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Sector Reports - 25/10/2019

Looking in the mirror at sustainability: Luxury Goods and Cosmetics Sector meets halfway ESG contributions to sustainability

This report provides Vigeo Eiris’ exclusive opinion on 59 companies belonging to the Luxury Goods and Cosmetics Sector and companies’ strengths and best practices as well as their vulnerabilities, controversies and material risks and contribution to the United Nations Sustainable Development Goals (UN SDG’s).

Regarding the sector’s strengths and innovations, the Luxury and Cosmetic sector are leaders regarding non-discrimination policies such as integration of women in managerial positions and at board level and environmental strategies linked to business models, Yet, the sector still covers the biggest challenges regarding child labour in its supply chain especially on minerals, respect of indigenous people’s rights and weak performances on the promotion of labour relations.

Furthermore, the Vigeo Eiris report reveals the contrasted and overall limited ESG performance of the Luxury Goods and Cosmetics Sector. This sector remains heavily exposed to controversies on information to customers, the integration of environmental factors in the supply chain and the promotion of social and economic development. The sector features a significant carbon footprint with an energy transition performance that remains weak, despite its high potential to drive the transition to a sustainable production and consumption system towards organic and natural products.

Sector Report Luxury

Key Findings:

  • According to Reuters, the cosmetic sub-sector was globally valued at USD 507.75 billion in 2018 and is estimated to reach USD 758.45 billion by 2025. The sub-segments that is growing fast is the global natural and organic cosmetic market which for 2018 was valued at USD 11,500 million and according to MarketWatch and is expected to reach USD 23,600 million by the end of 2025. Now consumers look for products without synthetic chemicals, not tested in animals and companies with natural and ethical lines. Some of the cosmetics companies took the high road and acquired companies related to organic and natural components such as Unilever with Schmidt’s Naturals (US) and Estee Lauder with Too Faced (US), yet companies such as Shiseido and L’Oréal with Garnier; developed their own organic segments.
  • The Luxury Goods & Cosmetics sector is divided into two main sub-sectors: the first sub-sector is the personal luxury goods which includes men, women and infants clothing, as well as leather goods (e.g. handbags, wallets), shoes, jewellery, watches and other accessories; all defined as luxury and prestigious products. The second sub-sector is the cosmetic and toiletries, which includes all types of make-up products (e.g. lipstick, mascara), hair and body care products (e.g. shampoo, cream, hair dye), personal hygiene products (e.g. soap, deodorant) as well as fragrance perfumes.
  • Vigeo Eiris awarded an overall limited score of (35/100) to companies in the Luxury Goods & Cosmetics sector. The sector’s performance remains unchanged since our previous analysis in 2017.
  • The sector ranks 8th out of Vigeo Eiris’ 39 sectors, which cover a total research universe of 4,500 companies. Previously, the sector ranked 6th. The Sector Leaders are concentrated in Europe, with an overall limited score of (41/100), followed by North America (36/100) and Asia Pacific companies (30/100). Laggards are listed in the Emerging Markets region with an overall limited score of (32/100).
  • The Luxury Goods & Cosmetics sector reporting rate is 68%, above the universe average (58%), with European companies communicating most comprehensively on their ESG policies, practices and performances with an overall reporting rate of 76%, while Emerging Market companies remain the least communicative, with an average reporting rate standing at 58%.
  • ESG risk mitigation overall average scores are limited in relation to operational efficiency (41/100), reputation (35/100), legal security (33/100) and human capital (31/100). The lowest score is achieved on the human capital asset, as the reported efforts to ensure the proper management of issues related to employees (including the impact of reorganisations and the management of layoffs, as well as the promotion of fundamental labour rights) generally lack substantial and consistent disclosure for the majority of companies. However, in terms of managing issues affecting operational efficiency, companies show their highest performances, mainly due to the application of rigorous environmental safeguarding policies and strong internal controls.
  • The Luxury Goods & Cosmetics sector faces 76 controversies, affecting 19 of the companies: 11% of high severity cases, 6% of significant severity cases and 2% of minor cases. The most recurrent controversies concern information to customers, environmental and labour standards in the supply chain, as well as product safety.

Key Takeaways:

