How the S in ESG is growing in importance for the cosmetics industry

In the era of stakeholder capitalism, no corporation can afford to ignore the impact of ESG issues. Progressive cosmetics companies are responding by measuring and tracking their ESG performance, and placing greater emphasis on social factors to align with the priorities of customers, employees and communities

Speaking at the recent virtual Sustainable Cosmetics Summit, alva’s managing director of healthcare and consumer, Siera Torontow, offered insight into the importance of measing ESG for the cosmetics industry. Since 2020, she noted, there has been a proliferation of interest in ESG issues within the sector as primary stakeholders, particularly consumers, put pressure on companies to be more environmentally and socially accountable.

“From a stakeholder perspective, we’re seeing compelling evidence that ESG is moving from the periphery to the core. It goes beyond NGOs, local communities and single interest groups to primary stakeholders,” she said. “We see stated consumer and employee choices oriented much more towards firms with better ESG profiles.”

In order to raise their ESG profiles, cosmetics companies not only need to be doing the right thing, but also need to be seen to be doing the right thing, she added. As a consequence, many brands are employing ESG measurement solutions to make sure their efforts are being recognised by key stakeholders.

Shifting from the E to the S in ESG

Cosmetics companies have had a handle on the need to make their operations more environmentally conscious for decades – witness the Body Shop’s early adoption of naturally-based ingredients supplied in refillable packaging, based on its founding principle that business could be a force for good. The E in ESG is consequently familiar and frequently covered in reporting on the sector.

Now, the S is coming to the fore, with the recognition that better engagement with stakeholders allows companies to rebuild their social contract and create shared, long-term value. alva’s research shows that recent news stories and social media mentions of cosmetics companies which have attracted positive sentiment include sourcing from local suppliers, charitable donations and job creation.

Philanthropic support for causes including education and women’s health also raise the social cachet of cosmetics businesses. Beiersdorf’s donation of €1m to European regions affected by floods is a case in point. As is Clarins’ collaboration with social enterprise FEED to create cosmetics gift pouches that cover the cost of school meals.

Speaking during a panel discussion at the event, Siera highlighted the social aspects of sustainability, alongside the expansion of ESG measurement to encompass social as well as environmental concerns. “A focus on aspirational and active engagement with communities is coming to the fore,” she noted. “Businesses are pursuing a holistic approach, and being more vocal about what they are doing, which is reflected in their ESG performance, as perceived by their stakeholders.”

While these socially conscious activities aren’t new, she added, they are now seen as a must-have. “It’s a holistic approach, with no one way of doing it. Where brands weren’t previously connected with this kind of philanthropy in stakeholders’ perceptions, they’re now more vocal about what they’re doing.”

Cosmetics companies, she concluded, are recognising that social factors are at the heart of sustainability, that people are at the core of every business, and that a balanced approach to ESG issues will lead to longevity. With that in mind, measuring the impact of the S in ESG is more important than ever.

Which ESG principles are most valued in the cosmetics industry?

alva’s reporting on the volume of coverage surrounding 16 top international cosmetics brands over the second half of 2021 shows that ESG is in the top two most prevalent topics. It comes second only to product discussions, and outstrips share performance. During her presentation, Siera Torontow outlined how alva’s Stakeholder Intelligence solutions can give even greater insight, surfacing the specific ESG issues affecting the cosmetics industry.

In the case study, the most prominent trends making up the cosmetics’ sector’s ESG performance, rated on visibility – by volume, influence, prominence and relevance of each mention – emerge as:

• Governance: Split between positive and negative sentiment, the latter possibly driven by reactions to executive pay.
• Product health and safety: Largely negative following recalls of products containing carcinogens.
• Environmental sustainability: Criticisms over use of palm oil undermine other positive environmental practices.
• Philanthropic initiatives: Support of local charities, including those helping flood victims and supplying school meals sees reporting around philanthropy attracting exclusively positive sentiment.
• Equality, diversity and inclusion: Positive reporting surrounds initiatives among cosmetics corporations for female empowerment, youth development and employment, and racial equality.
• Sustainable products: Attracting largely positive sentiment, perhaps due to a long-term focus on sourcing natural ingredients and reducing packaging.

alva’s Stakeholder Intelligenceenables companies to measure the reputational impact of their ESG efforts, as well as track emerging trends, and gain board-level insight to make more informed decisions. For cosmetics companies, this means seeing how they compare against their peers, which industry trends are resonating with stakeholders, and where they face risks and opportunities.