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Industry Focus

Why the Only Way Is Ethics

New Regulations Driving ESG Strategies in Europe

Retail businesses are like rivers that have an upstream source of raw materials to meet the downstream demand of their customers. 

It could be a product or service, but the outcome of the flow remains the same as it meets the mighty ocean or the expectant customer with the desired impact of making the right kind of splash. By this, I mean they must be aware of their overall impact along meandering miles of the water to the sea, despite what might block their path—from flotsam and jetsam to pollution and pesticides. 

Businesses are increasingly in need of reminding of the fact that profit should not come ahead of people and planet as the world faces its own existential crisis through human-generated climate change. They must be cogniscent of their wider social responsibility towards controlling their emissions and carbon footprints so that the process and progress is both clean and green. 

That is why the upward to downward stream must be policed to ensure their onward flow is both environmentally sustainable and ethical, and that the supply chain washes its own face in terms of unnecessary impact, to avoid the crashing consequences of reputational damage.

This water analogy plays well in terms of the growing demands of Environmental, Social, and Governance (ESG), the three corporate guiding ethical principles of good practice and “doing the right thing” in the core activities of a business, and both upstream and downstream in their supply chains. 

Arguably too long in the making in the wake of an increasing climate crisis created as far back as the advent of the industrial revolution, businesses should not be surprised by the need for accountability—they certainly should not have needed extra sensory perception (ESP) to understand the requirement for actionable ESG. 

A reputational line in the sand to be considered predominantly when financially investing in companies, ESG is independently measured by third-party auditors using quantitative and qualitative indicators—carbon emissions, water usage, employee turnover rates, board diversity, and executive compensation, for example—to meet new standards that came into force this year. 

 

Corporate Sustainability Reporting Directive

5 January 2023 saw the introduction of the European Union’s Corporate Sustainability Reporting Directive (CSRD), which requires EU and non-EU companies who operate in EU countries, to file annual sustainability reports alongside their financial statements. 

These reports must be prepared in accordance with European Sustainability Reporting Standards (ESRS) and means that ESG is no longer a “nice to have”, but a “must have”. 

If a business is guilty of non-compliance with the CSRD, it can expect administrative sanctions and three possible penalties: a public denunciation, an order to change conduct, financial punishment. Each EU member state will set the penalty and define the limits of the sanctions within their jurisdiction, but the maximum fines are expected to be up to ten million Euros or 5 per cent of their annual revenue.

The most public denunciation would be the claim of “green washing” for those businesses who, while claiming to take their environmental responsibilities seriously, are in fact demonstrating the opposite. 

The UK’s privatised water industry has been mired in scandal of putting profit dividend payments above infrastructure investment for years, resulting in ongoing leakage from crumbling Victorian sewers and raw effluent being illegally discharged into rivers hundreds of times a day killing wildlife and affecting the health of water users. It is an existential failure of ESG, because a water company’s sole responsibility is to maintain the system and provide clean and usable water for its customers. 

The model, it could be argued, was broken at its very inception in that a public utility, there for the common good, cannot sustainably be run for profit where the investors, both UK and overseas institutions and pension funds, have first refusal on bill payer’s money and take large dividends out of a fund meant to be used for repairing leaks and maintaining our rivers and reservoirs. It fails from an obvious environmental perspective, but also in terms of poor governance in allowing the situation to continue for so long. Consequently, it has become a pariah industry with a reputation that is in the toilet for many environmental campaigners. 

As a result, the river analogy is a fitting one in that Britain’s water industry would be likely to be held up as a clear example for non-compliance with the new directive if the rules did apply in the UK.

However, although the CSRD will apply directly in all twenty-seven EU member states, but not in the post-Brexit UK, businesses here will have to comply when trading in the EU, such as retail and hospitality brands who will need to report their compliance with these new rules as early as the 2024 reporting period.

 

Shareholder to Stakeholder Capitalism

The growing movement of ESG, according to Professor Christopher Marquis of the Cambridge Judge Business School, which provides executive education to business leaders, is a move away from shareholder capitalism with its focus on short-term financial returns, to one of “stakeholder” capitalism, where the focus is upon the longer-term dividends including transparency and accountability in environmental practice such as reducing wastage and employee engagement, which focuses upon diversity and inclusion to build robust recruitment and retention strategies. 

“Today’s Gen Z employees want to work for companies with a clear purpose and invest in their people by paying attention to their employees—employers need to be authentic.”

In terms of investors, he argues that directors that fail to deliver on their ESG mandate or “walk the talk” will be voted off the board as part of what he describes as a “game changing” decade under the new CSRD regulations.

 

Retail

Retail has its own litany of business casualties that would fail the ESG litmus paper test if they had not financially failed already. Sir Philip Green’s Arcadia Group and its well-publicised £300 million pension fund deficit which the tycoon was required to pay back after the business failed, was a case in point of how a brand went from hero to zero almost overnight both financially and reputationally.

