Tesco PLC – Annual report – 26 February 2022
Industry: retail
Climate. (page 40)
Commitment
To be carbon neutral across our Group operations by 2035 and net zero across our full value chain, aligned to 1.5˚C, by 2050.
Climate change remains the greatest environmental threat we face, and as such is recognised as one of the Group’s principal risks. The effects of climate change have the potential to threaten our own business operations, the operations of our suppliers’ businesses and the livelihoods of the farmers and workers in our supply chains, in addition to changing the way customers shop and eat. We must play a leading role in helping to avoid the most severe consequences. Urgent, collective action is required to meet global climate goals and protect the health of the natural environment upon which we all rely.
The food sector is responsible for over one third of greenhouse gas (GHG) emissions and as a business, we impact the climate in both our own operations and our supply chains. In 2021, we completed a new cradle-to-customer carbon footprint analysis for our Group operations to understand the main sources of emissions and to help us develop reduction strategies, aligned with our net zero commitment. More than 90% of our total emissions footprint lies within our value chain – our Scope 3 indirect emissions.
This includes emissions associated with producing the things we sell and customers using what they buy from us. While reducing Scope 3 emissions represents a significant challenge, we must drive transformative action across the food system.
In 2021/22, our direct GHG emissions (Scope 1 and 2) increased slightly on the previous year due to methodology improvements in our data collection and operational changes resulting from the easing of COVID-19 restrictions also adversely impacting our emissions.
Despite a step back from last year’s performance, we remain on track to meet our target of becoming carbon neutral across our Group operations by 2035, aligned to a 1.5˚C trajectory. This year, we achieved a 52% absolute reduction in our own operations emissions on a 2015 baseline. Further information on the steps we have taken to drive energy efficiency and transition to renewable sources are contained within the Streamlined Energy and Carbon Reporting disclosure on page 103.
In September 2021, we announced our extended commitment to be net zero across our value chain, aligned to a 1.5˚C trajectory by 2050, covering all indirect Scope 3 emissions. This was informed by updating our Group carbon footprint to align with new methodology developments and the inclusion of new data points such as deforestation and land conversion. Further information on our 2019/20 carbon footprint can be found on page 42. Through this process, we have been able to identify our material emissions hotspots and focus on modelling decarbonisation interventions relevant to each hotspot. This work will be concluded in 2022/23 and support the revalidation of our expanded science-based targets.
We continue to engage our direct suppliers, requesting that all of our direct suppliers report on emissions to help us co-design our decarbonisation pathways. This year, to support these efforts, we undertook webinars and online training to support suppliers on their decarbonisation journeys. Through the Tesco Supplier Network, we also provide bespoke services and online tools to all Tesco suppliers.
Recognising that we cannot achieve our climate ambitions alone, we have continued to promote cross-industry action through our partnership with WWF and involvement in industry initiatives such as the Courtauld Commitment 2030, The Aldersgate Group and The Climate Group. Together we are supporting the development of positive public policy mechanisms to deliver low-carbon economies in the countries where we operate.
For more information on our approach to climate and energy management please visit www.tescoplc.com/sustainability/reporting-hub.
Page 103 extract
Streamlined Energy and Carbon Reporting (SECR) disclosures
A breakdown of our greenhouse gas (GHG) emissions in accordance with our regulatory obligation to report greenhouse gas emissions pursuant to section 7 of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 and the Companies (Directors’ Report), and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 can be found on page 40. The below summarises some of the initiatives we have implemented to drive energy efficiency across our operations in support of our net zero ambitions:
- LED lighting upgrades across the entire UK estate: this included completing lighting upgrades in over 130 stores, resulting in all sales floors, distribution centres and customer fulfilment centres having LED lighting.
- Installation of refrigeration technology across all our UK stores: we have installed aerofoils in all large format stores and most of our Express stores have fridge doors which are saving 15% energy use.
- Invested in high-efficiency ventilation fans: the majority of our large format store ventilation units, salesfloor air handling units and extract fans have been upgraded with more efficient fans. We will complete all store upgrades within the next two years.
- Invested in new energy monitoring platform: we are migrating to an enhanced energy monitoring system that will help us to identify opportunities to reduce energy consumption across all our UK sites.
