NEXT plc – Annual report – 29 January 2022
CORPORATE RESPONSIBILITY (extract)
We are committed to minimising our environmental impact by reducing the carbon intensity of our activities and the natural resources we use.
Our efforts around ESG are reflected in the following:
- Constituent of the FTSE4Good Index.
- Sustainalytics: 15.5 risk rating (low risk), ranked 132 out of 453 in our industry (retail).
- MSCI: ESG rating AA (Leader).
- CDP: Climate change: A-, Forests: B, Water security: B.
Greenhouse gas emissions – Streamlined Energy and Carbon Reporting (SECR)
In accordance with the disclosure requirements for listed companies under the Companies Act 2006, the table below shows the Group’s SECR disclosure across Scope 1 and 2 together with an appropriate intensity metric and our total energy use of gas, electricity and other fuels during the financial year. The reported emissions data includes NEXT plc and its subsidiaries with the exception of any associates in which our interest is below 51%.
Energy consumption data is captured through monthly bills showing actual or estimated consumption. We continue to look for ways to improve energy efficiency as this reduces both carbon emissions and costs for our business. We actively track and review energy performance via a central data collection facility to ensure our properties are operating efficiently. The following initiatives were our principal measures during the year:
- Continued to invest in high efficiency LED lighting in existing retail stores which reduced our lighting energy consumption by around 75% in comparison to the lighting replaced. The LED lighting solutions are fitted in new stores as standard. We have also identified further existing stores to re-fit during 2022/23.
- Installed solar panels installed across two of our warehouses and a third installation will be commissioned this year on our Elmsall 3 warehouse.
We are also exploring additional other self-generated energy opportunities across our estate.
- Maintained our Energy Forums, working closely with our energy provider and other parties to actively identify opportunities in energy efficiency measures and technology to help reduce our environmental impact and deliver savings for the business.
We gained SBTi approval for our Scope 1, 2 and 3 reduction targets during the year.
NEXT is a signatory to the RE100 initiative and has committed to using 100% renewable energy by 2030. Our UK and Eire operations have been run using 100% renewable energy since April 2017, and we continue to work towards achieving this target in our direct operations overseas.
Carbon footprint – including Scope 3
Due to the nature of our business, most of our carbon footprint falls outside of our direct control and is reported under our Scope 3 emissions. Our Scope 3 total emissions disclosure (CO2e) covers the complete lifecycle of all the products we sell, including branded items sold through LABEL and Total Platform. This extends from the production of raw materials through to the manufacture, transport, how our customers use and care for them and the eventual end of life treatment of the products we sell. The emissions have been estimated in line with the GHG Protocol Corporate Accounting and Reporting Standard, and are based on a combination of high quality internal data coupled with the best available public sources on CO2 emissions factors using conservative assumptions.
Our total Scope 3 emissions is reported in the table below, together with our Scope 1 and 2 (location based) emissions. Our carbon reduction targets are set out on page 98.
Taskforce on Climate-related Financial Disclosures (TCFD)
NEXT’s climate-related disclosures are consistent with the recommendations and recommended disclosures of the TCFD, and in compliance with the requirements of LR 9.8.6R (UK Listing Rules). They set out how NEXT incorporates climate-related risks and opportunities into governance, strategy, risk management, what we are doing to reduce our environmental impact and our key metrics and targets.
Our ESG governance framework
Our governance structure around ESG-related activities is relatively simple. This allows emerging issues and matters for decision to be escalated quickly.
The Board has delegated oversight of ESG activities to the Audit Committee. It decided that this was appropriate given the increasing focus on the potential risks and financial impacts associated with climate change in particular. The Committee’s remit includes:
- Monitoring progress against climate-related goals and targets.
- Keeping under review the Company’s ESG risks and opportunities.
- Keeping under review the materiality of climate-related risk and its impact on the financial statements.
- Monitoring adherence to externally applicable sustainability codes and principles.
