Unilever PLC (ULVR) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining our webcast today. My name is Richard Williams, and I'm Unilever's Head of Investor Relations. I'm joined by Thomas Lingard, our Global Climate and Environment Director. This session on the subject of climate action is aimed at investors and analysts. We'll focus on the urgent challenges posed by climate change and the actions that Unilever is taking within our operations, our value chain, our business strategy and wider society. We'll run for no more than 40 minutes, including Q&A. [Operator Instructions] So with that, over to you, Thomas.

Thank you, Richard, for that introduction. I thought we'd begin the conversation today with just 2 slides about the possible futures that lie ahead of us. This may be familiar territory for some of you, but I believe it's important we all start on the same page and with the same understanding of the science. Over the last 800,000 years, the concentration of carbon dioxide in the atmosphere has oscillated with a degree of regularity between about 180 and 280 parts per million. And this indeed was the concentration of carbon in the atmosphere before the Industrial Revolution in the mid-18th century. Today, less than 300 years later, it is over 400 parts per million, higher than it has ever been in the last 800,000 years. In fact, the last time that atmospheric CO2 levels were this high was more than 3 million years ago, when the temperature was 2 to 3 degrees higher than during the pre-industrial era, and sea levels were 15 to 25 meters higher than today. There is no debate that rising greenhouse gas emissions caused the concentrations of CO2 in the atmosphere to increase, and this increase in CO2 acts as a blanket that warms the earth. Average surface temperatures have already warmed by about 1 degree Celsius since pre-industrial levels. Warm air draws more moisture. This means more hurricanes and extreme weather events. Changing rainfall patterns can mean drier forest, more forest fires, harvest lost to drought, poverty, forced migration and a new class of environmental refugees. This is the story of our nightly news in 2020. What happens now depends in large part on the policy response of governments and the actions that we take as a society. The graph on the right of this chart shows a number of possible rises in global average surface temperature. The yellow line shows the trajectory of the current public policies the world has in place. The red line shows the projections for a no-policy scenario, which is relevant when you consider that some governments are currently seeking to weaken environmental protections. The light green line is a more optimistic scenario, indicating the trajectory we could achieve if all current pledges by governments were implemented. But this still suggests a temperature rise of between 2.5 and 3 degrees by the end of the century, 3x the warming the world is experiencing today. The dark green line is where we believe we need to get to. Let me explain why. Informed by the science, the world's governments in Paris in 2015 decided that to give humanity the best chance of averting catastrophic climate change, the world should seek to limit global average temperature rise to well below 2 degrees and preferably no more than 1.5 degrees above pre-industrial levels. Since the Paris summit, a new report by the UN's Intergovernmental Panel on Climate Change highlighted that in spite of the small numerical difference between 1.5 and 2 degrees, the impact of this difference could still be severe: more pressure on the climate system and extreme weather events; more pressure on natural systems with decreases in crop yields and rising sea levels; increased human impacts linked to poor air quality, food security and downward pressure on economic growth. The report gave the 1.5 degree target additional political and moral legitimacy as the only credible target for the world. To quote directly from the IPCC report, "Without additional mitigation efforts beyond those in place today and even with adaptation, warming by the end of the 21st century will lead to high to very high risks of severe, widespread and irreversible impacts globally." Substantial cuts in greenhouse gas emissions over the next few decades can substantially reduce risks of climate change by limiting warming in the second half of the 21st century and beyond. Of course, the second half of the 21st century seems far away for most conventional investment horizons. But as Mark Carney highlighted in his landmark speech, the tragedy of the horizons, it's a fallacy to think that they can therefore be ignored. As our business's roots go back over 100 years, we perhaps find it easier to look forward 100 years and to take a long-term perspective. And indeed, we do believe it's in the interest of Unilever and all Unilever stakeholders to try to limit global average temperature rise to 1.5 degrees. But even if your planning horizons don't stretch that far, there are still reasons to respond decisively to this challenge. That's because we believe that as awareness of the climate crisis grows, both consumers, governments and providers of capital will respond with higher expectations of brands and companies. And we believe that Unilever can benefit commercially from being a first mover in the race to 0. Unilever's approach to climate action takes the form of 4 interconnected areas supported by a well-established governance and reporting protocols. We start with the action that we are taking within our own operations, then the actions we're taking in our value chain. We then consider how we integrate climate action into our strategy, portfolio and brands, and finally, the action we're taking to influence the external world. In these next few slides, I'll walk you through our approach to each of these areas. I hope to give you a sense of how