Failure to carry out due diligence on supply-chain outsourcing and having transparency around who works for you and where, will almost certainly be a concern for retailers, particularly in the wake of incidents such as the 2013 Rana Plaza disaster where a building housing fast fashion workers supplying a number of European retailers collapsed killing 1,134 people in Bangladesh. 

Apart from millions of dollars in compensation, the issue triggered a reputational warning shot for many businesses, forcing them to revisit their international policies on labour sub-contracting. Policies on modern slavery, bribery, and money laundering as well as diversity and inclusion will now also have to be more than written statements of intent on a corporate website.  

Retailers who operate in EU countries will be impacted by CSRD, and they will be measured and judged against good or poor ESG performance. Demonstrable strategies that reduce food wastage, for example, will be a major factor that is likely to build a high ESG rating.

 

The Grocery Sector

European hypermarket Carrefour has become the first French grocery business to secure the National Anti-Food Waste Label for its work with the national food bank Banques Alimentaires, a relationship it has nurtured since 1995. The partnership has recorded ten million “Too Good To Go” baskets sold in its stores.

The label was granted by the Bureau Viratas—a world leader in testing, inspection and certification—following a successful audit of the hypermarket’s two Montesson stores and its head office. Carrefour, which views food waste as a civic engagement because 17 per cent of all food produced is thrown away and recognises its impact on increasing emissions and global warming. It now aims to obtain the label for another twenty of its stores by the end of the year as part of its objective to cut food waste in half by 2025.

Remaining in the grocery sector, global trolley solutions provider Gatekeeper Systems, which operates in fifty-one countries for forty-seven of the world’s leading supermarkets, has built-in ESG in its Trolley Retention Programme, a wheel-locking technology that prevents carts leaving supermarket car parks—whether they are stolen or joy-ridden—where they often end up abandoned in local canals, creating environmental hazards and costs for local authorities to clear up.

The cost of trolley loss to UK retail businesses is a conservative £35 million per year, but the manufacturing of the more than one million steel trolleys that go missing every year represents a staggering 490,000 metric tonnes of CO2, the equivalent of 1.2 billion miles driven by an average passenger car.

Including importation—no trolleys are manufactured in the UK, they are imported from Germany or China—retrieval and repair journeys add up to a total of 690,175 metric tonnes of CO2 emissions per year, the equivalent of 1.7 billion car miles, which makes it easy to understand why Gatekeeper Systems’ Trolley Retention Programme was shortlisted for the Retail Risk Sustainability Award at the 2023 Fraud Awards.

 

Security

Security in retail is also playing its part in highlighting and supporting shopping centre ESG ratings in Europe. 

Crime Prevention Through Environmental Design Ltd (CPTED-UK Ltd) is a UK-based international real estate security consultancy which undertook a first-of-its-kind security and social value assessment using the internationally renowned Building Research Establishment (BRE) Environmental Assessment Method (BREEAM). 

Formed by Richard Stones, OBE—former Nottinghamshire police inspector and Association of Chief Police Officers (now NPCC) business crime co-ordinator—and Boguslawa (Baxi) Moytlska, who was Nottingham police’s Designing Out Crime lead, CPTED-UK’s work has taken them all over the world.

As a result, the application of good ESG security practice has been adopted by Poland’s largest retail estate owners EPP as part of a global first Building Research Establishment report connecting ESG and social value with security. CPTED-UK is now working on the same approach with Galary Szczecin, another EPP shopping centre in north-west Poland. The consultancy has now been asked to present its findings at an ESG conference in Brazil.

Richard said: “Traditional approaches to security can often result in inequitable and exclusionary outcomes.” 

“We encourage the design, policies and procedures that protect buildings and infrastructure users, and at the same time contribute to the dignity, safety, and security of the wider community, so, the introduction of an internationally recognised standard for managing the social risk and opportunities of a business was music to my ears.” 

“Baxi and I were working with EPP—the largest real estate owner in Poland—on various aspects of their security when the international standard was introduced.” 

Baxi, a Polish national added, “Applying our expertise to the management practice of a popular office park owned by the largest Polish real estate owners, EPP, has helped the property management company to enhance its ESG performance by recognising the value of security. This was so successful that it increased the market value of their property portfolio when subsequently floated.” 

In 2021, the International Organisation for Standardisation (ISO) introduced standard 22341 for security and resilience and protective security guidelines for Crime Prevention Though Environmental Design.

The assessment for this considered the added value of rigorous and effective security interventions in connecting security and social value in urban planning, architecture, property management and ESG strategies. 

Talking about the EPP project, Baxi said, “We considered the impact and interdependencies of all manner of factors including, social disruption, instability, labour and community relations, public health, acute and chronic diseases, social and environmental determinants to health, poverty, income equality, modern slavery, workforce training, forced labour—it’s a holistic approach to all the effects a business can have on its community and workforce.” 

