs to

sell. In addition, £11 million of borrowings and £528 million of trade creditors and other current liabilities were also classified as held-for-

sale. Impairment charges and associated costs of £957 million were recognised in the Income Statement and were treated as a non-

cash, adjusting item. The assets and liabilities recognised as held-for-sale, as at 30 June 2022, and the subsequent impairment charge,

did not include Belarus.

At 31 December 2022, £281 million of property, plant and equipment and other non-current assets, £474 million of trade and other

receivables, £368 million of cash and cash equivalents and £181 million of other current assets principally relating to inventories, have

been similarly classified as held-for-sale and presented as such on the balance sheet at an estimated fair value less costs to sell. In

addition, £16 million of borrowings and £412 million of trade creditors and other current liabilities have been classified as held-for-sale at

31 December 2022. Impairment charges of £554 million and associated costs of £58 million have been recognised in the Income

Statement as adjusting items.

An estimated charge of £295 million in respect of foreign exchange previously recognised in other comprehensive income will be

reclassified to the income statement on completion of the transaction as has been shown as a separate amount within Group reserves.

At the date of approval of these accounts, no definitive agreement to transfer the shares in these subsidiaries had been entered into,

with no final consideration agreed. The assessment of the recoverable value (fair value less costs to sell) at 30 June and 31 December

2022 has taken into account a range of internal assumptions, including those regarding the likely consideration for the sale, the impact,

extent and duration of sanctions, the likelihood of consideration being significantly deferred and ongoing macro-economic

developments, including the impact of inflation and interest rates. All assumptions are based on current expectations and are subject to

a very high degree of volatility and uncertainty and therefore may change up until the final value can be determined, based on an actual

transaction.

The following is a reconciliation between the total assets available for sale and their estimated recoverable value (fair value less costs to

sell):

|  |  |
| --- | --- |
|  |  |
|  | 31 December 2022  £m |
| Total assets held-for-sale1 | 1,321 |
| Impairment of non-current assets held-for-sale - Russia and Belarus | (281) |
|  | 1,040 |
| Excess impairment beyond non-current assets held-for-sale - Russia and Belarus | (273) |
|  | 767 |

Note:

1.In December 2022, £15 million of assets held-for-sale being held in territories other than Russia and Belarus.

(ii) B.A.T. Pars Company PJSC (BAT Pars)

On 25 June 2021, the Group agreed to dispose of its Iranian subsidiary, BAT Pars to DTM ME FZE LLC. Accordingly, BAT Pars was

classified as held-for-sale at that date and £152 million of assets, primarily comprised £98 million of cash and cash equivalents,

£38 million of inventory and £14 million of property, plant and equipment, were transferred to held-for-sale assets. Also, £24 million of

liabilities, primarily comprised £10 million of trade creditors and £8 million of corporation tax payable, were transferred to held-for-sale

liabilities. Subsequently an impairment charge and associated costs of £88 million was recognised in the income statement and treated

as an adjusting item.

Completion took place on 6 August 2021.  £272 million in respect of foreign exchange previously recognised in other comprehensive

income has been reclassified to the income statement. The financial impact of this has also been treated as an adjusting item.

In compliance with IAS 7 Statement of cash flows, the £98 million of cash and cash equivalents held at the date of disposal was reported

as a cash outflow under investing activities.

In 2022, as a result of the unwind of discounting on the deferred proceeds and a true-up on the completion of accounts, a credit of

£6 million (2021: £2 million) was recognised. The value of the consideration remains outstanding at 31 December 2022, and £56 million is

recognised as a current receivable.

In addition, in 2021, £24 million of related investments held at fair value were provided against as a charge to net finance costs given

uncertainties regarding recovery of these funds. During 2022, £17 million was recovered with some progress on resolving issues over the

release of the remaining funds.

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267

28 Share-based payments

The Group operates a number of share-based payment arrangements of which the three principal ones are:

LTIP - Performance Share Plan (PSP):

Since 2020, performance-related conditional awards under which shares are released automatically following a 3-year vesting period (5-

year period for the Executive Directors). LTIP awards granted up to 2019 are nil-cost options exercisable after three years from date of

grant (five years for Executive Directors) with a contractual life of 10 years.

For awards granted in 2021, 2020 and 2019, vesting is subject to performance conditions measured over a 3-year period (for all awards),

based on earnings per share (40% of grant), operating cash flow (20% of grant), total shareholder return (20% of grant) and net turnover

(20% of grant). Total shareholder return combines the share price and dividend performance of the Company by reference to one

comparator group.

For 2022 awards, the performance conditions are based on earnings per share (30% of grant), operating cash flow (20% of grant), total

shareholder return (20% of grant), net turnover (15% of the grant) and New Categories revenue growth (15% of the grant).

Participants are not entitled to dividends prior to the vesting or exercise of the awards. A cash equivalent dividend accrues through the

vesting period (other than for the Executive Directors where additional shares are delivered in lieu of cash) and is paid on vesting. Both

equity and cash-settled PSP awards are granted in March each year.

In the U.S., PSP awards are made over BAT American Depository Shares (ADSs).

Restricted Share Plan (RSP):

Introduced in 2020, conditional awards under which shares are released three years from date of grant, subject to a continuous

employment condition during the three-year vesting period. Participants are not entitled to dividends prior to shares vesting. A cash

equivalent dividend accrues through the vesting period and is paid on vesting. Both equity and cash settled RSP awards are granted in

March or September.

In the U.S., RSP awards are made over BAT American Depository Shares (ADSs).

Deferred Share Bonus Scheme (DSBS):

Granted in connection with annual bonuses, conditional awards under which shares are released three years from date of grant subject

to a continuous employment condition during the three-year vesting period. A cash equivalent dividend accrues through the vesting

period and is paid quarterly (other than for the Executive Directors where additional shares are delivered in lieu of cash). Both equity and

cash-settled DSBS awards are granted in March each year.

The Group also has a number of other arrangements which are not material for the Group and these are as follows:

Sharesave Scheme (SAYE)

Options are granted in March each year by invitation at a 20% discount to the market price. Options under this equity-settled scheme

are exercisable at the end of a three-year or five-year savings contract. Participants are not entitled to dividends prior to the exercise of

the options. The maximum amount that can be saved by a participant in this way is £6,000 in any tax year.

Share Reward Scheme (SRS)

Free shares are granted in April each year (up to an equivalent of £3,600 in any year) under the equity-settled schemes are subject to a

three-year holding period. Participants receive dividends during the holding period which are reinvested to buy further shares. The shares

are held in a UK-based trust and are normally capable of transfer to participants tax-free after a five-year holding period.

International Share Reward Scheme (ISRS)

Conditional shares are granted in April each year (up to an equivalent of £3,600 in any year) subject to a three-year vesting period.

Dividend equivalents accrue through the vesting period and additional shares are delivered at vesting. Awards may be equity or cash-

settled.

Partnership Share Scheme

Employees can allocate part of their pre-tax salary to purchase shares in British American Tobacco p.l.c. (maximum £1,800 in any year).

The shares purchased are held in a UK-based trust and are normally capable of transfer to participants tax-free after a five-year holding

period.

The amounts recognised in the income statement in respect of share-based payments were as follows:

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  |  |  | 2022 |  |  | 2021 |  |  | 2020 |
|  | Notes | Equity-  settled  £m | Cash-  settled  £m |  | Equity-  settled  £m | Cash-  settled  £m |  | Equity-  settled  £m | Cash-  settled  £m |
| LTIP - PSP & RSP | 28(a) | 38 | 1 |  | 30 | — |  | 36 | — |
| DSBS | 28(b) | 36 | 3 |  | 39 | 2 |  | 44 | 3 |
| Other schemes |  | 7 | — |  | 7 | — |  | 8 | — |
| Total recognised in the income statement | 3 | 81 | 4 |  | 76 | 2 |  | 88 | 3 |

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268

Share-based payment liability

The Group issues to certain employees cash-settled share-based payments that require the Group to pay the intrinsic value of these

share-based payments to the employee at the date of exercise. The Group has recorded liabilities in respect of vested and unvested

grants at the end of 2022 and 2021:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Vested  £m\* | Unvested  £m |  | Vested  £m | Unvested  £m |
| LTIP - PSP & RSP | (0.3) | 1.9 |  | 0.1 | 1.1 |
| DSBS | 0.5 | 6.6 |  | 0.1 | 6.4 |
| Total liability | 0.2 | 8.5 |  | 0.2 | 7.5 |

Note:

\* The reduction in the liabilities for vested LTIPs was due to shares being exercised at prices lower than the share price at date of grant.

(a) Long-Term Incentive Plan - PSP & RSP

Details of the movements for the equity- and cash-settled LTIP scheme during the years ended 31 December 2022 and 31 December

2021, were as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Equity-settled  Number  of options  in thousands | Cash-settled  Number  of options  in thousands |  | Equity-settled  Number  of options  in thousands | Cash-settled  Number  of options  in thousands |
| Outstanding at start of year | 9,891 | 243 |  | 10,000 | 274 |
| Granted during the period | 2,927 | 58 |  | 3,440 | 81 |
| Exercised during the period | (1,606) | (58) |  | (1,639) | (48) |
| Forfeited during the period | (2,252) | (47) |  | (1,910) | (64) |
| Outstanding at end of year | 8,960 | 196 |  | 9,891 | 243 |
| Exercisable at end of year | 661 | 40 |  | 611 | 29 |

As at 31 December 2022, the Group has 8,960,000 shares (2021: 9,891,000 shares) outstanding which includes 1,749,762 shares (2021:

2,650,364 shares) which are related to Reynolds American LTIP awards from which nil shares (2021: nil shares) are exercisable at the end

of the year.

The weighted average British American Tobacco p.l.c. share price at the date of exercise for share options exercised during the period

was £32.84 (2021: £27.67; 2020: £29.37) for equity-settled and £33.01 (2021: £27.59; 2020: £28.68) for cash-settled options.

The weighted average British American Tobacco p.l.c. share price for ADS on the New York Stock Exchange at the date of exercise for

share options exercised during the period relating to equity-settled Reynolds American LTIP awards was US$38.37 (2021: US$35.93;

2020: US$40.04).

The outstanding shares for the year ended 31 December 2022 had a weighted average remaining contractual life of 1.8 years (2021: 3.7

years; 2020: 8.1 years) for the equity-settled scheme, 1.8 years for Reynolds American equity-settled scheme (2021: 1.70 years; 2020: 1.72

years) and 1.7 years (2021: 4.1 years; 2020: 8.1 years) for the cash-settled share-based payment arrangements.

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269

(b) Deferred Share Bonus Scheme

Details of the movements for the equity- and cash-settled DSBS scheme during the years ended 31 December 2022 and 31 December

2021, were as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | Equity-settled  Number  of options  in thousands | Cash-settled  Number  of options  in thousands |  | Equity-settled  Number  of options  in thousands | Cash-settled  Number  of options  in thousands |
| Outstanding at start of year | 4,141 | 223 |  | 4,141 | 200 |
| Granted during the period | 1,616 | 85 |  | 1,562 | 179 |
| Exercised during the period | (1,609) | (159) |  | (1,497) | (142) |
| Forfeited during the period | (133) | (8) |  | (65) | (14) |
| Outstanding at end of year | 4,015 | 141 |  | 4,141 | 223 |
| Exercisable at end of year | 1 | 14 |  | — | 1 |

The weighted average British American Tobacco p.l.c. share price at the date of exercise for share options exercised during the financial

year was £32.20 (2021: £27.58; 2020: £28.08) for equity-settled and £32.50 (2021: £27.70; 2020: £28.06) for cash-settled options.

The outstanding shares for the year ended 31 December 2022 had a weighted average remaining contractual life of 1.3 years (2021: 1.3

years; 2020: 1.4 years) for the equity-settled scheme and 1.1 years (2021: 1.3 years; 2020: 1.4 years) for the cash-settled scheme.

Valuation assumptions

Assumptions used in the Black-Scholes models to determine the fair value of share options at grant date were as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  |  | 2022 |  |  | 2021 |
|  | LTIP –  PSP & RSP | DSBS |  | LTIP –  PSP & RSP | DSBS |
| Expected volatility (%) | 27.0 | 27.0 |  | 27.0 | 27.0 |
| Average expected term to exercise (years) | 3.0 | 3.0 |  | 3.0 | 3.0 |
| Risk-free rate (%) | 1.4 | 1.4 |  | 0.2 | 0.2 |
| Expected dividend yield (%) | 6.8 | 6.8 |  | 7.7 | 7.7 |
| Share price at date of grant (£) | 32.18 | 32.18 |  | 27.94 | 27.94 |
| Fair value at grant date (£)\* | 27.46 / 26.28 | 26.28 |  | 19.87/22.20 | 22.20 |
| Fair value at grant date (£)\* - Management Board | 24.80 / 26.28 | 26.28 |  | 17.35/22.20 | 22.20 |

Note:

\*Where two figures have been quoted for the Long-Term Incentive Plan, the numbers relate to PSP and RSP awards, respectively.

Market condition features were incorporated into the Monte-Carlo models for the total shareholder return elements of the LTIP - PSP, in

determining fair value at grant date. Assumptions used in these models were as follows:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  LTIP - PSP | 2021  LTIP - PSP |
| Average share price volatility FMCG comparator group (%) | 23 | 23 |
| Average correlation FMCG comparator group (%) | 31 | 29 |

Fair values determined from the Black-Scholes and Monte-Carlo models use assumptions revised at the end of each reporting period for

cash-settled share-based payment arrangements.

The expected British American Tobacco p.l.c. share price volatility was determined taking account of the return index (the share price

index plus the dividend reinvested) over a five-year period. The FMCG share price volatility and correlation was also determined over the

same periods. The average expected term to exercise used in the models has been adjusted, based on management’s best estimate, for

the effects of non-transferability, exercise restrictions and behavioural conditions, forfeiture and historical experience.

The risk-free rate has been determined from market yield curves for government gilts with outstanding terms equal to the average

expected term to exercise for each relevant grant. The expected dividend yield was determined by calculating the yield from the last two

declared dividends divided by the grant share price.

In addition to these valuation assumptions, LTIP awards, excluding RSP, contain earnings per share performance conditions. As these are

non-market performance conditions they are not included in the determination of fair value of share options at the grant date, however,

they are used to estimate the number of awards expected to vest. This pay-out calculation is based on expectations published in

analysts’ forecasts.

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270

29 Group employees

The average number of persons employed by the Group and its associates during the year, including Directors, was 77,951 (2021: 82,868).

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  Number | 2021  Number |
| U.S. | 4,274 | 4,789 |
| AmSSA | 16,084 | 16,799 |
| Europe | 21,885 | 22,289 |
| APME | 9,834 | 10,488 |
| Subsidiary undertakings | 52,077 | 54,365 |
| Associates | 25,874 | 28,503 |
|  | 77,951 | 82,868 |

Included within the employee numbers for Europe are certain employees in the UK in respect of central functions. Some of the costs of

these employees are allocated or charged to the various regions and markets in the Group.

30 Related party disclosures

The Group has a number of transactions and relationships with related parties, as defined in IAS 24 Related Party Disclosures, all of which

are undertaken in the normal course of business. Transactions with CTBAT International Limited (a joint operation) are not included in

these disclosures as the results are immaterial to the Group.

Intercompany transactions and balances are eliminated on consolidation and therefore are not disclosed.

Transactions and balances with associates relate mainly to the sale and purchase of cigarettes and tobacco leaf. The Group’s share of

dividends from associates, included in other net income in the table below, was £438 million (2021: £392 million; 2020: £394 million).

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022  £m | 2021  £m | 2020  £m |
| Transactions |  |  |  |
| – revenue | 494 | 524 | 495 |
| – purchases | (190) | (123) | (80) |
| – other net income | 440 | 387 | 388 |
| Amounts receivable at 31 December | 51 | 48 | 33 |
| Amounts payable at 31 December | (4) | (3) | (5) |

In 2022, as mentioned in note 27, the Group made a £32 million investment in exchange for 16% of Sanity Group GmbH  and made a non-

controlling investment in Steady State LLC for £4 million.

Also in 2022, the Group acquired a further 3.3% in Hrvatski Duhani d.d. Tobacco Leaf Processing at a cost of £1 million, following the

acquisition of an additional 2.7% in 2021 at a cost of £1 million.

During 2022, the Group increased its ownership of a wholesale producer and distributor operating in the agriculture sector based in

Uzbekistan, FE “Samfruit” JSC to 45.40% for £1 million. In 2021, the Group increased its ownership to 42.61%, for £1 million (2020: increase

to 38.63% for £5 million).

In 2021, the Group made a capital contribution in Brascuba Cigarrillos S.A. at a cost of £6 million (2020: £17 million). There was a capital

reduction in CTBAT International Limited of approximately US$171 million with funds remitted prorata to investors in 2021.

On 5 October 2021, PT Bentoel Internasional Investama Tbk (Bentoel) announced its intention to delist from the Indonesia Stock

Exchange and go private by conducting a Voluntary Tender Offer (VTO). As part of this, in two phases in November and December 2021,

the Group acquired an additional 0.2% of shares in Bentoel from independent shareholders at a cost of £4 million and terminated the

total return swap (as explained in note 32).

As explained in note 15, in 2022 the Group provided a temporary liquidity facility to the main UK pension fund. As at 31 December 2022

this facility was undrawn.

As set out in note 27, in March 2021, the Group acquired a 19.9% equity stake in Organigram. The Group and Organigram also entered

into a Product Development Collaboration Agreement following which a Centre of Excellence has been established to focus on

developing the next generation of cannabis products with an initial focus on cannabidiol (CBD).

The key management personnel of British American Tobacco consist of the members of the Board of Directors of British American

Tobacco p.l.c. and the members of the Management Board. No such person had any material interest during the year in a contract of

significance (other than a service contract) with the Company or any subsidiary company. The term key management personnel in this

context includes their close family members.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | 2022  £m | 2021  £m | 2020  £m |
| The total compensation for key management personnel, including Directors, was: |  |  |  |
| – salaries and other short-term employee benefits | 19 | 18 | 17 |
| – post-employment benefits | 1 | 1 | 2 |
| – share-based payments | 17 | 16 | 13 |
|  | 37 | 35 | 32 |

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271

The following table, which is not part of IAS 24 disclosures, shows the aggregate emoluments of the Directors of the Company.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Executive Directors | | |  | Chair | | |  | Non-Executive Directors | | |  | Total | | |
|  | 2022  £'000 | 2021  £'000 | 2020  £'000 |  | 2022  £'000 | 2021  £'000 | 2020  £'000 |  | 2022  £'000 | 2021  £'000 | 2020  £'000 |  | 2022  £'000 | 2021  £'000 | 2020  £'000 |
| Salary; fees; benefits;  incentives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| – salary | 2,129 | 2,119 | 2,026 |  |  |  |  |  |  |  |  |  | 2,129 | 2,119 | 2,026 |
| – fees |  |  |  |  | 670 | 727 | 714 |  | 1,027 | 1,045 | 1,028 |  | 1,697 | 1,772 | 1,742 |
| – taxable benefits | 449 | 420 | 744 |  | 59 | 55 | 77 |  | 78 | 2 | 72 |  | 586 | 477 | 893 |
| – short-term incentives | 3,761 | 4,128 | 3,274 |  |  |  |  |  |  |  |  |  | 3,761 | 4,128 | 3,274 |
| – long-term incentives | 7,888 | 3,399 | 1,294 |  |  |  |  |  |  |  |  |  | 7,888 | 3,399 | 1,294 |
| Sub-total | 14,227 | 10,066 | 7,338 |  | 729 | 782 | 791 |  | 1,105 | 1,047 | 1,100 |  | 16,061 | 11,895 | 9,229 |
| Pension; other  emoluments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| – pension | 320 | 318 | 304 |  |  |  |  |  |  |  |  |  | 320 | 318 | 304 |
| – other emoluments | 6 | 6 | 20 |  |  |  |  |  |  |  |  |  | 6 | 6 | 20 |
| Sub-total | 326 | 324 | 324 |  |  |  |  |  |  |  |  |  | 326 | 324 | 324 |
| Total emoluments | 14,553 | 10,390 | 7,662 |  | 729 | 782 | 791 |  | 1,105 | 1,047 | 1,100 |  | 16,387 | 12,219 | 9,553 |

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31 Contingent liabilities and financial commitments

1.The Group is subject to contingencies pursuant to

requirements that it complies with relevant laws, regulations

and standards.

2.Failure to comply could result in restrictions in operations,

damages, fines, increased tax, increased cost of compliance,

interest charges, reputational damage or other sanctions.

These matters are inherently difficult to quantify. In cases

where the Group has an obligation as a result of a past event

existing at the balance sheet date, if it is probable that an

outflow of economic resources will be required to settle the

obligation and if the amount of the obligation can be reliably

estimated, a provision will be recognised based on best

estimates and management judgement.

3.There are, however, contingent liabilities in respect of

litigation, taxes in some countries and guarantees for which

no provisions have been made.

General Litigation Overview

4.There are a number of legal and regulatory actions,

proceedings and claims against Group companies related to

tobacco and New Category products that are pending in a

number of jurisdictions. These proceedings include, among

other things, claims for personal injury (both individual claims

and class actions) and claims for economic loss arising from

the treatment of smoking- and health-related diseases (such

as medical recoupment claims brought by local governments).

5.The plaintiffs in these cases seek recovery on a variety of legal

theories, including negligence, strict liability in tort, design

defect, failure to warn, fraud, misrepresentation, violations of

unfair and deceptive trade practices statutes, conspiracy,

public nuisance, medical monitoring and violations of

competition and antitrust laws. The plaintiffs seek various

forms of relief, including compensatory and, where available,

punitive damages, treble or multiple damages and statutory

damages and penalties, creation of medical monitoring and

smoking cessation funds, disgorgement of profits, attorneys’

fees, and injunctive and other equitable relief.

6.Although alleged damages often are not determinable from a

complaint, and the law governing the pleading and calculation

of damages varies from jurisdiction to jurisdiction,

compensatory and punitive damages have been specifically

pleaded in a number of cases, sometimes in amounts ranging

into the hundreds of millions and even hundreds of billions of

sterling.

7.The Group has successfully managed tobacco-related

litigation, and a very high percentage of the tobacco-related

litigation claims brought against them, including Engle

progeny cases, continue to be dismissed at or before trial.

Based on their experience in tobacco-related litigation and the

strength of the defences available to them in such litigation,

the Group’s companies believe that their successful defence

of tobacco-related litigation in the past will continue in the

future.

8.It is the policy of the Group to defend tobacco-related

litigation claims vigorously; generally, Group companies do not

settle such claims. However, Group companies may enter into

settlement discussions in certain cases, if they believe it is in

their best interests to do so. Exceptions to this approach

include, but are not limited to, actions taken pursuant to ‘offer

of judgment’ statutes and Filter Cases, as defined below. An

‘offer of judgment,’ if rejected by the plaintiff, preserves the

Group’s right to recover attorneys’ fees under certain statutes

in the event of a verdict favourable to the Group. Such offers

are sometimes made through court-ordered mediations.

Other settlements by Group companies include the State

Settlement Agreements (as defined in paragraph 40 below),

the funding by various tobacco companies of a US$5.2 billion

(approximately £4.3 billion) trust fund contemplated by the

Master Settlement Agreement (as described in paragraph 40

below) to benefit tobacco growers, the original Broin flight

attendant case, and most of the Engle progeny cases pending

in U.S. federal court, after the initial docket of over 4,000 such

cases was reduced to approximately 400 cases. The Group

believes that the circumstances surrounding these claims are

readily distinguishable from the current categories of

tobacco-related litigation claims involving Group companies.

9.Although the Group intends to defend all pending cases

vigorously, and believes that the Group’s companies have valid

bases for appeals of adverse verdicts and valid defences to all

actions, and that an outflow of resources related to any

individual case is not considered probable, litigation is subject

to many uncertainties, and, generally, it is not possible to

predict the outcome of any particular litigation pending

against Group companies, or to reasonably estimate the

amount or range of any possible loss. Furthermore, a number

of political, legislative, regulatory and other developments

relating to the tobacco industry and cigarette smoking have

received wide media attention. These developments may

negatively affect the outcomes of tobacco-related legal

actions and encourage the commencement of additional

similar litigation. Therefore, the Group does not provide

estimates of the financial effect of the contingent liabilities

represented by such litigation, as such estimates are not

practicable.

10.The following table lists the categories of the tobacco-related

actions pending against Group companies as at 31 December

2022 and the increase or decrease from the number of cases

pending against Group companies as at 31 December 2021.

Details of the quantum of past judgments awarded against

Group companies, the majority of which are under appeal, are

also identified along with any settlements reached during the

relevant period. Given the volume and more active nature of

the Engle progeny cases and the Filter Cases in the U.S.

described below, and the fluctuation in the number of such

cases and amounts awarded from year to year, the Group

presents judgment or settlement figures for these cases on a

three-year basis. Where no quantum is identified, either no

judgment has been awarded against a Group company, or

where a verdict has been reached no quantification of

damages has been given, or no settlement has been entered

into. Further details on the judgments, damages

quantification and settlements are included within the case

narratives below. For a discussion of the non-tobacco related

litigation pending against the Group, see note 31, paragraph

82, et seq.

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| Case Type | Notes | Case Numbers as at  31 December 2022  (note 31(a)) | Case Numbers as at  31 December 2021  (note 31(a)) | Change in Number  Increase/(decrease) |
| U.S. tobacco-related actions |  |  |  |  |
| Medical reimbursement cases | 31(b) | 2 | 2 | No change |
| Class actions | 31(c) | 20 | 20 | No change |
| Individual smoking and health cases | 31(d) | 206 | 222 | (16) |
| Engle Progeny Cases | 31(e) | 665 | 1,071 | (406) |
| Broin II Cases | 31(f) | 1,183 | 1,200 | (17) |
| Filter Cases | 31(g) | 46 | 46 | No change |
| State Settlement Agreements – Enforcement and Validity | 31(h) | 1 | 2 | (1) |
| Non-U.S. tobacco-related actions |  |  |  |  |
| Medical reimbursement cases |  | 18 | 19 | (1) |
| Class actions | 31(i) | 12 | 12 | No change |
| Individual smoking and health cases | 31(j) | 51 | 68 | (17) |

(Note 31(a)) This includes cases to which the Reynolds American Inc. (Reynolds American) group companies were a party at such date.

(Note 31(b)) This category of cases includes the Department of Justice action. See note 31, paragraphs 20-23.

(Note 31(c)) See note 31, paragraphs 24-37.

(Note 31(d)) See note 31, paragraphs 38-39.

(Note 31(e)) See note 31, paragraphs 28-37.

(Note 31(f)) See note 31, paragraph 39.

(Note 31(g)) See note 31, paragraph 39.

(Note 31(h)) See note 31, paragraphs 40-54.

(Note 31(i)) Outside the United States, there are 12 class actions being brought against Group companies as at 31 December 2022. These

include class actions in the following jurisdictions: Canada (11) and Venezuela (1). For a description of the Group companies’ class actions,

see note 31, paragraphs 69-80. For a description of the Quebec Class Actions, see note 31, paragraph 75. All of the class actions in

Canada are currently stayed pursuant to a court order. See note 31, paragraph 57.

(Note 31(j)) As at 31 December 2022, the jurisdictions with the most active individual cases against Group companies were, in descending

order: Brazil (17), Chile (11), Italy (9), Canada (5), Argentina (5) and Ireland (2). There were a further two jurisdictions with one active case

only. Out of these 51 active individual cases, as at 31 December 2022 there were two cases in Argentina that have resulted in pending

unfavourable judgments. In one case, damages were awarded totalling ARS 685,976 (approximately £3,200) in compensatory damages

and ARS 2,500,000 (approximately £11,700) in punitive damages, with post-judgment interest totalling approximately ARS 5,288,000

(approximately £25,000), while in the other case, compensatory damages were awarded totalling ARS 2,850,000 (approximately

£13,400), with post-judgment interest totalling approximately ARS 92,638,000 (approximately £435,000). Both judgments are currently

on appeal.

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274

11.Certain terms and phrases used in this note 31 may require

some explanation.

a)‘Judgment’ or ‘final judgment’ refers to the final decision of

the court resolving the dispute and determining the rights

and obligations of the parties. At the trial court level, for

example, a final judgment generally is entered by the court

after a jury verdict and after post-verdict motions have

been decided. In most cases, the losing party can appeal a

verdict only after a final judgment has been entered by the

trial court.

b)‘Damages’ refers to the amount of money sought by a

plaintiff in a complaint, or awarded to a party by a jury or,

in some cases, by a judge. ‘Compensatory damages’ are

awarded to compensate the prevailing party for actual

losses suffered, if liability is proved. In cases in which there

is a finding that a defendant has acted wilfully, maliciously

or fraudulently, generally based on a higher burden of

proof than is required for a finding of liability for

compensatory damages, a plaintiff also may be awarded

‘punitive damages’. Although damages may be awarded at

the trial court stage, a losing party may be protected from

paying any damages until all appellate avenues have been

exhausted by posting a supersedeas bond. The amount of

such a bond is governed by the law of the relevant

jurisdiction and generally is set at the amount of damages

plus some measure of statutory interest, modified at the

discretion of the appropriate court or subject to limits set

by a court or statute.

c)‘Settlement’ refers to certain types of cases in which

cigarette manufacturers, including R. J. Reynolds Tobacco

Co. (RJRT), Brown & Williamson Tobacco Corporation

(now known as Brown & Williamson Holdings, Inc.) (B&W),

and Lorillard Tobacco Company (Lorillard Tobacco), have

agreed to resolve disputes with certain plaintiffs without

resolving the cases through trial.

d)All sums set out in note 31 have been converted to GBP

and US$ using the following end closing rates: GBP 1 to

US$ 1.2029, GBP 1 to CAD$ 1.6299, GBP 1 to EUR 1.1271,

GBP 1 to BRL 6.3510, GBP 1 to AOA 613.3401, GBP 1 to

NGN 703.8799, GBP 1 to KRW 1,521.0700, GBP 1 to HRK

8.4921, GBP 1 to JPY 158.7166, GBP 1 to QAR 4.3807, GBP 1

to SAR 4.5205, GBP 1 to ARS 213.0510, GBP 1 to MZN

77.0999 and GBP 1 to EGP 29.7778.

U.S. Tobacco Litigation

12.Group companies, notably RJRT (individually and as successor

by merger to Lorillard Tobacco) and B&W as well as other

leading cigarette manufacturers, are defendants in a number

of product liability cases. In a number of these cases, the

amounts of compensatory and punitive damages sought are

significant.

13.The total number of U.S. tobacco product liability cases

pending as at 31 December 2022 involving RJRT, B&W and/or

Lorillard Tobacco was approximately 2,140.

14.Since many of these pending cases seek unspecified

damages, it is not possible to quantify the total amounts being

claimed, but the aggregate amounts involved in such litigation

are significant, possibly totalling billions of U.S. dollars. The

cases fall into four broad categories: medical reimbursement

cases; class actions; individual cases; and other claims.

15.RJRT (individually and as successor by merger to Lorillard

Tobacco), American Snuff Co., Santa Fe Natural Tobacco

Company, Inc. (SFNTC), R.J. Reynolds Vapor Company (RJR

Vapor), Reynolds American, Lorillard Inc., other Reynolds

American affiliates and indemnitees, including but not limited

to B&W (collectively, the Reynolds Defendants), believe that

they have valid defences to the tobacco-related litigation

claims against them, as well as valid bases for appeal of

adverse verdicts against them. The Reynolds Defendants

have, through their counsel, filed pleadings and memoranda in

pending tobacco-related litigation that set forth and discuss a

number of grounds and defences that they and their counsel

believe have a valid basis in law and fact.

16.Scheduled trials. Trial schedules are subject to change, and

many cases are dismissed before trial. In the U.S., there are 48

cases, exclusive of Engle progeny cases, scheduled for trial as

at 31 December 2022 through 31 December 2023, for the

Reynolds Defendants: 35 individual smoking and health cases,

11 Filter Cases, and two other cases. There are also

approximately 77 Engle progeny cases against RJRT

(individually and as successor to Lorillard Tobacco) and B&W

scheduled for trial through 31 December 2023. It is not known

how many of these cases will actually be tried.

17.Trial results. From 1 January 2020 through 31 December 2022,

44 trials occurred in individual smoking and health, Engle

progeny, and patent cases in which the Reynolds Defendants

were defendants, including nine where mistrials were

declared. Verdicts in favour of the Reynolds Defendants and,

in some cases, other defendants, were returned in eight

cases, tried in Florida (5), Oregon (1), and Massachusetts (2).

Verdicts in favour of the plaintiffs were returned in 23 cases,

tried in Florida (18), Massachusetts (1), New Mexico (1), Oregon

(2) and North Carolina (1). Three of the cases (in Florida) were

dismissed during trial. One of the cases (in Florida) was a

punitive damages re-trial.

(a) Medical Reimbursement Cases

18.These civil actions seek to recover amounts spent by

government entities and other third-party providers on

healthcare and welfare costs claimed to result from illnesses

associated with smoking.

19.As at 31 December 2022, one U.S. medical reimbursement suit

(Crow Creek Sioux Tribe v. American Tobacco Co., filed in

1997) was pending against RJRT, B&W and Lorillard Tobacco

in a Native American tribal court in South Dakota. The

plaintiffs seek to recover actual and punitive damages,

restitution, funding of a clinical cessation programme, funding

of a corrective public education programme, and

disgorgement of unjust profits from sales to minors. There

has been no recent activity in this case, and no other medical

reimbursement suits are pending against these companies by

county or other political subdivisions of the states.

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275

U.S. Department of Justice Action

20.On 22 September 1999, the U.S. Department of Justice (DOJ)

brought an action in the U.S. District Court for the District of

Columbia against various industry members, including RJRT,

B&W, Lorillard Tobacco, B.A.T Industries p.l.c. (Industries) and

Investments (United States v. Philip Morris USA Inc.). The DOJ

initially sought (i) recovery of certain federal funds expended in

providing health care to smokers who developed alleged

smoking-related diseases and (ii) equitable relief under the

civil provisions of the Racketeer Influenced and Corrupt

Organizations Act (RICO), including (a) disgorgement of

roughly US$280 billion (approximately £232.8 billion) in profits

allegedly earned from a purported racketeering ‘enterprise’ - a

remedy the U.S. Court of Appeals for the DC Circuit ruled in

February 2005 was not available - and (b) certain ‘corrective

communications’. In September 2000, the district court

dismissed Industries for lack of personal jurisdiction and

dismissed the health care cost recovery claims.

21.After a roughly nine-month non-jury trial of the remaining

RICO claims, the district court issued its Final Judgment and

Remedial Order (the Remedial Order) on 17 August 2006. That

order found certain defendants, including RJRT, B&W, Lorillard

Tobacco and Investments, had violated RICO, imposed

financial penalties and enjoined the defendants from

committing future racketeering acts, participating in certain

trade organisations, making misrepresentations concerning

smoking and health and youth marketing, and using certain

brand descriptors such as ‘low tar’, ‘light’, ‘ultra-light’, ‘mild’

and ‘natural’. The Remedial Order also required the

defendants to issue ‘corrective communications’ on five

subjects, including smoking and health and addiction, and to

comply with further undertakings, including maintaining

websites of historical corporate documents and

disseminating certain marketing information on a confidential

basis to the government. In addition, the district court placed

restrictions on the defendants’ ability to dispose of certain

assets for use in the United States, unless the transferee

agrees to abide by the terms of the district court’s order.

22.The parties appealed and cross-appealed and, on 22 May

2009, the DC Circuit affirmed the district court’s RICO liability

judgment but vacated the Remedial Order in part and

remanded for further factual findings and clarification as to

whether liability should be imposed against B&W, based on

changes in the nature of B&W’s business operations

(including the extent of B&W’s control over tobacco

operations). The DC Circuit also remanded three other

discrete issues relating to the injunctive remedies, including

for the district court ‘to reformulate’ the injunction on the use

of low-tar descriptors ‘to exempt foreign activities that have

no substantial, direct, and foreseeable domestic effects,’ and

for the district court to evaluate whether corrective

communications could be required at point-of-sale displays

(which requirement the DC Circuit vacated). On 28 June 2010,

the U.S. Supreme Court denied the parties' petitions for

further review.

23.On 22 December 2010, the district court dismissed B&W from

the litigation. Due to intervening changes in controlling law, on

28 March 2011, the district court ruled that the Remedial

Order no longer applied to Investments prospectively, and for

this reason, Investments would not have to comply with any of

the remaining injunctive remedies. In November 2012, the

district court entered an order setting forth the text of the

corrective statements and directed the parties to engage in

discussions with the Special Master to implement them. After

various proceedings and appeals, the district court in October

2017 ordered RJRT and the other U.S. tobacco company

defendants to fund the publication of compelled public

statements in various U.S. media outlets, including in

newspapers, on television, on the companies’ websites, and in

onserts on cigarette packaging. The compelled public

statements in newspapers and on television were completed

in 2018 and in package onserts in mid-2020. The compelled

public statements now also appear on RJRT websites. The

final issue regarding corrective statements was their display

at retail point of sale. On 6 December 2022, the district court

entered a consent order requiring the tobacco company

defendants to have the compelled public statements posted

at retail point of sale from October 2023 through June 2025.

(b) Class Actions

24.As at 31 December 2022, RJRT, B&W and Lorillard Tobacco

were named as defendants in two actions asserting claims on

behalf of putative classes of persons allegedly injured or

financially impacted by their smoking, and SFNTC was named

in 17 putative class actions relating to the use of the words

‘natural’, ‘100% additive-free’ or ‘organic’ in Natural American

Spirit advertising and promotional materials. If the classes are

or remain certified, separate trials may be needed to assess

individual plaintiffs’ damages. Among the pending class

actions, 16 specified the amount of the claim in the complaint

and alleged that the plaintiffs were seeking in excess of

US$5 million (approximately £4.16 million) and one that alleged

that the plaintiffs were seeking less than US$75,000

(approximately £62,349) per class member plus unspecified

punitive damages.

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276

No Additive/Natural/Organic Claim Cases

25.A total of 17 pending putative class actions were filed in nine

U.S. federal district courts against SFNTC, a subsidiary of

Reynolds American, which cases generally allege, in various

combinations, violations of state deceptive and unfair trade

practice statutes, and claim state common law fraud,

negligent misrepresentation, and unjust enrichment based on

the use of descriptors such as ‘natural’, ‘organic’ and ‘100%

additive-free’ in the marketing, labelling, advertising, and

promotion of SFNTC’s Natural American Spirit brand

cigarettes. In these actions, the plaintiffs allege that the use of

these terms suggests that Natural American Spirit brand

cigarettes are less harmful than other cigarettes and, for that

reason, violated state consumer protection statutes or

amounted to fraud or a negligent or intentional

misrepresentation. The actions seek various categories of

recovery, including economic damages, injunctive relief

(including medical monitoring and cessation programmes),

interest, restitution, disgorgement, treble and punitive

damages, and attorneys’ fees and costs. In April 2016, the U.S.

Judicial Panel on Multidistrict Litigation (JPML) consolidated

the 16 cases pending at that time for pre-trial purposes before

a federal district court in New Mexico, and a later-filed case

was transferred there for pre-trial purposes in 2018. On 21

December 2017, that court granted the defendants’ motion to

dismiss in part, dismissing a number of claims with prejudice,

and denied it in part. The district court conducted a five-day

hearing on the motion for class certification and on the

motion challenging the admissibility of expert opinion

testimony in December 2020. The parties filed post-hearing

briefs in January 2021 and filed proposed findings of fact and

conclusions of law in February 2021. A decision is pending.

Other Putative Class Actions

26.Jones v. American Tobacco Co. is a putative class action filed

in December 1998 in the Circuit Court, Jackson County,

Missouri, against various U.S. cigarette manufacturers,

including RJRT, B&W, Lorillard Tobacco and certain parent

companies. The action was brought by a plaintiff on behalf of

a putative class of Missouri tobacco product users and

purchasers alleging that the plaintiffs’ use of the defendants’

tobacco products has caused them to become addicted to

nicotine, and seeking an unspecified amount of compensatory

and punitive damages. There is currently no activity in this

case.

27.Young v. American Tobacco Co. is a putative class action filed

in November 1997 in the Circuit Court, Orleans Parish,

Louisiana against various U.S. cigarette manufacturers,

including RJRT, B&W, Lorillard Tobacco and certain parent

companies. This action was brought on behalf of a putative

class of Louisiana residents who, though not themselves

cigarette smokers, have been exposed to second-hand smoke

from cigarettes manufactured by the defendants, and who

allegedly suffered injury as a result of that exposure. The

action seeks an unspecified amount of compensatory and

punitive damages. In March 2016, the court entered an order

staying the case, including all discovery, pending the

completion of an ongoing smoking cessation programme

ordered by the court in a now-concluded Louisiana state court

certified class action, Scott v. American Tobacco Co.

Engle Class Action and Engle Progeny Cases (Florida)

28.In July 1998, trial began in Engle v. R. J. Reynolds Tobacco Co., a

then-certified class action filed in Circuit Court, Miami-Dade

County, Florida, against U.S. cigarette manufacturers,

including RJRT, B&W, Lorillard Tobacco and Lorillard Inc. The

then-certified class consisted of Florida citizens and residents,

and their survivors, who suffered from smoking-related

diseases that first manifested between 5 May 1990, and 21

November 1996, and were caused by an addiction to

cigarettes. In July 1999, the jury in this Phase I found against

RJRT, B&W, Lorillard Tobacco, Lorillard Inc. and the other

defendants on common issues relating to the defendants’

conduct, general causation, the addictiveness of cigarettes,

and entitlement to punitive damages.

29.In July 2000, the jury in Phase II awarded the class a total of

approximately US$145 billion (approximately £120.5 billion) in

punitive damages, apportioned US$36.3 billion (approximately

£30.2 billion) to RJRT, US$17.6 billion (approximately

£14.6 billion) to B&W, and US$16.3 billion (approximately

£13.6 billion) to Lorillard Tobacco and Lorillard Inc. The three

class representatives in the Engle class action were awarded

US$13 million (approximately £10.8 million) in compensatory

damages.

30.This decision was appealed and ultimately resulted in the

Florida Supreme Court in December 2006 decertifying the

class and allowing judgments entered for only two of the

three Engle class representatives to stand and setting aside

the punitive damages award. The court preserved certain of

the jury’s Phase I findings, including that cigarettes can cause

certain diseases, nicotine is addictive, and defendants placed

defective cigarettes on the market, breached duties of care,

concealed health-related information and conspired. Putative

Engle class members were permitted to file individual

lawsuits, deemed ‘Engle progeny cases’, against the Engle

defendants, within one year of the Supreme Court’s decision

(subsequently extended to 11 January 2008).

31.During 2015, RJRT and Lorillard Tobacco, together with Philip

Morris USA Inc. (PM USA), settled virtually all of the Engle

progeny cases then pending against them in federal district

court. The total amount of the settlement was US$100 million

(approximately £83.1 million) divided as follows: RJRT

US$42.5 million (approximately £35.3 million); PM USA

US$42.5 million (approximately £35.3 million); and Lorillard

Tobacco US$15 million (approximately £12.5 million). The

settlement covered more than 400 federal Engle progeny

cases but did not cover 12 federal progeny cases previously

tried to verdict and then pending on post-trial motions or

appeal, and two federal progeny cases filed by different lawyers

from the ones who negotiated the settlement for the plaintiffs.

32.As at 31 December 2022, there were approximately 665 Engle

progeny cases pending in which RJRT, B&W and/or Lorillard

Tobacco have all been named as defendants and served.

These cases include claims by or on behalf of 838 plaintiffs. In

addition, as at 31 December 2022, RJRT was aware of five

additional Engle progeny cases that have been filed but not

served. The number of pending cases fluctuates for a variety

of reasons, including voluntary and involuntary dismissals.

Voluntary dismissals include cases in which a plaintiff accepts

an ‘offer of judgment’ from RJRT and/or RJRT’s affiliates and

indemnitees. An offer of judgment, if rejected by the plaintiff,

preserves the offering party's right to seek attorneys’ fees

under Florida law in the event of a favourable verdict. Such

offers are sometimes made through court-ordered

mediations.

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277

33.31 trials occurred in Engle progeny cases in Florida state and federal courts against RJRT, B&W and/or Lorillard Tobacco from 1

January 2020 through 31 December 2022, and additional state court trials are scheduled for 2023.

34.The following chart identifies the number of trials in Engle progeny cases as at 31 December 2022 and additional information about

the adverse judgments entered:

Trials/verdicts/judgments of individual Engle progeny cases from 1 January 2020 through 31 December 2022:

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| --- | --- |
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| Total number of trials | 31 |
| Number of trials resulting in plaintiffs’ verdicts | 16 \*\* |
| Total damages awarded in final judgments against RJRT | US$92,934,000 (approximately £77 million) |
| Amount of overall damages comprising ‘compensatory  damages’ (approximately) | US$57,869,000 (of overall US$92,934,000 )  (approximately £48 million of £77 million) |
| Amount of overall damages comprising ‘punitive damages’ (approximately) | US$35,065,000 (of overall US$92,934,000)  (approximately £29 million of £77 million) |

Note:

\*\*Of the 16 trials resulting in plaintiffs’ verdicts 1 January 2020 to 31 December 2022 (note 31(k)):

|  |  |
| --- | --- |
|  |  |
| Number of adverse judgments appealed by RJRT (note 31(l)) | 12 |
| Number of adverse judgments, in which RJRT still has time to file an appeal | 2 |
| Number of adverse judgments in which an appeal was not, and can no longer be, sought | 2 |
| Appeals of individual Engle progeny cases 1 January 2020 to 31 December 2022: | |
| Number of adverse judgments appealed by RJRT (note 31(m)) | 13 |

(Note 31(k)) The 31 trials include two cases that were tried twice (Yount v. R.J. Reynolds Tobacco Co. and Rutkowski v. R. J. Reynolds

Tobacco Co.). In each case, the first trial resulted in mistrial, while the second resulted in a verdict for plaintiff. The 31 cases also include

one trial that resulted in a plaintiff verdict, but a new trial was ordered (Leidinger v. R. J. Reynolds Tobacco Co.).

(Note 31(l)) Of the 12 adverse verdicts appealed by RJRT as a result of judgments arising in the period 1 January 2020 to 31 December

2022:

a.eight appeals remain undecided in the District Courts of Appeal;

b.two appeals were decided and/or closed in the District Court of Appeals;

c.one judgment was affirmed and paid; and

d.there was one appeal in which the case was resolved and appeal dismissed.

(Note 31(m)) In addition to the 12 cases discussed in note 31(l), RJRT appealed one additional case during the 1 January 2020 to 31

December 2022 period, the original plaintiff verdict of which was returned in November 2019.

35.By statute, Florida applies a US$200 million (approximately £166.3 million) bond cap to all Engle progeny cases in the aggregate.

Individual bond caps for any given Engle progeny case vary depending on the number of judgments in effect at a given time. Judicial

attempts by several plaintiffs in the Engle progeny cases to challenge the bond cap as violating the Florida Constitution have failed.

In addition, bills have been introduced in sessions of the Florida legislature that would eliminate the Engle progeny bond cap, but

those bills have not been enacted as at 31 December 2022.

36.In 2022, RJRT paid judgments in 11 Engle progeny cases. Those payments totalled US$13.2 million (approximately £11.0 million) in

compensatory or punitive damages. Additional costs were paid in respect of attorneys’ fees and statutory interest.

37.In addition, accruals for damages and attorneys’ fees and statutory interest for 14 cases and three resolution bundles (Konzelman v.

R. J. Reynolds Tobacco Co., Ledo v. R. J. Reynolds Tobacco Co., Blackwood v. R. J. Reynolds Tobacco Co., Lane v. R. J. Reynolds

Tobacco Co., McKeehan v. R. J. Reynolds Tobacco Co., Woodley v. R. J. Reynolds Tobacco Co., Rodriguez v. R. J. Reynolds Tobacco Co.,

French v. R. J. Reynolds Tobacco Co., Rembe v. R. J. Reynolds Tobacco Co., Canady v. R. J. Reynolds Tobacco Co., Redburn v. R. J.

Reynolds Tobacco Co., Phelps v. R. J. Reynolds Tobacco Co., Wlasiuk v. R. J. Reynolds Tobacco Co., Leidinger v. R. J. Reynolds Tobacco

Co., the Gary Williams Engle progeny bundle, the Ogle/Wiggins Child Engle progeny bundle, and the Ogle Engle progeny bundle)

were recorded in Reynolds American’s consolidated balance sheet as at 31 December 2022 to the value of approximately US$53

million (approximately £44.1 million).

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278

(c) Individual Cases

38.As at 31 December 2022, 206 individual cases were pending in the United States against RJRT, B&W and/or Lorillard Tobacco. This

category of cases includes smoking and health cases alleging personal injuries caused by tobacco use or exposure brought by or on

behalf of individual plaintiffs based on theories of negligence, strict liability, breach of express or implied warranty, and violations of

state deceptive trade practices or consumer protection statutes. The plaintiffs seek to recover compensatory damages, attorneys’

fees and costs, and punitive damages. The category does not include the Engle progeny cases, Broin II cases, and Filter Cases

discussed above and below. One of the individual cases is brought by or on behalf of an individual or his/her survivors alleging

personal injury as a result of exposure to Environmental Tobacco Smoke (ETS).

39.The following chart identifies the number of individual cases pending as at 31 December 2022 as against the number pending as at

31 December 2021, along with the number of Engle progeny cases, Broin II cases, and Filter Cases, which are discussed further

below.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Case Type | U.S.  Case Numbers  31 December  2022 | U.S.  Case Numbers  31 December  2021 | Change in  Number  Increase /  (Decrease) |
| Individual Smoking and Health Cases (note 31(n)) | 206 | 222 | (16) |
| Engle Progeny Cases (Number of Plaintiffs) (note 31(o)) | 665 (838) | 1,071 (1,304) | (406) (466) |
| Broin II Cases (note 31(p)) | 1,183 | 1,200 | (17) |
| Filter Cases (note 31(q)) | 46 | 46 | No change |

(Note 31(n)) Out of the 206 pending individual smoking and health cases, nine have received adverse verdicts or judgments in the court of

first instance or on appeal, and the total amount of those verdicts or judgments is approximately US$60.0 million (approximately

£49.9 million).

(Note 31(o)) The number of Engle progeny cases will fluctuate as cases are dismissed or if any of the dismissed cases are appealed.

Please see earlier table in paragraph 34.

(Note 31(p)) Broin v. Philip Morris, Inc. was a class action filed in Circuit Court in Miami-Dade County, Florida in 1991 and brought on behalf

of flight attendants alleged to have suffered from diseases or ailments caused by exposure to ETS in airplane cabins. In October 1997,

RJRT, B&W, Lorillard Tobacco and other cigarette manufacturer defendants settled Broin, agreeing to pay a total of US$300 million

(approximately £249 million) in three annual US$100 million (approximately £83.1 million) instalments, allocated among the companies by

market share, to fund research on the early detection and cure of diseases associated with tobacco smoke. It also required those

companies to pay a total of US$49 million (approximately £40.7 million) for the plaintiffs’ counsel’s fees and expenses. RJRT’s portion of

these payments was approximately US$86 million (approximately £71.5 million); B&W’s was approximately US$57 million (approximately

£47.4 million); and Lorillard Tobacco’s was approximately US$31 million (approximately £25.8 million). The settlement agreement, among

other things, limits the types of claims class members may bring and eliminates claims for punitive damages. The settlement agreement

also provides that, in individual cases by class members that are referred to as Broin II lawsuits, the defendants will bear the burden of

proof with respect to whether ETS can cause certain specifically enumerated diseases, referred to as ‘general causation’. With respect to

all other liability issues, including whether an individual plaintiff’s disease was caused by his or her exposure to ETS in airplane cabins,

referred to as ‘specific causation’, individual plaintiffs will bear the burden of proof. On 7 September 1999, the Florida Supreme Court

approved the settlement. There have been no Broin II trials since 2007. There have been periodic efforts to activate cases and the Group

expects this to continue over time.

(Note 31(q)) Includes claims brought against Lorillard Tobacco and Lorillard Inc. by individuals who seek damages resulting from their

alleged exposure to asbestos fibres that were incorporated into filter material used in one brand of cigarettes manufactured by a

predecessor to Lorillard Tobacco for a limited period of time ending more than 60 years ago. Pursuant to a 1952 agreement between P.

Lorillard Company and H&V Specialties Co., Inc. (the manufacturer of the filter material), Lorillard Tobacco is required to indemnify

Hollingsworth & Vose for legal fees, expenses, judgments and resolutions in cases and claims alleging injury from finished products sold

by P. Lorillard Company that contained the filter material. As at 31 December 2022, Lorillard Tobacco and/or Lorillard Inc. was a

defendant in 46 Filter Cases. Since 1 January 2020, Lorillard Tobacco and RJRT have paid, or have reached agreement to pay, a total of

approximately US$22.3 million (approximately £18.5 million) in settlements to resolve 84 Filter Cases.

(d) State Settlement Agreements

40.In November 1998, the major U.S. cigarette manufacturers, including RJRT, B&W and Lorillard Tobacco, entered into the Master

Settlement Agreement (MSA) with attorneys general representing 46 U.S. states, the District of Columbia and certain U.S. territories

and possessions. These cigarette manufacturers previously settled four other cases, brought on behalf of Mississippi, Florida, Texas

and Minnesota, by separate agreements with each state (collectively and with the MSA, the ‘State Settlement Agreements’).

41.These State Settlement Agreements settled all health care cost recovery actions brought by, or on behalf of, the settling

jurisdictions; released the defending major U.S. cigarette manufacturers from various additional present and potential future claims;

imposed future payment obligations in perpetuity on RJRT, B&W, Lorillard Tobacco and other major U.S. cigarette manufacturers;

and placed significant restrictions on their ability to market and sell cigarettes and smokeless tobacco products. In accordance with

the MSA, various tobacco companies agreed to fund a US$5.2 billion (approximately £4.3 billion) trust fund to be used to address the

possible adverse economic impact of the MSA on tobacco growers.

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42.RJRT and SFNTC are subject to the substantial payment obligations under the State Settlement Agreements. Payments under the

State Settlement Agreements are subject to various adjustments for, among other things, the volume of cigarettes sold, relative

market share, operating profit and inflation. Reynolds American’s operating subsidiaries’ expenses and payments under the State

Settlement Agreements for 2019, 2020, 2021 and 2022 and the projected expenses and payments for 2023 and onwards are set

forth below (in millions of U.S. dollars)\*:

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 and  thereafter |
| Settlement expenses | $2,762 | $3,572 | $3,420 | $2,951 |  |  |
| Settlement cash payments | $2,918 | $2,848 | $3,744 | $3,129 |  |  |
| Projected settlement expenses |  |  |  |  | >$2,800 | >$2,800 |
| Projected settlement cash payments |  |  |  |  | >$3,000 | >$2,800 |

Note:

\*Subject to adjustments for changes in sales volume, inflation, operating profit and other factors. Payments are allocated among the companies on the basis of relative market share or

other methods.

43.The State Settlement Agreements have materially adversely affected RJRT’s shipment volumes. Reynolds American believes that

these settlement obligations may materially adversely affect the results of operations, cash flows or financial position of Reynolds

American and RJRT in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in

U.S. cigarette sales in the premium and value categories, RJRT’s share of the domestic premium and value cigarette categories, and

the effect of any resulting cost advantage of manufacturers not subject to the State Settlement Agreements.

44.In addition, the MSA includes an adjustment that potentially reduces the annual payment obligations of RJRT, Lorillard Tobacco and

the other signatories to the MSA, known as ‘Participating Manufacturers’ (PMs). Certain requirements, collectively referred to as the

‘Adjustment Requirements’, must be satisfied before the Non-Participating Manufacturers (NPM) Adjustment for a given year is

available: (i) an Independent Auditor must determine that the PMs have experienced a market share loss, beyond a triggering

threshold, to those manufacturers that do not participate in the MSA (such non-participating manufacturers being referred to as

NPMs); and (ii) in a binding arbitration proceeding, a firm of independent economic consultants must find that the disadvantages of

the MSA were a significant factor contributing to the loss of market share. This finding is known as a significant factor determination.

45.When the Adjustment Requirements are satisfied, the MSA provides that the NPM Adjustment applies to reduce the annual

payment obligation of the PMs. However, an individual settling state may avoid its share of the NPM Adjustment if it had in place

and diligently enforced during the entirety of the relevant year a ‘Qualifying Statute’ that imposes escrow obligations on NPMs that

are comparable to what the NPMs would have owed if they had joined the MSA. In such event, the state’s share of the NPM

Adjustment is reallocated to other settling states, if any, that did not have in place and diligently enforce a Qualifying Statute.

46.RJRT, Lorillard Tobacco and SFNTC are or were involved in the NPM Adjustment proceedings concerning the years 2003 to 2019. In

2012, RJRT, Lorillard Tobacco, and SFNTC entered into an agreement (the Term Sheet) with certain settling states that resolved

accrued and future NPM adjustments. After an arbitration panel ruled in September 2013 that six states had not diligently enforced

their qualifying statutes in the year 2003, additional states joined the Term Sheet. RJRT executed the NPM Adjustment Settlement

Agreement on 25 September 2017 (which incorporated the Term Sheet). Since the NPM Adjustment Settlement Agreement was

executed, an additional 11 states have joined. The arbitration panels ruled in September 2021 that two states had not diligently

enforced their qualifying statutes in the year 2004. In September 2022, a panel also ruled that an additional state had not diligently

enforced its qualifying statute in the year 2004. NPM proceedings are ongoing and could result in further reductions of the

companies’ MSA-related payments.

47.On 18 January 2017, the State of Florida filed a motion to join Imperial Tobacco Group, PLC (ITG) as a defendant and to enforce the

Florida State Settlement Agreement, which motion sought payment under the Florida State Settlement Agreement of

approximately US$45 million (approximately £37.4 million) with respect to the four brands (Winston, Salem, Kool and Maverick) that

were sold to ITG in the divestiture of certain assets, on 12 June 2015, by subsidiaries or affiliates of Reynolds American and Lorillard,

to a wholly owned subsidiary of Imperial Brands plc (the Divestiture), referred to as the ‘Acquired Brands’. The motion also claimed

future annual losses of approximately US$30 million per year (approximately £24.9 million) absent the court’s enforcement of the

Florida State Settlement Agreement. The State’s motion sought, among other things, an order declaring that RJRT and ITG are in

breach of the Florida Settlement Agreement and are required, jointly and severally, to make annual payments to the State under the

Florida State Settlement Agreement with respect to the Acquired Brands. By order dated 30 March 2017, ITG was joined into the

enforcement action. In addition, on 18 January 2017, PM USA filed a motion to enforce the Florida State Settlement Agreement

asserting, among other things, that RJRT and ITG breached that agreement by failing to make settlement payments as to the

Acquired Brands, which PM USA asserts improperly shifted settlement payment obligations to PM USA.

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280

48.After a bench trial, on 27 December 2017 the court entered

an order holding RJRT (not ITG) liable for annual settlement

payments for the Acquired Brands, finding that ITG did not

assume liability for annual settlement payments related to the

Acquired Brands under the terms of the asset purchase

agreement relating to the Divestiture. The court declined to

enter final judgment until after resolution of the dispute

between RJRT and PM USA regarding PM USA's assertion

that the settlement payment obligations have been

improperly shifted to PM USA. On 15 August 2018, the court

entered a final judgment in the action (the Final Judgment). As

a result of the Final Judgment, PM USA's challenge to RJRT's

accounting assumptions related to the Acquired Brands was

rendered moot, subject to reinstatement if ITG joins the

Florida State Settlement Agreement or if the Final Judgment

is reversed. On 29 August 2018, RJRT filed a notice of appeal

on the Final Judgment. On 7 September 2018, PM USA filed a

notice of appeal with respect to the court's ruling as to ITG.

These appeals were consolidated pursuant to RJRT's motion

on 1 October 2018. On 29 July 2020, Florida's Fourth District

Court of Appeal affirmed the Final Judgment. On 12 August

2020, RJRT filed a motion for rehearing or for certification to

the Florida Supreme Court of the 29 July 2020 decision. RJRT

posted a total bond in the amount of US$187,797,139.83

(approximately £156.1 million) for its appeal. RJRT’s motion for

rehearing or certification to the Florida Supreme Court was

denied on 18 September 2020 and its motion for review was

denied by the Florida Supreme Court on 18 December 2020.

On 5 October 2020, RJRT satisfied the Final Judgment

(approximately US$192,869,589.86 (approximately £160.3

million)) and paid approximately US$3.2 million (approximately

£2.7 million) of Florida’s attorneys’ fees. RJRT's appellate

bonds were released to RJRT by order dated 5 November

2020. As explained below, RJRT has secured an order in the

Delaware action requiring ITG to indemnify it for amounts paid

under the Final Judgment.

49.On 17 February 2017, ITG filed an action in the Delaware Court

of Chancery seeking declaratory relief against Reynolds

American and RJRT on various matters related to its rights

and obligations under the asset purchase agreement (and

related documents) relating to the Divestiture with respect to

the subject of the Florida enforcement litigation described

above. Reynolds American and RJRT filed counterclaims on

the same issues. As a result of multiple rounds of cross-

motions for judgment on the pleadings, the Delaware court

ruled (i) that ITG’s obligation to use its reasonable best efforts

to join the Florida Settlement Agreement did not terminate

due to the closing of the asset purchase agreement relating to

the Divestiture; (ii) that the asset purchase agreement does

not entitle ITG to a unique protection from an equity-fee law

that does not yet exist in a Previously Settled State; and (iii)

that it would defer until after it received evidence related to

the parties' intent in the asset purchase agreement, its

determination of whether, to the extent RJRT is held liable for

any settlement payments based on ITG's post-closing sales of

the Acquired Brands, ITG assumed this liability. After

discovery was completed in March 2022, the parties briefed

cross-motions for summary judgment on that third issue. On

30 September 2022, the court granted summary judgment for

Reynolds American and RJRT, holding that ITG assumed the

liability that the Final Judgment imposed on RJRT for

settlement payments to the State of Florida based on ITG's

post-closing sales of the Acquired Brands. A second round of

summary judgment briefing on the amount of indemnifiable

damages is complete. A hearing on that issue is scheduled for

23 February 2023.

50.In June 2015, ITG joined the Mississippi State Settlement

Agreement. On 26 December 2018, PM USA filed a motion to

enforce the settlement agreement against RJRT and ITG

alleging RJRT and ITG failed to act in good faith in calculating

the base year net operating profits for the Acquired Brands,

claiming damages of approximately US$6 million

(approximately £5.0 million) through 2017. On 21 February

2019, the Chancery Court of Jackson County, Mississippi held

a scheduling conference and issued a discovery schedule

order. A hearing on PM USA’s motion to enforce, originally

scheduled for 3-6 May 2021, was adjourned on consent of the

parties to 11-12 August 2021. On 8 June 2021, PM USA and

RJRT entered into a settlement agreement resolving the

outstanding payment calculation issues. On 11 June 2021, the

Mississippi Chancery Court entered an order withdrawing PM

USA’s motion to enforce. On 14 June 2021, RJRT made a

payment of US$5.1 million (approximately £4.2 million) to PM

USA. On 3 December 2019, the State of Mississippi filed a

notice of violation and motion to enforce the settlement

agreement in the Chancery Court of Jackson County,

Mississippi against RJRT, PM USA and ITG, seeking a

declaration that the base year 1997 net operating profit to be

used in calculating the Net Operating Profit Adjustment was

not affected by the change in the federal corporate tax rate in

2018 from 35% to 21%, and an order requiring RJRT to pay the

approximately US$5 million (approximately £4.2 million)

difference in its 2018 payment because of this issue.

Determination of this issue may affect RJRT’s annual payment

thereafter. A hearing on Mississippi’s motion to enforce

occurred on 6-7 October 2021. On 10 June 2022, the

Mississippi Chancery Court granted the State's motion to

enforce, finding that the base year 1997 net operating profit to

be used in calculating the Net Operating Profit Adjustment

was not affected by the change in the federal corporate tax

rate in 2018. RJRT will appeal the motion to enforce. On 29 July

2022, the parties each submitted a supplemental briefing on

damages, including interest and attorneys' fees. A hearing on

damages was scheduled for 7 December 2022, however, the

Court advised the parties that the hearing will be rescheduled

for a date in 2023; the parties will confer to select a new date.

51.In January 2021, RJRT reached an agreement with several

MSA states to waive RJRT’s claims under the MSA in

connection with a settlement between those MSA states and

a non-participating manufacturer, S&M Brands, Inc. (S&M

Brands), under which the states released certain claims

against S&M Brands in exchange for receiving a portion of the

funds S&M Brands had deposited into escrow accounts in

those states pursuant to the states’ escrow statutes. In

consideration for waiving claims, RJRT, together with SFNTC,

received approximately US$55.4 million (approximately

£46.1 million) from the escrow funds paid to those MSA states

under their settlement with S&M Brands.

52.On 27 May 2022, PM USA filed a motion to compel arbitration

under the MSA against RJRT and ITG in North Carolina

Superior Court claiming RJRT and ITG inaccurately calculated

the base year net operating profits for the Acquired Brands

and this improperly shifted approximately US$80 million

(approximately £66.5 million) in MSA payment obligations

from RJRT to PM USA, to date. On 7 June 2022, RJRT and PM

USA negotiated a resolution of the MSA claims, in which RJRT

agreed to, among other things, pay PM USA the sum of

approximately US$37 million (approximately £30.8 million).

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53.On 28 July 2022, the State of Iowa filed a motion to enforce

the Consent Decree and MSA against the PMs asserting,

among other things, claims for breach of contract and

violations of the Iowa False Claims Act. Iowa seeks over

US$130 million (approximately £108 million) in damages, as

well as treble damages. The PMs filed their resistance to

Iowa’s motion and a motion to compel arbitration on 26

September 2022. Iowa filed its resistance to the PMs’ motion

to compel arbitration on 6 October 2022, and the PMs filed

their reply on 31 October 2022. A hearing on the motion was

held on 21 December 2022; a decision is pending.

54.On 29 November 2022, the State of New Mexico filed a

complaint, or in the alternative, a motion to enforce the

Consent Decree and MSA against the PMs asserting, among

other things, claims for breach of contract and violations of

New Mexico’s Unfair Practices Act. New Mexico seeks

compensatory damages in an amount to be determined at

trial, as well as treble damages, punitive damages, and

declaratory and injunctive relief. The PMs’ deadline to answer

or respond was 29 December 2022. On 15 December 2022,

the PMs filed an opposed motion for an extension of deadlines

and pages to file their response on 10 February 2023. New

Mexico filed its response to the motion on 20 December 2022

and the PMs filed their reply on 30 December 2022. On 13

January 2023, the court granted the PMs’ motion to extend

their deadline to file their response to 10 February 2023.

Tobacco-Related Litigation Outside the U.S.

55.As at 31 December 2022:

a)medical reimbursement actions are being brought in

Angola, Brazil, Canada, Nigeria and South Korea;

b)class actions are being brought in Canada and Venezuela; and

c)active tobacco product liability claims against the Group’s

companies existed in 12 markets outside the U.S. The only

markets with five or more claims were Argentina, Brazil,

Canada, Chile, Nigeria and Italy.

(a) Medical reimbursement cases

Angola

56.In November 2016, BAT Angola affiliate Sociedade Unificada

de Tabacos de Angola (SUT) was served with a collective

action filed in the Provincial Court of Luanda, 2nd Civil Section,

by the consumer association Associação Angolana dos

Direitos do Consumidor (AADIC). The lawsuit seeks damages

of AOA 800,000,000 (approximately £1.3 million) allegedly

incurred by the Angolan Instituto Nacional do Controlo do

Cancro (INCC) for the cost of treating tobacco-related

disease, non-material damages allegedly suffered by certain

individual smokers on the rolls of INCC, and the mandating of

certain cigarette package warnings. SUT filed its answer to

the claim on 5 December 2016. The case remains pending.

Canada

57.On 1 March 2019, the Quebec Court of Appeal handed down a

judgment which largely upheld and endorsed the lower court’s

previous decision in two Quebec class actions (the Quebec Class

Actions), as further described below. The share of the judgment

for Imperial, the Group’s operating company in Canada, is

approximately CAD$9.2 billion (approximately £5.6 billion). As a

result of this judgment, there were attempts by the Quebec

plaintiffs to obtain payment out of the CAD $758 million

(approximately £465 million) on deposit with the court. JTI-

MacDonald Corp (a co-defendant in the cases) filed for creditor

protection under the Companies’ Creditors Arrangement Act (the

CCAA) on 8 March 2019. A court order to stay all tobacco litigation

in Canada against all defendants (including RJRT and its affiliate

R.J. Reynolds Tobacco International Inc. (collectively, the RJR

Companies)) until 4 April 2019 was obtained, and the need for a

mediation process to resolve all the outstanding litigation across

the country was recognised. On 12 March 2019 Imperial filed for

creditor protection under the CCAA. In its application Imperial

asked the Ontario Superior Court to stay all pending or

contemplated litigation against Imperial, certain of its subsidiaries

and all other Group companies that were defendants in the

Canadian tobacco litigation, including British American Tobacco

p.l.c. (the Company), Investments, Industries and Carreras

Rothmans Limited (collectively, the UK Companies). On 22 March

2019, Rothmans, Benson & Hedges Inc. also filed for CCAA

protection and obtained a stay of proceedings (together with the

other two stays, the Stays). The Stays are currently in place until 31

March 2023. While the Stays are in place, no steps are to be taken

in connection with the Canadian tobacco litigation with respect to

any of the defendants.

58.The below represents the state of the referenced litigation

as at the advent of the Stays.

59.Following the implementation of legislation enabling provincial

governments to recover health-care costs directly from tobacco

manufacturers, 10 actions for recovery of health-care costs arising

from the treatment of smoking- and health-related diseases have

been brought. These proceedings name various Group companies

as defendants, including the UK Companies and Imperial as well as

the RJR Companies. Pursuant to the terms of the 1999 sale of RJRT’s

international tobacco business to Japan Tobacco Incorporated (JTI),

JTI has agreed to indemnify RJRT for all liabilities and obligations

(including litigation costs) arising in respect of the Canadian

recoupment actions. Subject to a reservation of rights, JTI has

assumed the defence of the RJR Companies in these actions.

