BSR Conference 2014: Karl Johan Persson, Managing Director and CEO H & M Hennes & Mauritz AB

Thank you. Great to be here, and thank you very much for inviting me to speak about H&M's commitment to sustainability and to give some examples of what we do and what we believe will drive positive change. My grandfather founded the company in 1947. He often spoke about the importance of long-term thinking, not only thinking about maximizing short-term profits. His view was that businesses have a wider responsibility than just maximizing profits. Before he passed away in 2002, we spoke often about ethical business. He often brought up that he wanted to sleep well at night, to go to stores and look customers and colleagues in the eyes, and to feel good about the business being run in the right way.

Before I give examples of what we do, I would like to say a few words about the garment industry, and in particular about trade with low-wage countries. Since 1990, according to the World Bank, the number of people living in extreme poverty has fallen by some 990,000 every day in countries that have developed export industries like the garment industry. In Bangladesh, people living in extreme poverty have halved since 1991. The garment industry is a phenomenal development escalator — a key route out of poverty, creating a lot of jobs, particularly for women. It's often their first paid job, a great driver for independence and liberation. I say this because it's often forgotten in the debate. That being said, there are still a lot of challenges connected to the garment industry that need to be addressed by us, by other brands, and by other stakeholders. We can't just lean back and be happy with the fact that jobs are being created. We need to act, and we need to act faster.

For us, there needs to be a solid foundation for sustainability work. We believe it consists of three things. First, sustainability work needs to be integrated into all parts of the business — it cannot be an isolated function. It has to be part of design, production, logistics, sales — every function and country needs sustainability goals on which they are measured and followed up. There needs to be a head of sustainability who is part of the management group. Sustainability topics need to be discussed in the boardroom, with annual sustainability reports in place. It should be completely integrated into the company's DNA and values. Second, we think it's very important to dare to take a long-term view. If long-term and short-term goals collide, you should do what's best for the company in the long term. That can be really tricky, especially for listed companies with pressures from investors and analysts on quarterly results. But good sustainability work requires big investments. We have to be prepared to sacrifice short-term profits for long-term profits, and trust there is a good business case long-term. Third, we have to have a collaborative mindset. This is not something one company can drive in isolation. We have to work together with other brands, with global trade unions, the ILO, NGOs, and innovators. All of this makes for a really good foundation for sustainability work.

I would like to give examples on what we are working on, limited to one on the social side, one on the environmental side, and one on transparency — all three that we believe will have a big positive impact on the world. Starting with the social side: a really exciting project connected to fair living wages. Last year we launched a fair living wage roadmap, developed with experts from the ILO, NGOs, and global trade unions. It's a four-way collaboration between us, our suppliers, the suppliers' workers, and the governments from where we source. Higher wages will mean higher prices — are we prepared to pay more without passing costs to customers? The answer was yes. It's already affecting margins, but we see it as an investment in the customer offering. We also saw potential to improve our purchasing practices — better dialogue with suppliers so they can plan capacity better, buy more evenly, and avoid production peaks. We're working closely with suppliers and started with Fair Wage Network, an independent organization that reviewed several hundred of our suppliers. They developed a method we're now testing in three role model factories — two in Bangladesh and one in Cambodia — with a five-year commitment and 100% of capacity. I visited Bangladesh a month ago. The signs are promising: overtime reduced by 50%, wages increased, better wage structures in place, better dialogue between management and workers, and productivity is up. We will scale this to all our strategic suppliers by 2018 at the latest. We're also investing heavily to empower workers through training, technical skills, knowledge about rights, and improved negotiation skills. Finally, we're working with governments to improve and enforce labor laws and ensure salaries are revised annually. I've met with the Prime Ministers of both Bangladesh and Cambodia to discuss these topics. During the last two years we have seen improvements in these markets. We're nowhere near where we should be, but it's getting better, and I'm very optimistic that this roadmap, together with collaboration, will make a really big difference.

On the environmental side: we want to continue to grow, and in doing that we have to respect the planetary boundaries. The fashion industry is dependent on natural resources. We have to change how fashion is made, learn to do more with less, go from a linear model to a circular model, and do it at scale. Our approach was two-step. First, we launched our global garment collecting initiative last year in all markets and stores, where customers can leave garments — H&M or any other brand — that will be reused for charity or recycled. There's no profit for H&M, but so far we've collected more than 8,000 tons of garments. The most exciting and important part is closing the loop — getting these fibers back into production. We're investing a lot of resources into new materials and research and development to find technical solutions for fibers that can be reused at scale. We're increasing use of recycled materials like Tencel. We've invested in some really exciting projects run by really good people. It's early stages, but it looks really promising. We're optimistic that these innovative people will crack the code and we'll see major positive impact on the environment.

One really exciting area connected to transparency is consumer labeling. We're working with other brands in the Sustainable Apparel Coalition on something called the Higg Index — a tool to measure apparel and footwear products, brands, and suppliers on sustainability performance, taking the entire value chain into account from raw materials to end-of-life solutions. We hope it will be connected to a label on the product, so when a customer comes into a store, sees a product, likes the design, quality, and price, tries it on for fit, they also have a label showing the sustainability performance, so they can make a more informed buying decision. This would put great pressure on us companies to do more. I think it will be really groundbreaking when it happens.

Just to conclude: we want to continue to grow, and in doing that we have to respect the planetary boundaries. Customers will care more and more, colleagues will care more and more about sustainability work, and rightly so. When we put resources into sustainability work, we see it as an investment in improving the customer offering and in becoming an even more attractive employer. We want customers and colleagues to be proud — to know we're conscious about what we're doing and take our responsibilities seriously. As I said, my grandfather founded H&M, so I feel very passionately about it. I care about quarterly profits as well, but I have a long-term perspective and think about future generations of colleagues and customers. Just as he did, I want to feel pride when I look back at my time at H&M — that we gave customers great value for money, great designs, but also had a positive impact on the world.

