Background to the organization
Born on September 2, 1929, Unilever is a global fast-moving consumer goods (FMCG) company based in London, UK (Unilever, 2024). The company, listed on the London Stock Exchange, offers a range of products including baby food, beauty products, bottled water, ice cream, and soft drinks among others. It operates through five segments, namely “ice cream, personal care, home care, nutrition, and beauty & wellbeing” (Unilever, 2022, p.156). Each of these segments allows the company to deliver value to all stakeholders. for example, by selling shampoo, conditioner, and body moisturizers, the beauty and wellbeing segment allows Unilever to generate more sales, diversify risk, and enhance shareholder wealth by improving profits. The company serves around 3.4 billion people who use its products every day. It generated a total of €60,073 million in sales in 2022 and a net profit of €2.07 billion. Its market capitalization stands at €122.51 billion whereas its asset size is €77.82 billion (Yahoo Finance, 2024). The company’s performance is likely to improve in the next five years as the company operates in growing industries. For example, the global beauty and wellness industry is anticipated to achieve a CAGR of 11.4% while the personal care industry will grow at an annualized rate of 7.7% between 2023 and 2030 (Fortune Business Insights, 2024; Grand View Research, 2024, implying that the company is likely to realize more sales and profits in the next seven years. Besides, Unilever has embedded sustainability into its operations to ensure sustainable living becomes commonplace. It has set a climate transition action plan that will ensure its operations become net zero by 2030 (Unilever, 2022). The company is also aiming to ensure forests are protected and restored and that agricultural systems are regenerated. These ambitious goals are achieved through investment in various activities, including recycling and reduction of food waste. In addition, the company is committed to transparent sustainability reporting, which is the main focus of this report. The report outlines the importance of sustainability reporting to Unilever. It also recommends sustainability reporting strategies that should be used to enhance the reporting of sustainability issues, some of which are outlined in the report.
Relevant sustainability issues
According to Lawrence et al. (2018), sustainability is an opportunity that can enable brands such as Unilever to gain a competitive advantage and achieve growth. This claim is based on the realization that more consumers are willing to spend more for sustainable products (Pedro, 2021). Estimates suggest that over 90% of today’s millennials are willing to pay an extra 10% for sustainable products. This means that Unilever can generate more revenue and profits by offering sustainable products and operating sustainably. The company has realized this and embedded sustainability into its operations. According to Mirvis (2011), the company sources its raw materials sustainably. It is also working with sustainable suppliers and specialists to enhance its sustainability performance. However, while the company’s sustainability efforts are praised by activists, it faces some material sustainability issues that need to be addressed (Mirvism 2011). As per a study by Owusu and Asumadu-Sarkodie (2016), climate change is one of the material sustainability issues facing Unilever and other companies around the world. By definition, climate change is “the long-term shifts in temperatures and weather patterns”, which can impact the world’s health, housing, ability to grow food, and safety and work (United Nations, 2024, par.1). The sustainability issue is caused by various human activities, including the use of fossil fuels, which emit large volumes of greenhouse gases (Owusu & Asumadu-Sarkodie, 2016). Unilever, like many other companies, still uses non-renewable energy sources such as oil and gas, meaning that they contribute to climate change. However, the company is working to remove all fossil-fuel-driven carbon from its cleaning and laundry brands to address the sustainability issue. Biodiversity loss is another sustainability issue that has the potential to adversely impact Unilever. According to Giam (2017), tropical forests and the biodiversity in such foresters are becoming increasingly bleak due to “unabated deforestation”, which occurs due to human activities such as aggressive farming practices. Loss of biodiversity due to physical and regulatory risks can adversely impact Unilever; for example, it can increase costs and introduce supply chain challenges, such as a lack of access to quality raw materials (Crenna et al., 2019).
