Unilever – A Pivotal Moment

Recently, Unilever, widely regarded as a sustainability leader in the consumer sector, revised its ESG targets. Of its original 27 goals, at first glance it looks like 10 were dropped. However, closer scrutiny reveals some objectives are new and others have become divisional, rather than a corporate-wide target. This paper explains why Planet Tracker is not despondent and demonstrates that if a corporate’s sustainability goals are adjusted, they should be scrutinised and judged on their own merits.

Historic sustainable leadership

In mid-April, Unilever’s CEO, Hein Schumacher,ⁱ announced that a range of sustainability targets were being adjusted. For a corporate that is rated as a leader on many environmental measuresⁱⁱ, this was a shock, especially to civil society. Successive Unilever CEOs have often enhanced ESG targets, kick-started under Paul Polman’s leadership (2009-2018), who argued that “we cannot choose between growth and sustainability – we must have both”. Alan Jope, CEO from 2019 to 2023, continued with similar messaging arguing that “climate change, nature degradation, biodiversity decline, water scarcity – all these issues are interconnected, and we must address them all simultaneously”.ⁱⁱⁱ The incumbent CEO, Hein Schumacher, rejects the claim of any watering down. His interpretation is that Unilever is ”doubling down in those areas that most materially impact the business and where a more focused approach will enable us to drive real change at scale”.^iv

Sustainable realignment and abandonment

Unilever’s announcement last month saw changes to a range of sustainability targets. Planet Tracker’s interactive dashboard shows the updated goals and allows the user to sort by category and progress against the objective. In Figure 1, we show those targets which were dropped.

An examination of the dashboard displays a variety of changes. We have categorised them as dropped, reduced, moved to internal, new, and improved/clarified. For example, for plastic-related goals, the previous target of a 50% reduction in virgin plastic reduction by 2025, was lowered to a 30% goal by one year later (2026), and to 40% by 2028. Delays have also been introduced for all plastic packaging, which originally would be reusable, recyclable, or compostable by 2025. The new goal has different targets for rigids by 2030, and flexibles by 2035, but the 100% objective still holds. Planet Tracker classifies both of these as reduced targets. However, the goal of collecting and processing more plastic than Unilever’s sells by 2025, remains unchanged, as does the target of using 25% recycled plastic by 2025. Company representatives specify that although the original goal applied to ‘plastic’ rather than the new reference to ‘plastic packaging’, the ambition was always a focus on plastic packaging as “there are only very small amounts of plastic that are not packaging, as (we) are an FMCG business”.

It is disappointing to see a number of worthy goals dropped or disappear from view. Planet Tracker is particularly disappointed in the disappearance of the halving food waste within their operations by 2025, when compared to 2019. This is one of the six priority actions Planet Tracker identified for transforming the global food system.^v

Interestingly, Unilever was making good progress on this target, having already achieved a 30% reduction by 2023, which was independently assured by PwC. When seeking further clarification on this target change from Unilever, executives explained that the Nutrition Division will continue to work towards this goal in 2025, although Planet Tracker is unsure whether there will be external visibility on this metric. Planet Tracker classifies this goal as moving to an internal one.

One further waste target that was ditched at a corporate level was maintaining zero non-hazardous waste to landfill from its factories. We recognise that this target has been met by Unilever every year since 2021, in line with the corporate goal, so its disappearance looks strange.

Again, discussions with Unilever executives reveals that although removed as a corporate goal, this has now become embedded within responsible operating practices. It will be interesting to see if this will be monitored by the appropriate divisions going forward but this looks unlikely. For this waste target we categorise it as dropped.

It is noticeable that all the nutrition-related objectives have vanished as corporate goals, despite their proximity to the stated target. Again, we have learned from Unilever that they are now business level targets. Planet Tracker will be interested to see if Unilever divisions continue to provide transparency on these goals.

Also, one desirable social objective was dropped from the corporate level. The goal of improving health & wellbeing and advancing equity & inclusion through its brands, to reach 1 billion people per year by 2030, was trending downwards. In 2021, it had reached 686 million but had fallen to 638 million (down 48 million) last year.

Although this objective is now the responsibility of the Global HR and Learning Teams at Unilever, externally there is unlikely to be any visibility on this issue. Unilever respond that ‘Univoice’, an internal survey, has recently demonstrated that employee perception of career development opportunities has improved. Planet Tracker is unable to verify this point.
Table 1: Unilever’s dropped non-financial goals (Source: Planet Tracker)

Planet Tracker, like the Unilever management team, views climate and environmental targets as influential on Unilever’s operations. For example, Unilever’s 2023 annual report identifies risks to its business such as climate change – notably Government action (e.g. product composition regulations) or physical risks (e.g. water scarcity) or extreme weather (e.g. high temperatures, hurricanes, or floods)^vi – and plastic packaging – stating that “the use of recycled plastic and an increase in the recyclability of our packaging are critical to our future success”.^vii

Too ambitious?

There is the obvious question as to whether the original set of targets was too ambitious. Certainly, the CEO believes it is beneficial to focus resources on the key priorities of “the four platforms on climate, nature, plastic, and livelihoods”.^viii If this renewed focus really does increase the probability of delivery, then it should be supported.

We note that Unilever’s more focused strategy still has 15 corporate targets, and that all these targets are quantified and time-stamped – see Figure 1.

