What is ESG?
Environmental, social and governance (ESG) is a set of standards and criterial that measure company or business performance and impact on the environment, society and the world. Measuring and evaluating against these criteria helps stakeholders better determine future financial performance, risk, resilience and reputation of companies. In recent years, ESG has become a central area of focus for investors, government regulators and society.
The E, S and G
- Land management
- Human rights
- Diversity, equity and inclusion
- Labor practices
- Human capital management
- Product safety
- Community impact
- Occupational safety
- Board diversity
- Executive pay
- Customer satisfaction
- Data security
- Risk management
- Code of conduct
- Tax strategy
- Supply chain
- ESG oversight
According to NRF and IBM’s latest study, 50% of consumers claim they’re willing to pay a premium for sustainability.
How is ESG relevant to retail?
Customers, investors, financial institutions and governments all care more and more.
ESG is becoming more relevant to all industries as stakeholders demand increased performance and disclosure. Within the retail industry, customers are becoming increasingly aware of issues like waste, plastic pollution and human rights, and they are making intentional decisions to purchase from companies they view as more socially and environmentally conscious. Similarly, investors are increasingly looking to align their portfolios with companies that demonstrate a commitment to ESG.
Regulators are increasing scrutiny on retailers’ operations and supply chains regarding issues like responsible sourcing and fair labor practices. Additionally, as banks and credit institutions become increasingly aware of the material risks of climate change and other ESG factors, they are adopting policies and practices that require those seeking loans, financing and other services to account for their own ESG-related performance.
The retail industry faces moderate exposure to several ESG-related risks, including:
- Supply chain disruptions
- Plastics and packaging
- Product labeling and marketing transparency
- Materials sourcing and product traceability
- Shifts in consumer and market behavior
- Human rights and labor relations
Increasing digitalization and the widespread use of social media are making transparency paramount, amplifying the consequences for businesses that fail to meet stakeholder expectations. Failure to meet these demands can result in financial losses, restricted access to capital, reputational damage, litigation risk and more.
Read more about how retailers are increasing sustainability initiatives on the NRF blog.
What does success look like?
Addressing the most pressing risks and integrating an ESG strategy provides retail companies with the opportunity to protect and create business value. Successful ESG integration involves buy-in at all levels of the company — companies should identify the most material topics to their business model, establish baselines, determine KPIs to measure progress, set meaningful targets and strategies to achieve them, develop data collection processes, and ultimately disclose the company’s ESG vision, strategy and performance.
What others are doing
Patagonia accounts for its environmental and social footprint across its supply chain, and it has policies and programs in place for materials sourcing and use, social responsibility, energy use, fair trade, plastics and waste, philanthropy and more. Patagonia is a certified B Corp dedicated to sharing best practices with other companies.
- Forbes: Global Consumers Drive The Market Toward Sustainable Retail
- Barclays: How the retail industry is impacted by ESG
- Global Banking & Finance Review: How and why retail businesses should be buying into ESG
More on retail sustainability
Last Updated: 4/15/2022