A focus on sustainability is no longer a matter of choice, it is an imperative since we have left our historical ‘safe operating space’ with respect to CO2 emissions.
As the COP26 summit approaches, the actions undertaken today will be decisive to alter the alarming trajectory of global temperature pathways in the next decade.
Consumers and investors have been paying heightened attention to the sustainability record of companies. Between 30% and 50% of Millennials and Gen Z consumers claim they are willing to pay more for products that have the least negative impact on the environment.
Investors are more likely than ever to prioritise sustainability in asset allocation decisions - approximately 40% of investment funds globally are managed under ESG mandates, and the proportion is growing by around 16% a year.
While companies must respond to these demand drivers, many are also finding sustainability brings operating advantages. Sustainability leaders attract higher numbers of the most talented individuals and see much lower levels of staff turnover.
They face lower compliance and regulatory risk and are much less likely to attract negative headlines. A growing number of prominent brands have also issued debt linked to sustainability targets.
Sustainability is the key word
Many have sharpened their focus on sustainability recently. More than 1,700 companies, accounting for around 20% of the global stock market, have committed to a science-based target - the leading framework for emissions reduction. The BRC has convened 63 retailers to a joint commitment to hit net-zero emissions by 2040.
We see three horizons over which the sustainability imperative can play out for companies:
The first is focused on compliance and ensuring the company can keep pace with shifting expectations, supported by emerging disclosure regulations such as the Task Force on Climate-related Financial Disclosures (TCFD). Many in retail have reached, or are working to reach, this goal. In the process, they are finding they often need to make trade-offs between the planet and profit. As many have found, consumer attitudes and willingness to pay are not always aligned;
On a further horizon, sustainability is intrinsically coupled with productivity goals. Leading companies increasingly see a benefit if they produce locally with shorter lead times, deploy advanced analytics to make superior decisions and work to reduce returns and waste through the value chain. H&M, for example, has invested in AI capabilities to improve demand forecasting to better match demand and supply, thereby minimising overproduction.
Looking further ahead, there is a third horizon in which sustainability ceases to be an element of the business and becomes the element that defines the business. Here sustainability confers a right to premiumisation, by which differentiated services create rarity value that fuels demand and sets the company apart from its peers. Once they reach this stage, decision makers no longer ask themselves how they should manage sustainability. Rather, they identify with a business model that is sustainable, and generates value because of it. Examples include Patagonia, where the product and brand promise is inextricably linked to making the planet better; dairy major Danone venturing into plant-based milks; Oatly with its commitment to human health and sustainability driving technical advancements to expand across a broad dairy portfolio; and Sweden’s Renewcell, breaking barriers in textile recycling.
As retailers navigate their sustainability journeys, it is this third horizon that should increasingly be on the board agenda.
Regardless of the horizon of impact a company is focused on, given the urgent and intractable nature of the issues that we face, retailers will need to move past target-setting to demonstrate tangible progress; match their bold ambitions with the investments to finance the changes and innovations – these need to be articulated with the same rigour as the cost for a multi-year transformational programme; and pursue industry-wide collaborations to drive swift progress beyond the current baseline – we cannot afford to run out of time.
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