Figure 1: Unilever’s new sustainability focus (Source: Unilever, Q1 2024 trading statement)^ix

A hidden message for financial markets?

This change in sustainability strategy may have little to do with ambition, and instead be driven by the desire for higher financial returns. In the short term, this is a strategy that is likely to appeal to many financial institutions. Undoubtedly, most equity investors will be focused on shareholder returns, whether that be capital gain (share price appreciation) or income (dividends), while debt investors want security of interest payments.

Planet Tracker notes mixed messaging from management on the costs related to achieving sustainability targets. On the one hand, the CEO was keen to emphasise, on the Q1 2024 earnings call, that achieving plastic targets “is not a matter of money or investing”.^x He further emphasised this point commenting that “once again, our renewed focus and urgency, and driving for systemic change was not a result of saying, “Hey, this is too high of an investment, or we cannot bear the costs”, no. It was a deliberate choice to drive performance in ESG.”^xi

However, the 2023 Annual Report recognises higher costs in plastic packaging stating “There is a risk around finding appropriate replacement materials, but also due to high demand, the cost of recycled plastic or other alternative packaging materials could significantly increase in the foreseeable future and this could impact our business performance. We could also be exposed to higher costs as a result of taxes or fines if we are unable to comply with plastic regulations, which would again impact our profitability and reputation”.^xii

When bearing this in mind, Planet Tracker would be surprised if no consideration was given to the costs associated with its sustainability goals. In the portfolio management risks category, Unilever notes that the company’s “strategic investment choices will affect the long-term growth and profits of our business” and states its wish to “ensure that resources are prioritised towards those categories and markets having the greatest long-term potential for Unilever”.^xiii

Similarly, it would be reasonable to assume that the economic and political instability risks recognised by management, probably included consideration of the ESG backlash in some countries which could fall under the recognition “Government actions such as trade and economic sanctions […] can impact on the growth and profitability of our local operations”.^xiv This view is in line with the CEO’s view in October last year, where he described corporate purpose as an “unwelcome distraction”, preferring to focus on a performance based culture. He recognised that ‘the quality of our growth, productivity and returns have all underdelivered”. He went on to add that “not every brand should have a social or environmental purpose”.^xv

Removing the need to spend The target of spending EUR 2 billion annually with diverse businesses worldwide by 2025 – EUR 1.1 billion was achieved last year – was probably welcomed internally by the finance division and possibly financial institutions which are focused on bottom line growth.

No doubt the performance of Unilever shares will be a major focus for the management team. Certainly, the compensation structure laid out in the 2023 Annual Report incentivises financial metrics over sustainability^xvi – see Table 2.

Table 2: Unilever’s executive incentive plan (Source: Unilever 2023 Annual Report)

Finally, Unilever executives are likely to be mindful of the removal of the previous Chairman and CEO of Danone by the Board of Directors in 2021, which despite him building the company into “a world leader on sustainability”, opted to use the company’s “strong platform […] to accelerate and grow”, recognising the need to “grow and build the business for all consumers, customers and stakeholders”.^xvii

A greenwashing positive

Planet Tracker is disappointed that four sustainability targets were reduced and three were dropped which raises the question of whether there is any silver lining. We prefer companies to be honest and transparent about the challenges they are having meeting their targets, hence our earlier comment that we feel there has been a missed opportunity to provide further insights. What should not be accepted is when targets are manipulated. This is evident when companies adopt a ‘greenrinsing’ strategy, whereby targets are changed before they are achieved, often re-stated at a higher level at a more distant date in the future.^xviii Planet Tracker identified this tactic being previously used by both Coca-Cola (KO) and PepsiCo (PEP).^xix

We note that Unilever’s 2023 annual report recognises in its ‘Principal Risks’ section, compliance with laws and regulations “in such diverse areas as regulations relating to environmental compliance (e.g. greenwashing)”.^xx To manage this risk, the company comments that it has “legal and regulatory specialists […] heavily involved in monitoring and reviewing our practices”.^xxi

Onlookers should also be cognisant that there were five new targets and a further two were improved. It remains to be seen whether the seven targets which were removed at a corporate level to be integrated into the appropriate business units, will disappear from external view. However, as companies become more sustainable, it is fair for management to argue that targets which are achieved simply become part of the ongoing operations of a company when it manages itself in a responsible manner.

Remain attentive!

Is this a pivotal moment? A corporate leader in sustainability has adjusted a range of sustainability targets. Is this driven by a desire to focus on the most important metrics from a sustainability perspective, as management claims, or is this change based on the lessons learned from implementation? Or perhaps it is an opportunity to save costs and satisfy investors demanding higher returns?

We also believe it is not all bad news for sustainability advocates. All should welcome ambitious but achievable sustainability targets, and reward transparency, even if this occasionally entails a reset by a particular company. The avoidance of greenwashing should be welcomed. And should we consider the day when a truly sustainably run company matures, its ESG targets disappear from external view as they become embedded in the ongoing operations of its business units?

But remain attentive. Will financial markets remain unconcerned by Unilever’s sustainability reset with financial returns remaining the share price driver? And will other corporates take the opportunity to adjust their sustainability targets? Careful scrutiny of environmental and climate targets, especially adjustments, is required. This report shows that the details are important.

Unilever near-term investor events:

• 25 July 2024 – Half year and second-quarter results
• 24 October 2024 – Third quarter trading statement

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