ESG is a standing agenda item at each Audit Committee meeting.
Wider governance arrangements
There are wider governance arrangements in place to support the Audit Committee, and ultimately the Board, in discharging their responsibilities. An ESG Steering Group has been established which meets quarterly to oversee the delivery of our action plan and improvement roadmap, ESG targets and emerging ESG risks. Climate-related issues are central to the ESG matters that the Steering Group considers. The key areas of focus of the ESG Steering Group are as follows:
The Steering Group is chaired by the Company Secretary & Central Finance Director. It is cross-functional; members include senior management from the Central Finance and Product teams as well as the Head of Supplier Ethical Compliance and the Head of Product Legislation & Sustainable Development.
The Group Finance Director, Amanda James, is the executive sponsor of ESG activities and directs the activities of the Steering Group. She meets regularly with the key members of the Steering Group, receives various updates throughout the year and is present at Audit Committee and Board meetings to discuss ESG matters that arise. The Audit Committee receives reports from the ESG Steering Group at each of their meetings. The Committee subsequently updates the Board and makes recommendations as appropriate.
The current approach of the Remuneration Committee to incorporation of ESG metrics in the variable pay arrangements of the executive directors is set out in the Remuneration Report on page 135.
The Company’s senior management is responsible for managing on a day-to-day basis the climate-related risks and opportunities of the business. Over the last three years, management engaged an external climate risk consulting firm to help us undertake a gap analysis against TCFD recommendations, complete a climate opportunity and risk assessment, quantify the financial impacts of those risks and opportunities and conduct a scenario analysis of business resilience under a range of climate scenarios.
Senior management also hold quarterly calls with the Company’s broker to keep abreast of the fast evolving views of institutional shareholders on ESG matters, as well as regularly engaging directly with shareholders, banks, credit rating agencies and proxy advisors. During the year, we engaged directly with many of our shareholders specifically to discuss ESG matters.
Climate-related risks are embedded within our overall integrated risk management framework and any risks identified are subject to the same process and managed in line with all other risks. For further detail on our risk management framework and processes please see page 78 to 82.
The Audit Committee, under delegated authority from the Board, is accountable for overseeing the effectiveness of our risk management process, including identification of the principal and emerging risks. Our ESG Steering Group has also supported this process and helps to identify, monitor and assess current and emerging climate risks and report these to the Audit Committee. Valuable input is received from the Head of Product Legislation & Sustainable Development who is a member of the ESG Steering Group. The output of all climate-related risk assessments is considered by the Board when they assess the principal risks of the business and is also used to direct focus to our ESG work.
Identification of climate-related risks and opportunities, and their impact on NEXT’s business, strategy and financial performance
During the year, we refined our assessment of the risks and opportunities posed by climate change and how they might impact our business. We considered the transitional and physical risks and opportunities presented by rising temperatures, climate-related policy, and emerging technologies and agreed the methodology for assessing and quantifying financial impacts.
For the purposes of our assessment, the time horizons we used were as follows:
- Short term: from 2022 to 2025.
- Medium term: from 2025 to 2030.
- Long term: from 2030 to 2040.
The risks identified during our analysis are more likely to present themselves in the medium or long term. Having assessed and modelled the risks, we believe that there is no immediate material financial risk or threat to our business model.
We have considered the potential for the financial statements to be impacted by climate change, with a particular focus on long term assets. Of the assets on our balance sheet which might be considered to be at risk from climate change, the majority of our plant, property and equipment are warehouses, retail stores, plant and machinery and shop fittings in the UK. These assets have a useful remaining life of less than 10 years other than the leases on our Head Office and warehouses. These assets are not considered to be at risk of any physical impacts or transitional risks arising from climate change. Please see further information in our Group Accounting Policies, on page 189.
