Accelerating the transition to a more sustainable economy is increasingly at the forefront of consumers’ and institutional investors’ minds. Over 75% of consumers in PwC’s Consumer Intelligence Series survey 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. Whilst 78% of investors in EY’s Global Corporate Reporting and Institutional Investor survey are more likely to favour sustainable, long-term value creation initiatives even at the expense of short-term earnings shortfalls. Consumers and investors wanting to be sure companies are doing the right thing has led to a seismic shift in linking ESG to both brand loyalty and investor engagement.

However, the response of companies is far from uniform. In EY’s DNA of the CFO survey, despite 43% of respondents selecting ESG as one of their top 3 long-term investment priorities, 37% were planning a near-term cut or pause in ESG spending. Similarly, the survey found that 55% of finance leaders are hesitant to sacrifice short-term earnings for long-term ESG initiatives.

The survey found many investors feel companies fail to properly articulate the rationale for long-term investments in sustainability, which can hamper investment and lead to companies feeling unrewarded – a problematic catch-22.

As a leading finance partner to the UK Consumer Industries sector[2], NatWest aims to play a key role in supporting corporates on their ESG journeys. This article aims to highlight the opportunities and challenges we see as companies transition on ESG.

• Increasing attractiveness for consumers: Aligning products with consumers’ values could result in top-line growth through increased demand for sustainable products. In Deloitte’s Gen Z and Millennial Survey, c.60% were willing to pay more for sustainable products and services, and c.30% review sustainability credentials to verify marketing claims before buying goods or services. This is catalysed by NGOs educating consumers on ESG issues, such as, Greenpeace with its “Detox my fashion” campaign, and Good On You rating fashion brands. 
• Increasing attractiveness for investors: Institutional investors are actively considering the transition pathways of their investments, and increasingly calling out blockers to sustainable investment. PwC’s Global Investor Survey revealed that c.44% 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%). Fashion For Good’s innovation platform exemplifies how ESG can support innovation, connecting companies with solutions to sustainability challenges within their value chains.  
• Increasing attractiveness for employees: A strong ESG proposition may help attract and retain high calibre employees. A Deloitte study showed purpose-led companies can achieve 40% higher levels of workforce retention than their competitors. 
• Supply chain management: The global and multi-tiered supply chains of consumer companies increase their exposure to climate change, environmental, human rights and other risks. Applying ESG principles could require a review and modification of corporate processes, which may result in more resilient supply chains and efficiencies in resource use. 
• Mitigating regulatory ESG risk: The incorporation of holistic sustainability strategies may help companies prepare for the growing ESG regulatory and legal requirements. Organisations such as ICPEN and CMA continue to focus on greenwashing by companies. Furthermore, climate litigation risk is an ever-growing issue for companies to monitor across an expanding range of issues, jurisdictions and complexities. 

As Scope 3 emissions could account for over 90% of total emissions, companies are increasingly engaging with suppliers to implement greenhouse gas (GHG) reduction project partnerships and improve their reporting capabilities of value chain emissions. 

The data challenges are illustrated in NatWest’s Global Fixed Income Investor Survey, with 56% of investors recognising the challenge of setting Scope 3 targets in Sustainability-Linked Bonds (SLB). Reflecting this, only 42% of investors currently use Scope 3 in their decision-making tools and risk assessments, with another 40% expecting to do so within 1-2 years given the importance of Scope 3 in achieving Net Zero.

Despite such challenges, we are seeing a growing expectation from lenders and investors for companies to track and target all GHG emissions within Sustainability-Linked instruments, in line with the Science-Based Targets Initiative (SBTi). 

The preference for targets typically being: i) absolute targets (including partial Scope 3 targets); ii) intensity targets (e.g. emissions per turnover or production); or iii) supplier engagement targets (e.g. % of suppliers with Scope 1 & 2 reduction targets). 

Scope 3 targets can create top-down pressure for suppliers to set and report their own emissions. To support companies to decarbonise their own supply chains, SBTi published new guidance for companies to engage their supply chains in setting science-based targets (incl. accompanying training packs), and Carbon Disclosure Project (CDP) have been working with large purchasing organisations such as Microsoft and Sainsbury’s to encourage their respective supply chains to disclose their GHG emissions. 