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60.The 10 cases were proceeding in British Columbia, New

Brunswick, Newfoundland and Labrador, Ontario, Quebec,

Manitoba, Alberta, Saskatchewan, Nova Scotia and Prince

Edward Island. The enabling legislation is in force in all 10

provinces. In addition, legislation has received Royal Assent

in two of the three territories in Canada, but has yet to be

proclaimed into force.

Canadian province: British Columbia

Act pursuant to which Claim was brought: Tobacco

Damages and Health Care Costs Recovery Act 2000

Companies named as Defendants: Imperial, Investments,

Industries, Carreras Rothmans Limited, the RJR Companies

and other former Rothmans Group companies have been

named as defendants and served.

Current stage: The defences of Imperial, Investments,

Industries, Carreras Rothmans Limited and the RJR

Companies have been filed, and document production and

discoveries were ongoing. On 13 February 2017, the Province

delivered an expert report dated October 2016, quantifying its

damages in the amount of CAD$118 billion (approximately

£72.4 billion). No trial date has been set. The federal

government is seeking CAD$5 million (approximately

£3.1 million) jointly from all the defendants in respect of costs

pertaining to the third-party claim, now dismissed.

Canadian province: New Brunswick

Act pursuant to which Claim was brought: Tobacco

Damages and Health Care Costs Recovery Act 2006

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: The defences of Imperial, the UK Companies

and the RJR Companies have been filed and document

production and discoveries are substantially complete. The

most recent expert report filed by the Province estimated a

range of damages between CAD$11.1 billion (approximately

£6.8 billion) and CAD$23.2 billion (approximately £14.2 billion),

including expected future costs. Following a motion to set a

trial date, the New Brunswick Court of Queen’s Bench ordered

that the trial commence on 4 November 2019. On 7 March

2019, the New Brunswick Court of Queen’s Bench released a

decision which requires the Province to produce a substantial

amount of additional documentation and data to the

defendants. As a result, the original trial date of 4 November

2019 would have been delayed. No new trial date has been set.

Canadian province: Ontario

Act pursuant to which Claim was brought: Tobacco

Damages and Health Care Costs Recovery Act 2009

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: The defences of Imperial, the UK Companies

and the RJR Companies have been filed. The parties

completed significant document production in the summer of

2017 and discoveries commenced in the autumn of 2018. On

15 June 2018, the Province delivered an expert report

quantifying its damages in the range of CAD$280 billion

(approximately £172 billion) – CAD$630 billion (approximately

£387 billion) in 2016/2017 dollars for the period 1954 – 2060,

and the Province amended the damages sought in its

Statement of Claim to CAD$330 billion (approximately

£202.5 billion). On 31 January 2019, the Province delivered a

further expert report claiming an additional amount between

CAD$9.4 billion (approximately £5.8 billion) and

CAD$10.9 billion in damages (approximately £6.7 billion) in

respect of ETS. No trial date has been set.

Canadian province: Newfoundland and Labrador

Act pursuant to which Claim was brought: Tobacco Health

Care Costs Recovery Act 2001

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: This case is at an early case management

stage. The defences of Imperial, the UK Companies and the

RJR Companies have been filed and the Province began its

document production in March 2018. Damages have not been

quantified by the Province. No trial date has been set.

Canadian province: Saskatchewan

Act pursuant to which Claim was brought: Tobacco

Damages and Health Care Costs Recovery Act 2007

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: This case is at an early case management

stage. The defences of Imperial, the UK Companies and the

RJR Companies have been filed and the Province has delivered

a test shipment of documents. Damages have not been

quantified by the Province. No trial date has been set.

Canadian province: Manitoba

Act pursuant to which Claim was brought: Tobacco

Damages Health Care Costs Recovery Act 2006

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: This case is at an early case management

stage. The defences of Imperial, the UK Companies and the

RJR Companies have been filed and document production

commenced. Damages have not been quantified by the

Province. No trial date has been set.

Canadian province: Alberta

Act pursuant to which Claim was brought: Crown’s Right of

Recovery Act 2009

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: This case is at an early case management

stage. The defences of Imperial, the UK Companies and the

RJR Companies have been filed and the Province commenced

its document production. The Province has stated its claim to

be worth CAD$10 billion (approximately £6.1 billion). No trial

date has been set.

Canadian province: Quebec

Act pursuant to which Claim was brought: Tobacco Related

Damages and Health Care Costs Recovery Act 2009

Companies named as Defendants: Imperial, Investments,

Industries, the RJR Companies and Carreras Rothmans

Limited have been named as defendants and served.

Current stage: This case is at an early case management

stage. The defences of Imperial, Investments, Industries,

Carreras Rothmans Limited and the RJR Companies have

been filed. Motions over admissibility of documents and

damages discovery have been filed but not heard. The

Province is seeking CAD$60 billion (approximately

£36.8 billion). No trial date has been set.

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Canadian province: Prince Edward Island

Act pursuant to which Claim was brought: Tobacco

Damages and Health Care Costs Recovery Act 2009

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: This case is at an early case management

stage. The defences of Imperial, the UK Companies and the

RJR Companies have been filed and the next step was

expected to be document production, which the parties

deferred for the time being. Damages have not been

quantified by the Province. No trial date has been set.

Canadian province: Nova Scotia

Act pursuant to which Claim was brought: Tobacco Health

Care Costs Recovery Act 2005

Companies named as Defendants: Imperial, the UK

Companies and the RJR Companies have been named as

defendants and served.

Current stage: This case is at an early case management

stage. The defences of Imperial, the UK Companies and the

RJR Companies have been filed. The Province provided a test

document production in March 2018. Damages have not been

quantified by the Province. No trial date has been set.

Nigeria

61.British American Tobacco (Nigeria) Limited (BAT Nigeria), the

Company and Investments have been named as defendants in

a medical reimbursement action by the federal government of

Nigeria, filed on 6 November 2007 in the Federal High Court,

and in similar actions filed by the Nigerian states of Kano (9

May 2007), Oyo (30 May 2007), Lagos (13 March 2008), Ogun

(26 February 2008), and Gombe (17 October 2008)

commenced in their respective High Courts. In the five cases

that remain active, the plaintiffs seek a total of approximately

10.6 trillion Nigerian naira (approximately £15 billion) in

damages, including special, anticipatory and punitive

damages, restitution and disgorgement of profits, as well as

declaratory and injunctive relief.

62.The suits claim that the state and federal government

plaintiffs incurred costs related to the treatment of smoking-

related illnesses resulting from allegedly tortious conduct by

the defendants in the manufacture, marketing, and sale of

tobacco products in Nigeria, and assert that the plaintiffs are

entitled to reimbursement for such costs. The plaintiffs assert

causes of action for negligence, negligent design, fraud and

deceit, fraudulent concealment, breach of express and implied

warranty, public nuisance, conspiracy, strict liability,

indemnity, restitution, unjust enrichment, voluntary

assumption of a special undertaking, and performance of

another’s duty to the public.

63.The Company and Investments have made a number of

challenges to the jurisdiction of the Nigerian courts. Such

challenges are still pending (on appeal) against the federal

government and the states of Lagos, Kano, Gombe and Ogun.

The underlying cases are stayed or adjourned pending the

final outcome of these jurisdictional challenges. In the state of

Oyo, on 13 November 2015, and 24 February 2017, respectively,

the Company’s and Investments’ jurisdictional challenges

were successful in the Court of Appeal and the issuance of the

writ of summons was set aside.

South Korea

64.In April 2014, Korea’s National Health Insurance Service (NHIS)

filed a healthcare recoupment action against KT&G (a Korean

tobacco company), PM Korea and BAT Korea (including BAT

Korea Manufacturing). The NHIS is seeking damages of

roughly 54 billion Korean Won (approximately £35.5 million) in

respect of health care costs allegedly incurred by the NHIS

treating patients with lung (small cell and squamous cell) and

laryngeal (squamous cell) cancer between 2003 and 2012.

Court hearings in the case, which constitute the trial,

commenced in September 2014. On 20 November 2020, the

court issued a judgment in favour of the defendants and

dismissing all of the plaintiff’s claims. The NHIS filed an appeal

of the judgment on 11 December 2020. Appellate proceedings

commenced in June 2021 and remain ongoing.

Brazil

65.On 21 May 2019, the Federal Attorney’s Office (AGU) in Brazil

filed an action in the Federal Court of Rio Grande do Sul

against the Company, the BAT Group’s Brazilian subsidiary

Souza Cruz LTDA (Souza Cruz), Philip Morris International,

Philip Morris Brazil Indústria e Comércio LTDA and Philip

Morris Brasil S/A (collectively, PMB), asserting claims for

medical reimbursement for funds allegedly expended by the

federal government as public health care expenses to treat 26

tobacco-related diseases over the last five years from the

filing date and that will be expended in perpetuity during

future years, including diseases allegedly caused both by

cigarette smoking and exposure to ETS. The action includes a

claim for moral damages allegedly suffered by Brazilian

society to be paid into a public welfare fund. The action is for

an unspecified amount of monetary compensation, as the

AGU seeks a bifurcated action in which liability would be

determined in the first phase followed by an evidentiary phase

to ascertain damages.

66.On 19 July 2019, the trial court ordered that service of the

action on the Company be effected via service on Souza Cruz.

On 6 August 2019, Souza Cruz refused to receive service on

behalf of the Company due to Souza Cruz’s lack of power to

do so. On 7 August 2019, Souza Cruz was served with the

complaint. On 19 August 2019, Souza Cruz filed an

interlocutory appeal challenging the 19 July 2019 trial court

order and requesting a stay of proceedings until the appeal is

decided. On 20 August 2019, the trial court issued a new

decision that vacated its 19 July 2019 order to reassess

whether service of a foreign defendant via its Brazilian

subsidiary constituted improper service. The appellate court,

in response to the trial court's 20 August 2019 decision, ruled

on 21 August 2019 that the interlocutory appeal previously

filed by Souza Cruz was rendered moot. The AGU filed its

submission in the trial court on 19 September 2019, and Souza

Cruz filed a reply submission on 25 September 2019.

67.On 4 February 2020, following further submissions by the

AGU and Souza Cruz, the trial court ruled that service of the

Company via its Brazilian subsidiary constituted proper

service, and ordered that defences be filed within 30 business

days. On 18 February 2020, Souza Cruz filed an interlocutory

appeal challenging this decision and requesting a stay of the

deadline to file defences. The Company intervened in Souza

Cruz's appeal effective 8 July 2020. On 15 July 2020, the

appellate court denied the interlocutory appeal. Souza Cruz

and the Company filed their respective defences on 12 May

2020. The appellate decision in the interlocutory appeal

became final on 7 June 2021.

68.On 19 February 2021, the Associação de Controle do

Tabagismo, Promoção da Saúde (ACT) filed a petition seeking

to intervene in the case as amicus curiae. Souza Cruz, PMB

and the Company filed responses (on 25 March 2021, 26

March 2021 and 20 August 2021, respectively) asserting that

ACT's request should be rejected and/or in the alternative that

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284

the scope of ACT's intervention rights should be limited. On 13

May 2022, the trial court ordered the AGU to reply to the

defences within 30 business days, and also permitted the ACT

to intervene, limiting ACT's rights as amicus curiae to

presenting technical and scientific opinions and participating

in court hearings. The AGU submitted its reply on 5 July 2022.

Souza Cruz, PMB and the Company submitted responses to

the AGU's reply on 26 August 2022. On 19 May 2020, notice

was sent to the Public Prosecutor’s Office (MPF) regarding

the AGU’s request that the MPF join the action as a plaintiff.

The MPF, via its response filed on 10 July 2020, declined to join

the action as party, but will act as an ‘inspector of the law’,

which enables MPF to express its opinion on case matters. On

10 October 2022, the MPF submitted an opinion on

preliminary issues and evidence, which called for rejection of

the defendants’ preliminary defences and the majority of the

evidence requested by AGU and defendants. The court has

not set a deadline for responses to the MPF’s submission.

(b) Class Actions

Canada

69.As described in paragraph 57, the Canadian tobacco litigation

is currently stayed subject to court-ordered stays of

proceeding (the Stays). The Stays are currently in place until 31

March 2023. While the Stays are in place, no steps are to be

taken in connection with the Canadian tobacco litigation with

respect to any of the defendants.

70.The below represents the state of the referenced litigation as

at the advent of the Stays.

71.There are 11 class actions being brought in Canada against

Group companies.

72.Knight Class Action: the Supreme Court of British Columbia

certified a class of all consumers who purchased Imperial

cigarettes in British Columbia bearing ‘light’ or ‘mild’

descriptors since 1974. The plaintiff is seeking compensation

for amounts spent on ‘light and mild’ products and a

disgorgement of profits from Imperial on the basis that the

marketing of light and mild cigarettes was deceptive because

it conveyed a false and misleading message that those

cigarettes are less harmful than regular cigarettes.

73.On appeal, the appellate court confirmed the certification of

the class, but limited any financial liability, if proven, to 1997

onward. Imperial’s third-party claim against the federal

government was dismissed by the Supreme Court of Canada.

The federal government is seeking a cost order of

CAD$5 million (approximately £3.1 million) from Imperial

relating to its now dismissed third-party claim. After being

dormant for several years, the plaintiff delivered a Notice of

Intention to Proceed, and Imperial delivered an application to

dismiss the action for delay. The application was heard on 23

June 2017 and was dismissed on 23 August 2017. Notice to

class members of certification was provided on 14 February

2018. As at the date of the Stays, the next steps were

expected to include discovery-related ones.

74.Growers’ Class Action: in December 2009, Imperial was

served with a proposed class action filed by Ontario tobacco

farmers and the Ontario Flue-Cured Tobacco Growers’

Marketing Board. The plaintiffs allege that Imperial and the

Canadian subsidiaries of Philip Morris International and JTI

failed to pay the agreed domestic contract price to the

growers used in products manufactured for the export market

and which were ultimately smuggled back into Canada. JTI

has sought indemnification pursuant to the JTI Indemnities

(discussed below at paragraphs 131-132). The plaintiffs seek

damages in the amount of CAD$50 million (approximately

£30.7 million). Various preliminary challenges have been heard,

the last being a motion for summary judgment on a limitation

period. The motion was dismissed and ultimately, leave to

appeal to the Ontario Court of Appeal was dismissed in

November 2016. In December 2017, the plaintiffs proposed

that the action proceed by way of individual actions as

opposed to a class action. The defendants did not consent. As

at the date of the Stays, the claim was in abeyance pending

further action from the plaintiffs.

75.Quebec Class Actions: there are currently two smoking and

health class actions in Quebec, certified by the Quebec

Superior Court on 21 February 2005 against Imperial and two

other domestic manufacturers. Judgment was rendered

against the defendants on 27 May 2015. Pursuant to the

judgment, the plaintiffs were awarded damages and interest

against Imperial and the Canadian subsidiaries of Philip Morris

International and JTI in the amount of CAD$15.6 billion

(approximately £9.6 billion), most of which was on a joint and

several basis, of which Imperial’s share was CAD$10.4 billion

(approximately £6.4 billion). An appeal of the judgment was

filed on 26 June 2015. The court also awarded provisional

execution pending appeal of CAD$1,131 million (approximately

£694 million), of which Imperial’s share was approximately

CAD$742 million (approximately £455 million). This order was

subsequently overturned by the Court of Appeal. Following

the cancellation of the order for provisional execution, the

plaintiffs filed a motion against Imperial and one other

manufacturer seeking security in the amount of CAD$5 billion

(approximately £3.1 billion) to guarantee, in whole or in part,

the payment of costs of the appeal and the judgment. On 27

October 2015, the Court of Appeal ordered the parties to post

security for the judgment in the amount of CAD$984 million

(approximately £604 million), of which Imperial’s share was

CAD$758 million (approximately £465 million) which amounts

have been paid into court. Imperial's share was later

recalculated by the Court of Appeal as CAD$759 million

(approximately £465.7 million). On 1 March 2019, the trial

judgment was upheld by a unanimous decision of the five-

member panel of the Court of Appeal, with one exception

being an amendment to the original interest calculation

applied to certain portions of the judgment. The interest

adjustment has resulted in the reduction of the total

maximum award in the two cases to CAD$13.7 billion

(approximately £8.4 billion) as at 1 March 2019, with Imperial’s

share being reduced to approximately CAD$9.2 billion

(approximately £5.6 billion).

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76.Other Canadian Smoking and Health Class Actions: seven

putative class actions, described below, have been filed

against various Canadian and non-Canadian tobacco-related

entities, including the UK Companies, Imperial and the RJR

Companies, in various Canadian provinces. In these cases,

none of which have quantified their asserted damages, the

plaintiffs allege claims based on fraud, fraudulent

concealment, breach of warranty of merchantability, and of

fitness for a particular purpose, failure to warn, design defects,

negligence, breach of a ‘special duty’ to children and

adolescents, conspiracy, concert of action, unjust enrichment,

market share liability and violations of various trade practices

and competition statutes. Pursuant to the terms of the 1999

sale of RJRT’s international tobacco business, and subject to a

reservation of rights, JTI has assumed the defence of the RJR

Companies in these seven actions (Semple, Kunka, Adams,

Dorion, Bourassa, McDermid and Jacklin, discussed below).

77.In June 2009, four smoking and health class actions were filed

in Nova Scotia (Semple), Manitoba (Kunka), Saskatchewan

(Adams) and Alberta (Dorion) against various Canadian and

non-Canadian tobacco-related entities, including the UK

Companies, Imperial and the RJR Companies. In

Saskatchewan, the Company, Carreras Rothmans Limited and

Ryesekks p.l.c. have been released from Adams, and the RJR

Companies have brought a motion challenging the jurisdiction

of the court. There are service issues in relation to Imperial

and the UK Companies in Alberta and in relation to the UK

Companies in Manitoba. The plaintiffs did not serve their

certification motion materials and no dates for certification

motions were set.

78.In June 2010, two further smoking and health class actions were

filed in British Columbia (Bourassa and McDermid) against

various Canadian and non-Canadian tobacco-related entities,

including Imperial, the UK Companies and the RJR Companies.

The UK Companies, Imperial, the RJR Companies and other

defendants objected to jurisdiction. Subsequently, the

Company, Carreras Rothmans Limited and Ryesekks p.l.c. were

released from the actions. Imperial, Industries, Investments and

the RJR Companies remain as defendants in both actions. The

plaintiffs did not serve their certification motion materials and

no dates for certification motions were set.

79.In June 2012, a smoking and health class action was filed in

Ontario (Jacklin) against various Canadian and non-Canadian

tobacco-related entities, including the UK Companies, Imperial

and the RJR Companies. The claim has been in abeyance.

Venezuela

80.In April 2008, the Venezuelan Federation of Associations of

Users and Consumers (FEVACU) and Wolfang Cardozo

Espinel and Giorgio Di Muro Di Nunno, acting as individuals,

filed a class action against the Venezuelan government. The

class action seeks regulatory controls on tobacco and

recovery of medical expenses for future expenses of treating

smoking-related illnesses in Venezuela. Both C.A Cigarrera

Bigott Sucs. (Cigarrera Bigott), a Group subsidiary, and

ASUELECTRIC, represented by its president Giorgio Di Muro

Di Nunno (who had previously filed as an individual), have been

admitted as third parties by the Constitutional Chamber of

the Supreme Court of Justice. A hearing date for the action is

yet to be scheduled. On 25 April 2017 and on 23 January 2018,

Cigarrera Bigott requested the court to declare the lapsing of

the class action due to no proceedings taking place in the case

in over a year. A ruling on the matter is yet to be issued.

(c) Individual Tobacco-Related Personal Injury Claims

81.As at 31 December 2022, the jurisdictions with the most active

individual cases against Group companies were, in descending

order: Brazil (17), Chile (11), Italy (9), Canada (5), Argentina (5)

and Ireland (2). There were a further two jurisdictions with one

active case only. Out of these 51 active individual cases, as at 31

December 2022 there were two cases in Argentina that have

resulted in pending unfavourable judgments. In one case,

damages were awarded totalling ARS 685,976 (approximately

£3,200) in compensatory damages and ARS 2,500,000

(approximately £11,700) in punitive damages, with post-

judgment interest totalling approximately ARS 5,288,000

(approximately £25,000), while in the other case,

compensatory damages were awarded totalling ARS

2,850,000 (approximately £13,400 ), with post-judgment

interest totalling approximately ARS 92,638,000

(approximately £435,000). Both judgments are currently on

appeal.

Non-Tobacco-Related Litigation

Vuse Litigation

82.On 22 July 2020, Nicholas Bernston filed a personal injury

action in the Northern District of Oklahoma against JUUL Labs

Inc. (JUUL), Altria Client Services, LLC, RJR Vapor, Reynolds

American, and others. The complaint seeks damages for

personal injuries (including pneumonia and acute respiratory

failure) allegedly resulting from vaping on several theories,

including strict liability, negligence, and breach of implied

warranty of merchantability. On 5 August 2020, the Judicial

Panel on Multidistrict Litigation entered a conditional transfer

order transferring the case to the Northern District of

California where this case now is a member case in the JUUL

multidistrict litigation (MDL). On 13 October 2020, RJR Vapor

and Reynolds American moved to dismiss the complaint or, in

the alternative, for a stay or a suggestion of remand to the

Northern District of Oklahoma. On 16 October 2020, the MDL

court issued an order staying those motions to dismiss. The

case will remain pending against Reynolds American and RJR

Vapor, but they will not be subject to discovery or other

pretrial obligations absent further order from the court.

83.On 11 January 2023, Camellia Chastain filed a putative class

action complaint in the Middle District of Florida against RJRV.

The complaint seeks damages arising from alleged

discoloration and/or a burnt taste in Vuse Alto Golden

Tobacco pods based on several theories, including state

consumer protection statutes, false and misleading

advertising, breach of warranty, negligent misrepresentation,

fraud, and unjust enrichment. The complaint seeks to certify

two classes, including a Florida class and a multi-state class

from the states of North Carolina, South Carolina, Georgia,

Alabama, and Mississippi. RJRV has not yet responded to the

complaint.

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Croatian Distributor Dispute

84.BAT Hrvatska d.o.o u likvidaciji and British American Tobacco

Investments (Central and Eastern Europe) Limited are named as

defendants in a claim by Mr Perica received on 22 August 2017 and

brought before the commercial court of Zagreb, Croatia. Mr Perica

seeks damages of HRK 408,000,000 (approximately £48 million)

relating to a BAT Standard Distribution Agreement dating from

2005. BAT Hrvatska d.o.o and British American Tobacco

Investments (Central and Eastern Europe) Ltd filed a reply to the

statement of claim on 6 October 2017. A hearing had been

scheduled to take place on 10 May 2018, but it was postponed due

to a change of the judge hearing the case. The Commercial Court

in Zagreb declared they do not have jurisdiction and that the

competent court to hear this case is the Municipal Court in

Zagreb. TDR d.o.o. is also named as the defendant in a claim by Mr

Perica received on 30 April 2018 and brought before the

commercial court of Zagreb, Croatia. Mr. Perica seeks payment in

the amount of HRK 408,000,000 (approximately £48 million)

claiming that BAT Hrvatska d.o.o. transferred a business unit to

TDR d.o.o, thus giving rise to a liability of TDR d.o.o. for the debts

incurred by BAT Hrvatska d.o.o, on the basis of the provisions of

Croatian civil obligations law. A response to the statement of claim

was filed on 30 May 2018. The Commercial Court in Zagreb

declared they do not have jurisdiction and that the competent

court to hear this case is the Municipal Court in Pula. Mr Perica

filed an appeal against this decision which was rejected by the

High Commercial Court of The Republic of Croatia confirming

therewith that the competent court to hear this case is the

Municipal Court in Pula. The Municipal Court in Zagreb has

decided that the claims by Mr Perica initiated on 22 August 2017

and 30 April 2018 shall be heard as one case in front of the

Municipal Court of Zagreb. After the two hearings have been held,

the Municipal Court of Zagreb has appointed the court financial

and auditing appraisal to determine the value of Mr Perica’s claim.

Patents and Trademark Litigation

85.Certain Group companies are party to a number of patent

litigation cases and procedural challenges concerning the

validity of patents owned by or licensed to them and/or the

alleged infringement of third-parties’ patents.

86.On 22 June 2018, an affiliate of Philip Morris International

(PMI) commenced proceedings against British American

Tobacco Japan, Ltd. (BAT Japan) in the Japanese courts

challenging the import, export, sale and offer of sale of the glo

device and of the NeoStiks consumable in Japan at the time

the claim was brought (and earlier models of the glo device),

alleging that the glo devices directly infringe certain claims of

two Japanese patents that have been issued to the PMI

affiliate and that the NeoStiks indirectly infringe certain claims

of those patents. On 17 January 2019, the PMI affiliate

introduced new grounds of infringement, alleging that the glo

device also infringes some other claims in the two PMI

affiliate’s Japanese patents. Damages for the glo device and

NeoStik are claimed in the court filing, to the amount of

100 million Yen (approximately £630,054). The PMI affiliate

has also filed a request for injunction with respect to the glo

device. BAT Japan denies infringement and is challenging the

validity of the two PMI affiliate’s Japanese patents. On 30

November 2022, the Tokyo District Court dismissed both of

the above claims of the PMI affiliate on the grounds that both

of the above two PMI affiliate's Japanese patents lack inventive

step and would be invalidated by a patent invalidation trial. The

PMI affiliate has appealed against this judgment.

87.On 9 April 2020, Nicoventures Trading Limited (Nicoventures)

commenced an action in the England and Wales High Court

(Patents Court) against Philip Morris Products S.A. (PMP) for

revocation against three divisional patents in the same family,

of which PMP is the proprietor (a further divisional patent in

the same family was added into the revocation action on 9

July 2020). On 12 May 2020 PMP filed its defence together

with a counterclaim for patent infringement against

Nicoventures and Investments concerning prototype

examples or production samples of certain ‘glo’ tobacco

heating devices. PMP are seeking an injunction and damages

on commercial sales (and interest thereon). On 14 July 2021

the England and Wales High Court (Patents Court) handed

down its judgment finding that the four divisional patents

belonging to PMP were invalid and consequently, that PMP’s

counterclaim for patent infringement against Nicoventures

and Investments failed. PMP's appeal was heard in November

2022 and dismissed in December 2022.

88.On 11 February 2022, Nicoventures commenced an action in

the England and Wales High Court (Patents Court) against

PMP for revocation against one of PMP’s patents (a further

divisional patent in the same family was added into the

revocation action on 27 May 2022). On 22 August 2022, PMP

counterclaimed for patent infringement against Nicoventures

and Investments concerning certain ‘glo’ tobacco heating

devices that comprise two inductive heating coils and their

corresponding consumables. PMP are seeking an injunction

and damages (plus interest thereon). The trial will be heard in

March 2023.

89.On 28 May 2020, Altria Client Services LLC and U.S.

Smokeless Tobacco Company LLC commenced proceedings

against RJR Vapor before the U.S. District Court for the Middle

District of North Carolina against the vapour products Vuse

Vibe and Vuse Alto, and the tin used in the modern oral

product Velo. Nine patents in total were asserted: two against

Vibe, four against Alto and three against Velo. On 5 January

2021, Altria filed an Amended Complaint adding Modoral

Brands Inc. as a defendant with respect to the Velo product

claims. The plaintiffs have sought damages but have not to

date sought preliminary or permanent injunctions. A claim

construction hearing was held on 28 April 2021, and the court

issued its claim construction ruling on 12 May 2021. All

asserted patent claims against Vibe and Velo as well as one of

the four patents asserted against Alto were dropped prior to

trial, leaving three patents asserted against Alto for trial. Trial

was held from 29 August 2022 to 7 September 2022. The jury

found infringement by all accused products and awarded

approximately US$95 million (approximately £79 million) in

damages. On 12 January 2023, the court denied all parties'

post-trial motions. The court issued an order on Altria's

motion for ongoing royalty on 27 January 2023, denying Altria's

request to double the jury's awarded royalty rate for post-trial

sales and setting the royalty rate applicable to post-trial sales

to the jury's awarded rate of 5.25%. Altria did not request

entry of an injunction and has stipulated it will not enforce the

monetary judgment until appeals are exhausted.

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90.On 9 April 2020, RAI Strategic Holdings, Inc. and RJR Vapor

commenced an action in the U.S. District Court for the

Eastern District of Virginia against Altria Client Services LLC,

Philip Morris USA, Inc., Altria Group, Inc., Philip Morris

International, Inc., and Philip Morris Products S.A. (collectively,

Philip Morris) for infringement of six patents based on the

importation and commercialization within the United States

of IQOS. On 8 May 2020 and 12 June 2020, Philip Morris filed

Inter Partes Review (IPR) petitions in the U.S. Patent Office

challenging the validity of each of the six patents asserted. On

29 June 2020, Philip Morris asserted counterclaims alleging

that RJR Vapor infringes five patents. On 24 November 2020,

the court issued a claim construction order that determined

that each disputed term would have its plain and ordinary

meaning. On 4 December 2020, the magistrate judge issued

an order staying RJR Vapor and Philip Morris’s patent claims

pending a decision by the U.S. Patent Office regarding

whether to proceed with the IPRs. Trial on the Altria and Philip

Morris patents began on 8 June 2022. Shortly before trial,

Philip Morris dropped its claims to one patent and the Altria

entities dismissed their claims relating to two patents, which

left two Philip Morris patents at issue in the trial. On 15 June

2022, the jury found that RJR Vapor's Alto product infringed

two claims in one patent and that its Solo product infringed

three claims of the other patent. The jury awarded damages

of US$10,759,755 (approximately £8,944,846), which was

supplemented by the Court to a total of US$14,062,742

(approximately £11,690,699) to account for additional sales of

Solo and Alto through the date of judgment and interest.

Philip Morris has requested entry of a permanent injunction

barring sale of the Alto and Solo products and a hearing was

held on 4 November 2022. A decision on Philip Morris's

request for permanent injunction is expected imminently. RJR

Vapor intends to appeal the jury verdict after the Court has

issued its decision on Philip Morris's request for an injunction.

The RJR Vapor offensive patent case remains stayed pending

(i) an appeal by Philip Morris to the Federal Circuit in relation

an exclusion order granted against Philip Morris by the

International Trade Commission based on the relevant

patents, and (ii) the decisions in IPRs commenced by Philip

Morris against the relevant patents at the U.S. Patent Office.

91.On 27 November 2020 Philip Morris filed a complaint before

the Regional Court Mannheim in Germany against British

American Tobacco (Germany) GmbH (BAT Germany) alleging

that the sale, offer for sale and importation of Vype ePod

products infringes a patent. Philip Morris is seeking an

injunction, a recall of product from commercial customers

and a declaratory judgment for damages. The trials of this

action took place on 15 June 2021 and 9 November 2021. A

decision on the matter was promulgated on 30 November

2021. The decision dismissed the complaint in its entirety. On

28 December 2021, Philip Morris lodged an appeal against this

decision before the Higher Regional Court Karlsruhe. A date

has not yet been set for the appeal hearing.

92.On 11 December 2020 Philip Morris filed a complaint before the

Regional Court Dusseldorf in Germany against BAT Germany

alleging that the sale, offer for sale and importation of the glo

TABAK HEATER and neo STICK products infringe a patent.

Philip Morris is seeking an injunction, a recall of product from

commercial customers and a declaratory judgment for

damages. The trial of this action took place on 30 November

2021. The court promulgated its decision on 21 December 2021

and decided that the above-mentioned products infringe the

patent. The decision was appealed by BAT Germany on 21

December 2021 to the Higher Regional Court Dusseldorf. The

oral hearing of these appeal proceedings took place on 24

November 2022. On 15 December 2022, the Higher Regional

Court Dusseldorf reversed the trial court decision and

dismissed Philip Morris’s complaint in its entirety. In addition,

the Higher Regional Court Dusseldorf did not grant a further

appeal to the German Supreme Court (Bundesgerichtshof

(BGH)). PMI filed a motion for leave of appeal with the BGH,

which is why the decision of the Higher Regional Court

Dusseldorf is not yet final.

93.On 14 December 2020, Modoral Brands Inc. (Modoral) filed a

complaint in the U.S. District Court for the District of Delaware

against Pinkerton Tobacco Co., LP, Swedish Match North

America LLC, and NYZ AB (collectively Swedish Match)

seeking a declaratory judgment that the importation,

manufacture, use, and/or sale of certain Modoral Velo

products that Modoral acquired from Dryft Sciences does not

infringe a Swedish Match patent or its trade secrets. On 3 June

2021, the case was transferred to the U.S. District Court for the

Central District of California. On 13 July 2021, Swedish Match

and Helix Innovations GmbH filed counterclaims against

Modoral for infringement of the patent and misappropriation

of trade secrets arising out of the manufacture, use, and sale of

Modoral’s Velo product. On 15 December 2021, the court

entered a Markman Order finding that the patent

distinguishes a nicotine complex from the claimed ‘nicotine

salt,’ and more specifically, affirmatively excluding the nicotine

polacrilex complex used in the accused Velo product from the

claimed invention because it is 'not a nicotine salt'. Swedish

Match agreed to a joint stipulation and request for entry of

judgment of non-infringement for all of the asserted claims of

the '908 patent, which the Court granted on 19 January 2022.

Trial on Swedish Match’s trade secret misappropriation claims

is scheduled to begin on 13 February 2023.

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Mozambican IP Litigation

94.On 19 April 2017, Sociedade Agrícola de Tabacos, Limitada (SAT)

(a BAT Group company in Mozambique) filed a complaint to the

National Inspectorate for Economic Activities (INAE), the

government body under the Ministry of Industry and Trade,

regarding alleged infringements of its registered trademark (GT)

by GS Tobacco SA (GST). INAE subsequently seized the allegedly

infringing products (GS cigarettes) and fined and ordered GST to

discontinue manufacturing products that could infringe SAT’s

intellectual property rights. Following INAE’s decision, in July 2017

and March 2018, SAT sought damages via the Judicial Court of

Nampula, from GST in the amount of MZN 46,811,700

(approximately £607,156) as well as a permanent restraint order

in connection with the manufacturing and selling of the allegedly

infringing products. The Judicial Court of Nampula (Tribunal

Judicial de Nampula) granted the order on an interim basis on 7

August 2017. After hearing the parties, on 5 September 2017, the

court found that no alleged infringement by GST had occurred

and removed the interim restraint order, this decision was

appealed by SAT and is currently pending a decision. GST filed an

application for review against INAE’s initial decision directly to the

Minister of Trade and Industry, which reversed the decision of

INAE. On 31 December 2018, SAT was notified of GST’s

counterclaim against SAT at the Judicial Court of Nampula for

damages allegedly sustained as a result of SAT’s complaint to

INAE (and INAE’s decision). GST is seeking damages in the

amount of approximately MZN 14.5 billion (approximately

£188.2 million). On 31 January 2019 SAT filed a formal response to

the counterclaim. GST was notified on 28 February 2019 to file a

response to SAT's formal response to the counterclaim and the

judge scheduled the preliminary hearing for 14 March 2019. This

hearing was adjourned and was held on 2 April 2019, when the

court heard arguments on the validity of GST’s counterclaim. On

2 September 2019, SAT received notification of an order which

provided that (i) SAT’s claim had been dismissed by the court;

and (ii) the GST counterclaim would proceed to trial. On 9

September 2019 SAT responded to the order by appealing the

dismissal of the SAT claim. Additionally, SAT made an

interlocutory application in the counterclaim proceedings to

challenge certain questions posed by the judge, on the basis that

the responses may be used as evidence at trial. SAT was notified

in December 2021 that the trial of the counterclaim was to take

place on 24 February 2022. SAT subsequently submitted a

complaint related to that trial to the court, on the basis that prior

to any further step being taken in relation to the trial the process

should be submitted to the superior court for analysis, as per the

appeals previously submitted in the proceedings. SAT’s

complaint has been appreciated favorably and the process will

be remitted to the superior court. Trial has not taken place.

Malawi Group Action

95.In December 2020, the Company and British American Tobacco

(GLP) Limited (GLP) were named as defendants in a claim made

in the English High Court by around 7,500 Malawian tobacco

farmers and their family members. The claim also names

Imperial Brands plc and five affiliates as defendants. The

claimants allege they were subjected to unlawful and exploitative

working conditions on tobacco farms from which it is alleged

that the defendants indirectly acquire tobacco. They seek

unquantified damages (including aggravated and exemplary

damages) for the torts of negligence and conversion and

unquantified personal and proprietary remedies for restitution of

unjust enrichment. They also seek an injunction to restrain the

commission of further torts of conversion or negligence by the

defendants. The defendants had an application to strike out the

claims dismissed in a judgment dated 25 June 2021. In January

2022, the Company and GLP were served with a similar claim by

around a further 3,500 claimants. The Company and GLP intend

vigorously to defend the claims.

Qatar Customs Authority Claims

96.On 12 November 2020, British American Tobacco Middle East

W.L.L (formerly British American Tobacco Middle East SPC)

(BAT ME), along with its distributor in Qatar, Ali Bin Ali

Establishment (ABA), filed a case before the Qatar Court of

First Instance which challenged a decision of Qatar's General

Authority of Customs dated 16 August 2020 ordering ABA to

pay two amounts arising from unrelated circumstances, one

of which totalled QAR 160,531,588 (approximately

£36.6 million) in customs duties and penalties in relation to 27

consignments of cigarettes imported into Qatar by ABA. On

January 7, 2021, BAT arranged for a bank guarantee covering

the QAR 160,531,588 claimed by the General Authority of

Customs to be issued to the General Authority of Customs.

That bank guarantee was subsequently liquidated by the

General Authority of Customs. On 14 February 2021, the

General Authority of Customs issued a new order that

repeated (and addressed only) its demand that ABA pay QAR

160,531,588 in customs duties and penalties in relation to the

same 27 consignments of cigarettes imported into Qatar by

ABA. On 19 May 2021, BAT ME and ABA filed a second case

before the Qatar Court of First Instance which challenges the

decision of Qatar’s General Authority of Customs dated 14

February 2021. On 28 October 2021, the Court of First Instance

dismissed both cases filed by BAT ME and ABA on the

grounds the cases were not timely filed. In December 2021,

BAT ME and ABA appealed to the Court of Appeal the

decisions of the Court of First Instance in both cases. ABA can

only have liability under one case not both, so its maximum

liability is QAR 160,531,588, not twice that amount. BAT ME

and ABA strongly asserted that the additional customs duty

and penalties imposed by the Qatar Customs Authority are

inconsistent with applicable law. Nonetheless, BAT ME and

ABA decided not to continue contesting the orders of the

General Authority of Customs for ABA to pay QAR 160,531,588.

Accordingly, BAT ME and ABA submitted requests to the

Court of Appeal in both cases to withdraw their appeals. On 6

April 2022, the Court of Appeal ordered the withdrawal of the

appeals irrevocably ending the two cases. As a result, the

General Authority of Customs will keep the QAR 160,531,588

proceeds of the liquidated bank guarantee. BAT ME has no

further potential liability in respect of the two cases.

Saudi Arabia Customs Claim

97.On 25 January 2021, Walid Ahmed Mohammed Al Naghi for

Trading Establishment (Al Naghi), a former distributor for the

Group’s operating companies in the Middle East, filed a claim

in the Commercial Court in Jeddah, Saudi Arabia, seeking SAR

2,105,356,121 (approximately £466 million) for reimbursement

of funds allegedly due under contract. Al Naghi did not

formally name any Group entity as a defendant in the claim.

The claim was dismissed orally by the Court on 9 February

2021. On 20 April 2021, Al Naghi filed a new claim in the Jeddah

Commercial Court against BAT UKE demanding that BAT UKE

reimburse Al Naghi in the amount of SAR 2,105,356,121

allegedly paid by Al Naghi to the customs authorities in

customs dues. On 16 June 2021, the Court of First Instance

issued a judgment dismissing the claim against BAT UKE on

the ground that BAT UKE lacks legal standing to be sued. On

22 August 2021, Al Naghi filed an appeal against the Court of

First Instance judgment. On 15 November 2021, the Appellate

Court remanded the case to the lower Court in order for the

lower Court to join BAT entities in Bahrain and UAE, which Al

Naghi had wrongly claimed on appeal to be branches of BAT

UKE. The lower Court tried to summon the Bahrain and UAE

BAT entities to obtain clarifications about their status;

however, said entities were not properly notified and did not

appear. On 2 August 2022, the Court reversed its decision to

seek clarifications from the BAT entities in Bahrain and UAE

and dismissed the claim against BAT UKE for lack of legal

capacity. On 29 August 2022, Al Naghi filed an appeal against

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289

the Court of First Instance judgment. On 5 December 2022,

the Court of Appeal issued a judgment affirming the

preliminary court's ruling dismissing Al Naghi's claim against

BAT UKE. On 27 December 2022, Al Naghi filed an appeal

before the Supreme Court and the appeal is still pending.

Asbestos Litigation

98.On 17 October 2022, plaintiffs in an asbestos personal injury

action (Barbara Lowis and Trevor Lowis) filed a complaint in

the Supreme Court of the State of New York (New York

County), which names as a defendant BATUS Holdings Inc.,

along with various other defendants. The complaint was

served on BATUS Holdings Inc. on 24 October 2022. The

complaint alleges that plaintiff Barbara Lowis was exposed to

the defendants’ asbestos and asbestos-containing talcum

powder and cosmetics products, which allegedly caused her

to develop mesothelioma, and asserts claims under state law,

including for negligence, breach of warranty, strict liability,

conspiracy, and fraud. Plaintiffs seek unspecified

compensatory and punitive damages. BATUS Holdings Inc.

filed a motion to dismiss BATUS Holdings Inc. for lack of

personal jurisdiction on 18 November 2022. On 28 November

2022, plaintiffs filed an opposition to the motion and

requested jurisdictional discovery. On 2 December 2022,

BATUS Holdings Inc. filed a reply submission in further

support of the motion, which remains pending.

99.On 13 December 2022, plaintiffs in an asbestos personal injury

action (Michele Stuck and Jack Bannister, individually and as

executors of the estate of Penelope Rigby) filed an amended

complaint in the Supreme Court of the State of New York

(New York County), which names as a defendant BATUS

Holdings Inc., along with various other defendants. The

complaint was served on BATUS Holdings Inc. on 28

December 2022. The complaint alleges that the decedent was

exposed to the defendants’ asbestos and asbestos-containing

talcum powder and cosmetics products, which allegedly

caused her to develop mesothelioma, and asserts claims by

the executors of her estate under state law, including for

negligence, breach of warranty, strict liability, conspiracy,

fraud, and wrongful death. Plaintiffs seek unspecified

compensatory and punitive damages. BATUS Holdings Inc.

filed a motion to dismiss BATUS Holdings Inc. for lack of

personal jurisdiction on 27 January 2023.

100.On 22 December 2022, plaintiffs in an asbestos personal injury

action (Marion Mannooch and Harvey Mannooch) filed a

complaint in the Supreme Court of the State of New York (New

York County), which names as a defendant BATUS Holdings Inc.,

along with various other defendants. The complaint was served on

BATUS Holdings Inc. on 28 December 2022. The complaint alleges

that plaintiff Marion Mannooch was exposed to the defendants’

asbestos and asbestos-containing talcum powder and cosmetics

products, which allegedly caused her to develop mesothelioma,

and asserts claims under state law, including for negligence,

breach of warranty, strict liability, conspiracy, and fraud. Plaintiffs

seek unspecified compensatory and punitive damages. BATUS

Holdings Inc. filed a motion to dismiss BATUS Holdings Inc. for lack

of personal jurisdiction on 27 January 2023.

101.A further three asbestos personal injury actions (Carlson,

Alloway and Wolfe) naming as a defendant BATUS Holdings

Inc., along with various other defendants, and alleging the

respective plaintiffs sustained personal injury from exposure

to the defendants’ asbestos and asbestos-containing talcum

powder and cosmetics products, were filed in Washington

state court (Carlson) and California state court (Alloway and

Wolfe) on 4 March 2022, 25 April 2022, and 10 November

2022, respectively. Plaintiffs in these cases sought unspecified

compensatory and punitive damages.  BATUS Holdings Inc.

filed motions to dismiss the respective complaints for lack of

personal jurisdiction. The cases were subsequently voluntarily

dismissed without prejudice as to BATUS Holdings Inc. by

orders entered on 1 July 2022 (Carlson), 29 September 2022

(Alloway), and 17 January 2023 (Wolfe).

Cigarette Filter Litter Litigation

102.On 21 November 2022, the Mayor and City Council of

Baltimore, Maryland, filed a lawsuit in the Circuit Court for

Baltimore City naming the Company and RJRT, as well as

Philip Morris USA, Inc., Altria Group, Liggett Group LLC and a

Maryland-based distributor, as defendants. RJRT was served

on 13 December 2022, and the Company received the

complaint on 18 January 2023. Plaintiff, a municipality, alleges

that the defendants manufactured, distributed and sold non-

biodegradable cigarette filters with knowledge that

consumers would discard used filters on public property

owned by the plaintiff, and further alleges that the defendants

failed to warn consumers of the alleged environmental

impacts of littered filters. Plaintiff asserts causes of action for

alleged violation of state and municipal civil and criminal anti-

littering and dumping laws, trespass, strict liability and

negligent design defect, public nuisance, and strict liability and

negligent failure to warn. Plaintiff seeks, among other relief,

unspecified damages (including punitive damages) for costs

allegedly incurred removing discarded cigarette filters from

public property, and for alleged damage to land and natural

resources and property value diminution, along with fines

under state and municipal laws.

Fox River

Background to environmental liabilities arising out of

contamination of the Fox River:

103.U.S. authorities identified potentially responsible parties

(PRPs), including NCR Corporation (NCR), to fund the clean-

up of polluted sediments in the Lower Fox River, Wisconsin.

Discharges of Polychlorinated Biphenyls (PCBs) from paper

mills and other facilities operating close to the river caused

that pollution. Industries’ involvement with the environmental

liabilities arises out of (i) indemnity arrangements which it

became party to due to various transactions that took place

from the late-1970s onwards and (ii) subsequent litigation

brought by NCR against Industries and Appvion Inc. (Appvion)

(a former Group subsidiary) in relation to those arrangements.

104.Following substantial litigation in the United States regarding

the responsibility for the costs of the clean-up operations, and

enforcement proceedings brought by the U.S. Government

against NCR and Appvion to ensure compliance with

regulatory orders made relating to the Fox River clean-up, the

District Court of Wisconsin approved (on 23 August 2017) a

form of settlement with the U.S. Government known as a

Consent Decree.

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290

105.The principal terms of that Consent Decree, in summary, are:

a)NCR is obliged to perform and fund all of the remaining

Fox River remediation work by itself.

b)The U.S. Government enforcement proceedings were

settled, with NCR having no liability to meet the U.S.

Government’s claim for costs it had incurred in relation to

the clean-up to date, a secondary responsibility to meet

certain future costs, and no liability to the U.S.

Government for natural resource damages (NRDs).

c)NCR ceased to pursue its contribution claims against the

other PRPs and in return received contribution protection

preventing other PRPs from pursuing their contribution

claims against NCR and existing claims for contribution

being dismissed by order of the Court. NCR does,

however, have the right to reinstate its contribution claims

if the other PRPs decide to continue to pursue certain

contractual claims against NCR.

d)Appvion also agreed to cease pursuance of claims against

the other PRPs, subject to retention of the right to

reinstate its claims if the other PRPs decide to continue to

pursue certain claims against Appvion.

106.A cost breakdown filed in support of the motion to approve

the Consent Decree estimates the total Fox River clean-up

costs (including NRDs) to be US$1,346 million (approximately

£1,119 million).

107.A further Consent Decree between the U.S. Government, P.H.

Glatfelter Company and Georgia-Pacific Consumer Products

LP (Georgia-Pacific), approved by the Wisconsin District

Court on 14 March 2019, concluded all remaining litigation

relating to the Fox River. In November 2019, an arbitral tribunal

awarded approximately US$10 million (approximately

£8.3 million) to the remediation contractor engaged by a

limited liability company formed by NCR and Appvion to

perform the Fox River clean-up operation. NCR has stated (in

its 2021 Annual Report on Form 10-K) that its indemnitors and

co-obligors were responsible for the majority of the award,

with its own share being approximately 25%.

108.On 3 October 2022, the United States Environmental

Protection Agency issued a Certificate of Completion in

respect of remedial action for the Lower Fox River.

Industries’ involvement with environmental liabilities arising

out of the contamination of the Fox River:

109.NCR's position is that, under the terms of a 1998 Settlement

Agreement between it, Appvion and Industries, and a 2005

arbitration award, Industries and Appvion had a joint and

several obligation to bear 60% of the Fox River environmental

remediation costs imposed on NCR and of any amounts NCR

has to pay in respect of other PRPs’ contribution claims. BAT

has not acknowledged any such liability to NCR and has

defences to such claims.

110.Until May 2012, Appvion and Windward Prospects Limited

(Windward) (another former Group subsidiary) paid a 60%

share of the clean-up costs incurred by NCR. Industries was

never required to contribute. Around that time, Appvion

refused to continue to pay clean-up costs, NCR therefore

demanded that Industries pay a 60% share of those costs.

Industries commenced proceedings against Windward and

Appvion seeking confirmation of indemnities provided to

Industries in respect of any liability it might have to NCR (the

English Indemnity Proceedings) pursuant to a 1990 de-merger

agreement between those parties.

Funding Agreement of 30 September 2014

111.On 30 September 2014, Industries entered into a Funding

Agreement with Windward, Appvion, NCR and BTI 2014 LLC

(BTI) (a wholly owned subsidiary of Industries). Pursuant to the

Funding Agreement, the English Indemnity Proceedings (and

a related counterclaim) and NCR-Appvion arbitration were

discontinued as part of an overall agreement providing a

framework through which the parties would together fund the

ongoing costs of the Fox River clean-up.

112.Under the Funding Agreement, NCR has agreed to accept

funding by Industries at the lower level of 50% of the ongoing

clean-up related costs of the Fox River (rather than the 60%

referenced above). This remains subject to an ability to litigate

at a later stage the extent of Industries’ liability (if any) in

relation to Fox River clean-up related costs (including in

respect of the 50% of costs that Industries has paid under the

Funding Agreement to date). Additionally, Windward has

contributed US$10 million (approximately £8.3 million) of

funding. Appvion has contributed US$25 million

(approximately £20.8 million) for Fox River and agreed to

contribute US$25 million (approximately £20.8 million) for the

Kalamazoo River (see further below). Appvion entered Chapter

11 bankruptcy protection on 1 October 2017.

113.The parties also agreed to cooperate in order to maximise

recoveries from certain claims made against third parties,

including (i) a claim commenced by Windward in the High

Court of England & Wales (the High Court) against Sequana

S.A. (Sequana) and the former Windward directors (the

Windward Dividend Claim), assigned to BTI under the Funding

Agreement, and which relates to dividend payments made by

Windward to Sequana of around €443 million (approximately

£393 million) in 2008 and €135 million (approximately

£119.8 million) in 2009 (the Dividend Payments) and (ii) a claim

commenced by Industries directly against Sequana to recover

the value of the Dividend Payments alleging that the dividends

were paid for the purpose of putting assets beyond the reach

of Windward’s creditors (including Industries) (the BAT

section 423 Claim) (together, the Sequana Proceedings).

114.The High Court heard the Windward Dividend and BAT

section 423 Claims and handed down its judgment on 11 July

2016. The court upheld the BAT section 423 Claim and, by way

of a consequentials judgment dated 10 February 2017, ordered

that Sequana pay to BTI an amount up to the full value of the

2009 Dividend plus interest, equating to around US$185 million

(approximately £153.8 million). The Court dismissed the

Windward Dividend Claim.

115.The parties pursued cross appeals on the judgment, during

which time Sequana was granted a stay in respect of the

above payments. That stay was lifted in May 2017, three

months after Sequana had entered into an insolvency process

in France seeking court protection. On 15 May 2019, the

Nanterre Commercial Court made an order placing Sequana

into formal liquidation proceedings. To date, Sequana has

made no payments to Industries. On 6 February 2019 the

Court of Appeal gave judgment upholding the High Court’s

findings, with one immaterial change to the method of

calculating the damages awarded. Sequana therefore remains

liable to pay approximately US$185 million (approximately

£153.8 million). Because of Sequana’s ongoing insolvency

process, execution of that judgment is stayed. Sequana is also

liable to pay around £10 million in costs to Industries.

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291

116.BTI was subsequently granted permission to appeal to the

Supreme Court in respect of the Windward Dividend Claims.

The hearing of its appeal took place on 4 and 5 May 2021. On 5

October 2022, the Supreme Court handed down its judgment,

dismissing BTI's appeal.

117.BTI has brought claims against certain of Windward’s former

advisers, including Windward’s auditors at the time of the

dividend payments, PricewaterhouseCoopers LLP (PwC)

(which claims were also assigned to BTI under the Funding

Agreement). The claim had been stayed pending the outcome

of the Sequana Proceedings. Once that stay was lifted, PwC

unsuccessfully applied to strike-out BTI’s claim. A hearing of

this application took place in October 2019. On 15 November

2019, the court dismissed PwC’s application. BTI's claim

against PwC is progressing in the High Court and the trial is

expected to take place in the summer of 2024. An agreed stay

is in place in respect of BTI’s separate assigned claim against

Freshfields Bruckhaus Deringer.

118.The sums Industries has paid under the Funding Agreement

are subject to the reservation as set out in paragraph 112

above and ongoing adjustment. Clean-up costs can only be

estimated in advance of the work being carried out and

certain sums payable are the subject of ongoing U.S. litigation.

In 2019, Industries paid £32 million in respect of clean-up

costs. In 2020, Industries paid £2 million in respect of clean-up

costs. In 2021, Industries paid a further £2 million in respect of

clean-up costs. In 2022, Industries has paid an additional £1

million in respect of clean-up costs. Industries is potentially

liable for further costs associated with the clean-up. Industries

has a provision of £54 million which represents the current

best estimate of its exposure – see note 24.

Kalamazoo

119.Georgia-Pacific, a designated PRP in respect of the

Kalamazoo River in Michigan, also pursued NCR in relation to

remediation costs caused by PCBs released into that river. On

26 September 2013, the Michigan Court held that NCR was

liable as a PRP on the basis that it had arranged for the

disposal of hazardous material for the purposes of the

Comprehensive Environmental Response, Compensation and

Liability Act (CERCLA).

120.Following further litigation, on 11 December 2019, NCR

announced that it had entered into a Consent Decree with the

U.S. Government and the State of Michigan (subsequently

approved by the Michigan Court on 2 December 2020),

pursuant to which it assumed liability for certain remediation

work at the Kalamazoo River. The payments to be made on

the face of the Consent Decree in respect of such work total

approximately US$245 million (approximately £204 million).

The Consent Decree also provides for the payment by NCR of

an outstanding judgment against it of approximately

US$20 million (approximately £16.6 million) to Georgia-Pacific.

121.The quantum of the clean-up costs for the Kalamazoo River is

presently unclear. It may well exceed the amounts payable on

the face of the Consent Decree.

122.NCR has informed Industries that it will look to Industries to

pay 60% of any sums NCR becomes liable to pay under the

Consent Decree on the asserted basis that the river

constitutes a ‘Future Site’ for the purposes of the Settlement

Agreement. The Funding Agreement described above does

not resolve any such claims. Industries has defences to any

claims made by NCR in relation to the Kalamazoo River. No

such claims have yet been pursued against Industries.

123.Industries also anticipates that NCR may seek to recover from

Appvion (subject to a cap of US$25 million (approximately

£20.8 million)) for ‘Future Sites’ under the Funding Agreement.

The basis of the recovery would be the same as any demand

NCR may make on Industries. The effect of Appvion's Chapter

11 bankruptcy proceedings on its liability for Future Sites

payments under the Funding Agreement is currently

uncertain. If NCR is unable to obtain recovery from Appvion

then NCR will seek to recover such from Industries.

124.In summary, Industries is taking active steps to protect its

interests. These include preparation of all its defences, seeking

to procure the repayment of the Windward dividends,

pursuing the other valuable claims that are now within its

control, and working with the other parties to the Funding

Agreement to maximise recoveries from third parties with a

view to ensuring that amounts funded towards clean-up

related costs are later recouped under the agreed repayment

mechanisms under the Funding Agreement.

Other environmental matters

125.Reynolds American and its subsidiaries are subject to federal,

state and local environmental laws and regulations

concerning the discharge, storage, handling and disposal of

hazardous or toxic substances. Such laws and regulations

provide for significant fines, penalties and liabilities,

sometimes without regard to whether the owner or operator

of the property or facility knew of, or was responsible for, the

release or presence of hazardous or toxic substances. In

addition, third parties may make claims against owners or

operators of properties for personal injuries and property

damage associated with releases of hazardous or toxic

substances. In the past, RJRT has been named a PRP with

third parties under CERCLA with respect to several superfund

sites. Reynolds American and its subsidiaries are not aware of

any current environmental matters that are expected to have

a material adverse effect on the business, results of

operations or financial position of Reynolds American or its

subsidiaries.

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292

Criminal investigations

126.From time to time, the Group investigates, and becomes aware of governmental authorities’ investigations into, allegations of

misconduct, including alleged breaches of sanctions and allegations of corruption against Group companies. The Group cooperates

with the authorities’ investigations, where appropriate. For instance, the Group is currently engaged in discussions with the DOJ and

the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) regarding their investigations into

suspicions of sanctions breaches to find a resolution through settlement. Based on those discussions, the Group expects any such

settlements will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as compliance

requirements. Although the Group is discussing resolution of these government investigations through settlement, there can be no

assurance that these discussions will be successful or, if they are, what the timing or terms of any such settlements would be. The

Company has recognised a provision of £450 million (approximately US$541 million) in the first half of 2022. However, it cannot be

excluded that the amount of any potential settlement with the DOJ and OFAC may vary from this amount. Separately, British

American Tobacco Italia SpA has been charged with administrative offences in Florence, Italy in a case against a large number of

individual and corporate defendants. This relates to potential allegations of failure to supervise or take appropriate steps to prevent

alleged corruption by two (now former) employees. Any financial penalty is not thought likely to be material.

Closed litigation matters

127.The following matters on which the Company reported in the contingent liabilities and financial commitments note 31 to the

Company’s 2021 financial statements have been dismissed, concluded or resolved as noted below:

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| Minnesota State  Settlement Agreement | U.S. | RJRT | State Settlement  Agreements -  Enforcement and Validity | Settled |
| Texas State Settlement  Agreement | U.S. | RJRT | State Settlement  Agreements -  Enforcement and Validity | Settled |
| Fuma International LLC  patent litigation | U.S. | RJR Vapor | Vuse patent infringement  claims | Resolved |
| Reynolds American  dissenters' litigation | U.S. | Reynolds American Inc. | Shareholder Litigation | Final judgment of North  Carolina Supreme Court  (upholding Reynolds  American's proposed  valuation) |
| Rentko / Smoltino  asbestos litigation | U.S. | Reynolds American, RJRT, the  Company, BATUS Holdings,  Inc., and British American  Tobacco (Brands) Inc. | Personal Injury | Voluntary dismissal by  plaintiffs |
| Gilbride asbestos  litigation | U.S. | RJRT | Personal Injury | Voluntary dismissal by  plaintiffs |
| Argentina Tort Law  Association medical  reimbursement matter | Argentina | Nobleza | Medical reimbursement | Court judgment of  dismissal |

General Litigation Conclusion

128.While it is impossible to be certain of the outcome of any particular case or of the amount of any possible adverse verdict, the Group

believes that the defences of the Group’s companies to all these various claims are meritorious on both the law and the facts, and a

vigorous defence is being made everywhere.

129.As indicated above, on 1 March 2019 the Quebec Court of Appeal released its appeal judgment. The trial judgment was largely

upheld by a unanimous decision of the five-member panel including the requirement that the defendants deposit the initial deposits

in their solicitors’ trust accounts within 60 days. This is the only executory aspect of the judgment. In these circumstances we are of

the view that it is more likely than not that there will be an outlay and it is reasonably estimable at CAD$758 million (approximately

£465 million), the amount of the initial deposit paid into court. If further adverse judgments are entered against any of the Group’s

companies in any case, avenues of appeal will be pursued. Such appeals could require the appellants to post appeal bonds or

substitute security (as has been necessary in Quebec) in amounts which could in some cases equal or exceed the amount of the

judgment. At least in the aggregate, and despite the quality of defences available to the Group, it is not impossible that the Group’s

results of operations or cash flows in any particular period could be materially adversely affected by the impact of a significant

increase in litigation, difficulties in obtaining the bonding required to stay execution of judgments on appeal, or any final outcome of

any particular litigation.

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293

130.Having regard to all these matters, with the exception of the

Quebec Class Actions, Fox River, and the DOJ and OFAC

investigations, the Group does not consider it appropriate to

make any provision in respect of any pending litigation

because the likelihood of any resulting material loss, on an

individual case basis, is not considered probable and/or the

amount of any such loss cannot be reasonably estimated.

Notwithstanding the negative decision in the Quebec Class

Actions, the Group does not believe that the ultimate

outcome of this litigation will significantly impair the Group’s

financial condition. If the facts and circumstances change and

result in further unfavourable outcomes in the pending

litigation, then there could be a material impact on the

financial statements of the Group. In addition, the Group

accrues for damages, attorneys' fees and/or statutory

interest, including in respect of certain Engle Progeny cases,

certain U.S. individual smoking and health cases, the DOJ

medical reimbursement/corrective statement case and the

Nigeria competition investigation.

Other contingencies

131.JTI Indemnities. By a purchase agreement dated 9 March

1999, amended and restated as at 11 May 1999, referred to as

the 1999 Purchase Agreement, R.J. Reynolds Tobacco

Holdings, Inc. (RJR) and RJRT sold their international tobacco

business to JTI. Under the 1999 Purchase Agreement, RJR and

RJRT retained certain liabilities relating to the international

tobacco business sold to JTI, and agreed to indemnify JTI

against: (i) any liabilities, costs and expenses arising out of the

imposition or assessment of any tax with respect to the

international tobacco business arising prior to the sale, other

than as reflected on the closing balance sheet; (ii) any

liabilities, costs and expenses that JTI or any of its affiliates,

including the acquired entities, may incur after the sale with

respect to any of RJR’s or RJRT’s employee benefit and

welfare plans; and (iii) any liabilities, costs and expenses

incurred by JTI or any of its affiliates arising out of certain

activities of Northern Brands.

132.RJRT has received claims for indemnification from JTI, and

several of these have been resolved. Although RJR and RJRT

recognise that, under certain circumstances, they may have

other unresolved indemnification obligations to JTI under the

1999 Purchase Agreement, RJR and RJRT disagree what

circumstances described in such claims give rise to any

indemnification obligations by RJR and RJRT and the nature

and extent of any such obligation. RJR and RJRT have

conveyed their position to JTI, and the parties have agreed to

resolve their differences at a later date.

133.ITG Indemnity. In the Divestiture, Reynolds American agreed to

defend and indemnify, subject to certain conditions and

limitations, ITG in connection with claims relating to the

purchase or use of one or more of the Winston, Kool, Salem or

Maverick cigarette brands on or before 12 June 2015, as well as in

actions filed before 13 June 2023, relating to the purchase or use

of one or more of the Winston, Kool, Salem or Maverick cigarette

brands. In the purchase agreement relating to the Divestiture,

ITG agreed to defend and indemnify, subject to certain

conditions and limitations, Reynolds American and its affiliates in

connection with claims relating to the purchase or use of ‘blu’

brand e-cigarettes. ITG also agreed to defend and indemnify,

subject to certain conditions and limitations, Reynolds American

and its affiliates in actions filed after 12 June 2023, relating to the

purchase or use of one or more of the Winston, Kool, Salem or

Maverick cigarette brands after 12 June 2015. ITG has tendered a

number of actions to Reynolds American under the terms of this

indemnity, and Reynolds American has, subject to a reservation

of rights, agreed to defend and indemnify ITG pursuant to the

terms of the indemnity. Reynolds American has tendered an

action to ITG under the terms of this indemnity, and ITG has,

subject to a reservation of rights, agreed to defend and indemnify

Reynolds American and its affiliates pursuant to the terms of the

indemnity. These claims are substantially similar in nature and

extent to claims asserted directly against RJRT in similar actions.

134.Loews Indemnity. In 2008, Loews Corporation (Loews),

entered into an agreement with Lorillard Inc., Lorillard

Tobacco, and certain of their affiliates, which agreement is

referred to as the ‘Separation Agreement’. In the Separation

Agreement, Lorillard agreed to indemnify Loews and its

officers, directors, employees and agents against all costs and

expenses arising out of third-party claims (including, without

limitation, attorneys’ fees, interest, penalties and costs of

investigation or preparation of defence), judgments, fines,

losses, claims, damages, liabilities, taxes, demands,

assessments, and amounts paid in settlement based on,

arising out of or resulting from, among other things, Loews’

ownership of or the operation of Lorillard and its assets and

properties, and its operation or conduct of its businesses at

any time prior to or following the separation of Lorillard and

Loews (including with respect to any product liability claims).

Loews is a defendant in three pending product liability actions,

each of which is a putative class action. Pursuant to the

Separation Agreement, Lorillard is required to indemnify

Loews for the amount of any losses and any legal or other fees

with respect to such cases. Following the closing of the

Lorillard merger, RJRT assumed Lorillard’s obligations under

the Separation Agreement as was required under the

Separation Agreement.

135.SFRTI Indemnity. In connection with the 13 January 2016 sale

by Reynolds American of the international rights to the

Natural American Spirit brand name and associated

trademarks, along with SFR Tobacco International GmbH

(SFRTI) and other international companies that distributed

and marketed the brand outside the United States, to JT

International Holding BV (JTI Holding), each of SFNTC, R. J.

Reynolds Global Products, Inc., and R. J. Reynolds Tobacco B.V.

agreed to indemnify JTI Holding against, among other things,

any liabilities, costs, and expenses relating to actions (i)

commenced on or before (a) 13 January 2019, to the extent

relating to alleged personal injuries, and (b) in all other cases,

13 January 2021; (ii) brought by (a) a governmental authority to

enforce legislation implementing European Union Directive

2001/37/EC or European Directive 2014/40/EU or (b)

consumers or a consumer association; and (iii) arising out of

any statement or claim (a) made on or before 13 January 2016,

(b) by any company sold to JTI Holding in the transaction, (c)

concerning Natural American Spirit brand products

consumed or intended to be consumed outside of the United

States and (d) that the Natural American Spirit brand product

is natural, organic, or additive-free. These claims settled for a

total of US$4,653,009 (approximately £3,868,159) in taxes and

interest.

136.Indemnification of Distributors and Retailers. RJRT, Lorillard

Tobacco, SFNTC, American Snuff Co. and RJR Vapor have

entered into agreements to indemnify certain distributors and

retailers from liability and related defence costs arising out of

the sale or distribution of their products. Additionally, SFNTC

has entered into an agreement to indemnify a supplier from

liability and related defence costs arising out of the sale or use

of SFNTC’s products. The cost has been, and is expected to

be, insignificant. RJRT, SFNTC, American Snuff Co. and RJR

Vapor believe that the indemnified claims are substantially

similar in nature and extent to the claims that they are already

exposed to by virtue of their having manufactured those

products.

137.Except as otherwise noted above, Reynolds American is not

able to estimate the maximum potential of future payments, if

any, related to these indemnification obligations.

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294

138.Competition Investigations. There are instances where Group

companies are cooperating with relevant national competition

authorities in relation to ongoing competition law

investigations and/or engaged in legal proceedings at the

appellate level, including (amongst others) in the Netherlands

and Nigeria. In the previously disclosed investigation by the

Nigerian Federal Competition and Consumer Protection

Commission into alleged violations of the Nigerian

Competition and Consumer Protection Act and National

Tobacco Control Act, a consent order was entered into

between the FCCPC and British American Tobacco (Holdings)

Limited, British American Tobacco (Nigeria) Limited and

British American Tobacco Marketing (Nigeria) Limited in

December 2022 terminating the investigation and associated

proceedings, replacing the previous Final Order. A penalty

equivalent to US$110 million will be paid in Naira in

instalments, among other measures.

Tax disputes

The Group has exposures in respect of the payment or recovery of

a number of taxes. The Group is and has been subject to a number

of tax audits covering, amongst others, excise tax, value added

taxes, sales taxes, corporate taxes, withholding taxes and payroll

taxes.

The estimated costs of known tax obligations have been provided

in these accounts in accordance with the Group’s accounting

policies. In some countries, tax law requires that full or part

payment of disputed tax assessments be made pending resolution

of the dispute. To the extent that such payments exceed the

estimated obligation, they would not be recognised as an expense.

While the amounts that may be payable or receivable in relation to

tax disputes could be material to the results or cash flows of the

Group in the period in which they are recognised, the Board does

not expect these amounts to have a material effect on the Group’s

financial condition.

The following matters are in or may proceed to litigation:

Corporate taxes

Brazil

Profits of overseas subsidiaries. The Brazilian Federal Tax Authority

has filed claims against Souza Cruz seeking to reassess the profits

of overseas subsidiaries to corporate income tax and social

contribution tax. The reassessments are for the years 2004 until

and including 2012 for a total amount of BRL1,919 million

(£302 million) to cover tax, interest and penalties.

Souza Cruz appealed all reassessments. Regarding the first

assessments (2004-2006), Souza Cruz’s appeals were rejected by

the ultimate Administrative Court after which Souza Cruz filed two

lawsuits with the Judicial Court to appeal the reassessments. The

judgment in respect of the reassessment of corporate income tax

has been decided in favour of Souza Cruz by the first level of the

Judicial Court and Souza Cruz is waiting to see whether the

Brazilian Tax Authorities will appeal the judgment. The lawsuit

appealing the social contribution tax is pending judgment in the

first level of the Judicial Court. The appeal against the second

assessments (2007 and 2008) was upheld at the second tier

tribunal and was closed. In 2015, a further reassessment for the

same period (2007 and 2008) was raised after the five-year statute

of limitation which has been appealed against. Souza Cruz received

further reassessments in 2014 for the 2009 calendar year and in

2015 an assessment for the 2010 calendar year. Souza Cruz

appealed both the reassessments in full. In December 2016,

assessments were received for the calendar years 2011 and 2012

which have also been appealed.

