November 2022 Issue
FW discusses sustainability in the retail sector with Jason Saiban, Kerry Stares, Nick White, Ingrid Saffin and Ashwin Pillay at Charles Russell Speechlys LLP.
FW: Could you outline why the retail industry is under growing pressure to reduce its impact on the environment? What factors are pushing sustainability up the agenda?
Pillay: The retail industry is one of many that have come under pressure in recent years to reduce its impact on the environment. However, increased public awareness of retail’s significant environmental footprint has subjected this particular industry to pressure from all angles. Sustainability is being pushed up the agenda from both above and below. Consumers are increasingly conscious of sustainable retail throughout the supply chain, and their purchasing habits are often heavily influenced by a desire to ‘shop sustainable’. Shareholders and investors have also become more focused on sustainable retailers for their ability to marry profitability with environmental friendliness. The pressure to satisfy both consumers and investors, along with the necessity of complying with additional regulations aimed at environmental, social and governance (ESG) transparency, means that operators within this industry will have to balance sustainability with profitability so that their environmental policies are not prejudicing their ability to make money.
Saiban: The fashion sector has come under public scrutiny for its apparent failure to become more sustainable, particularly in comparison to other parts of the retail industry. This is likely due to the fact that fashion and sustainability appear to be at natural odds with one another, given the cyclical, trend-driven nature of the fashion sector – ‘out with the old, in with the new’. The media has criticised the overproduction and use of harsh chemicals, and the throwaway mentality that fashion promotes. However, many ESG-backed loans are coming into the market, and the many retailers that rely heavily on debt funding will have to improve their ESG credentials to protect their cash flow. Moreover, many companies are introducing personal ESG company directors and targets, which, if unmet, will see a reduction in director remuneration packages. As such, change is near, and ‘fast fashion’ is falling out of vogue.
Saffin: Buying behaviours are increasingly influenced by how ‘green’ consumers perceive the product in question to be, with many willing to pay a premium for sustainability. This is evidenced in the popularity of products such as ‘Who Gives a Crap’ toilet paper, and in Love Island sponsor Ebay’s ‘pre-loved fashion’ offering. Consumers also prefer to purchase from brands with ‘green credentials’ that have made clear commitments to sustainability and safe working conditions for their suppliers. Given that the Generation Z workforce expects employers to demonstrate ethical behaviours, sustainability within retail has become an important part of attracting and retaining staff in a difficult job market. Finally, after many UK landlords committed to reach net zero by 2030, many of the leases granted to retailers now include ‘green’ provisions, which oblige retailer tenants to collaborate with their landlords to reduce the carbon footprint around their occupation and use of their premises.
“While sustainability should already be a key priority for retailers, it will only become more important in the coming years.”
FW: What kinds of financial and reputational risks might retailers face if they choose to neglect sustainability?
Saiban: Unsustainable companies risk falling out of favour with banks that provide their funding, and as ‘green loans’ become the norm, they will likely have to pay more in interest. Moreover, if ESG targets are not met, some facility agreements will now include default provisions that mean the loan can become payable immediately – a harsh example, but one which indicates the direction of travel. Reputational risks abound, as the media and consumers take conversations to Twitter, and other sources of social media that retailers have no control over. In the age of the viral tweet, just one negative comment from a consumer can cause significant damage. Some well-known retailers have faced criticism for ‘greenwashing’, an area in which there has been a flood of case law. This, arguably, threatens even more reputational damage, and so retailers must take care to be authentic and upfront with regard to their green credentials.
Pillay: With news outlets providing continuous updates on the environment, thanks to increased regulatory reporting requirements, and social media providing numerous platforms for the public to voice their opinions, neglecting environmental and sustainability considerations is not an option for retailers. While consumers have shown a willingness to boycott brands that do not comply with the environmental agenda, investors are showing little hesitation in refusing to back retailers with insufficient ESG policies. In either case, both parties are unwilling to risk their reputations and morality in aligning themselves with non-environmentally friendly brands. This has an undeniable impact on a business’ ability to generate profit and raise further capital to execute its business plans. Indeed, the strength of a business’ ESG credentials is now a key metric whereby investors, such as private equity houses, review its overall performance, alongside more traditional financial measures.
Stares: Retailers, like all businesses, are expected by their stakeholders to know and say more about their impact on people and planet than ever before. Some of this new scrutiny is coming from policymakers: publication of ‘Net Zero Carbon Transition Plans’ is expected to become mandatory for businesses across the UK economy over the next few years, as are amendments to the Modern Slavery Act 2015. Retailers need to invest in these areas now to future-proof their businesses against financial and reputational risk. A more informed public and press creates obvious reputational and financial risk for retailers that neglect to invest in sustainability, deterring purchase likelihood. Retailers also need to be prepared to provide hard evidence for what they say to consumers about their environmental impact, as regulators, including the Advertising Standards Authority, are ramping up their focus on brands and greenwashing.
“Retailers that choose to forgo the journey toward a more sustainable future put their customers, their workforce, and the profit and reputation of their business at serious risk.”
