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Carrot or the stick? The Retail sector’s response to ESG

Despite the shifting sands of Covid-19, the issue of ESG (Environmental, Social and Governance) has remained very firmly planted on the agenda of retailers who have a very significant decision to make. Do they adapt their practices because they are pressured into doing so by legislation and their various stakeholders, or do they change because they fundamentally believe in it?

Retailers facing big decisions

We are very much talking about a stick and carrot scenario right now around ESG, with the stick being presented by Government, investors and social media-wielding consumers, while the carrot can be created by businesses bringing about change through culture and having the board drive it through the organisation.

There has certainly been much of the former to date, with companies being pushed into making changes. This goes back to things like the move to reduce plastic carrier bag usage, the introduction of the Modern Slavery Act and gender pay gap reporting. There has also been evidence of institutional investors using their influence to drive ESG disciplines onto companies.

These shareholders have certainly brought pressure to bear on the likes of Boohoo and its supply chain practices, which has led to a significant overhaul of its business processes alongside the appointment of a CSO (Chief Sustainability Officer). How many companies have thought about replicating this move and will it become common practice to employ such specialists?

Social media pressures

B&M, Frasers and JD Wetherspoon, among others like them, have also seen consumers driving their ESG adoption as such businesses have been victims of social media shaming during Covid-19. Today people increasingly buy products and services they see as socially acceptable from ethical companies and are more than willing to call out on social media platforms any bad practice.

Retailers certainly need to manage these channels carefully. The Co-operative for instance has invested heavily in many communities, and its social media activity has enabled it to proactively share this information locally.

Taking the top-down approach

The top-down, carrot-based approach is very much in evidence at Greggs where its CEO Roger Whiteside recently issued a statement outlining the new purpose of the business – that suggests the company is not just about producing sausage rolls anymore but is also about how these porcine delicacies are produced.

This move recognises it is not solely about making money but that companies should also work towards having a positive societal impact. There is no doubt such actions have the potential to drive increased valuations, which pushes up the appetite of investors, and also attracts more people into these organisations who are extremely committed employees.

Despite these possible upsides there have been questions about whether ESG had been pushed down the agenda during Covid-19 but we could argue it has actually been quite the opposite. As business models have been adapted to the new environment, and changed customer behaviours, there has been evidence of the incorporation of ESG elements.

Identifying greenwashing

Great care has to be taken because greenwashing – the practice by which organisations falsely present an environmentally responsible public image – is still very prevalent. At Barclays we have clear guidelines and use due diligence to underpin our green financial products to help companies with their ESG activities and objectives.

Greenwashing is undeniably a contentious area. When large companies like H&M trial sustainable cotton and circular product ranges, they invariably receive accusations of greenwashing from those who probably feel fast fashion should not exist at all. In contrast, it could also be seen as positive as it highlights they are at least doing something. We should also recognise that these legacy businesses cannot simply change overnight.

To differentiate those retailers who are genuinely adopting a culture around ESG versus those masquerading as green organisations some form of governance is needed. There are moves to have such disclosures represented in Annual Reports and legislation on this front is understood to be on its way.

ESG becomes truly multi-faceted

Retailers need to think very hard about ESG because it is now impacting their businesses much more widely. To date, the driver has very much been focused on environmental considerations but more recently it has begun to increasingly encompass the social and governance aspects.

Against this backdrop it is surely far better for retailers to take the carrot option and embed ESG into their culture rather than wait to be beaten by the ESG stick and risk their future relevance.

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