they're not distinct pillars but rather an interconnected and holistic strategy for taking climate action. We believe that our first responsibility is to take action to reduce our direct emissions. These are the emissions that occur within our factories, our offices and labs, primarily from the use of heat and power. Unilever benefits from a world-class, in-house, sustainable manufacturing team that have delivered outstanding performance at our sites. Our decarbonization progress has been achieved in equal measure through the reduction of energy use through increasing eco-efficiency and the switch to renewable energy sources. Our energy procurement team have led the shift of our power contracts from conventional to 100% renewable grid electricity achieved worldwide from January this year, almost a year ahead of schedule. And in addition to the rollout of renewable heat technologies such as sustainable biomass, we're also pioneering new energy technologies such as hydrogen with our manufacturing site in Port Sunlight. Many of our sites use cooling technologies too, and we're building on our long-standing leadership in deploying commercial natural refrigerant technologies, now used by our 3 million ice cream cabinets around the world to accelerate the phaseout of any remaining HFC refrigerants from our sites. Our progress in these areas have been accelerated, thanks to our innovative internal carbon pricing scheme, recognized by the World Bank's Carbon Pricing Leadership Coalition, which taxes our divisions based on prior year emissions funding a central low-carbon fund that's used to deliver CapEx projects with the very highest levels of emission reduction as well as a commercial return. Importantly, all our operational programs are aligned to our target to reach 0 emissions without the use of any offsets by 2030. And this target has been approved by the Science Based Targets initiative that's consistent with the 1.5 degree ambition of the Paris Agreement. I'd now like to talk about our approach to decarbonizing our value chain. Unilever was an early pioneer of the adoption of life cycle targets. These targets include both upstream and downstream emissions. And it's usually the case that these scope 3 emissions, as they're called, are often much more significant than the operational or scope 1 and 2 emissions of the company. We set ourselves the target of halving those emissions on a per consumer use basis by 2030, another target which has been approved by the Science Based Targets initiative as consistent with the 1.5 degree goal. This means that by 2030, the footprints of a cup of tea, a hair wash or a laundry load should be half what it was in 2010. The chart here reveals a very interesting story. First, thanks to the success of our manufacturing sustainability program, our operational footprint has been reduced to just 1% of the life cycle footprint, 1/3 of what it was a decade ago. Second, that the lion's share of the life cycle emissions occurred downstream in the consumer's home when they heat water for a shower or make food in the kitchen. Third, 1/4 of our product footprint occurs upstream in the raw materials that we buy and where we ought to have a reasonable degree of influence. And it's here upstream in our value chain that we'll need to use our influence if we're to achieve our halving target. There are 3 ways we can reduce the footprints of the materials that we buy: First, we can ensure that we buy the same materials and they're produced in a lower-impact way, for example, agricultural commodities that are free from deforestation. We can also buy different materials with a lower footprint, for example, purchasing a bio-based surfactant instead of a petrochemical-based one. And third, we can buy less materials in the first place by concentrating and compacting our formulations. To reduce our downstream emissions, the interventions will be different. We'll need to work with our logistic partners to decarbonize journeys through even greater distribution efficiency and the use of electric vehicles. In turn, this will require systemic changes to the distribution network as a whole, especially for long-distance transport, such as long-distance road and shipping. We'll lead to transform the cold chain for ice cream with storage and transport that is more energy efficient and powered by renewable energy. And we'll need to support an accelerated global transition to renewable energy to reduce the impact of heating water in the home, 2/3 of our end-to-end footprint. But halving the value chain goal is just one of our targets. In June this year, Unilever committed to a new additional target to achieve net-zero emissions from sourcing to point-of-sale by 2039. We wanted this to act as a North Star to guide our long-term transition but also act as a signal to policymakers of the importance of setting clear, long-term targets that can guide business planning and decision-making through the transition. For Unilever, a net-zero target from sourcing to point-of-sale means that when a consumer adds one of our products to their basket, they will be assured that it's completely carbon-neutral: that we've done everything possible to reduce the emissions contained within it, and we've removed the equivalent of any residual carbon through a high-quality carbon credit earned elsewhere. This is a new area for many companies. And earlier this month, we announced a partnership with others, including Microsoft, Maersk and Nike, called Transform to Net Zero, to explore innovative ideas and strategies to accelerate the net-zero transition. The work is just beginning, but there are already some clear steps emerging. First, getting accurate data about the residual emissions in our products will be critical. That's why we're also partnering with the World Business Council for Sustainable Development and a number of fellow members on the value