Earlier this month the world’s largest LEGO store opened in Sydney’s CBD. Visitors to the two-level 900sqm store marvelled at massive LEGO creations such as a Sydney Harbour Bridge with 549,378 bricks that took 3,630 hours to build.

LEGO is the world’s largest toymaker and rated by Reptrak as the world’s most reputable company. The Danish group continues to boost sales at a time when its competitors are struggling and it is busy expanding its global manufacturing network.

LEGO also plans to spend large sums over the next few years reducing its carbon footprint through using more sustainable materials and more renewable energy. It has a target to reduce emissions by 37 per cent by 2032 and it has pledged to achieve net-zero emissions across its full supply chain by 2050.

ESG Hypothetical

The privately-held LEGO is 75 per cent-owned by members of Denmark’s Kristiansen family and 25 per cent-owned by the LEGO Foundation (which directs its share of LEGO profits to “creating opportunities for children to learn through play”).

But what if LEGO was a publicly traded company and you were an asset owner or manager? Would you buy or hold its shares? At first blush, LEGO looks like – in more ways than one – a model company. From what you have read so far, it might seem to sit very well in, say, your ‘Global Sustainability Leaders Fund’.

To further set the scene, a number of your existing ‘sustainability leaders’ are causing you some headaches. Their ESG rhetoric has not been matched by action. Their climate transition strategies no longer seem credible. You fear you have been deceived by greenwashing, obfuscation and elegant euphemisms.

Investee engagement is not producing much in the way of results. However, you have decided to persist rather than divest. These inconsiderate investees should really be in a ‘sustainability laggards’ fund but you have been consoling yourself by the fact they have been helping you outperform your benchmark index.

Acrylonitrile butadiene styrene (ABS)

After a little research, you learn that LEGO’s iconic bricks are made from acrylonitrile butadiene styrene (ABS), a thermoplastic used to make light, rigid, moulded products such as pipe, automotive body parts and protective headgear. The diagram below shows how ABS resin is made.

Source: Cradle-To-Gate Life Cycle Analysis Of ABS Resin. Franklin Associates, 2022

Petrochemical plastic makes you a little nervous until you see that in mid-2021 LEGO unveiled a prototype brick made from recycled plastic as “the latest step in its journey to make LEGO products from sustainable materials”. A one-litre recycled PET (rPET) bottle would provide enough raw material for ten 2 x 4 LEGO bricks.

But your worries return when you realise that two months ago, LEGO suddenly announced it had ditched its rPET prototype because “ultimately it wouldn’t have helped us reduce carbon emissions”, believing “there are potentially better alternatives that will help us meet our sustainability ambitions”.

LEGO was very philosophical: “This is the nature of innovation … Some things will work, others won’t”. This may be true, but you are concerned LEGO is sounding a little like your other troublesome investees.

After five years of materials scientists and engineers testing over 250 variations of PET materials and hundreds of other plastic formulations, LEGO found producing bricks with recycled plastic would require extra materials and energy (resulting in higher emissions) to make them durable enough. There was also the challenge of matching the colour palette and the high gloss shine of its traditional bricks). LEGO says it will continue working on a solution.

On the right path?

You are now asking yourself whether LEGO will be able to meet its 37 per cent emission reduction target, especially when you notice LEGO’s emissions have been rising over the last few years.

Source: LEGO 2023 (numbers are tCO2e)

LEGO says relax. “Long-term emissions reduction is not a straight line, but we’re on the right path. We know the challenge is large and urgent, and we are prepared to do what it takes. We’re making investments and business decisions in sustainable materials innovation, manufacturing technology and our supply chain.

“These actions combined will increase our carbon footprint in the short term but will ultimately allow us to hit our science-based target in 2032 and reach net-zero by 2050,” the company reassures.

In August this year – just a couple of months before its shock announcement – LEGO said it would work with the Science Based Targets Initiative (SBTi) “to develop the net-zero target over the next two years, whilst developing a climate transition plan demonstrating a roadmap to achieving the target”. You see the words ‘plan’ and ‘roadmap’, but you can’t find the word ‘action’.

Source: LEGO publicity photo 2023

You see that LEGO is in a predicament, being forced to stick with petrochemicals to maintain the integrity of its globally-loved products. Is LEGO operating in a hard-to-abate sector where you can give it some leeway? Or is it just not willing to abate? If this business model continues to produce higher emissions, could LEGO’s bricks risk becoming stranded assets?

CDP gives a ‘C’

Historically, LEGO has scored within the leadership bracket (either an A or A-) of companies reporting their sustainability actions to CDP (formerly the Carbon Disclosure Project). However, last year its CDP Climate Change score dropped to C.

LEGO explains that “our emissions have gone up in the short-term due to a high demand for our products and a subsequent growth in production and product sales. At the same time, the CDP’s scoring methodology became more stringent in 2022”.

Scope 3

Apart from using new sustainable materials for its bricks, LEGO doesn’t have too many other decarbonisation options. A whopping 99 per cent of total emissions are Scope 3 emissions produced within its supply chain (mainly in the processes shown in the ABS diagram). LEGO reminds you of the importance of Scope 3 investee disclosure to properly assess their risk profile and long-term resilience.

Labour issues

You all see that LEGO has production sites in Denmark, Hungary, the Czech Republic, Mexico and China. In its 2023 First Half Year Sustainability Update LEGO says that after increasing the scope of its labour audit programme to include “agency workers at our suppliers’ manufacturing sites”, it found a “minority” of agencies used by suppliers had not complied with requirements, such as “providing consistent working conditions”.

As a result, LEGO is unlikely to meet its 2023 target relating to “suppliers with higher-risk nonconformities”. You note that the ‘minority’ was a not insignificant 45 per cent.

LEGO listens

However, while all this analysis has been fine, at the end of the day, you know that when it comes to investment decisions, you should just trust your gut.

When making its net zero pledges in August, LEGO said: “We know that children are looking to us to do what’s right. Caring for the environment is one of their top concerns and we receive hundreds of letters a year with great ideas from kids on how we can make a difference.

“They are holding us to account, and we must set ambitious goals and take meaningful and lasting actions to protect their futures.”

Source: LEGO 2021

If LEGO lets its young consumers hold the company to account, then you know it will allow your Global Sustainability Leaders Fund to do the same if it doesn’t deliver on its promises.

*Disclosure: The author has fond childhood memories of LEGO that are difficult to block out.

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