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Navigating ESG Risks: A Focused Look at IKEA's Private Practices

By: ESG Team | June 25, 2024

Navigating ESG Risks: A Focused Look at IKEA's Private Practices
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The first and second parts of this series discussed the differences between public and private companies from the Environmental, Social, and Governance (ESG) and the United Nations Sustainable Development Goals (UNSDG) perspectives. In this part, we’re using IKEA as a prime example; we can explore how its private ownership impacts its sustainability practices and governance. This analysis aims to reveal how IKEA's strategies align with broader ESG goals, shedding light on the implications of private versus public company frameworks.

We chose IKEA as an example for this use case for two main reasons. Firstly, as a private company, it provides a suitable basis for comparison with other private companies in the same industry. Secondly, IKEA is known for promoting sustainable practices, such as using renewable energy, responsibly sourced materials, and minimizing waste. However, despite the company's claims about the eco-friendliness of its products, our goal is to investigate whether these claims and products are perceived as environmentally friendly. We also aim to identify any issues affecting any of its stakeholders beyond the environment.

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ESG Industry Benchmark

In our study, we focused on a detailed comparative analysis of IKEA's Environmental, Social, and Governance (ESG) risk mentions over the past three years, particularly in the context of the consumer discretionary sector. Our findings indicate a lower prevalence of environmental controversies both for IKEA and the sector overall. However, regarding governance risks, the consumer discretionary sector appears to encounter these issues more frequently than IKEA does.

esg risks-1Figure 1: ESG risks in IKEA and Consumer Discretionary.

On the other hand, IKEA stands out with a more significant presence of social risks than the sector average. This includes a notable number of product safety concerns, exemplified by instances of product recalls due to choking hazards, laceration risks, and even products infested with bugs. The analysis also brought to light several instances of human rights breaches at IKEA, particularly concerning privacy issues, such as data leaks and illegal filming incidents involving staff and customers. Labor rights violations are another area of concern, with instances ranging from union-busting activities to allegations of religious and gender discrimination within the company. Additionally, human capital risks are conspicuous, with mentions of strikes driven by dissatisfaction over wages and layoffs, as well as health and safety issues. Risks in customer relations have also been documented, including incidents of overcharging customers and discriminatory practices against certain customer groups.

Detecting ESG Risks Through the Industry SDG Lens

In our comparative analysis of IKEA's controversies against the average adverse behaviors in its sector concerning the Sustainable Development Goals (SDGs), we noticed both similarities and distinctions. A key finding is that Goal 1, "End poverty," features prominently for both IKEA and the sector, highlighting a common vulnerability to controversies under this goal.

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These breaches predominantly pertain to issues around labor rights and human capital, aligning with the findings from our ESG controversy analysis. Additionally, a smaller yet significant portion of controversies is linked to internal control deficiencies within the company. This pattern suggests that both IKEA and its sector face similar challenges in addressing labor rights and human capital issues, contributing to breaches of Goal 1.
In examining the differences, Goal 3, "Health and well-being," stands out for IKEA, exceeding the sector norm. This is largely attributed to numerous product recalls, alongside health and safety concerns related to IKEA's workforce.
Moreover, in Goals 11 ("Sustainable Cities") and 12 ("Responsible Production and Consumption"), IKEA shows a higher-than-average proportion of controversies, mainly due to issues in human capital and customer relations. This highlights a specific focus on product safety and human capital challenges at IKEA, pointing to areas of heightened risk or difficulty compared to industry peers.
Additionally, our study reveals distinct variations in Goals 9 ("Industry, Innovation, and Infrastructure") and 16 ("Peace, Justice, & Strong Institutions"), where IKEA shows a lower proportion of issues compared to the sector average. This suggests that, unlike its industry counterparts, IKEA has been more effective in mitigating risks in these areas.

Detecting ESG Risks Through the Industry SDG Lens

Our methodology analyzes the controversies detected for IKEA and maps them to identify which ones constitute breaches of the United Nations Global Compact (UNGC) principles.

CD vs IKEA-1Figure 2: UNGC principles in IKEA and Consumer Discretionary.

Consistent with the identified ESG risks, human rights breaches at IKEA are notably more prominent than the sector average. This is primarily due to multiple instances of privacy, security, and dignity violations, as well as issues in diversity & inclusion. Additionally, labor rights issues at IKEA, while exceeding the industry average, are not markedly higher.
Our study also reveals that IKEA has a slightly higher proportion of breaches in the environmental pillar compared to its sector. These include incidents like gas leaks, allegations of greenwashing, and cases of illegal logging.

Conclusion

ESG controversies and breaches of SDG goals vary notably between public and private sectors. Public companies frequently encounter more visible and consistent ESG risks, while private companies, although subject to less scrutiny, experience significant impacts when controversies do occur. The case study of IKEA particularly sheds light on the unique challenges faced in product safety and human capital. This highlights the critical need for rigorous and proactive risk management strategies to maintain sustainable corporate practices tailored to the specific nature and scale of the entity in question.

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