Rio de Janeiro VAT Incentives. The Brazilian Federal Tax authority

has challenged the treatment of Rio de Janeiro VAT incentives. In

October 2021, in respect of the 2016-2021 calendar years, the

authorities position was upheld at the lower Judicial Court. Souza

Cruz has appealed in full against the Judgment. The maximum

exposure from 2016 is BRL 833 million (£131 million) including

potential interest and penalties.

Netherlands

The Dutch tax authority has issued a number of assessments on

various issues across the years 2003-2016 in relation to various

intra-group transactions. The assessments amount to an

aggregate net potential liability across these periods of

£1,221 million covering tax, interest and penalties. The Group has

appealed against the assessments in full. The case is being dealt

with in two separate trials. The first trial deals with assessments

for periods from 2008-2013 (with an aggregate potential net

liability of £285 million). A separate trial will cover the periods from

2014-2016 (with an aggregate potential net liability of £936 million).

In relation to the periods from 2008-2013 at an initial trial, the

District Court of North Holland issued judgments on 17 October

2022, resulting in findings against the Group on a number of

issues. All these judgments have been appealed to the High Court.

The Group believes that its companies have meritorious defences

in law and fact in each of the above matters and intends to pursue

each dispute through the judicial system as necessary. The Group

does not consider it appropriate to make provision for these

amounts nor for any potential further amounts which may be

assessed in relation to these matters in subsequent years.

Indirect and other taxes

Bangladesh

In 2017, the National Board of Revenue (NBR) passed a

discriminatory special order fixing BDT 27 for local brands and BDT

35 for foreign brand cigarettes. After NBR passed the special

order, it was highlighted to the Government that it was against the

principles of foreign direct investment and against WTO practice.

Subsequently, the Finance Minister directed that no action should

be taken in this regard until the different issues raised were

finalised. Later in 2018, the special order itself was repealed. AKTC

(a local Bangladeshi tobacco manufacturer) filed a case against

NBR to get a direction from the Court to implement the special

order and reserve low segment for local industries. The judgment

in the AKTC case was passed by the High Court Division verbally

on 21 September 2020. The judgment revived the discriminatory

regime of VAT and Supplementary Duty (SD) between local and

international/imported brands for the fiscal year 2017 - 2018. In

light of the judgment, the Large Taxpayers’ Unit (LTU) of National

Board of Revenue by a notice asked BATB to show cause as to why

BATB believed it should not be liable to pay £210 million as unpaid

VAT and SD. Challenging the judgment, BATB filed and moved an

appeal (known as the Civil Miscellaneous Petition for Leave to

Appeal) before the Appellate Division of the Supreme Court of

Bangladesh and the judgment was subsequently stayed.

On 20 December 2020, BATB filed a Civil Petition for Leave to

Appeal as directed by the Appellate Division Judge in Chamber.

The judgment passed by the High Court Division will continue to

remain stayed while the appeal remains pending at the Appellate

Division of the Supreme Court of Bangladesh. It is anticipated that

the appeals admission hearing date may be fixed for February or

March 2023.

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Egypt

Until 28 September 2022 and 4 December 2022, respectively, British American Tobacco Egypt LLC (BAT Egypt) was subject to two civil

cases concerning the imposition of sales tax on low-price category brands brought by the Egyptian tax authority for £88 million, one case

pertaining to the period May 2008 to February 2009, and the second case pertaining to the period March 2009 to June 2010. Court-

appointed experts filed reports in both cases. Management believes the tax claims are unfounded and challenged both claims. In May

2021, a judgment was issued in the second of the two cases which acquitted BAT Egypt from all amounts related only to the period from

March 2009 to October 2009. An appeal was submitted to the Supreme Administrative Court to extend the acquittal to the rest of the

disputed period. A judgment in the first claim was not issued.

In June 2022, following the business decision to exit the Egyptian market, BAT Egypt entered into an arrangement with the Tax Authority

to fully and finally settle the outstanding claims and take advantage of a tax amnesty scheme introduced into the market which provided

for a 65% reduction on the penalties claimed in the event payment of the principal was made in full, which amounts to EGP 1.183 billion

(£50 million). Following this agreement with the Tax Authority, applications were made to the court to abandon the pending court cases,

and the proceedings are now formally closed since 28 September 2022 and 4 December 2022, respectively.

South Korea

In 2016, the Board of Audit and Inspection of Korea (BAI) concluded its tax assessment in relation to the 2014 year-end tobacco inventory,

and imposed additional national excise, local excise, VAT taxes and penalties. This resulted in the recognition of a KRW80.7 billion

(approximately £50 million) charge by Group subsidiaries, Rothmans Far East B.V. Korea Branch Office and BAT Korea Manufacturing

Ltd. Management deems the tax and penalties to be unfounded and has appealed to the tax tribunal against the assessment. On

grounds of materiality and the likelihood of the tax and penalties being reversed in future, the Group classified the tax and penalties

charge as an adjusting item in 2016.

On 23 August 2019, the trial court ruled in favour of Rothmans Far East B.V. Korea Branch Office on KRW6.7 billion (approximately

£4 million), the VAT portion of the assessment. The Korean government appealed the ruling on 16 September 2019. On 16 April 2021 the

Court of Appeals affirmed the ruling of the Trial Court. The government immediately appealed to the Supreme Court and the Supreme

Court also affirmed the ruling of the Appeals Court on 26 August 2021. On 16 September 2021, Rothmans Far East B.V. Korea Branch

Office duly received the amount litigated (VAT portion) including statutory interests (note 6). Appeals on the other elements of the

assessment are still pending at Appeals Court.

Commitments in relation to service contracts, non-capitalised leases

The total future minimum payments under non-cancellable service contracts based on when payments fall due:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Service contracts |  |  |
| Within one year | 45 | 41 |
| Between one and five years | 66 | 81 |
| Beyond five years | — | 5 |
|  | 111 | 127 |

Financial commitments arising from short-term leases and leases of low-value assets that are not capitalised under IFRS 16 Leases are

£30 million (2021: £7 million) for property and £50 million (2021: £19 million) for plant, equipment and other assets.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

296

32 Interests in subsidiaries

Subsidiaries with material non-controlling interests

Non-controlling interests principally arise from the Group’s listed investment in Bangladesh (British American Tobacco Bangladesh

Company Limited) where the Group held 72.91% in 2022, 2021 and 2020. Summarised financial information for Bangladesh is shown

below as required by IFRS 12 Disclosure of interest in other entities. No adjustments have been made to the information below for the

elimination of intercompany transactions and balances with the rest of the Group.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Summarised financial information | 2022  £m | 2021  £m | 2020  £m |
| Revenue | 732 | 640 | 553 |
| Profit for the year | 153 | 127 | 101 |
| – Attributable to non-controlling interests | 41 | 34 | 27 |
| Total comprehensive income | 132 | 127 | 91 |
| – Attributable to non-controlling interests | 36 | 34 | 25 |
| Dividends paid and other appropriations made to non-controlling interests | (32) | (28) | (31) |
| Summary net assets: |  |  |  |
| Non-current assets | 322 | 303 | 271 |
| Current assets | 253 | 345 | 271 |
| Non-current liabilities | 78 | 70 | 58 |
| Current liabilities | 166 | 262 | 190 |
| Total equity at the end of the year | 331 | 316 | 294 |
| – Attributable to non-controlling interests | 90 | 86 | 80 |
| Net cash generated from operating activities | 164 | 52 | 137 |
| Net cash used in investing activities | (46) | (26) | (11) |
| Net cash used in financing activities | (147) | (55) | (111) |
| Differences on exchange | 4 | — | (1) |
| (Decrease)/increase in net cash and cash equivalents | (25) | (29) | 14 |
| Net cash and cash equivalents at 1 January | 1 | 30 | 16 |
| Net cash and cash equivalents at 31 December | (24) | 1 | 30 |

Subsidiaries subject to restrictions:

As a result of the Group’s Canadian subsidiary, Imperial Tobacco Canada (ITCAN), entering CCAA protection, the assets of ITCAN

are subject to restrictions. The table below summarises the assets and liabilities of ITCAN:

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Summarised financial information | 2022  £m | 2021  £m |
| Non-current assets | 2,554 | 2,403 |
| Current assets | 2,193 | 1,630 |
| Non-current liabilities | (114) | (109) |
| Current liabilities | (526) | (479) |
|  | 4,107 | 3,445 |

Under the terms of CCAA, the court has appointed FTI Consulting Canada Inc. to act as a monitor. This monitor has no operational input

and is not involved in the management of the business. The Group considers that ITCAN continues to meet the requirements of IFRS 10

Consolidated Financial Statements, and, until such requirements are not met, the Group will continue to consolidate the results of ITCAN.

Whilst the Group continues to control the operations of its Canadian subsidiary, there are restrictions over the ability to access or use

certain assets including the ability to remit dividends. Included in non-current assets for 2022 and 2021 is goodwill of £2.5 billion subject

to impairment reviews (note 12). Included in current liabilities are trade and other payables of £391 million (2021: £341 million), the majority

of which are amounts payable in respect of duties and excise. A breakdown of current assets has been provided below.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Cash and cash equivalents\* | 1,569 | 1,114 |
| Inventory | 182 | 126 |
| Investments held at fair value | 396 | 351 |
| Other | 46 | 39 |
|  | 2,193 | 1,630 |

Note:

\*Cash and cash equivalents above include £1,411 million (2021: £1,024 million) of restricted cash and cash equivalents. The Group defines restricted cash and cash equivalents as where

there are significant restrictions on its ability to access or use the assets and settle the liabilities of the Group, but excludes cash and cash equivalents where there are also outstanding

local currency borrowings or where there is an outstanding excise liability. In addition, dividends payable would also be excluded from restricted cash and cash equivalents if the dividend

has been approved by the necessary regulatory channels.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

297

Refer to note 31 for information on the Quebec Class Actions.

Other shareholdings

At 31 December 2022, the Group holds almost 100% (2021: 99%; 2020: 92%) of the equity shares of PT Bentoel Internasional Investama

Tbk (Bentoel). Between 2011 and 2021, the Group was party to a total return swap on approximately 7% of Bentoel’s issued capital. While

the Group did not have legal ownership of these shares in this period, it retained the risks and rewards associated with them which

resulted in the Group continuing to recognise an effective interest in 99% of Bentoel’s net assets and results. In 2021, the Group

terminated the total return swap as part of its intention to delist from the Indonesia Stock Exchange and go private by conducting a

Voluntary Tender Offer (VTO), as a result of which the Group acquired 0.2% additional shares at a cost of £4 million. Shares from over one

thousand individual shareholders who could not be contacted are in the process of being transferred to a courts-approved Public

Trustee. When this is complete, approvals will be sought from the relevant authorities to delist the company.

33 Summarised financial information

The following summarised financial information is required by the rules of the Securities and Exchange Commission and has been

prepared as a requirement of the Regulation S-X 3-10 in respect of the guarantees of:

–US$11.00 billion of outstanding bonds issued by B.A.T Capital Corporation (BATCAP) in connection with the acquisition of Reynolds

American Inc. (Reynolds American), including registered bonds issued in exchange for the initially issued bonds (the 2017 Bonds);

–US$12.15 billion of outstanding bonds issued by BATCAP pursuant to the Shelf Registration Statement on Form F-3 filed on July 17,

2019, and US$0.6 billion of outstanding bonds issued by BATCAP pursuant to the Shelf Registration Statement on Form F-3 filed on

July 1, 2022 pursuant to which BATCAP or BATIF may issue an indefinite amount of debt securities; and

–US$2.50 billion of outstanding bonds issued by BATIF pursuant to the Shelf Registration Statement on Form F-3 filed on July 17, 2019,

pursuant to which BATCAP or BATIF may issue an indefinite amount of debt securities.

As of July 28, 2020, all relevant Group entities suspended their reporting obligations with respect to the US$7.7 billion (2022:

US$7.7 billion) of Reynolds American unsecured notes and US$40.9 million (2022: US$40.9 million) of Lorillard unsecured notes. As such,

no summarised financial information is provided with respect to these securities.

As described below, Reynolds American is a subsidiary guarantor of all outstanding series of BATCAP and BATIF bonds. Under the terms

of the indentures governing such notes, any subsidiary guarantor (including Reynolds American) other than BATCAP or BATIF, as

applicable, BATNF and BATHTN, will automatically and unconditionally be released from all obligations under its guarantee, and such

guarantee shall thereupon terminate and be discharged and of no further force or effect, in the event that (1) its guarantee of all then

outstanding notes issued under the Group’s EMTN Programme is released or (2) at substantially the same time its guarantee of the debt

securities is terminated, such subsidiary guarantor is released from all obligations in respect of indebtedness for borrowed money for

which such subsidiary guarantor is an obligor (as a guarantor or borrower). Under the EMTN Programme, Reynolds American’s

guarantee is released if at any time the aggregate amount of indebtedness for borrowed money, subject to certain exceptions, for which

Reynolds American is an obligor does not exceed 10% of the outstanding long-term debt of BAT as reflected in the balance sheet

included in BAT’s most recent publicly released interim or annual consolidated financial statements.

Reynolds American’s guarantee may be released notwithstanding Reynolds American guaranteeing other indebtedness, provided

Reynolds American’s guarantee of outstanding notes issued under the EMTN Programme is released. If Reynolds American’s guarantee

is released, BAT is not required to replace such guarantee, and the debt securities will have the benefit of fewer subsidiary guarantees for

the remaining maturity of the debt securities.

Note: The following summarised financial information report the unconsolidated contribution of each applicable company to the Group’s

consolidated results and not the separate financial statements for each applicable company as local financial statements are prepared in

accordance with local legislative requirements and may differ from the financial information provided below. In particular, in respect of

the U.S. region, all financial statements and financial information provided by or with respect to the U.S. business or RAI (and/or RAI and

its subsidiaries (collectively, the Reynolds Group)) are prepared on the basis of US GAAP and constitute the primary financial statements

or financial information of the U.S. business or RAI (and/or the Reynolds Group). Solely for the purpose of consolidation within the results

of BAT p.l.c. and the BAT Group, this financial information is then converted to IFRS. To the extent any such financial information provided

in these financial statements relates to the U.S. business or RAI (and/or the Reynolds Group), it is provided as an explanation of the U.S.

business’s or RAI’s (and/or the Reynolds Group’s) primary US GAAP based financial statements and information.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

298

The subsidiaries disclosed below are wholly-owned and the guarantees provided are full and unconditional, and joint and several:

a.British American Tobacco p.l.c. (as the parent guarantor), referred to as ‘BAT p.l.c.’ in the financials below;

b.B.A.T Capital Corporation (as an issuer or a subsidiary guarantor, as the case may be), referred to as ‘BATCAP’ in the financials below;

c.B.A.T. International Finance p.l.c. (as an issuer or a subsidiary guarantor, as the case may be), referred to as ‘BATIF’ in the financials

below;

d.B.A.T. Netherlands Finance B.V. (as a subsidiary guarantor), referred to as ‘BATNF’ in the financials below;

e.Reynolds American Inc. (as a subsidiary guarantor), referred to as ‘RAI’ in the financials below; and

f.British American Tobacco Holdings (The Netherlands) B.V. (as a subsidiary guarantor of the 2017 Bonds only), referred to as ‘BATHTN’

in the financials below.

In accordance with Regulation S-X 13-01, information in respect of investments in subsidiaries that are not issuers or guarantors has been

excluded from non-current assets as shown in the balance sheet table below. The ‘BATHTN’ column in the summarised financial

information is only applicable in the context of the 2017 Bonds. British American Tobacco Holdings (The Netherlands) B.V. (BATHTN) is

not an issuer nor guarantor of any of the other securities referenced in this note. None of the issuers or other guarantors has material

balances with or an investment in BATHTN. Investments in subsidiaries represents share capital acquired in relation to or issued by

subsidiary undertakings.

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Summarised Financial Information | | | | | |
| Year ended 31 December 2022 | BAT p.l.c.  £m | BATCAP  £m | BATIF  £m | BATNF  £m | RAI  £m | BATHTN  £m |
| Income Statement |  |  |  |  |  |  |
| Revenue | — | — | — | — | — | — |
| (Loss)/profit from operations | (115) | (1) | (2) | — | 5 | 1 |
| Dividend income | 7,515 | — | — | — | 4,835 | 148 |
| Net finance income/(costs) | 264 | (52) | 187 | — | (500) | — |
| Profit/(loss) before taxation | 7,664 | (53) | 185 | — | 4,340 | 149 |
| Taxation on ordinary activities | (10) | (9) | (21) | — | 110 | — |
| Profit/(loss) for the year | 7,654 | (62) | 164 | — | 4,450 | 149 |
| Intercompany Transactions – Income Statement |  |  |  |  |  |  |
| Transactions with non-issuer/non-guarantor subsidiaries  (expense)/income | (116) | (1) | (2) | — | 47 | — |
| Transactions with non-issuer/non-guarantor subsidiaries net  finance (cost)/income | 52 | 815 | 732 | — | 25 | — |
| Dividend income from non-issuer/non-guarantor subsidiaries | 7,515 | — | — | — | 4,835 | 148 |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Summarised Financial Information | | | | | |
| Year ended 31 December 2021 | BAT p.l.c.  £m | BATCAP  £m | BATIF  £m | BATNF  £m | RAI  £m | BATHTN  £m |
| Income Statement |  |  |  |  |  |  |
| Revenue | — | — | — | — | — | — |
| (Loss)/profit from operations | (111) | (1) | (2) | — | 3 | — |
| Dividend income | 6,200 | — | — | — | 4,827 | 164 |
| Net finance income/(costs) | 170 | (43) | 63 | 1 | (421) | — |
| Profit/(loss) before taxation | 6,259 | (44) | 61 | 1 | 4,409 | 164 |
| Taxation on ordinary activities | 5 | 19 | 1 | — | 97 | — |
| Profit/(loss) for the year | 6,264 | (25) | 62 | 1 | 4,506 | 164 |
| Intercompany Transactions – Income Statement |  |  |  |  |  |  |
| Transactions with non-issuer/non-guarantor subsidiaries  (expense)/income | (111) | (1) | (2) | — | 36 | — |
| Transactions with non-issuer/non-guarantor subsidiaries net  finance (cost)/income | (2) | 709 | 370 | — | 28 | — |
| Dividend income from non-issuer/non-guarantor subsidiaries | 6,200 | — | — | — | 4,827 | 164 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

299

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Summarised Financial Information | | | | | |
| As at 31 December 2022 | BAT p.l.c.  £m | BATCAP  £m | BATIF  £m | BATNF  £m | RAI  £m | BATHTN  £m |
| Balance Sheet |  |  |  |  |  |  |
| Non-current assets | 1,917 | 20,962 | 2,480 | 1,500 | 405 | 45 |
| Current assets | 9,166 | 7,947 | 42,748 | 22 | 1,135 | 8 |
| Non-current liabilities | 1,580 | 20,018 | 14,058 | 1,500 | 10,094 | 12 |
| Non-current borrowings | 1,572 | 19,762 | 13,510 | 1,500 | 10,033 | — |
| Other non-current liabilities | 8 | 256 | 548 | — | 61 | 12 |
| Current liabilities | 55 | 8,749 | 29,379 | 21 | 1,011 | 1 |
| Current borrowings | 23 | 8,657 | 28,525 | 21 | 568 | 1 |
| Other current liabilities | 32 | 92 | 854 | — | 443 | — |
| Intercompany Transactions – Balance Sheet |  |  |  |  |  |  |
| Amounts due from non-issuer/non-guarantor  subsidiaries | 9,117 | 17,003 | 42,752 | — | 700 | 8 |
| Amounts due to non-issuer/non-guarantor  subsidiaries | 5 | 3,890 | 22,702 | — | 34 | 1 |
| Investment in subsidiaries (that are not issuers  or guarantors) | 27,234 | — | 718 | — | 26,690 | 1,573 |

|  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  | Summarised Financial Information | | | | | |
| As at 31 December 2021 | BAT p.l.c.  £m | BATCAP  £m | BATIF  £m | BATNF  £m | RAI  £m | BATHTN  £m |
| Balance Sheet |  |  |  |  |  |  |
| Non-current assets | 1,916 | 18,192 | 4,986 | 1,417 | 357 | 75 |
| Current assets | 8,443 | 3,583 | 35,772 | 21 | 1,033 | 19 |
| Non-current liabilities | 9 | 17,024 | 13,667 | 1,417 | 8,778 | 19 |
| Non-current borrowings | — | 16,965 | 13,560 | 1,417 | 8,719 | — |
| Other non-current liabilities | 9 | 59 | 107 | — | 59 | 19 |
| Current liabilities | 1,607 | 4,633 | 25,451 | 20 | 882 | 10 |
| Current borrowings | 1,580 | 4,602 | 25,081 | 20 | 263 | 10 |
| Other current liabilities | 27 | 31 | 370 | — | 619 | — |
| Intercompany Transactions - Balance Sheet |  |  |  |  |  |  |
| Amounts due from non-issuer/non-guarantor  subsidiaries | 8,405 | 14,999 | 38,539 | — | 1,360 | 19 |
| Amounts due to non-issuer/non-guarantor  subsidiaries | — | 3,006 | 20,422 | — | 48 | 9 |
| Investment in subsidiaries (that are not issuers  or guarantors) | 27,234 | — | 718 | — | 23,643 | 1,488 |

Perpetual hybrid bonds

BAT p.l.c. has issued two €1 billion of perpetual hybrid bonds which have been classified as equity as there is no contractual obligation

to either repay the principal or make payments of interest (note 22(d)).

BAT p.l.c.’s unconsolidated contribution to the Group’s consolidated equity results is shown below:

BAT p.l.c.

|  |  |  |
| --- | --- | --- |
|  |  |  |
| As at 31 December | 2022  £m | 2021  £m |
| Total equity | 36,682 | 35,977 |
| Share capital | 614 | 614 |
| Share premium | 113 | 107 |
| Perpetual hybrid bonds | 1,685 | 1,685 |
| Other equity | 34,270 | 33,571 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Notes on Accounts  Continued | | | | | | | |

300

This disclosure is made in accordance with Section 409 of the Companies Act 2006 and The Large and Medium-sized Companies and

Groups (Accounts and Reports) Regulations 2008, as amended by The Companies, Partnerships and Groups (Accounts and Reports)

Regulations 2015. A full list of subsidiary undertakings, associates and joint ventures and joint operations as defined by IFRS (showing the

country of incorporation, effective percentage of equity shares held and full registered office addresses) as at 31 December 2022 is

disclosed below.

The subsidiary undertakings that are held directly by British American Tobacco p.l.c. (the ultimate Parent Company) are indicated thus\*;

all others are held by sub-holding companies.

Unless otherwise stated, the equity shares held are in the form of ordinary shares or common stock, except for those indicated thus#,

which include preference shares. The effective percentage of equity shares held in subsidiary undertakings is 100% unless otherwise

stated. Further, where the effective percentage of equity shares held by the sub-holding company is different from that held by British

American Tobacco p.l.c., the percentage of equity shares held by British American Tobacco p.l.c. is indicated thus^ and is shown after the

percentage interest held by the sub-holding company.

The results of a number of these subsidiary undertakings principally affect the financial statements of the Group. These principal

subsidiary undertakings are highlighted in grey and are considered to be the main corporate entities in those countries which, in

aggregate, contributed 90% of the Group revenue in 2022.

|  |
| --- |
|  |
| Subsidiary Undertaking |
| Albania |
| Rruga e Kavajes, Ish Kombinati Ushqimor, Tirana, Albania |
| British American Tobacco - Albania SH.P.K. |
| Algeria |
| Zone d’activité El Omran, Route de Ouled Fayet, Ilot 789- Lot 04,  Cheraga, Alger, Algeria |
| British American Tobacco (Algérie) S.P.A. (51%)4 |
| Angola |
| Viana Park, Polo Industrial, Viana, Luanda, Angola |
| British American Tobacco - B.A.T. Angola, Limitada |
| Sociedade Geral de Distribuição e Comércio, Limitada |
| Sociedade Industrial Tabacos Angola LDA (71.6%) |
| Sociedade Unificada Tabacos Angola LDA (62.67%) |
| Argentina |
| San Martín 140, Floor 14, City of Buenos Aires, Argentina |
| BAT Operaciones S.A.U. |
| British American Tobacco Argentina S.A.I.C.y F. (99.98%) |
| Australia |
| 166 William Street, Woolloomooloo, NSW 2011, Australia |
| British American Tobacc South East Asia Pty Ltd |
| British American Tobacco Australasia Limited |
| British American Tobacco Australia Limited |
| British American Tobacco Australia Overseas Pty Limited |
| British American Tobacco Australia Services Limited |
| Rothmans Asia Pacific Limited # |
| The Benson & Hedges Company Pty. Limited |
| W.D. & H.O. Wills Holdings Limited |
| Austria |
| Dr. Karl Lueger Platz 5, 1010, Wien, Austria |
| British American Tobacco (Austria) GmbH |
| Bahrain |
| Flat 2115, Building 2504, Road 2832, Block 428 Al Seef Area,  Kingdom of Bahrain |
| British American Tobacco Middle East W.L.L |
| Bangladesh |
| New DOHS Road, Mohakhali, Dhaka 1206, Bangladesh |
| British American Tobacco Bangladesh Company Limited (72.91%) |
|  |

|  |
| --- |
|  |
| Barbados |
| Chancery Chambers, Chancery House, High Street, Bridgetown,  Barbados |
| Southward Insurance Ltd. |
| Belarus |
| 7th Floor, 3 Kuprevicha Str., Minsk, 220141, Belarus |
| Limited liability company "International Tobacco Marketing Services BY" |
| Belgium |
| Globe House, 4 Temple Place, London, WC2R 2PG, United  Kingdom |
| British American Tobacco Holdings Belgium N.V. |
| Nieuwe Gentsesteenweg 21, 1702 Groot-Bijgaarden, Belgium |
| British American Tobacco Belgium N.V. |
| Benin |
| Cotonou, Lot Numbero H19, Quartiers Les Cocotiers, 01 BP 2520,  Benin |
| British American Tobacco Benin SA |
| Bolivia |
| Av. Ballivián entre calles 11 y 12 No. 555, Edificio El Dorial, Piso 19,  Oficina E, zona de Calacoto, La Paz, Bolivia |
| BAT Bolivia S.R.L. |
| Bosnia and Herzegovina |
| Fra Dominka Mandića 24A, 88220 Široki Brijeg, Bosnia and  Herzegovina |
| IPRESS d.o.o. |
| ul. Azize Šaćirbegović 1, 71000 Sarajevo-Novo Sarajevo, Bosnia  and Herzegovina |
| TDR d.o.o. Sarajevo |
| ul. Kolodvorska 12, 71000 Sarajevo-Novo Sarajevo, Bosnia and  Herzegovina |
| iNovine BH d.o.o. |
| Botswana |
| Plot 20774 Broadhurst Industrial Estate, Gaborone, Botswana |
| British American Tobacco Botswana (Pty) Limited |
| Business Venture Investments Botswana 6773 (Pty) Ltd. (In  Liquidation) |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Group Companies and Undertakings | | | | | | | |

301

|  |
| --- |
|  |
| Subsidiary Undertaking continued |
| Brazil |
| Avenida República do Chile, nº 330, Bloco 1, Torre Leste, 30º  andar, Centro, Rio de Janeiro/RJ - CEP 20.031-170, Brazil |
| Instituto Souza Cruz |
| Souza Cruz LTDA |
| Yolanda Participacoes S.A. |
| Bulgaria |
| 115 M, Tsarigradsko Shose Blvd., Building D, Floor 5, Sofia,  Mladost Municipality, 1784, Bulgaria |
| British American Tobacco Trading EOOD |
| Burkina Faso |
| Ouagadougou, Avenue Yennega BP: 882, Ouagadougou, Burkina Faso |
| Tobacco Marketing Consultant Burkina Faso SARL |
| Cambodia |
| 1121 National Road 2, Prek Tanou Village, Sangkat Chak Ang Re  Leu, Khan Mean Chey, Phnom Penh, Kingdom of Cambodia |
| British American Tobacco (Cambodge) International Limited |
| 516, National Road No. 2, Phum Prek Ta Nu, Sangkat Chak Ang Re  Leu, Khan Mean Chey, Phnom Penh, Kingdom of Cambodia |
| British American Tobacco (Cambodia) Limited (71%) |
| Cameroon |
| Rue Njo Njo, Bonapriso - B.P. 259, Douala, Cameroon |
| British American Tobacco Cameroun S.A. (99.76%) |
| Canada |
| 30 Pedigree Court, Brampton, Ontario, L6T 5T8, Canada |
| Imperial Tobacco Canada Limited |
| Imperial Tobacco Company Limited |
| 3711 St-Antoine West, Montreal, Quebec, H4C 3P6, Canada |
| Allan Ramsay and Company Limited |
| Cameo Inc. |
| Genstar Corporation #2 |
| Imperial Brands Limited |
| Imperial Tobacco Products Limited |
| Imperial Tobacco Services Inc. |
| John Player & Sons Ltd |
| Liggett & Myers Tobacco Company of Canada Limited (70%)  (50%)^3 |
| Marlboro Canada Limited |
| Medaillon Inc. |
| 45 O'Connor Street, Suite 1500, Ottawa, Ontario, K1P 1A4, Canada |
| 2004969 Ontario Inc. |
| Cayman Islands |
| Trident Trust Company (Cayman) Ltd., One Capital Place, PO Box  847, Grand Cayman KY1-1103, Cayman Islands |
| R.J. Reynolds Tobacco (CI), Co. |
| Chile |
| Isidora Goyenechea 3000, Piso 15,  of 1501, Las Condes, Santiago,  Chile |
| BAT Chile S.A. |
| British American Tobacco Chile Operaciones S.A. (99.51%) |
| Inversiones Casablanca S.A. |
|  |

|  |
| --- |
|  |
| China (People's Republic of) |
| Room 3101, Tower A, Gemdale Viseen Tower, No. 16, Gaoxin  South 10th Road, High-tech Park, Nanshan District, Shenzhen,  People's Republic of China |
| Nicoventures Technical (Shenzhen) Co., Ltd. |
| Room 436, No. 1000, Zhenchen Road, Baoshan District, Shanghai,  People's Republic of China |
| British American (Shanghai) Enterprise Development Co., Ltd |
| British American Nico Business Consulting (Shanghai) Co., Ltd |
| Unit 1001 in 901, 9/F, Building 3, No.8 Guanghuadongli, Chaoyang  District Beijing, People’s Republic of China |
| British American Consulting (Beijing) Co., Ltd8 |
| Colombia |
| Av. Cra. 72 # 80-94 Piso 10. Bogotá, Colombia |
| British American Tobacco Colombia S.A.S. |
| Vype Colombia S.A.S. |
| Congo (Democratic Republic of) |
| 1er étage, Immeuble du Centenaire, Gombe, Kinshasa,  Democratic Republic of Congo |
| BAT Distributon SARL (In Liquidation) |
| British American Tobacco Congo SARL (In Liquidation) |
| 1st floor Immeuble L’horizon sis avenue Colonel Lukusa n°50,  Gombe, Kinshasa, Democratic Republic of Congo |
| British American Tobacco Import SARL |
| British American Tobacco Services Congo SARL |
| Costa Rica |
| 325 Metros este del Puente de la Firestone, Llorente, Flores,  Heredia, Costa Rica |
| BASS Americas S.A. |
| BATCCA Park Inversiones Immobiliarias, S.A. |
| BATCCA Servicios S.A. |
| Croatia |
| Avenija Dubrovnik 16, 10000 Zagreb, Croatia |
| BAT HRVATSKA d.o.o. u likvidaciji (In Liquidation) |
| Draškovićeva 27, 10000 Zagreb, Croatia |
| iNovine d.d. (93.42%) |
| Obala V. Nazora 1, 52210 Rovinj, Croatia |
| TDR d.o.o. |
| Osječka 2, 33000 Virovitica, Croatia |
| Hrvatski Duhani d.d. Tobacco Leaf Processing (95.54%) (98.65%)^ |
| Cuba |
| Parcela nº 2 a noroeste do terminal de contêineres de Mariel, a  2,2 km do vértice nº 4, Município de Mariel, Província de  Artemisa, Republic of Cuba |
| Brascuba Cigarrillos S.A. (50%) |
| Cyprus |
| Photiades Business Centre, 5th Floor, 8 Stasinou Avenue, Nicosia,  CY-1060, Cyprus |
| B.A.T (Cyprus) Limited |
| Rothmans (Middle East) Limited |
| Czech Republic |
| Karolinská 654/2, Prague 8 – Karlín, 186 00, Czech Republic |
| British American Tobacco (Czech Republic), s.r.o. |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Companies and Undertakings  Continued | | | | | | | |

302

|  |
| --- |
|  |
| Denmark |
| Bernstorffsgade 50, 1577 Copenhagen, Denmark |
| British American Tobacco Denmark A/S (House of Prince A/S) |
| Precis (1789) Denmark A/S |
| Djibouti |
| Rue de Magadiscio, Lot No. 133, Djibouti City, Djibouti |
| British American Tobacco Djibouti SARL (In Liquidation) |
| Egypt |
| Administrative unit no.1 , 5th Floor, Building S2B, Sector A,  Downtown Mall Katameya, 5th settlement, New Cairo, Egypt |
| BETCO for General Services and Marketing LLC |
| BETCO for Trade and Distribution LLC |
| British American Tobacco Egypt LLC |
| British American Tobacco North Africa LLC |
| English American Company for Importation and Trade L.L.C (In  Liquidation) |
| Eritrea |
| P.O. Box 749, 62 Fel Ket Street, Asmara, Eritrea |
| British American Tobacco (Eritrea) Share Company # |
| Estonia |
| Tornimäe 7-10, 10145 Tallinn, Estonia |
| British American Tobacco Estonia AS |
| Fiji |
| Lady Maria Road, Nabua, Suva, Fiji |
| British American Tobacco (Fiji) Marketing Pte Limited |
| Central Manufacturing Company Pte Limited |
| Rothmans of Pall Mall (Fiji) Pte Limited |
| Finland |
| c/o Retail24, Olarinluoma 7, 02200 Espoo, Finland |
| British American Tobacco Finland Oy |
| France |
| 111 Avenue Victor Hugo, 75016 Paris, France |
| Carreras France SAS |
| Tour Légende, 20 place de la Défense, CS 80289, 92050 Paris La  Défense Cedex, France |
| British American Tobacco France SAS |
| Germany |
| Alsterufer 4, 20354 Hamburg, Germany |
| BATIG Gesellschaft fur Beteiligungen m.b.H. |
| British American Tobacco (Germany) GmbH |
| British American Tobacco (Industrie) GmbH |
| Schutterwälder Straße. 23, 01458 Ottendorf-Okrilla, Germany |
| Quantus Beteiligungs-und Beratungsgesellschaft mbH i.L (In  Liquidation) |
| Ghana |
| 4th Floor, Volta Place, Airport Residential Area, Patrice Lumumba  Street, Accra, Ghana |
| British American Tobacco Ghana Limited (97.09%) |
|  |

|  |
| --- |
|  |
| Greece |
| 27, Ag. Thoma Street, Maroussi, 151 24, Greece |
| British American Tobacco Hellas S.A. |
| Guernsey |
| St Martin’s House, Le Bordage, St. Peter’s Port, GY1 4AU, Guernsey |
| Belaire Insurance Company Limited |
| Guyana |
| Lot 122 Parade Street, Kingston, Georgetown, Guyana |
| Demerara Tobacco Company Limited (70.25%) |
| Honduras |
| Boulevard del Sur, Zona El Cacao, San Pedro Sula, Depart. de  Cortés, Honduras |
| Tabacalera Hondureña S.A. (83.64%) |
| Hong Kong |
| 11/F, One Pacific Place, 88 Queensway, Hong Kong, China |
| British American Tobacco China Investments Limited |
| Lehman, Lee & XU Corporate Services, Suite 3313, Tower One,  Times Square 1 Matheson Street, Causeway Bay, Hong Kong,  China |
| Reynolds Asia-Pacific Limited |
| Level 24, Suites 2407-09, 3 Pacific Place, 1 Queen's Road East,  Wanchai, Hong Kong, China |
| BAT Global Travel Retail Limited |
| Level 30, 3 Pacific Place, 1 Queen's Road East, Wanchai, Hong  Kong, China |
| British American Tobacco Asia-Pacific Region Limited |
| British-American Tobacco Company (Hong Kong) Limited |
| Nicoventures Business Consulting (Hong Kong) Co., Ltd. |
| Hungary |
| H-1124, Budapest, Csörsz utca 49-51. 3. em., Hungary |
| BAT Pécsi Dohánygyár Korlátolt Felelosségu Társaság |
| Indonesia |
| Capital Place Office Tower, 6th Floor, Jl. Gatot Subroto Kav. 18,  Jakarta 12710, Indonesia |
| PT Bentoel Internasional Investama, Tbk (99.96%) |
| Jl. Raya Karanglo, 1  Desa Banjararum, Kecamatan Singosari,  Jawa Timur 65153, Indonesia |
| PT Bentoel Prima (99.99%)(99.96%)^4 |
| Jl. Susanto No. 2B, Ciptomulyo, Sukun, Malang, Jawa Timur  65148, Indonesia |
| PT Bentoel Distribusi Utama (100%) (99.96%)^ |
| Iraq |
| Empire Business Tower, Building C5, 2nd floor, Erbil, Kurdistan  Region of Iraq |
| B.A.T. Iraqia Company for Tobacco Trading Limited |
| Ireland |
| Suite D, 2nd Floor, The Apex Building, Blackthorn Road, Sandyford  Industrial Estate, Dublin 18, Republic of Ireland |
| Carroll Group Distributors Limited |
| P.J. Carroll & Company Limited |
| Rothmans of Pall Mall (Ireland) Limited5 |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
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|  | | | | | | | |

303

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| --- |
|  |
| Subsidiary Undertaking continued |
| Isle of Man |
| 2nd Floor, St Mary’s Court, 20 Hill Street, Douglas, IM1 1EU, Isle of Man |
| Abbey Investment Company Limited |
| The Raleigh Investment Company Limited |
| Tobacco Manufacturers (India) Limited |
| Italy |
| Località Bagnoli della Rosandra, snc, 34018 San Dorligo della Valle  (TS), Italy |
| BAT Trieste S.p.A. |
| Via Amsterdam 147, 00144 Rome, Italy |
| British American Tobacco Italia S.p.A. |
| Ivory Coast |
| Rue des Jardins -Immeuble Sayegh-Mezzanine, Abidjan, Cocody  2 plateaux, Côte d'Ivoire |
| British American Tobacco RCI SARL |
| Jamaica |
| 13A Ripon Road, Kingston 5, Jamaica |
| Carreras Limited (50.40%)13 |
| Sans Souci Development Limited (100%) (50.40%)^13  (In  Liquidation) |
| Sans Souci Limited (100%) (50.40%)^13 (In Liquidation) |
| Japan |
| Midtown Tower 20F, 9-7-1 Akasaka, Minato-ku, Tokyo, Japan |
| British American Tobacco Japan, Ltd.10 |
| Jersey |
| 22 Grenville Street, St Helier, JE4 8PX, Jersey |
| Pathway 5 (Jersey) Limited |
| Jordan |
| Airport Road, Al Qastal Industrial Area, Air Cargo Road, Amman,  Jordan |
| British American Tobacco – Jordan Private Shareholding  Company Limited |
| Kazakhstan |
| 240G, Nursultan Nazarbayev Avenue, A26F8D4 Almaty, Republic  of Kazakhstan |
| British American Tobacco Kazakhstan Trading LLP1 |
| Kenya |
| 8 Likoni Road, Industrial Area, P.O. Box 30000-00100, Nairobi,  Kenya |
| BAT Kenya Tobacco Company Limited (100%) (60%)^ |
| British American Tobacco Area Limited |
| British American Tobacco Kenya plc (60%) |
| East African Tobacco Company (Kenya) Limited (60%) (In Liquidation) |
| Korea, Republic of |
| 141, Gongdan1-ro, Sanam-Myun, Sacheon City, Kyungsangnamdo,  Korea (the Republic of) |
| British American Tobacco Korea Manufacturing Limited |
| 22nd FL. West Tower, MiraeAssetCENTER1, 26, Eulji-ro 5-gil,  Jung-gu, Seoul, Korea (the Republic of) |
| British American Tobacco Korea Limited |
|  |

|  |
| --- |
|  |
| Kosovo, Republic of |
| Llapllaselle p.n., 10500 Gracanicë, Republic of Kosovo |
| British American Tobacco Kosovo SH.P.K. |
| Kuwait |
| Unit 21, 35th Floor, Al Hamra Tower, Al Shohada St. Kuwait City,  Kuwait |
| BAT Kuwait for Wholesale and Retail Trading Company (S.P.C) |
| Latvia |
| Mukusalas iela 101, Riga LV-1004, Latvia |
| British American Tobacco Latvia SIA |
| Lesotho |
| Mohokare Industrial Estate, Florida Area Extention, Ha Hoohle,  Maseru, 100, Lesotho |
| British Amercan Tobacco Lesotho (Pty) Ltd |
| Lithuania |
| J. Galvydžio g. 11-7, LT-08236 Vilnius, Lithuania |
| UAB British American Tobacco Lietuva |
| Luxembourg |
| 1, Rue Jean Piret, 2350 Luxembourg, Grand Duchy of Luxembourg |
| British American Tobacco Brands (Switzerland) Limited |
| Malawi |
| Northgate Arcade Complex, Masauko Chipembere Highway,  Blantyre, Malawi. |
| British American Tobacco (Malawi) Limited |
| Malaysia |
| 12th Floor, Menara Symphony, No. 5, Jalan Prof Khoo Kay Kim,  Seksyen 13, 46200, Petaling Jaya, Selangor Darul Ehsan, Malaysia |
| British American Tobacco GSD (Kuala Lumpur) Sdn Bhd |
| Level 11, Sunway Geo Tower, Jalan Lagoon Selatan, Sunway South  Quay, Bandar Sunway, 47500 Subang Jaya, Selangor Darul Ehsan,  Malaysia |
| BAT Aspac Service Centre Sdn Bhd |
| Level 19, Guoco Tower, Damansara City, No. 6 Jalan Damanlela,  Bukit Damansara, 50490 Kuala Lumpur, Malaysia |
| British American Tobacco (Malaysia) Berhad (50%) |
| British American Tobacco Malaysia Foundation11 |
| Commercial Marketers and Distributors Sdn. Bhd. (100%) (50%)^ |
| Rothmans Brands Sdn. Bhd. (100%) (50%)^ (In Liquidation) |
| Tobacco Importers and Manufacturers Sdn. Bhd. (100%) (50%)^ |
| Mali |
| Djelibougoud-Immeuble Bassaro - BP 2065, Bamako, Mali |
| British American Tobacco (Mali) Sarl |
| Malta |
| PM Building, Level 2, Bone Street, Zone 1, Central Business  District, Birkirkara, CBD 1060, Malta |
| British American Tobacco (Malta) Limited |
| Central Cigarette Company Limited |
| Rothmans of Pall Mall (Malta) Limited |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Companies and Undertakings  Continued | | | | | | | |

304

|  |
| --- |
|  |
| Mexico |
| Francisco I Madero 2750 Norte, ZipCode 64000, Monterrey,  Nuevo Leon, Mexico |
| BAT DBS Mexico S.A De C.V4 |
| Francisco I Madero 2750 Poniente, Colonia Centro, Monterrey,  Nuevo León, C.P. 64000, Mexico |
| British American Tobacco Mexico Comercial, S.A. de C.V. |
| British American Tobacco Mexico, S.A. de C.V. |
| British American Tobacco Servicios S.A. de C.V. |
| Cigarrera La Moderna, S.A. de C.V. |
| Predio Los Sauces Sin número, Colonia Los Sauces, C.P. 63197,  Tepic, Nayarit, Mexico |
| Procesadora de Tabacos de Mexico, S.A. de C.V. (93%) |
| Mozambique |
| 2289 Avenida de Angola, Maputo, Mozambique |
| British American Tobacco Mozambique Limitada (95%) |
| Myanmar |
| Min Aye Yar Street, Plot No. (55, 56), Survey Ward No. (14) Shwe  Than Lwin Industrial Zone, Hlaing Tharyar Township Yangon  Region, Myanmar |
| British American Tobacco Myanmar Limited (95%)13 (In  Liquidation) |
| British American Tobacco Myanmar Services Limited13 (In  Liquidation) |
| Namibia |
| 24 Orban Street, Klein Windhoek, Namibia |
| Twisp (Pty) Limited |
| Shop 48, Second Floor Old Power Station Complex, Armstrong  Street, Windhoek, Namibia |
| British American Tobacco Namibia (Pty) Limited |
| Netherlands |
| Handelsweg 53 A, 1181 ZA, Amstelveen, Netherlands |
| Aruba Properties B.V. |
| B.A.T. Netherlands Finance B.V. |
| British American Tobacco European Operations Centre B.V. |
| British American Tobacco Exports B.V. |
| British American Tobacco Holdings (Australia) B.V. |
| British American Tobacco Holdings (Malaysia) B.V. |
| British American Tobacco Holdings (South Africa) B.V. |
| British American Tobacco Holdings (The Netherlands) B.V. |
| British American Tobacco Holdings (Venezuela) B.V. |
| British American Tobacco Holdings (Vietnam) B.V. |
| British American Tobacco International (Holdings) B.V. |
| Molensteegh Invest B.V. |
| Precis (1790) B.V. |
| Rothmans Far East B.V. |
| Rothmans International Holdings B.V. |
| Rothmans Tobacco Investments B.V. |
| Rothmans UK Holdings B.V. |
|  |

|  |
| --- |
|  |
| New Zealand |
| 2 Watt Street, Parnell, Auckland, 1052, New Zealand |
| BAT (New Zealand) Limited |
| BAT Holdings (New Zealand) Limited |
| Mint Advisory Limited, Suite 6, 8 Turua Street, St Heliers,  Auckland, 1071, New Zealand |
| New Zealand (UK Finance) Limited # |
| Nigeria |
| 1, Tobacco Road, Oluyole Local Government Area, Ibadan, Oyo  State, Nigeria |
| British American Tobacco (Nigeria) Limited |
| 2 Olumegbon Road, Ikoyi, Lagos, Nigeria |
| British American Tobacco Marketing Nigeria Limited (80%) |
| North Macedonia, Republic of |
| Blvd. 8-mi SEPTEMVRI No. 18, 1000 Skopje, Republic of North  Macedonia |
| TDR SKOPJE DOOEL Skopje |
| Norway |
| Dronning Eufemias gate 42. 0191 Oslo, Norway |
| British American Tobacco Norway AS |
| Pakistan |
| Bun Khurma Chichian Road, Mirpur Azad Jammu & Kashmir,  Pakistan |
| Phoenix (Private) Limited (100%) (94.65%)^ |
| First Floor, 26-FCC, Syed Maratab Ali Road,  Gulberg IV, Lahore, Pakistan |
| British American Tobacco SAA Services (Private) Ltd |
| Serena Business Complex. Khayaban-e-Suhrwardy, Islamabad,  Pakistan |
| Pakistan Tobacco Company Limited (94.65%) |
| Panama |
| Calle 54, Obarrio, PH Twist Tower, Piso 22, Oficina E-22,  Corregimiento Bella Vista, Ciudad de Panamá, Panama |
| British American Tobacco Central America S.A. (87.65%) |
| British American Tobacco Panama S.A. |
| Tabacalera Istmeña S.A. |
| Vía Fernández de Córdoba, Corregimiento of Pueblo Nuevo,  Panama City, Panama |
| BAT Caribbean, S.A. |
| Papua New Guinea |
| Ashurst Png, Level 11 Mrdc Haus, Cnr Of Musgrave Street And  Champion Parade, Port Moresby, National Capital District, Papua  New Guinea |
| British American Tobacco (PNG) Limited |
| Rothmans of Pall Mall (P.N.G.) Limited |
| Paraguay |
| Roque Centurion Miranda 1635, AYMAC II, Piso 2, Asunción,  Paraguay |
| British American Tobacco Productora de Cigarrillos S.A. |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
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|  |  |  |  |  |  |  |  |
|  | | | | | | | |

305

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| --- |
|  |
| Subsidiary Undertaking continued |
| Peru |
| Av. El Derby N° 055, Torre 3, Oficinas 405-406-407-408, Urb.  Lima Polo and Hunt Club, Santiago de Surco, Lima, Peru |
| British American Tobacco del Peru Holdings S.A. (98.55%)6 |
| British American Tobacco del Peru, S.A.C. |
| Philippines |
| 31 Tayuman Street, Tonda, Manila, Philippines |
| Alhambra Industries Inc. # |
| Poland |
| Aleja Wojska Polskiego 23c, 63-500, Ostrzeszow, Poland |
| CHIC sp. z o.o |
| ESMOKING LIQUIDS SP. Z O.O |
| Krakowiakow 46, 02-255, Warszawa, Poland |
| BAT DBS Poland sp. Z.o.o. |
| Krakowiakow 48, 02-255, Warszawa, Poland |
| British American Tobacco Polska Trading sp. zo.o. |
| Rubiez 46, 61-612, Poznan, Poland |
| eSMOKING INSTITUTE sp.zo |
| ul. IŁŻECKA 26E, 02-135WARSZAWA, Poland |
| Nicoventures Poland sp. Z.o.o. (In Liquidation) |
| Ul. Tytoniowa 16, 16-300, Augustow, Poland |
| British-American Tobacco Polska S.A. |
| Portugal |
| Edificio Amoreiras Square, Rua Carlos Alberto da Mota Pinto 17,  3e A, 1070-313, Amoreiras, Lisboa, Portugal |
| COTAPO Empreendimentos Commerciais e Industriais S.A. |
| Sociedade Unificada de Tabacos Limitada (76.4%) |
| Qatar |
| 61 Al Funduq St., Al Dafna, 8th floor – AL Fardan Office Tower,  P.O Box 31316, Doha, Qatar |
| BAT Gulf for Trading LLC |
| P.O. Box 6689, 41 Floor, Tornado Tower, West Bay, Doha, Qatar |
| British American Tobacco Q LLC |
| Réunion |
| 5, Immeuble Cap, Avenue Théodore Drouhet, ZAC Horizon 2000,  Le Port, 97420, IIe de la Réunion |
| B.A.T. La Réunion SAS |
| Romania |
| 319 Splaiul Independentei, Sema Parc “City Building”, 1st Floor,  6th Sector, Bucharest, Romania |
| British American Shared Services (Europe) S.R.L. |
| 319 Splaiul Independentei, Sema Parc “City Building”, 6th Floor,  6th Sector, Bucharest, Romania |
| BRITISH American GBS Recruitment S.R.L. |
| Bucharest Business Park, Building A (3rd floor) and Building B2  ( floors 3-4), 1A Bucuresti - Ploiesti (DN1) Road, Sector 1,  Bucharest 013681, Romania |
| British American Tobacco (Romania) Trading SRL |
| Ploiesti, 17-19 Laboratorului Street, Prahova County, Romania |
| British-American Tobacco (Romania) Investment S.R.L. |
|  |

|  |
| --- |
|  |
| Russia |
| 121614 Russia, Moscow, Krylatskaya st., 17, bld. 2, Russia |
| JSC ‘International Tobacco Marketing Services’ |
| 38, 3rd Konnaya Iakhta, Saint Petersburg, 197229, Russia |
| JSC ‘British American Tobacco-SPb’ # |
| Rwanda |
| SORAS Building, Boulevard de la Revolution P.O Box 650 Kigali,  Rwanda |
| British American Tobacco Rwanda Limited |
| Saint Lucia |
| c/o ADCO Incorporated, 10 Manoel Street, Castries, Saint Lucia |
| Carisma Marketing Services Ltd |
| Pointe Seraphine, Castries, Saint Lucia |
| Rothmans Holdings (Caricom) Ltd. |
| Samoa |
| Vaitele Estate, Vaitele, Samoa |
| British American Tobacco Company (Samoa) Limited |
| Saudi Arabia, Kingdom of |
| 7051 Al Amir Sultan-Al Salamah District, Unit 1302. Jeddah 23525  - 2661, Saudi Arabia |
| BAT Arabia for Trading |
| BAT Saudia for Trading |
| Office Pending |
| Regional HQ of British American Tobacco Middle East - Single  Person Company |
| Senegal |
| Almadies, Route Hôtel Méridien en Face Club Med, Dakar, BP  3174, Senegal |
| Tobacco Marketing Consultant TMC S.A.R.L (In Liquidation) |
| Serbia |
| Bulevar Milutina Milankovića 1ž, Belgrade, 11070, Serbia |
| British American Tobacco South – East Europe d.o.o. Beograd |
| Kralja Stefana Provenčanog 209, Vranje, 17500, Serbia |
| British American Tobacco Vranje a.d. Vranje |
| Singapore |
| 15 Senoko Loop, 758168, Singapore |
| British American Tobacco Sales & Marketing Singapore Pte. Ltd. |
| British-American Tobacco (Singapore) Private Limited |
| British-American Tobacco Marketing (Singapore) Private Limited |
| Shenton Way, #33-00 OUE Downtown, 068809, Singapore |
| RHL Investments Pte Limited # (In Liquidation) |
| Solomon Islands |
| Kukum Highway, Ranadi, Honiara, Honiara, Solomon Islands |
| Solomon Islands Tobacco Company Limited |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Companies and Undertakings  Continued | | | | | | | |

306

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| --- |
|  |
| South Africa |
| Waterway House South, 3 Dock Road, V&A Waterfront, Cape  Town, Western Cape 8002, South Africa |
| Agrega EEMEA (Pty) Ltd |
| Amalgamated Tobacco Corporation (South Africa) (Pty) Ltd (In  Liquidation) |
| American Cigarette Company (Overseas) (Pty) Ltd |
| Benson and Hedges (Pty) Ltd (In Liquidation) |
| British American Shared Services Africa Middle East (Pty) Ltd |
| British American Tobacco East and Southern Africa (Pty) Ltd |
| British American Tobacco GSD (South Africa) (Pty) Ltd |
| British American Tobacco Holdings South Africa (Pty) Ltd # |
| British American Tobacco Properties South Africa (Pty) Ltd. |
| British American Tobacco Services South Africa (Pty) Ltd |
| British American Tobacco South Africa (Pty) Ltd |
| Brown & Williamson Tobacco Corporation (Pty) Ltd |
| Business Venture Investments No 216 (Pty) Ltd |
| Carlton Cigarette Company (Pty) Ltd (In Liquidation) |
| John Chapman (Pty) Ltd (In Liquidation) |
| John Player and Sons (Pty) Ltd (In Liquidation) |
| Kentucky Tobacco Corporation (Pty) Ltd (In Liquidation) |
| Martins of London (Pty) Ltd (In Liquidation) |
| Rembrandt Tobacco Corporation (Overseas) (Pty) Ltd (In Liquidation) |
| Riggio Tobacco Corporation of New York (Pty) Ltd (In Liquidation) |
| Rothmans of Pall Mall London (Pty) Ltd (In Liquidation) |
| St Regis Tobacco Corporation (Pty) Ltd |
| Thomas Bear’s Son and Company (Pty) Ltd (In Liquidation) |
| Tobacco Research and Development Institute (Pty) Ltd |
| Twisp (Pty) Ltd |
| WD and HO. Wills (Pty) Ltd (In Liquidation) |
| Westminster Tobacco Company (Cape Town and London) (Pty)  Ltd (In Liquidation) |
| Winfield Tobacco Corporation (Pty) Ltd (In Liquidation) |
| Winston Tobacco Company (Pty) Ltd (In Liquidation) |
| Spain |
| Torreo Espacio, Paseo de la Castellana, 259D, 28046 Madrid,  Spain |
| British American Tobacco España, S.A. |
| Sri Lanka |
| 178 Srimath Ramanathan Mawatha, Colombo, 15, Sri Lanka |
| Ceylon Tobacco Company Plc (84.13%) |
| Sudan |
| Byblos Tower, Al-Muk Nemer Street, Postal Code 11111, P.O Box  1381, Khartoum, Sudan |
| Blue Nile Cigarette Company Limited |
| Swaziland |
| 213 King Mswati III Avenue West, Matsapha Industrial Site,  Matsapha, Swaziland |
| British American Tobacco Swaziland (Pty) Limited |
|  |

|  |
| --- |
|  |
| Sweden |
| Hyllie Boulevard 32, 215 32 Malmö, Sweden |
| Niconovum AB |
| Stenåldersgatan 23, 213 76 Malmö, Sweden |
| Fiedler & Lundgren AB |
| Västra Trädgårdsgatan 15, 11153 Stockholm, Sweden |
| British American Tobacco Sweden AB |
| Switzerland |
| c/o Bright Law AG, Bundesplatz 9, 6302 Zug, Switzerland |
| British American Tobacco International Limited (In Liquidation) |
| c/o British American Tobacco Switzerland S.A., Route de France  17, 2926 Boncourt, Switzerland |
| American-Cigarette Company (Overseas) Limited |
| BAT Switzerland Vending SA |
| Rothmans of Pall Mall Limited |
| c/o NBA Fiduciaire S.A., Route de la Glâne 107, 1752 Villars-sur-  Glâne, Switzerland |
| Intertab S.A. (50%) |
| Route de France 17, 2926 Boncourt, Switzerland |
| British American Tobacco Switzerland S.A. |
| Nicoventures Communications (Switzerland) SA |
| Tanzania |
| Acacia Estate Building, Kinondoni Road, P.O Box 288, Dar es  Salaam, Tanzania |
| BAT Distribution Tanzania Limited |
| British American Tobacco (Tanzania) Limited (In Liquidation) |
| International Cigarette Distributors Limited (99%) (In Liquidation) |
| Zanzibar Distribution Company Limited (99%) (In Liquidation) |
| Trinidad and Tobago |
| Corner Eastern Main Road and Mt. D’or Road, Champs Fleurs,  Trinidad and Tobago |
| The West Indian Tobacco Company Limited (50.13%) |
| Turkey |
| Orjin Maslak İş Merkezi, Eski Büyükdere Caddesi, Kat 9-10,  Maslak, Sarıyer, İstanbul |
| British American Tobacco Tütün Mamulleri Sanayi ve Ticaret  Anonim Sirketi |
| Uganda |
| 10th Floor, Lotis Towers, Plot 16 Mackinnon Road, Nakasero,  Kampala, Uganda |
| British American Tobacco Uganda Limited (90%) |
| Ukraine |
| 13-15 Bolsunovska Str, Kyiv, 01014, Ukraine |
| LLC “British American Tobacco Sales and Marketing Ukraine”1 |
| 21 Nezalezhnosti Str, Chernihiv Oblast, Prylucky, 17502, Ukraine |
| PJSC “A/T B.A.T. – Prilucky Tobacco Company” |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

307

|  |
| --- |
|  |
| Subsidiary Undertaking continued |
| United Arab Emirates |
| 2302-08, Smart Heights, Al Thanyah First, Dubai, United Arab  Emirates |
| BAT Middle East For Trading LLC |
| Jumeirah Business Centre 3, 37th Floor, Jumeirah Lake Towers,  Dubai, P.O. Box 337222, United Arab Emirates |
| British American Tobacco GCC DMCC |
| Jumeirah Business Centre 3, 38th Floor, Jumeirah Lake Towers,  Dubai, P.O. Box 337222, United Arab Emirates |
| British American Tobacco ME DMCC |
| Unit # 2680, DMCC Business Center- Level # 1, Jewellery &  Gemplex 3, Dubai, United Arab Emirates |
| British American Tobacco International DMCC |
| United Kingdom |
| 212-218 Upper Newtownards Road, Belfast, BT4 3ET, Northern  Ireland |
| Murray, Sons & Company, Limited |
| 7 More London, Riverside, London, SE1 2RT, United Kingdom |
| Ryesekks P.L.C. (50%) (In Liquidation) |
| Building 7, Chiswick Business Park, 566 Chiswick High Road,  London, W4 5YG, United Kingdom |
| 10 Motives Limited |
| British American Tobacco UK Limited |
| Nicoventures Retail (UK) Limited |
| Ten Motives Limited |
| Globe House, 1 Water Street, London, WC2R 3LA, United  Kingdom |
| Advanced Technologies (Cambridge) Limited |
| Allen & Ginter (UK) Limited |
| B.A.T (U.K. and Export) Limited |
| B.A.T Cambodia (Investments) Limited |
| B.A.T Far East Holding Limited |
| B.A.T Far East Leaf Limited |
| B.A.T Services Limited |
| B.A.T Uzbekistan (Investments) Limited |
| B.A.T Vietnam Limited |
| B.A.T. (Westminster House) Limited |
| B.A.T. China Limited |
| BAT Finance COP Limited |
| BATIF Dollar Limited |
| BATUS Limited |
| Big Ben Tobacco Company Limited |
| British American Shared Services (GSD) Limited |
| British American Shared Services Limited |
| British American Tobacco (AIT) Limited |
| British American Tobacco (GLP) Limited |
| British American Tobacco (Investments) Limited |
| British American Tobacco (Philippines) Limited |
| British American Tobacco (Serbia) Limited |
| British American Tobacco (South America) Limited |
| British American Tobacco China Holdings Limited |
| British American Tobacco Exports Limited |

|  |
| --- |
|  |
| British American Tobacco Georgia Limited |
| British American Tobacco Global Travel Retail Limited |
| British American Tobacco International Holdings (UK) Limited |
| British American Tobacco Investments (Central & Eastern  Europe) Limited |
| British American Tobacco Italy Investments Limited |
| British American Tobacco Italy Limited (In Liquidation) |
| British American Tobacco Korea (Investments) Limited |
| British American Tobacco Malaysia (Investments) Limited (In  Liquidation) |
| British American Tobacco Peru Holdings Limited |
| British American Tobacco UK Pension Fund Trustee Limited13 |
| British-American Tobacco (Mauritius) p.l.c. |
| Carreras Rothmans Limited # |
| Chelwood Trading & Investment Company Limited |
| East African Tobacco Company (U.K.) Limited (In Liquidation) |
| KBio Holdings Limited |
| Lord Extra Limited |
| Myddleton Investment Company Limited |
| Nicovations Limited |
| Nicoventures Holdings Limited |
| Nicoventures Trading Limited |
| Powhattan Limited |
| Precis (2396) Limited |
| Ridirectors Limited |
| Rothmans Exports Limited |
| Rothmans International Limited |
| Rothmans International Services Limited (In Liquidation) |
| Rothmans International Tobacco (UK) Limited |
| Rothmans of Pall Mall (Overseas) Limited (In Liquidation) |
| Rothmans Trading Limited (In Liquidation) |
| Ryservs (1995) Limited |
| Ryservs (No.3) Limited |
| Tobacco Exporters International Limited |
| Tobacco Marketing Consultants Limited |
| Venezuela Property Company Limited |
| Westanley Trading & Investment Company Limited |
| Westminster Tobacco Company Limited |
| Globe House, 2 Milford Lane, London, WC2R 3LN, United Kingdom |
| World Investment Company Limited (In Liquidation) |
| Globe House, 4 Temple Place, London, WC2R 2PG, United Kingdom |
| Amalgamated Tobacco Company Limited |
| American Cigarette Company (Overseas) Limited |
| Ardath Tobacco Company Limited |
| B.A.T Additional Retirement Benefit Scheme Trustee Limited |
| B.A.T Industries p.l.c. |
| B.A.T. International Finance p.l.c. \* |
| B.A.T. Operating Finance Limited |
| BATLaw Limited |
| BATMark Limited \* |
| Benson & Hedges (Overseas) Limited |
| British American Global Shared Services Limited |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Companies and Undertakings  Continued | | | | | | | |

308

|  |
| --- |
|  |
| British American Tobacco (1998) Limited \* |
| British American Tobacco (2009 PCA) Limited |
| British American Tobacco (2009) Limited # |
| British American Tobacco (2012) Limited |
| British American Tobacco (Brands) Limited |
| British American Tobacco (Corby) Limited |
| British American Tobacco (NGP) Limited |
| British American Tobacco Healthcare Trustee Limited |
| British American Tobacco Taiwan Logistics Limited |
| British-American Tobacco (Holdings) Limited |
| Brown & Williamson Tobacco Corporation (Export) Limited |
| Btomorrow Ventures Limited |
| Carreras Limited |
| Courtleigh of London Limited |
| Dunhill Tobacco of London Limited |
| John Sinclair Limited |
| Louisville Securities Limited |
| Moorgate Tobacco Co. Limited |
| Peter Jackson (Overseas) Limited |
| Precis (1789) Limited |
| Precis (1814) Limited # |
| Rothmans International Enterprises Limited |
| Rothmans of Pall Mall Limited (In Liquidation) |
| Senior Service (Overseas) Limited |
| South Western Nominees Limited (In Liquidation) |
| The London Tobacco Company Limited |
| The Water Street Collective Limited |
| Tobacco Insurance Company Limited (In Liquidation) |
| Weston (2009) Limited |
| Weston Investment Company Limited |
| United States |
| 251 Little Falls Drive, Wilmington, DE  19808, United States |
| B.A.T Capital Corporation |
| BATUS Holdings Inc. |
| BATUS Japan, Inc. |
| BATUS Retail Services, Inc. |
| British American Tobacco (Brands), Inc. |
| Brown & Williamson Holdings, Inc. |
| BT DE Investments Inc. |
| BTI 2014 LLC1 |
| BTomorrow Innovation Hub Inc. |
| Imasco Holdings Group, Inc. |
| Imasco Holdings, Inc. |
| ITL (USA) Limited |
| Louisville Corporate Services, Inc. |
| Nicoventures U.S. Limited |
|  |

|  |
| --- |
|  |
| 3700 Airpark Dr., Owensboro, KY 42301, United States |
| KBio Inc. |
| 401 N. Main Street, Winston-Salem, NC 27101, United States |
| Conwood Holdings, Inc. |
| EXP Homes, LLC1 |
| Lorillard Licensing Company LLC1 |
| Lorillard, LLC1 |
| Modoral Brands Inc. |
| Northern Brands International, Inc. |
| R. J. Reynolds Global Products, Inc. |
| R. J. Reynolds Tobacco Company |
| R. J. Reynolds Tobacco International, Inc. |
| R. J. Reynolds Vapor Company |
| R.J. Reynolds Tobacco Co. |
| R.J. Reynolds Tobacco Holdings, Inc. |
| RAI Innovations Company |
| RAI International, Inc. |
| RAI Services Company |
| RAI Strategic Holdings, Inc. |
| Reynolds American Inc. |
| Reynolds Brands Inc. |
| Reynolds Marketing Services Company |
| Reynolds Technologies, Inc. |
| RJR Realty Relocation Services, Inc. |
| RJR Vapor Co., LLC1 |
| Rosswil LLC1 |
| S.F. Imports, Inc. |
| Santa Fe Natural Tobacco Company, Inc. |
| Spot You More, Inc. |
| The Water Street Collective LLC1 |
| Vuse Stores LLC1 |
| 5106 Tradeport Dr., Memphis, TN 38141, United States |
| American Snuff Company, LLC1 |
| CSC-Lawyers Incorporating Service, 2710 Gateway Oaks Drive,  Suite 150N, Sacramento CA 95833-3505, United States |
| Genstar Pacific Corporation |
| Farmers Bank Building, Suite 1402, 301 N. Market Street,  Wilmington, DE 19801, United States |
| Reynolds Finance Company |
| Uruguay |
| Juncal 1392, Montevideo, Uruguay |
| Kellian S.A. |
| Uzbekistan |
| 77 Minor Passage, Tashkent, 100084, Uzbekistan |
| JSC JV “UZBAT A.O.” (97.38%) |
|  |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

309

|  |
| --- |
|  |
| Subsidiary Undertaking continued |
| Venezuela |
| Avenida Francisco de Miranda, Edificio Bigott, Los Ruices,  Caracas – Estado Miranda, 1010, Venezuela |
| Agrobigott, C.A. |
| Compania Anonima Cigarrera Bigott Sucesores |
| Distribuidora Bigott, C.A. |
| Avenida Francisco de Miranda, Torre Regelfall, Municipio Chacao,  Estado, Miranda, Caracas, Venezuela |
| Proyectos de Inversion BAT 1902 C.A. |
| Registro Mecantil Primero de la Circunscripción, Judical des  Distrito, Capital y Estado, Miranda, Venezuela |
| Agrega de Venezuela, Agreven, C.A. (50%) (In Liquidation) |
| Vietnam |
| 20/F MPlaza Saigon, 39 Le Duan Street, Ben Nghe ward,  District 1, Ho Chi Minh City, Vietnam |
| East Asia Area Services Company Limited8 |
| Area 8, Long Binh Ward, Bien Hoa City, Dong Nai Province, Vietnam |
| British American Tobacco – Vinataba (JV) (70%) |
| Lot 45C/I, Road #7, Vinh Loc Industrial Park, Binh Chanh District,  Ho Chi Minh City, Vietnam |
| VINA-BAT Joint Venture Company Limited (49%) |
| Zambia |
| Plot No. PH1 IND & 53 & 54, LS-MFEZ, Chifwema Road, Lusaka, Zambia |
| British American Tobacco (Zambia) plc (75%) |
| Zimbabwe |
| Manchester Road 1, Southerton, Harare, Zimbabwe |
| American-Cigarette Company (Overseas) (Private) Ltd |
| British American Tobacco Zimbabwe (Holdings) Limited (42.98%) |
| Rothmans Limited |

|  |
| --- |
|  |
| Associated Undertakings and Joint Ventures |
| Canada |
| 2800 Park Place, 666 Burrard Street, Vancouver, BC, V6C 2Z7, Canada |
| Charlotte's Web Holdings, Inc. 16 |
| 35 English Drive, Moncton, New Brunswick, E1E 3X3, Canada |
| Organigram Holdings Inc. (19.43%) |
| France |
| 88 Avenue des Ternes, 75017, Paris, France |
| Alcome SAS (24%)15 |
| Germany |
| Jägerstraße 28-31, 10117 Berlin, Germany |
| Sanity Group GmbH (16.3%)12 |
| Greece |
| Filonos 107-109, 185 35, Piraeus, Greece |
| Alternative Management of Tobacco Products Filters Societe  Anonyme (17.5%)15 |
| Hungary |
| H-6800 Hódmezóvásárhely, Erzsébeti út 5/b, Hungary |
| Országos Dohányboltellátó Korlátolt Felelosségu Társaság (49%) |
|  |

|  |
| --- |
|  |
| India |
| Azamabad, Andhra Pradesh, Hyderabad, 500 020, India |
| VST Industries Limited (32.16%)13 |
| Virginia House, 37, J.L. Nehru Road, Kolkata, 700071, India |
| ITC Limited (29.16%)13 |
| Italy |
| Via Messina, 38 – 20154 Milano, Italy |
| Erion Care (25%) 9 |
| Nepal |
| Shree Bal Sadan, Gha 2-513, Kantipath, Kathmandu, Nepal |
| Surya Nepal Pvt. Limited (61%) (19.79%) ^ |
| United Kingdom |
| 4a Station Parade, Uxbridge Road, London, W5 3LD, United  Kingdom |
| AYR Limited (13.14%)14 |
| United States |
| 12 Timber Creek Land, Newark, Delaware, 19711, United States |
| Steady State LLC (5.76%) 5 |
| 6160, Lusk Blvd, Suite C105, San Diego, CA, CA 92121, United States |
| ZabBio, Inc (49%)7 |
| Uzbekistan |
| Gulobod Village, Samarkand Region, 140100, Uzbekistan |
| FE "Samfruit" JSC (45.4%) |
| Yemen |
| P.O. Box 14, Sanna, Yemen |
| Kamaran Industry and Investment Company (31%) |
| P.O. Box 5302, Hoban, Taiz, Yemen |
| United Industries Company Limited (32%) |

|  |
| --- |
|  |
| Joint Operations |
| Hong Kong |
| 29/F, Oxford House, 979 King’s Road, Taikoo Place, Quarry Bay,  Hong Kong |
| CTBAT International Co. Limited (50%) |

Notes:

1.Ownership held in Membership Interest.

