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September 7, 2023

Investors underplay cost of FMCG giants’ indirect emissions 

The cost of ignoring indirect emissions could hit the consumer giants significantly, though asset managers have been slow to engage with them too.

By Adrian Murdoch

Indirect emissions, FMCG
Waste of paste (Photo by Hilman Kamaruzzaman via Shutterstock)
  • Consumer giants have avoided much climate scrutiny, but they are still not factoring in indirect emissions. 
  • Emissions for Unilever, Colgate-Palmolive and Procter & Gamble are up to three times, five times and eight times higher respectively when they are factored in. 
  • This is happening at a time when influential asset managers are losing interest in environmental and social matters, despite the huge financial downside.

Consumer giants have generally had a pass for their sustainability efforts. Consumer pressure has given a sense that they are taking climate change seriously – despite the frequent charges of greenwashing

More to the point, the sector has been eclipsed by the relentless refusal of the oil industry to engage with decarbonisation. Both Shell and BP have revised their emission reduction targets and reduced their ambitions to cut fossil fuel production on top of vast investments in fossil fuel expansion by the asset management industry. 

Where the consumer sector has hit the headlines, has been the way that it has dragged its feet over a withdrawal from Russia. 

Unilever was put on the International Sponsor of War watchlist by the Ukrainian government – a list Kyiv keeps of those who refuse to cease doing business with Russia – after it emerged at the beginning of July that the London-listed company had not only refused to leave Russia, it had seen its profits in the country almost double to Rub9.2bn ($99m) in 2022 and had paid taxes of Rub3.8bn last year.

But that could change. In mid-August, new chief executive Hein Schumacher pledged to look at the company’s Russia policy with “fresh eyes”. 

Further good news for Unilever comes in a report, also in mid-August, from London-based non-profit financial think tank Planet Tracker which looked at the company climate transition plans of the three market leaders: Unilever, Colgate-Palmolive and Procter & Gamble. 

While Unilever is currently likely to hit emissions of 32.7m tonnes of carbon dioxide which is 1.5 times over the recommended level set by the Science-Based Targets initiative (SBTi) by 2030, Colgate-Palmolive and Procter & Gamble are both on a three-degrees-Celsius pathway with expected emissions seven times higher than recommended levels. 

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“The comparison between companies allows us to see how far behind giants like Colgate-Palmolive and Procter & Gamble are from the targets laid out in the Paris Agreement,” says research analyst Ion Visinovschi at Planet Tracker. 

Brushing indirect emissions under the carpet

Planet Tracker has looked at the companies’ Scope 3 emissions – those connected with a company but outside its direct control.

The report shows that emissions for Unilever, Colgate-Palmolive and Procter & Gamble are up to three times, five times and eight times higher respectively when optional indirect emissions are factored in. 

Procter & Gamble’s total emissions for example are 26m tonnes of carbon dioxide. But when downstream Scope 3 emissions are included, that increases to 200m tonnes of carbon dioxide [see chart]. That is the equivalent, Planet Tracker points out, to the national emissions of France. 

The report has looked at the companies’ emissions when those derived from the use of other products and services together with the companies’ brands are included.

Downstream Scope 3 emissions include direct consumption which covers emissions from direct consumer use such as HFC propellants; emissions linked to downstream logistics; those from retail freezers; disposal including emissions from the end-of-life of sold products; as well as what are called indirect use or indirect use-phase emissions which stands for emissions from complementary products and services used together with the company’s products. These include emissions from washing machines tied to energy consumption while using the company’s brands. 

What makes Unilever stand out is that it has, as the report says, “the most credible transition plan among the three” with a comprehensive upstream engagement strategy, explicit links between management compensation and climate transition targets and quantified scenario analysis revealing potential climate financial impacts.

On the other hand, Colgate-Palmolive lacks concrete reduction initiatives, disclosure of financial risks, alignment of capital expenditure plans with emission reduction targets and climate adaptation requirements are necessary components missing from their plan. Procter & Gamble’s emphasis on upstream Scope 3 mitigation initiatives is just described as “limited”. 

Visinovschi points out that failure to tackle direct Scope 3 emissions, especially upstream, could “could cost billions of dollars in the future”. 

Losing their appetite

Is any of this likely to dampen investor enthusiasm? Probably not. 

Along with pressure in the US where sustainability has been politicised, institutional investors are losing their appetite for green and social proposals. 

Last week it became apparent that support for environmental and social matters at company meetings from BlackRock had declined for the second year in a row. The world’s largest fund house ($8.6trn AUM) had only backed 7% of proposals, down from 22% last year and 47% the year before. 

Joud Abdel Majeid, global head of investment stewardship at BlackRock, blamed shareholder proposals that were “over-reaching, lacking economic merit, or simply redundant” for the shift. 

Unsurprisingly, it was the same story at Pennsylvania-based asset manager Vanguard ($7.2trn AUM). No one had great hopes there. In December last year, the world’s second-largest asset manager flounced out of the Net Zero Asset Managers (NZAM) initiative, a collective of fund managers committed to reaching net zero emissions targets by 2050.

In the year to June, Vanguard supported only 2% of environmental and social proposals in the US – down from 12% in 2022. 

The asset manager complained that there was an increase in the number of proposals that were “overly prescriptive”. They were “immaterial at the company in question”, or “do not provide sufficient discretion to company leadership to act on the proposal’s request”. 

Both BlackRock and Vanguard claim to have their attention entirely on the bottom line. “Our focus remains on identifying proposals that address financially material risks at a given company,” says Vanguard while BlackRock continues to bang the drum for “long-term shareholder value”. 

The difficulty is that neither BlackRock nor Vanguard are properly focused on long-term value if they are ignoring environmental and sustainable proposals. Planet Tracker estimates that continuing with their current trends of emissions could cost Unilever 14% of its historic annual operating profit, Colgate-Palmolive 30% and Procter & Gamble 51%.

For asset managers not to factor this in is to ignore the fiduciary duty that they claim to follow. 

[Read more: Why consumers get suckered by greenwashing]

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