Tesco

Tesco maintains its trajectory on materiality; it continues to take a dual approach to portfolio diversification. The company excluded Scope 3 emissions targets from the executive team compensation and its framework for sustainability-linked bonds, given the carbon accounting challenges of Scope 3 emissions. Tesco will update its scenario analysis considering physical and transition risks, and the disclosure will prioritise the most material impacts. Tesco acknowledges the need to re-balance its protein sources given livestock supply chains’ high environmental impact. Hence, the company is taking climate mitigation actions, including increasing the proportion of plant-based products in its portfolio, to address this key decarbonisation issue. The company has adopted a dual approach to portfolio diversification. It is reacting to consumer behavioural change seeking commercial opportunity. Simultaneously, it manages the climate risks of conventional proteins by producing them more sustainably and providing alternative options with lower impact. Tesco reinforced the link between climate-related ambitions and executive remuneration by considering sustainability metrics (Scope 1 & 2, waste, and diversity & inclusion) in its Performance Share Plan awards for the Executive team. Scope 3 emissions, which comprise 90% of total GHG emissions, do not yet form part of this executive award program. Also, the framework for Tesco’s sustainability-linked bonds (SLBs) does not currently allow for financing of projects to help reduce Scope 3 emissions. The company explained this is due to the significant challenges and lack of scientific consensus on elements of scope 3, which it stated would make this extremely challenging at present. Tesco has been conducting TCFD-aligned scenario analysis for the past four years. In its latest iteration, the company will continue to incorporate both transition and physical risk into its assessment; it clarified that animal agriculture would be incorporated and that only the most material impacts would be disclosed in the next reporting period (May 2023). Last year the company disclosed the transition risk impact of a livestock carbon tax, as it found it to be material. We encourage the company to disclose granular information on the inputs used and the outputs found in its scenario analysis impacting animal-derived protein supply chains. In the last year, Tesco started working with Risilience, part of the Centre for Risk Studies at the University of Cambridge Judge Business School, to provide more granularity in its climate scenario analysis. They are building a ‘digital twin’ for Tesco to understand climate-related risks at a more granular level and in real-time for the business.

Tesco continues to implement its strategy of reducing supply chain emissions and diversifying its protein portfolio. It extended its net-zero target to scope 3 emissions and started engaging more systematically with its suppliers regarding decarbonisation. The company reported no progress on the target to increase the sale of healthy products to 65% by 2025. Regarding its target to increase the sales by 300% of meat alternatives by 2025, it continues to be unclear how this will impact the long-term composition of its overall product portfolio and procurement strategy, specifically regarding animal proteins. This target excludes dairy alternatives, as well as moderate excess consumption of animal proteins. In a discussion with investors, Tesco highlighted that because it is an ambitious target and this growth expectation is above average for the company, achieving this target will result in an increased proportion of its sales coming from plant-based products. It shared that it would not consider setting an explicit displacement target for meat or dairy. In measuring the carbon abatement potential of the sales target, Tesco disclosed that it has a rough estimate internally of how shifting diets can help achieve climate ambitions. However, it will not disclose its estimations until the data sets are robust and comparable. Tesco mentioned interventions such as low carbon fertiliser, novel technologies, animal feed and regenerative agriculture to reduce Scope 3 emissions. Alongside this, the company views diets as a large part of addressing Scope 3 emissions, incorporating its work on healthy and sustainable diets, and influencing consumer demand. Tesco disclosed the carbon intensity of the parts of the supply chain with high consumer demand, like animal protein, grains, and fresh produce. It is working on developing decarbonisation action plans for the identified emission hotspots and will publish an update in 2022/2023, as this is an ongoing workstream. Tesco is engaging with suppliers to decrease their carbon emissions; the company has achieved a 20% GHG emission reduction across its largest suppliers. The company sent a letter to suppliers at the end of last year asking for them to take climate action. Tesco encourages them to measure their carbon foot printing and set science-based targets. Subsequently, the company has followed up with more letters with reminders from various areas of the business to ensure the message is consistent and requesting more detail on specific actions being taken. It has run in-person conferences with strategic suppliers and done a roadshow to educate suppliers on environmental and social responsibility and help build capacity and understanding of what involves reaching net zero. Tesco is also building internal systems to track emissions and compliance. Specifically, on dairy supply chains, Tesco is measuring the carbon footprint of more farms and encouraging innovation to reduce methane emissions from livestock. It also asks dairy farmers to provide a safe-haven for migratory birds and boost biodiversity, by installing nest boxes on farmlands. Tesco also mentioned that it is looking to implement closed-loop supply chains to facilitate matchmaking of waste and inputs from different suppliers to reduce waste in the supply chain (i.e., designing out waste by having the waste from one supplier become the input for another supplier). A large part of Tesco’s work addressing supply chain emissions is through its WWF Sustainable Basket target. Central Europe is now also covered by the target to halve the environmental impact of the average shopping basket by 2030, not only the UK operations. Tesco maintains its partnership with WWF on this effort; it will continue to disclose progress as it works internally to track the evolution of its Sustainable Basket metrics to indicate how it has changed over the years. On 6 November, WWF published a letter where CEOs of leading UK food retailers committed to collectively halve the environmental impact of UK Baskets by 2030, Tesco being one of them. The WWF will oversee reporting progress against individual metrics for companies annually, with the first progress report expected in November 2022. Tesco extended its 2050 net-zero commitment to Scope 3 emissions, including purchased goods and services. The company specifically highlighted that an increase in plant-based food is required to cut emissions. Tesco is in the process of getting its net-zero targets approved by the SBTi. The company shared that it is currently re-validating its emission targets to consider the SBTi Forest, Land and Agriculture (FLAG) guidance, which proposes intensity-based targets. The company highlighted that any intensity-based targets would be complementary to our overall (absolute) target; also, that it is aware of the inter-relations and potential for unintended consequences of setting intensity-based targets.