It goes back to what I said earlier — there's a good business case for it. We have a long-term view at H&M. We've always had that, although we want to deliver good quarterly results as well. But we always choose what's best for the company in the long run. Customers are caring more and more, colleagues are caring more, and in doing that we will strengthen the customer offering even though it's costing in the short term. It's also the right thing to do.

It is a balance. Price is important — for us, for other brands, in all industries. But it's not only that. It's about sustainability work, lead times, proximity to selling markets — we're sourcing from countries in Europe as well. It's about long-term relationships, capacity. When prices go up, like they're doing now in Bangladesh, it's not like we're leaving. We're still there, we're growing, we're paying higher prices. Myanmar and Ethiopia — it's a great opportunity for them, exactly what's needed to create jobs and grow economies. Many years ago we sourced from Sweden and the UK; those countries have moved on. But we have to do it in a responsible way.

We're doing a lot of good things at H&M, but we're not alone. There are many other brands doing wonderful things connected to sustainability. We're collaborating on a lot of initiatives — the Higg Index, Better Cotton Initiative, Fire and Building Safety Agreement, the Fair Wage Roadmap. There are many examples of collaboration, but it should be more.

It's part of the company values — we speak a lot about it, it's part of the culture, and we want people who live the values every day. Then in the more concrete measures, we have it in the goals: all functions and all countries have sustainability goals they are measured on. That connects to recruiting and keeping the right people — not only with great drive and delivering good results, but with good values as well, with a good heart.

I completely agree — it's necessary that we find a way of closing the loop. That's why we're investing so much into these new exciting projects that we believe can be scalable. We're using more and more recycled materials and have goals of 100% sustainable cotton by 2020, increasing every year. When we speak about fast fashion, we want to make fashion affordable for all people, but with good quality — not throwaway fashion, but pieces that last a long time. The major thing connected to fast fashion and natural resources is cracking the code — finding a way to get fibers back into production. I'm optimistic, but it's still early days. I think consumption is good — it drives the economy, creates jobs. I don't think the right way is to consume less of everything; that could have bad consequences on the economy and poverty. Continue to consume, but do it from companies that are responsible and that are innovating to find ways to do more with less.

It's part of the customer offering — the designs, the quality, the price, but also the sustainability work. We think it is more of an advantage in the long term. Today, I don't think many customers are prepared to pay more. We don't charge more, for example, when we have organic cotton, even though it's costing us more — it's an example of where we're investing because we believe it's the right thing for the future. The interest is there, it's growing all the time, and it's not going to stop. Customers are caring more and more, and colleagues as well. There is a slight competitive advantage today, but it will become even more in the future. We see more interest in developed economies — Northern Europe, UK, US — but it's growing in all markets.

We have two things worth mentioning. We developed a new care label together with Welspun, so customers can think about washing more responsibly. As for the Higg Index, it's not yet fully developed — it's a work in progress. The idea is to have a label; what exactly will be in it is not yet finalized, but it will cover the entire value chain from raw materials to end-of-life solutions, both environmental and social sides, with KPIs that are easy for customers to understand. Maybe you could also scan the label and get more detailed information about the product. I'm convinced it will happen — it's just not there yet. As for the marketing research question, I'll have to check with my colleagues who work in the Sustainable Apparel Coalition about what exactly has gone into it, but a lot of work and a lot of enthusiasm.

It goes back to what I said earlier. One is that it should be part of the company culture and values to have that mindset. It is at H&M — it's been like that from the very start. We are listed, but in a way a family company as well, with a long-term perspective. That helps in having that culture. And then it's also in the goal setting — not only setting goals connected to delivering short-term results, but having goals connected to sustainability work with a longer time perspective.

Sorry, I didn't follow. Can you say it again?

We see that trend. A lot of companies are growing in the low price, so-called fast fashion companies, and that is growing. But when we look at what we want to do, it's offer customers good designs, affordable, good quality. We are investing in improving quality so products last longer. All the investments in sustainability work we see as part of the quality. We think it's possible to do both — offer low prices and have good quality while doing good sustainability work.

Yes, but one thing to remember is that we use the same suppliers as many other companies — some in the mid-price segment and some in the high-price segment. Regardless of the price of a product, it doesn't say much about the actual salary for workers. But as I said earlier, with pushing for higher wages, we have to be prepared to pay higher prices. We're not charging customers more, so it's affecting margins — that's part of the sustainability work, just like using more sustainable materials. Customers are not yet prepared to pay for it, it's affecting margins, but we believe it's the right thing to do. We want to stay competitive — if we're not competitive, we cannot do good sustainability work. If we don't do good sustainability work, we cannot be competitive, because customers will like us less and colleagues will like us less. It's all connected.

On the first question: we are a listed company, although the family is still involved. As I said earlier, it is tricky with all the pressures from the stock market, investors, and analysts to deliver great quarterly results. There's too much short-term thinking. But we have to stand up to that pressure and do what's best for the company in the long term. I think we manage it well at H&M. Non-listed companies like IKEA are doing a wonderful job, and I think it helps not being listed. But I'm sure there are many other examples of listed companies doing well. It's possible — it's about having that mindset, getting it in the culture, recruiting the right people, and setting goals not only connected to short-term results. On the second part: we're increasing use of materials all the time — not only organic cotton and Better Cotton Initiative cotton. We're increasing use of recycled materials like Tencel and many other materials.