What is ESG?

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.

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    
• Digitalization    
• 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.

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.

Best Buy is a member of the Clean Energy Buyers Coalition (formerly the Renewable Energy Buyers Alliance) and has signed the Climate Pledge. Additionally, the athletic apparel retailer Under Armour is innovating for ESG causes — it is making strides in the areas of responsible sourcing, fair labor (the company is accredited by the Fair Labor Association) and sustainable manufacturing operations. It is also a member of the Sustainable Apparel Coalition and works with the Environmental Defense Fund Climate Corps.

The NRF blog highlights other member sustainability initiatives, including those retailers setting science-based targets for net-zero carbon emissions