Why Retailers Must Navigate Muddy Waters of ESG Requirements

The need for more corporate responsibility has evolved for today’s corporations and the next generation of business leaders in the form of environmental, social and governance (ESG). Investors, activists and regulators are now requiring proactive, community-structured commitment and accountability that's designed to step above shareholder returns.

Today’s global capital markets aren’t interested in more marketing from companies in every industry. Instead, they're demanding sustainability and eco-friendly business practices as well as a reasonable return. Global retailers and their executives are now hearing this call, and the industry is being more proactive in this movement.

Why Are ESG Standards Needed?

Although ESG metrics are still trying to find their proper place in today’s standardized financial reporting, that hasn’t stopped retailers and other industry institutions from making promises and illustrating the proactive nature of their ESG standards.

What’s needed at this critical step is the ability for companies across all industries to truly quantify their company’s present position relative to investor objectives of integration, values and impact in the areas of governance over environmental and social contexts. American stakeholders AND shareholders aren’t interested in window dressing and empty promises only for the benefit of a feel-good investor report. They want to know that companies are holding themselves accountable to the promises and commitments they’re making in these key areas.

Proxy Advisors Making Unfair Pressures

Many retail companies, specifically, have felt their fair share of pressure to adopt more ESG-forward practices. Whether through a reduction of plastic carrier bag usage or gender pay gap reporting, shareholders have certainly brought pressure on a large number of retail companies over their supply chain strategies, environmental and sustainability impacts, and certainly gender-diverse practices. This focus has led to a significant overhaul of many business processes alongside the appointment of a new addition to the C-suite: the chief sustainability officer (CSO). Other companies inside and out of retail continuously look at leaders in this movement and have started to replicate their operational changes.

However, making promises about ESG commitments and holding true to them are apparently two different stories for some. Many companies are being pushed into making ESG improvements and commitments, especially through institutional investors and oversight organizations such as Institutional Shareholder Services (ISS).

This has led some to wonder if these proxy advisors have become too focused on ESG issues, have conflicted, and have broadly too much power over the operation of America’s largest companies and retailers.

ISS Hypocrisy Over ESG Requirements

For example, ISS talks a big game on the issue of diversity and inclusion. ISS demanded publicly traded companies disclose the ethnicity of each and every member of their board of directors. More recently, ISS has been accused of refusing to recommend voting for board slates that it alleges do not contain enough "diverse" representation.

However, it appears that ISS lacks representation from even a single person of color. Moreover, it doesn't appear that ISS's two corporate owners — Genstar Capital and Deutsche Boerse — have even a single person of color on their executive teams. This is troubling given the fact that they've claimed diversity, equity and inclusion is a priority and have asked publicly traded companies and retailers to make commitments towards those ends. Standards are not only needed, they must be adhered to at all levels.

Retailers Have a Chance to Serve as Models

Despite the hypocrisy demonstrated by organizations such as ISS, retailers have the opportunity to truly bring about change — not just in their marketing but in the way they go about doing business. In fact, as business models have had to adapt to this new landscape and changed customer behaviors, there has been evidence of the incorporation of ESG elements across the retail industry.

These moves recognize it's not solely about making money and preserving the bottom line, but that retailers have been working toward having a positive societal impact. There's no doubt that these newly implemented strategies have the potential to drive increased valuations, which pushes up the appetite of investors, but that they also attract more qualified people into retail companies who are extremely committed to the corporate cause.

As more retailers focus on staying committed to their ESG promises, everyone will win in the end, including customers, stakeholders, investors, the environment, and certainly employees. These companies will truly serve as models of operation in the future. But we must move beyond just promises and commitments, a new set of ESG standards must be developed to level the playing field of reporting.

Rashida Salahuddin is the president and CEO of The Corporate Citizenship Project, an organization that provides objective guidance on governance matters at publicly traded companies and larger private enterprises.