- Rolled out Lightfoot® telematics in our home delivery vans and continued to use Fleetboard in our distribution fleet: both systems improve driver efficiency and miles per gallon, with our home delivery vans reporting a 7% saving across our UK vehicle fleet.
- Optimising distribution and home delivery operations: which continues to reduce road miles and secure efficiencies, including upgrading vehicle tyres.
Task Force on Climate-related Financial Disclosures
TCFD.
Climate-related financial disclosures
In addition to this TCFD report, we provide further information on climate change in the Principal risks and uncertainties section, on page 34 and detail on our greenhouse gas emissions can be found on page 40. We continue to consider the potential financial impacts of climate change in the cash flow scenario modelling within our viability statement on page 38 and impairment note on page 149.
Governance
We have implemented an enhanced climate governance framework this year, encompassing the Board, its associated Committees and the Executive Committee.
The Board is responsible for the long-term success of the Group and has ultimate responsibility for climate-related risks and opportunities. The Board most recently discussed climate-related risks in March 2022. The Corporate Responsibility Committee oversees the Group’s social and environmental obligations, including climate-related matters and is responsible for monitoring progress towards our commitments. The Corporate Responsibility Committee meets four times each year and has discussed climate on every occasion during 2021/22, with similar plans to discuss at all 2022/23 meetings. Further information about the activities discussed at the Corporate Responsibility Committee can be found on page 66. In addition to the Corporate Responsibility Committee, the Audit Committee also monitors climate-related risk management, internal controls and reporting requirements.
From 2022, the Executive Committee will review our progress against our climate targets twice each year, supported by an integrated performance dashboard. The Executive Committee will next discuss climate change in June 2022 to conduct a retrospective review of 2021/22 and in December 2022, to facilitate a forward-looking discussion of our climate-related plans for 2023/24. These discussions are led by the Chief Product Officer, as executive sponsor of our net zero climate commitment.
Strategic investments considered to advance the achievement of our climate objectives will be discussed and approved by the Executive Committee.
Our updated governance structure builds upon the previously mentioned forums and is divided into two streams: strategic oversight and implementation and compliance, both of which feed into the newly created Group climate committee, chaired by the Chief Product Officer, with the aim of enabling the Group to accelerate decarbonisation initiatives and further embed climate in our corporate strategy.
The Group climate committee, which meets quarterly, is responsible for maintaining oversight of progress made against our interim decarbonisation milestones, and for holding the new steering groups to account for delivery of the operational and supply chain decarbonisation roadmaps. The committee is also responsible for oversight of climate risk management, including assessing and managing climate-related risks and opportunities on the Group risk register where climate is a principal risk, and for our climate-related disclosures.
The Group climate committee comprises representatives from significant business functions which materially influence our ability to achieve both our climate targets and regulatory obligations.
Three steering groups underpin the implementation and compliance component of our climate governance structure. They are responsible for delivering initiatives to meet operational climate targets and interim milestones, propel decarbonisation in our supply chain and enable the business to report our progress. These steering groups are chaired by senior leaders: our Chief Property Officer leads operational decarbonisation (Scope 1 and Scope 2), our Group Quality Director leads Scope 3 value
chain decarbonisation and our Group Communications Director leads reporting and disclosure. The steering groups are more broadly supported by a number of cooperative workstreams that each focus on carbon reduction within material emissions hotspots across the business.
Strategy
As part of our commitment to reach operational carbon neutrality by 2035 on a 1.5˚C pathway for Scope 1 and 2, we have set a target to reduce our absolute carbon emissions by 60% by 2025 compared to a 2015 baseline.
Since setting our operational science-based target in 2017, we have realised opportunities through driving greater efficiency in key processes across operations, including improving the efficiency of our refrigeration units and reducing refrigerant emissions across the store and distribution centre network through switching from fluorinated gas to CO2 systems. In addition to reducing emissions from logistics through a range of fuel efficiency maximisation initiatives, such as improved route planning, we are also committed to the electrification of transport. As signatories to the Clean Van Commitment and EV100, Tesco has committed to a fully electric home delivery fleet by 2028, with almost 50 vans rolled out at the end of 2021, including in Glasgow at the time of COP26. Alongside this continued rollout, we are exploring the opportunity to electrify more of our heavy goods vehicles (HGVs) including a current pilot involving two electric HGVs, which we expect to replace 65,000 diesel-fuelled road miles with clean energy. We are utilising greener distribution beyond the road and have partnered with Direct Rail Services (DRS) to use refrigerated rail freight in the UK, in addition to our existing rail service from Spain. The new service operates twice a day, seven days a week and will save Tesco 7.3 million road miles per year.