chain carbon transparency pathfinder program to build a prototype data platform that can track real carbon data through the B2B value chain. Second, supplier partnerships will be key. On Monday this week, Unilever announced a partnership with IKEA, BT and Ericsson called the 1.5 Degree Supply Chain Leaders initiative (sic) [ 1.5°C Supply Chain Leaders initiative ], working in partnership with the Exponential Roadmap. Our first action as a coalition was to endorse the SME Climate Hub developed by the International Chamber of Commerce as a one-stop shop for small- and medium-sized enterprises looking for support on their own climate action agenda. And finally, a net-zero strategy will require us to balance or offset any residual emissions from 2039. Today, the voluntary carbon markets are immature, but their scaling up is essential to achieve the Paris Agreement and encouraging financial flows to much needed nature-based solutions. That's why we're working with others, including as a member of the new Taskforce for Scaling Voluntary Carbon Markets, hosted by the International Institute of Finance, to find ways to do this. We also believe there will be opportunities to avoid direct carbon credit purchases on the open market and instead to invest directly in high-quality, natural climate solutions programs connected with our value chains, which themselves could deliver credible carbon credits. Indeed, this would be our preference. We believe this will be a space of significant innovation over the coming years, and we've begun the process of identifying opportunities of how to make this work best for our business and brands. For many companies, climate strategy stops at the delivery of an emissions reduction or net-zero goal, but we believe we must go further, integrating climate action to the core of our business strategy. And we're doing that in 4 ways. Firstly, future-fit products. As consumers wake up to climate change and other related concerns, so demand for climate-friendly products is growing. For example, shifts in consumption patterns towards plant-based or vegan diets motivated by concern for climate change, amongst other factors, are now noticeable. And we're responding. Through the evolution of our brands to meet consumers' needs in this area, such as Hellmann's Vegan Mayo to partnerships between Unilever's Vegetarian Butcher brand and Burger King, we're well positioned to help consumers as they take action to lower their own impact through their lifestyle choices. Second area is relevant consumer claims. A growing number of consumers are interested in the action brands have taken to improve the health of the planet. Thanks to more than a decade of work in decarbonizing our own operations, our brands are now able to exploit this progress in consumer communication as simple as done here in this consumer communication showing that it's now made with 100% renewable grid electricity and claims relevant to the brand's overall position. Third area is innovation reformulation. This month, our Home Care division launched Clean Future, really exciting business strategy with sustainability at its core. It includes a commitment to remove fossil fuel-based carbon molecules from our Home Care formulations by 2030, replacing them with molecules sourced from renewable or recycled carbon sources. This shift to lower carbon materials will make a significant contribution to our 2030 and our 2039 targets, but it can also deliver better-performing products that drive consumer preference. Already, we have products in the market such as Quix, a hand dish wash project in Chile and Vietnam made with plant-based surfactants instead of petrochemicals surfactants, with the additional consumer benefit that these new formulations are much milder for the skin. And the final area is brand climate partnerships. We have a long tradition of partnering on relevant issues with our brands, whether it's Dove's work with self-esteem organizations or Lifebuoy's work on preventing disease through hand washing education. But as consumer concern on climate rises, we want to empower our brands to lead more of our engagement with environmental programs and partners. Some of our pioneering brands, such as Seventh Generation and Ben & Jerry's already play in this space, and we want to accelerate that. In June, we announced the intention for our brands to invest EUR 1 billion over the next 10 years in consumer-facing climate and nature programs in a way that makes a real, positive impact on climate and nature whilst also driving consumer preference. Everything we've talked about so far is really important: decarbonizing our operations, decarbonizing our value chain, excelling at marketing sustainable brands. They're all critical, and they're all part of our sustainable business strategy. But there is no sustainable business in an unsustainable world. And even if we deliver all of our targets, it won't make a difference unless the world moves as a whole in this direction. And that's why our work to influence the external agenda is a critically important part of our strategy. Let's start with policy advocacy. The science is clear that without significant additional policy interventions, the world will not hit the 1.5 degree temperature limit. Unilever created its first dedicated advocacy team back in 2011, when it became clear how important public policy was to the achievement of our sustainability goals. For a decade now, we've been helping to advance the cause of corporate climate advocacy, creating, joining and building industry coalitions that help create the political space for action. With many groups operating in this space and only limited resources, we prioritize the most influential groups for engagement. At the international level, the We Mean Business coalition leads the business voice on climate ambition, advocacy and action. It leads the development