Why ESG Reporting Is Important for the Food Retail Industry
December 15, 2022 | Jonathan Tan, Peter Cooke
At Ratio Institute, we launched the Food Retail Environmental, Social, and Governance (ESG) Reporting Standard to provide a comprehensive set of metrics for food retail companies to organize and track ESG performance. The standard consolidates food retail–specific criteria from several reporting frameworks to create a tool that can meet the food retail industry’s needs. The standard was informed by a sixty-day comment period before publication, has been endorsed by the food retail industry’s major trade associations, and has been adopted by several major retailers.
In our recently published 2022 State of the Industry Report, we evaluated the ESG reporting of more than a hundred of the largest North American food retailers against criteria drawn from the standard. The report helps raise the industry’s profile and enables organizations to learn best practices and benchmark their ESG efforts. Now, we’re working hard to support the industry in adopting the standard.
So, why all the fuss about ESG reporting? Why do we think it’s so important? To answer these questions, let’s start with the basics and explain what ESG is and why it is important.
ESG refers to an extensive set of environmental, social, and governance topics that can be used to assess a company’s operations and performance. Examples of environmental topics are greenhouse gas emissions, energy use and efficiency, management of materials, food waste reduction, and sourcing products from sustainable agriculture. Social topics include human rights in supply chains, labor and community relations, and diversity, equity, and inclusion in the workplace. Governance encompasses various practices and procedures that drive decision-making, such as executive sponsorship of sustainability initiatives and the integration of climate-related risks into business strategy.
There is overwhelming evidence that strong ESG performance drives profits. An analysis of 2,200 academic studies on the relationship between ESG and corporate financial performance found that the majority of these studies reported a positive relationship. According to McKinsey, strong ESG performance can improve financial performance through numerous pathways, such as enhancing returns on capital investments, strengthening community and government relations, and increasing worker productivity and motivation. In EY’s 2022 survey of US CEOs, 82% said ESG can drive value for their businesses, and 73% have adopted ESG for competitive advantage, lower cost of capital, and other strategic reasons.
Increasingly, investors are screening companies for ESG performance. In 2020, global sustainable investment—defined as investments that consider ESG factors in portfolio selection—was more than $35 trillion, representing 36% of professionally managed assets.
So, now that we’ve explained the value of ESG performance, why is ESG reporting important? In our experience, the most important driver of strong ESG performance is ESG reporting. In particular, we’ve found that reporting with purpose translates into the most benefits for food retail companies.
Reporting with purpose is systematic, consistent, comprehensive reporting and analysis of quantitative and qualitative data across a clearly defined set of criteria, with a genuine intention for process, performance, and profit improvement.
A good starting point for reporting with purpose is a materiality assessment, which involves gathering input from internal and external stakeholders to identify and prioritize the ESG topics that matter most to a company and its stakeholders. The results of the assessment allow a company to report strategically on the most relevant topics and criteria.
Reporting with purpose enables companies to define their baselines in key areas and equips them to identify the changes necessary for improvements. Strong ESG performance naturally flows from reporting with purpose.
When food retailers report in this way, they are more transparent to investors, vendors, customers, communities, and other stakeholders. Investors can easily compare companies’ performance across the food retail industry and make informed decisions on how and where to invest. Consumers can make informed choices about which companies are most aligned with their values.
The following are a few additional benefits of ESG reporting that we’ve observed in the food retail industry:
- Robust ESG reporting can help retailers get lower insurance premiums as well as access to capital at lower interest rates.
- Food retail companies that effectively communicate their ESG values and successes tend to attract more shoppers, increase market share, and attract and retain more talented workers.
- Reducing costs is particularly important in the food retail industry because of its tight margins. Reporting with purpose can facilitate significant store-level cost reductions that can improve profits despite tight margins. For example, Weis Markets has leveraged ESG reporting to cut its annual costs by approximately $80,000 per store by reducing landfill waste, refrigerant leak rates, and energy usage.
To learn more about how ESG reporting can help your food retail business, contact Ratio Institute.