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Climate change is one of the biggest existential threats to the fashion and beauty industries, but you would never know that from the way major brands report their financial performance and define their success.
Tune into any of their annual financial results presentations and you will hear about the impact of marketing investments, tech innovations, inventory management and a number of other topics related to financial performance. What you won’t hear about are the wide-ranging and potentially seismic material impacts of climate change, including climate risks to raw materials and manufacturers, potential costs and savings associated with decarbonisation, and investments in tools to track sustainability progress.
“It’s clear that sustainability is not the buzzword it was at the beginning of the decade among corporate and financial circles,” says Lindsey Stewart, director of stewardship research at ESG and corporate governance research, ratings and analytics firm Morningstar Sustainalytics. “Mentions of climate, sustainability and ESG (environmental, social and governance) are becoming increasingly rare in corporate earnings reports.”
In the latest round of full-year earnings calls and corresponding annual reports (FY24), Vogue Business extended its typical analysis of major fashion and beauty brands’ financial performances to include their approaches to sustainability reporting. We covered LVMH, Puig, L’Oréal, Kering, Moncler Group, Hermès, Prada Group, Ferragamo, Brunello Cucinelli, Hugo Boss, Ulta Beauty and Zegna Group. In addition, each of the 12 companies were given a week to respond to the question: “How do you measure the impact of your ESG/sustainability efforts on financial performance?”
Of the 12 companies, nine mentioned sustainability or ESG in their earnings calls. Of those, two (Ferragamo and Zegna Group) stated that sustainability remains a priority, while seven (Puig, L’Oréal, Kering, Moncler Group, Hermès, Prada Group, Brunello Cucinelli), highlighted specific topline achievements and commitments to varying degrees of depth. For instance, Puig mentioned that its targets were verified by the Science Based Targets initiative (SBTi); L’Oréal shared that it reached 97 per cent renewable energies for its direct sites; Kering said it achieved a 23 per cent reduction in greenhouse gas emissions across all scopes compared with 2022 levels; and Prada mentioned its three-year plan to convert its raw materials to lower-impact alternatives. None of the nine companies that mentioned sustainability or ESG explicitly noted any connection with financial performance within their earnings calls. The other three (LVMH, Hugo Boss and Ulta Beauty) did not mention the subject within their earnings calls at all (though more information was shared in Hugo Boss and LVMH’s annual reports, and Ulta Beauty is releasing an ESG report in April).
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Experts say this oversight could cost brands in the long run. But if they hone the links between sustainability and financial performance — and report these links in a way that allows analysts and investors to track progress — it could lead to cost savings, new revenue streams and operational efficiencies in the short term. It could also help companies to avoid future reputational and climate-related risks, and to stay competitive down the road.
Honing the link between ESG and earnings
So why isn’t sustainability a bigger part of earnings calls? Some argue that companies may be reluctant to connect ESG with financial performance because they’re afraid of spooking investors. It’s common practice for companies to explain the financial implications of other investments, for instance in marketing or innovation, but these investments are more likely to improve companies’ bottom lines. On the flipside, sustainability investments often affect suppliers more than brands, rarely have an immediate pay-off, can be much harder to quantify (such as biodiversity), and might mean smaller dividends for shareholders. Plus, many require companies to rethink how they measure success and whether growth is even a viable goal.
In a market environment where many companies are in survival mode, this can be a tough sell. “Lately, reporting companies have emphasised their credentials in managing operating costs, leverage and complex supply chains at a time of higher inflation and interest rates, and deglobalisation,” says Stewart. Still, the common omission of the financial impacts in ESG reports (and vice versa) is mainly because most companies aren’t thinking about the financial opportunities tied to sustainability — nor the risks associated with inaction — in a meaningful way, experts posit.
“We need to make sure that the C-suites understand the real commercial risk their businesses are facing,” says Amy Nelson-Bennett, co-CEO of Positive Luxury, which helps luxury businesses improve their sustainability standards. “We’re starting to see the impact of climate change on supply chains and that is only going to speed up. If we don’t get businesses in the mindset of risk mitigation and unlocking opportunities to generate value for shareholders, employees and stakeholders, we’re going to miss [those] opportunities.”
The links between sustainability and financial performance are manifold. There are the direct impacts that come from changing consumer perception around sustainability performance and increasing demand for more sustainable products, which could also bring in new revenue via circular business models. Then, there are the indirect impacts, such as financial savings from cutting back on energy consumption, improving supply chain resilience, attracting and retaining talent, and identifying and reducing risks across the business. For investors, these links will only grow in importance. “Investors do tend to want reassurance that company boards and management teams have strong oversight of these issues, as they often have significant long-term financial impact,” says Stewart.
Could legislation level the playing field?
How a company reports its financial performance and sustainability progress is largely dictated by legislation. All publicly listed companies are required to release their earnings and any other financial statements to the public, so that investors and analysts can evaluate the company’s performance and outlook. Since the purpose of updating the market is primarily related to financial performance, earnings calls have no legal requirement for ESG disclosure, nor to include all financial information (so long as nothing is misleading by omission).
Full-year earnings calls tend to mention ESG more often than quarterly updates, as many companies will include their full ESG disclosure in their annual reports. Along with meeting legal reporting requirements, experts say disclosure should allow stakeholders to assess the company’s level of preparedness for climate change.
Sustainability has its own reporting rules, which are much newer, less standardised and in flux globally. The most substantial references fashion and beauty companies made to sustainability in their FY24 reports were in their Consolidated Sustainability Reporting segments, which are required by the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD).
