Building sustainable operations – To achieve ESG goals in times of budget cuts
According to a Gartner survey, 87% of business leaders are expected to increase their investment in sustainability in the next two years.
Read moreThe Road to a Sustainable Future: Detailed Guide for US Retailers to Follow
Jaffar Razool – Senior Vice President
The retail industry has undergone significant transformation in the last decade, with the internet creating new sales channels and introducing new competitors. The COVID-19 pandemic accelerated the retail industry’s digital transformation. Simultaneously, it brought sustainability into focus for retailers with heightened scrutiny from different stakeholders.
Sustainability is not limited to the environment but includes social and governance factors that retailers must manage. ESG (Environmental, Social, and Governance) form the three pillars of the sustainability framework, which retailers must report on to comply with the regulations and meet the expectations of customers, investors, and other key stakeholders.
- Environmental factors include reducing greenhouse gas emissions, waste management, energy efficiency, and other efforts to minimize climate change impact.
- Social factors include how companies manage their workforce and positively contribute to the society within which it operates.
- Governance includes companies’ internal systems and processes to meet stakeholders’ rights, responsibilities, and expectations.
Challenges of the US Retail Industry in Moving Towards ESG Goals
Even as retailers across the globe are taking action across the three facets of ESG, there is a greater emphasis on reducing environmental impact, with priority focus on climate change and scarce resources. US retailers face challenges as they move towards ESG goals; however, a sustainable business model can position them for long-term success in an increasingly competitive market. Some challenges include:
Cost Implications
As per the Mckinsey report, the number of retailers setting science-based targets to reduce carbon emissions increased from one in 2016 to sixty-six in 2021, highlighting the urgency of pursuing sustainability in retail. However, retailers recognize that these commitments have cost implications with the funding sources, and the path forward remains unclear.
Supply Chain Transparency
Supply chain transparency enables retailers to provide credible evidence of their commitment to ESG while creating an agile supply chain that is resilient, predictive, and responsive to the fast-evolving global economy. Achieving supply chain transparency is a challenge for retailers considering the expansive nature of their supply chain with consumer product vendors from across the globe.
Additionally, scope-3 emissions contribute 98% of carbon emissions for home and fashion retailers. The responsibility of abating these emissions is primarily with suppliers and vendors, further increasing the retailer’s challenges in meeting their ESG goals.
Regulatory Compliance
Even as ESG reporting is voluntary in many countries, increasing global regulations are being drafted for ESG data reporting. The United States is considering rules requiring companies to make detailed disclosure of climate-related risks and Greenhouse Gas (GHG) emissions. While the European Union has introduced the Sustainable Finance Disclosure Regulation (SFDR) to improve transparency around corporate sustainability claims.
Retailers must comply with regulations that vary by country and region, which can be challenging for multi-location retailers.
Data Management
In a Deloitte survey, 43% of respondents mentioned measurement and reporting as one of the top challenges. ESG goals often require retailers to track and report on various metrics, including energy usage, emissions, and social impact. However, shockingly, most retailers need to figure out what to measure or where to collect data for their ESG programs. They also face challenges in establishing an efficient and reliable method to track relevant data scattered across the organization and their extended ecosystem for all three facets of ESG.
Brand reputation
Retailers face brand reputation issues if they fail to meet the customer’s expectations on sustainability issues. This is because Generation Z and higher-income shoppers have evinced interest in seeing data on sustainability initiatives. Besides pressure from consumers, retailers also have to contend with investors’ demand for ESG strategy. They risk falling out of favor with large institutional investors if they fail to comply with the recommendations of the Sustainability Accounting Standards Board (SASB) as well as of the Task Force on Climate-related Financial Disclosures (TCFD).
Steps Retailers Can Take to Build a Sustainable Business Model
Green Bonds and Impact Investing
Retailers are exploring various financing options (such as green bonds, sustainability-linked loans, and impact investing) to address the cost implications of implementing ESG goals.
They also realize financial gains by reducing costs through energy efficiency measures, waste reduction, and sustainable sourcing practices. They are adopting LED lighting, using renewable energy, and implementing energy management systems to monitor and optimize their energy usage.
Sustainable Sourcing and Transportation
An increasing number of retailers are prioritizing sustainable sourcing practices, such as sourcing from suppliers that meet environmental and social standards. They are jointly working to increase the use of recyclable or compostable materials for packaging as well as following circular economy principles to eliminate waste by designing products that can be recycled or reused.
Moreover, retailers are also exploring sustainable transportation options such as electric vehicles, bike deliveries, and alternative fuels to reduce their carbon footprint.
Retailers are collaborating with suppliers to increase supply chain transparency through proper disclosure.
AI and ML for Data Management
The data required for ESG reporting sits across multiple platforms and databases internally and externally. Therefore, the first step for accurate reporting should begin with integrating data to collate and store data from diverse formats and disparate sources for a unified view of ESG data.
AI (Artificial Intelligence) can help retailers automate data collection, standardize data, derive insights, and report against it. With the help of NLP (Natural Language Processing), retailers can extract relevant information from unstructured data and integrate it into more stable, comprehensive databases to identify patterns and trends for improved decision-making.
Regulatory Compliance and ESG Reporting
ESG standards and regulations are ambiguous, with no universally adopted standardization. Transparency and reliability in ESG measurement and reporting is a challenge for retailers that often leads to misreporting.
Blockchain technology enables retailers to issue an immutable certificate and automate reporting of any number of data points related to their ESG tracking. They can track product and labor conditions along the supply chain and store them on the blockchain and other metrics. Carrefour is leveraging blockchain technology to trace 450 textile products, enabling customers to access product data through a QR code with their cell phones.
How Can US Retailers Measure Their ESG Performance?
ESG metrics enable US retailers to track progress and measure performance on all three dimensions of their ESG initiatives. Here are some metrics that retailers can use to measure their ESG performance.
Environmental
Retailers can measure their environmental impact by tracking greenhouse gas emissions, energy usage, water usage, waste generation, and air pollution. They can also report on their progress towards sustainability goals, such as reducing their carbon footprint or achieving zero waste.
Retailers can directly measure Scope 1 and 2 emissions reduction while measuring Scope 3 emissions reduction requires collaboration with other stakeholders in the value chain.
Social
Retailers can measure their social impact by tracking employee diversity and inclusion metrics, labor practices, supply chain transparency, and community engagement.
Many prominent retailers like Macy, Sephora, and twenty-three other retailers have signed a 15% pledge to dedicate more shelf space to black-owned brands. They can also report on their efforts to promote social responsibility, such as supporting local communities or implementing fair trade practices.
Governance
Retailers can measure their governance practices by tracking metrics such as board diversity, executive compensation, and transparency in financial reporting. They can also report on their adherence to ethical business practices and efforts to promote corporate responsibility.
Final Thought
Achieving ESG goals require domain knowledge and technology capabilities which may not be available in-house. Hence, retailers can leverage strategic partnerships with technology services providers to tap into their consulting and implementation expertise to build sustainable businesses.
Quinnox has extensive experience in data integration offering end-to-end services. The team has expertise in consumer retail, having served some prominent consumer retailers. If you need expert help to guide your organization to achieve its ESG goals by implementing innovative technology solutions, contact the Quinnox team today!
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