Even though there is uncertainty around the time horizon over which climate risks will materialise, stakeholder expectations and regulatory attention could develop at pace, impacting the rate at which the business may need to cut carbon emissions. We recognise that we will need to keep abreast of future climate change legislation as well as consumer preferences. The retail sector is faster paced than many and there are likely to be changes in the way retailers do business in the next few years. However, we have a strong track record of evolving at pace and we are confident that we can react accordingly.
The risk management recommendations arising from our climate change scenario analysis (further details on pages 95 to 96) were:
Policy/Regulation: It is likely that increased policy and regulation will have the most significant financial impact on NEXT over the longer term. The most significant thing the business can do to reduce exposure to this risk is to reduce the carbon intensity of its supply chain and operations.
Market: Climate change is expected to impact the supply and demand for certain commodities, products and services. NEXT can mitigate this risk by continuing to maintain balanced and diverse sourcing routes and product suppliers.
Physical: It is through playing our part in reducing the carbon intensity of our operations, that we will in turn reduce the physical climate-related risks that impact our business.
We are at the start of a complex and challenging journey and our strategy will continue to be refined. Our environmental strategy is informed and driven by:
- Industry trends with a potential environmental impact.
- The direct and potential impact of climate change on our operations, identified through assessing our risks and opportunities in the short, medium and long term and also climate change scenario analysis.
- Our commitment to reducing our Scope 1, 2 and 3 emissions, which have been set to align with the Science Based Target Initiative (SBTi) footprint approach and methodology. Our Scope 1 and 2 targets are consistent with achieving a 1.5 degree reduction in line with the SBTi pathway. We gained SBTi approval for our targets in July 2021.
Industry trends can create shorter term risks and opportunities, as was evident during the pandemic.
Our impact on the environment, either directly or indirectly, occurs throughout our value chain. Much of the value chain is outside our direct control as we do not source raw materials directly. The majority of our emissions are embedded within the products we purchase and within our supply chain, as illustrated in the chart below. We are creating more sustainable ways of working within our own operations so that we can minimise our impact on the environment.
The retail industry has an increasingly important role to play in limiting its environmental impact, particularly given emerging trends in recent years. These include:
Our climate change scenario analysis
To further understand and explore how potential climate risks and opportunities could evolve and impact our business over the medium to longer term, the TCFD recommends undertaking climate scenario analysis. Climate scenarios are hypothetical plausible future states under different levels of global warming and states of transition to a low carbon world. They provide a forward looking view into how different types of climate-related risks and opportunities may impact an organisation. There are a number of scenarios that have been developed by scientific organisations which are publicly available and widely used within TCFD scenario analysis.
Scenarios and timeframes assessed
The TCFD specifically recommends that organisations consider a set of scenarios, including a ‘2°C or lower scenario’ in line with the 2015 Paris Agreement. This low carbon scenario is centred on ‘transition’ risks and looks at the rapid changes, such as policy, technology, market and reputational risks, that will be needed to cut emissions in line with the Paris Agreement. The scenario analysis should also consider ‘physical’ risks, such as temperature rise, sea level rise, and changes to the frequency and severity of extreme weather events, including droughts and storms. This is most relevant to our supply chain, the majority of which is based in Asia.
We examined three climate scenarios against two timeframes for the purposes of our analysis. The time frames we selected were to 2030 and 2040, to align with our long term planning horizons and with the British Retail Consortium commitment to net zero by 2040.
The three scenarios we considered were as follows:
As NEXT grows and changes, and the reference data evolves, we intend to periodically review the scenarios and timeframes we choose to apply in our analysis and refine them as needed.
Overview of our findings
The headline implications for the resilience of our business, as summarised by reference to our scenarios, are:
The analysis suggests that NEXT is most exposed to transition risk up to 2040. This is due to:
- The potential for significant exposure to new Scope 3 emissions costs.
- The ability to manage physical risks to the supply chain via a diverse supplier base and agile procurement practices. NEXT already has this ability, therefore it does not require any investment or changes in approach.
