Find out how far your organisation has progressed down the path towards being an industry leader in corporate purpose and sustainability.

It’s no secret that the environmental, social and governance (ESG) expectation dial has shifted exponentially. The subject is dominating the media, with the retail sector firmly in the spotlight. In KPMG’s 2021 Global CEO Outlook, ESG and corporate purpose were the top two issues among the 1,300 CEOs surveyed across 12 countries, including 50 from Australia.

Data systems need to be built and business processes updated to underpin ESG measures.

Sarah Newman
Director, Sustainability Services

The importance of ESG considerations emerged before COVID-19 but has now escalated. Purpose, reputation, and integrity are playing an even larger role in consumer purchasing decisions. KPMG research shows that 80 per cent of customers now prefer to buy brands that align with their values and 54 per cent of customers say an organisation’s environmental and social responsibility goals have changed their purchasing decisions . Brand purpose and how well ESG is integrated within an organisation can truly set it apart. Consumers are judging retailers on their treatment of employees, company diversity, human rights in the supply chain, environmental footprint, and resource circularity. All this has helped push consumer brands to prioritise ESG a strategic business focus.

Based on KPMG’s market observations and experience, we position most Australian retailers in one of the following three categories of ESG integration:

Categories of ESG integration

Consumer brands that are newcomers to ESG are positioned at the entry level of the integration scale. Typically, their focus is keeping on top of regulatory and reporting requirements and they may lack resources or executive sponsorship for additional aspirations. There are more than 500 formal and informal sustainability frameworks globally, which can be a lot to manage. Adopting industry standard frameworks such as the UN Sustainable Development Goals, and certifications such as B Corp, can provide a formal framework to track progress. A major consideration in this category is the risk of greenwashing – retailers publishing sustainability credentials, such as eco labels, but not actually having data to prove the claims they are making.

Many retailers are in this second category; they meet or exceed their regulatory obligations and they understand the value proposition that a stronger focus on ESG can provide. These retailers also can attract green finance, as the volume of funds committed to sustainable investment strategies, like green bonds and sustainability-linked loans, continues to strengthen.

More Australian retailers have started integrating sustainability goals into the core of their business strategy. To do this, they have identified their priority ESG areas and set aligned targets, such as zero net emissions, increasing the diversity of the workforce, improving responsible sourcing practices, and circular innovation. Many have started to monitor progress, as consumers expect sustainability claims to be supported by data.

A major challenge for these retailers is incorporating ESG into their day-to-day operations. Data systems need to be built and business processes updated to underpin ESG measures. Examples of this include the data taxonomies required to drive Scope 3 carbon accounting, end-of-life recycling and full traceability and transparency of the supply chain. These retailers need to go beyond their sustainability report and operationalise ESG – taking into account the governance and business case development required to invest and transform.

The third category is reserved for ESG standouts who are leading the way in building a sustainable and inclusive economy. They include disruptors and innovators. Disruptors are newer companies challenging traditional business models with ESG and purpose at their core from inception. An example is the Zero Co start-up, which in late 2020 commenced delivering environmentally friendly cleaning products packaged in reusable and refillable containers made in Australia from recycled beach and ocean waste. In less than a year, Zero Co is achieving sales in excess of $1 million a month. Innovators are existing retailers that have redesigned their business model to make sustainable change, with economy-wide impact. A number of local retailers are planning net-zero emissions by 2050. Internationally, Britain’s biggest retailer, Tesco, has made the same commitment. The company’s 2050 target, often referred to as Scope 3 emissions, covers not just the carbon from its own operations but also what comes from its food producers, suppliers, and other partners involved in the value chain. Reducing Scope 3 emissions involves creating partnerships to fast-track innovation and develop technology that doesn’t yet exist – for example, a means of reducing methane emissions from livestock – thereby creating real economy-wide change.

Sustainability inaction is costly.

Consumers prefer brands that reflect societal values and they have high expectations for how brands conduct themselves. Failing to place ESG at the heart of decision-making leaves retailers vulnerable to losing competitive advantage. Most retailers sit in the middle category of needing to operationalise ESG – they have goals and ambitions but now need to go beyond their sustainability report and embed ESG into their core operational functions. This takes planning, time and resources, but the benefits often speak for themselves. While the costs of implementing ESG initiatives may impact operating profitability in the short term, the cost of inaction may be greater down the line.

Contributing Authors: Sarah Newman, Director, Sustainability Services and Robert Poole, Partner, National Sector Leader, Consumer & Retail.

This article was originally published in Australian Retail Outlook 2022 co-produced with Inside Retail magazine. 

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