ESG in The Beauty Industry

The recent Belt and Road conference held in Beijing emphasized the alignment of ESG principles with the core values of economic prosperity, environmental sustainability, and social equity, which are essential for the high-quality development of the Belt and Road Initiative. The practical implementation of ESG principles is of significant importance in ensuring that the outcomes of the Belt and Road Initiative benefit people worldwide. Since China announced its carbon peak and carbon neutrality goals in 2020, the concept of ESG has been gaining momentum in the business sector.

The beauty industry inherently exhibits ESG characteristics, focusing on low pollution, energy efficiency, marketing, and research and development. With the growing adoption of sustainable consumption practices in China, beauty companies are gradually paying more attention to ESG principles. According to the "2022 Sustainable Beauty Industry Trends Report," the global personal care and cosmetics industry is maintaining a yearly growth rate of 5%, while the market for green cosmetics is rapidly expanding at a rate of 15% annually. It is projected that by 2027, the market size for natural cosmetics will reach USD 54.5 billion (approximately CNY 379.7 billion). Furthermore, the concept of pure beauty products is gaining increasing attention. According to Brand Essence Market Research, the annual compound growth rate for pure beauty products is predicted to be 12% from 2020 to 2027, far exceeding the growth rate of the global beauty market.

Taking a look at the cosmetics industry, market trends are increasingly leaning towards sustainable development. According to the "2022 Sustainable Beauty Industry Trends Report," over the past two years, there has been rapid growth in discussions about sustainable beauty on social media platforms. Domestic beauty companies in China have a relatively high ESG report disclosure rate. Among the 25 cosmetic companies listed in the A-share market, 16 have disclosed their 2022 ESG reports, resulting in an industry disclosure rate of 64%. An analysis reveals that in the cosmetics industry, companies are focusing on energy efficiency, innovation in product development, and communication with consumers as key areas of interest.

Green packaging is the easiest step to implement in low-carbon practices

According to research by the nonprofit organization "Zero Waste Week," the global beauty industry generates over 120 billion units of packaging waste each year, with plastic packaging being the top choice, and up to 70% of it is non-recyclable. This contributes to the proliferation of microplastics and environmental pollution, making it a significant concern. Therefore, sustainable packaging is perhaps the easiest step for the beauty industry to take in its low-carbon practices.

In the realm of green packaging, the internationally renowned beauty brand L'Oréal partnered with Alibaba as early as 2018 to promote the use of eco-friendly packaging in e-commerce logistics. They replaced packing materials and outer packaging with eco-friendly recyclable materials. By the end of 2022, L'Oréal China had shipped 149 million eco-friendly packages. Meanwhile, Sephora advocated the use of 100% recyclable FSC-certified environmentally friendly paper materials for shopping bags and gift boxes in 2022, reducing the weight of paper shopping bags by 10%, resulting in annual savings of 30 tons of packaging paper. All their boxes are 100% recyclable, with 85% of the raw materials coming from recycled paper.

Domestic beauty brands in China have also made significant progress in green packaging. According to the "2022 Sustainable Development Report" by Yatsen E-commerce, such as some brands, Perfect Diary, Bear Paw, and Little Autumn, have reduced the weight and optimized the size of cardboard boxes, replaced printed cardboard boxes with watermarked ones, and started using more environmentally friendly kraft paper materials, leading to a 25% reduction in paper usage. In addition, all their cardboard boxes no longer have plastic film coatings, further reducing the use of plastic packaging materials. Belite, another brand, has expanded the application and scale of green packaging within the company to reduce plastic usage. They have upgraded the packaging of their 30ml and 50ml Dual Brightening Essence to be refillable and encouraged consumers to reuse product packaging. These products were launched for sale in April 2023.

Product innovation: Raw materials are the key to low-carbon transformation.

A substantial portion of carbon emissions in the cosmetics industry comes from the production of raw materials. Given the significant presence of petroleum-based ingredients in cosmetics, it results in substantial carbon emissions. The cosmetics market is now shifting towards biotechnology, with botanical and synthetic biology becoming the primary sources of beauty ingredients.

In June 2023, L'Oréal Group acquired a minority stake in the US biotechnology company Debut through its venture capital fund BOLD. Debut has a technology for mimicking plant-based molecular production in nature using enzymes. This technology is more efficient and consumes fewer resources compared to growing plants. It is expected to be used in the development of new ingredients and personal care products at L'Oréal in the future. Additionally, Chando acquired a portion of cosmetic ingredients from biotechnology company Amyris. One of the most representative materials from Amyris is squalane, which has changed the traditional method of extracting ingredients from deep-sea shark livers, aiming to protect marine life and the environment.