Impacts to Unilever
Sustainability issues such as climate change and biodiversity loss can have a significant impact on Unilever. According to Parajuli et al. (2019), climate change causes supply chain disruptions making it difficult for firms to access raw materials. This claim implies that climate change can adversely impact Unilever by reducing the quality and availability of ingredients such as tea, palm oil, and other agricultural products. This can, in turn, impact the company’s financial performance, as measured by net profit and net sales. For example, a lack of access to quality raw materials due to climate change can reduce the supply of quality products leading to a decline in Unilever’s sales and profitability. The company has in the past been criticized for lagging behind its rivals, such as P&G, concerning sales growth and margins (Naidu & Kerber, 2022). However, all firms in the FMCG industry are adversely impacted by climate change, implying that Unilever’s underperformance may not be attributed to climate change. In addition, the company does not quantify the influence of climate change on its financial performance. This means that stakeholders, including investors, customers, suppliers, and government, cannot determine the extent to which the sustainability issues impact Unilever. Nonetheless, the risk of climate change is high for Unilever. According to the 2022 annual report, the risks posed by climate change and government measures to reduce the issue increased significantly. For example, the company is required to switch to using energy sources that emit low levels of greenhouse gas. This requirement, as indicated in the report, led to higher costs and reduced flexibility of operations. Concerning costs, the company is investing €1 billion into climate change projects (Cavale, 2020). The investment would not have been made if climate change was not an issue but has to be made to reduce climate change and ensure compliance with government requirements. Commitment to addressing climate change can however have positive financial and nonfinancial impacts. According to Pedro (2022), over 90% of today’s young consumers support sustainable brands, suggesting that Unilever is likely to report increased profitability and sales if it invests in climate change projects. The investments can also enhance the company’s reputation (Cowan & Guzman, 2020), which is positively correlated with long-term performance. Biodiversity loss can also significantly impact Unilever. According to Unilever’s 2022 report loss of biodiversity makes ‘future harvests more difficult and expensive in the long term. This could cause supply chain disruptions making it difficult for the company to access quality raw materials and deliver goods to consumers in a reasonable time.
Sustainability reporting
Sustainability reporting is necessary in today’s business environment. According to Schaltegger & Hörisch (2017), firms engage in sustainability reporting for legitimacy purposes. this claim aligns with the legitimacy theory which asserts that firms “secure legitimacy” through communication (Schaltegger & Hörisch, 2017, p.260). In particular, firms such as Unilever should engage in sustainability reporting to reinforce their legitimacy in the eyes of their stakeholders, who include the public, regulators, and communities. Besides, sustainability reporting is undertaken due to peer and industry pressure (KPMG, 2022). This occurs when firms feel pressured to report their sustainability initiatives due to for example increased emphasis on sustainability reporting. According to KPMG (2022), the number of N100 countries engaging in sustainability reporting increased from 64% to 79% in the last ten years due to industry and peer pressure. This suggests that peer and industry pressure has a significant impact on sustainability reporting. Cuadrado-Ballesteros et al. (2017) add that sustainability reporting reduces information asymmetry. According to the research paper, firms engage in sustainability reporting to communicate their environmental, social, and governance activities and performance to stakeholders to allow for informed decision-making. This is necessary since stakeholders, particularly investors and creditors, rely on the information provided by firms to make investment decisions.
Sustainability reporting is designed to communicate a company’s ESG performance to a diverse range of stakeholders (Herremans et al., 2016). It targets investors, shareholders, customers, employees, suppliers, regulators, local communities, and rating agencies (Herremans et al., 2016). Investors and shareholders use sustainability reports to determine a company’s ESG practices and its overall sustainability strategy, which may impact investment choices. Firms however use different reporting frameworks to convey information to stakeholders. for example, Unilever adheres to the principles of the global reporting initiative (GRI) standards, a reporting framework that has been in use for years. The main advantage of the GRI reporting framework is that it is used by more than 10,000 firms around the world (GRI, 2022), a fact that enhances the comparability of sustainability reports (Boiral & Henri, 2017). The standards require Unilever to report its impact on society, the environment, and the economy. This implies that the company’s use of the GRI reporting standards allows it to report about its contribution to climate change and biodiversity loss as well as how the two issues impact the company. However, the GRI reporting framework focuses on material issues, such as climate change. This implies that its use may lead to variations in reporting across and within industries, resulting in a lack of comparability.
Unilever also supports efforts towards standardization of sustainability reports. It does so by producing an SASB mapping document and by being a signatory to the UN Global Compact (UNGC) principles. The SASB framework is industry-specific, meaning that firms in the FMCG industry will report on the same matter and in a similar format to ensure comparability. By focusing on investors, the framework allows firms to meet their investor’s needs (Pizzi et al., 2023). However, the framework’s use may limit companies’ ability to meet the expectations of their diverse group of stakeholders. this is possible since the model focuses on investors and linking sustainability to financial outcomes (Rodriguez et al., 2017). The SASB framework, as noted by Pizzi et al. (2023), may limit reporting since it primarily focuses on financial material matters; it leaves out some sustainability aspects that may be important to stakeholders. The UN Global Compact framework is also limited since focuses on ten principles (Gonzalez-Perez & Leonard, 2017). It requires firms to report information about human rights, labor, environment, and anti-corruption (Tsalis et al., 2020). It does not specify the environmental challenges that businesses such as Unilever should report about, meaning that the firm may choose not to report about the impact of its operations on climate change, leading to a lack of transparency. In addition, UNGC, like many other frameworks, including GRI and SASB, lacks enforcement mechanisms (Williams, 2014). It is a voluntary reporting framework, suggesting that firms may choose not to use it, a move that can limit the comparability of sustainability reports. The lack of enforcement mechanisms also reduces the chances of having a large number of firms using the UNGC, which can also limit comparability, which is vital to investors and creditors (Williams, 2014).