The scenario analysis has confirmed that our mitigation actions to 2040 should focus on transitional risks, and critically on the reduction of carbon and environmental impacts on which NEXT may be taxed or regulated. The impacts of the physical risks under all scenarios are relatively modest under both time horizons, but become much more pronounced from the 2050s onwards.
Our main opportunity is reduced energy spend through energy-saving measures.
What we are doing to reduce our environmental impact
Our key current and planned initiatives are set out below.
1. Source 100% of main raw materials through known, responsible or certified routes by 2025
We do not source raw materials directly, so our main focus is on educating our supply chain partners, working closely with them to influence positive sourcing and manufacturing decisions, and increasing our visibility of the different tiers of our supply chain to ensure the materials used in our products are sourced and manufactured responsibly. We have a clear responsible sourcing strategy to source 100% of main raw materials through known, responsible or certified routes by 2025.
In 2021, we started labelling most NEXT products containing at least 50% of a 2025 approved raw material. This makes it easier for customers to identify sustainably sourced items.
2. Reduce emissions caused by transport
One of the main elements within our control is around our Scope 1 transport emissions. We have set up a working group in our Retail Distribution Transport team to develop a strategy for fleet decarbonisation, covering both electric and alternative fuel vehicles. Currently, we are constrained by the range of electric vehicles which do not yet meet our operational requirements. However, we expect this to change in the near term at which point we can start to replace our van fleet with electric vans from 2023. For larger heavy goods vehicles, we expect a viable electric option to be available in 2023.
Our ambition is to start replacing our HGV fleet with electric HGVs around this time, assuming they are operationally viable.
We recognise that technology may move away from electric in the future and we are therefore also investigating hydrogen as an alternative fuel.
During the year, we signed up to EV100 and committed to switching our car and van fleets to electric vehicles by 2030. We are installing charging points across all staff sites and all customer sites where car parks are for our sole use.
3. Reduce our Scope 3 emissions by encouraging our supply chain to improve energy efficiency and reduce carbon emissions
To help support our work on encouraging and supporting our key suppliers to decarbonise their operations, we joined the Sustainable Apparel Coalition during 2021. This gives us access to a suite of tools to support the standardised measurement of sustainability from our supply chain, using the Higg Index. In addition, we supported the creation of the BRC’s Climate Action Roadmap. This is a framework to guide the retail industry to net zero by 2040. As a founding signatory to the Roadmap we commit to working with other retailers, suppliers, Government and stakeholders, and to support customers, to collectively deliver the industry’s net zero ambition.
Our next step is to incorporate the data we collect from the Higg Index sustainability tool into the different tiers of our supply chain, identify the areas in need of greatest improvement and communicate the importance of our ambitions to our suppliers.
4. Waste, packaging and recycling
We have exceeded our target of diverting more than 95% of operational waste from landfill by 2020 for reuse or recycling. In 2021/22 we diverted 97% of operational waste from landfill.
We continue to identify ways to reduce the amount of packaging and eliminate avoidable plastics in product packaging such as PVC, polystyrene and acetate. Having trialled paper carrier bags, we have made the decision not to move away from plastic bags made from recycled plastic at this time. This is due to a number of reasons, including customer feedback, the larger overall environmental impact of paper bags and issues with damage from wet weather. We continue to focus on reducing the environmental impact of plastic packaging.
We are a signatory to the UK Plastics Pact, which sets out our commitments to the following by 2025:
- Eliminate problematic or unnecessary single-use packaging through redesign, innovation or alternative reuse delivery models.
- 100% of plastic packaging to be reusable, recyclable or compostable.
- 70% of plastic packaging to be effectively recycled or composted.
- 30% average recycled content across all plastic packaging.
All our packaging is recyclable, although not all local authorities recycle all materials. In 2019 we introduced 100% recycled content carrier bags (excluding the handles) in our retail stores and we recycle any bags returned to us by our customers.
