SASB Speaks: In Retail’s New Era, Sustainability Issues Take Center Stage

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Retail has seen better years. Traditional brick-and-mortar stores, including Macy’s, JC Penney, Payless, and Sears, have announced store closures. Meanwhile, as customers turn to convenience and value, discount stores and e-commerce are flourishing. Dollar General is set to open 1,000 new stores (over two per day) and two distribution centers in 2017. According to research firm GlobalData, sales at dollar stores grew 50% between 2010 and 2015, whereas retail overall only grew 17%.
With the proliferation in discount stores and shift towards e-commerce, investors should not overlook the importance of sustainability factors in driving financial performance for retailers.
Through measures such as governing chemical formulations in products, increasing transparency into supply chains, and procuring sustainable raw materials, retailers can reduce risk, drive consumer demand, and reduce price volatility.

In me, On me, Around Me
Consumers care about what is in them (i.e. food), on them (i.e. personal care products), and around them (i.e. home products). As such, consumers are increasingly conscious of potentially harmful chemicals in the household and personal care products they buy, and are demanding products with fewer negative health effects.
A 2015 Nielsen survey found that 66% of global consumers say they’re willing to pay more for sustainable brands. Millennials take this demand further, at 73%. There’s proof this is true: Unilever’s “sustainable living brands,” accounted for half of the company’s growth in 2014, growing at double the rate of more conventional offerings. Sales of Target’s “Made to Matter” line rose 30% last fiscal year. Companies that actively invest in alternative chemicals and sustainable products will be able to anticipate and mitigate the impact of regulation, as well as capitalize on consumer demand trends.
Ingredients in products can also result in negative financial and reputational ramifications for retailers. Major brands have been scrutinized for their use of chemicals, including Johnson & Johnson, who paid $70 million to one woman after the talcum in baby powder was found to have caused her ovarian cancer. In 2015, Lumber Liquidators came under CDC investigation after a report revealed the company’s laminate flooring had higher levels of formaldehyde than allowed by law. The ordeal caused the company’s stock to plunge from over $66 per share in January 2015, to $11.33 after the investigation.
Walmart and Target have already demonstrated leadership in this area. Their sheer size and market power means they will continue to play an important role in guiding manufacturers toward responding to consumer demands for “safer chemistry,” and sustainably and ethically produced products.
In July 2016, Walmart asked its suppliers to stop using certain substances that can affect human health or the environment. They also reduced 95 percent of “high priority chemicals” in their Walmart consumable products. In January, Target introduced one of the most robust chemicals management policies among U.S. retailers. They promised to achieve full ingredient transparency in all personal care and household cleaning products, work with partners to improve chemical formulations and remove certain chemicals in products, and invest in green chemistry innovation to promote safer chemical alternatives.
When large retailers create policies around managing chemicals in products, it reduces business risk related to potential violations, improves the company’s reputation by being viewed as a company who values health and sustainability and boosts sales by appealing to consumer demand and the trend toward transparency. As such, investors should care about how companies are managing this critical issue.Supply Chain “Farm to Store”

“Sustainable procurement is no longer a nice-to-have—it’s an integral business function responsible for protecting and improving brand reputation, driving revenue and mitigating business risk,” said Pierre-Francois Thaler, co-CEO of EcoVadis

Have you ever considered the path your products take from raw materials extraction to your home? Sustainability issues go beyond products: transporting products from raw materials extraction to the store shelf has sustainability implications that are important for investors to note. Along the product lifecycle, retailers need to be aware of (and manage) issues including forced labor in the supply chain that could result in reputational damage and added costs to fix issues or find new suppliers, sustainable and non-destructive raw material extraction to ensure raw materials are available for product development in the long-term, and the effect of environmental externalities like water discharge and air pollution on local communities.
Raw material extraction is the first, and arguably most critical, piece to take note of. Retailers need to be able to source raw materials, such as cotton and palm oil, in the long-term because they are critical components of the products in their stores. Therefore, greater control over how raw material inputs are grown, extracted and produced can reduce cost variability.
Because consumer goods are typically manufactured in countries with less stringent labor standards, the need for a retailer’s governance over potential labor issues is heightened. If a retailer does not have transparency into its full value chain of suppliers, or does not ensure its suppliers are meeting labor and safety codes, it could face higher costs to fix an issue (such as factory violations or safety incidents), and reduced sales from reputational damage if an incident occurs, such as the devastating Rana Plaza building collapse in 2013. For example, Walmart faces a lawsuit for selling cotton sheets from a supplier that mislabeled them as “Egyptian cotton”. In 2016, some of the biggest grocery and restaurant chains were accused of supplying fish from seafood suppliers in Thailand with alleged forced labor. These examples underscore the risks retailers face by not increasing transparency throughout the supply chain.

The Missing Link
Despite the clear relevance of these issues on society and the environment, and their link to financial performance, retailers are not disclosing their management of these topics to investors in regulatory filings. SASB’s analysis showed that 70% of retailers only use vague, boilerplate language to discuss how they manage product sourcing, packaging, and sustainability. Investors deserve better information on this, such as the degree of transparency the retailer has into their supplier list and the business and operational processes it employs to assess and manage potential risks and hazards associated with substances in products it offers for sale.
Companies should reassure investors of their governance over these issues by disclosing their performance relating to these issues. Retailers with established sustainability programs related to supply chain governance and transparency have greater control over sustainability risks. As discount stores and e-commerce proliferate, investors should be keen to understand how retailers ensure sustainability in their products and value chain, as well as how companies are managing these issues that affect short-term and long-term value.

Gabriella Vozza is the Consumption/ Sector Analyst for the Sustainability Accounting Standards Board (SASB)