In particular, the following main risks and opportunities were studied:
Risk 1
Regulations concerning carbon pricing mechanisms, such as specific taxes on fossil fuels, carbon taxes, and emissions trading schemes (or carbon markets), are a major challenge for the Group and its suppliers. In this context, an increase in the price per tonne of direct greenhouse gas emissions for suppliers could be reflected in the sale prices of their products and services, and potentially have a material impact on L’Oréal’s operating costs. In order to mitigate this risk, the Group is engaged with its suppliers, in particular through the CDP Supply Chain, to ensure they devise and implement emissions reduction targets and associated action plans (see section 4.3.1.2. “Involving suppliers in the Group’s transformation” of this document).
Risk 2
Changes in consumer preferences towards consumption choices increasingly influenced by the carbon footprint of products and the overall climate performance of plants could have a material impact, progressively and in the medium-term, for L’Oréal. The challenge, if this risk were insufficiently managed, would be a potential loss of revenue because of a reduction in demand for L’Oréal products from consumers. L’Oréal’s strategy to prevent the associated risk is to continue to reduce the carbon footprint of its products and to give consumers the means to take enlightened purchasing decisions by providing transparent information and listening to their expectations on the issues of sustainable development (see paragraph “Displaying the environmental and social impact of the products” in section 4.3.1.3.2.of this document).
Risk 3
Climate change is expected to lead to an increase in the frequency and intensity of extreme weather events, resulting primarily in changes in precipitation patterns, which will have a particularly strong impact on agriculture.
In particular, in Indonesia and Malaysia, medium-term chronic changes in the El Niño and La Niña cycles are likely to occur. For the preparation of its palm-based ingredients, which represent a large share of its purchasing volumes of ingredients of plant origin, 98.8% of L’Oréal’s supply of palm oil comes from Indonesia and Malaysia. L’Oréal could, therefore, be affected by the consequences of a chronic increase in the frequency and intensity of these extreme weather events with, as a result, an increase in the supply costs for palm oil, associated with higher production and certification costs.
These risks are taken into account by working on the resilience of the supply chain, developing projects in the field with the suppliers, and by making a long-term commitment with some of them. In order to drill down on this identification of climate-related risks on the price and availability of the most important raw materials of plant origin in the L’Oréal portfolio, a specific study taking account of a set of methodologies and sources on climate change was carried out with “BIPE” (a consulting firm specialised in the analysis of the consequences of climate change on plant production) in 2017, then refined in 2018 and 2019 in order to adapt supply strategies.
Opportunity 1
One of the consequences of climate change is the increase in the number of regions around the world that will face periods of water shortage, particularly in urban areas. An increase in the frequency or intensity of water short ages could lead to changes in consumer routines in terms of showering and hair-washing. A market opportunity consists in innovating and developing products adapted for use by consumers living in these areas of water stress. These new products could increasingly better meet consumer’s needs in this context. L’Oréal could seize this opportunity by evaluating the products as a function of their water footprint, by developing new products, routines or new technologies that improve rinsing or save water in the use phase, and by increasing consumer awareness of the challenges associated with water quality and availability.
Opportunity 2
The medium-term global trend in the price of non-renewable energy is expected to rise, both because of future regulations and taxes on fossil fuels, and complex balances between supply and demand. The progressive elimination of the use of conventional fuels in favour of renewable energies would protect L’Oréal from increases in the fossil fuel prices and could result over time in operating costs that are relatively lower than those paid by other manufacturers who are not committed or insufficiently committed to this energy transition. L’Oréal intends to seize this opportunity by rapidly reducing the use of fossil energies. L’Oréal has thus committed to using 100% renewable energy at all its operated sites by 2025, by developing projects for self-supply of renewable energies on-site, as well as a 100% local and renewable energy supply (electricity, heat, biogas, etc.). L’Oréal has already started on this path with, for example, the completion of a series of projects for its own consumption of renewable energy on-site in locations such as the United States, Western Europe, Brazil, and China.
Methods for managing risks and opportunities
Identification and assessment of the risks are primarily coordinated at the Group Level by the Ethics, Risk and Compliance Department with all relevant departments. When necessary and relevant, an additional risk analysis is conducted in the operational entities, particularly for the physical risks associated with climate change.
Contributions are collected from the main operational managers and experts in this area worldwide, representing all the Group’s business activities, regions, and areas of activity. Climate-related risks have been the subject of a specific approach that identified and assessed their financial and strategic impact when the Group’s reputation is impacted or the long-term growth of the Group may be impacted. This analysis is regularly updated.
The mapping of the Group’s risks is reviewed regularly. It is validated by the L’Oréal Executive Committee once a year and presented to the Audit Committee.
