Adidas CEO Kasper Rorsted On Incorporating Sustainability

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Adidas CEO Kasper Rorsted On Incorporating Sustainability
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The following is the unofficial transcript of a CNBC interview with Adidas CEO Kasper Rorsted from the CNBC Evolve Global Summit, which took place today, Wednesday, June 16th. Video from the interview will be available at cnbc.com/evolve.

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Interview With Adidas CEO Kasper Rorsted

Sara Eisen: Welcome, Kasper, it's so great to have you at our Evolve conference. Good to see you.

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Kasper Rorsted: Good to see you. Thank you for letting me in.

Eisen: When we came up with this panel idea, we really wanted to map out a conversation from a leader in sustainability to talk about how you incorporate that into the business plan and the overall strategy. And I immediately thought of you and Adidas. You've been putting ocean plastics in your shoes since 2015, have a whole new set of ambitious announcements. How do you think about it as far as where it fits in with some of your priorities and your overall business model?

Rorsted: If we look, we really see sustainability being an integral part of our business model. And I think that's where a lot of companies are struggling. They try to, you know, say execute sustainability through donations. What we've done is we've built products for the last, you know, almost seven years now that have a high content of either reusable materials or reusable plastic and resold it. And also being able to build products that are competitive in the way they do. And we've been very keen on setting aggressive targets. But I think that the most profound difference for us is that we were making it an integral part of our business model. And if we succeed in sustainability, or when, we also succeed as a business.

Eisen: What's the most difficult challenge you laid out? Is it the recycled polyester going fully there by 2024?

Rorsted: I think there are different challenges at different stages. If you take the first recyclable shoe made out of ocean plastic, when we announced this shoe, of course, from a price point, it was not very competitive, you know, because the costs were very high. So first, it was a costing issue, then you had a scaling issue around it, which you always do around your new products, if you take this or you take this which was made to be remade, where we completely recycle all the elements of a shoe and build a new shoe on it. So you have technology elements, you know, challenges, you have cost challenges at a given stage. And then of course, you said yourself, you know, aggressive targets. And that will be a challenge in itself. But I think a lot of the challenges lies around innovation, and getting the right, you know, costing into place that it actually makes it a competitive offer. Because in the beginning, it will never be.

Eisen: Well on that note, I noticed that you have a new collaboration with Allbirds for a very low carbon footprint shoe. And I was curious as to why you would partner with them and not just do it yourself when they're a competitor.

Rorsted: If you look and I think this is super important is that we get the best innovation from everybody. And we use Parley for ocean plastic. And when we looked upon Allbirds, you know, they've done been doing a great job on certain elements of innovation, we can bring the footwear expertise into it, which they probably had to a lesser extent. And when I look upon the shoe that we have jointly built that is a super cool product. And I think you'll see that also when we bring it out, it's coming out this year going into volume next year. And for us, the cost is more important than the competitive aspect of it. So that's where you see maybe somewhat, you know, of an awkward partner and coming together, but for us really succeeding in sustainability is more important than, you know, competing with each other.

Eisen: That's interesting. Speaking of super cool products, Stan Smith going 100% recycled. It's obviously been popular for decades. Do consumers really want this? I mean when I go shopping for shoes, I’ve got to be honest, it's style and price. I don't really think about the carbon footprint.

Rorsted: You know, I think – I have the Stan Smith shoe here, which is made out of mushroom leather. Over time consumers will want it and I think you need the choice of both right now and that's what we're giving. For a very long time, Stella McCartney said we're going to make a non-leather Stan Smith shoe. And that's what we brought into the market. And I think over time that will happen, but I think we need to give the consumer the choice of both. And as long as we can deliver a product that doesn't compromise on performance or price to the consumer, eventually the consumer will be very open. Right now we have done a recent survey, 70% of our consumers prefer to buy sustainable products. So I think there's going to be a great demand for this product. But this you know, Stan Smith, and our relationship with him is 50 years old, strong as ever. And he's very keen also to push this innovation along with us. I spoke to him and his wife two weeks ago, of course, like we're speaking today, and they're super excited about us bringing this product into the market in the late summer.

Eisen: Are we going to pay more for it? Is it going to be worth the higher cost?

Rorsted: We are of course trying to – the answer is no because we believe that it has to be our problem to develop the underlying technology to make sure that we don't overcharge. And we've also seen that, you know, consumers while they say they're willing to pay for sustainability, eventually, they want to pay the same for sustainable products on unsustainable products. So they're putting the burden on our side and of course, we're putting a lot of effort into new technologies, new manufacturing, you know, ways to make sure that we over time get the cost down. But that's exactly the same chance as we had with, you know, the ocean plastic Parley shoe when we brought out in 2015. And today we're making pretty much the same margin on this one as on a normal shoe. That was not the case in 2015. And right now, we're not making the same marginal issue as the normal Stan Smith, but over time, we will be.