Tesco continues to expand its product portfolio, tapping into various implementations to address the health and nutrition of plant-based foods, such as blended protein products with meat and vegetables. Through its own brand Wicked Kitchen, the company also expanded its offering. The company shared that as its plant-based product range matures, it won’t necessarily continue to launch new products at the same rate as previously and in some areas, it will rationalise its existing ranges, based on customer insight. Reformulation is one of the tools Tesco uses to improve consumers’ health without them having to alter behaviour, for instance, taking out sugar, salt, and fats and adding vegetables, whole grains, and plant-based protein. The company tries to ensure that its plant-based products cover various price points, highlighting healthier options should also be more affordable. Learnings from the consumer insights Clubcard assessment informed the company on how to continue using reformulation. The company clarified it does not reformulate products solely with the goal to limit the amount of animal-ingredients, as it shared it could be seen by some customers as a reduction in quality, but it did not provide any data points to back up this statement. Nevertheless, Tesco has seen a stronger customer response when the launch new meat-free or blended (meat + more vegetables) products. Tesco launched the blended protein (i.e., pork sausages, beef mince or chicken burgers mixed with vegetables) own-brand “Meat and Veg” range containing 11 products. The range is available in ~11% of UK stores; all products have at least 30% vegetables. The Tesco health score is broadly based on the UK Government’s 2004/5 Nutrient Profiling Model (NPM), and considers energy, saturated fat, sugar, salt, fruit, vegetable content, fibre and protein content. Moreover, despite the delayed UK regulation Tesco confirmed that it would remove volume-led promotions on HFSS (high fat, salt, sugar) products from October 2022. Tesco continues to expand its product portfolio. It launched 173 products in 2021, bringing the range of plant-based products to 450 in total; this includes launches in underserved categories, such as plant-based salmon from JBS’s ‘Vivera’. Tesco confirmed it continues to have at least 10% plant-based items in all relevant product categories (i.e., fresh, and frozen meat, dairy, eggs, desserts ready meals) and if this % has increased YoY. Yet, it clarified that it has not made a target around increasing this proportion, and that as the plant-based portfolio matures it expects the proportion to remain flat. In 2018 Tesco partnered with Derek Sarno to create the Wicked Kitchen brand; he then became the Director of Plant-Based Innovation. The company shared that Wicked Kitchen remains a key part of its plant-based offering. In 2021/22, it expanded the offering under this range with a meal deal in UK stores and introduced the brand in Booker (Tesco’s wholesale business). In July 2022, the brand launched plant-based milk for the first time in the UK, including Barista Milks, using Soya, Oat, Coconut and Almond SKUs. Moreover, this brand has partnered with other retailers in international markets where Tesco does not have operations, such as Finland and the USA.