2.Ownership held in the class of Series F and 2nd Preferred shares.

3.Ownership held in the class of A shares (50%) and class of B shares (100%).

4.Ownership held in class of A shares and B shares.

5.Ownership held solely in class of Preference shares.

6.Ownership held in class of Ordinary and Investment Shares.

7.Ownership held in 49% share capital and 39% voting rights.

8.Ownership held in Registered Capital.

9.Ownership held in Voting shares.

10.Ownership held in Equity Units.

11.Company limited by guarantee.

12.Ownership held in Series B Preferred shares.

13.31 March year-end.

14.31 May year-end.

15.Accounted for as an investment at fair value through profit and loss.

16. Refer to Note 14, Investments in associates and joint ventures.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Group Companies and Undertakings  Continued | | | | | | | |

310

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | Notes | 2022  £m | 2021  £m |
| Assets |  |  |  |
| Fixed assets |  |  |  |
| Investments in Group undertakings | 2 | 27,798 | 27,809 |
| Current assets |  |  |  |
| Debtors | 3 | 12,135 | 11,329 |
| Cash at bank and in hand |  | 5 | 4 |
| Total current assets |  | 12,140 | 11,333 |
| Total assets |  | 39,938 | 39,142 |
|  |  |  |  |
| Equity |  |  |  |
| Capital and reserves |  |  |  |
| Called up share capital | 4a | 614 | 614 |
| Share premium account, capital redemption and merger reserves | 4b | 23,331 | 23,325 |
| Other reserves | 4c | 90 | 90 |
| Profit and loss account | 4d | 11,302 | 10,597 |
| Total shareholders’ funds |  | 35,337 | 34,626 |
| Perpetual hybrid bonds | 4e | 1,685 | 1,685 |
| Total equity | 4 | 37,022 | 36,311 |
|  |  |  |  |
| Liabilities |  |  |  |
| Creditors | 5 | 2,916 | 2,831 |
| Total liabilities |  | 2,916 | 2,831 |
| Total equity and liabilities |  | 39,938 | 39,142 |

The accompanying Notes on the Accounts are an integral part of the Parent Company financial statements.

On behalf of the Board

Luc Jobin

Chair

8 February 2023

@ denotes section, including accompanying text and tables, that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Balance Sheet@  British American Tobacco p.l.c. – at 31 December | | | | | | | |

311

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | Called up  share  capital  £m | Share  premium  account,  Capital  redemption  and Merger  Reserve  £m | Other  Reserves  £m | Profit  and  loss  account  £m | Total  Shareholders’  funds  £m | Perpetual  hybrid  bonds  £m | Total  Equity  £m |
| 1 January 2022 | 614 | 23,325 | 90 | 10,597 | 34,626 | 1,685 | 36,311 |
| Increase in share capital - share options | — | 6 | — | — | 6 | — | 6 |
| Profit for the financial year | — | — | — | 7,675 | 7,675 | — | 7,675 |
| Dividends – declared on equity shares | — | — | — | (4,915) | (4,915) | — | (4,915) |
| Consideration paid for share buy-back  programme | — | — | — | (2,012) | (2,012) | — | (2,012) |
| Consideration paid for purchase of own  shares held in Employee Share Ownership  Trusts | — | — | — | (76) | (76) | — | (76) |
| Perpetual hybrid bonds |  |  |  |  |  |  |  |
| Coupons paid (net of tax) | — | — | — | (48) | (48) | — | (48) |
| Other movements\* | — | — | — | 81 | 81 | — | 81 |
| 31 December 2022 | 614 | 23,331 | 90 | 11,302 | 35,337 | 1,685 | 37,022 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | Called up  share  capital  £m | Share  premium  account,  Capital  redemption  and Merger  Reserve  £m | Other  Reserves  £m | Profit  and  loss  account  £m | Total  Shareholders’  funds  £m | Perpetual  hybrid  bonds  £m | Total  Equity  £m |
| 1 January 2021 | 614 | 23,321 | 90 | 9,263 | 33,288 | — | 33,288 |
| Increase in share capital - share options | — | 4 | — | — | 4 | — | 4 |
| Profit for the financial year | — | — | — | 6,250 | 6,250 | — | 6,250 |
| Dividends - declared on equity shares | — | — | — | (4,904) | (4,904) | — | (4,904) |
| Consideration paid for purchase of own  shares held in Employee Share Ownership  Trusts | — | — | — | (66) | (66) | — | (66) |
| Perpetual hybrid bonds |  |  |  |  |  |  | — |
| Proceeds net of issuance costs and tax | — | — | — | — | — | 1,685 | 1,685 |
| Coupons paid (net of tax) | — | — | — | (5) | (5) | — | (5) |
| Other movements\* | — | — | — | 59 | 59 | — | 59 |
| 31 December 2021 | 614 | 23,325 | 90 | 10,597 | 34,626 | 1,685 | 36,311 |

Note:

\*Other movements includes share-based payments.

There was no difference between profit and loss for the period and total comprehensive income for the period.

The profit and loss account is stated after deducting the cost of treasury shares which was £7,106 million at 31 December 2022 (31

December 2021: £5,113 million).

@denotes section, including accompanying text and tables, that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Financial Statements |  |  |  |  |  |  |  |
| Statement of Changes in Equity@  British American Tobacco p.l.c. – for the year ended 31 December | | | | | | | |

312

1 Accounting policies

Basis of accounting

The financial statements of the Company have been prepared

in accordance with the Companies Act 2006 (‘the Act’) and in

accordance with Financial Reporting Standard 101 Reduced

Disclosure Framework (’FRS 101’).

In preparing these financial statements, the Company applies

the recognition, measurement and disclosure requirements

of UK-adopted international accounting standards, but makes

amendments where necessary in order to comply with the Act

and has set out below where advantage of the FRS 101 disclosure

exemptions has been taken, including those relating to:

–a cash flow statement and related notes;

–comparative period reconciliations;

–disclosures in respect of transactions with wholly

owned subsidiaries;

–disclosures in respect of capital management;

–the effects of new but not yet effective IFRSs; and

–disclosures in respect of the compensation of key

management personnel.

As the consolidated financial statements of the Group include

equivalent disclosures, the Company has also taken the

exemptions under FRS 101 available in respect of disclosures under

IFRS 2 related to group settled share-based payments.

The financial statements have been prepared on a going concern

basis under the historical cost convention except as described in

the accounting policy below on financial instruments. After

reviewing the annual budget, plans and financing arrangements,

the Directors consider that the Company has adequate resources

to continue in operational existence for a period of at least 12

months from the date of signing the financial statements, and that

it is therefore appropriate to continue to adopt the going concern

basis in preparing the financial statements.

The preparation of the financial statements requires the Directors

to make estimates and assumptions that affect the reported

amounts of revenues, expenses, assets and liabilities, and the

disclosure of contingent liabilities at the date of the financial

statements. The key estimates and assumptions are set out in

the accounting policies below, together with the related Notes

on the Accounts.

The critical accounting judgements include determination as to

whether the issue of perpetual hybrid bonds should be classified

as equity instead of borrowings (see note 4) and the determination

as to whether to recognise provisions and the exposures to

contingent liabilities (see note 7). Judgement is necessary to

assess the likelihood that a pending claim is probable (more likely

than not to succeed), possible or remote.

There are no critical accounting estimates which would have

a significant risk of a material adjustment within the next

financial year.

As permitted by Section 408 of the Act, the profit and loss of the

Company has not been presented in these financial statements.

The Company is a public limited company which is listed on the

London Stock Exchange and the Johannesburg Stock Exchange

and is incorporated and domiciled in the UK. In addition, the

Company’s shares are traded on the New York Stock Exchange in

the form of American Depository Shares (ADSs).

Foreign currencies

The functional currency of the Company is sterling. Transactions

arising in currencies other than sterling are translated at the rate

of exchange ruling on the date of the transaction.

Monetary assets and liabilities expressed in currencies other than

sterling are translated at rates of exchange ruling at the end of

the financial year. All exchange differences are taken to the profit

and loss account in the year. Amounts recognised in equity are

not retranslated.

Income

Income consists of dividend income from Group undertakings,

fee income from financial guarantees and interest income. These

are included in the profit and loss account when all contractual

or other applicable conditions for recognition have been met.

Dividend income is recognised at the same time as the paying

company recognises the liability to pay a dividend.

Taxation

Taxation is that chargeable on the profits for the period, together

with deferred taxation. Income tax charges, where applicable,

are calculated on the basis of tax laws enacted or substantively

enacted at the balance sheet date. A deferred tax asset is

recognised only to the extent that it is probable that future taxable

profits will be available against which the asset can be utilised.

Deferred tax is determined using the tax rates that have been

enacted or substantively enacted by the balance sheet date

and are expected to apply when the related deferred tax asset

is realised or deferred tax liability is settled. As required under

IAS 12 Income Taxes, deferred tax assets and liabilities are not

discounted.

Investments in Group companies

Investments in Group companies are stated at cost, together

with subsequent net capital contributions, less provisions for any

impairment in value, where appropriate.

Dividends

The Company recognises the interim dividend as an appropriation

of reserves in the period in which it is paid.

Repurchase of share capital

When share capital is repurchased, the amount of consideration

paid, including directly attributable costs, is recognised as a

deduction from equity. Repurchased shares which are not

cancelled, or shares purchased for the employee share ownership

trusts, are classified as treasury shares and presented as a

deduction from total equity.

Related parties

The Company has taken advantage of the exemption under

FRS 101 from disclosing transactions with related parties that

are wholly-owned subsidiaries of British American Tobacco

p.l.c. Group.

@ Denotes phrase, paragraph or similar that does not form part of BAT's Annual Report on

Form 20-F as filed with the SEC.

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313

Equity instruments

Instruments are classified as either financial liabilities or as

equity in accordance with the substance of the contractual

arrangements. Instruments that cannot be settled in the

Company’s own equity instruments and that include no

contractual obligation to deliver cash or another financial asset

are classified as equity. Equity instruments issued by the Company

are recognised at the proceeds received, net of issuance costs.

On 27 September 2021, the Company issued two €1 billion

perpetual hybrid bonds. As the Company has the unconditional

right to avoid transferring cash or another financial asset in

relation to these bonds, they are classified as equity instruments

in the financial statements.

Financial instruments

Financial assets and financial liabilities are recognised when the

Company becomes a party to the contractual provisions of the

relevant instrument and derecognised when it ceases to be a party

to such provisions. Such assets and liabilities are classified as

current if they are expected to be realised or settled within 12

months after the balance sheet date. If not, they are classified as

non-current.

Financial instruments are initially recognised at fair value.

The Company’s non-derivative financial assets, including debtors,

are held in order to collect contractual cash flows and are

subsequently carried at amortised cost. Non-derivative financial

liabilities, including creditors, are subsequently carried at

amortised cost using the effective interest method. Financial

guarantees are initially recorded at fair value, and subsequently

carried at this fair value less accumulated amortisation within

other creditors. Fees receivable in respect of these guarantees

are carried at discounted present value.

Derivative financial assets and liabilities are initially recognised,

and subsequently measured, at fair value, which includes accrued

interest receivable and payable where relevant. Changes in their

fair values are recognised in profit and loss.

The Company has accounted for the application of replacement

benchmark rates in accordance with the Amendments to

IFRS 9 Financial Instruments published in 2019 (phase 1) and

2020 (phase 2) .

Impairment of financial assets held at amortised cost

Loss allowances for expected credit losses on financial assets

which are held at amortised cost are recognised on the initial

recognition of the underlying asset. Allowances in respect of loans

and other receivables (debtors) are initially recognised at an

amount equal to 12-month expected credit losses. Where the

credit risk on the receivables has increased significantly since initial

recognition, allowances are measured at an amount equal to the

lifetime expected credit loss.

Share-based payments

The Company has equity-settled share-based compensation plans

in respect of Group employees.

Equity-settled share-based payments are measured at fair value

at the date of grant. The fair value determined at the grant date of

the equity-settled share-based payments is expensed over the

vesting period, based on the Group’s estimate of awards that will

eventually vest. For plans where vesting conditions are based on

total shareholder returns, the fair value at date of grant reflects

these conditions, whereas earnings per share vesting conditions

are reflected in the calculation of awards that will eventually vest

over the vesting period.

Fair value is measured by the use of the Black-Scholes option

pricing model, except where vesting is dependent on market

conditions when the Monte-Carlo option pricing model is used.

The expected life used in the models has been adjusted, based on

management’s best estimate, for the effects of non-transferability,

exercise restrictions and behavioural considerations.

The cost of these awards, less any direct recharges made to Group

companies, are recognised as capital contributions to investments

in subsidiaries.

Historically, the Company has used the British American Tobacco

Group Employee Trust (BATGET), which operates as an extension

of the Company, as the vehicle to obtain shares on market and

hold them in trust to satisfy outstanding awards. In addition, from

March 2020, the Company has utilised treasury shares acquired in

the share buy-back programme to satisfy shared-based payment

awards made to certain employees.

2 Investments in Group Companies

The Company’s directly-owned subsidiaries are British American Tobacco (1998) Limited, B.A.T. International Finance p.l.c. and BATMark

Limited. A full list of indirect subsidiaries and other undertakings as required by Section 409 of the Companies Act 2006 is shown from

page [301](#id739eb8a094346e4a1dd9989c862058f_8943) of the Group’s financial statements.

Movements in investments relate to Group share-scheme costs net of recharges to subsidiaries as well as amounts recognised in

relation to financial guarantees issued by the Company on behalf of Group subsidiaries.

The Directors are of the opinion that the individual investments in the subsidiary undertakings have a value not less than the amount at

which they are shown in the Balance Sheet.

Shareholdings at cost less provisions and other fixed asset investments

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| 1 January | 27,809 | 27,995 |
| Movements | (11) | (186) |
| 31 December | 27,798 | 27,809 |

@Denotes phrase, paragraph or similar that does not form part of BAT's Annual Report on Form 20-F as filed with the SEC.

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314

3 Debtors

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Amounts due from Group undertakings | 12,135 | 11,329 |
|  |  |  |
| Current | 9,339 | 8,591 |
| Non-current | 2,834 | 2,789 |
| Allowance account | (38) | (51) |
| 31 December | 12,135 | 11,329 |

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Allowance account |  |  |
| 1 January | 51 | 45 |
| Provided in year | 2 | 9 |
| Released during the year | (20) | (3) |
| Foreign exchange | 5 | — |
| 31 December | 38 | 51 |
| Current | 38 | 3 |
| Non-current | — | 48 |
| 31 December | 38 | 51 |

Included within amounts due from Group undertakings is an amount of £9,094 million (2021: £8,396 million) which is unsecured, interest-

bearing and repayable on demand. The receivable falls under the standard lending agreements within the Group which were revised to

take account of global benchmark interest rate reform. Prior to 1 August 2021 the applicable rate was based on the London InterBank

Interest Rate (LIBOR) and with effect from this date it is based on the Sterling Overnight Index Average (SONIA). Management consider

the replacement rates in the revised intercompany agreement to be economically equivalent to those used previously. The impact of the

change in rates was not significant to the Company.

Amounts due from Group undertakings include £1,364 million (2021: £1,291 million) representing the discounted value of the fees

receivable from the parental guarantees issued by the Company, of which £211 million (2021: £183 million) is due within one year and

£1,153 million (2021: £1,108 million) is due after more than one year.

Other amounts due from Group undertakings include:

–a balance of £841 million (2021: £841 million) which is unsecured, interest bearing and repayable in 2026, with an interest rate based

on SONIA + 1.070%; and

–a balance of £841 million (2021: £841 million) which is unsecured, interest bearing and repayable in 2029, with an interest rate based

on SONIA + 1.340%.

All other amounts owed by Group undertakings are unsecured, interest free and repayable on demand.

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315

4 Total Equity

(a) Called up Share Capital

|  |  |  |
| --- | --- | --- |
|  |  |  |
| Called up Share Capital | Ordinary Shares of 25p  each Number of shares | £m |
| Allotted and fully paid |  |  |
| 1 January 2022 | 2,456,617,788 | 614.15 |
| Changes during the year |  |  |
| –share option schemes | 249,632 | 0.06 |
| 31 December 2022 | 2,456,867,420 | 614.21 |
|  |  |  |
| Called up Share Capital | Ordinary Shares of 25p  each Number of shares | £m |
| Allotted and fully paid |  |  |
| 1 January 2021 | 2,456,591,597 | 614.14 |
| Changes during the year |  |  |
| –share option schemes | 26,191 | 0.01 |
| 31 December 2021 | 2,456,617,788 | 614.15 |

@Denotes phrase, paragraph or similar that does not form part of BAT's Annual Report on Form 20-F as filed with the SEC.

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| Notes on Accounts@  Continued | | | | | | | |

316

The Company’s ordinary shares are fully paid and no further contribution of capital may be required by the Company from the

shareholders. All ordinary shares rank equally with regard to participation in dividends and to share in the proceeds of the Company’s

residual assets upon a winding up of the Company. Shareholders may, by ordinary resolution, declare final dividends, but not in excess of

the amount recommended by the Directors. Holders of ordinary shares have no pre-emptive rights.

On a show of hands every shareholder who is present in person at a general meeting is entitled to one vote regardless of the number of

shares held by the shareholder, unless a poll is demanded. On a poll, every shareholder who is present in person or by proxy has one vote

for every share held by the shareholder. The Company’s Annual General Meeting voting is undertaken by way of a poll. All rights attached

to the Company’s shares held by the Group as Treasury shares are suspended until those shares are reissued.

Please refer to page [384](#id739eb8a094346e4a1dd9989c862058f_9078) for further detail of the provisions contained within the Articles of Association.

(b) Share premium account, capital redemption reserves and merger reserves

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  | Share premium  account  £m | Capital  redemption  reserves  £m | Merger  reserves  £m | Total  £m |
| 31 December 2022 | 114 | 101 | 23,116 | 23,331 |
| 31 December 2021 | 108 | 101 | 23,116 | 23,325 |
| 31 December 2020 | 104 | 101 | 23,116 | 23,321 |

Share premium

£5 million (2021: £nil) of the increase in share premium relates to ordinary shares issued under the Company's share option schemes.

These schemes are described in the Remuneration Report. A further £1 million (2021: £4 million) increase in share premium is related to

shares repurchased and not cancelled that have been transferred from the Company to other Group undertakings, to be granted to

employees on vesting of awards, and represents the excess of transfer price of the share over the original weighted average cost of

shares.

Capital redemption reserve

On the purchase of own shares, as part of the share buy-back programme for shares which are cancelled, a transfer is made from

retained earnings to the capital redemption reserve equivalent to the nominal value of the shares purchased. The Company suspended

its previous share buy-back programme from 30 July 2014. On 10 February 2022, the Board approved a £2 billion share buy-back

programme for 2022, which was concluded on 14 December 2022. Shares purchased under this programme have not been cancelled.

Merger reserve

In 2017, the Company announced the completion of the acquisition of the remaining 57.8% of Reynolds American Inc. it did not already

own. Pursuant to the Merger Agreement, the Company, on behalf of its indirect subsidiary BATUS Holdings Inc (’BATUS’), agreed to issue

new shares, represented by American Depositary Shares, for the benefit of Reynolds American Inc. shareholders. In consideration for the

Company issuing new shares, BATUS agreed to issue to the Company an assignable obligation owed by BATUS to issue shares to the

holder of that obligation. As a consequence, the Company issued 429,045,762 new shares with a nominal value of £107,261,441.

In accordance with Section 612 of the Companies Act 2006, the excess of the fair value of the shares issued over the nominal value of the

shares has been treated as a merger reserve.

(c) Other reserves

As part consideration for the acquisition of Rothmans International BV in 1999, convertible redeemable preference shares were issued by

the Company. The discount on these shares was amortised by crediting other reserves and charging retained earnings. The balance of

£90 million in other reserves comprises the accumulated balance in respect of the preference shares converted during 2004.

(d) Profit and loss account

As permitted by Section 408 of the Companies Act 2006, the profit and loss of the Company has not been presented in these Financial

Statements. The profit for the year ended 31 December 2022 was £7,675 million (2021: £6,250 million).

Dividend distributions to the Company’s shareholders are recognised in the period in which these are paid. The Company makes four

interim quarterly dividend payments.

Details of Directors’ remuneration, share options and retirement benefits are given in the Remuneration Report in the Group Annual

Report and Accounts. Details of key management compensation are included in note 30 of the Group financial statements. The

Company had two employees at 31 December 2022 (2021: two). These two employees are Jack Bowles and Tadeu Marroco. The details of

their remuneration are shown on page [164](#iff8934d3734b44f4b1d79b07b59bc890_58945) of the Group’s Annual Report and Accounts for the year ended 31 December 2022. The costs

of these employees are borne by another Group company.

Shareholders' funds are stated after deducting the cost of treasury shares which include £6,821 million (2021: £4,823 million) for shares

repurchased and not cancelled and £285 million (2021: £290 million) in respect of the cost of own shares held in Employee Share

Ownership Trusts. In 2022, the value of shares repurchased and not cancelled has increased, representing the value of shares that have

been acquired during the year as part of the share buy-back programme.

As at 31 December 2022 treasury shares include 5,621,012 (2021: 5,995,678) of shares held in trust and 221,000,192 (2021: 161,930,217) of

shares repurchased and not cancelled as part of the company's share buy-back programme which was relaunched in 2022. From March

2020, the Company has utilised shares acquired in the share buy-back programme to satisfy share-based payment awards made to

certain employees. Other movements in shareholders’ funds relate to the recognition of share-based payments and the release of

treasury shares as a result of the exercise of share options.

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317

(e) Perpetual hybrid bonds

On 27 September 2021, the Company issued two €1 billion perpetual hybrid bonds, which have been classified as equity. Issuance costs of

these bonds, amounting to €26 million (£22 million), have been recognised in equity, net of tax of £4 million. These bonds include

redemption options exercisable at the Company’s discretion from September 2026 to December 2026 (the 3% perpetual hybrid bond)

and June 2029 to September 2029 (the 3.75% perpetual hybrid bond), on specified dates thereafter, or in the event of specific

circumstances (such as a change in IFRS or tax regime) as set out in the individual terms of each issue.

The coupons associated with these perpetual bonds are fixed at 3% until 2026 and 3.75% until 2029, respectively, and would reset to

rates determined by the contractual terms of each instrument on certain dates thereafter. The bonds are perpetual in nature and do not

have maturity dates for the repayment of principal. The contractual terms of the perpetual hybrid bonds allow the Company to defer

coupon payments, however certain contingent events could trigger mandatory payments of such deferred coupons, including the

payment of dividends on and repurchase of ordinary shares, subject to certain exceptions in each case. As the Company has the

unconditional right to avoid transferring cash or another financial asset in relation to these bonds, they are classified as equity

instruments in these financial statements. The Company has not deferred any eligible coupon payments to date.

In September 2022 the Company paid a coupon of £33 million on the 3.75% September 2029 bond and in December 2022 a coupon of

£27 million (2021: £6 million) on the 3% December 2026 bond which have been recognised within equity. The fair value of these bonds at

31 December 2022 is £1,331 million (2021: £1,651 million).

5 Creditors

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022  £m | 2021  £m |
| Amounts due to Group undertakings | 28 | 8 |
| Loans due to Group undertakings | 1,571 | 1,571 |
| Other creditors | 1,310 | 1,244 |
| Deferred income | 7 | 8 |
|  | 2,916 | 2,831 |
| Current | 208 | 1,746 |
| Non-current | 2,708 | 1,085 |
|  | 2,916 | 2,831 |

Amounts due to Group undertaking of £28 million (2021: £8 million) are unsecured, interest free and repayable on demand. Loans due to

Group undertakings of £1,571 million (2021: £1,571 million) are unsecured, bear interest at rates based on SONIA between 0.19% and 3.42%

(2021: 1.47% and 1.50%, based on LIBOR), and are repayable in 2027. Included in other creditors are amounts in respect of subsidiary

undertaking borrowings guaranteed by the Company of £1,274 million (2021: £1,211 million). Out of this amount, a total of £146 million

(2021: £134 million) represents amounts to be released within one year.

6 Audit Fees

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 2022 | 2021 |
| Fees payable to KPMG |  |  |
| –Audit fees (borne by another Group Company) | £30,000 | £30,000 |

7 Contingent Liabilities

British American Tobacco p.l.c. has guaranteed borrowings by subsidiary undertakings of £40.7 billion (2021: £36.6 billion) and total

borrowing facilities of £55.7 billion (2021: £50.9 billion).

The Company has cross-guaranteed the liabilities of the British American Tobacco UK Pension Fund (“Fund”), which had a surplus

according to the last formal triennial valuation in March 2020 of £139 million on a Technical Provisions basis, in accordance with the

statutory funding objective. The Trustee of the Fund also has a Long-Term Funding Target to be fully funded on a Solvency Liabilities

basis by 2026, and on this basis the Fund had a surplus of £7 million at the valuation date. On an IAS 19 basis at 31 December 2022 of

£143 million (2021: £293 million). Contributions by the principal employer to the Fund in accordance with the agreed schedule of

contributions are expected to be £36 million in 2023.

In addition, there are contingent liabilities in respect of litigation in various countries (note 31 in the Notes on the Accounts).

8 Post Balance Sheet Events

On 02 February 2023, the fourth quarterly interim dividend of 54.45p (£1,211 million) declared by the Directors in February 2022, and

reconfirmed to the market prior to 31 December 2022, was paid to shareholders. The impact of this on the Company was to reduce the

level of profit and loss reserve from £11,302 million to £10,091 million.

In addition, on 8 February 2023, the Board declared an interim dividend of 230.9p per ordinary share of 25p for the year ended 31

December 2022, payable in four equal quarterly instalments of 57.72p per ordinary share in May, August, November 2023 and February

2024. These payments will be recognised as appropriations from reserves in 2023 and 2024. The total amount payable is estimated to be

£5,163 million based on the number of shares outstanding at the date of these accounts. In addition, on 08 February 2022 the Board

approved a £2 billion share repurchase program for 2022 as part of a new longer-term active capital allocation framework.

@Denotes section, including accompanying text and tables, that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.

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318

[Additional Disclosures](#id739eb8a094346e4a1dd9989c862058f_2578)

[Information on the Group](#id739eb8a094346e4a1dd9989c862058f_2599) .......................................................................................................................................................................................................................…. [321](#id739eb8a094346e4a1dd9989c862058f_2599)

[Selected Financial Information](#id739eb8a094346e4a1dd9989c862058f_2620) ............................................................................................................................................................................................................…. [322](#id739eb8a094346e4a1dd9989c862058f_2620)

[Non-Financial Measures](#id739eb8a094346e4a1dd9989c862058f_2641) ...............................................................................................................................................................................................................….......…. [323](#id739eb8a094346e4a1dd9989c862058f_2641)

Non-GAAP Measures ...............................................................................................................................................................................................................….............…. [325](#id739eb8a094346e4a1dd9989c862058f_10316)

[Employees](#id739eb8a094346e4a1dd9989c862058f_3095) ...............................................................................................................................................................................................................….............…......................... [338](#id739eb8a094346e4a1dd9989c862058f_3095)

[Additional Disclosures on Liquidity and Capital Resources](#id739eb8a094346e4a1dd9989c862058f_3116) ..................................................................................................................................................... [339](#id739eb8a094346e4a1dd9989c862058f_3116)

[Summary of Group Risk Factors](#id739eb8a094346e4a1dd9989c862058f_3217) ..............................................................................................................................................................................................................[341](#id739eb8a094346e4a1dd9989c862058f_3217)

[Group Risk Factors](#id739eb8a094346e4a1dd9989c862058f_3328) ...............................................................................................................................................................................................................….............…....... [342](#id739eb8a094346e4a1dd9989c862058f_3328)

[Regulation of the Group’s Business](#id739eb8a094346e4a1dd9989c862058f_4392) ...................................................................................................................................................................................................… [363](#id739eb8a094346e4a1dd9989c862058f_4392)

[Material Contracts](#id739eb8a094346e4a1dd9989c862058f_4753) ...............................................................................................................................................................................................................….............…....... [368](#id739eb8a094346e4a1dd9989c862058f_4753)

[Property, Plant and Equipment](#id739eb8a094346e4a1dd9989c862058f_4845) ............................................................................................................................................................................................................... [370](#id739eb8a094346e4a1dd9989c862058f_4845)

[Raw Materials](#id739eb8a094346e4a1dd9989c862058f_4888) ...............................................................................................................................................................................................................….............…................. [370](#id739eb8a094346e4a1dd9989c862058f_4888)

[U.S. Corporate Governance Practices](#id739eb8a094346e4a1dd9989c862058f_4910) ..................................................................................................................................................................................................[371](#id739eb8a094346e4a1dd9989c862058f_4910)

[Controls and Procedures](#id739eb8a094346e4a1dd9989c862058f_5052) ...............................................................................................................................................................................................................…......…. [372](#id739eb8a094346e4a1dd9989c862058f_5052)

[Statements Regarding Competitive Position](#id739eb8a094346e4a1dd9989c862058f_5155) ................................................................................................................................................................................. [372](#id739eb8a094346e4a1dd9989c862058f_5155)

Directors’ Report Information ...............................................................................................................................................................................................................… [373](#id739eb8a094346e4a1dd9989c862058f_8586)

[Cautionary Statement](#id739eb8a094346e4a1dd9989c862058f_5309) ...............................................................................................................................................................................................................….............… [374](#id739eb8a094346e4a1dd9989c862058f_5309)

[Shareholder Information](#id739eb8a094346e4a1dd9989c862058f_8454)

[Share Prices and Listings](#id739eb8a094346e4a1dd9989c862058f_8435) ...............................................................................................................................................................................................................….......... [375](#id739eb8a094346e4a1dd9989c862058f_8435)

[Dividends](#id739eb8a094346e4a1dd9989c862058f_9036) ...............................................................................................................................................................................................................….............…............................ [376](#id739eb8a094346e4a1dd9989c862058f_9036)

[Shareholder Taxation Information](#id739eb8a094346e4a1dd9989c862058f_9019) ......................................................................................................................................................................................................... [378](#id739eb8a094346e4a1dd9989c862058f_9019)

[Share Capital and Security Ownership](#id739eb8a094346e4a1dd9989c862058f_9060) ............................................................................................................................................................................................... [382](#id739eb8a094346e4a1dd9989c862058f_9060)

[Articles of Association](#id739eb8a094346e4a1dd9989c862058f_9078) ...............................................................................................................................................................................................................….............… [384](#id739eb8a094346e4a1dd9989c862058f_9078)

[Purchase of Shares](#id739eb8a094346e4a1dd9989c862058f_9168) ...............................................................................................................................................................................................................….............…....... [387](#id739eb8a094346e4a1dd9989c862058f_9168)

[Group Employee Trust](#id739eb8a094346e4a1dd9989c862058f_9150) ...............................................................................................................................................................................................................…................ [389](#id739eb8a094346e4a1dd9989c862058f_9150)

[American Depositary Shares](#id739eb8a094346e4a1dd9989c862058f_9132) ...............................................................................................................................................................................................................….. [390](#id739eb8a094346e4a1dd9989c862058f_9132)

[Shareholding Administration and Services](#id739eb8a094346e4a1dd9989c862058f_9114) ....................................................................................................................................................................................... [391](#id739eb8a094346e4a1dd9989c862058f_9114)

[Exhibits](#id739eb8a094346e4a1dd9989c862058f_9096) ...............................................................................................................................................................................................................….............…................................ [392](#id739eb8a094346e4a1dd9989c862058f_9096)

[Other Information](#id739eb8a094346e4a1dd9989c862058f_8628)

[Glossary](#id739eb8a094346e4a1dd9989c862058f_8983) ...............................................................................................................................................................................................................….............…...............................[395](#id739eb8a094346e4a1dd9989c862058f_8983)

[Cross-Reference to Form-20F](#id739eb8a094346e4a1dd9989c862058f_9001) ............................................................................................................................................................................................................…. [396](#id739eb8a094346e4a1dd9989c862058f_9001)

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319

Overview

British American Tobacco p.l.c. is the parent holding company of

the Group, a leading consumer-centric, multi-category consumer

goods company that provides tobacco and nicotine products to

millions of consumers around the world. According to the Group’s

internal estimates, the BAT Group is a market leader by volume in

more than 50 markets.

The Group, excluding the Group’s associated undertakings,

is organised into four regions:

–the United States of America (Reynolds American Inc.);

–Asia-Pacific and the Middle East (APME);

–Americas and Sub-Saharan Africa (AmSSA); and

–Europe.

From 2023, the Group will reduce to three regions, being the

United States, Americas & Europe (AME) and Asia-Pacific, Middle

East & Africa (APMEA), as discussed on page [209](#i7f26a72bfe184bda86632d29b4d0b67c_64629).

The Group’s range of combustible products covers all segments,

from value-for-money to premium with a portfolio of international,

regional and local tobacco brands to meet a broad array of adult

tobacco consumer preferences wherever the Group operates.

The Group has also built a portfolio of reduced risk\*† tobacco and

nicotine products – including Vapour products, Tobacco Heating

Products (THPs) and Modern Oral products, which are collectively

termed the New Categories, as well as Traditional Oral products.

The Group manages a globally-integrated supply chain and its

products are distributed to retail outlets worldwide.

History and development of BAT

The Group has had a significant global presence in the tobacco

industry for over 100 years. BAT Ltd. was incorporated in 1902,

when the Imperial Tobacco Company and the American Tobacco

Company agreed to form a joint venture company. BAT Ltd.

inherited companies and quickly expanded into major markets,

including India and Ceylon, Egypt, Malaya, Northern Europe and

East Africa. In 1927, BAT Ltd. expanded into the U.S. market

through its acquisition of B&W.

During the 1960s, 1970s and 1980s, the Group diversified its

business under the umbrella of B.A.T Industries p.l.c., with

acquisitions in the paper, cosmetics, retail and financial services

industries, among others. Various business reorganisations

followed as the business was eventually refocused on the Group’s

core cigarette, cigars and tobacco products businesses with BAT

becoming a separately listed entity on the LSE in 1998.

The following is a summary of the significant mergers, acquisitions

and disposals undertaken since 1998:

–1999 – global merger with Rothmans International;

–2000 – acquisition of Imperial Tobacco Canada;

–2003 – acquisition of Ente Tabacchi Italiani S.p.A., Italy’s state-

owned tobacco company, Tabacalera Nacional in Peru and

Duvanska Industrija Vranje in Serbia;

–2004 - the U.S. assets, liabilities and operations, other than

certain specified assets and liabilities, of BAT’s wholly-owned

subsidiary, B&W, were combined with RJR Tobacco Company

to form Reynolds American Inc. As a result of the B&W business

combination, B&W acquired beneficial ownership of

approximately 42% of the Reynolds American Inc. shares;

–2008 – acquisition of Tekel, the Turkish state-owned tobacco

company and the cigarette and snus business of Skandinavisk

Tobakskompagni A/S;

–2009 - acquisition of an effective 99% interest in Bentoel

in Indonesia;

–2011 – acquisition of Protabaco in Colombia;

–2012 – acquisition of CN Creative Limited in the UK;

–2013 – entered into joint operations in China;

–2015 – acquisition of the shares not already owned by the Group

in Souza Cruz in Brazil, the acquisition of the CHIC Group in

Poland, the acquisition of TDR d.o.o., a cigarette manufacturer in

Central Europe. Also in 2015, the Group increased its investment

in Reynolds American Inc. by US$4.7 billion to maintain the

Group’s approximate 42% equity position following Reynolds

American Inc.’s purchase of Lorillard Inc.;

–2016 – acquisition of Ten Motives in the UK;

–2017 – acquisition of the remaining 57.8% of Reynolds American

Inc. the Group did not already own. Following completion of the

acquisition, Reynolds American Inc. became an indirect, wholly-

owned subsidiary of BAT and is no longer a publicly-held

corporation. In 2017, the Group also acquired certain tobacco

assets from Bulgartabac Holding AD in Bulgaria and Fabrika

Duhana Sarajevo (FDS) in Bosnia, acquired Winnington Holdings

AB in Sweden and acquired certain assets from Must Have

Limited in the UK, including the electronic cigarette brand ViP;

–2018 – acquisition of Quantus Beteiligungs-und

Beratungsgesellschaft mbH in Germany;

–2019 – acquisition of Twisp Proprietary Limited in South Africa

and 60% of VapeWild Holdings LLC in the U.S.;

–2020 – acquisition of the nicotine pouch product assets of Dryft

Sciences, LLC (Dryft) in the U.S. and the acquisition of Eastern

Tobacco Company for Trading in Saudi Arabia;

–2021 – entry into a strategic research and product development

collaboration agreement with Organigram Inc., a licensed

producer of cannabis and cannabis-derived products in Canada

and a wholly-owned subsidiary of publicly-traded Organigram

Holdings Inc., and acquisition of a 19.9% equity stake in

Organigram Holdings Inc.. Also in 2021, the Group disposed of its

Iranian subsidiary, BAT Pars Company PJSC; and

–2022 – acquisition of a 16% equity stake in Sanity Group

GmbH, a German cannabis company. In 2022, the Group also

made an investment, via a convertible debenture in the amount

of c.£48 million, into Charlotte’s Web Holdings, Inc., a U.S.-based

hemp extract wellness products business.

British American Tobacco p.l.c. was incorporated in July 1997 under

the laws of England and Wales as a public limited company and is

domiciled in the United Kingdom.

Seasonality

The Group’s business segments are not significantly affected

by seasonality although in certain markets cigarette consumption

trends rise during summer months due to longer daylight time

and tourism.

Patents and trademarks

Our trademarks, which include the brand names under which our

products are sold, are key assets which we consider, in the

aggregate, to be important to the business as a whole. As well as

protecting our brand names by way of trademark registration, we

also protect our innovations by means of patents and designs in

key global jurisdictions.

Board oversight of M&A transactions

The Company’s Board has strategic oversight of significant

M&A transactions (determined by value or strategic nature of

transaction), which are referred to it for noting under the Group

Statement of Delegated Authorities (SoDA).

Other M&A transactions are referred for strategic oversight to the

Management Board or other applicable senior forum or persons,

under the Group SoDA. Those referral requirements under the

Group SoDA apply alongside any requirement for corporate

approval of M&A transactions by or within a Group company.

Notes:

\*Based on the weight of evidence and assuming a complete switch from

cigarette smoking. These products are not risk free and are addictive.

† Our Vapour product Vuse (including Alto, Solo, Ciro and Vibe), and certain products,

including Velo, Grizzly, Kodiak, and Camel Snus, which are sold in the U.S., are subject to

FDA regulation and no reduced-risk claims will be made as to these products without

agency clearance.

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320

This information set out below has been derived from, in part, the audited consolidated financial statements of the Group commencing

on page [196](#id739eb8a094346e4a1dd9989c862058f_4). This selected financial information should be read in conjunction with the consolidated financial statements and the

Strategic Report.

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|  | As of and for the Year Ended 31 December | | | | |
| All items shown in £m except per share information | 2022 | 2021 | 2020 | 2019 | 2018 |
| Income statement data |  |  |  |  |  |
| Revenue2 | 27,655 | 25,684 | 25,776 | 25,877 | 24,492 |
| Raw materials and consumables used | (4,781) | (4,542) | (4,583) | (4,599) | (4,664) |
| Changes in inventories of finished goods and work in progress | 227 | 160 | 445 | 162 | 114 |
| Employee benefit costs | (2,972) | (2,717) | (2,744) | (3,221) | (3,005) |
| Depreciation, amortisation and impairment costs | (1,305) | (1,076) | (1,450) | (1,512) | (1,038) |
| Other operating income | 722 | 196 | 188 | 163 | 85 |
| Loss on reclassification from amortised cost to fair value | (5) | (3) | (3) | (3) | (3) |
| Other operating expenses | (9,018) | (7,468) | (7,667) | (7,851) | (6,668) |
| Profit from operations | 10,523 | 10,234 | 9,962 | 9,016 | 9,313 |
| Net finance costs | (1,641) | (1,486) | (1,745) | (1,602) | (1,381) |
| Share of post-tax results of associates and joint ventures | 442 | 415 | 455 | 498 | 419 |
| Profit before taxation | 9,324 | 9,163 | 8,672 | 7,912 | 8,351 |
| Taxation on ordinary activities | (2,478) | (2,189) | (2,108) | (2,063) | (2,141) |
| Profit for the year | 6,846 | 6,974 | 6,564 | 5,849 | 6,210 |
| Per share data |  |  |  |  |  |
| Basic weighted average number of ordinary shares, in millions | 2,256 | 2,287 | 2,286 | 2,284 | 2,285 |
| Diluted weighted average number of ordinary shares, in millions | 2,267 | 2,297 | 2,295 | 2,291 | 2,292 |
| Earnings per share-basic (pence) | 293.3p | 296.9p | 280.0p | 249.7p | 264.0p |
| Earnings per share-diluted (pence) | 291.9p | 295.6p | 278.9p | 249.0p | 263.2p |
| Dividends per share (pence)3 | 230.9p | 217.8p | 215.6p | 210.4p | 203.0p |
| Balance sheet data |  |  |  |  |  |
| Assets |  |  |  |  |  |
| Non-current assets | 138,137 | 124,558 | 124,078 | 127,731 | 133,687 |
| Current assets | 15,409 | 12,807 | 13,612 | 13,274 | 12,655 |
| Total assets | 153,546 | 137,365 | 137,690 | 141,005 | 146,342 |
| Liabilities |  |  |  |  |  |
| Non-current liabilities | 59,983 | 54,820 | 59,257 | 58,022 | 64,325 |
| Current liabilities | 17,853 | 15,144 | 15,478 | 18,823 | 16,329 |
| Total borrowings | 43,139 | 39,658 | 43,968 | 45,366 | 47,509 |
| Equity |  |  |  |  |  |
| Share capital | 614 | 614 | 614 | 614 | 614 |
| Total equity | 75,710 | 67,401 | 62,955 | 64,160 | 65,688 |
| Cash flow data |  |  |  |  |  |
| Net cash generated from operating activities | 10,394 | 9,717 | 9,786 | 8,996 | 10,295 |
| Net cash used in investing activities | (705) | (1,140) | (783) | (639) | (1,021) |
| Net cash used in financing activities | (8,878) | (8,749) | (7,897) | (8,593) | (9,630) |

Notes:

1.All of the information above is in respect of continuing operations, revised for the fully retrospective adoption of IFRS 15.

2.Revenue is net of duty, excise and other taxes of £38,527 million, £38,595 million, £39,172 million, £39,826 million and £38,553 million for the years ended 31 December 2022, 2021, 2020,

2019, and 2018, respectively.

3.In February 2023, the BAT Directors declared an interim dividend of 230.9 pence per share for the year ended 31 December 2022, payable in four equal instalments of 57.72 pence per

ordinary share. The interim dividend will be paid to BAT shareholders in May 2023, August 2023, November 2023 and February 2024. The equivalent quarterly dividends receivable by

holders of ADSs in US dollars will be calculated based on the exchange rate on the applicable payment date.

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321

Volume

Volume is defined as the number of units sold. Units may vary between categories. This can be summarised for the principal metrics as

follows:

–Factory made cigarettes (FMC) – sticks, regardless of weight or dimensions;

–Roll-Your-Own/Make-Your-Own – kilos, converted to a stick equivalent based upon 0.8 grams (per stick equivalent) for Roll-Your-Own

and between 0.5 and 0.7 grams (per stick equivalent) for Make-Your-Own;

–Traditional oral – pouches (being 1:1 conversion to stick equivalent) and kilos, converted to a stick equivalent based upon 2.8 grams

(per stick equivalent) for Moist Snuff, 2.0 grams (per stick equivalent) for Dry Snuff and 7.1 grams (per stick equivalent) for other oral;

–Modern Oral – pouches, being 1:1 conversion to stick equivalent;

–Tobacco Heat sticks – sticks, being 1:1 conversion to stick equivalent; and

–Vapour – pods and 10 millilitre bottles. There is no conversion to a stick equivalent.

Volume is recognised in line with IFRS 15 Revenue from Contracts with Customers, based upon transfer of control. It is assumed that

there is no material difference, in line with the Group’s recognition of revenue, between the transfer of control and shipment date.

Volume is used by management and investors to assess the relative performance of the Group and its brands within categories, given

volume is a principal determinant of revenue.

Volume Share

Volume share is the number of units bought by consumers of a specific brand or combination of brands, as a proportion of the total units

bought by consumers in the industry, category or other sub-categorisation. Sub-categories include, but are not limited to, the total

nicotine category, Modern Oral, Vapour, Traditional Oral, total oral or cigarette. Except when referencing particular markets, volume

share is based on our key markets (representing around 70% of the Group’s cigarette and THP volume).

Where possible, the Group utilises data provided by third-party organisations, including AC Nielsen, based upon retail audit of sales to

consumers. In certain markets, where such data is not available, other measures are employed which assess volume share based upon

other movements within the supply chain, such as sales to retailers. This may depend on the provision of data to the industry by the

customers including distributors/wholesalers.

Volume share is used by management to assess the relative performance to the Group and its brands against the performance of its

competitors in the categories and geographies in which the Group operates. This measure is also useful to understand the Group’s

performance when seeking to grow scale within a market or category from which future financial returns can be realised. The Group’s

management believes that this measure is useful to investors to understand the relative performance of the Group and its brands

against the performance of its competitors in the categories and geographies in which the Group operates.

Volume share in each year compares the average volume share in the year with the average volume share in the prior year. This is a more

robust measure of performance, removing short-term volatility that may arise at a point in time.

However, in certain circumstances, related to periods of introduction to a market, in order to illustrate the latest performance, data may

be provided as at the end of the period rather than the average in that period. In these instances the Group states these are at a specific

date (for instance, December 2022).

Value Share

Value share is the retail value of units bought by consumers of a particular brand or combination of brands, as a proportion of the total

retail value of units bought by consumers in the industry, category or other sub-categorisation in discussion. Except when referencing

particular markets, value share is based on our key markets (representing around 80% of the Group’s cigarette and THP value).

Where possible, the Group utilises data provided by third-party organisations, including AC Nielsen, based upon retail audit of sales to

consumers. In certain markets, where such data is not available, other measures are employed which assess value share based upon

other movements within the supply chain, such as sales to retailers. This may depend on the provision of data to the industry by the

customers (including distributors and wholesalers).

Value share is used by management to assess the relative performance of the Group and its brands against the performance of its

competitors in the categories and geographies in which the Group operates, specifically indicating the Group’s ability to realise value

relative to the market. The measure is particularly useful when the Group’s products and/or the relevant category in the market in which

they are sold has developed or achieved scale from which value can be realised. The Group’s management believes that this measure is

useful to investors to apprehend the relative performance of the Group and its brands against the performance of its competitors in the

categories and geographies in which the Group operates, specifically indicating the Group’s ability to realise value relative to the market.

Value share in each year compares the average value share in the year with the average value share in the prior period. This is a more

robust measure of performance, removing short-term volatility that may arise at a point of time. However, in certain circumstances,

related to periods of introduction to a market, in order to illustrate the latest performance, data may be provided that is as at the end of the

period rather than the average in that period. In these instances the Group states these are at a specific date (for instance, December 2022).

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322

Price Mix

Price mix is a term used by management and investors to explain the movement in revenue between periods. Revenue is affected by the

volume (how many units are sold) and the value (how much is each unit sold for). Price mix is used to explain the value component of the

sales as the Group sells each unit for a value (price) but may also achieve a movement in revenue due to the relative proportions of higher

value volume sold compared to lower value volume sold (mix).

This term is used to explain the Group’s relative performance between periods only. It is calculated as the difference between the

movement in revenue (between periods) and volume (between periods). For instance, the decline in combustibles revenue (excluding

translational foreign exchange movements) of 0.6% in 2022, with a decline in combustibles volume of 5.2% in 2022, leads to a price mix

of 4.6% in 2022. No assumptions underlie this metric as it utilises the Group’s own data.

Non-Combustible Consumers

The number of consumers of Non-Combustible products is defined as the estimated number of Legal Age (minimum 18 years)

consumers of the Group’s Non-Combustible products. In markets where regular consumer tracking is in place, this estimate is obtained

from adult consumer tracking studies conducted by third parties (including Kantar). In markets where regular consumer tracking is not in

place, the number of consumers of Non-Combustible products is derived from volume sales of consumables and devices in such

markets, using consumption patterns obtained from other similar markets with consumer tracking (utilising studies conducted by third

parties including Kantar).

The number of Non-Combustible products consumers is used by management to assess the number of consumers regularly using the

Group’s New Categories products as the increase in Non-Combustible products is a key pillar of the Group’s ESG Ambition and is

integral to the sustainability of our business.

The Group’s management believes that this measure is useful to investors given the Group’s ESG ambition and alignment to the

sustainability of the business with respect to the Non-Combustibles portfolio.

% of farms monitored for child labour; % of farms with incidents of child labour identified; Number of child labour

incidents identified; % reported as resolved by end of the growing season

Data in relation to our contracted farmers is collected by BAT field technicians (FTs) who visit our contracted farmers approximately

once a month during the growing season. Details of each visit are recorded in our Farmer Sustainability Management (FSM) digital app

by the FTs and are formally acknowledged by the farmer. If any child labour case is identified, it is reported in the system and treated as a

critical prompt action. For this to be closed, it is followed by an unannounced visit within 14 days to observe whether this is repeated and

an agreed remediation plan agreed with the farmer. The remediation plan varies from case to case, considering the individual

circumstances.

Our strategic third-party suppliers collect data for Thrive via their own FTs, in their own farm monitoring systems.

Once the data is collected in the field, the country team analyses the data and approve it or reopen the questions for discussion with the

farmers. After that, the data is reported in Thrive and made available to the Global Leaf ESG team. The data is also reviewed by an

independent third-party.

The definition of child labour used to identify child labour incidents is hazardous child labour as defined by the ILO Convention No. 138 on

Minimum Age and ILO Convention No. 182 on the Worst Forms of Child Labour.

Ethnically Diverse Group

For the purposes of D&I Reporting, the following definitions are used. Ethnically diverse groups includes global ethnic groups Hispanic/

Latin American, Black, Asian, Indigenous, Mixed, Other (Arabs/Middle Eastern and Turkish). In 2022, we expanded the scope of our

confidential voluntary ethnicity identity collection and reporting beyond the UK to six additional markets (Australia, Brazil, Canada,

Malaysia, South Africa and the U.S.).

Senior Leadership Teams

Members of senior leadership teams are defined as any employee who is either a direct report of a Management Board member or a

direct report of a Management Board’s direct report.

Some MB-1 and MB-2 employees are double-counted in this calculation to account for those who feature on one or more senior

leadership teams, given their dual accountability.

% Women in Management Roles

The number of female management-grade employees, as a percentage of the total number of management-grade employees.

Management-grade employees include all employees at job grade 34 or above, as well as any global graduates. The gender of each

employee is typically recorded at the point of hire.

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323

To supplement the presentation of the Group’s results of operations and financial condition in accordance with IFRS, we also present

several non-GAAP measures used by management to monitor the Group’s performance. The Group’s management regularly reviews

the measures used to assess and present the financial performance of the Group and, as relevant, its geographic segments.

Changes to Non-GAAP measures in 2022

During 2022, the Group introduced a non-GAAP KPI measure called "Category Contribution", which is used within the Group's incentive

schemes. This measure demonstrates the contribution to Group profit from operations (before the impact of adjusting items and

translational foreign exchange and after directly attributable category specific costs) of the principal product categories of New

Categories (in aggregate) and the rest of the Group, reflecting the focus of the Group's investment activity.

The Group also introduced the non-GAAP KPI metric "adjusted cash generated from operations", which is used within the Group’s

incentive schemes. This provides an assessment of the cash generated in the period (excluding litigation payments, dividends received

from associates, and after dividends paid to non-controlling interests, net interest paid and net capital expenditure), which is a measure

of the cash generated by the underlying operations of the Group.

Revenue at constant rates of exchange

Definition – revenue before the impact of foreign exchange.

To supplement BAT’s revenue presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-

maker, reviews revenue at constant rates of exchange to evaluate the underlying business performance of the Group and its geographic

segments. The Group’s Management Board defines this measure as revenue retranslated at the prior periods rate of exchange. In prior

periods this was also presented before the impact of adjusting items (specifically the excise on bought-in goods that the Group acquired

and sold which, for the period 2017 to 2019, has been recorded in accordance with IFRS as a cost of sale and within revenue, with a

dilutive effect on operating margin).

In 2022 and 2021, as the short-term arrangements ceased or were immaterial, the goods are manufactured by the Group, and the excise,

in accordance with Group policy, is not included in cost of sales or revenue. In 2019, this excise included in revenue led to a reduction in

revenue and improvement in operating margin that did not represent the underlying performance of the Group. As such, the excise on

bought-in goods in 2019 met the Group’s definition of an adjusting item, as defined in note 1 in the Notes on the Accounts.

The Group’s Management Board also believes that revenue at constant rates of exchange provides information that enables investors to

better compare the Group’s business performance across periods. This measure has limitations as an analytical tool. The most directly

comparable IFRS measure to revenue, at constant rates of exchange, is revenue. Revenue at constant rates of exchange is not a

presentation made in accordance with IFRS, and is not a measure of financial condition or liquidity and should not be considered as an

alternative to revenue as determined in accordance with IFRS. Revenue at constant rates of exchange is not necessarily comparable to

similarly titled measures used by other companies. As a result, you should not consider this performance measure in isolation from, or as

a substitute analysis for, BAT’s results as determined in accordance with IFRS.

The table below reconciles the Group’s revenue to revenue at constant rates of exchange for the periods presented. The movement in

2020 is against revenue in 2019 that was adjusted for the excise on bought in goods in 2019. Refer to note 2 in the Notes on the Accounts

for further discussion of the segmental results and for the reconciliation of revenue at current and constant rates of exchange to

segmental revenue and to Group revenue for the years ended 31 December 2022, 2021 and 2020.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Revenue | 27,655 | 25,684 | 25,776 |
| Impact of translational foreign exchange | (1,382) | 1,877 | 894 |
| 2022 revenue re-translated at 2021 exchange rates | 26,273 |  |  |
| 2021 revenue re-translated at 2020 exchange rates |  | 27,561 |  |
| 2020 revenue re-translated at 2019 exchange rates |  |  | 26,670 |
| Change in revenue at prior year’s exchange rates (constant rates) | 2.3% | 6.9% | 3.3% |

Note:

The movement in 2020 of 3.3% is based upon revenue in 2019 of £25,776 million which excluded excise on goods bought-in on short-term arrangements in the amount of £50 million.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Non-GAAP Measures | | | | | | | |

324

Revenue by Product Category or Geographic Segment – Including Revenue From New Categories, at constant rates of

exchange

Definition – revenue by product category, and at the prior year’s prevailing exchange rate, derived from the principal product

categories of Combustibles, New Categories (being comprised of revenue from Vapour, THP and Modern Oral), and Traditional

Oral, including by the geographic segments of the United States, Europe, Americas and Sub-Saharan Africa and Asia-Pacific

and Middle East.

To supplement BAT’s revenue presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-

maker, reviews revenue growth from the principal product categories of combustibles, New Categories and Traditional Oral, including

from the geographic segments of the United States, Europe, Americas and Sub-Saharan Africa and Asia-Pacific and Middle East, to

evaluate the underlying business performance of the Group reflecting the focus of the Group’s investment activity. The Group’s

Management Board assesses revenue by product category, including by geographic segment, at constant rates of exchange, translated

to the Group’s reporting currency at the prior period’s prevailing exchange rate, derived from the Group’s combustible portfolio (including

but not limited to Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Camel (U.S.), Newport (U.S.), Natural American Spirit (U.S.)), the Group’s

New Category portfolio (being Vapour, THP and Modern Oral) and the Group’s Traditional Oral portfolio and the Group’s operations in the

United States, Europe, Americas and Sub-Saharan Africa and Asia-Pacific and Middle East.

The Group’s Management Board also believes that the revenue performance by product category, including by geographic segment

provides information that enables investors to better compare the Group’s business performance across periods and by reference to the

Group’s investment activity. Revenue by product category, including by geographic segment have limitations as analytical tools. The

most directly comparable IFRS measure to revenue by product category, including by geographic segment, is revenue. Revenue by

product category, including by geographic segment, are not presentations made in accordance with IFRS, are not measures of financial

condition or liquidity and should not be considered as alternatives to revenue as determined in accordance with IFRS. Revenue by

product category, including by geographic segment, are not necessarily comparable to similarly titled measures used by other

companies. As a result, you should not consider these performance measures in isolation from, or as a substitute analysis for, BAT’s

results as determined in accordance with IFRS.

Reconciliation of revenue by product category to revenue by product category at constant rates of exchange – 2022 - 2021

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2022 | | | | |  | 2021 |
|  | Reported  £m | vs 2021  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2021  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 1,436 | +54.9% | (103) | 1,333 | +43.8% |  | 927 |
| THP | 1,060 | +24.3% | 21 | 1,081 | +26.7% |  | 853 |
| Modern Oral | 398 | +45.3% | 1 | 399 | +45.6% |  | 274 |
| Total New Categories | 2,894 | +40.9% | (81) | 2,813 | +37.0% |  | 2,054 |
| Traditional Oral | 1,209 | +8.2% | (117) | 1,092 | -2.3% |  | 1,118 |
| Combustibles | 23,030 | +4.5% | (1,142) | 21,888 | -0.6% |  | 22,029 |
| Other | 522 | +7.6% | (42) | 480 | -0.8% |  | 483 |
| Revenue | 27,655 | +7.7% | (1,382) | 26,273 | +2.3% |  | 25,684 |

Reconciliation of revenue by product category to revenue by product category at constant rates of exchange – 2021 - 2020

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2021 | | | | |  | 2020 |
|  | Reported  £m | vs 2020  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2020  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 927 | +51.8% | 46 | 973 | +59.3% |  | 611 |
| THP | 853 | +34.4% | 74 | 927 | +46.1% |  | 634 |
| Modern Oral | 274 | +38.8% | 4 | 278 | +40.6% |  | 198 |
| Total New Categories | 2,054 | +42.4% | 124 | 2,178 | +50.9% |  | 1,443 |
| Traditional Oral | 1,118 | -3.6% | 77 | 1,195 | +3.0% |  | 1,160 |
| Combustibles | 22,029 | -3.2% | 1,640 | 23,669 | +4.0% |  | 22,752 |
| Other | 483 | +14.7% | 36 | 519 | +23.1% |  | 421 |
| Revenue | 25,684 | -0.4% | 1,877 | 27,561 | +6.9% |  | 25,776 |

Note:

cc: constant currency – measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year’s results of the Group and, where applicable, its

geographical segments or product categories.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

325

Reconciliation of revenue by product category to revenue by product category at constant rates of exchange

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2022 | | | | |  | 2021 |
| U.S. | Reported  £m | vs 2021  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2021  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 913 | +62.9% | (92) | 821 | +46.4% |  | 561 |
| THP | — | -69.1% | — | — | -72.3% |  | 1 |
| Modern Oral | 36 | n/m | (3) | 33 | n/m |  | 2 |
| Total New Categories | 949 | +68.7% | (95) | 854 | +51.6% |  | 564 |
| Traditional Oral | 1,174 | +8.9% | (119) | 1,055 | -2.1% |  | 1,077 |
| Combustibles | 10,470 | +4.5% | (1,061) | 9,409 | -6.1% |  | 10,015 |
| Other | 46 | +27.9% | (6) | 40 | +14.9% |  | 35 |
| Revenue | 12,639 | +8.1% | (1,281) | 11,358 | -2.8% |  | 11,691 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2021 | | | | |  | 2020 |
| U.S. | Reported  £m | vs 2020  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2020  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 561 | +46.4% | 40 | 601 | +56.9% |  | 383 |
| THP | 1 | -21.8% | — | 1 | -16.2% |  | 1 |
| Modern Oral | 2 | -81.5% | — | 2 | -80.1% |  | 10 |
| Total New Categories | 564 | +43.0% | 40 | 604 | +53.3% |  | 394 |
| Traditional Oral | 1,077 | -4.3% | 78 | 1,155 | +2.6% |  | 1,126 |
| Combustibles | 10,015 | +0.9% | 719 | 10,734 | +8.1% |  | 9,926 |
| Other | 35 | +26.9% | 2 | 37 | +36.0% |  | 27 |
| Revenue | 11,691 | +1.9% | 839 | 12,530 | +9.2% |  | 11,473 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2022 | | | | |  | 2021 |
| AmSSA | Reported  £m | vs 2021  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2021  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 218 | +55.1% | (11) | 207 | +47.0% |  | 141 |
| THP | — | — | — | — | — |  | — |
| Modern Oral | 1 | n/m | — | 1 | -100.0% |  | — |
| Total New Categories | 219 | +55.6% | (11) | 208 | +47.5% |  | 141 |
| Traditional Oral | — | — | — | — | — |  | — |
| Combustibles | 3,751 | +9.2% | (186) | 3,565 | +3.8% |  | 3,435 |
| Other | 233 | +3.2% | (27) | 206 | -8.7% |  | 225 |
| Revenue | 4,203 | +10.6% | (224) | 3,979 | +4.7% |  | 3,801 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2021 | | | | |  | 2020 |
| AmSSA | Reported  £m | vs 2020  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2020  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 141 | +115% | — | 141 | +115% |  | 65 |
| THP | — | — | — | — | — |  | — |
| Modern Oral | — | -99% | — | — | -100.0% |  | 1 |
| Total New Categories | 141 | +114% | — | 141 | +113.8% |  | 66 |
| Traditional Oral | — | — | — | — | — |  | — |
| Combustibles | 3,435 | -3% | 244 | 3,679 | +4.1% |  | 3,535 |
| Other | 225 | +32% | 22 | 247 | +44.7% |  | 171 |
| Revenue | 3,801 | +1% | 266 | 4,067 | +7.8% |  | 3,772 |

Note:

cc: constant currency – measures are calculated based on a re-translation of the current year’s results of the Group at the prior year’s exchange rates and, where applicable, its

geographical segments or product categories.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Non-GAAP Measures  Continued | | | | | | | |

326

Reconciliation of revenue by product category to revenue by product category at constant rates of exchange

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2022 | | | | |  | 2021 |
| Europe | Reported  £m | vs 2021  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2021  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 286 | +37.9% | 1 | 287 | +38.5% |  | 207 |
| THP | 537 | +57.3% | (14) | 523 | +53.3% |  | 341 |
| Modern Oral | 348 | +30.8% | 4 | 352 | +32.3% |  | 266 |
| Total New Categories | 1,171 | +43.7% | (9) | 1,162 | +42.7% |  | 814 |
| Traditional Oral | 35 | -12.3% | 2 | 37 | -7.7% |  | 41 |
| Combustibles | 4,996 | -0.6% | 87 | 5,083 | +1.2% |  | 5,024 |
| Other | 144 | +16.9% | (3) | 141 | +15.1% |  | 122 |
| Revenue | 6,346 | +5.7% | 77 | 6,423 | +7.0% |  | 6,001 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2021 | | | | |  | 2020 |
| Europe | Reported  £m | vs 2020  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2020  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 207 | +40.2% | 5 | 212 | +43.8% |  | 148 |
| THP | 341 | +149.7% | 23 | 364 | +167% |  | 136 |
| Modern Oral | 266 | +43.9% | 3 | 269 | +45.6% |  | 185 |
| Total New Categories | 814 | +73.6% | 31 | 845 | +80.3% |  | 469 |
| Traditional Oral | 41 | +18.2% | (1) | 40 | +18.1% |  | 34 |
| Combustibles | 5,024 | -6.2% | 390 | 5,414 | +1.1% |  | 5,356 |
| Other | 122 | -8.9% | 8 | 130 | -4.9% |  | 135 |
| Revenue | 6,001 | +0.1% | 428 | 6,429 | +7.3% |  | 5,994 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2022 | | | | |  | 2021 |
| APME | Reported  £m | vs 2021  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2021  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 19 | +4.3% | (1) | 18 | +1.7% |  | 18 |
| THP | 523 | +2.3% | 35 | 558 | +9.1% |  | 511 |
| Modern Oral | 13 | +117.0% | — | 13 | +121.2% |  | 6 |
| Total New Categories | 555 | +3.7% | 34 | 589 | +10.1% |  | 535 |
| Traditional Oral | — | —% | — | — | —% |  | — |
| Combustibles | 3,813 | +7.3% | 18 | 3,831 | +7.8% |  | 3,555 |
| Other | 99 | -0.9% | (6) | 93 | -7.8% |  | 101 |
| Revenue | 4,467 | +6.6% | 46 | 4,513 | +7.7% |  | 4,191 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
|  | 2021 | | | | |  | 2020 |
| APME | Reported  £m | vs 2020  % | Impact of  exchange  £m | Reported at cc  £m | Reported at cc  vs 2020  % |  | Reported  £m |
| New Categories: |  |  |  |  |  |  |  |
| Vapour | 18 | +26.0% | 1 | 19 | +27.5% |  | 15 |
| THP | 511 | +2.8% | 51 | 562 | +13.0% |  | 497 |
| Modern Oral | 6 | +179.3% | 1 | 7 | +199% |  | 2 |
| Total New Categories | 535 | +4.2% | 53 | 588 | +14.2% |  | 514 |
| Traditional Oral | — | — | — | — | — |  | — |
| Combustibles | 3,555 | -9.6% | 287 | 3,842 | -2.3% |  | 3,935 |
| Other | 101 | +13.0% | 4 | 105 | +20.1% |  | 88 |
| Revenue | 4,191 | -7.6% | 344 | 4,535 | 0.0% |  | 4,537 |

Note:

cc: constant currency – measures are calculated based on a re-translation of the current year’s results of the Group at the prior year’s exchange rates and, where applicable, its

geographical segments or product categories.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

327

Adjusted Profit From Operations and Adjusted Operating Margin

Definition – profit from operations before the impact of adjusting items and adjusted profit from operations as a percentage

of revenue.

To supplement BAT’s results from operations presented in accordance with IFRS, the Group’s Management Board, as the chief operating

decision‑maker, reviews adjusted profit from operations to evaluate the underlying business performance of the Group and its

geographic segments, to allocate resources to the overall business and to communicate financial performance to investors. The Group

also presents adjusted operating margin, which is defined as adjusted profit from operations as a percentage of revenue. Adjusted profit

from operations and adjusted operating margin are not measures defined by IFRS. The most directly comparable IFRS measure to

adjusted profit from operations is profit from operations.

Adjusting items, as identified in accordance with the Group’s accounting policies, represent certain items of income and expense which

the Group considers distinctive based on their size, nature or incidence. In identifying and quantifying adjusting items, the Group

consistently applies a policy that defines criteria that are required to be met for an item to be classified as adjusting and provides details

of items that are specifically excluded from being classified as adjusting items. Adjusting items in profit from operations include

restructuring and integration costs, amortisation of trademarks and similar intangibles, impairment of goodwill and charges in respect of

certain litigation. The definition of adjusting items is explained in note 1 in the Notes on the Accounts.

The Group’s Management Board believes that these additional measures are useful to investors and are used by the Group’s

Management Board as described above, because they exclude the impact of adjusting items which have less bearing on the routine

ongoing operating activities of the Group, thereby enhancing users’ understanding of underlying business performance. The Group’s

Management Board also believes that adjusted profit from operations provides information that enables investors to better compare the

Group’s business performance across periods. Additionally, the Group’s Management Board believes that similar measures are

frequently used by securities analysts, investors and other interested parties in their evaluation of companies comparable to the Group,

many of which present an adjusted operating profit-related performance measure when reporting their results. Adjusted profit from

operations and adjusted operating margin have limitations as analytical tools. They are not presentations made in accordance with IFRS,

are not measures of financial condition or liquidity and should not be considered as alternatives to profit for the year, profit from operations

or operating margin as determined in accordance with IFRS. Adjusted profit from operations and adjusted operating margin are not

necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider these performance

measures in isolation from, or as a substitute analysis for, BAT’s results of operations as determined in accordance with IFRS.