  • Ensuring product safety and content integrity in marketing and advertising remains a challenge: Addressing product safety-related risks is paramount for the Luxury Goods and Cosmetics sector and the sector remains exposed to risks in case of inadequate information to customers and irresponsible marketing techniques, as cosmetic products are substances that come in contact with the body. Nevertheless, companies’ average performance on the issues of product safety (34/100), and responsible marketing and information to customers (31/100) remains limited, with best performers, such as Henkel or L’Oréal located in Europe. Furthermore, the issues of product safety, and responsible marketing and information to customers are among the top 5 most controversial ESG topics for the Luxury Goods and Cosmetics sector, with approximately 26% of the total sector’s controversies related to information to customers, and 13% of the total sector’s controversies related to product safety incidents.
  • Stakeholders’ increasing concerns about adverse environmental and social risks in the supply chain, despite companies’ visible efforts: zoom on palm oil and minerals: A number of companies, including L’Oréal and Procter & Gamble, appear to disclose ambitious commitments in order to address adverse environmental impacts related to palm oil sourcing, supported by relevant measures. Nevertheless, Vigeo Eiris finds that the Luxury Goods and Cosmetics sector continues to face high profile and recurrent allegations linked to the sourcing of palm oil. Companies such as L’Oréal, Colgate-Palmolive and Reckitt Benckiser face allegations in Indonesia about the deforestation caused by their suppliers. Another high-demand raw material is minerals and diamonds especially are highly regulated. One of the best performers within the Luxury Goods and Cosmetics sector when it comes to social factors in the supply chain is Kering, which appears to have best practices in place, including membership of the Responsible Jewellery Council ensuring that ‘blood diamonds’ are not part of the supply chain and contractual clauses against child labour in its dealings with suppliers. However, the traceability of the supply chain of other minerals such as mica is still uncertain, as Vigeo Eiris finds that the Luxury, Goods and Cosmetics sector continues to face high profile and recurrent allegations linked to the sourcing of minerals and companies in the sector achieve a limited average performance on social issues in the supply chain (42/100).
  • The need to further navigate eco-friendly packaging options and eco-design throughout the product lifecycle is still identified: While companies operating in the Luxury Goods and Cosmetics sector’s highest performance are achieved in environmental strategy with an average robust performance (55.6/100), these same companies do not seem to substantively tackle the environmental impacts from the use and disposal of products’ packaging as shown by the overall average weak score of (29.3/100). Few sectors value beauty, design, and function as much as the Luxury Goods and Cosmetics industry; whether it’s sparkling clear, durable, diamond-faceted containers or copper-hued, satin-finish flexible tubes, plastics enable lightweight, durable, and attractive packaging solutions. However, consumers’ awareness of environmental standards and concern regarding plastic pollution are increasing the demand for more sustainable packaging solutions. Some outperforming companies such as L’Oréal (67/100), Christian Dior, Henkel and Kao (66/100) demonstrate strong commitments supported by significant measures including undertaking lifecycle assessments, designing reusable or recyclable packaging.
  • Respect of Indigenous People’s Rights: a clear sector weakness: Each of the United Nations’ (UN) 17 Sustainable Development Goals (SDGs) has special importance for the world’s 500 million indigenous people. Indigenous well-being depends on alignment with tools such as the UN Declaration on the Rights of Indigenous Peoples (UNDRIP). The respect of the Human Rights of Indigenous Peoples when conducting ‘Bio-prospection’ activities is one of the Cosmetics companies’ main Human Rights, responsibilities. According to the World Health Organization (WHO), bioprospecting is a process of discovery and commercialization of new products based on biological resources, typically in less-developed countries. Bio-prospecting includes indigenous knowledge about the uses and characteristics of plants and animals. As a result, bio-prospecting may lead to so-called “bio-piracy”, the exploitative appropriation of indigenous forms of knowledge by commercial actors. Despite the importance of this topic, companies from the Luxury and Cosmetic sector attain an overall limited score of (36/100). Some of the best-performing companies are L’Oréal and Shiseido with measures such as assessments prior to bioprospecting activities, training on indigenous people’s rights for relevant employees, formalised compensation agreements for indigenous peoples and grievance mechanisms.
  • Significant challenges lying ahead of the luxury industry to establish effective mechanisms to address animal rights in the supply chain: Most animal skin-based materials as leather, fur and wool come from countries where animal welfare standards are not well established and respected. The companies assessed by Vigeo Eiris demonstrate an overall average limited performance (37.8/100) when it comes to integrating environmental factors in the supply chain under which Vigeo Eiris assesses companies’ commitments and efforts to ensure animal welfare. This reflects the significant challenges lying ahead of the luxury industry to establish effective mechanisms to mitigate and address animal rights in the extended supply chains. Some of the best-performing companies with demonstrated efforts to ensure animal welfare are Kering, LVMH Moet Hennessy Louis Vuitton, and Christian Dior. These companies communicate on formalised commitment covering ethical considerations when it comes to animal skins as a material of high concern. In addition to traceability systems for biodiversity sensitive materials, and partnerships with stakeholders to build capacities in this field, they also report on using material substitutes such as eco-friendly alternative bio-plastic and vegan leather. Other companies have reported stopping using fox, mink, angora, rabbit and Asiatic raccoon fur.

Best performing areas:

  • Environmental Strategy
  • Shareholder’s Rights
  • Audit & Internal Control Systems

Worst performing areas:

  • Reorganisations
  • Responsible Lobbying
  • Transportation

Top Performing Companies:

  • Europe: L’Oréal (67/100)
  • North America: Kimberly-Clark; Colgate-Palmolive (44/100)
  • Asia Pacific: Kao (55/100)
  • Emerging Markets: Unilever Indonesia (44/100)

Companies making best progress since 2017:

  • Europe: Financière Richemont (Switzerland) (+13)
  • North America: Signet Jewellers (+6)
  • Asia Pacific: UniCharm (+9)
  • Emerging Markets: No progress

To view an excerpt of our 2018 Luxury, Goods & Cosmetics sector report, download the document below

To enquire about accessing our sector reports, please contact the relevant team below:

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