Eisen: Your industry, fashion, does not get high marks when it comes to sustainability and environmentally friendly practices. I think 8 to 10% of carbon emissions come from the fashion industry. Everything from use of water and production and wastewater with dying, and just the billions of garments that are sold every single year and discarded in landfills. Can this ever truly be an environmentally friendly industry?

Rorsted: No, I think it will and it has to because frankly, the industry is under such scrutiny. And that's why a lot of the big companies are making steps ahead. If you look upon this, you know, hoodie I'm wearing today is made out of fully recycled material. And that's where the industry has to go. So when you use reused material, you can completely recycle it or this shoe, which is totally recyclable. So I do think that it's very important that the industry takes the critique, you know, at heart. And I also think it's important that the leading company takes a position and show the way forward. And we see that as an integral part of our new strategy for 2025. We put very aggressive targets in place for sustainability. Nine out of 10 articles will be sustainable by 2025. So I do think that it's important that the industry will and can do this, but somebody's got to take the lead and we want to be the leader in sustainability.

Eisen: Do you think you're ahead of your competition on this? Nike has also made a lot of moves on this front.

Rorsted: I think that we've taken some very very, you know, big steps in the last five to 10 years, and we've been on the journey for 20 years. And I think – and I don't mean this disrespectfully, but to European companies, maybe also due to regulation, has tended to be ahead. We see ourselves as a leader in sustainability. But we actually welcome everybody that's taking a step forward. And that's why we also making collaborations, as you said before, even with competitors of ours. So we believe that we have a leadership position in this, I don't see anybody having this kind of shoe or fully recyclable product coming out or, you know, with the relationship we have with Stella on fully recyclable hoodies. So I do think that we have a lead in it.

Eisen: Do you think you get credit from investors, consumers, employees, and whoever, whichever stakeholder you're doing this for?

Rorsted: I think over time, you get the credit that you deserve. But it's a question of time. If you look upon internally, there's a tremendous, I would say, enthusiasm and rallying around what we're doing right now. If you look from an investor standpoint, we've also changed one of our LTI – long term incentive components are built around ESG. So that has changed. And I think the consumer says that we are resonating more and more, you know, a lot of our consumers are very young consumers. And for them, it's a very important, you know, criteria. But of course, you don't change the world overnight. And I believe over time, it will be a very, very important criteria, and it is today. So, I do think that we are getting the credit. We would like to have more, but the better we do, the more credit we get.

Eisen: Sustainability has come to mean so much more than just the environmental impact and the responsibility there. But social issues come to mind, especially this year. Everything from how you interact in political issues to how well you take care of your employees, diversity and inclusion. You were the CEO of the consumer giant Henkel, what, 13 years ago? How different is it to be a CEO in 2021 than it was back then?

Rorsted: You know, it's hard to remember back then. That was when the financial crisis was around. I think it's very different. I think that the scrutiny on companies and CEOs are much greater today. I think that part of the reason is social media is bringing a transparency and also a news flow out that was never there before. And I think there's a lot of goodness around it. I think it drives change, it drives responsibility. It drives transparency to ensure that you need to do what you're doing. At the same time, I also want to say that, you know, things take time also for companies. You try to do the right thing, it happens most of the time and not always. But I do think overall, it's a good thing. But I think it's a very different job today than in 2008. At the same time in the last 13 years, we've hardly had a normal year. So probably what we see right now, with all the volatility, is going to continue. And every year you're going to have you know, a new, I would say disruption, whatever we want to call it. But I think that's also part of being a CEO in these days.

Eisen: Well, how do you determine what issues to speak up around? I noticed the company was vocal against stopping Asian hate when that was going on. Of course, very vocal on some of the racial issues around George Floyd. How do those determinations get made? Is that your call?

Rorsted: I think it depends on which company you are. And we're a sports company. And there are certain elements that are very closely related to sport. And I think you have to, you know, we say pick your battles. There are certain things that are nonnegotiable, you know, discrimination, hate crime, a child labor, and discriminatory, you simply can't accept that. If you're a global company, you cannot have a political opinion about every political system in the world, in my opinion. You need to make sure that you do and you can always look yourself in the mirror for what the company stands for. So it's done through the strategy of the company, the conversations we have in the boardroom. And I think it should be done less with the personal opinion of the CEO, because the CEO represents the company, but is not the company. So he or she speaks on behalf of the company. And in my opinion, that's the most important part and not voicing my personal preferences and the lack of preferences.