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

Following COP27’s spotlight on climate reparations, this year’s COP28 is setting a work programme to explore financing a just transition. Greater focus is consequently being placed on the full ESG impact of a company’s business model, which for the Consumer Industry, often includes multiple tiers of suppliers (i.e. suppliers of suppliers) and types of suppliers (e.g. SMEs, farmers), making the interconnected nature of environmental and social issues ever-present. Illustrated through the scrutiny faced by the fashion industry on its “addiction to synthetic fibres” and ensuing waste on low-GDP countries. 

Deloitte’s Equity Activation Model helps capture how businesses build a more equitable future around workforce, marketplace and society; and could be used to examine social topics within a company’s supply chain. However, strong governance systems (including audits and verification) and stakeholder dialogue play a key role in guiding how a company engages in social issues. To aid this engagement, we are seeing improved transparency, such as M&S offering detailed insight into its supply chains through an interactive map on its website.

It is becoming more commonplace to address these issues via procurement policies. For example, corporates like Arla are implementing sustainability incentives for their farmers, and two out of five Chief Procurement Officers are using their supplier agreement, framework, or code of conduct to position ESG as a requirement to operate. 

We are also seeing more collaboration to bring about change. AIM-PROGRESS is a forum of leading consumer goods manufacturers and suppliers, founded to share knowledge about building sustainable supply chains; whilst the Sustainable Food Trust focuses on food and farming systems to develop a globally harmonised framework. 

It is important companies examine their supply chain’s transition in an inclusive way. For instance, to help farmers achieve their climate and nature goals, NatWest and WWF have partnered to bring together players across the UK food and agriculture sectors to channel and scale private and public finance for farmers.

As we continue to see new studies illustrating the long-term implications of plastics, a greater spotlight is being put on how consumer companies are transitioning away from the use of plastic. For example, despite being the main sponsor of COP27, Coca Cola faced criticism for their role in creating plastic waste in the UK and globally.

Over 180 investors (>$10tn AUM) have signed a joint statement calling on companies to cut their use of plastics and address the financial risks of plastic use (e.g. waste management costs and biodiversity degradation). To rectify the existing gaps in company disclosures, CDP has incorporated a new plastic module within its existing water security questionnaire that covers the plastic value chain. 

Regulation is also catching up: the UK banned several single-use plastic items from the hospitality industry; and the EU banned microplastics in consumer products, in line with the EU’s Circular Economy Action Plan which has plastic pollution as a key focus. Moreover, in May 2023 the UN coordinated >1,000 delegates from governments, NGOs, industry and civil society to come together and create a global treaty and unify the life cycle of plastics (expected to conclude by the end of 2024).

This growing regulatory trend seems to be supported by individuals, with WWF and the Plastic Free Foundation’s survey finding that 70% of citizens support the creation of global rules to end plastic pollution, 75% banning unnecessary single-use plastic, and 77% banning plastics that cannot be easily recycled. 

We are also beginning to see legal action being brought against companies with large plastic ‘footprints’, similar to the more common emissions litigation. In Jan 2023, three environmental groups filed a lawsuit against Danone over the impact of its plastic production (under the French ‘Duty of Vigilance’ law), despite driving sectoral change relative to peers and being a strategic partner of the Ellen MacArthur Foundation.

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, WRAP, ZDHC, and Cradle to Cradle Products Innovation Institute are promoting the switch towards a circular economy (see below Ellen MacArthur Foundation’s approach to a circular economy):

Examples of corporates focused on circular economy have emerged. IKEA, for example, buys products from >1,300 suppliers in 50 countries and supports suppliers by focusing on collaborative product designs to minimise the use of materials (specified in its IWAY code of conduct for suppliers).

The promotion of sustainable lifestyles also creates an opportunity to increase consumer interaction and loyalty, such as On’s Cyclon circularity program. Consumers’ shift to circularity is highlighted in Deloitte’s sustainable consumer survey which noted within the last 12 months, 53% repaired an item rather than replaced it, and 40% bought second-hand or refurbished goods. 

Whilst a circular economy represents the ideal long-term solution, recycling and disposing of waste responsibly can help reduce the negative impact during the transition period. Nevertheless, since only 2% of plastic waste is recycled in a closed loop (i.e. not turned into lower quality material), prioritisation should be given to preventing waste at earlier stages of a product’s lifecycle (e.g. using alternative materials and reducing the amount of materials used).

Nature is declining at an unprecedented rate across land and water, both within the UK and globally. Following COP15’s agreement to address biodiversity loss, restore ecosystems and protect indigenous rights; companies have increasingly focused on nature and biodiversity within their sustainability strategy, with agriculture and apparel having an immediate role in preventing biodiversity loss within their supply chains.  