The table below reconciles the Group’s profit from operations to adjusted profit from operations, and to adjusted profit from operations

at constant rates based on a re-translation of adjusted profit from operations for each year, at the previous year’s exchange rates, and

provides adjusted operating margin for the periods presented. Refer to note 2 in the Notes on the Accounts for further discussion of the

segmental results and for the reconciliation of adjusted profit from operations at current and constant rates of exchange to segmental

profit from operations and to Group profit for the years ended 31 December 2022, 2021 and 2020.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Profit from operations | 10,523 | 10,234 | 9,962 |
| Add: |  |  |  |
| Restructuring and integration costs | 771 | 150 | 408 |
| Amortisation and impairment of trademarks and similar intangibles | 285 | 306 | 339 |
| Impairment of Goodwill | — | 57 | 209 |
| Income in respect of an excise dispute in Russia | — | — | (40) |
| Charge in respect of MSA liabilities related to brands sold to a third party | — | — | 400 |
| Credit in respect of partial buy-out of the pension fund in the U.S. | (16) | (35) | — |
| Charges in connection with impairment on held-for-sale assets and associated costs | 612 | — | — |
| Charges in connection with disposal of subsidiaries | (6) | 358 | — |
| Credit in respect of calculation of VAT on social contributions in Brazil | (460) | — | — |
| Charges in respect of DOJ and OFAC investigations | 450 | — | — |
| Charges in respect of  Nigerian FCCPC case | 79 | — | — |
| Other adjusting items (including Engle) | 170 | 80 | 87 |
| Adjusted profit from operations | 12,408 | 11,150 | 11,365 |
| Operating margin | 38.1% | 39.8% | 38.6% |
| Adjusted operating margin | 44.9% | 43.4% | 44.1% |
| Impact of translational foreign exchange | (782) | 802 | 296 |
| 2022 adjusted profit from operations re-translated at 2021 exchange rates | 11,626 |  |  |
| 2021 adjusted profit from operations re-translated at 2020 exchange rates |  | 11,952 |  |
| 2020 adjusted profit from operations re-translated at 2019 exchange rates |  |  | 11,661 |
| Change in adjusted profit from operations at prior year’s exchange rates (constant rates) | +4.3% | +5.2% | +4.8% |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Non-GAAP Measures  Continued | | | | | | | |

328

Category Contribution at constant rates of exchange

Definition – Profit from operations before the impact of adjusting items and translational foreign exchange, having allocated

costs that are directly attributable to New Categories.

@To supplement BAT’s performance presented in accordance with IFRS, the Group’s Management Board, as the chief operating

decision‑maker, reviews the contribution to Group profit from operations (before the impact of adjusting items and translational foreign

exchange) of the principal product categories of New Categories (in aggregate) and the rest of the Group, reflecting the focus of the

Group's investment activity.@ Category contribution is used by management within the Group's incentive schemes, as reported within

the Remuneration Report beginning on page [159](#ida856e84a2c74b1280a26293040319de_403712).

@The Group’s Management Board believes that this additional measure provides information that enables investors to better compare

the Group's business performance across periods and by reference to the Group's investment activity.@ Category contribution by

products as a measure of Group performance has limitations as an analytical tool. They are not presentations made in accordance with

IFRS, are not measures of financial condition or liquidity and should not be considered as alternatives to profit from operations as

determined in accordance with IFRS. Category contribution is not necessarily comparable to similarly titled measures used by other

companies. @As a result, you should not consider such performance measures in isolation from, or as a substitute analysis for, BAT’s

results of operations as determined in accordance with IFRS.@

The table below reflects the marginal contribution of the New Categories products to the Group’s financial performance. This measure

includes all directly attributable revenue and costs. This measure is provided in aggregate as certain costs are incurred across all New

Categories and are not product specific. However, other overhead costs that are shared between New Categories and Rest of Business

are borne by the Rest of Business as they are deemed to be incurred regardless of the performance of New Categories.

|  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |
|  | For the year ended 31 December (£m) | | | | | | | | |
|  |  |  |  |  | 2022 |  |  |  | 2021 |
|  | Reported | Adj Items | Adjusted | Exchange | Adjusted  at cc |  | Reported | Adj Items | Adjusted |
| Profit from Operations | 10,523 | 1,885 | 12,408 | (782) | 11,626 |  | 10,234 | 916 | 11,150 |
| As delivered through: |  |  |  |  |  |  |  |  |  |
| New Categories contribution |  |  |  |  | (375) |  |  |  | (953) |
| Rest of Group contribution |  |  |  |  | 12,001 |  |  |  | 12,103 |

Note:

CC: constant currency – measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year’s results of the Group and, where applicable, its

geographical segments or product categories.

Adjusted Net Finance Costs

Definition – Net finance costs before the impact of adjusting items.

To supplement BAT’s performance presented in accordance with IFRS, the Group’s net finance costs are also presented before adjusting

items (as defined in note 1 in the Notes on the Accounts). The Group’s Management Board believes that adjusted net finance costs

provides information that enables investors to better compare the Group’s business performance across periods. The Group’s

Management Board uses adjusted net finance costs as part of the total assessment of the underlying performance of all the Group’s

business interests. Adjusted net finance costs has limitations as an analytical tool. It is not a presentation made in accordance with IFRS,

is not a measure of financial condition or liquidity, and should not be considered as an alternative to the Group’s net finance costs as

determined in accordance with IFRS. Adjusted net finance costs is not necessarily comparable to similarly titled measures used by other

companies. As a result, you should not consider this performance measure in isolation from, or as a substitute analysis for, BAT’s results

of operations as determined in accordance with IFRS.

The most directly comparable IFRS measure to adjusted net finance costs is net finance costs.

The table below reconciles the Group’s net finance costs to adjusted net finance costs, and to adjusted net finance costs at constant

rates based on a re-translation of adjusted net finance costs for each year, at the previous year’s exchange rates.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Finance costs | (1,733) | (1,521) | (1,795) |
| Finance income | 92 | 35 | 50 |
| Net finance costs | (1,641) | (1,486) | (1,745) |
| Less: Adjusting items in net finance costs | 34 | 55 | 153 |
| Adjusted net finance costs | (1,607) | (1,431) | (1,592) |
| Comprising: |  |  |  |
| Interest payable | (1,648) | (1,493) | (1,654) |
| Interest and dividend income | 92 | 35 | 50 |
| Fair value changes - derivatives | 473 | (252) | 217 |
| Exchange differences | (524) | 279 | (205) |
| Adjusted net finance costs | (1,607) | (1,431) | (1,592) |
| Impact of translation foreign exchange | 140 | (89) | (20) |
| Adjusted net finance costs, at constant rates of exchange | (1,467) | (1,520) | (1,612) |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
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329

Adjusted Share of Post-Tax Results of Associates and Joint Ventures

Definition – share of post-tax results of associates and joint ventures before the impact of adjusting items.

To supplement BAT’s performance presented in accordance with IFRS, the Group’s share of post-tax results of associates and joint

ventures is also presented before adjusting items (as defined in note 1 in the Notes on the Accounts). The Group’s Management Board

believes that adjusted share of post-tax results of associates and joint ventures provides information that enables investors to better

compare the Group’s business performance across periods. The Group’s Management Board uses adjusted share of post-tax results

from associates and joint ventures as part of the total assessment of the underlying performance of all the Group’s business interests.

Adjusted share of post-tax results of associates and joint ventures has limitations as an analytical tool. It is not a presentation made in

accordance with IFRS, is not a measure of financial condition or liquidity, and should not be considered as an alternative to the Group’s

share of post-tax results of associates and joint ventures as determined in accordance with IFRS. Adjusted share of post-tax results of

associates and joint ventures is not necessarily comparable to similarly titled measures used by other companies. As a result, you should

not consider this performance measure in isolation from, or as a substitute analysis for, BAT’s results of operations as determined in

accordance with IFRS.

The most directly comparable IFRS measure to adjusted share of post-tax results of associates and joint ventures is share of post-tax

results of associates and joint ventures.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Group’s share of post-tax results of associates and joint ventures | 442 | 415 | 455 |
| Issue of shares and changes in shareholding | 3 | (6) | (17) |
| Impairment of the Group’s associate in Yemen | 18 | 18 | — |
| Impairment in relation to Organigram (net of tax) | 59 | — | — |
| Other | 12 | — | 4 |
| Adjusted Group’s share of post-tax results of associates and joint ventures | 534 | 427 | 442 |

Adjusted Taxation

Definition – Taxation before the impact of adjusting items.

BAT management monitors the Group’s adjusted taxation to assess BAT’s underlying tax (as defined in note 1 in the Notes on the

Accounts). Adjusted taxation is not a measure defined by IFRS. The table below provides the calculation of the Group’s adjusted taxation.

The Group’s Management Board believes that this additional measure is useful to investors, and is used by BAT management as

described above, because it excludes the tax on adjusting items and adjusting tax, thereby enhancing users’ understanding of underlying

business performance.

Adjusted taxation has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be

considered as an alternative to the taxation as determined in accordance with IFRS. Adjusted taxation is not necessarily comparable to

similarly titled measures used by other companies. As a result, you should not consider this measure in isolation from, or as a substitute

analysis for, the Group’s taxation as determined in accordance with IFRS. The table below provides the calculation of the Group’s

adjusted taxation for the periods presented.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| UK corporation tax |  |  |  |
| – current year tax expense | 2 | 1 | 38 |
| – adjustments in respect of prior periods | (5) | (26) | — |
| Overseas tax |  |  |  |
| – current year tax expense | 2,675 | 2,418 | 2,369 |
| – adjustments in respect of prior periods | 46 | (17) | 18 |
| Total current tax | 2,718 | 2,376 | 2,425 |
| Deferred tax | (240) | (187) | (317) |
| Taxation on ordinary activities | 2,478 | 2,189 | 2,108 |
| Adjusting items in taxation | 27 | 91 | 35 |
| Taxation on adjusting items | 176 | 119 | 287 |
| Net adjusted tax charge | 2,681 | 2,399 | 2,430 |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Non-GAAP Measures  Continued | | | | | | | |

330

Underlying Tax Rate

Definition – Tax rate incurred before the impact of adjusting items and to adjust for the inclusion of the Group’s share of post-tax

results of associates and joint ventures within the Group’s pre-tax results.

BAT management monitors the Group’s underlying tax rate to assess the tax rate applicable to the Group’s underlying operations,

excluding the Group’s share of post-tax results of associates and joint ventures in BAT’s pre-tax results and adjusting items (as defined in

note 1 in the Notes on the Accounts). Underlying tax rate is not a measure defined by IFRS. The table below provides the calculation of the

Group’s effective tax rate as determined in accordance with IFRS with underlying tax rate for the periods presented. The Group’s

Management Board believes that this additional measure is useful to investors, and is used by BAT management as described above,

because it excludes the contribution from the Group’s associates, recognised after tax but within the Group’s pre-tax profits, and

adjusting items, thereby enhancing users’ understanding of underlying business performance.

Underlying tax rate has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be

considered as an alternative to the effective tax rate as determined in accordance with IFRS. Underlying tax rate is not necessarily

comparable to similarly titled measures used by other companies. As a result, you should not consider this measure in isolation from, or

as a substitute analysis for, the Group’s effective tax rate as determined in accordance with IFRS. The table below shows the

computation of the Group’s underlying tax rate for the periods presented and underlying tax rate at constant rates based on a re-

translation of underlying tax rate for each year, at the previous year’s exchange rates and the related reconciliation of profit before

taxation to adjusted profit before taxation, excluding associates and joint ventures, and taxation on ordinary activities to adjusted

taxation and adjusted taxation at constant rates of exchange.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Profit before taxation | 9,324 | 9,163 | 8,672 |
| Less: |  |  |  |
| Share of post-tax results of associates and joint ventures | (442) | (415) | (455) |
| Adjusting items within profit from operations | 1,885 | 916 | 1,403 |
| Adjusting items within finance costs | 34 | 55 | 153 |
| Adjusted profit before taxation, excluding associates and joint ventures | 10,801 | 9,719 | 9,773 |
| Impact of translational foreign exchange | (642) | 714 | 276 |
| Adjusted PBT, excluding associates and joint ventures at constant rates of exchange | 10,159 | 10,433 | 10,049 |
|  |  |  |  |
| Taxation on ordinary activities | (2,478) | (2,189) | (2,108) |
| Adjusting items within taxation and taxation on adjusting items | (203) | (210) | (322) |
| Adjusted taxation | (2,681) | (2,399) | (2,430) |
| Impact of translational foreign exchange on adjusted taxation | 131 | (164) | (63) |
| Adjusted taxation at constant rates of exchange | (2,550) | (2,563) | (2,493) |
|  |  |  |  |
| Effective tax rate | 26.6% | 23.9% | 24.3% |
| Underlying tax rate | 24.8% | 24.7% | 24.9% |
| Underlying tax rate (at constant rates) | 25.1% | 24.6% | 24.8% |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  | | | | | | | |

331

Adjusted Diluted Earnings Per Share

Definition – diluted earnings per share before the impact of adjusting items.

BAT management monitors adjusted diluted EPS, a measure which removes the impact of adjusting items (as defined in note 1 in the

Notes on the Accounts) from diluted earnings per share. Adjusted diluted EPS is considered by the Group’s Management Board to be

useful to investors and is used by management within the Group’s incentive schemes, as reported within the Remuneration Report

beginning on page [159](#ida856e84a2c74b1280a26293040319de_403712) and reported in note 11 in the Notes on the Accounts, as an indicator of diluted EPS before adjusting items.

Adjusted Diluted EPS is not necessarily comparable to similarly titled measures used by other companies. Adjusted diluted EPS has

limitations as an analytical tool and should not be used in isolation from, or as a substitute for, diluted EPS as determined in accordance

with IFRS. The most directly comparable IFRS measure to adjusted diluted EPS is diluted EPS. The table below shows the computation of

adjusted diluted EPS and adjusted diluted EPS at constant exchange rates for the periods presented.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (pence) | | |
|  | 2022 | 2021 | 2020 |
| Diluted earnings per share | 291.9 | 295.6 | 278.9 |
| Effect of amortisation and impairment of goodwill, trademarks and similar intangibles | 9.6 | 12.7 | 20.5 |
| Effect of Brazil VAT case | (17.1) | — | — |
| Effect of disposal of subsidiaries | (0.3) | 15.6 | — |
| Effect of excise and VAT dispute | — | 1.0 | (1.1) |
| Effect of charges in respect of DOJ and OFAC investigations | 19.9 | — | — |
| Effect of charges in respect of Nigerian FCCPC case | 3.5 | — | — |
| Effect of impairment on held-for-sale assets and associated costs | 26.4 | — | — |
| Effect of restructuring and integration costs | 28.9 | 4.9 | 14.9 |
| Effect of other adjusting items | 5.2 | 0.6 | 16.7 |
| Effect of adjusting items in net finance costs | 1.2 | 2.4 | 5.1 |
| Effect of associates’ adjusting items | 4.1 | 0.5 | (0.6) |
| Effect of adjusting items in respect of deferred taxation | (1.9) | (4.3) | (0.9) |
| Effect of retrospective guidance on overseas withholding tax | — | — | (1.8) |
| Adjusted diluted earnings per share | 371.4 | 329.0 | 331.7 |
| Impact of translational foreign exchange | (23.3) | 24.5 | 9.7 |
| Adjusted diluted earnings per share, at constant exchange rates | 348.1 | 353.5 | 341.4 |

Operating Cash Flow Conversion Ratio

Definition – net cash generated from operating activities before the impact of adjusting items and dividends from associates and

excluding trading loans to third parties, pension short fall funding, taxes paid and net capital expenditure, as a proportion of

adjusted profit from operations.

@Operating cash flow conversion ratio is a measure of operating cash flow.@Operating cash flow conversion ratio is used by

management within the Group’s incentive schemes as reported within the Remuneration Report beginning on page [159](#ida856e84a2c74b1280a26293040319de_403712)@, as an indicator

of the Group's ability to turn profits into cash@. Operating cash flow conversion ratio has limitations as an analytical tool. It is not a

presentation made in accordance with IFRS and should not be considered as an alternative to measures of liquidity or financial position

as determined in accordance with IFRS. Operating cash flow conversion ratio is not necessarily comparable to similarly titled measures

used by other companies. @As a result, you should not consider this measure in isolation from, or as a substitute analysis for, the Group’s

results of operations or cash flows as determined in accordance with IFRS.@ The table below shows the computation of operating cash

flow conversion ratio for the periods presented.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Net cash generated from operating activities | 10,394 | 9,717 | 9,786 |
| Cash related to adjusting items | 466 | 501 | 732 |
| – Non-tobacco litigation costs | 60 | — | 147 |
| – Tobacco litigation | 171 | 248 | 317 |
| – Other adjusting cash items | 235 | 253 | 268 |
| Dividends from associates | (394) | (353) | (351) |
| Tax paid | 2,537 | 2,314 | 2,132 |
| Net capital expenditure | (599) | (632) | (605) |
| Trading loans to third parties | — | — | 9 |
| Other | (1) | — | 1 |
| Operating cash flow | 12,403 | 11,547 | 11,704 |
| Adjusted profit from operations\* | 12,408 | 11,150 | 11,365 |
| Cash conversion ratio\*\* | 99% | 95% | 98% |
| Operating cash flow conversion ratio | 100% | 104% | 103% |

Note:

\*See page [328](#i49422b2b471646dabd086f354630c16e_96292) for a reconciliation of profit from operations to adjusted profit from operations.  \*\*  Net cash generated from operating activities as a percentage of profit from operations.

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Non-GAAP Measures  Continued | | | | | | | |

332

Adjusted cash generated from operations

Definition – net cash generated from operating activities before the impact of adjusting items (litigation), excluding dividends

received from associates, and after dividends paid to non-controlling interests, net interest paid and net capital expenditure.

Adjusted cash generated from operations is a measure of cash flow which is used within the Group’s incentive schemes as reported

within the Remuneration Report beginning on page [159](#ida856e84a2c74b1280a26293040319de_403712). @The Group’s Management Board believes that this additional measure is useful

to the users of the financial statements in helping them to see the level of cash generated by the Group's operating activities (excluding

that received from associates) and after financing costs. @Adjusted cash generated from operations has limitations as an analytical tool.

It is not a presentation made in accordance with IFRS and should not be considered as an alternative to measures of liquidity or financial

position as determined in accordance with IFRS. Adjusted cash generated from operations is not necessarily comparable to similarly

titled measures used by other companies. @As a result, you should not consider this measure in isolation from, or as a substitute analysis

for, the Group’s results of operations or cash flows as determined in accordance with IFRS.@ The table below shows the computation of

adjusted cash generated from operations for the periods presented.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Net cash generated from operating activities | 10,394 | 9,717 | 9,786 |
| Dividends paid to non-controlling interests | (158) | (150) | (136) |
| Net interest paid | (1,588) | (1,488) | (1,759) |
| Net capital expenditure | (599) | (632) | (605) |
| Trading loans to third parties | — | — | 9 |
| Cash related to adjusting items within adjusted cash generated from operations | 231 | 248 | 464 |
| – Non-tobacco litigation costs | 60 | — | 147 |
| – Tobacco litigation | 171 | 248 | 317 |
| Others costs excluding litigation and restructuring costs | 3 | — | — |
| Dividends from associates | (394) | (353) | (351) |
| Adjusted cash generated from operations | 7,889 | 7,342 | 7,408 |
| Impact of translational foreign exchange | (484) | 482 | 59 |
| Adjusted cash generated from operations, at constant exchange rates | 7,405 | 7,824 | 7,467 |

@Free Cash Flow – Before and After Dividends Paid to Shareholders

Definition – net cash generated from operating activities before the impact of trading loans provided to a third party and after

dividends paid to non-controlling interests, net interest paid and net capital expenditure. This measure is presented before and

after dividends paid to shareholders.

To supplement BAT’s net cash generated from operating activities as presented in accordance with IFRS, the Group’s Management

Board, as the chief operating decision-maker, reviews free cash flow (before and after dividends paid to shareholders) generated by the

Group to evaluate the underlying business performance of the Group and its geographic segments. This is deemed by the Group

Management Board to reflect the Group’s ability to pay dividends (free cash flow before dividends paid to shareholders) or invest in other

investing activities (free cash flow after dividends paid to shareholders).

Free cash flow (before dividends paid to shareholders) and free cash flow (after dividends paid to shareholders) are not measures defined

by IFRS. The most directly comparable IFRS measure to free cash flow (before and after dividends paid to shareholders) is net cash

generated from operating activities. The Group’s Management Board believes that this additional measure is useful to the users of the

financial statements in helping them to see the level of cash generated by the Group prior to the payment of dividends or debt and prior

to other investing activities. Free cash flow (before and after dividends paid to shareholders) has limitations as an analytical tool. They are

not a presentation made in accordance with IFRS and should not be considered as an alternative to net cash generated from operating

activities as determined in accordance with IFRS. Free cash flow (before and after dividends paid to shareholders) are not necessarily

comparable to similarly titled measures used by other companies. As a result, you should not consider this measure in isolation from, or

as a substitute analysis for, the Group’s measures of financial position or liquidity as determined in accordance with IFRS. The table below

shows the reconciliation from net cash generated from operating activities to free cash flow (before and after dividends paid to

shareholders) for the periods presented.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Net cash generated from operating activities | 10,394 | 9,717 | 9,786 |
| Dividends paid to non-controlling interests | (158) | (150) | (136) |
| Net interest paid | (1,588) | (1,488) | (1,759) |
| Net capital expenditure | (599) | (632) | (605) |
| Trading loans to third parties | — | — | 9 |
| Other | — | — | — |
| Free cash flow (before dividends paid to shareholders) | 8,049 | 7,447 | 7,295 |
| Dividends paid to shareholders | (4,915) | (4,904) | (4,745) |
| Free cash flow (after dividends paid to shareholders) | 3,134 | 2,543 | 2,550 |

@

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| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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333

Net Debt

Definition – total borrowings, including related derivatives, less cash and cash equivalents and current investments

held at fair value.

The Group uses net debt to assess its financial capacity. Net debt is not a measure defined by IFRS. The most directly comparable IFRS

measure to net debt is total borrowings. The Group’s Management Board believes that this additional measure, which is used internally

to assess the Group’s financial capacity, is useful to the users of the financial statements in helping them to see how business financing

has changed over the year. Net debt has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and

should not be considered as an alternative to total borrowings or total liabilities determined in accordance with IFRS. Net debt is not

necessarily comparable to similarly titled measures used by other companies. In addition, it does not exclude restricted cash (as set out

in note 21 in the Notes on the Accounts) in the calculation. As a result, you should not consider this measure in isolation from, or as a

substitute analysis for, the Group’s measures of financial position or liquidity as determined in accordance with IFRS. A reconciliation of

borrowings to net debt is provided in note 23 in the Notes on the Accounts.

@The table below reconciles the movement in net debt during each financial year:

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | For the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Opening net debt | (36,302) | (40,241) | (42,574) |
| Free cash flow (after dividends paid to shareholders) | 3,134 | 2,543 | 2,550 |
| Other cash payments | (635) | (150) | (210) |
| Net proceeds from the issue of perpetual hybrid bonds | — | 1,681 | — |
| Purchase of own shares | (2,012) | — | — |
| Acquired net debt | — | — | 95 |
| Transferred to held-for-sale | (352) | — | — |
| Other non-cash movements | (84) | (11) | (171) |
| Impact of foreign exchange | (3,030) | (124) | 69 |
| Closing net debt | (39,281) | (36,302) | (40,241) |

@

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Non-GAAP Measures  Continued | | | | | | | |

334

@Adjusted Net Debt to Adjusted Earnings Before Interest, Tax, Depreciation and Amortisation (Adjusted EBITDA)

Definition – net debt excluding the impact of the revaluation of Reynolds American Inc. acquired debt arising as part of the

purchase price allocation process, as a proportion of profit for the year (earnings) before net finance costs/income, taxation on

ordinary activities, depreciation, amortisation, impairment costs, the Group’s share of post-tax results of associates and joint

ventures, and other adjusting items.

To supplement BAT’s total borrowings as presented in accordance with IFRS, the Group’s Management Board, as the chief operating

decision‑maker, reviews adjusted net debt to adjusted EBITDA to assess its level of net debt (excluding the impact of the purchase price

allocation adjustment to Reynolds American Inc. acquired debt) in comparison to the underlying earnings generated by the Group to

evaluate the underlying business performance of the Group and its geographic segments. This is deemed by the Group’s Management

Board to reflect the Group’s ability to service and repay borrowings.

For the purposes of this ratio, adjusted net debt is net debt, as discussed and reconciled on page [334](#i49422b2b471646dabd086f354630c16e_79630), is adjusted for the uplift arising on

the Reynolds American Inc. debt as part of the purchase price allocation, as such an uplift in value is not reflective of the repayment value

of the debt.

Adjusted EBITDA is not a measure defined by IFRS. The most directly comparable IFRS measure to adjusted EBITDA is profit for the year.

The Group’s Management Board believes that this additional measure, which is used internally to assess the Group’s financial capacity, is

useful to the users of the financial statements in helping them to see how the Group’s financial capacity has changed over the year.

Adjusted EBITDA has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be considered

as an alternative to profit from operations as determined in accordance with IFRS.

Adjusted net debt to adjusted EBITDA is not necessarily comparable to similarly titled measures used by other companies. As a result,

you should not consider this measure in isolation from, or as a substitute analysis for, the Group’s measures of financial position or

liquidity as determined in accordance with IFRS. The definition of adjusting items is provided in note 1 in the Notes on the Accounts.

The table below reconciles both total borrowings to adjusted net debt and profit for the year to adjusted EBITDA for the periods

presented.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | As of the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Borrowings (excluding lease liabilities) | 42,622 | 39,212 | 43,493 |
| Lease liabilities | 517 | 446 | 475 |
| Derivatives in respect of net debt | 167 | (91) | (346) |
| Cash and cash equivalents | (3,446) | (2,809) | (3,139) |
| Current investments held at fair value | (579) | (456) | (242) |
| Net debt items included within asset held for sale | (352) | — | — |
| Purchase price allocation adjustment to Reynolds American Inc. debt | (798) | (754) | (790) |
| Adjusted net debt | 38,131 | 35,548 | 39,451 |
| Profit for the year | 6,846 | 6,974 | 6,564 |
| Taxation on ordinary activities | 2,478 | 2,189 | 2,108 |
| Net finance costs | 1,641 | 1,486 | 1,745 |
| Depreciation, amortisation and impairment costs | 1,305 | 1,076 | 1,450 |
| Share of post-tax results of associates and joint ventures | (442) | (415) | (455) |
| Other adjusting items (not related to depreciation, amortisation and impairment costs) | 1,380 | 564 | 704 |
| Adjusted EBITDA | 13,208 | 11,874 | 12,116 |
| Adjusted net debt to adjusted EBITDA | 2.89x | 2.99x | 3.26x |
| Impact of translational foreign exchange on adjusted net debt | (2,406) | (477) | 46 |
| Adjusted net debt at constant rates of exchange | 35,725 | 35,071 | 39,497 |
| Impact of translational foreign exchange on adjusted EBITDA | (811) | 839 | 323 |
| Adjusted EBITDA at constant rates of exchange | 12,397 | 12,713 | 12,439 |
| Adjusted net debt to adjusted EBITDA at constant rates of exchange | 2.88x | 2.76x | 3.18x |

@

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335

@Adjusted Return on Capital Employed

Definition – Profit from operations, excluding adjusting items and including dividends from associates and joint ventures, as a

proportion of average total assets less current liabilities in the period.

The Group provides adjusted return on capital employed (adjusted ROCE) to provide users of the financial statements with an indication

of the financial return (by reference to the financial performance in a given period), with the assets less current liabilities (defined as

Capital Employed) in the period.

Adjusted ROCE is not a measure defined by IFRS. The most directly comparable IFRS measure to adjusted ROCE is profit from

operations as a proportion of total assets less current liabilities. The Group’s Management Board believes that this additional measure is

useful to the users of the financial statements in helping them to see how the Group’s capital employed has generated a return in any

given period, by reference to Group’s performance as reported via the income statement. Adjusted ROCE has limitations as an analytical

tool. It is not a presentation made in accordance with IFRS and should not be considered as an alternative to other measures that may be

derived from the financial statements prepared in accordance with IFRS.

Adjusted ROCE is not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider

this measure in isolation from, or as a substitute analysis for, the Group’s measures of financial performance or return as determined in

accordance with IFRS. The definition of adjusting items is provided in note 1 in the Notes on the Accounts. The table below reconciles

profit from operations to adjusted profit from operations including dividends from associated and joint ventures and provides the

constituent parts of average capital employed.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
|  | As of the year ended 31 December (£m) | | |
|  | 2022 | 2021 | 2020 |
| Profit from operations | 10,523 | 10,234 | 9,962 |
| Adjusting items | 1,885 | 916 | 1,403 |
| Dividends received from associates and joint ventures | 394 | 353 | 351 |
| Adjusted profit from operations, inclusive of dividends from associates and joint ventures | 12,802 | 11,503 | 11,716 |
| Total Assets | 153,546 | 137,365 | 137,690 |
| Current Liabilities | 17,853 | 15,144 | 15,478 |
| Capital employed at balance sheet date | 135,693 | 122,221 | 122,212 |
| Average capital | 128,957 | 122,217 | 122,197 |
| Adjusted ROCE | 9.9% | 9.4% | 9.6% |

@

Results on a Constant Translational Currency Basis

Movements in foreign exchange rates have impacted the Group’s financial results. The Group’s Management Board reviews certain of its

results, including revenue, revenue growth from New Categories, adjusted profit from operations and adjusted diluted earnings per

share, at constant rates of exchange. The Group calculates these financial measures at constant rates of exchange based on a re-

translation, at prior year exchange rates, of the current year’s results of the Group and, where applicable, its geographic segments. The

Group does not adjust for the normal transactional gains and losses in profit from operations that are generated by exchange

movements. Although the Group does not believe that these measures are a substitute for IFRS measures, the Group’s Management

Board does believe that such results excluding the impact of currency fluctuations year-on-year provide additional useful information to

investors regarding the Group’s operating performance on a local currency basis. Accordingly, the constant rates of exchange financial

measures appearing in the discussion of the Group results of operations (beginning on page [96](#ic6d07913b92a442992ad8c75238fb668_169076)) should be read in conjunction with the

information provided in note 2 in the Notes on the Accounts.

In 2022, 2021 and 2020, results were affected by translational exchange rate movements. In 2022, at the prevailing exchange rates,

reported revenue increased by 7.7%, revenue from New Categories increased by 40.9% and adjusted profit from operations increased by

11.3% versus 2021. At constant rates of exchange, reported revenue would have increased by 2.3%, revenue from New Categories would

have increased by 37.0% and adjusted profit from operations would have increased by 4.3%. This higher growth rate at prevailing

exchange rates reflects the positive translational impact as a result of the relative weakening of the pound sterling. In 2021, at the

prevailing exchange rates, revenue declined by 0.4%, revenue from New Categories increased by 42.4% and adjusted profit from

operations decreased by 1.9% versus 2020. At constant rates of exchange, revenue would have increased by 6.9%, revenue from New

Categories would have increased by 50.9% and adjusted profit from operations would have increased by 5.2%. This lower growth rate at

prevailing exchange rates reflects the negative translational impact as a result of the relative strengthening of the pound sterling.

In 2022, 2021 and 2020, adjusted diluted earnings per share was affected by translational exchange rate movements. In 2022, the

adjusted diluted earnings per share of 371.4p, an increase of 12.9%, would, when translated at 2021 exchange rates, have been 348.1p, an

increase of 5.8%. This higher growth rate, in 2022, at prevailing exchange rates, reflects the positive translational impact as a result of the

relative weakness of the pound sterling. In 2021, the adjusted diluted earnings per share of 329.0p, a decrease of 0.8%, would, when

translated at 2020 exchange rates, have been 353.5p, an increase of 6.6%. This lower growth rate, in 2021, at prevailing exchange rates,

reflects the negative translational impact as a result of the relative strength of the pound sterling.

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336

As at 31 December 2022, the number of persons employed by the Group was 50,397 worldwide. The Group believes that its labour

relations are good.

Certain temporary employees are included in the below figures. The number of such temporary employees is approximately 224 in 2022

and largely relates to seasonal workers within operations.

The following table sets forth the number of Group employees by region in 2022, 2021 and 2020.

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Region (number of employees worldwide) | As of 31 December | | |
| 2022 | 2021 | 2020 |
| U.S. | 4,152 | 4,405 | 4,921 |
| AmSSA | 15,090 | 15,565 | 15,873 |
| Europe1 | 21,773 | 22,333 | 23,785 |
| APME1 | 9,382 | 9,747 | 10,750 |
| Total employees | 50,397 | 52,050 | 55,329 |

Note:

1.Included within the employee numbers for Europe are certain employees in different locations in respect of central functions. Some of the costs of these employees are allocated or

charged to the various regions and markets in the Group.

From 1 January 2022, Algeria, Sudan, Libya, Morocco, Tunisia and Egypt moved to APME and Europe and North Africa (ENA) has been renamed Europe. No restatement of prior year

figures has been made as the impact was not material to either Europe or APME.

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337

Additional Disclosures on Liquidity and Capital Resources

The Group’s cash inflows derive principally from its operating activities. They are supplemented when required by cash flows from

financing activities, typically to support general corporate requirements but also, from time to time, to support acquisitions. The principal

sources of liquidity for the Group are cash flows generated from the operating business and proceeds from issuances of debt securities

described below under ‘capital resources’.

The Board reviews and agrees the overall treasury policies and procedures, delegating appropriate oversight to the Finance and

Transformation Director and the treasury function. The treasury policies include a set of financing principles and key performance

indicators. The Group’s treasury position is monitored by a Corporate Finance Committee chaired by the Finance and Transformation

Director. Treasury operations are subject to periodic independent reviews and audits, both internal and external.

In 2022, 2021 and 2020, all contractual borrowing covenants were met and none are expected to inhibit the Group’s operations or funding

plans. In 2020, the Group’s financial covenant (interest cover) was removed from the terms of the revolving credit facility and syndicated

term loan.

Capital Expenditure

Gross capital expenditures include purchases of property, plant and equipment and purchases of certain intangibles. The Group’s gross

capital expenditures for 2022, 2021 and 2020 were £630 million, £664 million and £648 million, respectively, representing investment in

the Group’s global operational infrastructure (including, but not limited to, the manufacturing network, trade marketing and IT systems).

The Group expects gross capital expenditures in 2023 of approximately £600 million, representing the ongoing investment in the Group’s

operational infrastructure, including the continued investment in New Categories. This is expected to be funded by the Group’s cash

flows and existing facilities.

Hedging Instruments

As discussed in note 19 in the Notes on the Accounts, the Group hedges its exposure to interest rate movements and currency

movements. BAT’s cash flow hedges are principally in respect of sales or purchases of inventory and certain debt instruments. A certain

number of forward foreign currency contracts were used to manage the currency profile of external borrowings. Interest rate swaps

have been used to manage the interest rate profile of external borrowings, while cross-currency swaps have been used to manage the

currency profile of external borrowings.

Capital Resources

Policy

The Group utilises cash pooling and zero balancing bank account structures in addition to intercompany loans and borrowings to ensure

that there is the maximum mobilisation of cash within the Group. The key objectives of treasury in respect of cash and cash equivalents

are to protect the principal value of the Group’s cash and cash equivalents, to concentrate cash at the centre to minimise the required

long-term debt issuance, including perpetual hybrid debt treated as an equity instrument, and to optimise the yield earned. The amount

of debt the Group issues is determined by forecasting the net debt requirement after the mobilisation of cash. Subsidiary companies are

funded by share capital and retained earnings, loans from the central finance companies on commercial terms or through local

borrowings by the subsidiaries in appropriate currencies. All contractual borrowing covenants have been met and none are expected to

inhibit the Group’s operations or funding plans.

Borrowings

The following table sets out the Group’s long- and short-term borrowings as of the dates indicated:

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| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  |  |  |  | As of 31 December (£m)1 | | |
|  | Currency | Maturity dates | Interest rates at 31 December 2022 | 2022 | 2021 | 2020 |
| Eurobonds2 | Euro | 2023 to 2045 | 0.9% to 3.1% | 7,149 | 7,316 | 8,875 |
|  | Euro\* |  |  | — | — | 984 |
|  | UK sterling | 2024 to 2055 | 2.1% to 7.3% | 3,884 | 4,086 | 4,590 |
|  | Swiss franc | 2026 | 1.4% | 226 | 203 | 540 |
| Bonds issued pursuant  to rules under the U.S.  Securities Act (as  amended)2 | U.S. dollar | 2023 to 2052 | 1.7% to 8.1% | 30,152 | 25,625 | 25,461 |
|  | U.S. dollar | 2022 | USD3m LIBOR + 0.88 bps | — | 554 | 548 |
| Commercial paper2 |  |  |  | 27 | 269 | — |
| Other loans |  |  |  | 875 | 500 | 1,929 |
| Bank loans |  |  |  | 203 | 313 | 317 |
| Bank overdrafts |  |  |  | 106 | 346 | 249 |
| Finance leases |  |  |  | 517 | 446 | 475 |
| Total |  |  |  | 43,139 | 39,658 | 43,968 |

Notes:

1.The financial data above has been extracted from the Group’s consolidated financial statements.

2.The issuers of these debt securities are B.A.T. International Finance p.l.c., B.A.T Capital Corporation, Reynolds American Inc., or R.J. Reynolds Tobacco Company, as applicable. British

American Tobacco p.l.c. is the ultimate guarantor in each case.

Perpetual hybrid bonds issued by the Company have been classified as equity and therefore excluded from borrowings.

\*    Eurobond with a maturity date in 2021 that was repaid in 2021.

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338

Off-Balance Sheet Arrangements and Contractual Obligations

The Group has no significant off-balance sheet arrangements. The Group has contractual obligations to make future payments on debt

agreements. In the normal course of business, the Group enters into contractual arrangements where the Group commits to future

purchases of services from unaffiliated parties and related parties.

The Group’s undiscounted contractual obligations as of 31 December 2022 were as follows:

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |
|  | Payments due by period (£m) | | | | |
|  | Total | Less than  1 Year | 1–3 Years | 3–5 Years | Thereafter |
| Long-term notes and other borrowings, exclusive of interest1 | 42,615 | 3,889 | 8,660 | 7,089 | 22,977 |
| Interest payments related to long-term notes1 | 524 | 524 | — | — | — |
| Lease liabilities | 517 | 142 | 185 | 108 | 82 |
| Purchase obligations2 | 1,332 | 1,150 | 182 | — | — |
| Total cash obligations | 44,988 | 5,705 | 9,027 | 7,197 | 23,059 |

Notes:

1.For more information about the Group’s long-term debt, see note 23 in the Notes on the Accounts.

2.Purchase obligations primarily include commitments to acquire tobacco leaf. Purchase orders for the purchase of other raw materials and other goods and services are not included in

the table, as the Group’s operating subsidiaries are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders

typically represent authorisations to purchase rather than binding agreements.

The table above does not include any amounts that the Group may pay to fund its retirement benefit plans as the timing and amount of

any such future funding are unknown and dependent on, among other things, the future performance of defined benefit pension plan

assets, interest rate assumptions and other factors. The net retirement benefit scheme assets totalled £51 million as of 31 December

2022, which is net of pension assets of £7,424 million. The Group expects to be required to contribute £110 million to its defined benefit

plans during 2023. See note 15 in the Notes on the Accounts for further information.

The above table also excludes any amounts in relation to service contracts which are disclosed in note 31 in the Notes on the Accounts.

The Group has £80 million of future contractual commitments (2021: £90 million) related to property, plant and equipment.

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339

The following is a summary of some of the risks and uncertainties, the occurrence of any one of which, alone or in combination with other

events or circumstances, may materially adversely affect the Group’s results of operations and financial condition. You should read this

summary together with the ‘Group Principal Risks’ section from pages [116](#id739eb8a094346e4a1dd9989c862058f_8875) to 121 and the more detailed description of each risk factor

contained below.

Business execution and supply chain risks

–Competition from illicit trade.

–Geopolitical tensions that have the potential to disrupt the Group’s business in multiple markets.

–Disruption to the Group’s data and information technology systems, including by cyber attack or the malicious manipulation or

disclosure of confidential or sensitive information.

–Failure to meet current or future New Categories demand.

–Failure of a financial counterparty.

–Exposure to unavailability of, and price volatility, in raw materials and increased costs of employment.

–Failure to retain key personnel or to attract and retain skilled talent.

–Disruption to the supply chain and distribution channels.

–Failure to uphold the high standard of ESG management.

–Failure to deliver digital innovation and drive digital transformation.

–Inability to obtain adequate supplies of tobacco leaf.

–Exposure to product contamination.

–Failure to successfully design, implement and sustain an integrated operating model.

–Failure to manage the Group’s climate change and circular economy risk.

–Impact of a pandemic on the performance of the Group.

Legal, regulatory and compliance risks

–Exposure to, the enactment of, proposals for, or rumours of regulation that significantly impairs the Group’s ability to communicate,

differentiate, market or launch its products and/or the lack of appropriate regulation for New Categories.

–Adverse implications of EU legislation on single-use plastics that will result in on-pack environmental warnings and financial

implications relating to the Extended Producer Responsibility (EPR).

–Exposure to litigation, regulatory action or criminal investigations on tobacco, nicotine, New Categories and other issues.

–Significant and/or unexpected increases or structural changes in tobacco and nicotine-related taxes.

–Failure to comply with health and safety and environmental laws.

–Exposure to unfavourable tax rulings.

–Unexpected legislative changes to corporate income tax laws.

–Exposure to potential liability under competition or antitrust laws.

–Failure to establish and maintain adequate controls and procedures to comply with applicable securities, corporate governance and

compliance regulations.

–Loss of confidential information, including through manipulation of data by employees and system failure.

–Failure to comply with product regulations due to uncertainty surrounding the proper interpretation and application of those

regulations.

–Failure to uphold high standards of corporate behaviour, including through unintended or malicious breach of anti-bribery and anti-

corruption and other anti-financial crime laws.

–Imposition of sanctions under sanctions regimes or similar international, regional or national measures.

–Failure to uphold New Categories marketing practices.

–Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation, the UK Data

Protection Act 2018, e-Privacy laws and other privacy legislation governing the processing of personal data.

Economic and financial risks

–Foreign exchange rate exposures.

–Inability to obtain price increases and exposure to risks from excessive price increases and value chain erosion.

–Effects of declining consumption of legitimate tobacco products and a tough competitive environment.

–Funding, liquidity and interest rate risks.

–Failure to achieve growth through mergers, acquisitions, joint ventures, investments and other transactions.

–Unforeseen underperformance in key global markets.

–Increases in net liabilities under the Group’s retirement benefit schemes.

Product pipeline, commercialisation and Intellectual Property risks

–Inability to predict consumers’ changing behaviours and launch innovative products that offer adult tobacco and nicotine consumers

meaningful value-added differentiation.

–Exposure to risks associated with intellectual property rights, including the failure to identify, protect and prevent infringement of

the Group’s intellectual property rights and potential infringement of, or the failure to retain licences to use, third-party intellectual

property rights.

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| Summary of Group Risk Factors | | | | | | | |

340

|  |
| --- |
|  |
| Business Execution and Supply Chain Risks |
| Risk: Competition from illicit trade |
| Description |
| Illicit trade, illegal products and tobacco trafficking in the form of counterfeit products, smuggled genuine products (product diversion),  and locally manufactured products, which do not comply with applicable regulations and/or in which applicable taxes are evaded, represent a  significant and growing threat to the legitimate tobacco industry, including New Categories products. Factors such as increasing levels of  taxation, price increases, economic downturn, lack of law enforcement, appropriate penalties and weak border control are encouraging more  adult tobacco and New Categories consumers to switch to illegal cheaper tobacco and New Categories products and are providing greater  rewards for counterfeiters and smugglers. Regulatory restrictions such as plain packaging or graphic health warnings, display bans, flavour or  ingredient restrictions and increased compliance costs further disadvantage legitimate industry participants by providing competitive  advantages to illicit manufacturers and distributors of illicit tobacco and New Categories products.  In addition, third parties may seek to divert products when there is an arbitrage opportunity for them between lower and higher excise countries. |
| Impact |
| Illicit trade has an adverse effect on the Group’s overall sales volume and may restrict the ability to increase selling prices. Illicit trade  can also damage brand equity and reputation, which could undermine the Group’s investment in Trade Marketing and Distribution.  Operational costs (e.g. track and trace costs) can increase and the product may become commoditised.  These factors in turn could reduce profits and 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. Further, counterfeit products (especially New Categories) and other illicit  products could harm consumers, damaging goodwill and/or the category (with lower volumes and reduced profits), and potentially  leading to misplaced claims against BAT, further regulation and a failure to deliver our corporate harm reduction objective. In addition,  as the Group has contractual and legislative obligations to prevent the diversion of our products into illicit channels, actual and  perceived breaches of the obligations to prevent product diversion into illicit channels can lead to substantial fines in the forms of  seizure payments and legislative penalties (including financial penalties), as well as the risk of reputational damage (including negative  perceptions of our governance and our ESG credentials) from Group products being found in illicit channels. |

|  |
| --- |
|  |
| Risk: Geopolitical tensions that have the potential to disrupt the Group’s business in multiple markets |
| Description |
| The Group’s operations and financial condition are influenced by the economic and political situations in the markets and regions in  which it has operations, which are often unpredictable and outside of its control. Some markets in which the Group operates face the  threat of civil unrest and can be subject to frequent changes in regime. In others, there is a risk of terrorism, conflict, global health crisis,  war, organised crime or other criminal activity. The Group is also exposed to economic policy changes in jurisdictions in which it operates. In  addition, some markets maintain trade barriers or adopt policies that favour domestic producers, preventing or restricting the Group’s sales. |
| Impact |
| Deterioration of socio-economic or political conditions could lead to injury or loss of life, restricted mobility, loss of assets and/or denial  of access to BAT sites that reduce the Group’s access to particular markets or may disrupt the Group’s operations, such as supply  chain, or manufacturing or distribution capabilities. Such disruption may result in increased taxes and/or other costs due to the need for  more complex supply chain and security arrangements, to build new facilities or to maintain inefficient facilities, or in a reduction of the  Group’s sales volume. Further, there may be reputational damage, including negative perceptions of our governance and protection of  our people and our ESG credentials. |

|  |
| --- |
|  |
| Risk: Disruption to the Group’s data and information technology systems, including by cyber attack or the malicious  manipulation or disclosure of confidential or sensitive information |
| Description |
| The Group increasingly relies on data and information technology systems for its daily business operations, internal communications,  controls, reporting and relations with customers and suppliers. Some of these systems are managed by third-party service providers. A  significant disruption of the Group’s systems, including those managed by third-party service providers, due to computer viruses, cyber  threats, malicious intrusions or unintended or malicious behaviour by employees, contractors or services providers could affect the  Group’s communications and operations. Computer viruses and cyber attacks are becoming more sophisticated and coordinated. In  addition, such disruption may compromise the integrity of information and result in the inappropriate disclosure of confidential  information, or may lead to false or misleading statements being made about the Group. |
| Impact |
| Any disruption to technology systems related to the Group’s operations could adversely affect its business and result in financial and reputational  losses. Any delays or failure to rapidly detect or respond to attempts to gain unauthorised access to the Group’s information technology systems  through a cyber attack can lead to a loss of access to systems or information being corrupted or lost, resulting in significantly increased costs for  remediation and reputational consequences. Any delay in response will also impact the outcome.  Security breaches and the loss of data or operational capacity may disrupt relationships throughout the supply chain, expose the Group  or our consumers to a risk of loss or misuse of information, which could further expose the Group to liability, impact the Group’s  reputation and lead to increased costs.  The disclosure of trade secrets or other commercially sensitive information may provide competitors with a competitive advantage  resulting in competitive or operational damage to the Group. The disclosure of confidential and sensitive information about the Group’s  employees, customers, consumers, suppliers or other third parties could compromise data privacy and expose the Group to liability.  Failure to effectively prevent or respond to a major breach or cyber attack may also subject the Group to significant reputational damage. |

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| Group Risk Factors | | | | | | | |

341

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| --- |
|  |
| Business Execution and Supply Chain Risks continued |
| Risk: Failure to meet current or future New Categories demand |
| Description |
| The New Categories supply chain is a multi-tiered and complex environment with reliance on multiple factors, such as third-party  suppliers’ ability to upscale production in order to meet demand while maintaining product quality, dependency on single suppliers at  various points in the chain and the Group’s ability to build adequate consumables production capacity in line with product demand. The  geographical spread of suppliers and customers exposes the Group to political and economic issues such as Brexit and trade wars  which may compromise the New Categories supply chain. Given the developing nature of the New Categories portfolio, there is also an  enhanced risk that some products may not meet product quality and safety standards or may be subject to regulatory changes, leading  to product recalls, which we have experienced in the past, or bans of certain ingredients or products. In addition, the New Categories  supply chain may be vulnerable to changes in local legislation related to liquid nicotine that could increase import duties. Furthermore,  the New Categories supply chain includes the development of sensitive trade secrets jointly with external design partners, which  carries the risk of exposure of innovations to competitors. |
| Impact |
| Vulnerabilities in the New Categories supply chain may impact the Group’s ability to maintain supply and meet the current and future  demand requirements across the New Categories portfolio, potentially resulting in significant reputational harm and financial impact  that may negatively affect the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic  growth plans. Over-forecasting may also lead to write-offs and negatively impact working capital. The design of New Categories  devices may also prevent the scaling of commercial manufacturing, which will either restrict supply or increase the costs of production.  Further, there may be loss of investors’ confidence in ESG performance, including failure to deliver our corporate purpose of harm  reduction.  In addition, changes in local legislation related to liquid nicotine import duties may increase New Categories production costs, which  may increase end market pricing and reduce demand. Furthermore, the exposure of sensitive trade secrets can lead to competitive  disadvantages and further negatively impact the Group’s results of operations and financial condition and cause the Group to fail to  deliver on its strategic growth plans. |

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| Risk: Failure of a financial counterparty |
| Description |
| The Group relies on transactions with a variety of financial counterparties to manage the Group’s business and financial risks. In the  event that any of these counterparties fails, payments due from such counterparties, such as under hedging or insurance contracts,  may not be recovered. In addition, failure of a transactional banking party may lead to the loss of cash balances and disruption to  payment systems involving such counterparty. |
| Impact |
| The inability to recover payments due from one or more failed financial counterparties or the loss of cash balances may cause  significant financial loss and have an adverse impact on the Group’s results of operations, financial condition and financial risk profile. In  addition, the loss of cash balances or a disruption to payment systems may cause disruption to the Group’s ongoing operations and  ability to pay its creditors and suppliers. |

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| Risk: Exposure to unavailability of, and price volatility, in raw materials and increased costs of employment |
| Description |
| The availability and price of various commodities required in the manufacture of the Group’s products fluctuate. Raw materials and  other inputs used in the Group’s business, such as wood pulp and energy, are commodities that are subject to price volatility caused by  numerous factors, including inflation, political influence, market fluctuations and natural disasters.  Similarly, the Group is exposed to the risk of an increase above inflation in employment costs, including due to governmental action to  introduce or increase minimum wages. Employment and health care law changes and the increase in inflation may also increase the  cost of provided health care and other employment benefits expenses. |
| Impact |
| Restricted availability and price volatility of commodities may result in supply shortages and unexpected increases in costs for raw  materials and packaging for the Group’s products, which may affect the Group’s results of operations and financial condition.  Similarly, the Group’s profitability may be affected by increases in overall employment costs.  The Group may not be able to increase prices to offset increased costs without suffering reduced sales volume and revenue. In the  absence of compensating for increased costs through pricing, significant increases in raw material, packaging and employment costs  above inflation will impact product margins, leading to lower profits and negatively affecting the Group’s results of operations and  financial condition and cause the Group to fail to deliver on its strategic growth plans. |

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| Group Risk Factors  Continued | | | | | | | |

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| Risk: Failure to retain key personnel or to attract and retain skilled talent |
| Description |
| The Group relies on a number of highly experienced employees with detailed knowledge of the tobacco industry, other areas of focus  for the Group (including New Categories and Beyond Nicotine) and the Group’s business. Similarly, the Group is dependent on its ability  to identify, attract, develop and retain such qualified personnel in the future. The Group is also dependent on external hires to ensure  that there are the right new business critical capabilities and knowledge to accelerate transformation. BAT anticipates that this trend  will continue and therefore the ability to continue to build awareness, increase reach and ultimately attract the new target audience  remains a primary focus.  The shift in career development expectations from new hires are leading to shorter tenures. Although the Group is increasing its effort  on retaining critical capabilities and knowledge, following any departure of new external hires, there can be no assurance that this effort  will be successful. Furthermore, broader economic and ESG trends may impact the Group’s ability to retain key employees and may  increase competition for highly talented employees, potentially resulting in the loss of experienced employees. |
| Impact |
| If the Group is unable to retain its existing key employees or to attract and retain skilled talent in the future, critical positions may be left  vacant, which could adversely impact the delivery of strategic objectives, which could ultimately impact the Group’s results of operations,  financial condition and achieving its ESG related ambitions and cause the Group to fail to deliver on its strategic growth plans.  High voluntary employee turnover may also reduce organisational performance and productivity, which may have a further adverse  impact on the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic growth plans. |

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| Risk: Disruption to the supply chain and distribution channels |
| Description |
| The Group has an increasingly global approach to managing its supply chain and distribution channels and is exposed to the risk of disruption to  any aspect of the Group’s supply chain, to suppliers’ operations or to distribution channels, and the deterioration in the financial condition of a  trading partner. This is especially so in our New Categories Supply Chain which is a multi-tiered and complex environment.  Such disruption may be caused by a cyber event, global health crisis, political tensions, strikes, riots, civil commotion, major fire, violent weather  conditions or other natural disasters that affect manufacturing or other facilities of the Group’s operating subsidiaries or those of their suppliers  and distributors. In certain geographic areas where the Group operates, insurance coverage may not be obtainable on commercially reasonable  terms, if at all. Coverage may be subject to limitations or the Group may be unable to recover damages from its insurers.  Disruption may also be caused by spread of infectious disease (such as the COVID-19 pandemic) or by a deterioration/shortage in labour or  union relations, disputes or work stoppages or other labour-related developments within the Group or its suppliers and distributors.  In addition, the Group’s operating subsidiaries may not be able to establish or maintain relationships on favourable commercial terms  with their suppliers and distributors. In some markets, distribution of the Group’s products is through third-party monopoly channels,  often licensed by governments. The Group may be unable to renew these third-party supplier and distribution agreements on  satisfactory terms for numerous reasons, including government regulations or ESG considerations.  Furthermore, there are some product categories for which the Group does not have spare production capacity or where substitution between  different production plants is very difficult. Consolidation of global suppliers and certain distributors that control large geographies may reduce  the Group’s availability of alternatives and negatively impact the Group’s negotiating power with key suppliers and distributors.  These risks are particularly relevant in jurisdictions where the Group’s manufacturing facilities are more concentrated or for certain  product categories where production is more centralised. |
| Impact |
| Any disruption to the Group’s supply chain and distribution channels could have an adverse effect on the results of operations and financial  conditions of the Group through failures to meet shipment demand, contract disputes, increased costs, loss of market share and inability to  reinvest into New Category and support harm reduction agenda and cause the Group to fail to deliver on its strategic growth plans. |

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| Business Execution and Supply Chain Risks continued |
| Risk: Failure to uphold the high standard of ESG management |
| Description |
| Stakeholder expectations of the Group’s ESG performance are continually evolving. The Group may fail to have the appropriate internal  standards, strategic plans and governance, monitoring and reporting mechanisms in place to ensure it can identify emerging issues,  meet external expectations and align with recognised international standards. In addition, the Group relies on third-parties for certain  ESG monitoring and measurement services, the provision of carbon-offsets and other ESG-related services. Such service providers  may fail to perform these services to the specified standards. |
| Impact |
| Failure to uphold high standards of ESG management or provide transparent and consistent reporting could significantly impact Group  reputation and reduce investor confidence. In addition, poor performance across any aspect of ESG, such as a failure to address climate  change or human rights impacts across the Group’s business and supply chain, could result in increased regulation, difficulty in  attracting and retaining talent, criminal or civil prosecution, or decreases in consumer demand for our products. Poor performance can  also result in our failure to deliver our ESG targets.  Failure to responsibly and transparently market our products and communicate our achievements and position, such that we are  accused of greenwashing, can potentially cause reputational damage and litigation impacts. In addition, the Group's association with  any provider of ESG-related services that fails to perform its services for the Group or third-parties to the specified standard or is  alleged to have done so could also result in reputational damage and litigation impacts. |

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| Risk: Failure to deliver digital innovation and drive digital transformation. |
| Description |
| The Group’s strategy in areas of further growth and increasing profitability depends to a large extent on digital transformation and  innovation. Digital transformation and innovation are key drivers of the Group’s ethos and QUEST, which includes new and modern  categories of products, increased interaction with customers, data-driven decision making and cost optimisation efforts driven by  automated and modernised processes. Examples of the Group’s ambitions that depend on digital transformation include:  –the ability to leverage our data assets to generate insights and foresights as a key driver of revenue growth;  –the expansion and flexibility of technology solutions to streamline the market realisation of new products and marketing campaigns; and  –the ability to build new solutions and the flexibility to react to market disruptions.  The Group must effectively implement new ways of working and supporting technologies to fully develop the digital agenda defined by  the Board (e.g. digital channels, data and analytics, automation, etc.).  The Group may see stalled progress in the pace of digital transformation and hampered strategy goals realisation if the necessary  information and digital technology is not ready to support the business implementation of global functional transformations (e.g. direct  relationship with consumers, integrated planning, demand forecasting and revenue growth management). The unavailability of the  necessary digital technology may be due to missing technology capabilities, lack of scalability or poor data quality. Shortage of skills and  ineffective ways of working may slow down the pace of the Group’s digital transformation and hamper its value realisation processes.  Regulation may also limit the use of the data necessary for the Group's digital transformation. In addition, sub-optimal design of the  global digital platforms implemented by the Group may lead to the fragmentation and under-utilisation of such platforms and slow  down the Group’s digital transformation. |
| Impact |
| The Group’s multi-category strategy requires dealing with different consumer needs and behaviours as well as complying with various  regulations, which increasingly require the expansion and flexibility of technology solutions. This may lead to the fragmentation and  under-utilisation of existing and future technology solutions. Similarly, increased control and centralisation of the technology solutions  and delivery mechanisms may slow down the effective delivery of the Group’s digital transformation and innovation.  The Group’s inability to adapt to the ever-changing digital space and fully exploit the value expected from digital transformation may  have an adverse impact on its competitive edge, market share and profitability, and may prevent the Group from reaching its medium  and long-term financial targets. |

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| Group Risk Factors  Continued | | | | | | | |

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| Risk: Inability to obtain adequate supplies of tobacco leaf |
| Description |
| The Group purchases significant volumes of packed leaf each year. Tobacco leaf, as any other agricultural commodity, can be impacted  by a variety of external factors. Like any other agricultural supply chain, it can be particularly vulnerable to a range of challenges,  including climate change, weather-related events, such as drought, flood and other natural disasters, increasing demand for land and  natural resources, rural poverty, social inequality, child labour and ageing farmer populations.Tobacco production in certain countries is  also subject to a variety of controls, including regulation affecting farming and production control programmes, and competition for  land use from other agriculture commodities. Such controls and competition can further constrain the production of tobacco leaf,  raising prices and reducing supply.  The Group recognises the above and any combination of those, including topics like child labour, as a risk to our tobacco leaf supply chain. |
| Impact |
| Restricted availability of tobacco leaf may prevent the Group accessing sufficient tobacco leaf that meets volume, quality and the  Group’s ESG compliance requirements. This could lead to an impact in the quality of the Group's products to a level that may be  perceptible by consumers and may impact the Group's ability to deliver on consumer needs.The Group’s commitment to ESG may  restrict the sources we can buy from, which would result in an imbalance in supply and demand potentially causing incremental  tobacco prices. Higher tobacco leaf prices would result in increased raw material costs and have an adverse effect on the Group's  financial condition. The Group may also experience reputational damage from not adequately managing its sustainability priorities like  climate change, protection of natural resources, including forests, and human rights in our leaf supply chain, which may restrict  suppliers willing to do business with us. |

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| Risk: Exposure to product contamination |
| Description |
| The Group may experience product contamination, whether by accident or deliberate malicious intent, during supply chain or manufacturing  processes, or may otherwise fail to comply with the Group’s quality standards. The Group may also receive threats of malicious tampering. |
| Impact |
| Product contamination or threats of contamination may expose the Group to significant costs associated with recalling products from  the market or temporarily ceasing production. In addition, adult tobacco consumers may lose confidence in the specific brand affected  by the contamination, resulting in reputational damage and a loss of sales volume and market share. The Group could be subject to  liability and costs associated with civil and criminal actions as well as regulatory sanctions brought in connection with a contamination  of the Group’s products. Each of these results may in turn have an adverse effect on the Group’s results of operations, financial  condition and reputation and cause the Group to fail to deliver on its strategic growth plans. |

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| Risk: Failure to successfully design, implement and sustain an integrated operating model |
| Description |
| The Group aims to improve profitability and productivity through supply chain improvements and the implementation of an integrated  operating model and organisational structure, including standardisation of processes, centralised back-office services and a common IT  platform. The Group undertakes transformation initiatives periodically which aim to simplify the organisation and facilitate growth. The  Group’s efforts to achieve these goals are driven and enabled through use of our TaO (central SAP ERP system) global template – a  standardised process used by the Group with the use of a central SAP instance common for the Group's subsidiaries. These processes  include, among others, core back-office global processes, procurement, warehouse management, accounting and controlling. |
| Impact |
| Failure by the Group to successfully design, implement and sustain the integrated operating model, organisational structure and  transformation initiatives could lead to the failure to realise anticipated benefits, increased costs, disruption to operations, decreased  trading performance, disgruntled employees, loss of institutional knowledge and reduced market share. These results could in turn  reduce profitability and funds available for investment by the Group in long-term growth opportunities. Lack of adherence to the TaO  template, as well as template degradation over time, may result in the failure to maintain achieved productivity gains and capture  additional productivity gains which 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. |

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| Business Execution and Supply Chain Risks continued |
| Risk: Failure to manage the Group’s climate change and circular economy risk |
| Description |
| The Group is exposed to physical risks associated with climate change from severe weather events such as flooding, drought and  storms across its global operations and supply chain. Climate change may cause acute physical risks such as more frequent and severe  weather events, or chronic risks such as those related to longer-term shifts in climate patterns and temperatures. These, alongside  their direct impact on Group operations, could lead to reductions in the supply and quality of tobacco leaf and other physical goods and  cause transport and logistics disruptions in our supply chains.  The Group may also experience transition risks associated with the move to a low carbon economy. The Group is exposed to risks  associated with the move towards a circular economy, including product-related regulatory risks, such as product design/disassembly  requirements and Extended Producer Responsibility (EPR) requirements. As climate change and circular economy-related legislation  and reporting requirements further evolve, companies need to effectively identify, assess, monitor and mitigate associated transition  risks; failure to do so adequately or less well than others could lead to BAT scoring lower in ESG ratings and indices used by financial  actors in making investment decisions.  As consumer and customers behaviours and expectations evolve, the Group may fail to sufficiently adapt its product portfolio and  marketing strategy in response to stakeholders' increasing environmental (and social) sustainability expectations. Climate change and  circular economy-related considerations, including relevant aspects of products and value chains, may result in a potential reduced  demand for or rejection of the Group’s products as well as reputational risk in relation to sustainability matters. |
| Impact |
| Disruption to the Group's agricultural or non-agricultural supply chain or distribution channels could have an adverse effect on its  operations and financial condition through failures to meet product demand, contract disputes, increased costs and loss of market share.  Consumer and customer behaviours and expectations may influence their purchasing decisions and may lead them to seek alternative  product offerings. An inability to develop and commercialise products, packaging or value chain sustainability innovations in-line with  demand or less well than competitors, including failures to adequately predict changes in consumer and societal behaviour and  expectations and reflect them in the product portfolio, could lead to missed commercial opportunities, under- or over-supply, loss of  competitive advantage, loss of market share, unrecoverable costs and the erosion of the Group's consumer base or brand equity.This  includes potential impacts from a failure to adequately manage product-related matter and EPR requirements. In addition, consumers  failing to engage in product recycling and/or Take-Back schemes could also have an impact on the Group’s product-related and EPR  risks and requirements.  Material non-compliance with climate change or circular economy-related legislation or reporting requirements could reduce BAT's ability to  attract investors, result in reputational damage and potentially regulatory sanctions. Poor results in ESG ratings and indices used by financial  actors may negatively impact their investment decision, and thereby increase the cost of capital or negatively impact share price.  Failure to meet current and future employees’ expectations concerning the Group’s actions to mitigate and adapt to climate change or  address circular economy matters may negatively impact the retention and/or attraction of high-quality employees. |

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| Group Risk Factors  Continued | | | | | | | |

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| Risk: Impact of a pandemic on the performance of the Group |
| Description |
| The Group continues to closely monitor the potential for disruption arising from pandemics, the most recent having been coronavirus  ( COVID-19). Consequences may include significant logistical challenges for employees and their ability to perform their duties, potential loss of  lives or significant level of illness in the workforce, inability to deliver revenue stream and market share targets impacting profits and cash flows,  and disruption to the supply chain and third parties being unable to deliver contractual goods and services. In addition, some countries in which  the Group operates have adopted regulations restricting the ability to manufacture, distribute, market and sell products. |
| Impact |
| The influence of COVID-19, future variants and other pandemics on the Group's operations and financial condition is difficult to predict given the  wide range of determining factors, not least the nature of the pandemic/virus, its speed of infection, geographical scope and duration.  The impact of a pandemic on global economic activity and the nature and severity of measures adopted by governments are numerous.  The impact on the Group is not limited to:  –Reductions or volatility in consumer demand for one or more of our products due to illness, retail closures, quarantine or other travel  restrictions, health consciousness (quitting use of tobacco and nicotine products), government restrictions, the deterioration of  socio-economic conditions, economic hardship and customer-downtrading (switching to a cheaper brand), which may impact the  Group’s market share.  –Disruptions to the Group’s operations, such as its supply chain, or manufacturing or distribution capabilities, which may result in  increased costs due to the need for more complex supply chain arrangements, to expand existing facilities or to maintain inefficient  facilities, a reduction of the Group’s sales volumes or an increase in bad debts from customers.  –Disruption to the Group’s operations resulting from a significant number of the Group’s employees, including employees performing  key functions, working remotely for extended periods of time or becoming ill, which may reduce the employees’ efficiency and productivity and  cause product development delays, hamper new product innovation and have other adverse effects on the Group’s business.  –Significant volatility in financial markets (including exchange rate volatility) and measures adopted by governments and central banks  that further restrict liquidity, which may limit the Group’s access to funds, lead to shortages of cash and cash equivalents needed to  operate the Group’s business, and impact the Group’s ability to refinance its existing debt.  –Regulations restricting the ability to manufacture, distribute, market and sell products, and potentially increasing illicit trade.  –Governments seeking to increase revenues through increased corporate taxes and excise in combustible and/or New Category  products, increasing the cost and prices of our products – which could reduce volumes and margins, and/or increase illicit trade.  All of these factors may have material adverse effects on the Group’s results of operations and financial condition and cause the Group  to fail to deliver on its strategic growth plans. |

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| Legal, Regulatory and Compliance Risks |
| Risk: Exposure to, the enactment of, proposals for, or rumours of regulation that significantly impairs the Group’s ability to  communicate, differentiate, market or launch its products and/or the lack of appropriate regulation for New Categories |
| Description |
| Tobacco control measures are in place in nearly all markets in which we operate and specific regulations for non-tobacco nicotine  products and Beyond Nicotine products (including CBD) are gaining momentum. Such restrictions are introduced by legislation,  regulations and/or voluntary agreements. Most tobacco and nicotine control measures can be categorised as follows:  –Category Bans: including regulations that ban the sale, import, possession, or use of certain product categories, entirely (e.g. New  Categories);  –Place: including regulations restricting consumption in private and public spaces (e.g. public place smoking or vaping bans, including  restaurants and bars);  –Product: including regulations on the use of or testing for ingredients, product design and attributes (e.g. tar/ nicotine / carbon  monoxide ceilings) flavours bans (including menthol); product safety (e.g. reduced cigarette ignition propensity standards); product  disclosure (e.g. ingredients and emissions) and environmental impact (e.g. Extended Producer Responsibility (EPR) requirements for  cigarette filters);  –Packaging and labelling: including regulations on health warnings and other government-mandated messages; restrictions on the use  of certain descriptors and brand names; requirements on pack shape, size, weight and colour; and mandatory plain packaging;  –Advertising, promotion and sponsorship: including partial or total bans on advertising , promotions and sponsorship, and online and  direct engagement communication;  –Purchase: including regulations on where the products are sold, such as type of outlet (e.g. supermarkets and vending machines),  radius or distance restrictions (e.g. 300 meters from a school), online sales bans, regulation regarding how they are sold and displayed  (e.g. above the counter or under the counter) and minimum purchase age and increases thereto; and  –Price: including regulations that have implications on prices and margins (e.g. excise taxes, minimum prices and import/export duties).  The Group believes that further tobacco control and nicotine regulation is expected over the medium term in many of the Group’s  markets. Irresponsible behaviour or marketing practices of competitors (for example where there is a lack of appropriate regulation) or  actions contrary to the regulations in certain markets, may cause reputational harm to the industry as a whole and may result in  additional regulation or bans. Further, there is pressure on governments from international organisations and agencies, tobacco control  NGOs, vanguard regulators and the private sector (including philanthropists, pharmaceutical and security technology companies and  social justice groups) to pursue regulatory policies and implement tobacco or nicotine product-related regulation which is not science  or evidence based and is aimed at increasing the complexity and cost burden on the tobacco or nicotine industry, limiting the  commercial viability of tobacco and nicotine products or prohibiting the products completely. Regulators may be lacking in  understanding of New Categories products and their role in tobacco harm reduction due to their novelty. These factors can lead to a  lack of adequate or existing regulatory regimes or clear and appropriate product classifications.  In addition, the Group may fail to implement the right level of control measures or to maintain adequate standards of compliance with  regulatory measures. For example, the Group’s marketing activities may fail to comply with the relevant law and regulations or with the  Group’s International Marketing Principles.  Insufficient information, instruction and training in the relevant areas and a lack of knowledge of the existence and/or requirements of  relevant regulations including tobacco and nicotine as well as other relevant regulations, such as battery regulation, or a failure to  monitor, assess and implement the requirements of new or modified regulation, may increase these risks.  There may also be negative and disproportionate societal responses to consumer abuse or misuse of tobacco and/or nicotine products  (e.g. in New Categories) or to certain categories of products.  With respect to Modern Oral and other New Categories, regulatory frameworks currently follow divergent approaches. In certain  markets, where there is an absence of adequate regulation, actions of irresponsible competitors may cause reputational harm to the  category and result in outright bans or adverse regulation. In markets where there is a likelihood of tobacco, pharmaceutical or food  regulatory classification, the category can be at risk of severe regulation or total ban.  The Group believes that Tobacco Heated Products are likely to be regulated as traditional tobacco products, driven by the decision of  WHO’s 7th Conference of Parties to the Framework Convention on Tobacco Control, and Reports from the WHO submitted to the COP9  for noting, to apply tobacco control regulations to these products including recommendations for plain packaging and flavour bans. |

