Accelerating the transition to a more sustainable economy is at the forefront of investors and consumers’ minds. They want to be sure that a company is doing the right thing and calling out those which are not. Over 75% of the >5,000 consumers in PwC’s 2021 Consumer Intelligence Series survey on ESG think companies should be actively shaping ESG best practice, and 76% claimed they would discontinue relations with companies that treat employees, communities and the environment poorly. The growing public awareness of ESG issues has led to a seismographic shift in public opinion whereby a company’s holistic sustainability strategy is linked to brand loyalty.

In response, companies are giving greater focus to their transparency and value chain impact, however the quality and scope of the impact is not uniform across the sector. As the leading finance partner to the UK Consumer Industries sector, NatWest is playing a key role in supporting corporates on their sustainability journeys. Within this article we aim to outline the opportunities and challenges we see corporates face within the Consumer Industries as they transition their business models, and highlight some of the key initiatives we are observing in the sector.

While sustainability transformations require significant investment, the opportunities for ESG-led businesses within the Consumer Industry are clear: 

• Increasing attractiveness for consumers: Aligning products with consumers’ values could result in top-line growth through increased demand for sustainable products (which could result in a price premium), new markets, and winning new customers. In IBM’s 2022 survey of 16,000 global consumers, 49% said they’ve paid a premium (avg. 59% more) for products branded as sustainable or socially responsible in the last 12 months. Inversely, there’s the significant risk of negative publicity for those being seen as slow to act, with consumers now better informed about environmental issues and greenwashing driven by non-governmental organisations (NGOs) such as Greenpeace with its “Detox my fashion” campaign, and Good On You with its Ethical fashion app rating >3,000 fashion brands. Furthermore, organisations such as the International Consumer Protection and Enforcement Network and the Competition and Markets Authority continue to focus on greenwashing. 
• Increasing attractiveness for Investors: Institutional investors are actively considering the transition pathways of their investments. PwC’s Global Investor Survey revealed that c.44% of investors want companies to continue focusing on climate change, with the top priority being the development of innovative products, services and ways of operating (c.83% of investors) to mitigate the growing threats caused by climate disruptions and societal changes. This is reflected by investor groups and the UK’s Green Technical Advisory Group expressing disappointment and criticism over the UK government’s announcement that it will not meet the deadline for implementing the green taxonomy.
• Increasing attractiveness for employees: A strong ESG proposition helps attract and retain high calibre employees whilst enhancing employee motivation and productivity. A Deloitte study showed purpose-led companies can achieve 40% higher levels of workforce retention than their competitors, with compliance consulting firm Upright’s survey demonstrating the most sought-after employees prioritise the impact of their employer organisation over their own personal impact. 
• Supply chain efficiencies: Applying ESG principles requires a review and modification of corporate processes, which result in more efficient supply chains and resource use. Fashion For Good‘s innovation platform exemplifies sustainability boosting innovation, offering a platform for fashion companies to connect with innovators to create disruptive solutions to sustainability challenges within the value chains of the textiles industry. 
• Mitigating supply chain ESG risk: The global and multi-tiered supply chains of Consumer Industry companies increase their exposure to climate change risk. The incorporation of holistic sustainability strategies helps companies prepare for the growing ESG regulatory and legal requirements, and extreme weather risks such as the impact of droughts on production sites.

With companies across the consumer sector transforming their business models to forge a sustainable future, five key themes have emerged:

1. Scope 1, 2 and 3 GHG Emissions
2. Sustainable Supply Chains
3. Reduction in the use of plastic
4. Waste mitigation and management
5. Positive marketing and ESG education

Here we look at each theme.

1) Scope 1, 2 and 3 GHG Emissions: the challenge with Scope 3

While data is more readily available to measure Scope 1 and 2 emissions, and companies have greater control over initiatives to reduce these emissions – for example by sourcing renewable electricity or transitioning to clean transportation – Scope 3 emissions are much trickier to both observe and manage. Despite such challenges, pressure on companies from stakeholders is fast increasing to track all GHG emissions and establish reduction targets across each of the three Scopes in line with the Science-Based Targets Initiative (SBTi). 

Scope 3 targets are continuing to create top-down pressure in the mid-corporate space for suppliers to set and report their ESG impact, with greater onus being placed on larger companies to develop their suppliers’ ESG capabilities. Institutions such as the Carbon Disclosure Project (CDP) are working with large purchasing organisations including Microsoft, Diageo, and Sainsbury’s as part of their Supply Chain programmes to encourage companies in their respective supply chains to disclose their GHG emissions. Moreover, it is becoming more commonplace to include ESG thresholds within procurement policies, with corporates like Arla implementing sustainability incentives for their farmers.

For further GHG emission examples and initiatives, please see our Carbonomics series which can be found here.

2) Sustainable Supply Chains: increased scrutiny but increased opportunity 

As visibility over value chains increases, greater focus is being placed on the full ESG impact of a company’s business model which for the Consumer Industry includes multiple tiers of suppliers (i.e. suppliers of suppliers) and types of suppliers (e.g. mid-sized or small corporates, farmers etc.), making the interconnected nature of environmental and social issues ever-present.