The Financial Stability Board (FSB) has created the task force on climate-related financial disclosures (TFCD) to enhance sustainability reporting. The TFCD requires firms to include risks and opportunities presented by climate change in their operations (Braasch & Velte, 2023). To ensure this is achieved, the body provides a reporting framework that assists firms in reporting their climate-related risks. The framework is designed to solicit decision-useful, forward-looking information on financial impacts. The advantage of TCFD is that it encourages firms to identify, assess, and report climate-related risks, which have a significant impact on future performance (Braasch & Velte, 2023). This can enhance transparency enabling investors and other stakeholders to make informed decisions, concerning investing in a company such as Unilever. However, the model has limited scope; it focuses on climate-related risks and opportunities, meaning that companies leveraging the TCFD model will not disclose all the necessary information in their sustainability reports (Eccles & Krzus, 2019). In addition, the FCFD is a relatively new framework, implying that it has a limited adoption rate (Eccles & Krzus, 2019). This can limit the consistency and comparability of climate-related disclosures and make it challenging for stakeholders to assess and benchmark various companies’ climate performance.
Recommendations/preferred reporting frameworks
From the above analysis, it is evident that most of the available sustainability reporting frameworks have limitations. For example, the TCFD is quite new and has limited scope, meaning that its use may hinder transparency with respect to sustainability reporting. To overcome some of these challenges, Unilever should adopt two reporting standards, namely the GRI and SASB reporting standards. The GRI framework is widely used by firms and offers comprehensive sustainability reporting guidelines, including reporting on climate change and biodiversity. The framework offers a structured approach to sustainability reporting, meaning that it would enable the company to report on issues that matter to all stakeholders. Most importantly, the adoption of the GRI reporting framework would enhance comparability by ensuring that Unilever’s sustainability reports can be easily compared to those of other global companies that widely use the framework. The SASB would ensure that Unilever’s sustainability reports are tailored to the FMCG sector and align with investor’s needs. This is pivotal to enhancing the comparability of sustainability reports within the FMCG sector. In addition, the model is designed to be integrated into financial reports, suggesting that Unilever would not need to prepare standalone sustainability reports, which can be costly.
Conclusion
To sum up, sustainability reporting is critical to Unilever. In particular, engaging in sustainability reporting would allow Unilever to reinforce its legitimacy in the eyes of its stakeholders, who include investors, creditors, customers, employees, the public, regulators, and communities. Investment in sustainability reporting can also reduce information asymmetry, allowing the company to improve its ability to secure capital as investors prefer to invest in transparent organizations. However, the company should leverage the GRI and SASB sustainability reporting frameworks to offer comprehensive information to stakeholders. The two reporting frameworks are widely used and would thus allow Unilever to enhance the comparability of its sustainability reports. The GRI framework is more comprehensive, offering guidelines on a variety of topics including environmental, social, and economic aspects. The use of such a framework can allow Unilever to disclose more information on climate change and biodiversity loss, allowing stakeholders to make informed decisions. The industry-specific SASB framework would ensure that the company identifies and reports on the sustainability factors such as climate-related risks that matter to all stakeholders. In essence, Unilever should combine GRI and SASB reporting frameworks to comprehensively and holistically report on sustainability issues, such as climate change and biodiversity loss.
References
Boiral, O. and Henri, J.F., 2017. Is sustainability performance comparable? A study of GRI reports of mining organizations. Business & Society, 56(2), pp.283-317.
Braasch, A. and Velte, P., 2023. Climate reporting quality following the recommendations of the task force on climate‐related financial disclosures: A Focus on the German capital market. Sustainable Development, 31(2), pp.926-940.
Cavale, S., 2020. Unilever to invest 1 billion euros in climate change fund over 10 years. https://www.reuters.com/article/idUSKBN23L0Y5/ [accessed: February 5, 2024]
Cowan, K. and Guzman, F., 2020. How CSR reputation, sustainability signals, and country-of-origin sustainability reputation contribute to corporate brand performance: An exploratory study. Journal of Business Research, 117, pp.683-693.
Crenna, E., Sinkko, T. and Sala, S., 2019. Biodiversity impacts due to food consumption in Europe. Journal of cleaner production, 227, pp.378-391.
Cuadrado-Ballesteros, B., Martínez-Ferrero, J. and García-Sánchez, I.M., 2017. Mitigating information asymmetry through sustainability assurance: The role of accountants and levels of assurance. International Business Review, 26(6), pp.1141-1156.