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| Description continued |
| Traditional Tobacco Products  With respect to tobacco and combustible products, many of the measures outlined in the FCTC have been or are in the process of  being implemented through national legislation in many markets in which the Group operates, including recommendations for plain  packaging and flavour bans (e.g. menthol bans – in effect in the European Union since 20 May 2020). In April 2022, the U.S. Food and  Drug Administration (FDA) published proposed product standards that would ban menthol as a characterising flavour in cigarettes in  the U.S. if finalised. In December 2022, the sale of all tobacco products with characterising flavours (including menthol) other than  tobacco were banned in the state of California, which is the most populated state in the U.S. Further, various national or international  regulatory regimes may seek to require the reduction of nicotine levels in tobacco products.  In March 2018, the FDA published its Advanced Notice of Proposed Rulemaking titled “Tobacco Product Standard for Nicotine Level of  Combusted Cigarettes” and invited interested parties to submit comments on, among other issues, maximum nicotine limits and  whether any maximum nicotine level should apply to combustible tobacco products. In October 2019, the FDA withdrew the Advanced  Notice of Proposed Rulemaking without explanation. Then, in June 2022, the FDA announced a plan to move forward with a proposed  rule reducing nicotine levels in cigarettes to “minimally or non-addictive” levels, but the agency has said that there is no precise date on  which it plans to issue this proposed rule.  In the U.S., manufacturers of all tobacco products deemed to be under the authority of the FDA as of 2016 (which includes Vapour and  Modern Oral products that contain or can be used with tobacco-derived nicotine) must submit information to the FDA seeking formal  marketing authorisation of such products.  The New Zealand Smokefree Aotearoa 2025 Bill came into force on 1 January 2023. It implements a ban on anyone born after 1 January  2009 from buying tobacco products, will implement a retail limit of 600 retailers across New Zealand from 1 July 2024, and will  implement a nicotine limit in smoked tobacco to 0.8 mg/g (~5% of current levels) from 1 April 2025. A consultation on how to apply the  retail limit and nicotine restrictions will close on 15 March 2023.  Finally, the preparations of a revised EU Tobacco Products Directive are progressing, with estimated adoption in 2025. The current  Directive might be replaced with a directly applicable regulation, following which transposition in Member States would no longer be  required. It is anticipated that this new regulation could include plain packaging for combustibles and/or greater regulation of tobacco  and nicotine product ingredients.  New Categories  With respect to New Categories, regulation is still evolving and frameworks for regulation and taxation vary from country to country.  Some regulators have applied or are considering applying combustible tobacco products’ restrictive regulatory framework to New  Categories. Some jurisdictions have banned or are considering banning certain New Category products altogether.  Following reports of individuals experiencing acute respiratory injury in suspected association with vaping certain e-liquids (EVALI) and  reports regarding vaping youth usage in the U.S., stricter regulatory views gained momentum and were publicly supported by the  World Health Organization (WHO) which continues to call on countries to ban or regulate novel nicotine products as tobacco. The U.S.,  the EU and Canada are playing a leading role across all identified regulatory risks, including: bans on flavours, sales channel bans,  advertising restrictions and nicotine limits, among others.  The FDA granted marketing authorisation for the Vuse Solo device and its tobacco (“original”) flavour in October 2021, but denied  authorisation for Vuse Solo flavours other than menthol (which were not on the market). That denial is being appealed with the FDA. In  May 2022, the FDA issued marketing authorisation orders for tobacco flavoured Vuse Vibe and Ciro but denied authorisation for  flavours other than menthol (which were not on the market). This denial in relation to Vuse Vibe and Ciro has been appealed through a  request for further Agency review. We have received and are challenging the FDA's Market Denial Order dated January 2023 related to  Vibe and Ciro (menthol variants) and are seeking a permanent stay.There can be no assurance that the Vuse menthol or other flavours  appeals will succeed. Additionally, the continued marketing authorisations of Vuse products is contingent on continued compliance  with regulatory requirements.  The marketing authorisation may be suspended or withdrawn if the FDA determines that the continued marketing of the products are  no longer appropriate for the protection of the public health. The FDA has not issued marketing authorisations for Vuse Alto and its  associated flavours, including menthol, with FDA decisions still pending. Although the Vuse Alto menthol and tobacco flavoured  products remain on the market pending FDA decisions there can be no assurance that these authorisations (or the other Vuse Alto  flavours) will be granted. Similarly, the Group’s Velo products remain on the market in the U.S., again pending FDA decisions on their  marketing authorisations, and there can be no assurance these will be granted. If the FDA denies a marketing authorisation then the  relevant product(s) would need to be withdrawn from the market (unless a court or the FDA intervenes).  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 degrees of regulation.  Please refer to the discussion of tobacco and nicotine regulatory regimes under which the Group’s businesses operate set out from  page [363](#id739eb8a094346e4a1dd9989c862058f_4392). |

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| Legal, Regulatory and Compliance Risks continued |
| Risk: Exposure to, the enactment of, proposals for, or rumours of regulation that significantly impairs the Group’s ability to  communicate, differentiate, market or launch its products and/or the lack of appropriate regulation for New Categories  continued |
| Impact |
| Existing and future regulatory measures impacting one or more New Categories and/or Beyond Nicotine and/or traditional tobacco  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, compete in future product categories and make new market  entries; regulations (e.g. pharma or food) or total bans of tobacco and/or New Categories products in certain markets; reduced margins  due to increased operating costs; impediments to building or maintaining brand equity; and restrictions on the Group’s ability to deliver,  market and sell existing or new products responding to consumers’ preferences. In addition, new (and changes to existing) regulation  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 banning or materially restricting the use of menthol in tobacco products (such as the ban, from December  2022, in California) 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.  Regulations can also have an adverse impact on the Group’s ability to compete within the legitimate tobacco, nicotine or New  Categories industry and with illicit traders or legal operators exploiting legal and regulatory loop holes. Regulations could also lead to  reduced consumer acceptability of new product specifications, leading to consumers seeking alternatives in illicit markets.  Unclear or inadequate regulations can lead to legal uncertainty, impacting the Group’s position in the marketplace.  In the specific case of New Categories, our corporate harm reduction ambition, including of New Categories revenue of £5 billion by  2025 and 50 million consumers of Non-Combustible products by 2030 could be at risk if stricter regulatory views are imposed at a  global scale, or if appropriate regulation is lacking or there is a lack of acceptance of tobacco harm reduction as a tobacco control policy  (preventing a balanced regulatory framework for New Categories). Any action by the FDA or any government authority restricting the  use of New Category products could also have an adverse effect on the operation and financial position of the Group and the possible  failure of the Group’s harm reduction objective and loss of confidence in the Group’s ESG performance.  As a reflection of the real or perceived impact of stricter regulation in our business, the Group’s share price has also experienced, and  could in the future experience, shocks upon the announcement, rumour of 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.  In addition, 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 law s and regulations, or with our International  Marketing Principles. 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. |

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| Risk: Adverse implications of EU legislation on single-use plastics that will result in on-pack environmental warnings and  financial implications relating to the Extended Producer Responsibility (EPR) |
| Description |
| The EU adopted a Directive on single-use plastics in July 2019 (the "SUP Directive") which, among other products, targets tobacco products with  filters containing plastic. The Cellulose Acetate in our filters is defined as a single-use plastic under the Directive and, as such, the Directive will  have an impact on the Group’s cigarettes, filters for other tobacco products and consumables for THPs.  Under the SUP Directive, the Group will be subject to (and in some cases already is subject to) Extended Producer Responsibility (“EPR”)  schemes, requiring the Group to cover the costs of collecting, transporting, treating and cleaning-up of filters containing plastic. The SUP  Directive also imposes on tobacco manufacturers the obligation to finance consumer awareness campaigns and to place environmental  markings on packs of products with filters containing plastic.  Member States had to transpose the SUP Directive into national law by 3 July 2021, with an implementation deadline of 5 January 2023 for EPR  schemes. In practice, most Member States are late on transposition and implementation, with the practical consequence that EPR schemes will  go live with several months delays on average. The European Commission is also late in its issuance of guidelines on the criteria for the costs of  cleaning up litter, which should have been issued prior to the anticipated implementation deadline for EPR schemes. This introduces further  difficulties and uncertainty in the design and setting-up of EPR schemes. When transposing the SUP Directive into national law, EU member  states could decide to expand the scope of EPR systems under their respective national laws, which may expose the Group to additional  regulations and financial obligations. This is the case in France, where EPR implementation has already occurred with an expansion of the scope  to include non-plastic filters for RYO products. Although Sweden’s government has abandoned plans to extend its national EPR system to Snus  and Modern Oral pouches, other markets are still at risk of extension, such as in Spain (tobacco manufacturers would be mandated to financially  contribute to the cost of cleaning of parts of the general sewage system), the Czech Republic (tobacco manufacturers would be mandated to  contribute to the cost of managing household waste costs), and Poland and Romania (manufacturers’ financial contribution would also cover  paper filters, although they are not plastic items). Proposed regulations are still being discussed in these countries.  It is noted that there is a growing level of scrutiny on the use of single-use plastic across the world and a number of other markets in which the  Group operates are considering ways to restrict (or ban) the use of filters made of plastic and/or introduce EPR schemes covering other plastic  elements in our products beyond filters for traditional products and/or New Categories products. |
| Impact |
| The financial implications of existing and future EPR schemes will increase administrative burdens and operating costs and may 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. If significant space is appropriated on the packaging of some of the Group’s products, this may also be an impediment to  maintaining or building brand equity of the Group’s products which may, in turn, have a negative impact on the Group’s sales volume.  Failure to deliver appropriate EPR schemes may lead to imposition of the schemes by the local authorities at a higher cost to the Group,  adversely impacting the Group’s results of operations, financial condition and reputation. |

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| Risk: Exposure to litigation, regulatory action or criminal investigations on tobacco, nicotine, New Categories  and other issues |
| Description |
| The Group is involved in litigation related to its tobacco and nicotine products, including legal, regulatory and patent actions, proceedings  and claims, brought against it in a number of jurisdictions. Claims brought against the Group may be based on personal injury (both  individual claims and class actions), economic loss arising from the treatment of smoking and health-related diseases (such as medical  recoupment claims brought by local governments), patent infringement (please refer to the risk factor under “Product pipeline,  commercialisation and Intellectual Property risks, Exposure to risks associated with intellectual property rights, including the failure to  identify, protect and prevent infringement of the Group’s intellectual property rights and potential infringement of, or the failure to retain  licences to use, third-party intellectual property rights” below), negligence, strict tort liability, design defect, failure to warn, fraud,  misrepresentation, deceptive/unfair trade practices, conspiracy, medical monitoring and violations of antitrust/racketeering laws. ESG  and sustainability-related litigation and regulatory action may also be brought against the Group.  Certain actions, such as those in the U.S. and Canada, involve claims in the tens or hundreds of billions of pounds sterling. The Group is  also involved in proceedings that are not directly related to its tobacco and nicotine products, including proceedings based on  environmental pollution claims.  Additional legal and regulatory actions and investigations, proceedings and claims may be brought against the Group in the future. |
| Impact |
| The Group’s consolidated results of operations and financial position could be materially affected by any unfavourable outcome of  certain pending or future litigation. The Group could be exposed to substantial liability, which may take the form of ongoing payments,  such as is the case with the State Settlement Agreements in the U.S. that require substantial ongoing payments by Group subsidiary,  RJRT. Whether successful or not, the costs of the Group’s involvement in litigation could materially increase due to costs associated  with bringing proceedings and defending claims, which may also cause operational and strategic disruption by diverting management  time away from business matters. Liabilities and costs in connection with litigation could result in bankruptcy of one or more Group  entities, for example, following a judgement in Canada, certain of the Group's Canadian subsidiaries filed for protection under the CCAA.  Any negative publicity resulting from these claims may also adversely affect the Group’s reputation.  The occurrence of any of the above effects could 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.  Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group. |

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| Legal, Regulatory and Compliance Risks continued |
| Risk: Significant and/or unexpected increases or structural changes in tobacco and nicotine-related taxes |
| Description |
| Tobacco and nicotine products are subject to high levels of taxation, including excise taxes, sales taxes, import duties and levies in most  markets in which the Group operates. In many of these markets, taxes are generally increasing, but the rate of increase varies between  markets and between different types of tobacco and nicotine products. Increases in, or the introduction of new, tobacco and nicotine-  related taxes may be caused by a number of factors, including fiscal pressures, health policy objectives and increased lobbying pressure  from anti-tobacco advocates.  With respect to New Categories, although a common framework for regulation and taxation has yet to emerge, the manufacture, sale,  packaging and advertising of such products are increasingly being regulated and taxed. |
| Impact |
| Significant or unexpected increases in, or the introduction of new, tobacco-related taxes or minimum retail selling prices, changes in  relative tax rates for different tobacco and nicotine products or adjustments to excise have in the past resulted, and may in the future  result, in the need for the Group to absorb such tax increases due to limits in its ability to increase prices, an alteration in the sales mix in  favour of value-for-money brands or products, or growth in illicit trade, each of which could impact pricing, sales volume and profit for  the Group’s products. Significant or unexpected increases of tobacco-related taxes could also impact the Group's ability to deliver the  corporate purpose of harm reduction. |

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| Risk: Failure to comply with health and safety and environmental laws |
| Description |
| The Group is subject to a variety of laws, regulations and operational standards relating to health and safety and the environment.  The Group may fail to assess certain risks and implement the right level of control measures or to maintain adequate standards of health  and safety or environmental compliance, which could cause injury, ill health , disability or loss of life to employees, contractors or  members of the public, or harm to the natural environment and local communities in which the Group operates. As a result of the  outcomes of the COP26, further future regulation is anticipated as governments look to meet their climate change ambitions.  Insufficient information, instruction and training in the relevant areas and a lack of knowledge of the existence and/or requirements of relevant  regulations, or a failure to monitor, assess and implement the requirements of new or modified legislation, may increase these risks. |
| Impact |
| Any failure by the Group to comply with applicable health and safety or environmental laws, or the exposure to the consequences of a  perceived failure, could result in business disruption, reputational damage, difficulties in recruiting and retaining staff, increased  insurance costs, consequential losses, the obligation to install or upgrade costly pollution control equipment, loss of value of the Group’s assets,  remedial costs and damages, fines and penalties as well as civil or criminal liability. Each of these results could in turn adversely impact  the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic growth plans. |

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| Risk: Exposure to unfavourable tax rulings |
| Description |
| The Group is subject to tax laws in a variety of jurisdictions. The Group‘s interpretation and application of the tax laws could differ from  those of the relevant tax authority, which may subject the Group to claims for breach of such laws, including for late or incorrect filings or  for misinterpretation of rules. Tax authorities in a variety of jurisdictions, such as the Netherlands and Russia, have assessed, and may in  the future assess, the Group for historical tax claims, including interest and penalties, arising from disputed areas of tax law. The Group is  currently party to tax disputes in a number of jurisdictions, some of which involve claims for amounts in the hundreds of millions of  pounds sterling.  Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group. |
| Impact |
| The Group’s failure to comply with the relevant tax authority’s interpretation and application of the tax laws could result in significant  financial and legal penalties, including the payment of additional taxes, fines and interest in the event of an unfavourable ruling by a tax  authority in a disputed area, as well as the payment of dispute costs. Disruption to the business could occur as a result of management’s  time being diverted away from business matters. Each of these results could negatively affect the Group’s results of operations and  financial condition and cause the Group to fail to deliver on its strategic growth plans. |

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| Risk: Unexpected legislative changes to corporate income tax laws |
| Description |
| The Group is subject to corporate income tax laws in the jurisdictions in which it operates. These laws frequently change on a  prospective or retroactive basis. |
| Impact |
| Legislative changes to corporate income tax laws and regulations may have an adverse impact on the Group’s corporate income tax  liabilities and may lead to a material increase of the Group’s overall tax rate. This could, in turn, negatively affect the Group’s results of  operations and financial condition and cause the Group to fail to deliver on its strategic growth plans. |

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| Risk: Exposure to potential liability under competition or antitrust laws |
| Description |
| According to the Group’s internal estimates, the Group is a market leader by volume and/or value in certain categories in a number of  countries in which it operates and/or is one of a small number of tobacco and/or New Categories companies in certain other markets in  which it operates. The Group has had antitrust infringement decisions imposed against it in the past and is subject to ongoing  investigations (please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group). The Group  may fail to comply with competition or antitrust laws and may be subject to investigation and/or litigation for alleged abuse of its position  in markets in which it has significant market share or for alleged collusion/anti-competitive arrangements with other market participants.  Competition/antitrust laws continue to evolve globally with increasingly aggressive enforcement. |
| Impact |
| Failure by the Group to comply with competition or antitrust laws and investigations (and/or litigation) for violation of such laws may  result in significant legal liability, fines, penalties and/or damages actions; criminal sanctions against the Group, its officers and  employees; increased costs, prohibitions on conduct of the Group’s business; forced changes in business practices, forced divestment of  brands and businesses (or parts of businesses) to competitors or other buyers; director disqualifications; commercial agreements being  held void; and operational and strategic disruption (including by diverting management time away from business matters). The Group  may face increased public scrutiny and the investigation or imposition of sanctions by antitrust regulation agencies and/or courts for  violations of competition regimes which may subject the Group to reputational damage and loss of goodwill, including negative  perceptions of the Group’s governance and our ESG credentials.  The occurrence of any of the above effects could 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. |

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| Risk: Failure to establish and maintain adequate controls and procedures to comply with applicable securities, corporate  governance and compliance regulations |
| Description |
| The Group’s operations are subject to a range of rules and regulations around the world. These include U.S. securities, corporate  governance and compliance laws and regulations, such as the Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices Act of  1977, which applies to the Group’s worldwide activities. While the Group continuously seeks to improve its systems of internal controls  and to remedy any weaknesses identified, there can be no assurance that the policies and procedures will be followed at all times or  effectively detect and prevent violations of applicable laws. In addition, the Group is subject to increasingly stringent reporting  obligations under UK corporate reporting regulations. |
| Impact |
| The increased scope and complexity of applicable regulations to which the Group is subject may lead to higher costs for compliance. Failure to  comply with laws and regulations may result in significant legal liability, fines, penalties, and/or damages actions, criminal sanctions against the  Group, its officers and employees, and damage to the Group’s reputation. Non-compliance with such regulations could also lead to a loss of the  Group’s listing on one or more stock exchanges or a loss of investor confidence with a subsequent reduction in share price. |

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| Risk: Loss of confidential information, including through manipulation of data by employees and system failure |
| Description |
| Unintended or inappropriate behaviour by employees, contractors, service providers or others using or managing the Group’s  confidential information especially given the increased use of third parties (including sensitive or confidential information of third parties)  or personal data (including sensitive consumer personal data) may affect the Group’s communications and operations which may result  in the unauthorised disclosure of such information. Increased remote working has and may increase this risk.  In addition, flaws in our IT systems and/or those of our suppliers, a lack of infrastructure or application resilience, slow or insufficient  disaster recovery service levels or the installation of new systems may increase the possibility that data, including confidential, personal  or other sensitive information, stored or communicated by IT systems may be corrupted, lost or disclosed. There may be malicious ‘bad  actor’ activity (e.g. cyber attack) or ‘insider threat’ (e.g. activists or disgruntled employees). |
| Impact |
| The loss of confidential information may result in civil or criminal legal liability and prosecution by enforcement bodies and/or claims from  third parties, which may subject the Group to the imposition of material fines, damages and/or penalties and the costs associated with  defending these claims. It could also lead to a competitive disadvantage through the loss of trade secrets. There could also be potential  exposure from extortion attempts and costs from business continuity situations.  Inappropriate disclosure of confidential information or violation of the European General Data Protection Regulation (GDPR) or other  privacy laws (please refer to the risk factor under “Loss or misuse of personal data through a failure to comply with the European General  Data Protection Regulation, the UK Data Protection Act 2018, e-Privacy Laws and other privacy legislation governing the processing of  personal data” below) may also result in significant reputational harm and public scrutiny which could create negative perceptions of the  Group’s governance and our ESG credentials, a loss of investor confidence (including a possible share price impact) and reduced third-  party reliance on the Group’s information technology systems or other data handling practices. In addition, restoration and remediation  of disclosed confidential information or personal data may be costly, difficult or even impossible.  The occurrence of any of the above effects could 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. |

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| Legal, Regulatory and Compliance Risks continued |
| Risk: Failure to comply with product regulations due to uncertainty surrounding the proper interpretation and application  of those regulations |
| Description |
| The interpretation and application of regulations concerning the Group’s products, such as the Tobacco and Related Products Directive  (TPD2), may be subject to debate and uncertainty. This includes uncertainty over product classifications and restrictions on advertising.  In particular with respect to the developing category of New Categories, which has grown in size and complexity in a relatively short  period of time, a consensus framework for the interpretation and application of existing regulation, such as the rules concerning nicotine-  containing liquids used in Vapour products, has yet to emerge.  The continuously changing and evolving landscape of regulation concerning the Group’s products contributes to the uncertainty  surrounding interpretation and application and creates a risk that the Group may misinterpret or fail to comply with developing  regulations in the various jurisdictions in which it operates, or becomes subject to enforcement actions from regulators. With the  continuous changing of product cycle plans and expansion to new markets and innovations, there is a risk that such changes and  launches fail to comply with the relevant regulations, including pre-approval and/or pre-registration requirements. For example, some  governments have intentionally banned or are seeking to ban novel tobacco products and products containing nicotine, while others  would need to amend their existing legislation to permit their sale. Even in countries where the sale of such products is currently  permitted, some governments have adopted, or are seeking to adopt, bans on New Categories or restrictions on certain flavours. |
| Impact |
| The significant number of emerging regulations and the uncertainty surrounding their interpretation and application may subject the  Group to claims for breach of such regulations. Financial costs of such enforcement actions include financial penalties, product recalls  and litigation costs, and entail a significant risk of adverse publicity and damage to the Group’s reputation and goodwill. |

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| Risk: Failure to uphold high standards of corporate behaviour, including through unintended or malicious breach of anti-  bribery and anti-corruption and other anti-financial crime laws |
| Description |
| The Group is subject to various anti-corruption laws and regulations and other anti-financial crime laws including but not limited to those  relating to tax evasion, money laundering, terrorist financing and bribery (Anti-Corruption Laws, including the UK Proceeds of Crime Acts  (POCA)). All employees of BAT, its subsidiaries and joint ventures which it controls are expected to uphold a high standard of corporate  behaviour and comply with the Group Standards of Business Conduct (SoBC) which includes a requirement to comply with Anti-  Corruption Laws. Employees, associates, suppliers, distributors and agents are prohibited from engaging in improper conduct to obtain  or retain business or to improperly influence (directly or indirectly) a person working in an official capacity to decide in the Group’s favour.  The Group’s employees, contractors and service providers may fail to comply with our SoBC and/or may violate applicable Anti-  Corruption Laws.  From time to time, the Group investigates, and becomes aware of governmental authorities’ investigations into, allegations of misconduct,  including alleged breach of sanctions and allegations of corruption, against Group companies. The Group cooperates with the  authorities’ investigations, where appropriate, including with the DOJ and OFAC in the United States, which are conducting investigations  into suspicions of breach of sanctions. As the investigations are ongoing, it is not possible to identify the timescale in which these matters  might be resolved. Please refer to note 24 in the Notes on the Accounts.  Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group. |
| Impact |
| Failure of the Group to comply with Anti-Corruption Laws or to deploy and maintain robust internal policies, procedures and controls  could result in significant fines and penalties (reducing the Group’s ability to reinvest in the future), a share price impact, criminal and/or  civil sanctions against the Group and its officers and employees, increased costs, prohibitions or other limitations or requirements (e.g.  compliance requirements) on the conduct of the Group’s business and reputational harm (including negative perceptions of the Group’s  governance and our ESG credentials), it may subject the Group to claims for breach of such regulations and it could 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.  Even when proven untrue, there are often financial costs, time demands and reputational impacts associated with investigating and  defending against such claims. |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Group Risk Factors  Continued | | | | | | | |

354

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| --- |
|  |
| Risk: Imposition of sanctions under sanctions regimes or similar international, regional or national measures |
| Description |
| National, international and supra-national sanctions regimes or similar international, regional or national measures are complex and  dynamic and may affect territories in which the Group operates or third parties with which it may have commercial relationships. There  may be unintended or malicious breaches of sanctions due to inappropriate or negligent behaviour by BAT employees, contractors,  customers, suppliers or service providers.  In particular, the Group has operations in a number of territories that are subject to various sanctions, including Cuba, Russia and Belarus.  Operations in these territories expose the Group to the risk of significant financial costs and disruption in operations that may be difficult  or impossible to predict or avoid or the activities could become commercially and/or operationally unviable. Sanctions can be imposed  quickly (as happened recently in Russia) with the possibility of further territories the Group operates in becoming subject to sanctions at  short notice.  National, international and supra-national sanctions regimes may also affect third parties (or their banks) with which the Group has  commercial relationships, e.g. through their banks (including possible risk aversion to being associated with a sanctioned territory) and  could lead to supply and payment chain disruptions.  From time to time, the Group investigates, and becomes aware of governmental authorities’ investigations into, allegations of  misconduct, including alleged breach of sanctions and allegations of corruption, against Group companies. The Group cooperates with  the authorities’ investigations, where appropriate, including with the DOJ and OFAC in the United States, which are conducting  investigations into suspicions of breach of sanctions.  Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group. |
| Impact |
| As a result of the limitations imposed by sanctions, it may become commercially and/or operationally unviable for the Group and/or its  critical business partners to operate in certain territories or execute transactions related to them and the Group may be required to exit  existing operations in such territories. The Group may also experience difficulty in sourcing materials or importing products, repatriating  currency from a sanctioned country and finding financial institutions willing to transact with it, any of which may expose the Group to  increased costs. In addition, the costs of complying with sanctions may increase as a result of new, or changes to existing, sanctions  regimes.  Any failure to comply with sanctions regimes or similar international, regional, or national or supra-national measures may result in  significant legal liability, fines (reducing the Group’s ability to reinvest in the future) and/or penalties, criminal and/or civil sanctions  against the Group, its officers and employees, damage to commercial or banking relationships and reputational harm. Reputational harm  (including negative perceptions of the Group’s governance and our ESG credentials) may result regardless of whether the Group  complies with imposed sanctions.  The occurrence of any of the above effects could 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. |

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| Risk: Failure to uphold New Categories marketing practices |
| Description |
| The regulatory landscape is constantly evolving with marketing practices being different in key New Categories markets. The Group’s  marketing activities may be found to be, or alleged (including in the media) to be, non-compliant with laws and regulations, or with the  International Marketing Principles (IMPs) on the marketing and sale of tobacco and nicotine products to consumers such as age  verification measures. On-line activities can also be found to be, or alleged to be, aimed at consumers in a country where such activities  are not permitted. |
| Impact |
| The Group is and may in the future be subject to claims for breach of marketing practices. In particular, national 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 IMPs. As such, the Group could be subject to liability and costs 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.  Future breaches may lead to a loss of investor confidence in ESG performance and inability to meet our responsible marketing focus area  if our IMPs are not followed, impacting our corporate purpose of delivering harm reduction. |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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355

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| Legal, Regulatory and Compliance Risks continued |
| Risk: Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation,  the UK Data Protection Act 2018, e-Privacy Laws and other privacy legislation governing the processing of personal data. |
| Description |
| Personal data is a subset of data (which is likely to be confidential) which attracts different risks and treatment under applicable law.  Breaches of data privacy laws include misuse of information which may not be confidential in nature. These include, for example,  unsolicited marketing calls to a publicly available number, or using an individual’s personal data in a way which was not authorised or  in a way that the individual did not reasonably expect through technologies such as online tracking or monitoring.  Various privacy laws, including the European General Data Protection Regulation (GDPR), UK Data Protection Act 2018 (UKDPA) and e-  Privacy Directive, including EU and UK Regulatory guidances (e-Privacy Laws), govern the way in which organisations (such as  employees, contractors, service provider colleagues and other authorised persons) handle individuals’ personal data including how such  organisations, including the Group, track or monitor their online behaviour.  Unintended or malicious breaches of data privacy laws may occur through inappropriate or negligent behaviour by BAT employees,  contractors, service providers or others. In particular, in the event of:  –an unauthorised disclosure of personal data as a result of a bad actor (e.g. cyber attack); or  –a weakness in our IT systems, or application resilience, slow or insufficient disaster recovery service levels or the installation failure of  a new system (which result in personal data stored or communicated by IT systems being corrupted, lost or disclosed).  Depending on the risk to the individuals concerned, such personal data breaches (including mass personal data unavailability) could  trigger a formal notification to a local data protection supervisory authority. This, in turn, could subject Group companies to not only  regulatory scrutiny but also individual claims or even class action suits; and  ePrivacy Laws state that any misuse of consumer personal data or lack of transparency provided to consumers on how we use their data  or track their online behaviours are subject to regulatory scrutiny.  Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve. Following the entry into  force of the GDPR in May 2018, other jurisdictions in which the Group operates have enacted similar local legislation such as the  California Consumer Privacy Act U.S. and the “LGPD” in Brazil which further increases the risks surrounding the processing of personal  data especially in the consumer space. As part of the Group’s digital transformation initiative, it has an enhanced focus on consumer  data, especially regarding New Categories, which increases these risks. |
| Impact |
| Failure to comply with existing or future e-Privacy Laws and privacy legislation governing the processing of personal data may adversely  impact the Group’s results of operations and financial condition.  Loss or misuse of personal data may result in civil or criminal legal liability and prosecution by enforcement bodies, which may subject  the Group to the imposition of material fines (currently up to 4% of Group worldwide turnover in the context of GDPR and/or the UK Data  Protection Act) and/or penalties and/or claims and costs associated with defending these claims (which could include class action suits  brought by consumers). The Group’s officers and employees may also be subject to personal criminal sanctions.  Reputational damage could also potentially cause significant harm to the Group, including negative perceptions of the Group’s  governance and our ESG credentials.  Relevant data protection supervisory authority could also order certain Group legal entities to cease processing activities, which could  result in a significant operational disruption. Regulatory interest may also prompt interest from other compliance authorities/  governments, leading to further regulation or proceedings.  The occurrence of any of the above effects could 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. |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Group Risk Factors  Continued | | | | | | | |

356

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| --- |
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| Economic and Financial Risks |
| Risk: Foreign exchange rate exposures |
| Description |
| The Group’s reporting currency is the pound sterling. The Group is exposed to the risk of fluctuations in exchange rates affecting the  translation of net assets and earned profits of overseas subsidiaries into the Group’s reporting currency. These translational exposures  are not normally hedged.  Exposures also arise from the foreign currency denominated trading transactions undertaken by subsidiaries and dividend flows. Where  not offset by opposing flows, these exposures are generally hedged according to internal policies, but hedging of exposure to certain  currencies might not be possible due to exchange controls, limited currency availability or prohibitive costs, and errors in hedging may  occur. Fiscal policy divergence in relation to interest rates between key markets may also increase these risks. |
| Impact |
| During periods of exchange rate volatility, the impact of exchange rates on the Group’s results of operations and financial condition can  be significant. Fluctuations in exchange rates of key currencies against the pound sterling (as was the case in 2022 when the pound  sterling depreciated significantly against the US dollar, among other currencies) may result in volatility in the Group’s reported earnings  per share, cash flow and balance sheet. Furthermore, the dividend paid by the Group may be impacted if the payout ratio is not adjusted.  Differences in translation between earnings and net debt may also affect key ratios used by credit rating agencies, which may have an  adverse effect on the Group’s credit ratings.  In addition, volatility and/or increased costs in the Group’s business due to transactional foreign exchange rate exposures may adversely  affect operating margins and profitability and attempts to increase prices to offset such increases could adversely impact sales volumes. |

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| Risk: Inability to obtain price increases and exposure to risks from excessive price increases and value chain erosion |
| Description |
| Annual price increases by the Group are among the key drivers in increasing market profitability. However, the Group has in the past  been, and may in the future be, unable to obtain such price increases as a result of increased regulation; increased competition from illicit  trade; stretched consumer affordability arising from deteriorating political and economic conditions and rising prices; sharp increases or  changes in excise structures; and competitors’ pricing.  As the New Categories market continues to develop, the Group may face erosion in the value chain for New Categories through lower  market prices, excise taxes, high retail trade margins or high production costs that make New Categories less competitive versus  combustible tobacco products. As an example, excise on Tobacco Heated Products in Japan increased and aligned closer to FMC  following a five-year (2018-2022) phased excise plan.  In addition, the Group faces the risk that price increases it has conducted in the past, and may conduct in the future, may be excessive  and not find adequate adult tobacco consumer acceptance. |
| Impact |
| If the Group is unable to obtain price increases or is adversely affected by impacts of excessive price increases, it may be unable to  achieve its strategic growth metrics, have fewer funds to invest in growth opportunities, and, in the case of excessive price increases, be  faced with quicker reductions in sales volumes than anticipated due to accelerated market decline, down-trading (switching to a cheaper  brand) and increased illicit trade. These in turn impact the Group’s market share, results of operations and financial condition and cause  the Group to fail to deliver on its strategic growth plans.  In addition, erosion in the value chain for New Categories could have a negative impact on the Group’s sales volume or pricing for these  products. High excise could dampen demand for New Categories or result in lower profit margins. Lower market prices, high retail trade  margins or increases in production costs could also negatively impact profit margins or lead to uncompetitive pricing. |

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357

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| Economic and Financial Risks continued |
| Risk: Effects of declining consumption of legitimate tobacco products and a tough competitive environment |
| Description |
| Evidence of market contraction and the growth of illicit trade of tobacco products is apparent in several key global markets in which the  Group operates. This decline is due to multiple factors, including increases in excise taxes leading to continuous above-inflation price  rises, changes in the regulatory environment, the continuing difficult economic environment in many countries impacting consumers’  disposable incomes, the increase in the trade of illicit tobacco products, rising health concerns, a decline in the social acceptability of  smoking and an increase in New Category uptake.  The Group competes based on the strength of its strategic brand portfolio, product quality and taste, brand recognition, brand loyalty,  taste, innovation, packaging, service, marketing, advertising and price. The Group is subject to highly competitive environments in all  aspects of its business, and its competitive position can be significantly influenced by the prevailing economic climate, consumers’  disposable income, regulation, competitors’ introduction of lower-price or innovative products, higher tobacco product taxes, higher  absolute prices, governmental action to increase minimum wages, employment costs, interest rates and increase in raw material costs.  Furthermore, the Group is subject to substantial payment obligations under the State Settlement Agreements, which adversely affect  the ability of the Group to compete in the U.S. with manufacturers of deep-discount cigarettes that are not subject to such substantial  obligations. |
| Impact |
| Any future decline in the demand for legitimate tobacco products could 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.  In a tough competitive environment, factors such as market size reduction, customer down-trading, illicit trade and competitors  aggressively taking market share through price re-positioning or price wars generally reduce the overall profit pool of the market and may  impact delivery of the Group’s profits. This may also lead to a decline in sales volume, loss of market share, impact delivery of the Group’s  ESG agenda, erosion of its portfolio mix and reduction of funds available for investment in growth opportunities. |

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| Risk: Funding, liquidity and interest rate risks |
| Description |
| The Group cannot be certain that it will have access to bank financing or to the debt and equity capital markets at all times and is  therefore subject to funding and liquidity risks. In addition, the Group’s access to funding may be affected by restrictive covenants to  which it is subject under some of its credit facilities. Furthermore, broader ESG trends may impact the Group’s access to funding.  The Group is also exposed to increases in interest rates in connection with both existing floating rate debt and future debt refinancings.  Recently, after an extended period with historically low interest rates, interest rates have increased substantially and may further  increase in the future.  Furthermore, the Group operates in several markets closely regulated by governmental bodies that intervene in foreign exchange  markets by imposing limitations on the ability to transfer local currency into foreign currency and introducing other currency controls  that expose cash balances to devaluation risks or that increase costs to obtain hard currency. As a result, the Group’s operational entities  in these markets may be restricted from using end-market cash resources to pay for imported goods, dividend remittances, interest  payments and royalties. The inability to access end-market cash resources in certain markets contributes to the Group’s funding and  liquidity risks. |
| Impact |
| Adverse developments in the Group’s funding, liquidity and interest rate environment may lead to shortages of cash and cash  equivalents needed to operate the Group’s business and to refinance its existing debt. Inability to fund the business under the Group’s  current capital structure, failure to access funding and foreign exchange or increases in interest rates may also have an adverse effect on  the Group’s credit rating, which would in turn result in further increased funding costs and may require the Group to issue equity or seek  new sources of capital. Although the Group currently benefits from investment grade ratings from both Moody's and S&P, in 2022, S&P  revised its outlook from stable to negative. Any downgrade of the Group's credit ratings or loss of investment grade status could  materially increase the Group's financing costs. Non-compliance with the Group’s covenants under certain credit facilities could lead to  an acceleration of its debt.  All these factors may have material adverse effects on the Group’s results of operations and financial conditions and cause the Group to  fail to deliver on its strategic growth plans. These conditions could also lead to underperforming bond prices and increased yields.  In the case of funding or liquidity constraints, the Group may also suffer reputational damage due to its perceived failure to manage the  financial risk profile of its business, which may result in an erosion of shareholder value reflected in an underperforming share price, and/  or underperforming bond prices and higher yields. In addition, the Group’s ability to finance strategic opportunities or respond to threats  may be impacted by limited access to funds. |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Group Risk Factors  Continued | | | | | | | |

358

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| Risk: Failure to achieve growth through mergers, acquisitions, joint ventures, investments and other transactions |
| Description |
| The Group’s growth strategy includes a combination of organic growth as well as mergers, acquisitions, joint ventures and investments.  The Group may be unable to acquire or invest in attractive businesses on favourable terms and may inappropriately value or otherwise  fail to identify or capitalise on growth opportunities. The Group may not be able to deliver strategic objectives and revenue  improvements from business combinations, successfully integrate businesses it acquires or establishes, or obtain appropriate regulatory  approvals for business combinations. Risks from integration of businesses also include the risk that the integration may divert the  Group’s focus and resources from its other strategic goals.  Additionally, the Group could be exposed to financial, legal or reputational risks if it fails to appropriately consider and address any  compliance, antitrust or ESG aspects of a transaction or planned transaction. Further, the Group has certain uncapped indemnification  obligations in connection with divestitures and could incur similar obligations in the future. |
| Impact |
| Any of the foregoing risks could result in increased costs, decreased revenues or a loss of opportunities and have an adverse effect on the  Group’s results of operations and financial condition, and in the case of a breach of compliance or antitrust regulation, could lead to  reputational damage, fines and potentially criminal sanctions and an adverse impact on the Group's ESG agenda.  The Group may become liable for claims arising in respect of conduct prior to any merger or acquisition of businesses if deemed to be a  successor to the liabilities of the acquired company or indemnification claims relating to divestitures, and any resulting adverse  judgment against the Group may adversely affect its results of operations and financial condition and cause the Group to fail to deliver  on its strategic growth plans.  Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group. |

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| Risk: Unforeseen underperformance in key global markets |
| Description |
| A substantial majority of the Group’s profit from operations is based on its operations in certain key markets, including the U.S. A number  of these markets are declining for a variety of factors, including price increases, restrictions on advertising and promotions, smoking  prevention campaigns, increased pressure from anti-tobacco groups, migration to smokeless products and private businesses adopting  policies that prohibit or restrict, or are intended to discourage, smoking and tobacco use.  Economic and political factors affecting the Group’s key markets include the prevailing economic climate, governmental austerity  measures, levels of employment, inflation, governmental action to increase minimum wages, employment costs, interest rates, raw  material costs, consumer confidence and consumer pricing. |
| Impact |
| Any change to the economic and political factors in any of the key markets in which the Group operates could affect consumer behaviour  and have an impact on the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic  growth plans. |

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| Risk: Increases in net liabilities under the Group’s retirement benefit schemes |
| Description |
| The Group currently maintains and contributes to defined benefit pension plans and other post-retirement benefit plans that cover  various categories of employees and retirees worldwide. The Group’s obligations to make contributions under these arrangements may  increase in the case of increases in pension liabilities, decreases in asset returns, salary increases, inflation, decreases in long-term  interest rates, increases in life expectancies, changes in population trends and other actuarial assumptions.  Please refer to the information under the caption ‘Retirement benefit schemes’ on page 235 and to note 15 in the Notes on the Accounts  for details of the Group’s retirement benefit schemes. |
| Impact |
| Higher contributions to the Group’s retirement benefit schemes could have an adverse impact on the Group’s results of operations,  financial condition and ability to raise funds and cause the Group to fail to deliver on its strategic growth plans. |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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359

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| Product pipeline, commercialisation and Intellectual Property risks |
| Risk: Inability to predict consumers’ changing behaviours and launch innovative products that offer adult tobacco and  nicotine consumers meaningful value-added differentiation |
| Description |
| The Group focuses its research and development activities on both creating new products, including New Categories and Beyond  Nicotine products, whilst maintaining and improving the quality of its existing products. In a competitive market, the Group believes that  innovation is key to growth. The Group considers that one of its key challenges in the medium and long term is to provide adult tobacco  and nicotine consumers with high-quality products that take into account their changing preferences and expectations, including those  in relation to ESG, while complying with evolving regulation.  The Group continues to develop and roll-out its New Categories portfolio which requires significant investment. The Group may be  unsuccessful in developing and launching innovative products or maintaining and improving the quality of existing products across  Combustibles, New Categories and Beyond Nicotine that offer consumers meaningful value-added differentiation. The Group may fail to  keep pace with innovation in its sector or changes in consumer expectations and is also exposed to the risk of an inability to build a  strong enough brand equity through social media and other technological tools to compete with its competitors. There are potential  bans and restrictions in key markets when using social media to advertise and communicate. Competitors may be more successful in  predicting changing consumer behaviour, developing and rolling out consumer-relevant products and may be able to do so more quickly  and at a lower cost.  In addition, the Group devotes considerable resources to the research and development of innovative products that may have the  potential to reduce the risks of smoking-related diseases. The complex nature of research and development programmes necessary to  satisfy emerging regulatory and scientific requirements creates a substantial risk that these programmes will fail to demonstrate health-  related claims regarding New Categories and Beyond Nicotine or to achieve adult tobacco consumer, regulatory and scientific acceptance.  Furthermore, the regulatory environment impacting Non-Combustible tobacco products, Vapour products and other non-tobacco  nicotine products and Beyond Nicotine, including classification of products for regulatory and excise purposes, is still developing and it  cannot be predicted whether regulations will permit the marketing of such products in any given market in the future. Categorisation as  medicines, for example, and restrictions on advertising could stifle innovation, increase complexity and costs and significantly undermine  the commercial viability of these products.  Alternatively, categorisation of any New Categories, as tobacco products for instance, could result in the application of onerous  regulation, which could further stifle uptake. |
| Impact |
| The inability to timely develop and roll out innovations or products in line with consumer demand, including any failure to predict changes  in adult tobacco consumer and societal behaviour and expectations and to fill gaps in the product portfolio, as well as the risk of poor  product quality, could lead to missed opportunities, under- or over-supply, loss of competitive advantage, unrecoverable costs and/or the  erosion of the Group’s consumer base or brand equity.  Restrictions on packaging and labelling or on promotion and advertising could impact the Group’s ability to communicate its innovations  and product differences to adult tobacco consumers, leading to unsuccessful product launches. An inability to provide robust scientific  results sufficient to substantiate health-related product claims poses a significant threat to the ability to launch innovative products and  comply with emerging regulatory and legal regimes.  The occurrence of any of the above effects could 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.  In addition, there may be loss of investors’ confidence in ESG performance, including failure to deliver our corporate purpose of  harm reduction. |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Group Risk Factors  Continued | | | | | | | |

360

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| Risk: Exposure to risks associated with intellectual property rights, including the failure to identify, protect and prevent  infringement of the Group’s intellectual property rights and potential infringement of, or the failure to retain licences to use,  third-party intellectual property rights |
| Description |
| The Group relies on trademarks, patents, registered designs, copyrights, domain names and trade secrets. The brand names under  which the Group’s products are sold are key assets of its business. The protection and maintenance of these brand names and of the  reputation of these brands is important to the Group’s success. Protection of intellectual property rights is also important in connection  with the Group’s innovative products, including New Categories.  The Group is exposed to the risk of infringements of its intellectual property rights by third parties due to limitations in judicial protection,  failure to identify, protect and register its innovations and/or inadequate enforceability of these rights in some markets in which the  Group operates.  The Group currently is involved in various patent infringement litigation proceedings in several countries related to the Group’s New  Categories inventions and products. This litigation involves both claims by the Group that competitors are infringing the Group’s patents  and claims by competitors that the Group is infringing competitors’ patents. Please refer to note 31 in the Notes on the Accounts for  details of contingent liabilities relating to patent litigation applicable to the Group.  Some brands and trademarks under which the Group’s products are sold are licensed for a fixed period of time in certain markets. If any  of these licences are terminated or not renewed after the end of the applicable term, the Group would no longer have the right to use,  and to sell products under, those brand(s) and trademark(s).  In addition, as third party rights are not always identifiable, the Group may be subject to claims for infringement of third party intellectual  property rights. |
| Impact |
| Any erosion in the value of the Group’s brands or innovations, or failure to obtain or maintain adequate protection of intellectual property  rights for any reason, or the loss of brands, trademarks or other intellectual property rights under licence to Group companies, may have  a material adverse effect on the Group‘s market share, results of operations and financial condition. Any inability to appropriately protect  the Group’s products and key innovations will also limit its growth and affect competitiveness and return on innovation investment.  Any infringement of third-party intellectual property rights could result in interim or final injunctions, product recalls, legal liability and the  payment of damages, any of which may disrupt operations, negatively impact the Group’s reputation and have an adverse effect on its  results of operations and financial condition and cause the Group to fail to deliver on its strategic growth plan. In addition, litigation (even  where successful) results in an intensive use of resources and management time leading to potential disruption. |

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361

Overview

The Group’s businesses operate under increasingly stringent

regulatory regimes worldwide. 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. The Group continues to

respond to these regimes and engages with governments and

other regulatory bodies to find solutions to changing regulatory

landscapes. Restrictions on the manufacture, sale, marketing and

packaging of tobacco and non-tobacco nicotine products are in

place in nearly all countries and markets.

Regulation can typically be categorised as follows:

Place: including regulations restricting smoking and vaping in

private, public and work places (e.g. public place smoking and

vaping bans);

Product: including regulations on the use of ingredients, product

design and attributes (e.g. ceilings regarding tar, nicotine and

carbon monoxide yields for cigarettes and restrictions on nicotine

strength for non-tobacco nicotine products, as well as restrictions

on flavours); product safety regulations (e.g. the EU’s General

Product Safety Directive (2001/95/EC), electrical safety regulations

and reduced ignition propensity standards for cigarettes);

regulatory product disclosure requirements (e.g. in relation to

ingredients and emissions); and bans of entire product categories

(e.g. bans on the manufacture, import, and sale, of Non-

Combustible tobacco products or non-tobacco nicotine products);

Packaging and labelling: including regulations on health warnings

and other government-mandated messages (e.g. in respect of

content, positioning, size and rotation); restrictions on the use of

certain descriptors and brand names; requirements on pack shape,

size, weight and colour and plain packaging of products; and

marking requirements relating to single-use plastics;

Sponsorship, promotion and advertising: including partial or

total bans on tobacco and/or non-tobacco nicotine product

advertising, marketing, promotions and sponsorship and

restrictions on brand sharing and stretching (the latter refers to

the creation of an association between a tobacco product and a

non-tobacco product by the use of tobacco branding on the non-

tobacco product);

Purchase: including regulations on the manner in which tobacco

products and non-tobacco nicotine products are sold, such as type

of outlet (e.g. supermarkets and vending machines); how they are

sold (e.g. above-the-counter versus beneath-the-counter); and

restrictions on adult purchase (e.g. generational bans which

preclude the sale and supply of tobacco products to individuals

born after a certain year);

Price: including regulations which have implications for the prices

that manufacturers can charge for their tobacco products and

non-tobacco nicotine products (e.g. excise taxes and minimum

prices); and

Responsibility: including regulations introducing Extended

Producer Responsibility schemes on cigarette manufacturers to

cover the cost to clean up cigarette waste (see Single Use Plastics

Directive (EU) 2019/904); and equipment-related cost sharing

obligations to fight illicit trade (see Article 15.7 of EU Tobacco

Products Directive 2014).

In addition, the Group operates a number of global policies, and in

some cases its businesses have also entered into voluntary

agreements, which may impose more onerous obligations or

standards than those imposed by local legislation.

World Health Organization Framework Convention

on Tobacco Control

Much of the recent development in regulation at a global level has

been driven by the World Health Organization Framework

Convention on Tobacco Control (FCTC). The FCTC came into force

in 2005 and contains provisions aimed at, among other things,

reducing tobacco consumption and exposure to tobacco smoke.

The original treaty is supplemented by one protocol (on illicit trade)

and guidelines on the implementation of several of the treaty

obligations. While the guidelines are not legally binding, they

provide recommendations for Parties on the implementation of

specific provisions of the FCTC.

To date, the FCTC has been ratified by 182 countries, not including

the U.S. The FCTC has led to increased efforts by tobacco control

advocates and public health organisations to encourage

governments to further regulate the tobacco industry. As national

regulations increasingly reflect global influences, the scope of

areas regulated will likely further expand. The guidelines on

advertising, promotion, and sponsorship, for example, seek to

broaden the definition of tobacco advertising to include product

display, the use of vending machines as well as the design of the

pack itself. Where adopted by the Parties, a number of the

measures referred to in the guidelines may result in either

additional costs for the tobacco industry or restrictions on a

manufacturer’s ability to differentiate its products and

communicate those differences to adult smokers. The World

Health Organization and other public health organisations have

recently focused their efforts on attempting to widen the scope of

the FCTC beyond the text of the Convention to include Reduced

Risk Products (RRPs)1, including adopting a decision that tobacco

heated products (THPs) should be subject to the FCTC;

recommending that governments adopt stricter regulations of

RRPs; and applying existing cigarette regulations to RRPs. All

engagement efforts of the tobacco industry are being closely

monitored by these organisations and are often (incorrectly)

labelled as unlawful industry interference. In turn, this has an

impact on the willingness of Parties to engage with the industry,

which limits the opportunity for the industry to provide input into

the development of regulation.

The biannual session of the Conference of the Parties to the FCTC

took place in November 2021 (COP9). Due to the virtual nature of

the meetings most substantive discussions have however been

postponed to COP10, which will take place in 2023 in Panama.

EU Tobacco and Related Products Directive (2014/40/EU)

A revised EU Tobacco and Related Products Directive (2014/40/

EU) (TPD2) was adopted in April 2014 for transposition into EU

Member States’ law by May 2016. Provisions of TPD2 include: large

combined pictorial and textual health warnings covering 65% of

the two main pack surfaces (front and back) for cigarettes;

restrictions on pack shape and size, including minimum pack sizes

of 20 sticks for cigarettes and 30g for roll-your-own and make-

your-own tobacco; ingredients reporting; “tracking and tracing”

requirements; and for e-cigarettes: nicotine limits, pre-market

notification, ingredients reporting and advertising restrictions.

Among other things, TPD2 bans the sale of cigarettes and roll-

your-own tobacco with a characterising flavour. Enforcement of

the ban in relation to menthol-flavoured cigarettes was delayed

until May 2020, but those products are now also banned (see

“Regulation of Ingredients, Including Flavoured Tobacco Products

and RRPs”).

TPD2 seeks to ensure that the same rules apply in the same way

across all EU Member States, but it leaves open to individual

Member States the possibility of further standardising the

packaging of tobacco products and applying other requirements

not regulated by TPD2, provided these are compatible with EU law.

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The European Commission published its Article 28 report on the

application of TPD2 on 20 May 2021. The report concluded that

TPD2 helped decrease smoking rates and tobacco use but that

more efforts are needed, particularly in relation to enforcement

at national level and new market developments, such as novel

tobacco products. Currently, the preparations of a revised EU

Tobacco Products Directive are progressing, with estimated

adoption in 2025. TPD2 might be replaced with a directly

applicable regulation instead of a directive, following which

transposition in Member States would no longer be required.

It is anticipated that this new regulation will include the following

provisions: plain packaging for combustibles; more regulation of

ingredients, including a ban on the use of any menthol for

combustibles at the EU level; regulation of flavours and nicotine-

free liquids for e-cigarettes at the EU level; more stringent

advertising restrictions for e-cigarettes; stricter regulations for

THPs; and regulation of oral nicotine pouches at the EU level.

Single-Use Plastics

The Single Use Plastics Directive (EU) 2019/904 (the SUP

Directive) entered into force on 2 July 2019. The SUP Directive

requires that EU Member States introduce Extended Producer

Responsibility (EPR) schemes covering the cost to clean up litter

and the application of on-pack marking requirements for tobacco

product filters. Member States had to transpose the SUP Directive

into national law by 3 July 2021, with an implementation deadline of

3 July 2021 for pack marking requirements and of 5 January 2023

for EPR schemes. Member States are late on transposition and

implementation, with the practical consequence that EPR

schemes will go live with several months delays on average. The

European Commission is also late in its issuance of guidelines on

the criteria for the costs of cleaning up litter, which should have

been issued prior to the anticipated implementation deadline for

EPR schemes. France was the only Member State to not await the

5 January 2023 deadline and, in December 2020 and February

2021, it implemented EPR schemes for, among others, cigarette

manufacturers. These regulations are currently being challenged

before the French Council of State. Other governments have

passed or are considering similar legislation including Canada,

Russia, South Korea, and various levels of government in the U.S.

Restrictions on Smoking in Private, Public and Workplaces

The Group operates in a number of markets which have in place

restrictions on smoking and vaping in certain private, public and

workplaces, including restaurants, bars and nightclubs. While

these restrictions vary in scope, extensive public and workplace

smoking and vaping bans have been enacted in markets including

the U.S., Canada, the UK, Spain, New Zealand and Australia.

Restrictions on smoking and vaping in private have also been

adopted or proposed, and typically take the form of prohibitions on

smoking and vaping in cars or residential homes when children are

present, and/or smoking and vaping within a certain distance from

specified public places (such as primary schools).

Regulation of Ingredients, Including Flavoured

Tobacco Products

A number of countries have restricted or banned, and others are

seeking to restrict or ban, the use of certain flavours or ingredients

in cigarettes and other tobacco products, on the basis that such

flavoured products are alleged to appeal disproportionally to

minors, act as a catalyst for young people taking up smoking and/

or increase the addictiveness or toxicity of the relevant product. To

the extent flavours are permitted, this is often restricted to

tobacco and/or menthol flavours only.

Such restrictions have been enacted in markets including the U.S.,

Canada, Australia and Turkey. An ingredients ban in Brazil, which

would ban the use of certain ingredients with flavouring or

aromatic properties, including menthol, is not currently in force

due to ongoing legal challenges. TPD2 similarly bans in the EU the

manufacture and sale of cigarettes and roll-your-own tobacco

with a characterising flavour other than tobacco. A number of the

above regulations are subject to ongoing legal challenges (see

“The U.S.” for information pertaining to the regulation of menthol

in that market).

Regulators in Europe are increasingly seeking to ban the use of

flavours in Vapour products and other RRPs, except for non-

tobacco and menthol (see “Reduced Risk Products”1). For example,

Hungary, Finland, the Netherlands, Denmark and Norway have

adopted, or are considering adopting, bills banning flavours in

Vapour products. BAT is exploring its legal options in relation to

these new regulations.

The European Commission has also produced a Commission

Delegated Directive amending TPD2 to withdraw certain

exemptions in respect of THPs. If it proceeds, this proposal would

extend the prohibition of tobacco products with a characterising

flavour (which currently applies to cigarettes and hand rolling

tobacco) to THPs. BAT is exploring its legal options in relation to

this proposal.

Further legislation on ingredients, both for factory made cigarettes

and RRPs1, is expected. The Conference of Parties to the FCTC has

tasked a working group to further elaborate the partial guidelines

on the regulation of the contents of tobacco products and tobacco

product disclosures (see Articles 9 and 10 of the FCTC). The work

of this group was suspended in 2018 and an expert group was

created to examine the reasons for low implementation of Articles

9 and 10, and related partial guidelines. This expert group

presented its report in 2021, but the substantive discussions by the

Conference of Parties of this report have been postponed to

COP10 (see “World Health Organization Framework Convention on

Tobacco Control”). Furthermore, several regulators in EU Member

States have also taken action, or are considering taking action, to

ban low menthol products, or products using other coolants, from

the market. For example, in Belgium, the regulator banned all

cigarettes and other tobacco products that include components

with cooling and/or purported analgesic effects.

Plain and Standardised Packaging

Plain (or “standardised”) packaging generally refers to a ban on the

use of trademarks, logos and colours on packaging other than the

use of a single colour and the presentation of brand name and

variant in a specified font, size and location(s). The presentation of

individual cigarettes may be similarly restricted. Plain packaging is

high on the agenda of tobacco control groups, and the non-binding

FCTC guidelines recommend that the Parties consider introducing

plain packaging. As of 17 January 2023, 24 countries have

implemented plain packaging (including Australia, Belgium,

Canada, Denmark, France, Ireland, New Zealand, the Netherlands,

Saudi Arabia, Singapore, Turkey, and the UK), with a further nine

countries examining legislation to introduce the measure.

Countries, territories and states that are currently considering

adopting plain packaging legislation include, but are not limited to,

Argentina, India, Ecuador, Panama, Brazil, Chile, Spain and South

Africa. Others, such as South Korea, Ukraine and Colombia, are

considering implementing increased graphic health warnings. Also,

RRPs are increasingly facing plain packaging regulations (see

“Reduced Risk Products”1), such as in Denmark where a bill was

adopted on 15 December 2020, which introduced plain packaging

for Vapour products and THPs.

Product Display Bans at Point of Sale and

Licensing Regimes

Product display bans at point of sale and licensing regimes have

become relatively commonplace and have been implemented for

several years in a number of countries both at national and state

levels, including in Norway, Iceland, Finland, New Zealand, Thailand,

Canada, Australia, and the UK. The Danish bill (referenced above)

also introduced a product display ban for RRPs1. A large number of

countries, such as Hungary, Finland and Spain, have also sought to

restrict the supply of tobacco products, including through the

adoption of licensing regimes limiting the number of retail outlets

from which it is possible to purchase tobacco products and/or by

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prohibiting the sale of tobacco products within a certain distance

of specified public places.

Illicit Trade

The illegal market for tobacco products is an increasingly important

issue for governments and the industry across the world.

Euromonitor International estimates that, in 2021, approximately

350 billion cigarettes (excl. China) were smuggled, manufactured

illegally or counterfeited. A number of governments, regulators and

organisations have or are considering adopting regulation to

support anti-illicit trade activities. Among other forms, such

regulation may comprise mandatory “tracking and tracing”

requirements, enabling regulators to identify the point at which

any seized product left the legal supply chain, security features to

combat counterfeiting and inspection and authentication

obligations in respect of seized product. The TPD2, for example,

requires that all unit packets of tobacco are marked with a unique

and irremovable identifier, which when scanned provides various

information about that product’s route-to-market.

In November 2012, the FCTC Parties adopted the Protocol to

Eliminate Illicit Trade in Tobacco Products which includes a raft of

supply chain control measures, including the implementation of

“tracking and tracing” technologies. The Protocol entered into

force on 25 September 2018 and was considered at the first

session of the Meeting of the Parties to the Protocol in October

2018. The second session of the Meeting of the Parties to the

Protocol took place in November 2021. As of 10 October 2022, 66

parties have ratified the Protocol.

Reduced-Risk Products1 (“RRPs”)

As the Vapour category has grown in size and complexity in a

relatively short period of time, a consensus framework for

regulation and taxation has yet to emerge. The TPD2, for example,

establishes frameworks for the regulation of novel tobacco

products and e-cigarettes, introducing nicotine limits, health

warnings requirements, advertising bans and pre-market

notification and post-market disclosure obligations. As noted

above, the World Health Organization and other public health

organisations have recently focused their efforts on attempting to

widen the scope of the FCTC beyond the text of the Convention to

include RRPs (see “World Health Organization Framework

Convention on Tobacco Control”).

In countries where the sale of Vapour products is permitted,

governments are increasingly seeking to more strictly regulate

these products, including by adopting or seeking to adopt bans on

vaping in public places, bans or restrictions on flavours or other

restrictions such as plain packaging and retail display and

advertising bans. Conversely, some governments have expressly

banned or are seeking to ban RRPs (such as Hong Kong), while

others restrict their sale as medicinal products (such as Australia).

Also, other RRPs, such as nicotine pouches and THPs, are facing

increasing scrutiny by regulators. In countries such as Belgium,

Germany, and the Netherlands, regulators have sought to classify

oral nicotine pouch products as food stuff or medicinal products

and ban these products from the market. However, the Belgian

authorities have subsequently clarified that oral nicotine pouches

should not be classified as medicinal products, but may explore a

ban for other reasons. We expect tobacco-free nicotine pouches

to be regulated at a European level as part of the next revision of

the Tobacco Products Directive. In Germany and Hungary, THPs

have faced being classified in the same way as traditional tobacco

products, with the potential consequence of facing the same

restrictions and excise categories. However, in 2021, the

Administrative Court of Braunschweig (Germany) concluded that

THPs are smokeless because they do not involve a combustion

process (Judgment of 23 September 20212). The federal German

regulator did not appeal this judgment.

Generational Bans

A recent regulatory measure that some countries are considering,

including Denmark, New Zealand and Malaysia, involves the

prohibition on sales and supply of tobacco and/or nicotine

products to persons of a certain age that will follow them

throughout their lifetime. This regulatory measure is referred to as

a “generational ban” and entails that persons born on or after a

certain date would never be able to lawfully be sold tobacco

products. Over time, as more and more persons become subject

to the ban, the pool of consumers for tobacco products would

grow ever smaller. On 1 January 2023, the Smokefree

Environments and Regulated Products (Smoked Tobacco)

Amendment Act came into force in New Zealand, specifying that

New Zealand’s generational ban will commence on 1 January 2027.

BAT is continuing to monitor this situation and whether other

governments will follow suit with similar measures.

The U.S.

Through the Reynolds American Inc. (RAI) subsidiaries, the Group

is subject to U.S. federal, state, and local laws and regulations. The

Family Smoking Prevention and Tobacco Control Act (FSPTCA),

which was enacted in 2009, grants the U.S. Food & Drug

Administration (FDA) broad authority over the manufacture, sale,

marketing and packaging of tobacco products but limited the

Agency’s authority to cigarettes, smokeless tobacco products,

cigarette tobacco and roll-your-own tobacco products. Key

elements of the FSPTCA include: filing of facility registrations,

product listing, constituent testing and ingredient information;

obtaining FDA clearance for all new products and product

modifications; banning all characterising flavours other than

tobacco or menthol in cigarettes; establishing “user fees” to fund

the FDA’s regulation of tobacco products; increasing the health

warning size on cigarette packs with the option to introduce

pictorial health warnings; implementing good manufacturing

practices; revising the labelling and advertising requirements for

smokeless tobacco products; and requiring the study of menthol.

The U.S. Congress did limit the FDA’s authority in two areas,

prohibiting it from:

–banning categories of tobacco products; and

–requiring the reduction of nicotine yields of a tobacco product

to zero.

On 10 May 2016, the FDA issued a final regulation, referred to as

the Deeming Rule, deeming all remaining products that are “made

or derived from tobacco” to be subject to the FDA’s regulatory

authority under the FSPTCA. The Final Rule became effective as of

8 August 2016, though each requirement of the Final Rule had its

own compliance date. Such “deemed” tobacco products subject

to the FSPTCA include, among others, electronic nicotine delivery

systems (including e-cigarettes, e-hookah, e-cigars, vape pens,

advanced refillable personal vapourisers, electronic pipes and e-

liquids mixed in vape shops), certain dissolvable tobacco products,

cigars and pipe tobacco.

The “grandfathered” (now called "pre-existing products") date

under the Final Rule for newly deemed products remained the

same as the “grandfathered” date for those tobacco products

already subject to the FSPTCA – 15 February 2007 (known as “Pre-

Existing Tobacco Products”). Any tobacco product that was not

legally marketed as of 15 February 2007 is considered a new

tobacco product subject to premarket review by the FDA. The FDA

established a compliance policy allowing all newly deemed

tobacco products that were on the market as of 8 August 2016 to

remain on the market so long as the manufacturer filed a

Premarket Tobacco Product Application (PMTA) by a specific

deadline (9 September 2020).

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364

In October 2019, R. J. Reynolds Vapour Company filed PMTAs for

Vuse Solo. Based upon requirements of the FSPTCA that must be

addressed in PMTAs, and the FDA’s Guidance regarding the type

of evidence required for such applications, the costs of preparing a

PMTA are significant. R. J. Reynolds Vapor Company thereafter

filed PMTAs for the remaining Vuse products (Vibe, Ciro, and Alto)

and the Velo products (pouch and lozenge) by the September

2020 deadline. Certain additional data from ongoing research

relevant to the Alto and Velo applications were submitted as

amendments to the PMTAs during the FDA review process.

The FDA granted marketing authorisation for the Vuse Solo device

and its tobacco (‘original’) flavour in October 2021, but denied

authorisation for Vuse Solo flavours other than menthol (which

were not on the market). That denial is being appealed with the

FDA. In May 2022, the FDA issued marketing authorisation orders

for tobacco flavoured Vuse Vibe and Ciro, but denied authorization

for flavours other than menthol (which were not on the market). R.

J. Reynolds Vapor Company has appealed the denials issued for

the relevant Vuse Vibe and Ciro products by requesting further

Agency review. We have received and are challenging the FDA's

Market Denial Order dated January 2023 related to Vibe and Ciro

(menthol variants) and are seeking a permanent stay.There can be

no assurance that the Vuse menthol or other flavours appeals will

succeed.

Additionally, the continued marketing authorisation of the

applicable Vuse products is contingent on continued compliance

with regulatory requirements; the marketing authorisations may

be suspended or withdrawn if the FDA determines that the

continued marketing of the products is no longer appropriate for

the protection of the public health. The FDA has not issued

marketing authorisations for Vuse Alto and its associated flavours,

including menthol, with FDA decisions still pending. Although the

Vuse Alto menthol and tobacco flavoured products remain on the

market pending FDA decisions there can be no assurance that

these authorisations (or the other Vuse Alto flavours) will be

granted. Similarly, the Group’s Velo products remain on the market

in the U.S., again pending FDA decisions on their marketing

authorisations and there can be no assurance these will be

granted. If the FDA denies a marketing authorisation, then the

relevant product(s) would need to be withdrawn from the market

(unless a court intervenes).

Legislation granting the FDA authority over synthetic nicotine

products (products containing nicotine not “made or derived from

tobacco”) went into effect in April 2022, which required

manufacturers of such products to file PMTAs by a May 2022

deadline. Synthetic nicotine products without marketing

authorisation cannot remain on the U.S. market after 13 July 2022,

even if subject to a pending PMTA. The Group's current portfolio

contains no synthetic nicotine products.

Comprehensive plan for tobacco and nicotine regulation

On 28 July 2017, the FDA announced its intent to develop a

comprehensive plan for tobacco and nicotine regulation that

recognises the continuum of risk for nicotine delivery. As part of

that plan, the FDA planned to publish an Advance Notice of

Proposed Rulemaking (ANPRM) to seek public input regarding the

potential health benefits and possible adverse effects of lowering

the level of nicotine in combustible cigarettes. The FDA also

announced its intent to issue ANPRMs requesting public

stakeholder input on the impact of flavours (including menthol) in

increased initiation among youth and young adults as well as

assisting adult smokers to switch to potentially less harmful forms

of nicotine delivery, and the patterns of use and public health

impact of premium cigars.

This follows on from the FDA’s decision to issue its own

preliminary scientific evaluation regarding menthol cigarettes in

2013, which concluded that menthol cigarettes adversely affect

initiation, addiction and cessation compared to non-menthol

cigarettes. In January 2018, the FDA held a public hearing to obtain

input from a broad group of stakeholders on ways to streamline

the regulatory process for the issuance of therapeutic claims for

nicotine products. In March 2018, the Agency issued three

ANPRMs, seeking information on (1) the lowering of nicotine levels

to non-addictive or minimally addictive levels, (2) the impact of

flavours (including menthol) in increased initiation among youth

and young adults as well as assisting adult smokers to switch to

potentially less harmful forms of nicotine delivery, and (3) the

patterns of use and public health impact of premium cigars. In

April 2022, the FDA published a proposed product standard that

would ban menthol as a characterising flavour in cigarettes. The

FDA accepted public comment on this proposed rule through to

August 2022. RAI Services Company submitted a detailed

comment to the FDA (available on the U.S. Government's

Regulations website) opposing the proposed rule as unsupported

by existing scientific evidence and with the potential for negative

unintended consequences. In December 2022, the sale of all

tobacco products with characterising flavours other than tobacco

(including menthol) were banned in the state of California.