COP27 focused on climate reparations and returned the spotlight to a Just Transition, whilst social reporting initiatives (e.g. EU’s Social Taxonomy) continue to be developed. We believe it is crucial companies ensure ethical working practices and living wages across their supply chains, redress social injustices in areas of operation (e.g. through positive marketing and education), incorporate local communities in environmental projects (e.g. nature-based solutions), and expand their sphere of existing ESG targets across their workforce, marketplace and society (Deloitte’s Equity Activation Model helps capture how businesses build a more equitable future around these three primary spheres of influence).

Industry-wide collaboration on supply chain innovation is key and seen across most Consumer Industry sub-sectors. For example, WRAP and WWF are working with eight UK Grocers to agree a common set of rules to measure and report their supply chain emissions, with the aim to collaborate and catalyse the reduction of GHG emissions from food sold; whilst AIM-PROGRESS is a forum of leading consumer goods manufacturers and suppliers, founded to share knowledge on building sustainable supply chains. Partnerships are also being created to target specific supply chain issues, such as the Sustainable Food Trust which aims to transform the food and farming systems by working closely with governments, organisations and companies to develop a globally harmonised framework for sustainability in farms.

Improved corporate transparency with ongoing regular updates is a must-have, making sure that consumers can see for themselves how their brand of choice is managing its impact. M&S, for example, offers a detailed insight into its complex supply chains through an interactive map on its website which lists, for each of its product categories, the relevant suppliers, their locations, and number of employees.

Growing alignment among ESG reporting frameworks (e.g. ISSB’s December update) and ESG rating agencies will also help strengthen supply chain transparency and the importance of detailed impact reporting. Similarly, ongoing audits and verification are crucial to ensure suppliers operate at a specified standard. 

3) Reduction in the use of plastic: consumer and political campaigns push to reduce plastic consumption

Consumer companies need to demonstrate that they are proactively working to reduce the total amount of plastic used throughout their value chain. For example, despite being the main sponsor of COP27, Coca Cola continued to face criticism for being the world’s biggest plastic polluter. Regulation is also catching up, with growing attention to plastics at a national and European level: the UK government banned the sale of several single-use plastic items from takeaway businesses, food vendors, and hospitality industry in Jan-23; whilst Defra aims to increase responsibility for packaging producers, in alignment with the ‘polluter pays’ principle. 

By targeting a reduction of plastic usage, companies will invertedly reduce their Scope 3 emissions and mitigate reputational risk from the growing focus on all types of waste produced by companies. 

4) Circular Economy: “take-make-dispose” impossible to sustain 

A circular economy is based on three principles: eliminate waste and pollution, circulate products and materials, and regenerate nature. Organisations such as the Ellen MacArthur Foundation, the Waste and Resources Action Programme (WRAP), and the Cradle to Cradle Products Innovation Institute, are driving the switch towards a circular economy, distinguishing between durable and consumable components to ensure disassembly and reuse: 

Stakeholders are increasing their focus on industry specific waste and its relation to a Just Transition. For example, the fashion industry has faced scrutiny on its “addiction to synthetic fibres”, levels of waste created by fast fashion onto low-GDP countries, and Greenpeace’s Detox My Fashion campaign which exposed the pollution of waterways in the Global South. Solving these issues goes back to engaging in a direct and constant dialogue with supply chain partners, as outlined earlier.

IKEA, for example, buys products from more than 1,300 suppliers in 50 countries and supports suppliers by playing an active role in helping them be sustainable, focusing on collaborative product designs to minimise the use of materials. To support the governance of such initiatives, IKEA specifies in its code of conduct for suppliers that waste should be avoided, and where it does occur, try to use it in other products.

Whilst a circular economy represents the ideal long-term solution, recycling and disposing of dangerous waste responsibly can help reduce some of the negative impact on the environment during the transition period (e.g. Grocers providing recycling facilities, including for items that are difficult to recycle in kerbside collections). 

By promoting a circular economy, larger companies can invertedly benefit from the decreasing resource use and reduction in Scope 3 GHG emissions. 

5) Positive marketing and ESG education

The Consumer Industry sector has a unique position to increase ESG education via their marketing. Accenture’s global survey of 30,000 consumers found that 62% want companies to take a stand on current issues such as sustainability or fair employment practices. Similarly, Mindshare UK’s Reality 2022 report highlights the expectation of brands, with 58% of those surveyed agreeing that the pandemic has shown how change is possible, with the majority now having higher expectations of brands than before (53%). 

The promotion of sustainable lifestyles creates an opportunity to increase consumer interaction and loyalty. For example, repair and take-back programmes educate consumers on the environmental impact of their garments whilst strengthening brand loyalty. 