We met our 2030 ambition to switch to 100% renewable electricity in our own operations across the Group 10 years early, through a combination of direct sourcing and renewable certificates. We are now moving to ensure the majority of this renewable electricity comes from direct sourcing, thereby boosting the UK’s overall renewable capacity. In support of this, in 2019, we announced a major project to source renewable electricity directly from five windfarms and four solar farms. In July 2021 the third of these windfarms opened in Halsary, Scotland. Once all renewable energy sites are operational, they will strengthen our energy resilience and supply around 26% of our electricity from renewable sources, strengthening our current position of 100% renewable electricity usage across the Group based on certificates.
We quantified and disclosed our 2015 baseline Scope 3 emissions footprint in September 2021, accompanying our 2050 commitment to achieve net zero emissions across the entire value chain. We have subsequently calculated our Group carbon footprint for 2019/20, covering Scope 1, 2 and 3 emissions which includes the sourcing of raw materials and food production, where emissions are generated both upstream in activities such as agriculture, manufacturing and logistics; and downstream, through the use of Tesco products, including food waste and end-of-life disposal, all of which are affected by customers’ dietary choices and consumption patterns. Following expansion of our net zero commitment, we are currently revalidating our updated science-based targets with the Science-Based Targets initiative (SBTi).
The emissions from Tesco’s products and supply chain comprise more than 90% of our total emissions footprint. Upstream activities account for 50% of our total carbon footprint, of which 30% is driven by emissions generated by the rearing, growing and transportation of agricultural products, mainly within the animal protein categories. The remaining 20% is linked to the manufacture of our product ranges, including packaging, and production of the fuel that we sell. Downstream activities, on the other hand, represent around 40% of our footprint, primarily emissions resulting from customers using our products: cooking at home, preparational processes including washing and drying products, and the emissions associated with the fuel that customers buy from our petrol filling stations. Consequently, we identify our emission hotspots to be the production of our most emission-intensive, high-demand products (by volume and in particular, animal protein, grains and fresh produce), consumer use of products and consumer use of fuel that we sell.
Given that we do not control our Scope 3 emissions, due to their indirect nature, achieving net zero across our value chain will entail Government intervention, substantive coordination and collaboration with suppliers, as well as strategic communication with our customers. As such, our ability to influence carbon reduction presents both a risk and an opportunity to our decarbonisation strategy and net zero commitment – the success of our relationships both upstream and downstream will prove critical. We already actively engage with our key suppliers to press for change, and currently over 300 suppliers are reporting emissions data on a yearly basis.
Additionally, we have engaged with external climate consultants to leverage their expertise and model key mitigation interventions, enabling us to understand both the mitigation potential and associated cost over time in order to build long-term decarbonisation pathways, in alignment with the UK Government requirement for listed companies to submit transition pathways by 2023. These decarbonisation pathways assess both active reductions, including GHG mitigation activities implemented jointly with our supplier base, as well as assumptions on passive reductions, including processes beyond our direct or indirect control that will ultimately contribute to the abatement of our footprint (such as policy changes, greening of the grid etc.).
Although Tesco’s expanded net zero commitment was announced in 2021, our ambition to build a more sustainable supply chain has existed for many years. For example, deforestation-linked soy is a major contributor to the emissions associated with beef, pork and poultry. The complexity of the global supply chain means collaboration is essential and we have been at the forefront of industry action, advocating for change and spearheading the UK Soy Manifesto, where retailers, along with other leaders in the food, beverage and consumer goods industries which together represent almost 60% of all UK soy bought each year, agreed to remove deforestation-linked soy and feed from the supply chain by 2025.
In 2017, we committed to implement the TCFD recommendations and we developed our initial scenario analysis based on a materiality assessment of the areas of the business most exposed to the effects of climate change. The table below summarises the potential impacts to our animal protein categories, and UK property estate by 2030 under both a physical and transition risk scenario, including the annual operating profit impacts. These impacts are before mitigating actions and represent the majority of the risks quantified in our initial scenario modelling work. The time horizon over which the risks described impact the business largely depends on the timing of any introduction of tax legislation. Further context is provided in last year’s TCFD disclosure starting on page 26 of our 2020/21 Annual Report.