The company does not provide return on investment figures for consumer engagement campaigns for alternative proteins. Its consumer engagement strategy is informed by the learnings of its Clubcard assessments, which provide timely data. These include commercials, and analysis on consumer perception and behaviour. Tesco is working to address the impacts of inflation by engaging consumers on affordable and healthy options. In May, the company launched its ‘better baskets’ campaign to educate consumers through in-store banners that signpost foods high in fibre and plant-based options. It also included information, on its website and in the press, on how consumers can make good choices for climate and diet with accessibility and affordability. Better baskets campaign includes in-store zones and is supported by TV, print and outdoor advertising, social media and online. Tesco does not disclose comparable metrics reflecting the success of consumer engagement programmes for plant-based foods. It does not disclose any marketing budget/spend relative to animal-derived products on marketing campaigns, nor any other metric to measure how the company is increasingly nudging consumers on a dietary shift with its product portfolio. It does provide some initiative examples, but none that are clearly linked to an overall consumer engagement strategy for alternative proteins. For example, the company conducts a behaviour assessment from data collected from Clubcard users. Tesco noted that its Clubcard pricing initiative has provided exclusive offers for the past 18-24 to Clubcard users and has significantly increased consumer insight data. Tesco’s Clubcard data is the primary way it understands its marketing campaigns' impact and other interventions to change consumer behaviour. It shared that a topic such as health requires the company to be agile and make rapid changes to address consumers’ needs. Tesco introduced a plant-based ‘meal deal’ under the Wicked Kitchen brand and doubled plant-based sales during Veganuary. The company tracks the most popular plant-based items –milk, soups, meat, and desserts. It continues to work with public figures, like chef Jamie Oliver, to encourage consumers to eat more vegetables. Earlier this year, one of Tesco’s advertisements was banned by the UK advertising watchdog due to unsubstantiated claims about the environmental impact of its plant-based products. Through this experience, Tesco has learnt the parameters for claims and how they need to be substantiated (included in the green claims guide). Since then, the company has started undertaking life cycle assessments (LCAs) for products, which is the substantiation required to make claims. However, the company shared the challenges around LCAs, which take a long time and need to be broad -around 13 elements are required to make broad sustainability claims. Tesco is concerned about the time burden giving the example that for climate, just one aspect of LCA, took four months to complete. So, it is not feasible for every product for every claim you want to make. Tesco stated that eco-labelling is moving quickly; it references its involvement in the IGD alongside other food retailers and manufacturers. This work is insight-driven, and the goal is to understand what works and what does not when labelling and scoring. Tesco acknowledges that changing consumer demand is difficult, so it is key to understand the barriers that consumers face, whether affordability, taste, nutrition, or something else.

The company published more data related to scope 3 emissions, and has set new (SBTs) in line with a 1.5°C trajectory that is currently being validated by the Science Based Target Initiative (SBTi). Tesco reported progress on its meat alternative sales target, as well as an updated protein split which stayed flat YoY. Tesco reported progress against its target to increase the sales of meat alternatives, disclosing sales grew by 130% (vs its 2018 baseline), which means it is on track as it has achieved 43% of its target with still three more years to go. Tesco updated its protein disclosure, reported in sales volume – Meat & egg protein, 81%, Fish protein, 7%, Plant protein, 12% – and dairy – animal-derived, 95%, and alternative products, 5%. The proportions stayed flat year-over-year, which means that increasing the sales of meat alternatives by 130% alone has not proven to shift the meat volume sold. The company stated that the reason behind this can be linked to the challenges on mix with the temporary consolidation of ranges to support availability throughout the industry supply chain issues, combined with customer purchasing behaviour. Tesco shared it has no intention to disclose a breakdown of the composition of its product portfolio and the plant-based versus animal-derived percentage. It considers this commercially sensitive – especially the split between different animal-derived products. This would apply to any category breakdown. Tesco is calculating more accurately the baseline for emissions; it updated its Scope 3 emissions inventory last year as part of its work to set SBTs aligned with 1.5C degrees of warming. The company acknowledged the outsized proportion of Scope 3, given that these are more than 90% of total emissions. It also disclosed that 30% of total GHG emissions are related to agriculture, livestock. Moreover, in its annual report, the company reported that 30% of its Scope 3 emissions are linked to rearing, growing, and transporting agricultural products, mainly within the animal protein categories. Positively, the company has set a new Scope 3 target in line with a 1.5°C trajectory that is currently being validated by the SBTi, it will shortly publish its end-to-end roadmap to net zero, detailing an action plan to reach its goal. Tesco currently does not disaggregate emissions from purchased goods and services. Nevertheless, the company will report emissions information with more granularly, including within Scope 3 when it publishes its Scope 3 strategy in 2022. Depending on what is disclosed in the Scope 3 emission strategy, the company could have a positive trajectory, we expect Tesco to set ambitious targets across geographies and Scope 3 categories, comparably report absolute emissions on an annual basis, and demonstrate an absolute emissions reduction from animal agriculture. The company shared the challenges it faces regarding data availability and accuracy and the constant evolution of the science and methodologies behind data collection for Scope 3 emissions. The company is working on building capacity to track better and monitor farm environmental data. Encouragingly, Tesco has included new data points such as deforestation and land conversion in its carbon footprint methodology.

The company agreed to a dialogue with investors and met with the coalition as it did last year. The company provided detailed responses to the coalition’s questions on the call and answered investors’ follow-up questions. The company provided feedback on the final assessment, providing extra information and showing willingness to implement best practice.