We have seen the topics of Environmental, social, and governance (ESG) and sustainability grow at great pace since the COVID-19 pandemic and they are now a strategic priority in many business models. For retailers, sustainability is a core value to ensure that they continue to be attractive to increasingly discerning and ethical stakeholders, and see it as a key driver to economic growth.

It is estimated that a 20 per cent reduction in energy is equivalent to a five per cent increase in revenue so there is a clear financial incentive as well as environmental[1]. We are also seeing ESG-driven metrics driving sector acquisitions and funding rounds, so sustainability is not a subject to be ignored in the retail sector.

What does sustainability mean in the retail sector?

Sustainability in the retail sector means the ability of a business to continuously improve its performance, while reducing its environmental impact.

The European Corporate Sustainability Reporting Directive (CSRD) and the EU Deforestation Regulation will impact retailers and their suppliers greatly, driving them to put sustainability and the use of commodities in supply chains at the front and centre of their operations. (In addition, it will put emphasis on social issues – the need to provide flexible working arrangements and training opportunities, for example, will play a big role in retail, although for the purposes of this article, as we focusing on the sustainability issue.) These new pieces of legislation will increase both complexity and cost to doing 'responsible business'.

Just a few of the ways we have seen retailers try to manage their environmental impact include;

  • Increasing lifespan of products – recycling, resale market and repair initiatives
  • Traceability – monitoring a product's journey from sourcing materials, through product creation and delivery to the end customer – being accountable for the supply chain's carbon footprint
  • Being sustainable in every-day retail practices e.g. choosing energy-efficient equipment, lights and appliances, minimising paper usage, reducing packaging and waste management
  • Switching to sustainable packaging alternatives
  • Transport – EV for local deliveries, improving logistics and delivery routes[2]
  • Collaborating with key suppliers – creating a circular economy

The latter is one of the most important emerging principals in the sector in recent years and retailers are uniquely positioned to drive circularity at scale. If they are to stay on a net zero carbon trajectory they need to change their approach to design, material selection and use. Facilitating the transition towards a circular built environment involves changing attitudes from 'take-make-use-discard' to 'remake-reuse', which is arguably much harder than changing buying strategies and supply chains. But it is also much more tangible and visible to customers as an outward demonstration of a brand's commitment to the environment.

The race to net-zero

The ethical and sustainable behaviour of brands and retailers play a key role in the purchasing decision process and consumer expectations. Consumers are looking for more commitment from retailers so that they can consume better and make more sustainable choices. Therefore, it is more important than ever for retailers to make sure their behaviour and choices in their business align with its consumers.

While some have yet to implement comprehensive sustainability agendas, there are a number of retailers who are competitively reducing the climate impact along their value chains or embedding sustainable behaviour throughout their own organisations in attempt to reach net-zero. Let's take a look at some of the companies who have either achieved or are currently striving to get to net zero and see what can be learnt from their progress.

1. Peel L&P

The Manchester-based developer has created the UK's first carbon neutral shopping centres. A third-party assessor has recently confirmed that two of its locations, Quayside MediaCity in Salford and Gloucester Quays, have met the UK Green Building Council's net zero operational energy standard. The sustainability and ESG director at Peel L&P has outlined a four-step approach into reaching net zero as a commercial landlord[3];

Step 1 - Reduce energy use

Step 2 - Renewable energy

Step 3 - Work with tenants

Step 4 - Offset emissions

The company is now investigating whether it can use water source heat pumps at the two quayside locations to take advantage of the differentials in the heat in the canals to take it one step further.

2. Superdry

To play its part in the fight against climate change, Superdry has challenged itself to be the most sustainable fashion brand by 2030. Over the past decade, it has focused on its operations and reduced its carbon footprint by 97 per cent, mostly through converting to 100 percent renewable electricity.

As part of its journey, since 2017, the retailer only acquired stores and offices with a renewable electricity source and is are currently working with franchise store partners to help it make the switch too.

Superdry has acknowledged that the majority of its reported emissions came from its third-party logistics, i.e. moving the product from factory to customer. It now uses barges instead of lorries to transport over 40 per cent of garments from port to warehouse in Belgium – barges emit 50 percent less carbon than lorries. They are using airfreight less to move products from factories to warehouses, relying on it for 14% of volume three years ago to two per cent last year – they are planning to cap at one per cent this year. This means moving 99 per cent of inbound garments via lower carbon routes including sea freight.

Shaun Packe, global sourcing and sustainability director at Superdry, has laid out the three pillars that are helping the brand to achieve its eco conscious goals[4]:

3. Be clear on your ambitions

Set clear targets that are challenging and measurable.

