ESG is Becoming a Standard for Chinese Beauty Companies

For many years, the cosmetics industry has been questioned by environmentalists. With concerns about the potential health risks of using non-natural substances and chemicals and issues such as animal ethics, excessive water use, air pollution, and plastic pollution caused by the cosmetics industry, an increasing number of beauty conglomerates are shifting their focus to ESG.

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For a long time, environmentalists have raised questions about the cosmetics industry due to concerns about the use of non-natural substances and chemicals, as well as issues such as animal ethics, excessive water use, air pollution, and plastic pollution caused by the industry. As a result, an increasing number of large beauty companies are now turning their attention to ESG as a way to address these concerns. ESG provides a framework for evaluating a company's environmental, social, and governance impact, which goes beyond traditional financial performance.

ESG is a standard configuration for leading beauty companies in China

According to data from Precedence Research, the global beauty market is expected to exceed 500 billion US dollars by 2028, reaching 505.6 billion US dollars. The escalating climate crisis is altering many people's purchasing patterns, impacting the global beauty industry, which is striving to meet a series of sustainable development challenges in product manufacturing, packaging, and more. The industry, set to reach a market size of $500 billion, is witnessing an increasing focus on ESG development from major beauty giants.

In 2004, the United Nations Global Compact first formally proposed the concept of ESG. Specifically, ESG stands for Environmental, Social, and Governance, a concept and business evaluation standard that focuses on a company's environmental, social, and corporate governance performance rather than traditional financial performance.

Indeed, more and more consumers are placing greater importance on the social and environmental significance behind products. According to Simon Kucher's Global Sustainability Study 2021, a strategy and consulting firm, 60% of consumers across the globe consider sustainability as a crucial factor when making a purchase decision. Additionally, the study found that 35% of consumers are willing to pay a higher price for products or services that are environmentally sustainable.

With the continuous integration of China's capital market with the international market, Chinese beauty companies are leading in ESG development in the domestic capital market. According to relevant data, as of the end of September 2022, 1459 out of 5000 listed companies in China's A-share market have disclosed ESG reports, accounting for 29.45% of all listed companies.

Looking at the domestic beauty industry, the Baidu search index for the keyword "ESG beauty" began to gradually rise from 2021, indicating that more people are starting to pay attention to the integration of the beauty industry and the cutting-edge concept of ESG. Shanghai Jahwa, a traditional Chinese daily chemical company, is also leading in terms of ESG. In 2021, Shanghai Jahwa issued the beauty industry's first ESG report in the real sense.

Shanghai Jahwa, an old Chinese daily chemical company, is also in a leading position in terms of ESG. In 2021, Shanghai Jahwa released the first real ESG report in the beauty industry.

Taking the lead in ESG, Shanghai Jahwa's latest ESG report, Chairman Pan Qiusheng showcased the company's new actions in environmental protection, "In the environmental dimension, to achieve the dual carbon target, we continue to improve the level of environmental management in 2022. Across factories, we use clean energy, install photovoltaic power generation devices, save energy, and reduce consumption from the production link. Logistics launched the "Fly Yue Plan", set up a warehouse in the South China region, and was responsible for most orders in the South China region. By improving the efficiency of express delivery and reducing transportation time, greenhouse gas emissions are reduced." Pan Qiusheng elaborated on Shanghai Jahwa's environmental actions in the production link, using a large amount of clean energy.

In addition, Shanghai Jahwa's ESG dynamics are also mainly reflected in the packaging. Shanghai Jahwa stated that the company upgrades the product's transport packaging through structural optimization design and material adjustment upgrades, and the total area of cardboard and other materials saved reaches 348,200 square meters. The packaging of Jia'an Laundry Detergent in 2022 has been reduced through structural upgrades, shape upgrades, and material optimization, saving 22.41 tons of petroleum-based plastics.

In April 2021, China's beauty giant Proya also released the company's first ESG report. According to its latest ESG report, Proya reduces the use of fossil energy in production and operation through energy-saving technological transformation, clean energy replacement, and distribution route optimization, and reduces its carbon emissions. During the reporting period, the greenhouse gas emission per ten thousand yuan of revenue was 12.42 kg of carbon dioxide, a decrease of 31.69% year-on-year.

At the same time, it traces the source of palm oil derivatives and prefers to buy RSPO-certified palm oil to reduce deforestation and its impact on biodiversity. Like Shanghai Jahwa, Proya also practices environmental protection by using clean energy in production and ensures the use of cleaner raw materials from the source of raw materials.

The first ESG reports have different focuses

In 2022, domestic beauty companies released their first ESG report, including BTN, Yasten Group, Marubi, and Lily & Beauty.

Unlike Shanghai Jahwa and Proya, BTN demonstrated its new achievements in animal testing in its ESG report.

In 2022, the BTN Research Institute successfully established a Type IV sensitization model using zebrafish for the first time, holding a leading position in the industry and perfecting the existing sensitization evaluation system. The zebrafish Type IV sensitization evaluation method has higher predictability than conventional in vitro methods (cells), lower cost, and shorter experimental cycles than conventional animal experiments (guinea pigs) and can achieve high-throughput screening. This evaluation method is exempted from the "Animal Experiment Protection Law", avoiding ethical issues concerning animal testing. At the same time, based on the cellular model, a comprehensive construction from safety to efficacy testing has been completed, including skin irritation, eye irritation, phototoxicity, anti-inflammatory, anti-allergic, whitening, repairing, anti-aging, oil control, and other multi-dimensional evaluation experimental schemes.