FW: In what ways can a sustainable approach translate to improved performance and benefit shareholders?
Stares: Understanding and improving your sustainability credentials as a retail business mitigates numerous regulatory, litigation and reputational risks that might otherwise have posed a threat to business performance and profitability. Those that invest in improving their environmental impact are likely to see material cost savings through reduction of waste, lower staff turnover and lower cost of capital, as credit ratings agencies factor ESG into risk assessments and cheaper debt finance is available to companies with strong ESG credentials. Beyond this, investing in a more sustainable approach to business can add significant value for business owners, including giving access to new markets of climate-conscious consumers and the first steps toward a circular business model. In a challenging market for talent, these retailers will be best placed to attract and retain the right staff.
Saiban: A sustainable supply chain is more reliable, which will likely lead to higher quality products, greater customer satisfaction, and increased profit that benefits shareholders. Moreover, retailers with sustainable supply chains can rely on more solid investment streams, which in turn provides certainty for shareholders.
Pillay: By taking a sustainable approach, businesses are better able to plan for long-term relationships with key suppliers without having to consider the availability of alternative suppliers once the existing resource has been exhausted. This long-term holistic planning enables businesses to negotiate preferable terms so that management’s time and energy can be appropriately deployed. Furthermore, there are a growing number of sources of capital which are only available to businesses demonstrating strong ESG credentials. Access to a wide range of capital – through both debt and equity funding – allows retailers to seek competitive terms and to execute on ambitious business plans. As well as positive ESG having benefits, negative ESG can also have significant downsides. If retailers breach ESG rules or regulations, consequences can include fines, market assess restrictions and, of course, significant reputational damage, which can be particularly critical to businesses in the retail sector.
“Accurate data tracking against goals is always an important way to measure progress and performance.”
FW: What steps can companies take to place sustainability at the heart of their operations, ensuring the issue is prioritised and factored into key decisions? To what extent does this need to extend throughout their supply chain?
Saiban: Sustainability, or a sustainability-conscious mindset, should not only be discussed in the C-suite: it ought to be woven into the ethical fabric of each retail company. That said, statistics have shown that including ESG targets as a key performance indicator for company directors is extremely effective in pushing sustainability to the top of the agenda, particularly if that is tied to remuneration.
Pillay: Sustainability can be placed at the centre of a company’s operations by incorporating specific provisions into the company’s constitutional documents, including its articles of association. The inclusion of these matters means that the company is publicly resolving to take them into account and must refer back to them when making key decisions. For example, UK entities that wish to become B Corps are required to have specific provisions in their articles of association, which require them to create a material positive impact on society and the environment. These requirements will apply to actions taken by the company and will impact those with whom the company does business. As such, the company will have to consider links in its supply chain from an ESG perspective. ESG regulations are increasingly targeted at a company’s entire operations and business counterparties, so ensuring that they too have a strong ESG record is vital.
Saffin: Better Building Partnerships produced a green lease toolkit in 2013 outlining a number of key areas where landlords and tenants can increase the sustainability of their retail premises. Firstly, this can be achieved through fitting out the premises, without damaging and ideally enhancing its environmental performance and energy performance certificate rating, using sustainable materials and disposing of old materials sustainably in this process, as well as through adopting recycling regimes for general waste. In addition, landlords and tenants can reduce energy and water consumption by buying energy from green sources and installing green energy sources onsite, setting targets and strategies to improve the overall environmental performance of the premises together. Lastly, limiting the landlord’s requirement to strip out the premises when the lease ends and leaving items for the next occupier’s use is an efficient way of achieving more sustainable retail premises.
“Understanding and improving your sustainability credentials as a retail business mitigates numerous regulatory, litigation and reputational risks.”
FW: How important is it to set and track relevant milestones toward achieving sustainability? What steps can retailers take to effectively measure and monitor sustainable activities – and how can technology help?
White: Accurate data tracking against goals is always an important way to measure progress and performance. This is as much the case with sustainability as it is in any other area. Happily, improving sustainability performance often goes hand in hand with increases in general business efficiency. For example, by reducing the number and distance of journeys that need to be made, businesses can save on maintenance expenses and fuel costs, which has a beneficial impact on sustainability as well as the commercial bottom line. Software is available to help measure and track changes in energy expenditure in terms of units of electricity and volume or gas or petrol used across organisations. In addition, intelligent packaging recommendation solutions can analyse factors like physical stock-keeping unit dimensions, packing materials and time and temperature, which ensures that efficient packaging decisions are made.
Saffin: It is essential for retailers to set and track relevant milestones toward achieving sustainability. However, technology is rapidly changing to the extent that any plan must factor in a degree of flexibility. Better Building Partnerships’ cross-industry steering group has developed a standard for verifying what ‘net-zero carbon’ means in UK buildings. Likewise, the UK Green Building Council has produced guidance around defining net-zero carbon within the same context. In both instances, these bodies have provided helpful guidance to measure improvements in relation to premises. In any case, collaboration with landlords is essential, as many goals cannot be achieved without the landlord on board.
