ESG Frequently Asked Questions

You are reading part 1 of the 10-part ESG Factsheet Series. Explore all the chapters here.

ESG FAQs  |  What is ESG  |  ESG Ratings  |  ESG Reporting  |  ESG Climate and Risk  |  ESG Human Capital Management  |  Supply Chain and ESG  |  Real Estate and ESG  |  Plastics and Packaging and ESG ESG Glossary of Terms

What is ESG?

By definition, environmental, social and governance (ESG) refers to the three central factors in measuring the impact of an investment in a company or business on the environment, society and the world. Measuring and evaluating against these criteria help stakeholders better determine the future financial performance, resilience and reputation of companies.

In recent years, ESG has become more mainstream and is a central focus area for investors, government regulators and society.

Why is ESG relevant to the retail industry?

First and foremost, ESG is becoming more relevant to all industries as stakeholders demand increased performance and disclosure. Key ESG drivers include the increasing frequency and severity of the visible impacts of climate change, the fast pace of technological advancements and the increasing societal awareness around issues like diversity and inclusion, human rights and corporate governance. Failure to meet stakeholder demands can result in financial losses, restricted access to capital, reputational damage, increased risk of litigation and more.

The retail industry faces moderate exposure to several ESG-related risks, including (but not limited to):

  • Supply chain disruptions and logistical complexity
  • Digitalization
  • Shifts in consumer and market behavior
  • Materials sourcing and product traceability
  • Human rights and labor relations
  • Plastics and packaging
  • Product labeling and marketing transparency

Addressing the most pressing risks and integrating an ESG strategy provides retail companies with the opportunity to protect and create business value.

Aerial image of forest representing ESG initiatives

How is ESG different from CSR?

Corporate social responsibility (CSR) is a self-regulating approach to business that provides content about the culture of sustainability and corporate responsibility. ESG takes this approach and turns it into actionable and measurable targets, strategies and outcomes.

CSR integration can be completed through commitments and communication, while ESG builds on this foundation with data and metrics to measure progress and ensure accountability, and it involves a level of external regulation.

How are investors using ESG information?

Investors are increasingly demanding ESG disclosure from companies primarily because they consider it financially material to the performance of their investment. While ESG information does not always provide information about a company’s competitive positioning, it can provide insight into risk and resilience, which are two aspects with which investors are increasingly concerned. ESG data can be used to provide a holistic view of a business and allow investors to make more informed decisions.

What entities are setting ESG standards?

The U.S. Securities and Exchange Commission (SEC) mainly regulates capital markets, but it has recently been using its authority to unify existing ESG frameworks and develop reporting requirements for public companies. Other major ESG standards-setting entities include:

Aerial image of forest representing ESG initiatives

What are ESG Ratings?

Broadly, ESG ratings are scores and/or rankings issued by rating agencies as a measure of a company’s ESG performance and exposure to long-term ESG-related risks. Investors use ESG ratings to compare potential investments within their industries, and other stakeholder groups can use the ratings to get a snapshot of a company’s current ESG status.

There is currently no universally accepted ESG rating platform or scoring methodology, and even the most well-known and widely used raters can produce differing scores for the same company. Combining information from multiple raters often provides the most accurate and holistic view of a company’s ESG performance. Some raters use only information that companies make publicly available, while others request information directly from companies to inform their ratings. The most notable ESG rating agencies and platforms include:

What is climate risk?

Climate risk refers to the potential consequences of and responses to the impacts of climate change. It can be divided into two types of risk:

  1. Physical risks are risks related to the changing climate like extreme weather events and rising global temperatures, as well as indirect risks like food scarcity
    1. Physical risks are further divided into acute and chronic risks: Acute risks are single, highly destructive events like hurricanes and wildfires; chronic risks are longer-term shifts and patterns like decreased precipitation and rising sea levels.
  2.  Transition risks are related to the process of adjusting toward a low-carbon economy. This can include risks related to changing equipment needs, as well as changes in consumer and market behavior.

Understanding climate risks specific to your company and/or industry can help in preventing their potential consequences, as well as establishing regulatory compliance, building credibility with investors and other stakeholders, and gaining a competitive advantage.

Aerial image of forest representing ESG initiatives

What upcoming ESG-related legislation impacts or is expected to impact NRF members?

Government regulators are responding to investor and consumer concerns about corporate ESG performance and disclosure by working to establish more consistent reporting frameworks and compliance requirements.

In the U.S., ESG reporting is still primarily voluntary, but the SEC is expected to propose guidelines for mandatory reporting for public companies — specifically around climate change, human capital management and political spending — in 2022. These expected regulations would set forth metrics and broadly dictate reporting expectations to help investors make more informed decisions.

The mandatory ESG reporting measure passed through the House of Representatives in June of 2021, but it faces some opposition on the grounds that it is too costly for companies and does not focus on the issues most material to each industry and company.

In regions like the UK and the EU, mandatory ESG disclosure regulations have already passed and are in the implementation phase. In the UK, specifically, disclosures must be aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. The EU Sustainable Finance Disclosure Regulation requires the disclosure of an array of sustainability information.

What is NRF doing to help its members along their ESG journeys?

As ESG expectations increase from all stakeholders — including investors, customers, employees and regulating bodies — NRF is developing a suite of ESG resources for its member companies, including:

  • Monthly newsletters with highlights and headlines about recent ESG-related developments
  • A glossary of key ESG terms
  • Single-page documents outlining major ESG issues that impact the retail industry
  • How-to guides for important ESG practices like reporting and goal setting
  • An ESG best practices guide
  • ESG webinars

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Last Updated: 4/15/2022