Environmental, Social & Government Insights: FTI Consulting January-March 2023

In 2022, new Environmental, Social and Governance (ESG) regulations were designed to come into effect in a number of jurisdictions and have become of increasing importance to governments, investors and businesses around the world.

In the case of Large Format Retail, the ESG criteria helps to better determine the future financial performance of companies within the industry.

FTI Consulting has explored some of the emerging key insights in the ESG space from a global, Australian and retail perspective from the beginning of the year and heading into the second quarter of the year.

Global ESG Leadership

Biodiversity has been at the centre of attention with the United Nations (UN) Biodiversity Conference, COP15, ending with a landmark agreement to guide global action of nature restoration.

In sustainability reporting, the UN has issued a report containing guidelines for the appropriate net-zero target-setting in another push to assist companies in avoiding greenwashing.

The ISSB has confirmed that their world-first Global Sustainability and Climate Reporting Standards will be released this June and will become effective for periods commencing on or after 1 January 2024.

The Standards are designed to establish a globally consistent and transparent baseline for sustainability-related reporting and are expected to be endorsed and adopted by regulators and investors.

ESG in Australia

In Australia, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) continue to ramp up their enforcement action to penalise greenwashing.

The four-day work week has been in the spotlight this month, with the largest trial ending and showing some positive results.

The Australian government has now published its proposed reforms to the Safeguard Mechanism. The reforms would take effect from July this year and would force the country’s 200 biggest emitters to cut emissions by around 5 per cent each year until 2030.

Emissions reduction can be secured through operational changes but also through the purchase of carbon credits.

The Federal Government signaled it will consider replicating Europe’s planned carbon border adjustments tariffs on imports from countries without carbon price.

The review of the national carbon credit scheme concluded that it is well designed, however, it recommended setting greater data transparency and information-sharing arrangements to improve public confidence.

Following this, the government has confirmed it will adopt the review recommendations.

Furthermore, the Department of Climate Change, Energy and the Environment and Water announced Australia will host the Global Nature Positive Summit in 2024.

The Summit aims to bring together governments, businesses, and environmental groups to drive private investment in nature protection and repair.

The ACCC announced it will be investigating a number of businesses for potential greenwashing, following an internet sweep which found 57 per cent of the 247 businesses reviewed made concerning claims about their environmental or sustainability practices.

The cosmetic, clothing and footwear and food and drink sectors were found to have the highest proportion of concerning claims among the industries targeted in the operation.

ASIC launched its first court action against alleged greenwashing conduct, commencing civil penalty proceedings in the Federal Court against Mercer Super for allegedly making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.

Debate on changes to the safeguard mechanism is expected to resume in the Lower House of Parliament.

It is still unclear if the Bill will pass the Senate, as The Greens have stated they will not support the reform as it stands, and that the Government must stop new fossil fuel projects to gain the party’s vote.

ESG in Retail

A significant increase in demand for retail rentals is forecasted as the “concept of usership over ownership grows”. Some retailers like David Jones, have embraced this trend by offering high-end designer goods for hire.

IKEA Australia has also announced the launch of its Australian-first Sustainable Living Shop, a dedicated section of the store where customers can find products designed to help reduce their climate footprint.

Additionally, the brand brought back its Green Friday promotion, giving customers an additional 50% on a refund card when they traded in their pre-loved IKEA furniture in December.

The resale market is also expected to boom, with major retailers like Amazon Australia and the Iconic offering new platforms for customers to by pre-owned products.

Target also just announced it has just emerged from a near three-year makeover. The retailer will shift toward sustainable fashion, meaning it will audit its entire supply chain to ensure it meets Wesfarmers’ sustainability target.

Brands and Trends

From tougher regulations and supply chain issues to higher cybersecurity disclosure expectations, there are multiple ESG and climate trends to watch for in 2023.

The Environmental focus is expected to remain on corporate climate targets, with new disclosure frameworks and regulations in the pipeline, climate disclosure will continue to become standardised, allowing stakeholders, investors, to make better-informed climate-related decisions.

Retailers will be challenged by near-term shortages in responsibly sourced cotton, potentially pushing them towards the use of new and alternative fibres.

There will also be an increase in demand for supply chain transparency and traceability, with some companies implementing pilot projects to use blockchain technology for supply chain management.

In governance, as companies in the APAC region increased the presence of women on boards in 2022, 2023 will be a year to watch the impacts of such change, such as improved talent management practices.

The post-pandemic era has brought radical changes in workforce trends.

In 2023, following the Great Resignation, employee-friendly companies are gaining a competitive advantage.

Ikea published its Sustainability and Climate Reports FY22, showing among other highlights a significant increase in the share of renewable electricity in its retail, production and other operations.

The post-purchase waste remediation process remains a challenge to retailers, as returns create billions of pounds of waste annually.

In the US, a recent poll found more than half (56%) of consumers worry about the carbon footprint of returning a product, and 35% of them have refrained from returning an unwanted item because of environmental concerns.

Coles, Woolworths and Aldi launched a joint Roadmap to Restart soft-plastics collection and recycling.

The supermarkets plan to restart collections on a pilot basis in select stores by the end of this year, as they warned they are limited by current local processing capacity.

KMD Brands, the company behind Rip Curl and Kathmandu gained full B Corporation status after pushing its ESG strategy.

B Corporations are for-profit businesses evaluated and recognised for their positive impact in the governance, workers, customers, community and environment areas.