In response to the essential use of palm oil in the production process, domestic beauty brands are also making changes. In February 2022, Yatsen officially became a member of the Roundtable on Sustainable Palm Oil (RSPO) and committed to prioritizing the purchase of sustainable palm oil to increase the proportion of products using sustainable palm oil. Pareya officially joined the Roundtable on Sustainable Palm Oil (RSPO) in 2023 and committed to prioritizing the purchase of RSPO-certified sustainable palm oil to reduce deforestation and its impact on biodiversity. With the growing trend of synthetic biology in the cosmetics industry, both international giants like Shiseido and L'Oréal and domestic companies like Huaxi Bio and Giant Biogene have strategically invested in synthetic biology. Huaxi Bio disclosed during its 2022 annual report that the "International Innovative Industrial Base for Synthetic Biology" has settled in Beijing Daxing and has been put into operation. They are comprehensively focusing on six categories of biologically active substances: functional sugars, amino acids, proteins, peptides, nucleotides, and natural active compounds, with new products from four biologically active raw materials set to launch in the first half of 2023.

Digital operations: Improving carbon emission transparency in the value chain

The beauty industry spans various aspects, from product manufacturing and transportation to sales, involving upstream and downstream partners. Implementing digital operations management can help companies improve resource utilization, reduce pollution emissions, and achieve cost reduction and efficiency improvement for high-quality development.

In June 2023, Alibaba and L'Oréal Group reached a strategic cooperation to create the industry's first "digital circular economy model for cosmetics." It is based on digital management technology to innovate the supply of green products, explore end-to-end solutions for green circulation in warehousing, packaging, distribution, and recycling.

Among domestic beauty brands, the leading brand Yatsen in 2022 conducted carbon footprint assessments for their flagship products Perfect Diary Lip Glaze and Translucent Loose Oil-Control Powder. According to the product carbon footprint certificate from a third-party organization, the carbon footprint for one unit of Perfect Diary Lip Glaze (Model: 299) is 303g of carbon dioxide equivalent. For one box of Perfect Diary Translucent Loose Oil-Control Powder Lock Color Version, the carbon footprint is 1000g of carbon dioxide equivalent. By assessing the product carbon footprint, Yatsen E-commerce can clarify the carbon emissions throughout the product's lifecycle and identify potential emission reductions at various stages, thus continually upgrading its products to reduce environmental impact. Beatly, on the other hand, has integrated ESG principles into its green supply chain, incorporating green supply chain into business processes such as product development, design, procurement, manufacturing, warehousing, and logistics. Furthermore, Shanghai Jahwa initiated its "Family of Values" project during its 125th anniversary and established its first employee volunteer team.

Consumers are the fundamental driving force behind sustainability

As the discussion and attention surrounding sustainable development topics in society continue to rise, the intentions and purchasing behaviors of beauty consumers have also subtly changed. According to the CMRI "2022 Beauty Sustainability Awareness and Purchase Intention Survey Report," over 90% of consumers stated that they are increasingly valuing the sustainable development of beauty products, with consumers being the fundamental driving force for green beauty product purchases. Beauty brands not only communicate green and low-carbon ideas to consumers in their products but also take corresponding actions in terms of social responsibility.

Using sustainability as a point of engagement shared with users can be a good attempt to enhance brand image and strengthen the relationship between the brand and consumers. For example, ZumaLong posted on Instagram to share creative ideas for repurposing its fragrance candles' glass containers after they are used up, encouraging consumers not to discard them but to give them new purposes, such as turning them into vases or pen holders. In terms of social responsibility, Yixian E-commerce is committed to enabling more people to enjoy beauty and practicing corporate social responsibility. In 2020, Yixian E-commerce, with the goal of "empowering women to discover and create beauty," partnered with the China Women's Development Foundation to initiate the "Creating a Beautiful Life" beauty public welfare training program. As of March 2023, "Creating a Beautiful Life" has completed five rounds of training, empowering 202 women to pursue careers in the beauty industry. Similarly, Shanghai Jahwa initiated the "Jia · Public Welfare" project on the occasion of the company's 125th anniversary and established its first team of employee volunteers.

Without ESG, without orders.

Looking at the beauty industry, groups like L'Oréal, Estée Lauder, Shiseido, and Procter & Gamble have long made sustainability a development goal, firmly integrating ESG construction with their corporate strategies. While domestic beauty companies started later, companies like Pechoin and Yixian E-commerce have consistently upheld their corporate social responsibility and published ESG reports. In 2022, Yixian E-commerce and Shanghai Jahwa received MSCI's ESG ratings at the A, indicating that some domestic beauty companies have gained recognition from the capital market for their ESG development.

Furthermore, as domestic beauty companies continue to grow and expand, developing a multi-brand matrix and expanding into multiple regions will become an inevitable trend. This is especially true for domestic beauty giants aiming for global markets. Investing in ESG construction will drive companies to a higher level of governance and gain recognition from overseas investment institutions, laying the foundation for globalization and expansion. For local beauty companies, building a sustainable product model on the product side and focusing on responsible marketing and consumer education on the marketing side is crucial to creating a safe, eco-friendly, and human-centered brand image, essential for sustainable brand development.

As more beauty companies realize the importance of ESG, ESG is becoming a new threshold in corporate practice, and "without ESG, there are no orders" could become a reality. Embracing ESG is, therefore, a must for the future of beauty companies.