4. Sustainability starts at home

Set up a group called the "Sustainability Warriors", a group of 50 people in the company that have been fundamental in driving the change in every area of the business.

5. The consumer journey

Its approach was to start with clear and concise sustainable product offer enabling store colleagues to interact with consumers with authority in their core product categories.

6. IKEA

IKEA is on a journey to be climate positive by 2030 and has taken its latest step in their global transformation programme. Kick-started in 2018, this has seen the group undertake a 'total market approach' centring on convenience and accessibility to meet demand when and where it arises. This hub and spoke approach will mean a reduction in carbon by reducing travelling distances and traffic journeys for small items.

Sustainability executives from IKEA helped develop the WWF's report last year, which set out seven core actions that tend to characterise all the best corporate climate leaders. As a rule, these leading companies:

  • Account for and disclose their environmental performance;
  • Set targets in line with a 1.5C warming scenario;
  • Reduce emissions across the full value chain;
  • Finance and support solutions across and beyond their value chain;
  • Engage responsibly and actively to promote effective climate policies;
  • Collaborate with suppliers, employees, and stakeholders; and
  • Enable and inspire customers through the development of sustainable products and services.

Andreas Ahrens, head of climate at Inter IKEA Group has highlighted the importance of collaboration across all networks is crucial on achieving sustainability goals.

Challenges with sustainability

Some businesses struggle reach net zero as they find themselves being held back by a number of challenges, some of which include:

  • Supply chain - One of the key barriers to decarbonisation identified in a report commissioned by Zurich[5] was accounting for emissions that are embedded in the supply chain, particularly emissions that are generated when goods are transported from source to point of sale. Retailers can tackle this by working closely with their suppliers to accurately measure supply chain emissions, and by prioritising sustainable sourcing and transport for their products.
  • Cost - A report by Lloyds highlights the struggle seen especially with Small and medium-sized enterprises (SMEs) stating that almost 40 per cent of businesses cite the costs and fear of low returns on investment as a significant barrier to action[6]. The first step will always be to look at low-cost, high impact solutions to lower energy use such as LED lighting then looking towards whether funds and grants are available for higher-cost solutions.
  • Greenwashing - Many brands are being widely accused of overstating their sustainability intension or making little real impact on their emissions. Some retailers over communicate their goals before they can demonstrate any progress which can ultimately be damaging to the company's reputation.
  • Transparency and measuring impact - Organisations that fail to record and reduce their emissions risk losing a competitive edge, and ultimately being left behind in the green economy.
  • Retrofitting or demolishing - Although retrofitting is seen as the more sustainable option, it also comes with challenges in relation to costs and acceptance of change from the public and existing estate owners.
  • Offsetting - Some companies try to reduce their impact by offsetting their emissions without tackling the underlying problems which is not seen as good practice.

Who picks up the cost?

It is often unclear whether the obligation to pay for net zero initiatives is on the retailer (or its suppliers), or whether it is in fact passed on to the customer. While all sides often have the same goal and targets, it does not seem that a widely accepted 'norm' has been reached. Taking commercial leases as an example, service charge provisions, for example, do not have a settled approach on responsibility for greener initiatives run in shopping centres. (on this point, one of the key themes of the Whole Life Carbon Roadmap is the need for a collaborative approach – and green leases are certainly a step in the right direction, although there still needs to be a settled position.) [7] It seems the case that some customer segments are willing to pay for it – with more than four-fifths saying that they are willing to pay a 9.7 per cent 'sustainability premium' for more sustainably produced or sourced good[8] but the appetite of premiums will vary wildly between brands and sub-sectors of retail.

The way forward

Although there are a myriad of challenges to overcome, there is a sense of desire – and progress – for retailers to reach net zero. While the issue and solutions still feel quite new, words now need to be replaced with action. And it does feel that developers, investors and operators across all sectors have now crossed that Rubicon – and retail is no exception. Given the other challenges retail has faced in recent times, plus the inherently low profit margins, only time will tell just how quickly real headway can be made.

Our Retail & Leisure and ESG teams can support your company's ESG and sustainability requirements or ambitions in the retail sector. To discuss any of the points raised in this article, please contact Jocelyn Paulley or John Coldham.

Footnotes

[1] Retail repurposing: why improving retail environmentally will help it economically
[2] Reducing carbon footprint through efficient route planning
[3] React news article 15 Feb 2023 – 'How to make a net zero shopping centre – in four easy steps.'
[4] Superdry: 'We want to be the most sustainable fashion brand by 2030'
[5] Retail amongst industries facing toughest road to net zero
[6] From Now to Net Zero
[7] Net Zero Whole Life Carbon Roadmap
[8] Voice of the Consumer Survey 2024 — CEE Edition