Additional regulation

In addition to the ANPRMs on reduced nicotine products and

flavours, the FDA, in April 2019, issued a proposed rule on the

format and content of reports to demonstrate substantial

equivalence. This follows on from the FDA’s previous statements

regarding the development of foundational rules so as to provide

clarity and predictability to the tobacco product submission

process, including not only substantial equivalence applications

but new product applications as well as MRTP applications. In

September 2019, the FDA published a proposed rule on the format

and content of PMTAs. The final foundational rules for substantial

equivalence and PMTAs were published on 5 October 2021 and

became effective on 4 November 2021. The FDA has not yet

promulgated its proposed rule for MRTP applications.

Under the FSPTCA, for a manufacturer to launch a new tobacco

product or modify an existing tobacco product after 22 March

2011, the manufacturer must obtain an order from the FDA

authorising the new or modified product to be marketed. Similarly,

a manufacturer that introduced a cigarette or smokeless tobacco

product between 15 February 2007 and 22 March 2011 was

required to file a substantial equivalence report with the FDA

demonstrating either (1) that the new or modified product had the

same characteristics as a product commercially available as at 15

February 2007, referred to as a predicate product, or (2) if the new

or modified product had different characteristics than the

predicate product, that it did not raise different questions of public

health. A product subject to such report is referred to as a

provisional product. A manufacturer may continue to market a

provisional product unless and until the FDA issues an order that

the provisional product is not substantially equivalent, in which

case the FDA could then require the manufacturer to remove the

provisional product from the market. Many of the RAI subsidiaries’

cigarette and smokeless tobacco products currently on the market

are provisional products. In January 2017, the FDA issued its first

proposed product standard whereby the Agency would require

the reduction, over a three-year period, of the levels of

N-nitrosonornicotine (NNN) contained in smokeless tobacco

products.

Since issuing this proposal, the Agency has simply stated that it is

evaluating submitted comments. The FDA’s semi-annual

regulatory agenda has not listed the NNN proposal since its

publication. 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 as or similar to the proposed rule. On 18 December 2017,

the FDA accepted for review MRTP applications for six Camel

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365

Snus smokeless tobacco products. In 2018, the FDA began its

review of these applications, which included facility inspections

and a public meeting held 13-14 September 2018 before the

Tobacco Product Scientific Advisory Committee to obtain its

review and recommendation. These applications were withdrawn

in Q4 2022.

On 18 March 2020, the FDA issued a rule mandating the

incorporation on cigarettes packages of graphic health warnings.

The rule required eleven new textual warnings, each accompanied

by a specific graphic image, on the top 50% of the front and back

of all cigarette packages, on the left 50% of the front and back of

cigarette cartons, and the top 20% of all cigarette advertising,

beginning 18 June 2021. On 3 April 2020, RAI subsidiaries R. J.

Reynolds Tobacco Company and Santa Fe Natural Tobacco

Company, in conjunction with several cigarette manufacturers and

retailers, filed a lawsuit seeking to permanently enjoin

implementation of the rule. The court, following multiple orders to

delay the implementation of the rule, invalidated it as

unconstitutional in December 2022. The FDA may appeal this

decision to the federal court of appeals.

On 21 June 2022, the Biden Administration released the Fall 2022

Unified Agenda. This is an outline of the Administration’s

upcoming regulatory priorities. As a part of this agenda, the FDA

announced a plan to move forward with, among other proposals, a

proposed rule reducing nicotine levels in cigarettes to “minimally-

or non-addictive” levels. The regulatory agenda anticipates a

proposed nicotine rule in October 2023; however, the FDA has

clarified that there is no precise date on which it plans to issue the

proposed rule.

Cigarettes and other tobacco products are subject to substantial

taxes in the U.S. All states and the District of Columbia currently

impose cigarette excise taxes. Certain city and county

governments, such as those of New York, Philadelphia and

Chicago, also impose substantial excise taxes on cigarettes sold in

those jurisdictions. Also, all states and the District of Columbia

currently subject smokeless tobacco products to excise taxes.

Various states and the District of Columbia impose a tax on

Vapour products, such as e-cigarettes, and many other states

have proposed taxes on Vapour products. Currently, there is no

federal tax on Vapour products.

State and local governments also consider and implement other

legislation and regulation regarding the sale of tobacco products.

Measures include, among others, limiting or prohibiting the sale of

flavours in tobacco products, restricting where tobacco products

may be sold and increasing the minimum age to purchase tobacco

products. The Group believes that, as a responsible business, it can

contribute through information, ideas and practical steps, to help

regulators address the key issues regarding its products, including

underage access, illicit trade, product information, product design,

involuntary exposure to smoke and the development of potentially

less harmful products, while maintaining a competitive market

that accommodates the significant percentage of adults who

choose to be tobacco consumers. The Group is committed to

working with national governments and multilateral organisations

and welcomes opportunities to participate in good faith to achieve

sensible and balanced regulation of traditional tobacco and

potentially RRPs1.

Notes:

1.Based on the weight of evidence and assuming a complete switch from cigarette

smoking. These products are not risk free and are addictive. Our Vapour product Vuse

(including Alto, Solo, Ciro and Vibe), and certain products, including Velo, Grizzly, Kodiak,

and Camel Snus, which are sold in the U.S., are subject to FDA regulation and no

reduced-risk claims will be made as to these products without agency clearance.

2.Administrative Court Braunschweig - 4th Chamber, case No. 4 A 23/19, British American

Tobacco (Germany) GmbH v. Federal Republic of Germany, represented by the Federal

Office of Consumer Protection and Food Safety, 23 September 2021.

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366

The Master Settlement Agreement & State

Settlement Agreements

In 1998, the major U.S. cigarette manufacturers (including R.J.

Reynolds Tobacco Company, Lorillard and Brown & Williamson,

businesses which are now part of Reynolds American) entered into

the Master Settlement Agreement (“MSA”) with attorneys general

representing most U.S. states and territories. The MSA imposes a

perpetual stream of future payment obligations on the major US

cigarette manufacturers. The amounts of money that the

participating manufacturers are required to annually contribute

are based upon, among other things, the volume of cigarettes sold

and market share (based on cigarette shipments in that year).

During 2012, R.J. Reynolds Tobacco Company, various other

tobacco manufacturers, 17 states, the District of Columbia and

Puerto Rico reached a final agreement related to Reynolds

American’s 2003 MSA activities, and three more states joined the

agreement in 2013. Under this agreement, R.J. Reynolds Tobacco

Company has received credits of more than US$1 billion in respect

of its Non-Participating Manufacturer (“NPM”) Adjustment claims

related to the period from 2003 to 2012. These credits have been

applied against the company’s MSA payments over a period of five

years from 2013, subject to, and dependent upon, meeting the

various ongoing performance obligations. During 2014, two

additional states agreed to settle NPM disputes related to claims

for the period 2003 to 2012. R.J. Reynolds Tobacco Company

received US$170 million in credits, which have been applied over a

five-year period from 2014. During 2015, another state agreed to

settle NPM disputes related to claims for the period 2004 to 2014.

R.J. Reynolds Tobacco Company received US$285 million in

credits, which have been applied over a four-year period from 2016.

During 2016, no additional states agreed to settle NPM disputes.

During 2017, two more states agreed to settle NPM disputes

related to claims for the period 2004 to 2014. It is estimated that

R.J. Reynolds Tobacco Company will receive US$61 million in

credits, which will be applied over a five-year period from 2017.

During 2018, nine more states agreed to settle NPM disputes

related to claims for the period 2004 to 2019, with an option

through 2022, subject to certain conditions. It is estimated that R.J.

Reynolds Tobacco Company will receive US$182 million in credits

for settled periods through 2017, which will be applied over a five-

year period from 2018. Also in 2018, a 10th additional state agreed

to settle NPM disputes related to claims for the period 2004 to

2024, subject to certain conditions. It is estimated that R.J.

Reynolds Tobacco Company will receive US$205 million in credits

for settled periods through 2017, which will be applied over a five-

year period from 2019. In the first quarter of 2020, certain

conditions set forth in the 2018 agreements were met for those 10

states. In addition, in August 2020, 24 states, the District of

Columbia and Puerto Rico agreed to settle NPM disputes related

to claims for the period 2018-2022. In 2022, an additional state

settled NPM disputes related to claims for the period 2005 to

2028. It is estimated that R.J. Reynolds Tobacco Company will

receive US$130 million in credits for settled periods through 2018,

which will be applied over a five-year period from 2022. Credits in

respect of future years’ payments and the NPM Adjustment

claims would be accounted for in the applicable year and will not

be treated as adjusting items. Only credits in respect of prior year

payments are included as adjusting items.

The BAT Group is subject to substantial payment obligations under

the MSA and the state settlement agreements with the states of

Mississippi, Florida, Texas and Minnesota (such settlement

agreements, collectively “State Settlement Agreements”). Reynolds

American Inc.’s operating subsidiaries’ expenses and payments

under the MSA and the State Settlement Agreements for 2022

amounted to US$2,951 million in respect of settlement expenses

and US$3,129 million in respect of settlement cash payments.

Reynolds American Inc.’s operating subsidiaries’ expenses and

payments under the MSA and the State Settlement Agreements

for 2021 amounted to US$3,420 million in respect of settlement

expenses and US$3,744 million in respect of settlement cash

payments; for 2020 amounted to US$3,572 million in respect of

settlement expenses and US$2,848 million in respect of settlement

cash payments; and for 2019 amounted to US$2,762 million in

respect of settlement expenses and US$2,918 million in respect of

settlement cash payments.

R.J. Reynolds Tobacco Company divested certain brands to

Imperial Tobacco Group (ITG) in 2015. In 2020, R.J. Reynolds

Tobacco Company recognised additional expenses, included

above, under the state settlement agreements in the states of

Mississippi, Florida, Texas and Minnesota related to these divested

brands. R.J. Reynolds Tobacco Company recognised US$241

million of expense for payment obligations to the state of Florida

for the ITG acquired brands from the date of divestiture, 12 June

2015, as a result of an unfavourable judgment. In addition, R.J.

Reynolds Tobacco Company recognised US$264 million related to

the resolution of claims against it in the states of Texas, Minnesota

and Mississippi for payment obligations to those states for the ITG

acquired brands from the date of divestiture. R.J. Reynolds

Tobacco Company settled certain related claims with Phillip

Morris USA under the state settlement agreements in the states

of Mississippi, Texas and Minnesota for US$8 million. Finally, in

June 2022, R.J. Reynolds Tobacco Company settled PM USA's

claims relating to the calculation of the base-year net operating

profits for the ITG acquired brands for US$37 million.

Reynolds American Inc.: Transfer of Pension Obligations

On 7 October 2021, Reynolds American Inc. entered into a

transaction with Metropolitan Tower Life Insurance Company to

transfer approximately US$1.9 billion of pension obligations

through the purchase of annuities for retirees receiving benefit

payments of less than a threshold amount per month. The

transaction was funded with plan assets and resulted in an

increase in the funded status of the retirement plan.

On 7 June 2022, Reynolds American Inc. entered into a transaction

with Metropolitan Tower Life Insurance Company to transfer

approximately $1.6 billion of pension obligations through the

purchase of annuities for retirees receiving benefit payments from

one pension plan and less than a threshold amount per month

from another pension plan. The transaction was funded with plan

assets and resulted in an increase in the funded status of the

retirement plan.

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| Material Contracts | | | | | | | |

367

Significant agreements

Change of Control Provisions as at 31 December 2022

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| Nature of agreement | Key provisions |
| The revolving credit facilities agreement, effective 12 March 2020,  entered into between the Company, B.A.T. International Finance  p.l.c., B.A.T. Netherlands Finance B.V. and B.A.T Capital  Corporation (as borrowers and, in the case of the Company, as a  guarantor) and HSBC Bank plc (as agent) and certain financial  institutions (as lenders), pursuant to which the lenders have  agreed to make available to the borrowers £5.7 billion for general  corporate purposes (the Facility). | –should a borrower (other than the Company) cease to be a direct  or indirect subsidiary of the Company, such borrower shall  immediately repay any outstanding advances made to it and shall  cease to be a borrower under the Facility; and  –where there is a change of control in respect of the Company,  the lenders can require all amounts outstanding under the Facility  to be repaid. |
| During 2022, the Group extended or renewed short-term bilateral  facilities with core relationship banks for a total amount of £3.0  billion. B.A.T. International Finance p.l.c. is the borrower under  these facilities and the Company as the guarantor. As at 31  December 2022, £875 million was drawn on a short-term basis. | –should the borrower cease to be a direct or indirect subsidiary of  the Company, the borrower shall immediately repay any  outstanding advances made to it under these facilities; and  –where there is a change of control in respect of the Company, the  lenders can require all amounts outstanding under these facilities  to be repaid. |
| Packaging Materials Agreement dated 8 April 2015, between  Souza Cruz Ltda. and Amcor Group GmbH for the production and  supply of packaging for a value of R$1.5 billion. | –either party may terminate the agreement in the event of any  direct or indirect acquisition of at least 25% of the voting shares  of the supplier and/or its affiliates by directly or indirectly a  competitor of Souza Cruz S.A., importer or distributor. |
| Global Framework Agreement dated 1 January 2014, between  British American Tobacco (Investments) Limited and Papierfabrik  Wattens GmbH & Co for the supply of direct materials, cigarette  and plug-wrap paper. | –either party may terminate the agreement in the event of a  change of control of the other party (or certain of its affiliated  companies) in specified circumstances and which, in relation to  British American Tobacco (Investments) Limited, would trigger a  right for the other party to terminate the agreement on a change  of control of British American Tobacco (Investments) Limited (or  any holding company), where the new controlling entity is a  customer or competitor of the other party. |
| On 25 July 2017, the Company acceded as a guarantor under the  indenture of its indirect, wholly-owned subsidiary Reynolds  American Inc.. The securities issued under the indenture include  approximately US$7.7 billion aggregate principal amount of  unsecured Reynolds American Inc. debt securities. | –with respect to each series of debt securities issued under the  indenture, upon a change of control event, combined with a credit  ratings downgrade of the series to below investment-grade level  (such downgrade occurring on any date from the date of the  public notice of an arrangement that could result in a change of  control event until the end of the 60-day period following public  notice of the occurrence of a change of control event), Reynolds  American Inc. is obligated to make an offer to repurchase all debt  securities from each holder of debt securities. As a guarantor  under the indenture, the Company guarantees such payments. |
| Rules for the awards under the long-term incentive plans 2007  and 2016 (“LTIPs”) and Rules of the Restricted Share Plan 2019  (“RSP"). | –in the event of a change of control of the Company as a result of a  takeover, reconstruction or winding-up of the Company (not  being an internal reorganisation), LTIP and RSP awards will vest  (and in the case of an option, become exercisable for a limited  period) based on the period of time that has elapsed since the  date of the award and the achievement of the performance  conditions at that date (performance conditions are applicable to  LTIP only), unless the Remuneration Committee determines this  not to be appropriate in the circumstances; and  –the rules of the LTIPs and RSP allow (as an alternative to early  release) that participants may, if permitted, exchange their  existing awards for new awards of shares in the acquiring  company on a comparable basis. |

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368

The Group uses a combination of in-house and contract manufacturers to manufacture its products.

BAT-owned manufacturing facilities1

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|  | United States | APME | AmSSA | Europe | Total |
| Fully integrated manufacturing | 1 | 17 | 14 | 9 | 41 |
| Other processing sites (incl leaf threshing and OTP) | 1 | 5 | 5 | 5 | 16 |
| Sites manufacturing other products (including Snus, Modern Oral  and Liquids) | 3 | — | — | 4 | 7 |
| Research and development facilities | 3 | 2 | 3 | 1 | 9 |
| Total | 8 | 24 | 22 | 19 | 73 |

Note:

1.As of 31 December 2022.

The plants and properties owned or leased and operated by the Group’s subsidiaries are maintained in good condition and are believed to

be suitable and adequate for the Group’s present needs.

The technology employed in the Group’s factories is sophisticated, especially in the area of cigarette-making and packing where

throughputs can reach between 500 and 1,000 packs per minute. The Group can produce many different pack formats (e.g., the number

of cigarettes per packet) and configurations (e.g., bevel edge, round corner, international) to suit marketing and consumer requirements.

New technology machines are sourced from the leading machinery suppliers to the industry. Close cooperation with these organisations

helps the Group support its marketing strategy by driving its product innovations, which are brought to the market on a regular basis.

The Group utilises quality standards, processes and procedures covering the entire end-to-end value chain to help to ensure quality

products are provided to its customers and adult tobacco consumers according to the Group’s requirements and end market

regulatory requirements.

In 2022, the Group manufactured cigarettes in 41 cigarette factories in 39 countries. These plants and properties are owned or leased

and operated by the Group’s subsidiaries. The Group’s factory outputs and establishments vary significantly in size and production

capacity. In line with our corporate commitment to fight climate change, our factories have decarbonisation, water usage and waste

optimisation programmes.

Also in 2022, the Group used third-party manufacturers to manufacture the components required, including the devices, related to New

Categories. The Group also used third-party manufacturers to supplement the Group’s own production facilities in the U.S. and Poland to

bottle the liquids used in Vapour products.

For more information on property, plant and equipment, see note 13 in the Notes on the Accounts.

## Raw Materials

While the Group does not own tobacco farms or directly employ farmers, it sources tobacco leaf directly from circa 81,000 contracted

farmers and through third-party suppliers mainly in developing countries and emerging markets. In respect of farmers we contract, we

continually strive to improve farmer sustainability and viability with a focus on improved quality and resistance of seed, tailored

mechanisation to reduce costs of production and increased yield, with similar expectation on our third-party suppliers in respect of their

farmer contracts. We review our contracts on an annual basis considering Group requirements over the medium term (2-3 years) to

promote the stability of demand and supply on production volumes. The Group also purchases a small amount of tobacco leaf from India

where the tobacco is bought over an auction floor. The price of tobacco in US dollars varies from year-to-year driven by domestic inflationary

pressures, economic and political factors, as well as climatic conditions which impact supply, demand and quality of tobacco grown.

While COVID-19 impacted tobacco supply chains (in 2020 and 2021) across most markets and required process enhancements to

minimise transmission risks within communities, prices and availability of tobacco were not significantly impacted. The Group believes

there is an adequate supply of tobacco leaf in the world markets to satisfy its current and anticipated production requirements.

We also source a number of other materials required as part of our production requirements, covering areas that include wrapping

materials and filters for our combustibles business and liquids and batteries for our New Categories products. We work closely with our

suppliers to ensure a robust supply chain, with contingency sourcing in place. Contracts and sourcing agreements are reviewed regularly,

to ensure competitive trading terms while recognising that prices may be impacted by external factors that affect our third-party supply

partners. COVID-19 has led to some short-term disruption in the supply of certain materials (due to local lockdowns and travel

restrictions), yet this has been proactively managed to mitigate the impact.

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| Property, Plant and Equipment | | | | | | | |

369

Principles

In the U.S., ADSs of the Company are listed on the New York Stock

Exchange (NYSE). The significant differences between the

Company’s corporate governance practices as a UK company and

those required by NYSE listing standards for U.S. companies are

discussed below.

The Company has applied a robust set of board governance

principles, which reflect the UK Corporate Governance Code 2018

and its principles-based approach to corporate governance. NYSE

rules require U.S. companies to adopt and disclose on their

websites corporate governance guidelines. The Company

complies with UK requirements, including a statement in this

report of how the Company has applied the principles of the UK

Corporate Governance Code 2018 and that the Company has

complied with the provisions of the UK Corporate Governance

Code 2018.

Independence

The Company’s Board governance principles require that all Non-

Executive Directors be determined by the Board to be independent

in character and judgement and free from any business or other

relationships that could interfere materially with, or appear to

affect, their judgement. The Board also has formal procedures for

managing conflicts of interest. The Board has determined that, in

its judgement, all of the Non-Executive Directors are independent.

In doing so, the Board has taken into consideration the

independence requirements outlined in the NYSE’s listing

standards and considers these to be met by the Chair and all of its

Non-Executive Directors.

Committees

The Company has a number of Board Committees that are broadly

comparable in purpose and composition to those required by

NYSE rules for domestic U.S. companies. For instance, the

Company has a Nominations (rather than nominating/corporate

governance) Committee and a Remuneration (rather than

compensation) Committee. The Company also has an Audit

Committee, which NYSE rules require for both US companies and

foreign private issuers.

These Committees are composed solely of Non-Executive

Directors and, in the case of the Nominations Committee, the

Chair of the Board whom the Board has determined to be

independent in the manner described above.

Each Board Committee has its own terms of reference, which

prescribe the composition, main tasks and requirements of each of

the Committees (see the Board Committee reports on pages [145](#id739eb8a094346e4a1dd9989c862058f_10110),

[150](#id739eb8a094346e4a1dd9989c862058f_10128) and [159](#id739eb8a094346e4a1dd9989c862058f_8489)).

Under U.S. securities laws and the listing standards of the NYSE,

the Company is required to have an audit committee that satisfies

the requirements of Rule 10A-3 under the Exchange Act and

Section 303A.06 of the NYSE Listed Company Manual. The

Company’s Audit Committee complies with these requirements.

The Company’s Audit Committee does not have direct

responsibility for the appointment, reappointment or removal of

the independent auditors. Instead, it follows the UK Companies

Act 2006 by making recommendations to the Board on these

matters for it to put forward for shareholder approval at the AGM.

One of the NYSE’s additional requirements for the audit

committee states that at least one member of the audit

committee is to have ‘accounting or related financial management

expertise’. The Board has determined that Holly Keller Koeppel,

Véronique Laury and Darrell Thomas possess such expertise and

also possess the financial and audit committee experiences set

forth in both the UK Corporate Governance Code 2018 and SEC

rules (see the Audit Committee report on page [150](#id739eb8a094346e4a1dd9989c862058f_10128)). Holly Keller

Koeppel and Darrell Thomas have also each been designated as an

Audit Committee financial expert as defined in Item 16.A. of Form

20-F. The Board has also determined that each Audit Committee

member meets the financial literacy requirements applicable

under NYSE listing standards.

Shareholder Approval of Equity Compensation Plans

The NYSE rules for U.S. companies require that shareholders must

be given the opportunity to vote on all equity-compensation plans

and material revisions to those plans. The Company complies with

UK requirements that are similar to the NYSE rules. The Board,

however, does not explicitly take into consideration the NYSE’s

detailed definition of what are considered ‘material revisions’.

Codes of Business Conduct and Ethics

The NYSE rules require US companies to adopt and disclose a

code of business conduct and ethics for all directors, officers and

employees and promptly disclose any waivers of the code for

directors or executive officers. The Group Standards of Business

Conduct (the “SoBC”) described on pages [66](#id739eb8a094346e4a1dd9989c862058f_15661) and [67](#i61464e4022874402ab39d55c5876c2d6_112799) apply to all

staff in the Group, including senior management and the Board,

and satisfy the NYSE requirements. All Group companies have

adopted the SoBC (or localised versions). The SoBC also set out

the Group’s whistleblowing policy, enabling staff, in confidence

and anonymously, to raise concerns without fear of reprisal,

including concerns regarding questionable accounting or auditing

matters. The SoBC is available at bat.com/sobc.

The Company has also adopted a code of ethics for its Chief

Executive, Finance and Transformation Director, Group Financial

Controller and Group Chief Accountant as required by the

provisions of Section 406 of the Sarbanes-Oxley Act of 2002 and

the rules issued by the SEC. No waivers or exceptions to the Code

of Ethics were granted in 2022. The Code of Ethics includes

requirements in relation to confidentiality, conflicts of interest and

corporate opportunities, and obligations for those senior financial

officers to act with honesty and integrity in the performance of

their duties and to promote full, fair, accurate, timely and

understandable disclosures in all reports and other documents

submitted to the SEC, the UK Financial Conduct Authority, and any

other regulatory agency.

The Company considers that these codes and policies address the

matters specified in the NYSE rules for U.S. companies.

Independent Director Contact

Interested parties may communicate directly with the independent

directors, individually or as a group, by sending written

correspondence addressed to the independent Director(s) to the

attention of the Company Secretary at the following address: c/o

Paul McCrory, Company Secretary, British American Tobacco p.l.c.,

Globe House, 4 Temple Place, London WC2R 2PG.

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| US Corporate Governance Practices | | | | | | | |

370

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures

The Group maintains ‘disclosure controls and procedures’ (as such

term is defined in Exchange Act Rule 13a-15(e)), that are designed

to ensure that information required to be disclosed in reports the

Group files or submits under the Exchange Act is recorded,

processed, summarised and reported within the time periods

specified in the SEC rules and forms, and that such information is

accumulated and communicated to management, including the

Chief Executive and Finance and Transformation Director, as

appropriate, to allow timely decisions regarding required

disclosure.

In designing and evaluating our disclosure controls and procedures,

our management, including the Chief Executive and Finance and

Transformation Director, recognise that any controls and

procedures, no matter how well designed and operated, can

provide only reasonable, not absolute, assurance that the

objectives of the disclosure controls and procedures are met. Due

to the inherent limitations in all control systems, no evaluation of

controls can provide absolute assurance that all control issues and

instances of fraud, if any, within the Group have been detected. The

Group’s disclosure controls and procedures have been designed to

meet, and management believes that they meet, reasonable

assurance standards.

Management, with the participation of the Chief Executive and

Finance and Transformation Director, has evaluated the

effectiveness of the Group disclosure controls and procedures

pursuant to Exchange Act Rule 13a-15(b) as of the end of the period

covered by this annual report. Based on that evaluation, the Chief

Executive and Finance and Transformation Director have

concluded that the Group disclosure controls and procedures

were effective at a reasonable assurance level.

Management’s report on internal

control over financial reporting

Management, under the oversight of the Chief Executive and the

Finance and Transformation Director, is responsible for

establishing and maintaining adequate internal control over

financial reporting for the Group. The Group’s internal control over

financial reporting consists of processes which are designed to:

provide reasonable assurance regarding the reliability of financial

reporting and the preparation of the Group’s financial statements

for external reporting purposes in accordance with IFRS as issued

by the IASB and UK-adopted international accounting standards;

provide reasonable assurance that receipts and expenditure are

made only in accordance with the authorisation of management;

and provide reasonable assurance regarding the prevention or

timely detection of any unauthorised acquisition, use or disposal of

assets that could have a material effect on the consolidated

financial statements.

As required by Section 404 of the Sarbanes-Oxley Act of 2002,

management has assessed the effectiveness of the internal

control over financial reporting (as defined in Rules 13(a)-13(f) and

15(d)-15(f) under the US Securities Exchange Act of 1934) based on

the updated Internal Control‑Integrated Framework issued by the

Committee of Sponsoring Organisations of the Treadway

Commission (COSO) (2013). Based on that assessment,

management has determined that the Group’s internal control

over financial reporting was effective as at 31 December 2022.

Any internal control framework, no matter how well designed, has

inherent limitations, including the possibility of human error and

the circumvention or overriding of controls and procedures and

may not prevent or detect misstatements. Also, projections of any

evaluation of effectiveness to future periods are subject to the risk

that controls may become inadequate because of changes in

conditions or because the degree of compliance with the policies

or procedures may deteriorate.

»KPMG LLP, an independent registered public accounting firm,

who also audit the Group’s consolidated financial statements, has

audited the effectiveness of the Group’s internal control over

financial reporting as at 31 December 2022, which is included in this

document.»

Changes in internal control over financial reporting

During the period covered by this report, there were no changes in

the Group’s internal control over financial reporting that have

materially affected or are reasonably likely to materially affect the

effectiveness of internal control over financial reporting.

## Statements Regarding Competitive Position

Statements referring to the competitive position of BAT and its subsidiaries are based on the Group’s belief and best estimates. In

certain cases, such statements and figures rely on a range of sources, including investment analyst reports, independent market surveys,

and the Group’s own internal assessments of market share.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Controls and Procedures | | | | | | | |

371

This Other Information section of the British American Tobacco Annual Report and Form 20-F, which includes Additional Disclosures and

Shareholder Information, forms part of, and includes certain disclosures which are required by law to be included in, the Directors’ Report.

Strategic Report Disclosures

|  |  |
| --- | --- |
|  |  |
| Section 414C(11) of the Companies Act 2006 allows the Board to include in the Strategic Report information that it considers to be of strategic importance that  would otherwise need to be disclosed in the Directors’ Report. The Board has chosen to take advantage of this provision and accordingly, the information set out  below, which would otherwise be required to be contained in the Directors’ Report, has been included in the Strategic Report. | |
| Information required in the Directors’ Report | Section in the Strategic Report |
| Information on dividends | Financial Performance Summary |
| Certain risk information about the use of financial instruments | Treasury and Cash Flow |
| An indication of likely future developments in the business of the Group | A strategy for accelerated growth |
| An indication of the activities of the Group in the field of research and development | A Better Tomorrow™ For Consumers  A Better Tomorrow™ For Society and the  Environment  'Harm Reduction' |
| A statement describing the Group’s policy regarding the hiring, continuing employment  and training, career development and promotion of disabled persons | People, Diversity and Culture |
| Details of employee engagement: information, consultation, regard to employee interests,  share scheme participation and the achievement of a common awareness of the financial  and economic factors affecting the performance of the Group | Engaging with our stakeholders  People, Diversity and Culture |
| Details of business relationships: Directors’ regard to business relationships with  customers, suppliers and other external stakeholders | Engaging with our stakeholders |
| Disclosures concerning greenhouse gas emissions and energy consumption | TCFD Reporting |

Shareholder Information Disclosures

|  |  |
| --- | --- |
|  |  |
| Information required in the Directors’ Report | Section in Other Information |
| Change of control provisions | Material contracts |
| Information on dividends | Dividends |
| Share capital – structure and voting rights; restrictions on transfers of shares | Articles of Association |
| Directors – appointment and retirement | Articles of Association |
| Amendment of Articles of Association | Articles of Association |
| Branch outside of the UK - Representative Office in South Africa | Inside page of the back cover |
| Major shareholders | Share capital and security ownership |
| Directors – share issuance and buy-back powers | Share capital and security ownership  Purchases of shares |

Listing Rules (LRs) Disclosures

|  |  |
| --- | --- |
|  |  |
| For the purpose of LR 9.8.4C R the applicable information required to be disclosed by LR 9.8.4 R | Section in Other Information |
| Section (12) – shareholder waivers of dividends | Group Employee Trust |
| Section (13) – shareholder waivers of future dividends | Group Employee Trust |

Directors: Interests and Indemnities

|  |  |
| --- | --- |
|  |  |
| Interests | –details of Directors’ remuneration and emoluments, and their interests in the Company’s shares (including share  options and deferred shares) as at 31 December 2022 are given in the Remuneration Report; and  –no Director had any material interest in a contract of significance (other than a service contract) with the Company or  any subsidiary company during the year. |
| Insurance | –appropriate cover provided in the event of legal action against the Company’s Directors. |
| Indemnities | –provision of indemnities to Directors in accordance with the Company’s Articles of Association and to the maximum  extent permitted by law; and  –as at the date of this report, such indemnities are in force covering any costs, charges, expenses or liabilities that they  may incur in or about the execution of their duties to the Company or to any entity which is an associated company  (as defined in Section 256 of the Companies Act 2006), or as a result of duties performed by them on behalf of the  Company or any such associated company. |

Directors’ Report Approval and Signature

|  |
| --- |
|  |
| The Directors’ Report comprises the information on pages [122](#id739eb8a094346e4a1dd9989c862058f_8918) to [158](#i063086bbd4724f0a917bdd6df645c957_441325)@ and page [181](#id739eb8a094346e4a1dd9989c862058f_9334)@ and pages [319](#id739eb8a094346e4a1dd9989c862058f_2578) to [391](#id739eb8a094346e4a1dd9989c862058f_9114). The Directors’ Report was approved by the Board of  Directors on 08 February 2023 and signed on its behalf by Paul McCrory, Company Secretary. |

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| Other Information |  |  |  |  |  |  |  |
| Directors’ Report Information | | | | | | | |

372

This document contains certain forward-looking statements,

including “forward-looking” statements made within the meaning

of the U.S. Private Securities Litigation Reform Act of 1995. These

statements are often, but not always, made through the use of

words or phrases such as “believe,” “anticipate,” “could,” “may,”

“would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,”

“expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook”,

“target” and similar expressions. These include statements

regarding our intentions, beliefs or current expectations

concerning, amongst other things, our results of operations,

financial condition, liquidity, prospects, growth, strategies and the

economic and business circumstances occurring from time to

time in the countries and markets in which the Group operates,

including the projected future financial and operating impacts of

the COVID-19 pandemic.

In particular, these forward-looking statements include, among

other statements, statements regarding the Group’s future

financial performance, planned product launches and future

regulatory developments, as well as: (i) certain statements in the

Overview section (pages [2](#id739eb8a094346e4a1dd9989c862058f_5481) to [11](#i3877a6e924d34873a9b294bd57b20d04_146335)), including the Chair’s Introduction,

Chief Executive’s Review and Finance and Transformation

Director’s Overview; (ii) certain statements in the Strategic

Management section (pages [12](#id739eb8a094346e4a1dd9989c862058f_6844) to [29](#id739eb8a094346e4a1dd9989c862058f_17882)), including Our Global

Business section; (iii) certain statements in the Delivering a Better

Tomorrow for Society and the Environment section (pages [42](#id739eb8a094346e4a1dd9989c862058f_8800) to

[81](#i238db1b8b3d540b68cf1e1287e5ce401_12610)), including Our Material Topics and TCFD Reporting; (iv) certain

statements in the Board Engagement with Stakeholders section

(pages [136](#id739eb8a094346e4a1dd9989c862058f_9987) to [140](#id3819f8a96da48e2861d2e3e5697a104_1-1-1-1-244429)), including the Society section; (v) certain

statements in the Financial Review section (pages [98](#id739eb8a094346e4a1dd9989c862058f_9681) to [107](#i7a56c0d3f93a4214b795308bfdd6ec8e_129224)),

including the Treasury and Cash Flow section and going concern

discussions; and (vi) certain statements in the Other Information

section (pages [318](#id739eb8a094346e4a1dd9989c862058f_6027) to [395](#id739eb8a094346e4a1dd9989c862058f_8983)), including the Additional Disclosures and

Shareholder Information sections.

All such forward-looking statements involve estimates and

assumptions that are subject to risks, uncertainties and other

factors. It is believed that the expectations reflected in this

document are reasonable but they may be affected by a wide

range of variables that could cause actual results to differ

materially from those currently anticipated.

Among the key factors that could cause actual results to differ

materially from those projected in the forward-looking statements

are uncertainties related to the following: the impact of

competition from illicit trade; the impact of adverse domestic or

international legislation and regulation; the inability to develop,

commercialise and deliver the Group’s New Categories strategy;

adverse litigation and dispute outcomes and the effect of such

outcomes on the Group’s financial condition; the impact of

significant increases or structural changes in tobacco, nicotine and

New Categories related taxes; translational and transactional

foreign exchange rate exposure; changes or differences in

domestic or international economic or political conditions; the

ability to maintain credit ratings and to fund the business under

the current capital structure; the impact of serious injury, illness or

death in the workplace; adverse decisions by domestic or

international regulatory bodies; changes in the market position,

businesses, financial condition, results of operations or prospects

of the Group and direct and indirect adverse impacts associated

with Climate Change and the move towards a Circular Economy.

Further details on the principal risks that may affect the Group can

be found in the ‘Group Principal Risks’ section of the Strategic

Report on pages [116](#id739eb8a094346e4a1dd9989c862058f_8875) to [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718) of this document. A summary of all the

risk factors (including the principal risks) which are monitored by

the Board through the Group’s risk register is set out in the

Additional Disclosures section under the heading ‘Group Risk

Factors’ on pages [340](#id739eb8a094346e4a1dd9989c862058f_3217) to [361](#i4d4dc756e245431cb56d014c49f68d4c_3-0-1-1-347146).

Past performance is no guide to future performance and persons

needing advice should consult an independent financial adviser.

The forward-looking statements reflect knowledge and

information available at the date of preparation of this document

and the Group undertakes no obligation to update or revise these

forward-looking statements, whether as a result of new

information, future events or otherwise. Readers are cautioned not

to place undue reliance on such forward-looking statements.

No statement in this document is intended to be a profit forecast

and no statement in this document should be interpreted to mean

that earnings per share of BAT for the current or future financial

years would necessarily match or exceed the historical published

earnings per share of BAT.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Cautionary Statement | | | | | | | |

373

Premium Listing – London Stock Exchange (LSE)

The primary market for BAT’s ordinary shares is the LSE (Share Code: BATS; ISIN: GB0002875804). BAT’s ordinary shares have been

listed on the LSE main market since 8 September 1998 and are a constituent element of the FTSE 100 Index.

Secondary Listing – Johannesburg Stock Exchange (JSE Limited), South Africa

BAT’s ordinary shares have a secondary listing and are traded in South African rand on the Main Board of the JSE in South Africa

(Abbreviated name: BATS; Trading code: BTI). BAT’s ordinary shares have been listed on the JSE since 28 October 2008 and are a

constituent element of the JSE Top 40 Index.

American Depositary Shares (ADSs) – New York Stock Exchange (NYSE)

BAT ordinary shares trade in the form of BAT ADSs in the United States under the symbol BTI (CUSIP Number: 110448107). The BAT

ADSs have been listed on the NYSE since 25 July 2017 as a Sponsored Level III ADS programme for which Citibank, N.A. is the depositary

(the ‘Depositary’) and transfer agent. Each ADS represents one ordinary share. ADSs are evidenced by American Depositary Receipts (ADRs).

Share Prices

The high and low prices at which the Company’s ordinary shares and ADSs are recorded as having traded during the year on each of the

LSE, JSE and NYSE are as follows:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | High | Low |
| LSE | £36.28 | £27.34 |
| JSE | R734.02 | R591.40 |
| NYSE | US$47.18 | US$35.50 |

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Share Prices and Listing | | | | | | | |

374

Policy

The Group’s policy is to pay dividends of 65% of long-term sustainable earnings, calculated with reference to adjusted diluted earnings

per share, as defined on page [328](#i49422b2b471646dabd086f354630c16e_68565), and reconciled from earnings per share in note 11 in the Notes on the Accounts. Please see page [103](#if2de028cc61e4485afa17e66d2701679_15664)

of this Annual Report and Form 20-F 2022 for further discussion on the Group’s dividend.

Currencies and Exchange Rates

Details of foreign exchange rates are set out in the Financial Review section of the Strategic Report on page [107](#i7a56c0d3f93a4214b795308bfdd6ec8e_129224) of this Annual Report

and Form 20-F 2022. There are currently no UK foreign exchange controls or restrictions on remittance of dividends on the ordinary

shares other than restrictions applicable to certain countries and persons subject to UK economic sanctions.

American Depositary Shares – Dividends

The following table shows the dividends paid by British American Tobacco p.l.c. in the years ended 31 December 2022 to 31 December

2020 inclusive.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Announcement  Year | Payment | Dividend Period | Dividend Per BAT Ordinary  Share  GBP | Dividend Per BAT ADS  ADS ratio 1:1  USD1 |
| 2022 | May | Quarterly Interim 2022 | 0.5445 | 0.680434 |
|  | August | Quarterly Interim 2022 | 0.5445 | 0.655523 |
|  | November | Quarterly Interim 2022 | 0.5445 | 0.635540 |
|  | February 2023 | Quarterly Interim 2022 | 0.5445 | 0.669190 |
|  |  | Total | 2.1780 | 2.640687 |
|  |  |  |  |  |
| 2021 | May | Quarterly Interim 2021 | 0.5390 | 0.757618 |
|  | August | Quarterly Interim 2021 | 0.5390 | 0.734530 |
|  | November | Quarterly Interim 2021 | 0.5390 | 0.721721 |
|  | February 2022 | Quarterly Interim 2021 | 0.5390 | 0.729886 |
|  |  | Total | 2.1560 | 2.943755 |
|  |  |  |  |  |
| 2020 | May | Quarterly Interim 2020 | 0.5260 | 0.642403 |
|  | August | Quarterly Interim 2020 | 0.5260 | 0.688902 |
|  | November | Quarterly Interim 2020 | 0.5260 | 0.689586 |
|  | February 2021 | Quarterly Interim 2020 | 0.5260 | 0.717832 |
|  |  | Total | 2.1040 | 2.738723 |

Note:

1.Holders of BAT ADSs: dividends are receivable in US dollars based on the £ sterling/US dollar exchange rate on the applicable ADS payment date, being three business days after the

payment date for the BAT ordinary shares.

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| Dividends | | | | | | | |

375

Quarterly Dividends for the Year Ended 31 December 2022

The Group pays quarterly dividends. The Board has declared an interim dividend of 230.90p per ordinary share of 25p which is payable in

four equal quarterly instalments of 57.72p per ordinary share in May 2023, August 2023, November 2023 and February 2024. This

represents an increase of 6.0% on 2021 (2021: 217.8p per share), and a payout ratio, on 2022 adjusted diluted earnings per share, of 62.2%.

The quarterly dividends will be paid to shareholders registered on either the UK main register or the South Africa branch register and to

ADS holders, each on the applicable record dates set out under the heading ‘Key dates’ below.

Holders of American Depositary Shares (ADSs)

For holders of ADSs listed on the NYSE, the record dates and payment dates are set out below. The equivalent quarterly dividends

receivable by holders of ADSs in US dollars will be calculated based on the exchange rate on the applicable payment date.

South Africa branch register

In accordance with the JSE Listing Requirements, the finalisation information relating to shareholders registered on the South Africa

branch register (comprising the amount of the dividend in South African rand, the exchange rate and the associated conversion date) will

be published on the dates stated below, together with South Africa dividends tax information.

The quarterly dividends are regarded as ‘foreign dividends’ for the purposes of the South Africa Dividends Tax. For the purposes of South

Africa Dividends Tax reporting, the source of income for the payment of the quarterly dividends is the United Kingdom.

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Key dates  In compliance with the requirements of the LSE, the NYSE and Strate, the electronic settlement and custody system used by the JSE, the following are the salient  dates for the quarterly dividend payments. All dates are 2023 unless otherwise stated. | | | | |
| Event | Payment No. 1 | Payment No. 2 | Payment No. 3 | Payment No. 4 |
| Preliminary announcement (includes  declaration data required for JSE purposes) | 9 February | | | |
| Publication of finalisation information (JSE) | 13 March | 4 July | 18 September | 12 December |
| No removal requests permitted (in either  direction) between the UK main register  and the South Africa branch register | 13 March–  27 March | 4 July - 17 July | 18 September–  2 October | 12 December–  27 December |
| Last Day to Trade (LDT) cum-dividend (JSE) | 20 March | 11 July | 26 September | 19 December |
| Shares commence trading ex-dividend  (JSE) | 22 March | 12 July | 27 September | 20 December |
| No transfers permitted between the UK  main register and the South Africa branch  register | 22 March–  27 March | 12 July–  17 July | 27 September–  2 October | 20 December–  27 December |
| No shares may be dematerialised or  rematerialised on the South Africa branch  register | 22 March–  27 March | 12 July–  17 July | 27 September–  2 October | 20 December–  27 December |
| Shares commence trading ex-dividend  (LSE) | 23 March | 13 July | 28 September | 21 December |
| Shares commence trading ex-dividend  (NYSE) | 23 March | 13 July | 28 September | 21 December |
| Record date  (JSE, LSE and NYSE) | 24 March | 14 July | 29 September | 22 December |
| Last date for receipt of Dividend  Reinvestment Plan (DRIP) elections (LSE) | 11 April | 28 July | 13 October | 11 January 2024 |
| Payment date (LSE and JSE) | 3 May | 18 August | 3 November | 1 February 2024 |
| ADS payment date (NYSE) | 8 May | 23 August | 8 November | 6 February 2024 |

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| Dividends  Continued | | | | | | | |

376

The following discussion summarises material U.S. federal income tax consequences and UK taxation consequences to U.S. holders of

owning and disposing of ordinary shares or ADSs, this information is accurate as at 11 January 2023. This discussion does not address any

tax consequences arising under the laws of any state, local or foreign jurisdiction or under any U.S. federal laws other than those

pertaining to income tax. This discussion is based upon the U.S. Internal Revenue Code of 1986 (the ‘U.S. Tax Code’), the Treasury

regulations promulgated under the U.S. Tax Code and court and administrative rulings and decisions, all as in effect on the date hereof.

These laws may change, possibly retroactively, and any change could affect the accuracy of the statements and conclusions set forth in

this discussion.

This discussion addresses only those U.S. holders of ordinary shares or ADSs who hold such equity interests as capital assets within the

meaning of Section 1221 of the U.S. Tax Code. Further, this discussion does not address all aspects of U.S. federal income taxation that

may be relevant to U.S. holders in light of their particular circumstances or that may be applicable to them if they are subject to special

treatment under the U.S. federal income tax laws, including, without limitation:

–a bank or other financial institution;

–a tax-exempt organisation;

–an S corporation or other pass-through entity and an investor

therein;

–an insurance company;

–a mutual fund;

–a regulated investment company or real estate investment trust;

–a dealer or broker in stocks and securities, or currencies;

–a trader in securities that elects mark-to-market treatment;

–a U.S. holder subject to the alternative minimum tax provisions

of the U.S. Tax Code;

–a U.S. holder that received ordinary shares or ADSs through the

exercise of an employee stock option, pursuant to a tax qualified

retirement plan or otherwise as compensation;

–a U.S. holder that is a tax-qualified retirement plan or a

participant or a beneficiary under such a plan;

–a person that is not a U.S. holder (as defined below);

–a person that has a functional currency other than the U.S. dollar;

–a person required to recognise any item of gross income as a

result of such income being recognised on an applicable financial

statement;

–a U.S. holder of ordinary shares or ADSs that holds such equity

interest as part of a hedge, straddle, constructive sale,

conversion or other integrated transaction;

–a U.S. holder that owns (directly, indirectly or constructively) 10%

or more of ordinary shares or ADSs by vote or by value; or

–a U.S. expatriate.

The determination of the actual tax consequences to a U.S. holder will depend on the U.S. holder’s specific situation. U.S. holders of

ordinary shares or ADSs should consult their own tax advisers as to the tax consequences of owning and disposing of ordinary shares or

ADSs, in each case, including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and

of changes in those laws.

For purposes of this discussion, the term U.S. holder means a beneficial owner of ordinary shares or ADSs (as the case may be) that:

–is for U.S. federal income tax purposes: (i) an individual citizen or resident of the United States; (ii) a corporation, including any entity

treated as a corporation for U.S. federal income tax purposes, created or organised in or under the laws of the United States, any state

thereof or the District of Columbia; (iii) a trust if a U.S. court is able to exercise primary supervision over the trust’s administration and

one or more U.S. persons are authorised to control all substantial decisions of the trust or it has a valid election in effect under

applicable Treasury regulations to be treated as a U.S. person; or (iv) an estate that is subject to U.S. federal income tax on its income

regardless of its source; and

–is not resident in the UK for UK tax purposes.

The U.S. federal income tax consequences to a partner in an entity or arrangement treated as a partnership for U.S. federal income tax

purposes that holds ordinary shares or ADSs generally will depend on the status of the partner and the activities of the partnership.

Partners in a partnership holding any such equity interest should consult their own tax advisers.

Material U.S. Federal Income Tax Consequences Relating to the Ownership and Disposition of Ordinary Shares or ADSs

The following is a discussion of the material U.S. federal income tax consequences of the ownership and disposition by U.S. holders of

ordinary shares or ADSs. This discussion assumes that BAT is not, and will not become, a passive foreign investment company for U.S.

federal income tax purposes, as described below.

ADSs

A US holder of ADSs, for U.S. federal income tax purposes, generally will be treated as the owner of the underlying ordinary shares that

are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for or from ADSs will not be subject to U.S.

federal income tax.

Taxation of Dividends

The gross amount of distributions on the ordinary shares or ADSs will be taxable as dividends to the extent paid out of BAT’s current or

accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income will be includable in a U.S.

holder’s gross income as ordinary income on the day actually or constructively received by the U.S. holder. Such dividends will be treated

as foreign source income and will not be eligible for the dividends received deduction allowed to corporations under the U.S. Tax Code.

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| Shareholder Taxation Information | | | | | | | |

377

With respect to non-corporate U.S. investors, certain dividends

received from a qualified foreign corporation may be subject to

reduced rates of taxation. A qualified foreign corporation includes a

foreign corporation that is eligible for the benefits of a

comprehensive income tax treaty with the United States that the

Treasury determines to be satisfactory for these purposes and

that includes an exchange of information provision. The Treasury

has determined that the treaty between the United States and the

United Kingdom meets these requirements, and BAT believes that

it is eligible for the benefits of the treaty. However, non-corporate

holders that do not meet a minimum holding period requirement

during which they are not protected from the risk of loss or that

elect to treat the dividend income as ‘investment income’ pursuant

to Section 163(d)(4) of the U.S. Tax Code will not be eligible for the

reduced rates of taxation. In addition, the rate reduction will not

apply to dividends if the recipient of a dividend is obligated to make

related payments with respect to positions in substantially similar

or related property. This disallowance applies even if the minimum

holding period has been met. U.S. holders should consult their own

tax advisers regarding the application of these rules to their

particular circumstances.

The amount of any dividend paid by BAT in £ sterling (including any

such amount in respect of ADSs that is converted into U.S. dollars

by the depositary bank) will equal the U.S. dollar value of the £

sterling actually or constructively received, calculated by reference

to the exchange rate in effect on the date the dividend is so

received by the U.S. holder, regardless of whether the £ sterling are

converted into U.S. dollars. If the £ sterling received as a dividend

are converted into U.S. dollars on the date received, the U.S. holder

generally will not be required to recognise foreign currency

exchange gain or loss in respect of the dividend income. If the £

sterling received as a dividend are not converted into U.S. dollars

on the date of receipt, the U.S. holder will have a basis in £ sterling

equal to their U.S. dollar value on the date of receipt. Any gain or

loss realised on a subsequent conversion or other disposition of £

sterling will be treated as U.S. source ordinary income or loss. U.S.

holders of ADSs should consult their own tax advisers regarding

the application of these rules to the amount of any dividend paid

by BAT in £ sterling that is converted into U.S. dollars by the

depositary bank.

To the extent that the amount of any distribution exceeds BAT’s

current and accumulated earnings and profits for a taxable year, as

determined under U.S. federal income tax principles, the

distribution will first be treated as a tax-free return of capital,

causing a reduction in the U.S. holder’s adjusted basis of the

ordinary shares or ADSs, and to the extent the amount of the

distribution exceeds the U.S.holder’s tax basis, the excess will be

taxed as capital gain recognised on a sale or exchange, as

described below. BAT does not expect to determine earnings and

profits in accordance with U.S. federal income tax principles.

Therefore, notwithstanding the foregoing, U.S. holders should

expect that distributions generally will be reported as dividend

income for U.S. information reporting purposes.

Distributions by BAT of additional ordinary shares (which may be

distributed by the depositary bank to a holder of ADSs in the form

of ADSs) to a U.S. holder that is made as part of a pro rata

distribution to all holders of ordinary shares and ADSs in respect of

their ordinary shares or ADSs, and for which there is no option to

receive other property (not including ADSs), generally will not be

subject to U.S. federal income tax. The basis of any new ordinary

shares (or ADSs representing new ordinary shares) so received will

be determined by allocating the U.S. holder’s basis in the previously

held ordinary shares or ADSs between the previously held ordinary

shares or ADSs and the new ordinary shares or ADSs, based on

their relative fair market values on the date of distribution.

Passive foreign investment company

A passive foreign investment company (“PFIC”), is any foreign

corporation if, after the application of certain ‘look-through’ rules:

(1) at least 75% of its gross income is ‘passive income’ as that term

is defined in the relevant provisions of the U.S. Tax Code; or (2) at

least 50% of the average value of its assets produce ‘passive

income’ or are held for the production of ‘passive income.’ The

determination as to PFIC status is made annually.

BAT does not believe that it is, for U.S. federal income tax

purposes, a PFIC, and BAT expects to operate in such a manner so

as not to become a PFIC. If, however, BAT is or becomes a PFIC,

U.S. holders could be subject to additional U.S. federal income

taxes on gain recognised with respect to the ordinary shares or

ADSs and on certain distributions, plus an interest charge on

certain taxes treated as having been deferred under the PFIC rules.

Non-corporate U.S. holders will not be eligible for reduced rates of

taxation on any dividends received from BAT if it is a PFIC in the

taxable year in which such dividends are paid or in the preceding

taxable year. BAT’s U.S. counsel expresses no opinion with respect

to BAT’s PFIC status.

Taxation of capital gains

Upon a sale, exchange or other taxable disposition of ordinary

shares or ADSs, a U.S. holder will generally recognise capital gain

or loss for U.S. federal income tax purposes in an amount equal to

the difference between the US dollar value of the amount realised

on the disposition and the U.S. holder’s adjusted tax basis in the

ordinary shares or ADSs as determined in U.S. dollars. Such gain or

loss generally will be U.S. source gain or loss, and will be long-term

capital gain or loss if the U.S. holder has held the ordinary shares or

ADSs for more than one year. Certain non-corporate U.S. holders

may be eligible for preferential rates of U.S. federal income tax in

respect of net long-term capital gains. The deductibility of capital

losses is subject to limitations.

The amount realised on a sale, exchange or other taxable

disposition of ordinary shares for an amount in foreign currency

will be the U.S. dollar value of that amount on the date of sale or

disposition. On the settlement date, the U.S. holder will recognise

U.S. source foreign currency exchange gain or loss (taxable as

ordinary income or loss) equal to the difference (if any) between

the U.S. dollar value of the amount received based on the exchange

rates in effect on the date of sale, exchange or other disposition

and the settlement date. However, in the case of ordinary shares

traded on an established securities market that are sold by a cash-

basis U.S. holder (or an accrual-basis U.S. holder that so elects), the

amount realised will be based on the exchange rate in effect on the

settlement date for the sale, and no foreign currency exchange

gain or loss will be recognised at that time.

A U.S. holder’s tax basis in ordinary shares or ADSs will generally

equal the U.S. dollar cost of the ordinary shares or ADSs. The U.S.

dollar cost of ordinary shares purchased with foreign currency will

generally be the U.S. dollar value of the purchase price on the date

of purchase, or the settlement date for the purchase in the case of

ordinary shares traded on an established securities market that

are purchased by a cash-basis U.S. holder (or an accrual-basis U.S.

holder that so elects).

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| Shareholder Taxation Information  Continued | | | | | | | |

378

Information with respect to foreign financial assets

Individuals and certain entities that own ‘specified foreign financial

assets’ with an aggregate value in excess of US$50,000 are

generally required to file information reports with respect to such

assets with their U.S. federal income tax returns. Depending on the

individual’s circumstances, higher threshold amounts may apply.

Specified foreign financial assets include any financial accounts

maintained by foreign financial institutions, as well as any of the

following, but only if they are not held in accounts maintained by

financial institutions: (1) stocks and securities issued by non-U.S.

persons; (2) financial instruments and contracts held for

investment that have non-U.S. issuers or counterparties; and (3)

interests in non‑U.S. entities. If a U.S. holder is subject to this

information reporting regime, the failure to file information reports

may subject the U.S. holder to penalties. U.S. holders are urged to

consult their own tax advisers regarding their obligations to file

information reports with respect to ordinary shares or ADSs.

Medicare net investment tax

Certain persons who are individuals (other than non-resident

aliens), estates or trusts are required to pay an additional 3.8% tax

on the lesser of (1) their ‘net investment income’ (in the case of

individuals) or ‘undistributed net investment income’ (in the case of

estates and trusts) (which includes dividend income in respect of,

and gain recognised on the disposition of, ordinary shares or ADSs)

for the relevant taxable year; and (2) the excess of their modified

adjusted gross income (in the case of individuals) or adjusted

gross income (in the case of estates and trusts) for the taxable

year over specified dollar amounts. U.S. holders are urged to

consult their tax advisers regarding the applicability of this

provision to their ownership of ordinary shares or ADSs.

Credits or deductions for UK taxes

As indicated under ‘Material UK tax consequences’ below,

dividends in respect of, and gains on the disposition of, ordinary

shares or ADSs may be subject to UK taxation in certain

circumstances. A U.S. holder may be eligible to claim a credit or

deduction in respect of UK taxes attributable to such income or

gain for purposes of computing the U.S. holder’s U.S. federal

income tax liability, subject to certain limitations. The U.S. foreign

tax credit rules are complex, and U.S. holders should consult their

own tax advisers regarding the availability of U.S. foreign tax

credits and the application of the U.S. foreign tax credit rules to

their particular situation.

Information reporting and backup withholding

Information reporting and backup withholding may apply to

dividend payments and proceeds from the sale, exchange or other

taxable disposition of ordinary shares or ADSs. Backup withholding

will not apply, however, to a U.S. holder that: (1) furnishes a correct

taxpayer identification number (TIN), certifies that such holder is

not subject to backup withholding on Internal Revenue Service

Form W-9 (or appropriate successor form) and otherwise

complies with all applicable requirements of the backup

withholding rules; or (2) provides proof that such holder is

otherwise exempt from backup withholding. Backup withholding is

not an additional tax, and any amounts withheld under the backup

withholding rules may be refunded or credited against a holder’s

U.S. federal income tax liability, if any, provided that such holder

furnishes the required information to the Internal Revenue Service

in a timely manner. The Internal Revenue Service may impose a

penalty upon any taxpayer that fails to provide the correct TIN.

This summary of material U.S. federal income tax

consequences is not tax advice. The determination of the

actual tax consequences for a U.S. holder will depend on the

U.S. holder’s specific situation. U.S. holders of ordinary shares

or ADSs, in each case, should consult their own tax advisers as

to the tax consequences of owning and disposing of ordinary

shares or ADSs, including the applicability and effect of the

alternative minimum tax and any state, local, foreign or other

tax laws and of changes in those laws.

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379

Material UK Tax Consequences

The following paragraphs summarise material aspects of the UK

tax treatment of U.S. holders of ordinary shares or ADSs and do

not purport to be either a complete analysis of all tax

considerations relating to holding ordinary shares or ADSs or an

analysis of the tax position of BAT. They are based on current UK

legislation and what is understood to be current HMRC practice,

both of which are subject to change, possibly with retrospective

effect.

The comments are intended as a general guide and (otherwise

than where expressly stated to the contrary) apply only to U.S.

holders of ordinary shares or ADSs (other than under a personal

equity plan or individual savings account) and who are the absolute

beneficial owners of such shares. These comments do not deal

with certain types of shareholders such as charities, dealers in

securities, persons holding or acquiring shares in the course of a

trade, persons who have or could be treated for tax purposes as

having acquired their ordinary shares or ADSs by reason of their

employment, collective investment schemes, persons subject to

UK tax on the remittance basis and insurance companies. You are

encouraged to consult an appropriate independent professional

tax adviser with respect to your tax position.

Tax on chargeable gains as a result of disposals of ordinary

shares or ADSs

Subject to the below, U.S. holders will not generally be subject to

UK tax on chargeable gains on a disposal of ordinary shares or

ADSs provided that they do not carry on a trade, profession or

vocation in the United Kingdom through a branch, agency or

permanent establishment in connection with which the ordinary

shares or ADSs are held.

A U.S. holder who is an individual, who has ceased to be resident

for tax purposes in the United Kingdom for a period of less than

five years and who disposes of ordinary shares or ADSs during that

period may be liable for UK tax on capital gains (in the absence of

any available exemptions or reliefs). If applicable, the tax charge will

arise in the tax year that the individual returns to the United

Kingdom.

Tax on dividends

BAT is not required to withhold UK tax at source from dividends

paid on ordinary shares or ADSs.

U.S. holders will not generally be subject to UK tax on dividends

received from BAT provided that they do not carry on a trade,

profession or vocation in the United Kingdom through a branch,

agency or permanent establishment in connection with which the

ordinary shares or ADSs are held.

Stamp duty and stamp duty reserve tax (SDRT)

Based on current published HMRC practice and recent case law,

transfers of ADSs should not be subject to SDRT or stamp duty.

The transfer of an underlying ordinary share to the ADS holder in

exchange for the cancellation of an ADS should also not give rise to

a stamp duty or SDRT charge.

Transfers of ordinary shares outside of the depositary bank,

including the repurchase of ordinary shares by BAT, will generally

be subject to stamp duty or SDRT at the rate of 0.5% of the

amount or value of the consideration given, except as described

above in connection with the cancellation of an ADS. If ordinary

shares are redeposited into a clearance service or depositary

system, the redeposit will attract stamp duty or SDRT at the

higher rate of 1.5%.

The purchaser or the transferee of the ordinary shares or ADSs will

generally be responsible for paying any stamp duty or SDRT

payable. Where stamp duty or SDRT is payable, it is payable

regardless of the residence position of the purchaser.

Inheritance tax

A gift or settlement of ordinary shares or ADSs by, or on the death

of, an individual shareholder may give rise to a liability to UK

inheritance tax even if the shareholder is not a resident of, or

domiciled in, the United Kingdom.

A charge to inheritance tax may arise in certain circumstances

where ordinary shares or ADSs are held by close companies and

trustees of settlements.

However, pursuant to the Estate and Gift Tax Treaty 1980 (the

“Treaty”) entered into between the United Kingdom and the

United States, a gift or settlement of ordinary shares or ADSs by

shareholders who are domiciled in the United States for the

purposes of the Treaty may be exempt from any liability to UK

inheritance tax.

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380

Share Capital

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| --- | --- |
|  |  |
| Share Capital  Ordinary shares of 25p each | 31 December 2022 |
| Issued ordinary shares (excluding treasury  shares) | 2,235,867,228 |
| Treasury shares | 221,000,192 |
| Total alloted and fully paid ordinary shares | 2,456,867,420 |
| Aggregated nominal value £m | 614.2 |

Note:

1.Includes treasury shares and shares owned by employee share trusts.

Authority to allot shares

This authority (granted at the 2022 AGM) will expire at the 2023

AGM and provides the Company authority to allot relevant

securities up to the amount representing one-third of the

Company’s then issued ordinary share capital (excluding treasury

shares). Although the Directors have no present intention of

exercising this authority, it provides them with an appropriate level

of authority for on-going purposes and the Directors consider it

appropriate to maintain the flexibility that this authority provides.

Analyses of Shareholders

Ordinary Shares

At 31 December 2022, there was a total of 2,456,867,420 ordinary

shares in issue held by 102,304 shareholders. These shareholdings

are analysed as follows:

(a) by listing as at 31 December 2022:

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Register | Total number  of shares | Number of  holders | % of issued  share capital |
| UK | 2,201,061,504 | 32,955 | 89.59 |
| South Africa | 255,805,916 | 69,349 | 10.41 |
| Total | 2,456,867,420 | 102,304 | 100.00 |

(b) by size of shareholding as at 31 December 2022:

UK Register

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Number of  holders | % of UK  ordinary  share capital |
| 1-1,999 | 28,250 | 0.54 |
| 2,000-9,999 | 3,375 | 0.59 |
| 10,000-199,999 | 957 | 2.20 |
| 200,000-499,999 | 130 | 1.85 |
| 500,000 and over | 242 | 84.78 |
| Treasury shares (UK) | 1 | 10.04 |
| Total | 32,955 | 100.00 |

South Africa Register

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Number of  holders | % of SA  ordinary  share capital |
| 1-1,999 | 64,092 | 6.23 |
| 2,000-9,999 | 3,520 | 5.67 |
| 10,000-199,999 | 1,597 | 24.54 |
| 200,000-499,999 | 83 | 9.95 |
| 500,000 and over | 57 | 53.61 |
| Total | 69,349 | 100.00 |

Combined registers

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Number of  holders | % of issued ordinary  share capital |
| 1-1,999 | 92,342 | 1.13 |
| 2,000-9,999 | 6,895 | 1.12 |
| 10,000-199,999 | 2,554 | 4.52 |
| 200,000-499,999 | 213 | 2.70 |
| 500,000 and over | 299 | 81.53 |
| Treasury shares (UK) | 1 | 9.00 |
| Total | 102,304 | 100.00 |

American Depositary Shares (ADSs)

At 31 December 2022, there was a total of 277,478,111 ADSs

outstanding held by 8,595 registered holders. The ADS register is

analysed by size of shareholding as at 31 December 2022 as

follows:

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Number of holders | % of total ADSs |
| 1-1,999 | 8,418 | 0.58 |
| 2,000-9,999 | 157 | 0.19 |
| 10,000-199,999 | 18 | 0.13 |
| 200,000-499,999 | 1 | 0.08 |
| 500,000 and over | 1 | 99.02 |
| Total | 8,595 | 100.00 |

Note:

1.One registered holder of ADSs represents 570,503 underlying shareholders.

Security Ownership of Ordinary Shares

As at 3 February 2023, there were 32,819 record holders of

ordinary shares listed on the LSE (including Citibank as the

depositary bank for the ADSs) and 2,203,451,905 of such ordinary

shares outstanding. As at that date, to BAT’s knowledge, 302

record holders, representing 0% of the ordinary shares listed on

the LSE, had a registered address in the US. As at 3 February 2023,

there were 1,156 record holders of ordinary shares listed on the JSE

(including PLC Nominees (Proprietary) Limited as the nominee for

the dematerialised ordinary shares listed on the JSE) and

253,418,167 of such ordinary shares outstanding. As at such date,

to BAT’s knowledge, 7 record holders, representing 0% of the

ordinary shares listed on the JSE had a registered address in the

US. As at 3 February 2023, based on information received from

Citibank, there were 8,574 record holders of ADSs and 295,838,263

ADSs outstanding. As at that date, based on information received

from Citibank, 8,493  record holders, representing 99.95% of ADSs

representing ordinary shares, had a registered address in the US.

Security Ownership – Major Shareholders

All shares held by the significant shareholders represent the

Company's ordinary shares. These significant shareholders have

no special voting rights compared with other holders of the

Company's ordinary shares.

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| At 31 December 2022, the following substantial interests (3% or more) in the  Company’s ordinary share capital (voting securities) had been notified to the  Company in accordance with Section 5.1.2 of the Disclosure Guidance and  Transparency Rules (DTRs). The Company has not received any notifications  in accordance with DTR 5.1.2 from 1 January 2023 to the date of this report. | | |
| Name | Number of  ordinary  shares | % of issued  share  capital1 |
| The Capital Group Companies, Inc.2 | 292,841,616 | 13.10 |
| Spring Mountain Investments Ltd.3 | 187,023,731 | 8.36 |
| BlackRock, Inc | 132,891,526 | 5.94 |

Notes:

1.The percentage of issued share capital as at 31 December 2022, excluding treasury

shares.

2.Includes 17,722,608 ordinary shares represented by ADRs.

3.Includes 5,807,274 ordinary shares represented by ADRs.

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| Share Capital and Security Ownership | | | | | | | |

381

Additional Significant Shareholding Disclosure

The Company is aware of the following interests from filings by shareholders made under the US Securities Exchange Act of 1934 as at

the date of this report:

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Holder | Schedule 13G Filing Date1 | Date of holding | Ordinary shares held | Percentage of ordinary  share capital held2 |
| Portfolio Services Ltd3 | 10 February 2023 | 31 December 2022 | 198,285,158 | 8.9% |
|  | 10 February 2022 | 31 December 2021 | 187,023,731 | 8.2% |
|  | 22 January 2021 | 31 December 2020 | 114,819,555 | 5.0% |
| BlackRock, Inc. | 31 January 2023 | 31 December 2022 | 172,502,866 | 7.7% |
|  | 3 February 2022 | 31 December 2021 | 184,921,039 | 8.1% |
|  | 29 January 2021 | 31 December 2020 | 178,392,857 | 7.8% |
| Capital International Investors, a  division of Capital Research and  Management Company4 | 13 February 2023 | 30 December 2022 | 115,107,720 | 5.1% |
| 11 February 2022 | 31 December 2021 | 110,680,543 | 4.8% |
| 16 February 2021 | 31 December 2020 | 122,341,746 | 5.3% |
| Capital Research Global Investors, a  division of Capital Research and  Management Company4 | 13 February 2023 | 30 December 2022 | 126,794,516 | 5.7% |
| 16 February 2021 | 31 December 2020 | 42,749,672 | 1.9% |

Notes:

1.In addition to the Schedule 13G filings made with the SEC, in accordance with the DTRs, shareholders must notify the Company if their shareholding reaches, exceeds or falls below 3%

of total voting rights and each 1% threshold thereafter. The notifications received by the Company during the past three years to the best of the Company’s knowledge are set out in the

notes below.

2.The percentage of issued share capital excludes treasury shares.

3.Kenneth B. Dart is beneficial owner of all outstanding shares of Portfolio Services Ltd. and Spring Mountain Investments Ltd 187,023,731.. Spring Mountain Investments Ltd notified the

Company on: 22 October 2020 that its interest had increased above the notifiable threshold of 3% to 69,295,724 ordinary shares on 20 October 2020; 11 December 2020 that its interest

had increased above 4% to 92,462,558 ordinary shares on 9 December 2020; 14 January 2021 that its interest had increased above 5% to 115,596,737 ordinary shares on 12 January 2021;

19 February 2021 that its interest had increased above 6% to 138,342,092 ordinary shares on 23 February 2021; 22 April 2021 that its interest had increased above 7% to 161,977,731

ordinary shares on 20 April 2021; 17 August 2021 that its interest had increased above 8% to 184,360,731 ordinary shares on 16 August 2021; and 12 November 2021 that its interest had

increased above 9% to 187,023,731 ordinary shares on 11 November 2021.