We also quantified the risks described in the table above under a 4˚C scenario, which considered ‘physical risks’ associated with a systemic failure to address climate change. Given that this analysis showed these impacts to be less material to Tesco, and noting the potential for significant variation depending on the assumptions used, we have not separately disclosed the smaller impacts.
In light of our updated carbon footprint and climate ambitions, and reflecting the increasing integration of climate change throughout our business, we are now working to further build our internal capabilities in climate-related scenario modelling, and have partnered with Risilience, part of the Centre for Risk Studies at the University of Cambridge Judge Business School to create a digital version of our value chain. We will use this to model several warming scenarios across varying time horizons, enabling us to significantly enhance our climate-related risk modelling, develop effective mitigation plans, stress test organisational resilience and improve the execution of our strategy to deliver net zero.
Climate-related risks and opportunities are increasingly integrated into the business’s financial planning, with our multi-year Long Term Plan including capital investments in electric vehicles, regulatory and legislative changes and operational efficiencies. The recently established Group climate committee is responsible for reviewing strategic sustainability investments and as such, the committee comprises members from our Treasury and Group Finance functions. The Executive Committee is responsible for approving all investments, while the Audit Committee maintains its oversight role.
More information on our greenhouse gas emissions can be found on page 40.
Risk management
Following the establishment of climate change as a standalone principal risk in 2020/21, reviews have been conducted at various levels including the Executive Committee and the Board. This includes the identification and documentation of climate-related risks and the review and consideration of appropriate risk responses. This consolidated view provides an input to our review of the Group risk profile.
The most recent principal risk review was presented to the Executive Committee in November 2021 and the Board in March 2022. The decision was taken to both amend and expand the scope of the risk description to reflect the increased focus on ‘Planet’ as part of our refreshed purpose and increasingly ambitious sustainability targets. The Board is conscious of the complexity and scale of our value chain, in conjunction with the expectation for progressive regulatory requirements governing climate reporting, and the Executive Committee concluded that the risk may accelerate. Further information about principal risks and uncertainties can be found starting on page 31.
Following the expansion of the net zero commitment and establishment of strengthened climate governance, Tesco PLC has reviewed and refreshed the approach to further embed the management of climate-related risk and opportunity into local markets and categories. The business has created climate and sustainability task forces for our ROI, CE and Booker businesses, and for categories including non-food and Tesco Mobile.
Metrics & targets
Our net zero strategy is underpinned by three key commitments. We have committed to reduce Scope 1 and 2 market-based emissions by 60% by 2025, to be carbon neutral across our own operations by 2035 and to achieve net zero across our value chain by 2050.
In recognition of how critical sustainability is to our business success, our long-term Performance Share Plan will, from 2022, consider a number of sustainability metrics for the first time. Our 2025 target to reduce Scope 1 and 2 emissions by 60% will be included. For more information on the sustainability metrics included within our long-term Performance Share Plan, effective from financial year 2022/23, please refer to page 82.
Detailed greenhouse gas emissions, including disclosure across Scope 1, 2 and selected Scope 3 can be found on page 40. The related risks are those set out in the strategy section above.
Next steps
Our priorities in 2022/23 will include further developing our internal capabilities in climate-related scenario modelling through our partnership with Risilience, part of the Centre for Risk Studies at the University of Cambridge Judge Business School, enabling us to disclose the risks and opportunities that the business faces over a variety of time horizons, including how we intend to report and measure our progress.
Listing Rule 9.8.6R Compliance Statement
Tesco PLC has complied with all of the requirements of LR 9.8.6R by including climate-related financial disclosures in this section (and in the information available at the locations referenced therein) consistent with the TCFD recommendations. We will further develop the quantification of climate-related risks and opportunities, including expanding our scenario modelling to cover multiple time horizons in partnership with Risilience, part of the Centre for Risk Studies at the University of Cambridge Judge Business School. The initial output of this work will be disclosed in our 2022/23 Annual Report.
Principal risks and uncertainties (extract)
Accounts examples 