The continued development of frameworks such as Science Based Targets Network (SBTN), the Taskforce on Nature-related Financial Disclosures (TNFD), and SBTi’s new Forest, Land and Agriculture Guidance (FLAG) which includes zero deforestation targets in addition to emission reduction targets, are guiding companies on how best to approach their biodiversity impact.

The Consumer Industry has a unique position to increase ESG awareness through its marketing. Accenture’s consumer global survey found that 62% want companies to take a stand on current sustainability issues. For example, Dove’s products are marketed as helping individuals build positive body confidence via their self-esteem project and wider campaigns, opposing gender and beauty stereotypes around the world. 

However, sustainability marketing must be done as part of wider strategic initiatives, or else it risks green and/or social washing if limited measurable progress has been made.

The transition will require funding. If raised in the sustainable finance markets, this could result in greater liquidity from ESG investors and more competitive pricing. Corporates with strong ESG strategies or credible transition plans may be viewed more positively, with sustainability becoming an increasing part of credit analysis for banks and investors. The strength of a company’s sustainability strategy will need to be considered before raising sustainable finance, given the increased scrutiny and expertise of the market.

Sustainable finance also allows companies to showcase their sustainability credentials both internally and externally. Many Treasurers, CSOs and CFOs talk 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 range of financing, risk management and investment solutions in green, social and sustainability format; we share some of the most common debt solutions structured via “Use of Proceeds” and “Sustainability-Linked” approaches below: 

Use of Proceeds (UoP) products: For funding specific projects that have clear environmental / social benefits, UoP financing may be suitable, particularly for refinancing previous investments or smaller quantums (via an individual tranche within the wider financing structure). 

Sustainability-linked products: For corporates with established ESG targets, sustainability-linked financing can be used to fund general corporate purposes with a possible pricing benefit (or penalty) if the borrower achieves (or doesn’t achieve) sustainability targets.

A significant number of corporates have gone down this route, some of which are identified below:

For further sustainable finance structuring considerations, please see our article with Environmental Finance which can be found here.

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. Tesco launched UK retail’s first sustainability-linked supply chain finance programme, offering suppliers preferential financing rates based on their disclosure of GHG emissions, setting reduction targets, and delivering reductions. 
• Supplier finance to reduce your Scope 3: Financing solutions that support specific initiatives needed for suppliers to transition. For example, in order to reduce the financial barriers of their supply chain transition, NatWest and McCain Foods launched their partnership where NatWest (via Lombard) provides financing to McCain farmers for key investments in regenerative agriculture.
• Carbon Credits: Voluntary carbon credit market standards as well as new voluntary carbon market settlement platforms – such as Carbonplace – can help identify projects which are additional, permanent, local community driven, and with ongoing governance in place to offset emissions whilst transitioning.

As a leading sustainable finance partner to consumer companies in the UK, NatWest can help you link financing to specific ESG initiatives. Our in-house ESG and sustainable finance specialists help deliver the best outcomes by offering (including but not limited to[3]): 

• A broad suite of sustainable finance products and services, including sustainability-linked and use of proceeds financing across loans, bonds and private placements, sustainable asset finance, and ESG-linked FX, and derivatives.
• Strategic ESG advisory support on ESG ratings and ESG investor engagement.
• Innovations such as the NatWest Carbon Planner for SMEs and smaller businesses.
• An extensive pool of easily accessible information sources, such as the NatWest Sustainability hub, the NatWest Carbon hub, the monthly NatWest Corporate ESG newsletter, and ESG Policy & Regulation newsletter.

If you want to discuss how we could help you, please get in touch through your usual bank contact or the authors below:

Nick Bulloch

Vice President, ESG Advisory

nicholas.bulloch1@natwest.com

Peter Huish

Managing Director, Head of Consumer Industries

peter.huish@natwest.com

Notes:

[1] Where the final product is used by consumers

[2] NatWest Group is the biggest bank for businesses in Great Britain.

Source: MarketVue Business Banking from Savanta at Q4 2022. Based on a survey of businesses with a turnover up to £1bn. 19% of businesses in Great Britain (n=11,114) name a NatWest Group brand as their main bank. Excludes businesses using personal bank accounts.

[3] Please note, different kinds of financing will be subject to differing eligibility criteria.