4.The notifications regarding the holdings by The Capital Group Companies, Inc., listed below, indicate that Capital Research and Management Company is part of a chain of controlled

undertakings with The Capital Group Companies, Inc.: The Capital Group Companies, Inc. notified the Company on: 6 January 2020 that its interest had increased above 12% to

275,376,579 ordinary shares on 3 January 2020; 26 March 2020 that its interest had decreased below 12% to 274,639,101 ordinary shares on 25 March 2020; 8 April 2020 that its interest

had increased above 12% to 276,394,237 ordinary shares on 7 April 2020; 22 July 2020 that its interest had decreased below 12% to 243,800,405 ordinary shares on 20 July 2020; 6

August 2020 that its interest had decreased below 11% to 245,769,790 ordinary shares on 4 August 2020; 1 October 2020 that its interest had increased above 11% to256,801,504

ordinary shares on 29 September 2020; 29 March 2021 that its interest had decreased below 11% to 251,963,680 ordinary shares on 26 March 2021; 20 April 2021 that its interest had

increased above 11% to 253,881,408 ordinary shares on 19 April 2021; 15 October 2021 that its interest had decreased below 11% to 251,653,679 ordinary shares on 14 October 2021; 25

January 2022 that its interests had increased above 11% to 249,908,259 ordinary shares on 24 January 2022; 26 January 2022 that its interests had increased above 11% to 253,762,060

ordinary shares on 25 January 2022; 24 February 2022 that its interests had increased above 12% to 275,311,725 ordinary shares on 23 February 2022; 9 June 2022 that its interests had

increased above 13% to 295,342,819 ordinary shares on 8 June 2022; 17 June 2022 that its interests had decreased below 13% to 293,149,711 ordinary shares on 16 June 2022; 14 July 2022

that its interests had increased above 13% to 293,899,574 ordinary shares on 13 July 2022; 28 July 2022 that its interests had decreased below 13% to 292,880,152 ordinary shares on 27

July 2022; 11 August 2022 that its interests had increased above 13% to 292,841,616 ordinary shares on 9 August 2022.

To the extent known by BAT, BAT is not directly or indirectly owned or controlled by another corporation, any foreign government or by

any other natural or legal person, severally or jointly. BAT is not aware of any arrangements, the operation of which may at a subsequent

date result in a change of control of the Group.

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| Share Capital and Security Ownership  Continued | | | | | | | |

382

|  |
| --- |
|  |
| The Company is incorporated under the name of British American Tobacco p.l.c. and is registered in England and Wales under  registered number 3407696. Under the Companies Act 2006 (the “Companies Act”), the Company’s objects are unrestricted. The  following descriptions summarise certain provisions of the Company’s current Articles of Association (the “Articles”) (as adopted by  special resolution at the AGM on 28 April 2010), applicable English and Welsh law and the Companies Act. This summary is qualified in  its entirety by reference to the Companies Act and the Articles, available on bat.com. The Articles may be altered or added to, or  completely new articles may be adopted, by a special resolution of the shareholders of the Company, subject to the provisions of the  Companies Act. |

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| --- |
|  |
| Share capital – structure |
| Ordinary shares |
| –all of the Company’s ordinary shares are fully paid |
| –no further contribution of capital may be required by the Company from the holders of such shares |
| Alteration of share capital – the Company by ordinary resolution may: |
| –consolidate and divide all or any of its shares into shares of a larger amount than its existing shares |
| –divide or sub-divide any of its shares into shares of smaller amount than its existing shares |
| –determine that, as between the shares resulting from such a sub-division, any of them may have any preference or advantage  as compared with the others |
| Alteration of share capital – the Company, subject to the provisions of the Companies Act, may: |
| –reduce its share capital, its capital redemption reserve and any share premium account in any way |
| –purchase its own shares, including redeemable shares, and may hold such shares as treasury shares or cancel them |
| Dividend rights |
| –shareholders may, by ordinary resolution, declare dividends but not in excess of the amount recommended by the Directors |
| –the Directors may pay interim dividends out of distributable profits |
| –no dividend shall be paid otherwise than out of the profits available for distribution as specified under the provisions of the  Companies Act |
| –the Directors may, with the authority of an ordinary resolution of the shareholders, pay scrip dividends or satisfy the payment of a  dividend by the distribution of specific assets |
| –unclaimed dividends for a period of 12 years may be forfeited and cease to be owed by the Company |
| –specific provisions enable the Directors to elect to pay dividends by bank or electronic transfer only |

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| Share capital – voting rights |
| Voting at general meetings |
| –by a show of hands, unless a poll is demanded, and on a show of hands, every shareholder who is present in person at a general  meeting has one vote regardless of the number of shares held by that shareholder |
| –every proxy appointed by a shareholder and present at a general meeting has one vote except that if the proxy has been duly  appointed by more than one shareholder entitled to vote on the resolution and is instructed by one or more of those shareholders to  vote for the resolution and by one or more others to vote against it, or is instructed by one or more of those shareholders to vote in  one way and is given discretion as to how to vote by one or more others (and wishes to use that discretion to vote in the other way),  he has one vote for and one vote against the resolution |
| –on a poll, every shareholder who is present in person or by proxy has one vote for every share held by the shareholder |
| –a shareholder (or his duly appointed proxy) entitled to more than one vote need not use all his votes or cast all the votes he uses in the  same way |
| –a poll may be demanded by any of the following:  a.the Chairman of the meeting;  b.the Directors;  c.not less than five shareholders having the right to vote at the meeting;  d.a shareholder or shareholders representing not less than one-tenth of the total voting rights of all shareholders having the right to  vote at the meeting (excluding any voting rights attached to treasury shares); or  e.a shareholder or shareholders holding shares which confer a right to vote on the resolution at the meeting being shares on which  an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right  (excluding any voting rights attached to treasury shares) |
| Matters transacted at general meetings |
| –ordinary resolutions can include resolutions for the appointment, reappointment and removal of Directors, the receiving of the Annual  Report, the declaration of final dividends, the appointment and reappointment of the external auditor, the authority for the Company  to purchase its own shares and the grant of authority to allot shares |
| –an ordinary resolution is passed when a simple majority of the votes cast at a meeting at which there is a quorum vote in favour  of the resolution |
| –special resolutions can include resolutions amending the Company’s Articles and resolutions relating to certain matters concerning  a winding‑up of the Company |
| –a special resolution is passed when not less than three-quarters of the votes cast at a meeting at which there is a quorum vote in  favour of the resolution |
| –quorum for a meeting of the Company is a minimum of two shareholders present in person or by proxy or by a duly authorised  representative(s) of a corporation which is a shareholder and entitled to vote |
| –convening a meeting: the Company may specify a time not more than 48 hours before the time of the meeting (excluding any part of  a day that is not a working day) by which a person must be entered on the register of members in order to have the right to attend or  vote at the meeting |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Articles of Association | | | | | | | |

383

|  |
| --- |
|  |
| Share capital – pre-emptive rights and new issues of shares |
| –holders of ordinary shares have no pre-emptive rights under the Articles – the ability of the Directors to cause the Company to issue  shares, securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted |
| –under the Companies Act, the directors of a company are, with certain exceptions, unable to allot any equity securities without  express authorisation, which may be contained in a company’s articles of association or given by its shareholders in a general  meeting, but which in either event cannot last for more than five years |
| –under the Companies Act, a company may also not allot shares for cash (otherwise than pursuant to an employee share scheme)  without first making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in  proportion to their respective shareholdings, unless this requirement is waived by a special resolution of the shareholders |

|  |
| --- |
|  |
| Restrictions on transfers of shares |
| –Directors can, in their absolute discretion, refuse to register the transfer of a share in certificated form which is not fully paid, provided  that such a refusal would not prevent dealings in shares in certificated form which are not fully paid from taking place on a proper  basis |
| –the Directors may also refuse to register a transfer of a share in certificated form (whether fully paid or not) unless the instrument of  transfer: (1) is lodged, duly stamped, and is deposited at the registered office of the Company or such other place as the Directors may  appoint and is accompanied by a certificate for the shares to which it relates and such other evidence as the Directors may  reasonably require to show the right of the transferor to make the transfer; (2) is in respect of only one class of share; and (3) is in  favour of not more than four transferees |
| –for uncertificated shares, transfers shall be registered only in accordance with the terms of the Uncertificated Securities Regulations  2001 so that Directors may refuse to register a transfer which would require shares to be held jointly by more than four persons |
| –if the Directors refuse to register a share transfer, they must give the transferee notice of this refusal as soon as practicable and in  any event within two months of the instrument of transfer being lodged with the Company |

|  |
| --- |
|  |
| Repurchase of shares |
| –subject to authorisation by shareholder resolution, the Company may purchase its own shares in accordance with the Companies Act |
| –any shares which have been bought back may be held as treasury shares or, if not so held, must be cancelled immediately upon  completion of the purchase, thereby reducing the amount of the Company’s issued share capital |

|  |
| --- |
|  |
| Directors |
| Appointment and retirement |
| –a Board of Directors of not fewer than five Directors and not subject to any maximum (unless otherwise determined by ordinary  resolution of shareholders) |
| –Directors and the Company (by ordinary resolution) may appoint a person who is willing to act as a Director |
| –the Articles govern the minimum number of Directors who must be subject to retirement at each AGM and who may seek re-election |
| –notwithstanding the Articles, all of the Directors of the Company will be subject to re-election at the forthcoming AGM to be held  on 19 April 2023 in accordance with the UK Corporate Governance Code |
| –fees for Non-Executive Directors and the Chairman are determined by the Directors but cannot currently exceed in aggregate an  annual sum of £2,500,000, unless determined otherwise by ordinary resolution of the shareholders |
| –the remuneration of the Executive Directors is determined by the Remuneration Committee, which comprises independent  Non‑Executive Directors |
| Disclosure of interests |
| –the Articles require disclosure, subject to certain limited exceptions, of Directors’ interests in transactions that may result in a conflict  of interest, including those which may arise as a result of the Director’s office or employment or persons connected with such  Director, and identify procedures to resolve such conflicts of interest |
| Meetings and voting |
| –the quorum for a meeting of Directors is two Directors |
| –the Directors may delegate any of their powers to a person or a committee |
| –the Articles place a general prohibition on a Director voting at a Board meeting on any matter in which he has an interest other than  by virtue of his interest in shares in the Company |
| –the Articles restrict a Director’s ability to vote on any resolution concerning a matter in which such Director has a material interest,  unless such Director’s interest arises only because the resolution relates to the giving of guarantees; the provision of indemnities;  insurance proposals; retirement benefits; and other specified transactions or arrangements with a company in which the Director  may have an indirect interest |
| Borrowing powers |
| –the Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property,  assets (present and future) and uncalled capital |
| –the Directors may also issue debentures, debenture stock and other securities |
|  |

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Articles of Association  Continued | | | | | | | |

384

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| --- |
|  |
| Additional disclosures |
| Disclosure of ownership of shares |
| –there are no provisions in the Articles whereby persons acquiring, holding or disposing of a certain percentage of the Company’s  ordinary shares are required to make disclosure of their ownership percentage, although there are such requirements under statute  and regulation |
| Director retirement |
| –there is no requirement for a Director to retire on reaching any age |
| Sinking funds |
| –there is no sinking fund provision in the Articles applicable to the Company’s ordinary shares |
| Limitations on voting and shareholding |
| –there are no limitations under the Articles restricting the right of non-resident or foreign owners to hold or vote ordinary shares in the  Company |
| Distribution of assets on a winding up |
| –if the Company is wound up, the liquidator may, with the sanction of a special resolution and any other sanction required by law, divide  among the members in specie the whole or any part of the assets of the Company and may, for that purpose, value any assets and  determine how the division shall be carried out as between the members or different classes of members  –the liquidator may, with the like sanction, vest the whole or any part of the assets in trustees upon such trusts for the benefit of the  members as he may with the like sanction determine, but no member shall be compelled to accept any assets upon which there is a  liability |
| Anti-takeover devices and change of control |
| –there are no provisions in the Articles that would have the effect of delaying, deferring or preventing a takeover, or change of control,  of the Company  –under English law, the Company’s Directors have a fiduciary duty to take only those actions that are in the interests of the Company  and any anti-takeover devices employed by the Directors in the future, if any, must accordingly be in the interests of the Company  –the Company is also subject to the City Code on Takeovers and Mergers (the “City Code”), which governs the conduct of mergers and  takeovers in the UK. Any takeover of the Company would have to be in accordance with the City Code |

Note:

At the 2023 AGM to be held on 19 April 2023, the Company will seek authority to adopt new articles of association (the ‘New Articles’). If passed by shareholders, the New Articles will

become effective from the conclusion of this year's AGM.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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385

Renewal of Authority for Company to Purchase Own Shares

|  |  |
| --- | --- |
|  |  |
| Current authority  to purchase shares | –this authority (granted at the 2022 AGM) will expire at the 2023 AGM; and  –renewed authority to purchase the Company’s ordinary shares in order that the appropriate mechanisms  are in place to enable the share buy-back programme to be reinstated at any time and authority would be  exercised when, in the opinion of the Directors, the exercise of the authority would result in an increase in the  Company’s earnings per share and would be in the interest of its shareholders generally. |
| Proposed authority  to purchase shares | –the minimum price that may be paid for such shares is 25p, and the maximum price is the higher of: (i) an  amount equal to 105% of the average of the middle-market prices shown in the quotation for an ordinary  share as derived from the LSE Daily Official List for the five business days immediately preceding the day on  which the ordinary share is contracted to be purchased; and (ii) the higher of the price of the last  independent trade and the highest current independent bid for an ordinary share in the Company on the  trading venues where the market purchases by the Company will be carried out;  –in the absence of the necessary practical arrangements, the proposed authority has not been extended to  enable BAT to purchase its own ordinary shares on the JSE in South Africa or the NYSE in the form of ADSs;  and  –further details are set out in the Notice of Annual General Meeting 2023 which is made available  to all shareholders and is published on bat.com. |
| Treasury shares | –in accordance with the Company’s policy, any repurchased shares are expected to be held as treasury  shares; at 31 December 2022, the number of treasury shares was 221,000,192 (2021: 161,930,217); no  dividends are paid on treasury shares; treasury shares have no voting rights; and treasury shares may be  resold at a later date. |

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

At the AGM on 28 April 2022, authorisation was given to the Company to repurchase up to 228.9 million ordinary shares for the period

until the next AGM in 2023. This authorisation is renewed annually at the AGM.

On 11 February 2022, the Company announced the launch of its 2022 share buyback programme to purchase up to £2 billion of its own

ordinary shares of 25 pence each (the "Programme") by no later than 31 December 2022. The Programme commenced on 14 February

2022, the Company purchased 59,541,862 shares for a total consideration of £1,999,999,993.18, representing 2.66% of the Company's

issued share capital (excluding treasury shares), all shares purchased were held in treasury. As announced on 15 December 2022, the

Programme ended on 14 December 2022 and no further shares will be purchased under the Programme.

The following table provides details of ordinary share purchases made under the Programme, or made by the trustees of employee share

ownership plans (“ESOPs”) and other purchases of ordinary shares made to satisfy the commitments to deliver shares under certain

employee share-based payment plans.

Purchases of shares

|  |  |  |  |  |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  | Total number of shares  purchased1 | Number of  ordinary shares  purchased  under the Programme2 | Average price  paid per  ordinary share under  the Programme £3 | The maximum £ of  shares that may yet be  purchased under the  Programme |
| 2022 |  |  |  |  |
| January | 2,988 | 0 | 0 | 2,000,000,000 |
| February | 3,736,252 | 3,715,000 | 33.6616 | 1,874,960,982 |
| March | 8,257,489 | 8,255,000 | 31.5292 | 1,614,865,955 |
| April | 9,349,710 | 7,620,000 | 32.7320 | 1,364,843,657 |
| May | 8,884,216 | 8,754,945 | 33.8954 | 1,064,837,976 |
| June | 9,315,447 | 9,313,000 | 35.1578 | 737,628,425 |
| July | 4,159,427 | 4,156,800 | 34.4071 | 594,586,993 |
| August | 3,877,508 | 3,855,602 | 33.6599 | 464,808,654 |
| September | 4,356,867 | 4,354,322 | 34.4267 | 315,000,014 |
| October | 3,325,028 | 3,322,130 | 33.1375 | 205,044,172 |
| November | 3,661,280 | 3,639,076 | 33.1057 | 84,598,052 |
| December | 2,558,648 | 2,555,987 | 33.1700 | 7 |
| Total | 61,484,860 | 59,541,862 | 33.4150 | 1,999,999,993 |

Notes:

1.Total number of shares purchased includes purchases of ordinary shares made by ESOPs or certain employee based plans. See table below for breakdown of individual purchases by

ESOPs or certain employee share-based plans.

2.Maximum number of purchasable shares under the Programme was authorised by shareholders at the AGM held on 28 April 2022. The total number of shares purchased under the

Programme represented x% of the Company's issued share capital (excluding treasury shares) as at 31 December 2022.

3.The purchases made by the trustees of ESOPs or certain employee share-based plans are arranged in a manner where trustees are not provided with individual breakdowns of daily

purchases so that they are unable to present accurate calculations of the average prices combined with those purchased under the Programme.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Purchase of Shares | | | | | | | |

386

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | Total number of  shares  purchased by ESOPs or  certain employee  share-based plans 1 | Average price  paid per  ordinary share by  ESOPs or certain  employee share-based  plans  £ |
| 2022 |  |  |
| 05-January | 2,988 | 27.774400 |
| 02-February | 2,589 | 31.765100 |
| 09-February | 18,663 | 32.497890 |
| 02-March | 2,489 | 32.432630 |
| 01-April | 172,906 | 32.239770 |
| 01-April | 7,541 | 32.239770 |
| 01-April | 6,354 | 32.239770 |
| 06-April | 1,538,081 | 32.669440 |
| 06-April | 2,658 | 32.641520 |
| 07-April | 2,170 | 32.524744 |
| 03-May | 108,741 | 33.334600 |
| 04-May | 2,620 | 33.616150 |
| 04-May | 17,910 | 33.629770 |
| 01-June | 2,447 | 35.680810 |
| 06-July | 2,627 | 35.070330 |
| 03-August | 2,754 | 32.674170 |
| 17-August | 19,152 | 34.499774 |
| 07-September | 2,545 | 34.771960 |
| 05-October | 2,898 | 32.511230 |
| 02-November | 2,821 | 33.006300 |
| 10-November | 19,383 | 33.879800 |
| 07-December | 2,661 | 34.193333 |

Notes:

1.All share purchases were of ordinary shares of 25p each and were open market transactions. No purchases of ADSs took place during the year ended 31 December 2022.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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387

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| The British American Tobacco Group Employee Trust (BATGET) | | | |
| Function | –used to satisfy the vesting and exercise of awards of ordinary shares under the BAT Deferred Share Bonus  Scheme and Long-Term Incentive Plans; and  –a committee of senior management reporting to the Board’s Share Schemes Committee monitors the  number of ordinary shares held in BATGET to satisfy outstanding awards. | | |
| Funding | –funded by interest-free loan facilities from the Company totalling £1 billion;  –this enables BATGET to facilitate the purchase of ordinary shares to satisfy the future vesting or exercise  of options and awards;  –loan to BATGET: £370.51 million at 31 December 2022 (2021: £300.00 million);  –the loan is either repaid from the proceeds of the exercise of options or, in the case of ordinary shares acquired  by BATGET to satisfy the vesting and exercise of awards, the Company will subsequently waive the loan  provided over the life of the awards; and  –if any options lapse, ordinary shares may be sold by BATGET to cover the loan repayment. | | |
|  |  | 1 Jan 2022 | 31 Dec 2022 |
| Ordinary shares  held in BATGET | Number of ordinary shares | 5,995,678 | 5,621,012 |
| Market value of ordinary shares | £163.9m | £184.5m |
| % of issued share capital of Company | 0.24 | 0.23 |
| Dividends paid  in 2022 | –BATGET currently waives dividends on the ordinary shares held by it; and  –quarterly interim dividends 2022: £12.77 million across 2022. | | |
| Voting rights | –the trustee does not exercise any voting rights while ordinary shares are held in BATGET; and  –share scheme participants may exercise the voting rights attaching to those ordinary shares once the ordinary  shares have been transferred out of BATGET. | | |

Notes:

1.Company share–based payment arrangements: details of the material equity share-based and cash-settled share-based arrangements are set out in note 28 in the Notes on the

Accounts.

2.The values of ordinary shares shown are based on the closing mid-market share price on 31 December 2022: 3,282p (31 December 2021: 2,733p).

3.In addition to the ordinary shares held in BATGET, the trust held the following American Depositary Shares (ADSs) which relate to the vesting and exercise of certain employee stock

awards formerly granted by Reynolds American Inc. over Reynolds American Inc. common stock and which were assumed by BAT to be satisfied by the delivery of ADSs following the

merger with Reynolds American Inc. on 25 July 2017.

|  |  |  |
| --- | --- | --- |
|  |  |  |
|  | 1 Jan 2022 | 31 Dec 2022 |
| Number of ADSs | 15,197 | 0 |
| Market value of ADSs(a) | US$0.6m | US$0.0m |
| % of issued share capital | 0.0006 | 0.0000 |

Notes:

(a) The value of the ADSs shown is based on the closing price of ADSs on 31 December 2022 of US$39.98 (31 December 2021: US$37.41).

(b) On 1 August 2022 15,197 ADS were converted leaving the closing balance as zero.

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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Group Employee Trust | | | | | | | |

388

Fees and Charges Payable by ADS Holders

Citibank, N.A. (Citibank) was appointed as the depositary bank (the “Depositary”) for BAT’s ADS programme pursuant to the Amended

and Restated Deposit Agreement dated 1 December 2008 and amended as of 14 February 2017 and 14 June 2017 between BAT, the

Depositary and the owners and holders of ADSs (the “Deposit Agreement”). Citibank was reappointed as the Depositary pursuant to the

Second Amended and Restated Deposit Agreement dated 26 November 2018 (the “Restated Deposit Agreement”).

The Restated Deposit Agreement provides that ADS holders may be required to pay various fees to the Depositary, and the Depositary

may refuse to provide any service for which a fee is assessed until the applicable fee has been paid.

|  |  |
| --- | --- |
|  |  |
| Service | Fees |
| Issuance of ADSs upon deposit of ordinary shares (excluding issuances as a result  of distributions of shares described below) | Up to US$0.05 per ADS issued1 |
| Cancellation of ADSs | Up to US$0.05 per ADS surrendered1 |
| Distribution of cash dividends or other cash distributions (i.e., sale of rights and  other entitlements) | Up to US$0.05 per ADS held2 |
| Distribution of ADSs pursuant to: (1) stock dividends or other free stock  distributions; or (2) exercise of rights to purchase additional BAT ADSs | Up to US$0.05 per ADS held |
| Distribution of securities other than ADSs or rights to purchase additional ADSs  (i.e., spinoff shares) | Up to US$0.05 per ADS held |
| Depositary bank services | Up to US$0.05 per ADS held |

Notes:

1.Under the terms of a separate agreement between BAT and the Depositary, the Depositary has agreed to waive the fees that would otherwise be payable in connection with the

issuance of ADSs upon deposit of ordinary shares and the cancellation of ADSs and corresponding withdrawal of ordinary shares, in each case by BAT or any of its affiliates, officers,

directors or employees. The terms of this separate agreement may be amended at any time by BAT and the Depositary.

2.While under the Restated Deposit Agreement cash dividends paid in respect of ADSs are subject to a fee of up to US$0.05 per ADS payable to the Depositary, under the terms of the

separate agreement between BAT and the Depositary referred to above, such dividends are instead subject to a fee of up to US$0.02 per ADS per year (a fee of US$0.005 per dividend

based on the distribution of four quarterly cash dividends per year). Under the separate agreement, this dividend fee may not be varied by the Depositary without the consent of BAT.

Contact details for Citibank Shareholder Services are on page [391](#id739eb8a094346e4a1dd9989c862058f_9114).

In addition, ADS holders may be required under the Restated Deposit Agreement to pay the Depositary: (a) taxes (including applicable

interest and penalties) and other governmental charges; (b) registration fees; (c) certain cable, telex and facsimile transmission and

delivery expenses; (d) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (e) such fees and

expenses as are incurred by the Depositary in connection with compliance with applicable exchange control regulations and other

regulatory requirements; and (f) the fees and expenses incurred by the Depositary, the custodian or any nominee in connection with the

servicing or delivery of deposited securities. The Depositary may: (a) withhold dividends or other distributions or sell for the account of any

ADS holder any or all of the shares underlying the ADSs in order to satisfy any tax or governmental charge; and (b) deduct from any cash

distribution the applicable fees and charges of, and expenses incurred by, the Depositary and any taxes, duties or other governmental

charges on account.

Fees and Payments Made by the Depositary to BAT

Under the terms of the contractual arrangements set out in the separate agreement between BAT and the Depositary referred to above,

BAT received a total of approximately US$6.01 million from the Depositary, comprising fees charged in respect of dividends and a

contribution to BAT’s ADS programme administration costs for the year ended 31 December 2022.

In 2022, these programme administration costs principally included those associated with AGM proxy mailings, exchange listing and

regulatory fees, foreign private issuer analysis, legal fees, share registration fees and other expenses incurred by BAT in relation to the

ADS programme.

Under these contractual arrangements, the Depositary has also agreed to waive certain standard fees associated with the

administration of the ADS programme.

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|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| American Depositary Shares | | | | | | | |

389

Ordinary Shareholder Enquiries

United Kingdom Registrar

Computershare Investor Services PLC

The Pavilions, Bridgwater Road, Bristol BS99 6ZZ

tel: 0800 408 0094 or +44 370 889 3159

online: www.investorcentre.co.uk/contactus

South African Registrar

Computershare Investor Services Proprietary Limited

Private Bag X9000, Saxonwold, 2132, South Africa

tel: 0861 100 634; +27 11 870 8216

email: web.queries@computershare.co.za

American Depositary Shares Enquiries

All enquiries regarding ADS holder accounts and payment

of dividends should be addressed to:

Citibank Shareholder Services

PO Box 43077, Providence, Rhode Island 02940-3077, USA

tel: +1 888 985 2055 (toll-free) or +1 781 575 4555

email: citibank@shareholders-online.com

website: www.citi.com/dr

Manage Your Shareholding Online

Computershare Investor Services PLC (Computershare) operates

an online service, Investor Centre, for holders of shares on the

Company’s UK share register. Investor Centre allows shareholders

to manage their shareholding online, enabling shareholders to:

–update personal details and provide address changes;

–update dividend bank mandate instructions and review dividend

payment history;

–register for the Dividend Reinvestment Plan (“DRIP”); and

–register to receive Company communications electronically.

To register for Investor Centre, go to

www.computershare.com/uk/investor/bri.

Shareholders with any queries regarding their holding should

contact Computershare using the above contact details or at

www.investorcentre.co.uk/contactus

Share dealing

Computershare also offers a share dealing service to existing

shareholders. For full details on how to trade British American

Tobacco shares traded on the London Stock Exchange, go to

www.computershare.com/dealing/uk. Please note that this service

is only available in certain countries.

Dividends

Comprehensive information on dividend payments is available

on pages [375](#id739eb8a094346e4a1dd9989c862058f_9036) and [376](#i825f934e76db403c8fbb29df8799ed0b_2871).

DRIP

We offer a DRIP to our UK shareholders. The DRIP allows eligible

shareholders to use their cash dividends to acquire additional

shares in the Company. The DRIP shares are purchased by

Computershare through a low-cost dealing arrangement. Contact

Computershare in the UK for details and exclusions of this service.

Taxation of dividends

See pages [377](#id739eb8a094346e4a1dd9989c862058f_9019) and [380](#i67c1aaa6b1cc405a9762ae078738f39a_157987) for details on dividend taxation.

A fact sheet detailing historical UK capital gains tax information

is available at bat.com/cgt. Alternatively, contact the British

American Tobacco Company Secretarial Department on

+44 20 7845 1000.

Share Fraud

The practice of share fraud (also known as ‘boiler room’ scams)

unfortunately continues with many companies’ shareholders

receiving unsolicited phone calls or mail from people offering to

sell them what often turn out to be worthless or high risk shares

in US or UK investments, or to buy shares at an inflated price in

return for an upfront payment.

If you suspect that you have been approached by fraudsters,

please tell the FCA using the share fraud reporting form at

www.fca.org.uk/scams, where you can find out more about

investment scams. You can also call the FCA Consumer Helpline

on 0800 111 6768. If you have lost money to investment fraud, you

should report it to Action Fraud on 0300 123 2040 or online at

www.actionfraud.police.uk.

Documents on Display and Publications

This Annual Report and Form 20-F 2022 is available online at

bat.com/annualreport. Copies of current and past Annual Reports

are available on request from:

British American Tobacco Publications

Unit 80, London Industrial Park, Roding Road, London E6 6LS

tel: +44 20 7511 7797 email: bat@team365.co.uk

Holders of shares held on the South Africa register can contact the

Company’s Representative office in South Africa using the contact

details shown at the end of this Annual Report and Form 20-F 2022.

ADS holders can contact Citibank Shareholder Services in the

United States using the contact details shown opposite.

Highlights from the current and past Annual Reports can be

produced in alternative formats such as Braille, audio tape and

large print.

Documents referred to in this Annual Report and Form 20-F 2022

do not form part of this Annual Report unless specifically

incorporated by reference.

The Company is subject to the information requirements of the

US Securities Exchange Act of 1934 applicable to foreign private

issuers. In accordance with these requirements, the Company files

its Annual Report on Form 20-F and other documents with the

SEC. BAT’s SEC filings are available to the public, together with the

public filings of other issuers, at the SEC’s website, www.sec.gov.

The Company’s agent for service in the United States for the

purposes of the registration statement on Form F-3 (333-232691)

is Brian T. Harrison, Secretary, B.A.T Capital Corporation, C/O

Corporation Service Company, 251 Little Falls Drive, Wilmington,

Delaware 19808 U.S.A.

Our Website

Comprehensive information about British American Tobacco is

available from our website: bat.com. Within the Investors section

you will find valuation and charting tools, dividend and share price

data and you can download shareholder publications and

subscribe for email alert services. You can also download our

Investor Relations app to access all the latest financial information

on your iPad, iPhone or Android device.

Calendar 2023

|  |  |
| --- | --- |
|  |  |
| Wed 19 April  at 11:30am | Annual General Meeting  Details of the venue and business to be  proposed at the meeting are set out in the  Notice of Annual General Meeting, which is  made available to all shareholders and is  published on bat.com.  BAT provides for the vote on each resolution to  be by poll rather than by a show of hands. This  provides for greater transparency and allows  the votes of all shareholders to be counted,  including those cast by proxy. The voting results  will be released on the same day in accordance  with regulatory requirements and made  available on bat.com. |
| Thurs 27 July | Half-Year Report |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Shareholding Administration and Services | | | | | | | |

390

The following documents are filed in the SEC EDGAR system, as part of this Annual Report on Form 20-F, and can be viewed on the

SEC’s website, www.sec.gov:

|  |  |
| --- | --- |
|  |  |
| Exhibit  Number | Description |
| 1 | [Articles of Association of British American Tobacco p.l.c.](https://www.sec.gov/Archives/edgar/data/1303523/000119312517168591/d352136df4.htm#rom352136_158)[1](https://www.sec.gov/Archives/edgar/data/1303523/000119312517168591/d352136df4.htm#rom352136_158) |
| 2.1 | [Second Amended and Restated Deposit Agreement, dated as of 26 November 2018, by and among British American Tobacco](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000375/ex4-1.htm)  [p.l.c., Citibank, N.A., as depositary bank, and all holders and beneficial owners of American Depositary Shares issued](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000375/ex4-1.htm)  [thereunder](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000375/ex4-1.htm)[2](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000375/ex4-1.htm)[.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000375/ex4-1.htm) |
| 2.2 | [Indenture, dated as of 15 August 2017, among British American Tobacco p.l.c. and certain of its subsidiaries as guarantors,](https://www.sec.gov/Archives/edgar/data/1303523/000119312518083410/d492188dex24.htm)  [and Wilmington Trust, National Association, as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000119312518083410/d492188dex24.htm)[3](https://www.sec.gov/Archives/edgar/data/1303523/000119312518083410/d492188dex24.htm) |
| 2.3 | [Supplemental Indenture No. 1, dated as of 28 September 2018, among British American Tobacco p.l.c. and certain of its](https://www.sec.gov/Archives/edgar/data/1275283/000119312518290740/d577355dex42.htm)  [subsidiaries as guarantors, and Wilmington Trust, National Association, as Trustee.](https://www.sec.gov/Archives/edgar/data/1275283/000119312518290740/d577355dex42.htm)[4](https://www.sec.gov/Archives/edgar/data/1275283/000119312518290740/d577355dex42.htm) |
| 2.4 | [Indenture, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party thereto and Citibank,](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-1.htm)  [N.A., as trustee, authentication agent, transfer agent, registrar, calculation agent and initial paying agent.](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-1.htm)[5](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-1.htm) |
| 2.5 | [Supplemental Indenture No. 1, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-2.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-2.htm)[6](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-2.htm) |
| 2.6 | [Supplemental Indenture No. 2, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-3.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-3.htm)[7](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-3.htm) |
| 2.7 | [Supplemental Indenture No. 3, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-4.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-4.htm)[8](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-4.htm) |
| 2.8 | [Supplemental Indenture No. 4, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-5.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-5.htm)[9](https://www.sec.gov/Archives/edgar/data/1303523/000095015719000966/ex4-5.htm) |
| 2.9 | [Supplemental Indenture No. 5, dated as of 2 April 2020, by and among B.A.T Capital Corporation, the Guarantors party thereto](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-1.htm)  [and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-1.htm)[10](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-1.htm) |
| 2.10 | [Supplemental Indenture No. 6, dated as of 2 April 2020, by and among B.A.T Capital Corporation, the Guarantors party thereto](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-2.htm)  [and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-2.htm)[11](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-2.htm) |
| 2.11 | [Supplemental Indenture No. 7, dated as of 2 April 2020, by and among B.A.T Capital Corporation, the Guarantors party thereto](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-3.htm)  [and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-3.htm)[12](https://www.sec.gov/Archives/edgar/data/1303523/000095015720000462/ex4-3.htm) |
| 2.12 | [Supplemental Indenture No. 8, dated as of 25 September 2020, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-2.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-2.htm)[13](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-2.htm) |
| 2.13 | [Supplemental Indenture No. 9, dated as of 25 September 2020, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-3.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-3.htm)[14](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-3.htm) |
| 2.14 | [Supplemental Indenture No. 10, dated as of 25 September 2020, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-4.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-4.htm)[15](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-4.htm) |
| 2.15 | [Supplemental Indenture No. 11, dated as of 25 September 2020, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-5.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-5.htm)[16](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-5.htm) |
| 2.16 | [Supplemental Indenture No. 12, dated as of 16 March 2022, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex41.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex41.htm)[17](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex41.htm) |
| 2.17 | [Supplemental Indenture No. 13, dated as of 16 March 2022, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex42.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex42.htm)[18](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex42.htm) |
| 2.18 | [Supplemental Indenture No. 14, dated as of 24 March 2022, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000119312522083523/d277619dex41.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000119312522083523/d277619dex41.htm)[19](https://www.sec.gov/Archives/edgar/data/1303523/000119312522083523/d277619dex41.htm) |
| 2.19 | [Supplemental Indenture No. 15, dated as of 19 October 2022, by and among B.A.T Capital Corporation, the Guarantors party](https://www.sec.gov/Archives/edgar/data/1303523/000119312522265030/d261327dex41.htm)  [thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000119312522265030/d261327dex41.htm)[20](https://www.sec.gov/Archives/edgar/data/1303523/000119312522265030/d261327dex41.htm) |
| 2.20 | [Indenture, dated as of 25 September 2020, by and among B.A.T. International Finance p.l.c., the Guarantors party thereto and](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-1.htm)  [Citibank, N.A., as trustee, authentication agent, transfer agent, registrar, calculation agent and initial paying agent.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-1.htm)[21](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-1.htm) |
| 2.21 | [Supplemental Indenture No. 1, dated as of 25 September 2020, by and among B.A.T. International Finance p.l.c., the Guarantors](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-6.htm)  [party thereto and Citibank, N.A., as Trustee.](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-6.htm)[22](https://www.sec.gov/Archives/edgar/data/1303523/000095015720001174/ex4-6.htm) |
| 2.22 | [Supplemental Indenture No. 2, dated as of 16 March 2022, by and among B.A.T. International Finance p.l.c., the Guarantors](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex43.htm)  [party thereto and Citibank, N.A., as trustee, authentication agent, transfer agent, registrar, calculation agent and initial paying](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex43.htm)  [agent.](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex43.htm)[23](https://www.sec.gov/Archives/edgar/data/1303523/000119312522076964/d332641dex43.htm) |
| 2.23 | [Thirty-fourth Supplemental Trust Deed, dated 17 March 2022, by and among B.A.T. International Finance p.l.c., B.A.T Capital](https://www.sec.gov/Archives/edgar/data/1303523/000119312522186774/d329246dex41.htm)  [Corporation, B.A.T. Netherlands Finance B.V., British American Tobacco p.l.c. and the Law Debenture Trust Corporation p.l.c.,](https://www.sec.gov/Archives/edgar/data/1303523/000119312522186774/d329246dex41.htm)  [further modifying the Trust Deed, dated as of 6 July 1998 (as previously modified and restated) relating to the](https://www.sec.gov/Archives/edgar/data/1303523/000119312522186774/d329246dex41.htm)  [US$3,000,000,000 (now £25,000,000,000) Euro Medium Term Note Programme.](https://www.sec.gov/Archives/edgar/data/1303523/000119312522186774/d329246dex41.htm)[24](https://www.sec.gov/Archives/edgar/data/1303523/000119312522186774/d329246dex41.htm) |
| 2.24 | Description of Securities registered under Section 12 of the Exchange Act. |
| 4.1 | [Rules of the British American Tobacco 2007 Long-Term Incentive Plan.](https://www.sec.gov/Archives/edgar/data/1303523/000119312517168591/d352136dex106.htm)[25](https://www.sec.gov/Archives/edgar/data/1303523/000119312517168591/d352136dex106.htm) |
| 4.2 | [Rules of the British American Tobacco 2016 Long-Term Incentive Plan (Amended and Restated as of 9 February 2022).](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex42.htm)[26](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex42.htm) |
| 4.3 | [British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.](https://www.sec.gov/Archives/edgar/data/1303523/000119312517168591/d352136dex108.htm)[27](https://www.sec.gov/Archives/edgar/data/1303523/000119312517168591/d352136dex108.htm) |
| 4.4 | [Annex to British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.](https://www.sec.gov/Archives/edgar/data/1303523/000119312519075779/d688893dex46.htm)[28](https://www.sec.gov/Archives/edgar/data/1303523/000119312519075779/d688893dex46.htm) |
| 4.5 | [British American Tobacco p.l.c. 2019 Deferred Annual Share Bonus Scheme (Amended and Restated as of 9 February 2022).](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex45.htm)[29](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex45.htm) |
| 4.6 | [Rules of the British American Tobacco Restricted Share Plan (Amended and Restated as of 9 February 2022).](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex46.htm)[30](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex46.htm) |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Exhibits | | | | | | | |

391

|  |  |
| --- | --- |
|  |  |
| 4.7 | [Deferred Compensation Plan for Directors of Reynolds American Inc. (Amended and Restated Effective 30 November 2007).](https://www.sec.gov/Archives/edgar/data/1275283/000095014408001414/g11863exv10w43.htm)[31](https://www.sec.gov/Archives/edgar/data/1275283/000095014408001414/g11863exv10w43.htm) |
| 4.8 | [Service Contract between British American Tobacco p.l.c. and Jack Bowles, dated as of 11 December 2018.](https://www.sec.gov/Archives/edgar/data/1303523/000119312519075779/d688893dex411.htm)[32](https://www.sec.gov/Archives/edgar/data/1303523/000119312519075779/d688893dex411.htm) |
| 4.9 | [Service Contract between British American Tobacco p.l.c. and Tadeu Marroco, dated as of 27 February 2019.](https://www.sec.gov/Archives/edgar/data/1303523/000119312520086441/d852737dex414.htm)[33](https://www.sec.gov/Archives/edgar/data/1303523/000119312520086441/d852737dex414.htm) |
| 4.10 | [Master Settlement Agreement, referred to as the MSA, dated 23 November 1998, between the Settling States named in the](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-042142.txt)  [MSA and the Participating Manufacturers also named therein.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-042142.txt)[34](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-042142.txt) |
| 4.11 | [Settlement Agreement dated 25 August 1997, between the State of Florida and settling defendants in The State of Florida v.](https://www.sec.gov/Archives/edgar/data/83612/0000912057-97-030051.txt)  [American Tobacco Co.](https://www.sec.gov/Archives/edgar/data/83612/0000912057-97-030051.txt)[35](https://www.sec.gov/Archives/edgar/data/83612/0000912057-97-030051.txt) |
| 4.12 | [Comprehensive Settlement Agreement and Release dated 16 January 1998, between the State of Texas and settling](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-002173.txt)  [defendants in The State of Texas v. American Tobacco Co.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-002173.txt)[36](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-002173.txt) |
| 4.13 | [Settlement Agreement and Release in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of Minnesota,](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)  [Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named therein, dated as of 8 May](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)  [1998.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)[37](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt) |
| 4.14 | [Settlement Agreement and Stipulation for Entry of Consent Judgment in re: The State of Minnesota v. Philip Morris, Inc., by and](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)  [among the State of Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)  [therein, dated as of 8 May 1998.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)[38](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt) |
| 4.15 | [Form of Consent Judgment by Judge Kenneth J. Fitzpatrick, Judge of District Court in re: The State of Minnesota v. Philip](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)  [Morris, Inc.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt)[39](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-020580.txt) |
| 4.16 | [Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order dated 2 July 1998, by and among the](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-031513.txt)  [Mississippi Defendants, Mississippi and the Mississippi Counsel in connection with the Mississippi Action.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-031513.txt)[40](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-031513.txt) |
| 4.17 | [Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated 24 July 1998, by and among the](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-031513.txt)  [Texas Defendants, Texas and the Texas Counsel in connection with the Texas Action.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-031513.txt)[41](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-031513.txt) |
| 4.18 | [Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated 11 September 1998, by and among](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-040401.txt)  [the State of Florida and the tobacco companies named therein.](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-040401.txt)[42](https://www.sec.gov/Archives/edgar/data/83612/0001047469-98-040401.txt) |
| 4.19 | [Term Sheet agreed to by R. J. Reynolds Tobacco Company, an indirect subsidiary of Reynolds American Inc., certain other](https://www.sec.gov/Archives/edgar/data/1275283/000119312513112650/d505144dex101.htm)  [Participating Manufacturers, 17 states, the District of Columbia and Puerto Rico.](https://www.sec.gov/Archives/edgar/data/1275283/000119312513112650/d505144dex101.htm)[43](https://www.sec.gov/Archives/edgar/data/1275283/000119312513112650/d505144dex101.htm) |
| 4.20 | [Revolving credit facilities agreement, dated as of 12 March 2020, among British American Tobacco p.l.c., B.A.T. International](https://www.sec.gov/Archives/edgar/data/1303523/000119312520086441/d852737dex425.htm)  [Finance p.l.c., B.A.T. Netherlands Finance B.V. and B.A.T Capital Corporation, as borrowers, British American Tobacco p.l.c., as](https://www.sec.gov/Archives/edgar/data/1303523/000119312520086441/d852737dex425.htm)  [guarantor, HSBC Bank plc, as agent and euro swingline agent, HSBC Bank USA, National Association, as US agent and US$](https://www.sec.gov/Archives/edgar/data/1303523/000119312520086441/d852737dex425.htm)  [swingline agent, and the banks and financial institutions party thereto.](https://www.sec.gov/Archives/edgar/data/1303523/000119312520086441/d852737dex425.htm)[44](https://www.sec.gov/Archives/edgar/data/1303523/000119312520086441/d852737dex425.htm) |
| 8 | [List of Subsidiaries included on pages 301 to 310 in this report.](#id739eb8a094346e4a1dd9989c862058f_8943) |
| 11 | [Code of Ethics.](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex11.htm)[45](https://www.sec.gov/Archives/edgar/data/1303523/000119312522068869/d208089dex11.htm) |
| 12 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 13 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002.46 |
| 15.1 | Consent of KPMG LLP, independent registered public accounting firm. |
| 17 | Guarantor Subsidiaries of the Registrant (included as part of Exhibit 2.24) |
| 101 | Interactive Data Files (formatted in XBRL (Extensible Business Reporting Language) and furnished electronically). |

Notes:

1.Incorporated by reference to Exhibit 3.1 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.

2.Incorporated by reference to Exhibit 4.1 to BAT’s Registration Statement on Form S-8 (Reg. No. 333-237186) filed on 16 March 2020.

3.Incorporated by reference to Exhibit 2.4 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2017 filed on 15 March 2018.

4.Incorporated by reference to Exhibit 4.2 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-227658) filed on 2 October 2018.

5.Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.

6.Incorporated by reference to Exhibit 4.2 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.

7.Incorporated by reference to Exhibit 4.3 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.

8.Incorporated by reference to Exhibit 4.4 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.

9.Incorporated by reference to Exhibit 4.5 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.

10.Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.

11.Incorporated by reference to Exhibit 4.2 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.

12.Incorporated by reference to Exhibit 4.3 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.

13.Incorporated by reference to Exhibit 4.2 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.

14.Incorporated by reference to Exhibit 4.3 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.

15.Incorporated by reference to Exhibit 4.4 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.

16.Incorporated by reference to Exhibit 4.5 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.

17.Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 16 March 2022.

18.Incorporated by reference to Exhibit 4.2 to British American Tobacco p.l.c.’s Form 6-K filed on 16 March 2022.

19.Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 24 March 2022.

20. Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 19 October 2022.

21.Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.

22.Incorporated by reference to Exhibit 4.6 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.

23.Incorporated by reference to Exhibit 4.3 to British American Tobacco p.l.c.’s Form 6-K filed on 16 March 2022.

24.Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Registration Statement on Form F-3 (Reg. No. 333-265958) filed on 1 July 2022.

25.Incorporated by reference to Exhibit 10.6 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.

26.Incorporated by reference to Exhibit 4.2 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2021 filed on 8 March 2022.

27.Incorporated by reference to Exhibit 10.8 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.

28.Incorporated by reference to Exhibit 4.6 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2018 filed on 15 March 2019.

29.Incorporated by reference to Exhibit 4.5 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2021 filed on 8 March 2022.

30.Incorporated by reference to Exhibit 4.6 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2021 filed on 8 March 2022.

31.Incorporated by reference to Exhibit 10.43 to Reynolds American Inc.’s Annual Report on Form 10-K for the fiscal year ended 31 December 2007 filed on 27 February 2008.

32. Incorporated by reference to Exhibit 4.11 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2018 filed on 15 March 2019.

33.Incorporated by reference to Exhibit 4.14 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2019 filed on 26 March 2020.

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Exhibits  Continued | | | | | | | |

392

34.Incorporated by reference to Exhibit 4 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 24 November 1998.

35.Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 5 September 1997.

36.Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 27 January 1998.

37.Incorporated by reference to Exhibit 99.1 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.

38.Incorporated by reference to Exhibit 99.2 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.

39.Incorporated by reference to Exhibit 99.3 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.

40.Incorporated by reference to Exhibit 99.2 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 June 1998 filed on 14 August 1998.

41.Incorporated by reference to Exhibit 99.4 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 June 1998 filed on 14 August 1998.

42.Incorporated by reference to Exhibit 99.1 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 September 1998 filed on 12 November 1998.

43.Incorporated by reference to Exhibit 10.1 to Reynolds American Inc.’s Form 8-K dated 12 March 2013.

44.Incorporated by reference to Exhibit 4.25 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2019 filed on 26 March 2020.

45.Incorporated by reference to Exhibit 11 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2021 filed on 8 March 2022.

46.These certifications are furnished only and are not filed as part of BAT’s Annual Report on Form 20-F for the year ended 31 December 2022.

Certain instruments which define the rights of holders of long-term debt issued by BAT and its subsidiaries are not being filed because the total amount of

securities authorised under each such instrument does not exceed 10% of the total consolidated assets of BAT and its subsidiaries. BAT agrees to furnish copies of

any or all such instruments to the SEC on request.

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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|  | | | | | | | |

393

|  |  |
| --- | --- |
|  |  |
| ADR | American Depositary Receipt |
| ADS | American Depositary Share – 1 ADS is  equivalent to 1 BAT ordinary share |
| AGM | Annual General Meeting |
| AmSSA | Americas (excluding US) and Sub-  Saharan Africa |
| APFO | Adjusted profit from operations |
| APME | Asia-Pacific and Middle East |
| bps | Basis points |
| cc | Constant currency |
| CDP | Formerly the Carbon Disclosure Project |
| CGFO | Cash generated from operations |
| CO2e | Carbon dioxide equivalent |
| Code | UK Corporate Governance Code, July  2018 version |
| CSR | Corporate Social Responsibility |
| DOJ | The United States Department of Justice |
| DSBS | Deferred share bonus scheme |
| EMTN | European Medium Term Notes |
| ENA | Europe and North Africa |
| EPS | Earnings per share |
| ESG | Environmental, Social and Governance |
| EU | European Union |
| FII GLO | Franked Investment Income Group  Litigation Order |
| FCTC | Framework Convention on Tobacco  Control |
| FMC | Factory Made Cigarettes |
| FMCG | Fast Moving Consumer Goods |
| GAAP | Generally Accepted Accounting Practice |
| GDB | Global Drive Brands, being Kent, Dunhill,  Pall Mall, Lucky Strike and Rothmans |
| GDPR | EU General Data Protection Regulation |
| GDSB | Global Drive and Key Strategic Brands,  being the GDBs, plus Shuang Xi and State  Express 555 |
| GJ | Gigajoules (of energy use) |
| IASB | International Accounting Standards  Board |
| IEIS | International Executive Incentive Scheme |
| IFRS | International Financial Reporting  Standards as issued by the IASB and as  adopted by the EU |
| ISA | International Standards on Auditing |
| JSE | Johannesburg Stock Exchange |
| KPI | Key performance indicator |
| LIBOR | London Interbank Offered Rate |
| LSE | London Stock Exchange |
| LR | Listing Rules |
| LTIP | Long-Term Incentive Plan |

|  |  |
| --- | --- |
|  |  |
| MCE | Million cigarettes equivalent |
| MSA | Master Settlement Agreement |
| NGP | Next Generation Product |
| NRT | Nicotine Replacement Therapy |
| NTO | Net turnover or revenue |
| NYSE | New York Stock Exchange |
| OCF | Operating cash flow |
| OECD | Organisation for Economic Co-operation  and Development |
| OFAC | The United States Department of the  Treasury's Office of Foreign Assets Control |
| OTP | Other tobacco products, including but  not limited to roll-your-own, make-your-  own and cigars |
| Parker Report | The Parker Review Committee’s final  report on ethnic diversity in UK boards  published on 12 October 2017 |
| PCAOB | Public Company Accounting Oversight  Board |
| Reynolds American | Reynolds American Inc. |
| Reynolds American  Companies | Reynolds American Inc. and its subsidiary  companies |
| @ROCE | Return on capital employed@ |
| SAFL | Sustainable Agriculture and Farmer  Livelihoods |
| SEC | United States Securities and Exchange  Commission |
| SIP | Share incentive plan |
| SoBC | Group Standards of Business Conduct |
| SOx | United States Sarbanes-Oxley Act of  2002 |
| SRS | Share reward scheme |
| TaO | Programme to implement the new  operating model, including one instance  of SAP |
| TCFD | Taskforce on Climate-related Financial  Disclosures |
| TDR | TDR d.o.o |
| THP | Tobacco Heating Products (i.e. the  devices) or Tobacco Heated Products (i.e.  the consumables used by such devices) |
| TPD1 | European Tobacco Products Directive  (directive 2001/37/EC) |
| TPD2 | European Tobacco and Related Products  Directive  (directive 2014/40/EU) |
| TSR | Total shareholder return |
| U.S. | United States of America |
| UURBS | Unfunded unapproved retirement benefit  scheme |
| WHO | World Health Organization |

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| --- | --- | --- | --- | --- | --- | --- | --- |
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| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
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| Other Information |  |  |  |  |  |  |  |
| Glossary | | | | | | | |

394

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Item |  | Form 20-F caption | Location in this document |
| 1 |  | Identity of Directors, Senior Management and Advisers | N/A |
| 2 |  | Offer Statistics and Expected Timetable | N/A |
| 3 |  | Key Information |  |
|  | A |  | N/A |
|  | B | Capitalization and indebtedness | N/A |
|  | C | Reasons for the offer and use of proceeds | N/A |
|  | D | Risk factors | [116](#id739eb8a094346e4a1dd9989c862058f_8875)-[121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718), [340](#id739eb8a094346e4a1dd9989c862058f_3217)-[361](#i4d4dc756e245431cb56d014c49f68d4c_3-0-1-1-347146) |
| 4 |  | Information on the Company |  |
|  | A | History and development of the Company | [4](#id739eb8a094346e4a1dd9989c862058f_5736),[104](#id739eb8a094346e4a1dd9989c862058f_9700), [133](#id739eb8a094346e4a1dd9989c862058f_10005), [215](#i99191d8bb39e44aaaa2bfc5e0a19c92e_83172), [231](#id739eb8a094346e4a1dd9989c862058f_943)-[234](#id739eb8a094346e4a1dd9989c862058f_46), [266](#id739eb8a094346e4a1dd9989c862058f_1399)-[267](#iacbff9ba8d0e4b02b352fd6515a4315e_53085), [320](#id739eb8a094346e4a1dd9989c862058f_2599), [338](#id739eb8a094346e4a1dd9989c862058f_3116)-[339](#i1287057486f04e6b858626e2ea186532_154816), [383](#id739eb8a094346e4a1dd9989c862058f_9078), [339](#i1287057486f04e6b858626e2ea186532_154816),  [390](#id739eb8a094346e4a1dd9989c862058f_9114), Inside back cover page ([398](#id739eb8a094346e4a1dd9989c862058f_13590)) |
|  | B | Business overview | [2](#id739eb8a094346e4a1dd9989c862058f_5481)-[5](#id739eb8a094346e4a1dd9989c862058f_12503), [7](#id739eb8a094346e4a1dd9989c862058f_6649)-[25](#id739eb8a094346e4a1dd9989c862058f_14517), [27](#id739eb8a094346e4a1dd9989c862058f_14717)-[41](#id739eb8a094346e4a1dd9989c862058f_9462), [62](#id739eb8a094346e4a1dd9989c862058f_15601)-[65](#i7a6a54557f164cfea83eb7ad47950be6_258087), [76](#id739eb8a094346e4a1dd9989c862058f_18747), [99](#id739eb8a094346e4a1dd9989c862058f_18395), [108](#id739eb8a094346e4a1dd9989c862058f_9736)-[115](#id739eb8a094346e4a1dd9989c862058f_15251), [121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718), [138](#id739eb8a094346e4a1dd9989c862058f_14223), [209](#id739eb8a094346e4a1dd9989c862058f_28)-[212](#id739eb8a094346e4a1dd9989c862058f_31),  [320](#id739eb8a094346e4a1dd9989c862058f_2599), [322](#id739eb8a094346e4a1dd9989c862058f_2641), [344](#i8071c7c028004fdcba8dd8e21add6d87_0-0-1-1-359581), [362](#id739eb8a094346e4a1dd9989c862058f_4392)-[366](#ib2ca2a09b7af468b86c606a868ebb699_386089), [367](#id739eb8a094346e4a1dd9989c862058f_4753)-[368](#ieb3e00ff96df4e6ca4e446adf8feed71_6-0-1-1-225406), [371](#id739eb8a094346e4a1dd9989c862058f_5052) |
|  | C | Organizational structure | [301](#id739eb8a094346e4a1dd9989c862058f_8943)-[310](#i2ddf883f018541de9b25acdc530ac734_13200), [320](#id739eb8a094346e4a1dd9989c862058f_2599) |
|  | D | Property, plants and equipment | [231](#id739eb8a094346e4a1dd9989c862058f_943)-[232](#i53168f65d7274174ab33bd2c9cdfc438_18134), [369](#id739eb8a094346e4a1dd9989c862058f_4845) |
| 4a |  | Unresolved staff comments | N/A |
| 5 |  | Operating and Financial Review and Prospects |  |
|  | A | Operating results | [7](#id739eb8a094346e4a1dd9989c862058f_6649)-[9](#id739eb8a094346e4a1dd9989c862058f_13902), [22](#id739eb8a094346e4a1dd9989c862058f_6168)-[23](#ie62150bfe57547f7b520c380bec6ffd2_128753), [33](#id739eb8a094346e4a1dd9989c862058f_14772), [35](#id739eb8a094346e4a1dd9989c862058f_14874), [37](#id739eb8a094346e4a1dd9989c862058f_14907)-[40](#id739eb8a094346e4a1dd9989c862058f_15792), [76](#id739eb8a094346e4a1dd9989c862058f_18747), [99](#id739eb8a094346e4a1dd9989c862058f_18395)-[103](#if2de028cc61e4485afa17e66d2701679_28891), [106](#id739eb8a094346e4a1dd9989c862058f_9718)-[115](#id739eb8a094346e4a1dd9989c862058f_15251), [118](#i5664363aa5e1437fbf641ea66037072b_1-0-1-22-205163)-[120](#idbfaa8132f3346799d7e661cfefb6890_1-0-1-22-205275), [133](#id739eb8a094346e4a1dd9989c862058f_10005),  [209](#id739eb8a094346e4a1dd9989c862058f_28)-[211](#i7f26a72bfe184bda86632d29b4d0b67c_40938), [246](#ic232ec0c46d84a71b7fcb01dd6aa8293_14148)-[248](#id739eb8a094346e4a1dd9989c862058f_52), [262](#i651f6a5c8e5d4d3cbd025685ad7c7393_129737), [336](#i49422b2b471646dabd086f354630c16e_101874), [338](#id739eb8a094346e4a1dd9989c862058f_3116), [348](#i366eb35ac5d946d1a2cd9e4042347e88_1-0-1-1-394552)-[356](#ibcccba13e24945d28d241c8fc215b96b_0-0-1-1-394556), [362](#id739eb8a094346e4a1dd9989c862058f_4392)-[366](#ib2ca2a09b7af468b86c606a868ebb699_386089) |
|  | B | Liquidity and capital resources | [104](#id739eb8a094346e4a1dd9989c862058f_9700)-[105](#i38beb0f59f474b7e83e59155ae834f98_151202), [107](#ie2705674220e4e0ba1527584a3003bbb_0-0-1-8-247685), [202](#id739eb8a094346e4a1dd9989c862058f_22), [249](#id739eb8a094346e4a1dd9989c862058f_1337), [256](#id739eb8a094346e4a1dd9989c862058f_55)-[258](#icac7f87f5f4f4b578cb1eccd7c6407a1_19331), [261](#id739eb8a094346e4a1dd9989c862058f_1383)-[265](#i651f6a5c8e5d4d3cbd025685ad7c7393_128858), [338](#id739eb8a094346e4a1dd9989c862058f_3116)-[339](#i1287057486f04e6b858626e2ea186532_154765), [358](#ie055d243046d4565a76fc2ba10a72a07_0-0-1-1-390220) |
|  | C | Research and development, patents and licenses | [4](#id739eb8a094346e4a1dd9989c862058f_5736), [10](#id739eb8a094346e4a1dd9989c862058f_6665)-[11](#i3877a6e924d34873a9b294bd57b20d04_158828), [17](#id739eb8a094346e4a1dd9989c862058f_14058), [32](#id739eb8a094346e4a1dd9989c862058f_5896), [34](#id739eb8a094346e4a1dd9989c862058f_8732)-[36](#id739eb8a094346e4a1dd9989c862058f_8965), [41](#id739eb8a094346e4a1dd9989c862058f_9462), [50](#id739eb8a094346e4a1dd9989c862058f_15538)-[51](#id739eb8a094346e4a1dd9989c862058f_19555), [54](#id739eb8a094346e4a1dd9989c862058f_15564)-[55](#if5f39133701c44ffb122cdbaffd7d577_190556), [100](#id739eb8a094346e4a1dd9989c862058f_15721), [214](#i99191d8bb39e44aaaa2bfc5e0a19c92e_84335), [320](#id739eb8a094346e4a1dd9989c862058f_2599), [360](#i2461df313a3341fea934110212fd338c_1-0-1-1-394508) |
|  | D | Trend information | [2](#id739eb8a094346e4a1dd9989c862058f_5481)-[5](#id739eb8a094346e4a1dd9989c862058f_12503), [7](#id739eb8a094346e4a1dd9989c862058f_6649)-[25](#id739eb8a094346e4a1dd9989c862058f_14517), [28](#id739eb8a094346e4a1dd9989c862058f_5852)-[41](#id739eb8a094346e4a1dd9989c862058f_9462), [50](#id739eb8a094346e4a1dd9989c862058f_15538)-[51](#id739eb8a094346e4a1dd9989c862058f_19555), [70](#id739eb8a094346e4a1dd9989c862058f_9626)-[81](#id739eb8a094346e4a1dd9989c862058f_18802), [97](#id739eb8a094346e4a1dd9989c862058f_15687)-[121](#i41d1c56d02c243aa87bd0e2ba5e62a16_59718), [362](#id739eb8a094346e4a1dd9989c862058f_4392)-[366](#ib2ca2a09b7af468b86c606a868ebb699_386089) |
|  | E | Critical Accounting Estimates | N/A |
| 6 |  | Directors, Senior Management and Employees |  |
|  | A | Directors and senior management | [124](#id739eb8a094346e4a1dd9989c862058f_9915)-[129](#i44a28bcf2c9448a6b3cb3bc975de91d9_2-0-1-1-376253), [141](#id739eb8a094346e4a1dd9989c862058f_10074) |
|  | B | Compensation | [159](#id739eb8a094346e4a1dd9989c862058f_8489)-[177](#i1831158e35f74cc988db478d232fe873_119416), [234](#id739eb8a094346e4a1dd9989c862058f_46)-[241](#ib11efe51c0c84e64a4476aeaad3af338_136265), [271](#id739eb8a094346e4a1dd9989c862058f_64)-[272](#idae078a7e90e4284a940ff70f2a769b4_23787), [329](#i49422b2b471646dabd086f354630c16e_68562), [332](#i49422b2b471646dabd086f354630c16e_68563)-[333](#i49422b2b471646dabd086f354630c16e_93844) |
|  | C | Board practices | [124](#id739eb8a094346e4a1dd9989c862058f_9915)-[129](#i44a28bcf2c9448a6b3cb3bc975de91d9_2-0-1-1-376253), [147](#id739eb8a094346e4a1dd9989c862058f_14636), [150](#id739eb8a094346e4a1dd9989c862058f_10128)-[161](#i706ee59a7e1047d195218db9afa64cd5_310183), [163](#id739eb8a094346e4a1dd9989c862058f_15298), [172](#i1831158e35f74cc988db478d232fe873_120494), [178](#i1831158e35f74cc988db478d232fe873_120495)-[180](#i1831158e35f74cc988db478d232fe873_78357), [271](#id739eb8a094346e4a1dd9989c862058f_64)-[272](#idae078a7e90e4284a940ff70f2a769b4_23787), [372](#id739eb8a094346e4a1dd9989c862058f_8586), |
|  | D | Employees | [271](#id739eb8a094346e4a1dd9989c862058f_64), [337](#id739eb8a094346e4a1dd9989c862058f_3095) |
|  | E | Share ownership | [89](#iecb80c297bcf49878ca96946d0f9b1c3_85982), [167](#iff8934d3734b44f4b1d79b07b59bc890_329467)-[169](#iff8934d3734b44f4b1d79b07b59bc890_252488), [175](#i1831158e35f74cc988db478d232fe873_119415)-[177](#i1831158e35f74cc988db478d232fe873_119416), [268](#id739eb8a094346e4a1dd9989c862058f_61), [388](#id739eb8a094346e4a1dd9989c862058f_9150) |
| 7 |  | Major Shareholders and Related Party Transactions |  |
|  | A | Major shareholders | [381](#id739eb8a094346e4a1dd9989c862058f_9060)-[382](#id663c202a4e14ba997763edb1bde5c71_176236) |
|  | B | Related party transactions | [271](#id739eb8a094346e4a1dd9989c862058f_67)-[272](#idae078a7e90e4284a940ff70f2a769b4_23787) |
|  | C | Interests of experts and counsel | N/A |
| 8 |  | Financial Information |  |
|  | A | Consolidated statements and other financial information | [103](#if2de028cc61e4485afa17e66d2701679_28891), [118](#i5664363aa5e1437fbf641ea66037072b_1-0-1-22-205163), [152](#i063086bbd4724f0a917bdd6df645c957_448684), [194](#id739eb8a094346e4a1dd9989c862058f_19842)-[300](#i9d3f7b265eec44f8989a169ffc3b40de_26595), [351](#i4762738cedd144db86b1d84bfa0e41d7_1-0-1-1-394308)-[355](#ib77ed0e9393f44a887ebb2936fa35859_0-0-1-1-394313), [375](#id739eb8a094346e4a1dd9989c862058f_9036)-[376](#i825f934e76db403c8fbb29df8799ed0b_2871) |
|  | B | Significant changes | N/A |
| 9 |  | The Offer and Listing |  |
|  | A | Offer and listing details | [374](#id739eb8a094346e4a1dd9989c862058f_8435) |
|  | B | Plan of distribution | N/A |
|  | C | Markets | [374](#id739eb8a094346e4a1dd9989c862058f_8435) |
|  | D | Selling shareholders | N/A |
|  | E | Dilution | N/A |
|  | F | Expenses of the issue | N/A |
| 10 |  | Additional Information |  |
|  | A | Share capital | N/A |
|  | B | Memorandum and Articles of Association | [169](#iff8934d3734b44f4b1d79b07b59bc890_252488), [383](#id739eb8a094346e4a1dd9989c862058f_9078)-[385](#ia6b670ca8af54edaaf7502cb7c636054_30-0-1-1-389358) |
|  | C | Material contracts | [234](#id739eb8a094346e4a1dd9989c862058f_46)-[236](#ib11efe51c0c84e64a4476aeaad3af338_136264), [367](#id739eb8a094346e4a1dd9989c862058f_4753)-[368](#ieb3e00ff96df4e6ca4e446adf8feed71_6-0-1-1-225406) |
|  | D | Exchange controls | [375](#id739eb8a094346e4a1dd9989c862058f_9036) |
|  | E | Taxation | [377](#id739eb8a094346e4a1dd9989c862058f_9019)-[380](#i67c1aaa6b1cc405a9762ae078738f39a_157987) |
|  | F | Dividends and paying agents | N/A |
|  | G | Statements by experts | N/A |
|  | H | Documents on display | [390](#id739eb8a094346e4a1dd9989c862058f_9114) |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Cross-Reference to Form 20-F | | | | | | | |

395

|  |  |  |  |
| --- | --- | --- | --- |
|  |  |  |  |
| Item |  | Form 20-F caption | Location in this document |
|  | I | Subsidiary information | N/A |
|  | J | Annual Report to Security Holders | N/A |
| 11 |  | Quantitative and Qualitative Disclosures about Market Risk | [261](#id739eb8a094346e4a1dd9989c862058f_1383)-[265](#i651f6a5c8e5d4d3cbd025685ad7c7393_128858) |
| 12 |  | Description of Securities Other Than Equity Securities |  |
|  | A | Debt securities | N/A |
|  | B | Warrants and rights | N/A |
|  | C | Other securities | N/A |
|  | D | American Depositary Shares | [389](#id739eb8a094346e4a1dd9989c862058f_9132) |
| 13 |  | Defaults, Dividend Arrearages and Delinquencies | N/A |
| 14 |  | Material Modifications to the Rights of Security Holders  and Use of Proceeds | N/A |
| 15 |  | Controls and Procedures | [194](#id739eb8a094346e4a1dd9989c862058f_19842)-195, [371](#id739eb8a094346e4a1dd9989c862058f_5052) |
| 16A |  | Audit Committee Financial Expert | [151](#id739eb8a094346e4a1dd9989c862058f_13863), [370](#id739eb8a094346e4a1dd9989c862058f_4910) |
| 16B |  | Code of Ethics | [158](#i063086bbd4724f0a917bdd6df645c957_441325), [370](#id739eb8a094346e4a1dd9989c862058f_4910), [392](#i5761c8b2862b4b29a1cb623795afdbfc_47-0-1-1-400276) |
| 16C |  | Principal Accountant Fees and Services | [154](#i063086bbd4724f0a917bdd6df645c957_448682)-[155](#i063086bbd4724f0a917bdd6df645c957_448683), [215](#i99191d8bb39e44aaaa2bfc5e0a19c92e_83172) |
| 16D |  | Exemptions from the Listing Standards for Audit  Committees | N/A |
| 16E |  | Purchases of Equity Securities by the Issuer and  Affiliated Purchasers | [386](#id739eb8a094346e4a1dd9989c862058f_9168)-[387](#ie0c5e244d7374e96a86fb848a601b68a_22774) |
| 16F |  | Change in Registrant’s Certifying Accountant | N/A |
| 16G |  | Corporate Governance | [370](#id739eb8a094346e4a1dd9989c862058f_4910) |
| 16H |  | Mine Safety Disclosure | N/A |
| 16I |  | Disclosure Regarding Foreign Jurisdictions that Prevent  Inspections | N/A |
| 17 |  | Financial Statements | N/A |
| 18 |  | Financial Statements | [194](#id739eb8a094346e4a1dd9989c862058f_19842)-[300](#i9d3f7b265eec44f8989a169ffc3b40de_26595) |
| 19 |  | Exhibits | [391](#id739eb8a094346e4a1dd9989c862058f_9096)-[393](#ic3946c684ff1449aba78fe0b6bf2117f_63151) |

|  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| BAT Annual Report and Form 20-F 2022 | Strategic Report |  | Governance Report |  | Financial Statements |  | Other Information |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |
| Other Information |  |  |  |  |  |  |  |
| Cross-Reference to Form 20-F  Continued | | | | | | | |

396

397

398