In 2021 we introduced a minimum of 30% certified recycled materials into our product and Online packaging, and we plan to increase this to 100% where possible and when certified materials are more readily available. With over 85% of all Online returns being returned to a store by our customers, we are able to collect and recycle all the plastic packaging customers return to us via this route.
In addition, we reuse or recycle all hangers used in our retail stores, and accept back unwanted hangers from our customers for recycling. The recycled hangers are either reprocessed for reuse or made into new hangers. In 2021, we collected 111 tonnes of hangers for reprocessing with 29 tonnes of hangers reused within the supply chain and 82 tonnes remade into new hangers.
In 2021, we launched a customer packaging collection trial in a selection of our stores to make it easier for our customers to return any unwanted packaging for NEXT to reuse or recycle. The trial has been successful and is being rolled out to over 100 additional stores with the ambition for customer packaging recycling to be available in all stores by the end of 2022.
Our carbon reduction targets have been set to be in alignment with the requirements of the most recent climate science. Our target ambition is aligned with the 1.5 degree reduction pathway and was validated by the SBTi in 2021.
The SBTi developed the first science-based standard for corporate net zero targets in late 2021. This aims to translate companies’ net zero targets into action that is consistent with achieving a net zero world by no later than 2050. We are currently reviewing the standard and considering where to position our net zero target, having followed a considered and thorough process. We are a signatory to the British Retail Consortium’s Climate Action Roadmap, a framework to guide the industry to net zero emissions by 2040. Through the Roadmap we commit to working with other retailers, suppliers, Government and other stakeholders, and to support customers to collectively deliver to the industry’s net zero ambition.
We have a number of targets against which we measure progress, as set out in the table below. As anticipated, our Scope 1 and 2 absolute carbon emissions have increased year-on-year as our warehouses and stores were closed for more of 2020/21 due to COVID restrictions.
Illustrated below are some of the many carbon reduction initiatives we are working on.
Sustainability Accounting Standards Board (SASB)
In 2020, we carried out a full gap analysis against the SASB metrics for the Apparel, Accessories and Footwear industry (Apparel). We identified a number of policies, procedures and controls in place to support our goal to be a sustainable retailer working to reduce our environmental and social impact. We also identified some improvements that could be made. The following sets out how we comply with the SASB metrics together with progress on our remediation plan. More information can be found on our website at nextplc.co.uk/corporate-responsibility.
The Apparel metrics cover four broad areas:
- The Management of Chemicals in Products (Chemicals).
- Environmental Impacts in the Supply Chain (Environment).
- Labour Conditions in the Supply Chain (Labour).
- Raw Materials Sourcing (Raw Materials).
In the areas of Chemicals, Labour and Raw Materials we are well on our way to full compliance with around 85% of the compliance metrics met.
Last year, with regards to Chemicals, our key actions were to benchmark our suppliers against the standards within the Zero Discharge of Hazardous Chemicals (ZDHC) initiative, update our Chemical policy and place it in the public domain. We have developed a programme having prioritised our suppliers, and have a plan to benchmark our main suppliers over the next three years against ZDHC requirements. Our Chemical policy has been updated and is available on our corporate website.
For Labour and Raw Materials, our main efforts were around improving our existing policies and internal metrics to align more closely to the SASB requirements. While our compliance in these areas is good, we continue to work on disclosure which is covered in more detail within our Corporate Responsibility Report on our corporate website. Our policies are available to our suppliers via our Supplier Communication platform, and we also host key policies on our corporate website at nextplc.co.uk.
During the year, we became a member of the Sustainable Apparel Coalition which will significantly improve how we are able to measure our suppliers’ environmental performance across energy use, chemicals, waste and water use and discharge, where the main impact is at Tier 3 in our supply chain, by allowing us to capture the required level of data in a standardised format.
The table below reflects our progress towards compliance with SASB and sets out details of where to find further information.