The CSRD requirements include significant disclosure on the risks and impacts of activities from a “double materiality” perspective, meaning businesses have to disclose not only the risks they face from climate change, but also the role they play in harming the climate. Some companies, such as Brunello Cucinelli, choose to separate the Consolidated Sustainability Reporting document from their main annual reports. Others, such as Moncler, Hugo Boss and Ferragamo, include it within.
However, CSRD sits alongside the Corporate Sustainability Due Diligence Directive (CSDDD), which requires large companies to identify and address adverse human rights and environmental impacts across their supply chains. And both were on the red tape chopping block in the EU’s recent Omnibus Simplification Package, an attempt to streamline sustainability reporting and promote the competitiveness of European companies as a result. Exactly which reporting metrics will be removed remains up for debate, but it is estimated that 80 per cent less companies will be required to report, while the number of reporting metrics will be slashed and limited to Tier 1 (a brand’s direct business partners). This will undoubtedly limit fashion and beauty companies’ abilities to report their own environmental impacts, or the financial consequences of those impacts.
In the US, an equally fierce, albeit much quieter, debate is underway. The Securities and Exchange Commission (SEC) recently rolled back its climate and greenhouse gas emissions reporting requirements following the election of Donald Trump as president and the slew of anti-ESG executive orders he quickly put out. Likewise, ahead of the inauguration, six major US banks scaled back their net-zero commitments for fear of political backlash.
While legislation can level the playing field and promote long-term thinking, recent political instability shows that companies cannot rely on this solely. They would be better off pushing beyond compliance to get ahead of financial risks, says Nelson-Bennett. “Right now, there’s an element of executives feeling that they have to include this ESG section to check a box, rather than intentionally building a case for the public disclosure of your performance to help strengthen the perception of your business. The more businesses look at this through the lens of financial materiality, the better off they will be.”
How companies see the connection
Four of the 12 companies Vogue Business reached out to shared a response on how they measure the impact of ESG on their financial performance.
Hugo Boss highlighted that measures such as reducing air freight and enhancing energy efficiency throughout the supply chain result in not just carbon emissions reductions, but also cost savings. “While some sustainability efforts may not immediately be reflected in financial performance, they certainly contribute to other important business factors, such as long-term resource security and ensuring high-quality standards,” a representative said.
Prada Group said it is seeking to identify effective ways to quantify ESG impact. “Measuring the impact of ESG on financial performance goes beyond mere metrics as the link between the two is not always direct and immediate. Some initiatives are directly linked to cost reduction, such as our ongoing investments in the installation of photovoltaic plants and energy battery storage. Other initiatives are more difficult to link to ROI as they are not directly linked to future tangible economic benefits, such as our plan to transition from conventional raw materials to lower impact alternatives,” a representative said.
L’Oréal highlighted its participation in the Value Balancing Alliance (which develops standards for measuring and disclosing a company’s value to society and the environment beyond financial performance) as well as mentioning its internal sustainable finance division, which has developed a way of measuring value creation beyond financial value. “At L’Oréal, economic performance and social and environmental exemplarity go hand in hand. This dual excellence is the cornerstone of our strategy and guides our long-term investment decisions,” a spokesperson said.
A representative for Ulta Beauty — whose ESG report will not be available until later this month — said ESG efforts “are not only integral to our values, but also to our long-term financial performance” as they enhance customer engagement, operational efficiency, talent retention and brand value. The company prioritises “key areas that align with our strategic priorities and are most important to our guests, associates and stakeholders” in its sustainability strategy.
How could companies go further?
Sustainability experts say that instead of viewing it as a cost, companies should see ESG and sustainability as an investment — particularly because preparing for legislation in a timely manner will cost less than rushing the compliance process.
“We need to quantify, with more specificity, the cost of inaction in the long term,” says Alyssa Auberger, chief sustainability officer at law firm Baker McKenzie, who used to lead the organisation’s consumer goods and retail division with a particular focus on luxury. “It’s not sufficient to point out that we’re operating in an environment that can have a significant impact on communities and that you have a responsibility to do better. I think you need to have a business case, and that business case needs to also have a consideration of what happens if you do nothing — not just from a risk perspective, but financially what it could cost you.”
Experts recommend companies identify the topics that are materially meaningful to the business — which requires workshopping a variety of scenarios and evaluating the data with the finance, IT and sustainability teams. These topics should be tangible: the threat of a natural disaster in a cyclone-prone area where the company has three core manufacturing facilities, for instance. Then, companies can start planning their ESG pathways the same way they would a marketing strategy or a product pipeline, integrating it throughout the business. This allows companies not only to prioritise efficiently and report accurately, but also to build in a buffer for future investment.
Specificity is essential. “The only way ESG is likely to become a bigger part of reporting is if there is a particular issue that impacts the earnings or share price, such as brand damage from employment conditions in factories or raw material [controversies] like with blood diamonds or fur, or [significant] changes in consumer expectations,” says Deutsche Bank analyst Adam Cochrane. “If companies do not have any of this, we don’t see much incremental pressure for more disclosure.”
Cochrane says there’s a balance between the amount of disclosure and how useful it actually is, highlighting that most investors would prefer a smaller number of targets with more regular updates on progress.
“There’s a huge amount of pressure for all businesses to be perfect tomorrow, and that’s unfair and unhelpful,” adds Nelson-Bennett. “I wouldn’t expect massive shifts overnight — businesses need to do this while doing 50 other things — but there needs to be constant progress with [ESG] increasingly embedded in the organisation.”
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