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ESG concerns are pushing cosmetics companies to change the way they operate.

An ESG makeover for the beauty industry

  • 28Nov 17
  • Fionna Ross Senior Analyst – Responsible Investing, North American Equities

ESG concerns are encouraging the beauty industry to re-examine its practices.

Key Points:

  • The democratization of information has helped investors and consumers make informed choices
  • ESG concerns regarding microbeads, mica and palm oil have pushed companies to adopt more sustainable practices
  • Change won’t happen overnight, but it’s a promising start

  • Beauty is big business. Globally, it is a $450 billion business, larger than the gross domestic product (GDP) of many developed world countries. From haircare to cosmetics, beauty products form a part of our daily lives. But while they may help us maintain our image, are they causing harm to others?
  • In recent years, manufacturers of beauty products have been forced to reassess their practices in response to public concerns. Much has been driven by the growing importance of environmental, social and governance (ESG) factors. The democratization of information, enabled by the internet, has helped investors and consumers make more informed choices about which businesses to support with their hard-earned money. As a result, we are seeing an ESG makeover taking shape in the beauty industry.

    The microbead mess

    Microbeads – solid pieces of plastic less than one millimeter in dimension – used to be all the rage in scrubs and body wash. They became popular as a way to exfoliate dead skin, replacing natural materials such as almonds and oatmeal.

    But the long-term environmental impact was completely overlooked. Large amounts of microbeads entered the water supply, causing widespread plastic particle water pollution in large bodies of water such as Lake Erie. Aquatic animals also confused microbeads with their food source, endangering animals higher up the food chain.

    Fortunately, the destructive impact of microbeads has captured the world’s attention. The Microbead-Free Waters Act of 2015 in the U.S. prohibited the use of microbeads in rinse-off cosmetics by July 2017. In 2016, Canada designated microbeads as a toxic substance under its Environmental Protection Act. And the UK government has instituted a ban on the sale of microbeads by the end of 2017. L’Oréal, Crest, Johnson & Johnson and other global personal care companies have followed suit and committed to ending their use of microbeads by the end of this year, if not sooner.

    All that glitters

    Glittery highlighters, bronzers, blushers and eyeshadows are popular beauty items, but their origins can be ugly. Mica, a main ingredient for sparkly, shimmery products, is often mined illegally in India by children as young as six. While labor for children under 14 is illegal in India, extreme poverty and debt bondage (the repayment of a debt with labor) often force parents to send their children to work in the mines. Currently, five to 10 children die in mining disasters each month in India.

    These are positive steps toward ending exploitative practices.

    Large cosmetic companies have begun making changes to their mica sourcing as a result. Estée Lauder, L’Oréal, Shiseido, Coty and several other cosmetics companies have contributed to the Responsible Mica Initiative, which pledges to take steps toward a responsible supply of mica by 2020 by eradicating child labor and creating safer working conditions. Other beauty companies such as Lush have committed to stop using natural mica in their products, deeming such practices unethical. These are positive steps toward ending human exploitation in the beauty industry.

    Problems with palm oil

    Palm oil is widely used in a variety of products each day, from snack foods to cosmetics. Not only is it a cheap and versatile alternative to trans fats, but it also serves as an emulsifier for beauty creams and lotions. Around 70% of the world’s cosmetics contain palm oil, the majority of which is grown in Indonesia and Malaysia.

    The overwhelming demand for palm oil has devastated tropical ecosystems and those that live in them. Rainforests are being cut down and burned so that palm oil trees can be planted instead. Endangered animals such as orangutans and rhinoceros are losing their habitats. The harvest of the fruits of the palm oil tree creates massive amounts of greenhouse gas emissions, and result in thick clouds of smog. If that weren’t enough, questionable labor practices and human rights abuse on plantations are also well-known issues.

    In response to growing concerns over the sourcing of palm oil, many large cosmetic companies have committed to sustainably sourcing their palm oil supplies. Some of these companies have begun buying palm oil from independent farmers committed to reversing the tide of ecological destruction while receiving the benefits of producing a valuable commodity. Programs like Sustainable Palm Oil and Traceability with Sabah small producers (SPOTS) support smaller farmers by teaching them more sustainable cultivation methods that use less pesticides and fertilizers.

    Progress is beautiful

    Change certainly can’t – and won’t – occur overnight. But increased investor focus on ESG considerations is spurring companies on to make their practices less harmful and more sustainable. Investors’ demand for increased transparency should result in more detailed reporting on the progress companies are making towards meeting their targets.

    The rise in popularity of more environmentally-friendly cosmetics brands and other personal care items should also encourage companies to rethink how their products affect the environment and the labor force. The makeover is off to a beautiful start.

    Important Information

    Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

    Companies mentioned are for illustrative purposes only and are not intended to be a recommendation to buy or sell any security.

    ID: US-211117-52551-1

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