Integration of ESG in the retail sector
Retail & Consumer Focus
Hamza Al-HaboubiESG Consultant
Over the years the retail sector has been at the forefront of change and has consistently re-imagined itself, the emergence of ecommerce platforms along with Covid-19 have accelerated the increased significance of sustainability in the retail sector. The latter challenged the sector and significantly impacted consumer sentiment, purchasing behaviours, and accelerated digital transformation. The retail sector has experienced a range of disruptive themes over the recent years, with the integration of environmental, social and governance (ESG) being a core theme that will have a significant impact on the industry, a powerful opportunity lies ahead to demonstrate responsibility and resilience in the sector.
Globally we are seeing heightened consumer awareness on the impact and supply-chain of products. In addition, stronger awareness during the pandemic has shifted consumers’ focus, this has impacted sentiment and purchasing patterns and behaviours toward more sustainable alternatives. Consumer consciousness is shaping trends and purchasing patterns and will continue to hold the retail sector accountable on its ESG issues, and the result of this is retailers are now implementing ESG strategy and committing to ambitious goals. In addition, there is a call for transparency, and this has meant retailers have embedded ESG data for adopting sustainable measures across their business operations.
While the integration of ESG issues within business operations, sometimes referred to as responsible business practices, are of rising significance to retail businesses due to the added opportunities in the market; however, there is also the associated reputational and economic risks that come with making the wrong decisions. With this in mind, retail businesses can benefit from implementing sustainable practices within the retail supply chain ecosystem, these benefits include:
Reducing the global environmental impact – Minimising the environmental impact while ensuring high profitability of products.
Supply chain continuity – Maximising the end user process efficiency within the retail supply chain ecosystem.
High profits: better business - Streamlining a lot of supply chain processes can help improve business efficiency. This can positively impact the total product output. Efficient processes and implementations support in fast tracking tasks to meet consumer demand even faster. According to an online source, 40% of consumers in the US are planning to spend more on sustainable brands over the coming three years. With demand rising, marketing a product via its sustainability credentials can have a multiplier effect on growth.
Retailers are deploying new measures to safeguard their business while reducing their carbon footprint. Investing in sustainable practices not only helps retailers fight climate change but also allows them to cut costs in the long run. A large number of consumers are now aware of the concept of greenwashing, as such it is extremely important that retailers fulfil their ESG targets and goals. By proving their authenticity across all aspects of ESG, retailers will attract ethical consumers and expand their customer base.
With the general increase in sustainability considerations, consumers are becoming increasingly aware of the environmental impact in the life cycle of products. In addition, regulatory bodies are up to speed, passing new laws and regulations for net-zero emission across industries, which also accelerates companies’ shift towards sustainable alternatives. Some of the top actions taken by companies as part of their sustainability efforts in the retail industry[1], include:
Using more sustainable materials (e.g. recycled materials, lower-emitting products).
Increasing the efficiency of energy use (e.g., energy efficiency in buildings).
Using energy-efficient or climate-friendly machinery, technologies, and equipment.
Training employees on climate change actions and impacts.
Requiring suppliers and business partners to meet specific sustainability criteria.
Tying senior leaders’ compensation to environmental sustainability performance.
Transitioning from sustainability commitments to implementation is quite challenging due to a number of reasons, fundamentally however the retail sector faces a funding gap, because sustainable supply chains within products and food chains tend to be relatively more expensive than the existing ones. In the regional jurisdictions, tax incentives and funding mechanisms to support supply chains that acknowledge the full cost of carbon emissions are not yet well established.
Retailers need to identify the key ESG themes governing their industry and prioritising the actions most likely to deliver rapid impact. These issues primarily revolve around the areas of:
Greenhouse gas emissions
Waste and circular economy
Ethical sourcing
Diversity and inclusion
Human rights and good conduct
Occupational health and wellness
Upon identifying the key ESG themes, it then comes down to defining the set of action plans and the level of ambition for each theme. Retailers need to understand whether the ambition is more focused towards minimising risk and ensuring compliance with evolving regulations or capitalizing on an opportunity to build a reputation for excellence in the area.
Another crucial step is assessing the current stance, the direction where consumer and regulatory expectations are heading and the future ambition. Retailers need to innovate more on offering sustainable options and discard products that no longer meet consumer expectations in areas such as animal welfare or plastic packaging. Conversely however, retailers will also need to incentivise consumers that match sustainable choices in line with their ESG commitments.
For the retail industry, being at the end of a complex supply chain creates a huge challenge/burden. Suppliers have a huge role to play in bridging the existing gap, e.g. 95% of green house gas emissions in retail are scope three indirect emissions that retailers cannot tackle alone and require the support of upstream and downstream supply chain partners.[2]
It is not just retailers, governments are acutely aware and are being help accountable, for example on the matter of single use plastic. The UAE for example has taken the initiative to ban most single‑use plastics starting 2024, according to Ministerial Resolution No. 380 of 2022 issued on 10 January 2023. The resolution states that the import, production, or circulation of single‑use plastic shopping bags, regardless of the material used, will be prohibited from 1 January 2024. Biodegradable plastic bags are also banned. Furthermore, from 1 January 2026 the UAE government will prohibit the import, production, or circulation of most other single‑use plastic products. Items such as soft‑drink cups and caps, spoons, forks, knives, chopsticks, plates, straws, stirrers, food containers and boxes made of Styrofoam are all affected. The resolution also urged businesses and consumers to adopt practices that lower the production and consumption of single‑use plastics in the interim, such as plastic packaging.
For the retail sector sustainability improvements have the potential to reduce costs and generate a positive return on investment. For instance, sustainable sourcing can make it easier to weather short-term crises such as the Covid-19 supply disruption. Likewise, companies that are proactive on sustainability are less likely to be hit by regulatory tightening.
The retail sector will continue to be at the forefront of driving change and will continue to be held accountable by consumers to its ESG objective and targets. ESG and its impact on the sector is here to stay, what remains critical is for businesses to integrate ESG issues within its operational model and ensure the right reporting and transparency is in place to foster greater relationships with consumers and governments alike.
For further information,please contact Hamza Al-Haboubi.
Published in April 2023