Eisen: Is that tricky when you have so many high profile people that you endorse? Sponsors? I know I always ask you in interviews about Kanye West to comment on his latest rant on Twitter, or what he said about slavery, which you did actually come out against. Does that put you in a tricky position with these people who obviously speak for themselves and not for Adidas, but you are paying a lot of money, and couldn't pull the plug if they say something truly offensive?

Rorsted: And we do that also, we have pulled the plug in the past. But I do think the most important part is saying do we overall, in the long term align around the same values. And do we have a successful relationship. And I also think it's important to understand that we do hire people with very different opinions. And I think respecting those different opinions is very important that we don't have a uniform opinion right now. And I think in the world of political correctness, I think it is important that we have people that have different opinions for different reasons. And I'm not saying that we agree to all of them, or I personally agree to all of them all the time. But overall, I do think it's important that we respect different opinions at different times. Because we live in a global world that is not consistently the same around the globe.

Eisen: Yeah, with social media, no doubt. You did face a bit of a reckoning on the race issue at Adidas. Coming out, obviously against hate, and in support of Black Lives Matter. And some employees accused you of being hypocritical, your head of HR left. It was definitely a thing and it was very public. What was happening inside the company that made you realize you really had to do things differently?

Rorsted: You know, I spent a lot of time listening to make sure that I really understood the situation at the appropriate level. And as soon as I did that, I do believe that we took the appropriate actions. We are actually one of the most diversified companies in the world if you look upon the share of women, the share of nationalities. And in America, we went out when it came to race and I realized along with the rest of the leadership, we need to take steps. We also went out and was very public about it. You know, we said what we're going to do and we executed that extremely diligently since last summer when we – following the Floyd killing in Minneapolis. And I think we've made a tremendous amount of progress. And I think we are a learning organization. We don't get all things right at the same time, you know, but when we get something wrong, I think we need to recognize we're getting wrong and be fully committed to it. And I've been very vocal on this topic since last summer. Not only on diversity, which I have been vocal on I would say since 2004. But on Black Lives Matter. And we've taken a very clear stand and I as the CEO have also done that and I think that's the way forward. Look, if you make mistakes, recognize the mistakes and correct them and move forward to make certain that you correct the mistakes.

Eisen: What about China? That's another tricky tightrope that you have to walk when it comes to speaking out against human rights. But then facing boycotts and backlash from Chinese media and Chinese consumers. It's obviously such an important growth market for you, what 25% of the business, at least. So how do you deal with that, which is even tougher in some ways?

Rorsted: Well Sara, I think that this is part of being a global CEO. Within Europe, there's tension between Europe and Russia. There's been tension, you know, in the Middle East. Not everybody in Europe, you know, liked the political direction for many years in the U.S. You know, right now there's tension in China. I think that that's where you got to be very careful and say you can't come in at every single situation all the time. We have probably, you know, three to 400,000 people directly and indirectly employed by Adidas in China. It has been and will continue to be a super important market for us. We are very successful there. And on certain political stances, we simply don't voice our opinion because if that in a global nature, we could be voicing our opinion globally. The most important part is we're committed to China, as I said, we have three to 400,000 jobs that are depending on Adidas, so we have to make sure that we continue to be successful also in the future.

Eisen: We've been talking about so many different ESG issues. When you think about ESG, where do you think it's going? We've talked about environment. We've talked about diversity and inclusion. What are some of the other priorities within that bucket that you'd like to work on and you'd like to leave as your legacy as you try to stay in a leadership position in this area?

Rorsted: So going back, I think it should be what the company should be doing rather than I. I think if I were to pick one out it is really in plastic waste. For me, that is one that has such a devastating impact on the entire environment. And you need to support it, and I know we've said it before. This is only the beginning, but the impact plastic has on our global environment is so negative. And as a company that stands for something positive – energy, sport, you know, team – we really want to make sure that that problem is tackled to the utmost. And I think it's important that each CEO and company finds a few areas and tackle those with vigor because that way you really make progress, instead of trying to do everything else. You know, diversity and inclusion is one also. But right now we are doing that. That belongs to what we need to do. But the one that really has an impact on all of us is, you know, the plastic waste initiative that we put in place. And I think it's so fundamental for companies to really help innovate and find solutions that address the environment, not to be disrupted for the future.

Eisen: Well, that's why you are a great guest to talk about this subject. Kasper Rorsted, thank you so much for your time and for your insights.

Rorsted: Thank you very much and great to be here.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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