Yatsen on the other hand, practices ESG in the use of recyclable materials. Yatsen states that the company has been continuously exploring the feasibility of sustainable packaging materials. For example, the capsule packaging of EVE LOM Radiant Cleansing Oil Capsules and Fu Yan Wrinkle Repair Capsule Essence is made from natural plant ingredients, and the materials are 100% biodegradable.

Starting from the selection of packaging materials, Yatsen also intends to take into account the recycling of materials, committed to creating a closed loop of sustainable green packaging. Many brands under Yatsen have launched product packaging recycling projects, calling on consumers to start a green relay mode and increase the usage rate of product packaging. For example, EVE LOM products have participated in packaging recycling and recycling programs, earning The Green Dot logo.

In December 2022, MSCI upgraded Yatsen's ESG rating to Grade A, which is internationally recognized as a leading level of sustainability.

At the same time, the recently non-listed company, Gala Group, released its "2022 Sustainability Report", detailing the company's continuous efforts in key areas such as environment, society, and corporate governance. Gala Group has practiced its environmental philosophy in packaging, with its Ice Muscle Water packaging container being the world's first one-shot injection molded environmentally friendly packaging, which can improve production efficiency, reduce energy consumption, and reduce carbon dioxide emissions by up to 90%.

From the dynamics of these Chinese beauty companies, Chinese companies are constantly practicing the ESG concept at all stages of production. Jia Hua and Proya in Shanghai are using clean energy in production to reduce carbon emissions. In terms of packaging, Yatsen has been exploring the use of recyclable materials, using recyclable packaging materials as much as possible, while Gala Group uses its unique one-shot injection molded environmental packaging. On the other hand, BTN's animal experiments are exempted from the "Animal Experiment Protection Law", avoiding ethical issues related to animal testing, and leading the industry.

Driving the transformation of the beauty industry from three directions

International beauty giants are also continuously practicing environmental protection commitments through ESG.

As a global leader in the beauty industry, L’Oréal proposed a new sustainable development commitment called "L’Oréal for the Future" in 2020, gradually transitioning to a sustainable business model and actively addressing social and environmental issues.

L’Oréal has also set a series of sustainable development goals. By 2025, all factories will achieve a "carbon-neutral" state by improving energy efficiency and using 100% renewable energy. By 2030, innovation will be carried out to reduce the greenhouse gas emissions generated by consumers using our products by an average of 25% compared to 2016. By 2030, 100% of the bio-based ingredients in formulas and packaging materials will be traceable and from sustainable sources, none of which are related to deforestation. By 2030, 95% of the ingredients in product formulas will be bio-based, sourced from abundant minerals or recycling technologies.

Unlike other companies, L’Oréal not only focuses on using clean energy in the production process but also emphasizes the importance of bio-based ingredients in raw materials, with a strong emphasis on the sustainability of its raw material sources.

Liang Yinyin, Chief Sustainability Officer of L’Oréal North Asia and China, said in an interview that as a member of the EcoBeautyScore Alliance, L’Oréal is developing a theoretical framework internally and will publicly publish a product impact information and rating system online. The goal is to create a globally applicable measurement and rating system for the environmental impact of cosmetics.

In addition, Estée Lauder is focusing on the packaging field to implement environmental protection concepts.

Estée Lauder has set a goal to ensure that 75-100% of their packaging meets at least one of the "5 Rs": recyclable, refillable, reusable, recycled, or recoverable by 2025. They plan to increase the amount of post-consumer recycled material in their packaging by up to 50% and eliminate unnecessary cartons and paper for their products wherever possible. They also aim to have all their forest-based fiber cartons FSC-certified by 2025.

Nancy Mahon, Senior Vice President, Global Corporate Citizenship and Sustainability of Estée Lauder said, “Sustainability has long been central to how The Estée Lauder Companies and its brands have operated and is a key part of our corporate strategy for the future.”

In addition, Procter & Gamble uses artificial intelligence to track the entire manufacturing process of its products to accurately measure sustainable development goals through technology. Shiseido has stated that it is reducing water usage in its factories to a minimum through recycling.

When it comes to practicing ESG principles, both domestic and foreign beauty companies focus on using clean energy in the production process and promoting packaging recycling. However, for domestic companies, using less harmful raw materials and practicing environmentally friendly concepts in the material aspect is a key consideration.

According to public data from Jiufang Zhitou, ESG can drive the transformation of the beauty industry from three aspects. The first is for the beauty industry to shift from "quantity increase" to "quality increase". This means that the beauty industry should no longer focus solely on financial performance growth but also pay attention to product quality and social responsibility. Mindless marketing of products has become a thing of the past.

The second aspect is that domestic beauty companies are entering the era of raw material dividends and resonate with research and development to promote the transformation of the beauty industry towards biotechnology. In terms of raw materials, the beauty industry needs to turn to more technologically advanced biotechnology to develop environmentally friendly raw materials and practice environmental protection concepts from the source, aligning with international giants such as L’Oréal.

The third aspect is that ESG is driving companies towards full lifecycle digital management, laying the foundation for going global. In the increasingly important digital transformation, ESG can drive organizational reform and make enterprise management more efficient. More standardized ESG reports can also help companies go global and align with international standards.

ESG development in China is still in its infancy. Although domestic beauty companies are more advanced in ESG development than the overall level, there are still difficulties in aligning with international standards as the development of ESG abroad is relatively mature. For domestic beauty companies, developing cleaner raw materials through high-tech research and development and increasing the use of renewable energy are directions to strive for in improving their ESG standards.