of common policy and advocacy at the head of major international summits, enabling businesses to speak with one voice. We sit on its Corporate Advisory Board and helped to produce the landmark report, Climate Leadership Now, which launched yesterday. International policy frames the debate but most policy that bites must be enacted at the local level. The EU is of particular strategic importance for the global climate agenda. And we prioritize engagement in Brussels through the EU Corporate Leaders Group. The EU CLG has led efforts to land a call to action for over 150 CEOs, including Unilever's, into the European institutions, calling for the adoption of a 55% emissions reduction target for the EU by 2030, an increase from the current target of 40%. EU commission President, Ursula von der Leyen, personally cited the letter as evidence of business support for the higher target in our position to less progressive business groups operating in Brussels. And we also engaged through a small number of issue-specific advocacy groups with very specific objectives. With 2/3 of our value chain footprint coming from consumer energy use, groups like RE100 and the Powering Past Coal Alliance, both advocating different ways for energy decarbonization, are both strategic and effective voices for change. But of course, there are other ways we seek to have an effect on wider society, too. And the first is through our consumers and customers. We're fortunate to have a number of brands that campaign actively on climate change, Ben & Jerry's and Seventh Generation being 2 obvious ones. This advocacy helps raise public awareness, often provides employees with a platform for engagement and contributes to the climate advocacy movement led by civil society organizations. As consumer concerns grow, so with more retailers stepping up, creating commercial opportunities for our brands. Earlier this week, Amazon launched its Climate Pledge Friendly program, tagging particular products that meet environmental criteria with the Climate Pledge Friendly logo. Thanks to our strong track record on climate action, Unilever was a partner for Amazon in this program, with many projects featured in the -- products featured in the program and some selected for inclusion within the main campaign imagery. The second area is trade associations. It's well known that one of the barriers to policy progress in recent decades has been hard lobbying from industry groups, defending vested interest from an accelerated transition to net zero. Groups like InfluenceMap and the investor-led Climate Action 100+ have highlighted the risks from companies inadvertently funding counterproductive lobbying efforts simply by belonging to trade associations who are lobbying in their name. Alan Jope, our CEO, took the unprecedented step last year of writing an open letter to all of Unilever's trade associations, asking them to confirm whether their policy engagement on climate change was consistent with the 1.5 degree target of the Paris Agreement. This step was applauded as a radical move in trying to address this issue, and now other campaign groups are pushing other companies to adopt a similar approach. And finally, we couldn't conclude an investor presentation on this issue without mentioning disclosure. We believe that disclosure is a strategic transformation lever for an accelerated and smooth transition to a net-zero world. Our CFO, Graeme Pitkethly, is the Vice Chair of the Task Force on Climate-related Financial Disclosures, and we've been delighted with the success that the report's recommendations have found. We continue to disclose as Unilever in line with the TCFD guidance and advocate for its continued take up. We also disclose each year to investors on climate, forest and water through the CDP and participate in their supply chain program. We've looked at every part of our climate action approach today, and I hope you'll agree it's a comprehensive and interconnected agenda. And in concluding, I'd just like to sum up with the following reflections on Unilever's position. First, we've been incredibly lucky as a business to have leaders that have prioritized environmental leadership, certainly for as long as the 20 years that I've been here. From our science experts to our finance leaders, our innovation leads to our marketing directors, few companies are as well prepared to navigate this landscape, reducing risks and maximizing opportunities as we are here at Unilever. Secondly, for much of the last 20 years, climate change has been more of a corporate agenda in Unilever, but we expect that the next 20 will see it pivot to a consumer-centric agenda. This is a territory with many opportunities for climate action veterans, such as Unilever, to engage consumers and build strong customer relationships in support of our growth agenda. Third, there's no room for complacency. The journey on which we have embarked, a journey to net-zero emissions by 2039, is quite different from the old reduce environmental impact goals of the last decade. We will face many new challenges and many obstacles. We've got a lot to learn, and we must work hand in glove with our partners to address them. And finally, as the world wakes up to the truly systemic nature of the challenge, there's a growing understanding of the bigger role we need to play. The levers of influence that we can pull, whether consumer engagement, customer partnerships or policy advocacy are critical components, not added extras, I believe, in climate strategy. Only with policy change, widespread engagement from all the stakeholders in our multi-stakeholder model will we achieve the 1.5 degree goal of the Paris Agreement, ensuring the long-term success of our business and the prosperity of billions of consumers that we serve. Thank you very much for your attention, and I'll hand it back now to Richard who will moderate the Q&A.