Eccles, R.G. and Krzus, M.P., 2019. Implementing the task force on climate-related financial disclosures recommendations: An assessment of corporate readiness. Schmalenbach Business Review, 71, pp.287-293.
Fortune Business Insights. 2024. Beauty and wellness product market. https://www.fortunebusinessinsights.com/beauty-and-wellness-products-market-108456 [accessed: February 5, 2024]
Giam, X., 2017. Global biodiversity loss from tropical deforestation. Proceedings of the National Academy of Sciences, 114(23), pp.5775-5777.
Global reporting initiative (GRI). 2021. GRI standards. https://www.globalreporting.org/media/11jdjwuu/brochure-global-standards-fund-2021.pdf [accessed: February 6, 2024]
Gonzalez-Perez, M.A. and Leonard, L., 2017. The UN Global Compact. In Research Handbook on Transnational Corporations (pp. 117-138). Edward Elgar Publishing.
Grand View Research. 2024. Personal care industry report. https://www.grandviewresearch.com/industry-analysis/beauty-personal-care-products-market [accessed: February 5, 2024]
Herremans, I.M., Nazari, J.A. and Mahmoudian, F., 2016. Stakeholder relationships, engagement, and sustainability reporting. Journal of Business Ethics, 138, pp.417-435.
KPMG. 2022. Big shifts, small steps. https://assets.kpmg.com/content/dam/kpmg/se/pdf/komm/2022/Global-Survey-of-Sustainability-Reporting-2022.pdf [accessed: February 5, 2024]
Lawrence, J., Rasche, A. and Kenny, K., 2018. Sustainability as an opportunity: Unilever’s sustainable living plan. In Managing Sustainable Business: An Executive Education Case and Textbook (pp. 435-455). Dordrecht: Springer Netherlands.
Mirvis, P., 2011. Chapter 2 Unilever’s Drive for Sustainability and CSR–Changing the Game. In Organizing for sustainability (pp. 41-72). Emerald Group Publishing Limited.
Naidu, R. and Kerber, R., 2022. Unilever is under pressure to show sustainability focus is good for business. https://www.reuters.com/business/retail-consumer/unilever-under-pressure-show-sustainability-focus-is-good-business-2022-02-09/ [accessed: February 5, 2024]
Owusu, P.A. and Asumadu-Sarkodie, S., 2016. A review of renewable energy sources, sustainability issues, and climate change mitigation. Cogent Engineering, 3(1), p.1167990.
Parajuli, R., Thoma, G. and Matlock, M.D., 2019. Environmental sustainability of fruit and vegetable production supply chains in the face of climate change: A review. Science of the Total Environment, 650, pp.2863-2879.
Pedro, G., 2022. Consumers Demand Sustainable Products and Shopping Formats. Forbes. https://www.forbes.com/sites/gregpetro/2022/03/11/consumers-demand-sustainable-products-and-shopping-formats/?sh=6f8fb466a062 [accessed: February 5, 2024]
Pizzi, S., Principale, S. and De Nuccio, E., 2023. Material sustainability information and reporting standards. Exploring the differences between GRI and SASB. Meditari Accountancy Research, 31(6), pp.1654-1674.
Rodriguez, A., Cotran, H. and Stewart, L.S., 2017. Evaluating the effectiveness of sustainability disclosure: Findings from a recent SASB study. Journal of Applied Corporate Finance, 29(2), pp.100-108.
Schaltegger, S. and Hörisch, J., 2017. In search of the dominant rationale in sustainability management: legitimacy or profit-seeking? Journal of Business Ethics, 145, pp.259-276.
Tsalis, T.A., Malamateniou, K.E., Koulouriotis, D. and Nikolaou, I.E., 2020. New challenges for corporate sustainability reporting: United Nations’ 2030 Agenda for sustainable development and the sustainable development goals. Corporate Social Responsibility and Environmental Management, 27(4), pp.1617-1629.
Unilever. 2024. Our history. https://www.unilever.com/our-company/our-history-and-archives/1900-1950/#:~:text=On%202%20September%201929%2C%20Margarine,decide%20on%20an%20amalgamation%20instead. [accessed: February 6, 2024]
United Nations. 2024. What is climate change? https://www.un.org/en/climatechange/what-is-climate-change [accessed: February 5, 2024]
Williams, O.F., 2014. The United Nations global compact: What did it promise? Journal of Business Ethics, 122, pp.241-251.
Yahoo Finance. 2024. Unilever. https://finance.yahoo.com/quote/UL/balance-sheet?p=UL [accessed: February 5, 2024]
write