However, ESG education and marketing must be done as part of wider sustainability initiatives, or else it risks green and/or social washing if limited progress has been done on wider sustainability initiatives (e.g. Shein and Pretty Little Thing launching their resale platforms, or fast-fashion brands being challenged on their sustainability claims)

The transition will entail a series of projects which will require funding. If raised in the sustainable finance markets, this can result in greater liquidity from ESG investors, more competitive pricing, and longer tenors. Corporates with strong ESG strategies or credible transition plans are viewed more positively, with sustainability becoming an increasing part of credit analysis for banks and investors.

Sustainable finance also allows companies to showcase their sustainability credentials both internally and externally. Many Treasurers, Chief Sustainability Officers (CSOs) and Chief Financial Officers (CFOs) talk very positively of the loudspeaker effect of tying financing to their company’s sustainability journey, aligning the long-term sustainability agenda across the whole organisation. 

The sustainable finance market provides a wide (and growing) range of ‘conventional’ financing, risk management and investment products in green, social and sustainability format; with debt solutions structured via “Use of Proceeds” and “Sustainability-Linked” approaches which we have outlined below: 

Use of Proceeds financing: For funding specific projects that have clear environmental / social benefits, use of proceeds financing will be suitable, particularly for refinancing previous investments, or smaller quanta (including an individual tranche within the wider financing structure) given larger quanta require a large portfolio of existing / forecast eligible projects. However, Consumer Industry companies can face difficulty in illustrating the ambitiousness / additionality of operational expenditure, potentially increasing reliance on capital expenditure to cover the debt quantum. 

Sustainability-linked financing: For corporates with established ESG targets, sustainability-linked financing is a suitable product to consider with possible pricing benefits (and penalties) for the borrower if it achieves (or doesn’t achieve) sustainability targets. These instruments allow flexibility in the use of borrowing proceeds.

There are now a significant number of examples of corporates who have aligned their financing and sustainability plans, providing both comfort and clarity to corporates who have not yet embarked on this journey.

Looking at the use of sustainability key performance indicators (KPIs) in transactions of Consumer Industry corporates, PZ Cussons, Compass Group, and Burberry have set ambitious KPIs and eligible projects: 

• PZ Cussons (£325m Sustainability-Linked Revolving Credit Facility, Nov-22): The facility includes three sustainability KPIs: reduce Scope 1 & 2 GHG emissions (committing to include Scope 3 during the life of the facility), reduce virgin plastic packaging, and achieve B Corp certification across all business units. 
• Compass Group (€500m and £250m Sustainable Bonds, Sep-22): Funds will be used to progress the Group’s sustainability initiatives, including environmentally sustainable management of living natural resources and land use, pollution prevention and control, clean transportation, socioeconomic advancement, and food security. 
• Burberry (£300m Sustainability-Linked Loan, Jan-22): The facility is linked to accelerating emissions reductions across its extended supply chain (Scope 3) by 46% by 2030 and becoming net zero by 2040. The loan builds on their 2020 Sustainability Bond which focused on green buildings and raw material sourcing.

In partnership with NatWest, treasury teams and CSOs can steer the wheel around ESG innovation, as seen in other forms of financing and working capital solutions:

• Sustainability-Linked Supply Chain Finance: Supply chain finance programmes that incentivise suppliers to achieve emissions targets have been announced by a number of large consumer companies in the past two years. In 2021, Tesco launched the UK retail sector’s first sustainability-linked supply chain finance programme, which sees Tesco offering suppliers preferential financing rates based on their disclosure of GHG emissions, setting reduction targets, and delivering reductions. Coca-Cola Europacific Partners (CCEP) announced in August this year a similar programme, which provides financial incentives linked to a number of sustainability KPIs. 
• Asset Financing and Leasing: Green Asset Finance linked to specific assets which help businesses be more sustainable. Example eligible assets include electric or hydrogen buses, lorries or vans and car fleets, to clean energy assets ranging from batteries and energy storage to heat pumps and solar panels.
• Carbon Credits: Carbon credits to offset emissions can be an important part of your transition strategy. Voluntary carbon credit market standards as well as new voluntary carbon market settlement platforms – such as Carbonplace – can help identify those projects which are additional, permanent, local community driven, and with ongoing governance in place.

As an existing sustainable finance partner to consumer companies in the UK, we’re very aware of the specific challenges while transitioning to sustainable business practices. We can help clients link financing to specific ESG initiatives, providing a solutions-based approach in structuring impactful finance products. Our in-house ESG and sustainable finance specialists could help deliver the best outcomes through: 

• Strategic ESG advisory support on institutional developments, ESG ratings, sustainability strategy benchmarking and ESG investor engagement.
• A broad suite of sustainable finance products and services, including sustainability-linked and use of proceeds financing across loans, bonds and private placements. Furthermore, we provide ESG-linked FX, derivatives and supply chain finance, as well as ESG-linked asset finance.
• Innovations such as the NatWest Carbon Planner for SMEs and smaller businesses.
• Carbonplace, a new voluntary carbon market settlement platform of which NatWest is a founding member.
• An extensive pool of easily accessible information sources, such as the NatWest Sustainability hub, the NatWest Carbon hub, and the monthly NatWest Corporate ESG newsletter.

If you want to discuss how we could help you, please get in touch through your usual bank contact.