Thank you, Thomas, very much. So as Thomas said, we'll now move to Q&A session. [Operator Instructions]

So looking, we've got a few questions logged already. Thomas, lots of companies have set out 0 emissions targets for their operations. With so many companies doing so, do you think that they will all hit their goals?

Well, the first thing I would say is the more companies that set these targets, the more likely that everyone will achieve them. We know that as the movement builds and demand for new low-carbon technologies and services grows, so the providers of those services will invest more heavily in R&D innovation and deployment. So this is definitely a situation where the more momentum we can build within the system for people to set ambitious goals and to seek to implement them, the easier it will be for everyone.

Okay. Thanks, Thomas. What steps are you already taking in your supply chain to support smallholder farmers combat the negative impacts of climate change or at least to ensure that they do not contribute to its causes?

That's a great question. We focus very tightly on climate for this presentation. But when we made our announcement in June around our new climate and nature strategy, we sought very much to weave in both the broader environmental concerns but also the social concerns that are wrapped up in this agenda. And indeed, if you're a smallholder farmer in Southeast Asia struggling to make ends meet, and it's a choice between chopping down another bit of forest or not sending your kid to school, that's a decision that only gets to resolved one way. We've partnered in a number of ways on things like Farmfit funds with IDH to help provide financing to help smallholder farmers invest in a more long-term way in plantations to improve their livelihoods. We know that if we can raise the floor on livelihood, it will have also an impact in the pressures on things like deforestation. So yes, very, very cognizant of the need to link that agenda with the decarbonization agenda and see it as a systemic integrated program.

Okay. Thanks, Thomas. What effect do you think that the EU's pledge for a 55% cut in total emissions by 2030 will have?

This is a really exciting move by Europe and, obviously, something we've been pushing forward through the EU CLG for some time. And it's important to look at this in 2 ways, both in terms of the effect it will have in Europe but also the effect it will have internationally, as Europe being a leading political player within the global climate negotiations. Domestically within Europe, it will increase the impetus to decarbonize. It will probably raise the carbon price, which means that people investing in low-carbon solutions will have more commercial incentive to do so. If the carbon markets can be reformed to also allow some money to flow into natural climate solutions, that could have other benefits as people partially meet their obligations through funding reforestation programs and similar elsewhere. But I think really the significant -- the most significant part of this is how this could play into the international political climate. Not only have you seen the EU proposal for 55%, but also we've seen a statement from China this week that it will raise its climate ambition as part of the -- what's called the NDC process for Cop26, a climate summit with a target of carbon neutrality by 2060. And their proposal is thought to in itself contribute a reduction in the temperature forecast of something like 0.2 or 0.3 degrees because of the significance of that announcement. And so what you have now is you have both Europe and China stepping up as leaders on the global stage. That transforms the international dynamic about what other countries feel they should be doing and the kind of levels of ambition they should be setting. So I think it's been a very positive week for global climate momentum when you consider those 2 together.

Okay. Thomas, you've said that 66% of emissions are linked to consumer use. Can you really have direct impact on those? And without putting you on the spot, can you give any examples of your future actions to reduce this impact?

Yes. It's a -- this has really been a challenging one for us over the past 10 years as we've tried to tackle that because you're exactly right. We don't have a lot of direct -- we don't have any direct control. We've got a little bit of influence. It does depend a bit by product category. We've got quite a diverse portfolio. If you are a laundry product, right, we can do great R&D to develop laundry products that work really well in cold water. And we can tell you they work really well in cold water, and we can hope and cross our fingers that you will wash it in cold water and not boil or wash it at 90 degrees. We don't control that, but we can certainly do things that make it easier for people to have the option to use them with a lower impact. At the same time, if it is a shampoo or a skin cleansing product that you're going to use in the shower, it is very hard to persuade people at all that they're going to take a shorter shower a colder shower. So we know that there is some level of emissions which are just very, very hard to shift in that downstream portfolio. And it is really in the sort of Beauty & Personal Care products, the hot water in showering, that is probably the hardest thing to deal with. And I think that's why we -- again, coming back to the role of the external advocacy, the pressure that we're able to apply through groups like RE100, the campaign on renewable energy deployment, we know they have a really powerful impact in markets around the world, that such a large group of companies is now coming together, saying "We want to buy renewable energy, renewable electricity. Please, can you make it available? Please, can you make whatever reforms are necessary in your domestic energy markets so that the investment can flow?" And of course, as we transition that for the economy as a whole, that flows into the grids of our consumers' houses as well. So there's an interconnection there. We are quite optimistic on that. I think if you look at the International Energy Agency's projections for where consumer energy systems are going, it was -- it came slower than we expected through the first -- through the teen -- 20-teens. But through the 2020s, we think that decarbonization is going to accelerate. The combination of the political pressure and the rapidly falling cost of renewable energy technologies means it's the first place that most countries are now going.