“It’s a complex process, but when conducted alongside a full security risk assessment, the process serves to demonstrate the value of good security and its impact on the wider community. We worked intensely with the EPP management team and the City of Poznan authorities to ensure that the Malta Office Park office was the world’s first office complex certified to the latest BREEAM International standard.”

 

Taking Stock of ESG

International stocktaking and audit business Retail & Asset Solutions (RAS), which works with retailers across multiple sectors, has put sustainability at the heart of every business decision it makes, with an objective to go far beyond planting a few trees and leasing electric vehicles—although the business does do both—and focus on building and maintaining a healthy, thriving enterprise with the view to one day achieving ultimate sustainability. 

RAS was highly commended in the “sustainability” category at this year’s 10th Annual Fraud Awards in October, a plaudit granted to “leading by example” businesses that are helping to build a more sustainable future.

The business, which was subject to a management buy-out in 2018, takes part in a number of UK and international initiatives—from tree planting in Uganda to conquering Mount Kilimanjaro to raise funds for mental health charity MIND—all of which make it not only a business that counts stock, but one that its employees and the wider community can count upon for support.

In Jamaica, RAS supports the charity Likkle Swimmers, which provides youngsters with free swimming lessons with the aim of reducing drownings in a country which has the highest youth mortality rate in the world because of extreme weather conditions and coastal riptides. Keith Holt, RAS’s head of RFID, now sits on the board of the charity. 

Lois Haywood, chief executive officer for RAS, highlights another of its closer-to-home projects, where they engage in community-based recruitment when hiring seasonal counters.

“We look at communities with high unemployment and poor transport links and provide a free minibus to collect and drop them home. This works for everyone, because we attract a strong and motivated workforce, often in areas such as Cornwall where the seasonality of the work suits them. When the tourist season is over, they come and work for us for counts,” she said.

The community-based recruitment model also facilitates a reduction in travel whilst building a sustainable and inclusive workforce. The reduction in miles has resulted in a 2,877,484kg carbon saving per annum, while the impact on their colleagues and communities is immeasurable.

“We don’t do these things for the kudos—it runs deeper than that with us—we are looking at the sustainability of our people,” she said. 

The business is also involved in supporting Yorkshire food banks and Dewsbury Community Outreach, which aims to help the vulnerable members of society by providing practical, emotional, and spiritual support. 

The business has also just started supporting sponsoring AFC Reading’s first ladies’ football team, as part of its wider community engagement work.

In terms of its own business operation, it has developed new software and introduced tablets with the objective of eradicating paper, printers, and cartridges from the business, and following the successful roll-out, has realised annual savings of 1,671 reams of paper, fifty-one printer replacements and 889 printer cartridges. In addition to a carbon saving of 55,860kg per annum, the redundant printers were donated to community projects that were in desperate need of office equipment. 

The business is also moving to an all-electric fleet after conducting a thorough audit of carbon savings since 2019, a move that will provide a carbon saving of 264,851kg per annum.

As part of a wider, post-pandemic strategy, the business closed its hub head office in Orpington as part of “Operation Green Office”. It has relocated to a twelve-desk serviced office and provided all its managers with access to 313 offices across the UK and Ireland, ensuring that no manager will be further than twelve miles from an office. 

RAS knew the previous office “hub” was important for colleague engagement and teamwork, therefore they invested in initiatives for colleagues to meet both professionally and socially twice a year to facilitate networking and team building. The impact of the project has seen a huge reduction of mileage and electricity which have realised a carbon saving of 45,612kg.  

Having said that sustainability is more than just planting trees, RAS does indeed embrace a carbon offset initiative, with an annual commitment to partnering with Forestmatic, a green tech start-up focusing on high-impact climate action projects for reforestation and afforestation. With its first contribution of three-hundred trees, RAS is supporting reforestation and communities in some of the poorest areas of the world, with the chance to build their own sustainable future.

RAS also prides itself on being the only stocktaking company in the UK to publish a sustainability report because of its passion for communicating its progress on sustainability. The 2023 annual report which will be published by the end of the year highlights the organisation’s approach to all aspects of sustainability, with the board members being individually responsible for one area of sustainability to govern and report on.

“For RAS, sustainability will never become a buzzword. We understand that sustainability is a vital element of the business and we will remain committed to learning and developing our strategies and making it relevant and meaningful to our business, customers, and colleagues,” said Lois.

A lot of water has flowed under the bridge since the dawn of the industrial revolution—and a lot of it has been, and continues to be, polluted by it. Many businesses were already “doing the right thing” by their people and the wider communities, but still too few. 

ESG and its measurability and actionable management through the EU’s new CSRD regulations could therefore provide the lifeline and ongoing buoyancy aid that lifts the wider business community out of the depths of its own man-made, profit-driven depravity, especially when it comes to looking after the prosperity of the planet and its people.

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