Saiban: Without milestones and targets, you simply cannot measure whether you are achieving your goals. As such, goals need to be realistic and tailored for each retailer. Moreover, retailers must engage with suppliers, at all levels of the supply chain, and take particular care to do the relevant due diligence.
“Without milestones and targets, you simply cannot measure whether you are achieving your goals.”
FW: What essential advice would you offer retailers on combining operational excellence with social and environmental responsibility?
Saiban: It is essential that retailers are open and genuine about their green credentials, and about what they can realistically achieve. I would advise that retailers take their social and environmental responsibility seriously, and, in order to ensure that their chosen suppliers align with their intentions, I would suggest that all retailers conduct a thorough audit of their supply chain. On the whole, I would urge retailers to realise that the process is an ongoing one, as opposed to merely a tick-box exercise, and to be patient with this. When these steps are taken, the results will yield significant benefits for both environment and profit.
FW: Do you believe the retailers are capable of achieving a green future? To what extent is sustainability likely to shape the industry over the coming years?
Pillay: Not only do I believe that retailers are capable of achieving a green future, I believe that their survival is dependent on their ability to embrace and achieve a green future. While sustainability should already be a key priority for retailers, it will only become more important in the coming years. Consumers and funders are increasingly being driven toward, and are themselves driving the industry toward, companies, brands and products that can boast a strong ESG offering to the exclusion of other retailers. The sustainability revolution has already begun, which means that retailers that do not partake will find themselves left behind; struggling not only to find customers for their products, but also to find attractive and competitive funding that will allow them to function within the industry.
Saiban: I do believe that retailers are capable of achieving a green future – but, again, we need to be realistic about timelines and what can be achieved. Some of the business models that retailers have at present are not sustainable, and cannot be, unless they are completely reconfigured. That said, these parts of the industry may fall away as the sustainability conversation develops, and as banks refuse to give loans to companies that fall below what is required from an ESG perspective. Modern day consumers are also leading the way in choosing products that are sustainable, with many of the younger generation displaying eco-conscious buying behaviours and a general disinterest in fast fashion, the latter of which has various economic benefits, too.
Saffin: Retailers that choose to forgo the journey toward a more sustainable future put their customers, their workforce, and the profit and reputation of their business at serious risk. Landlords, government legislation, company reporting requirements and public perception all have a part to play in pushing retailers in a greener direction and helping them to achieve a more sustainable future.
White: Because sustainability is driven in so many ways by increased efficiency, businesses should be able to focus on it alongside their need for financial and commercial success. Software tools to assist retailers and their supply chains, and the sensors that provide them with data, will simultaneously become more sophisticated and less expensive. Governments, institutional investors and banks will all be looking to support and reward increasing efficiency, and to punish or shun its opposite. In areas such as clothing, I expect to see brands slowly but surely moving away from waste, ‘wear once’ culture and shorter lifespan products, and instead looking for authentically planet-friendly business models. Their customers and the influencer community will demand it, and fashion will evolve to enable it.
Jason Saiban is a commercial contracts specialist, with a focus on TMT, sport and retail & leisure. His retail practice is focused on marketing, e-commerce, franchising, distribution, supply and logistics. His clients in the retail space include brands, restaurant chains and manufacturers. His client base ranges from large multinationals to start-ups and entrepreneurs. He can be contacted on +44 (0)20 7203 5347 or by email: jason.saiban@crsblaw.com.
Kerry Stares supports clients to achieve their sustainability objectives and to ensure that the firm’s business has a positive impact for its people, its communities and its natural environment. She also leads the firm’s pro bono practice, which provides access to free legal advice for individuals who need support to access justice and for small charities and social enterprises. She can be contacted on +44 (0)20 7427 6642 or by email: kerry.stares@crsblaw.com.
Nick White is an intellectual property and digital specialist. His experience spans many areas including brand protection, e-commerce, broadcasting, marketing, esports, defamation and privacy, data protection, betting and gaming, disputes and regulatory matters. Alongside his expertise in sports, as one of the firm’s key lifestyle lawyers, he works extensively across the retail, leisure, fashion, and food and beverage industries. He can be contacted on +44 (0)20 7438 2294 or by email: nick.white@crsblaw.com.
Ingrid Saffin has a wealth of experience acting on industrial and energy projects, including energy from waste, gas production and pipelines and hydrogen refuelling, factories, warehouses and depots. She acts for a number of high-profile retail and leisure clients, healthcare businesses and corporate occupiers. She is ranked as a ‘Leading Individual’ in Legal 500 and also as a ‘Recognised Practitioner’ by Chambers and Partners. She can be contacted on +44 (0)1483 252 630 or by email: ingrid.saffin@crsblaw.com.
Ashwin Pillay works with a broad range of clients across many sectors and on all aspects of private M&A and private equity investments for both management teams and institutions, venture capital and growth capital transactions. He is also a member of the steering committee for the Association for Corporate Growth. He can be contacted on +44 (0)20 7438 2194 or by email: ashwin.pillay@crsblaw.com.
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