5 Key Considerations for Retail Companies to Enhance Climate Action

October 3, 2022

Retail is one the most important contributors to economic growth and development. The sector contributed approximately USD$20trn to the global economy in 2020 and is expected to grow to almost USD$30trn by 2025. The sheer volume of goods and products manufactured, stored, and distributed across retail supply chains also means that the sector will play a significant role in global decarbonization. For starters, retail fashion contributes between 2% and 8% of global emissions, according to the United Nations. 

If successfully implemented, the impacts of the sector’s decarbonization efforts will be multifold. First, the size and scale of the retail value chain means that its emissions reduction efforts will cascade through other sectors, such as energy, industry, waste, and agriculture. Second, large multinational retailers have the resources to finance and pilot low-carbon research and other innovations that can be widely adopted by smaller retailers. Third, a robust decarbonization plan will help companies to manage climate-related risks across their supply chains, which could help their financial bottom lines.

Currently, retail companies are at different stages of engaging with climate-related issues. In this article, we explore five key considerations for those starting out on their climate journeys and those looking to enhance their current strategies.

1. Know your emissions

Without emissions data, retail companies won’t know what actions to take to reduce their carbon footprints. Conducting an emissions inventory and establishing an accurate baseline is therefore a vital first step.

Under the Greenhouse Gas Corporate Protocol, emissions are quantified across three categories — Scope 1 (direct emissions), Scope 2 (emissions from purchased electricity, steam, heat, or cooling), and Scope 3 (indirect emissions). 

For retailers, Scope 3 emissions are those produced up and down their value chains. They can account for almost 80% of companies’ total carbon emissions and sometimes 98% for home and fashion retailers. Carbon-intensive upstream activities include the extraction, production, and transportation of goods. For downstream activities, Scope 3 emissions are those produced over the lifecycle of a retailer’s sold products. In order to get an accurate count of their carbon footprint, retail companies must know the Scope 1, 2, and 3 emissions of their upstream suppliers, as well as those of their own goods.

2. Identify and prioritize your risks

The retail sector is exposed to both physical and transition climate risks. Acute physical risks — such as wildfires, floods, and droughts — are increasing in frequency and intensity. These can destroy physical assets like factories and warehouses, disrupt supply chains, and scramble distribution networks. Extreme weather events can also cause the price of raw materials to swing, which affects retailers’ margins and pumps up insurance costs. Chronic physical risks, like rising temperatures and changing rainfall patterns, are impacting the yield of agricultural commodities and increasing operational costs, too.

Transition risks — including regulatory, market, reputational, and technological risks — are and will continue to change how retailers do business. Regulators in multiple jurisdictions are mandating climate-related disclosures and putting a price on carbon. An increasing number of investors are demanding compliance with voluntary reporting frameworks, such as the Task Force on Climate-related Financial Disclosures. In many cases, lenders are integrating climate-related risks within their lending decisions. All these developments pose challenges for retailers.

Market demand for retail products is also changing as consumers become more conscious of the climate crisis and how their spending contributes to it. Interest in environmentally-friendly and ethical products is surging, meaning retailers that don’t cater to this demand could lose business and take a reputational hit as well.

3. Engage with key stakeholders

Suppliers. Regulators. Investors. Lenders. Consumers. There are many stakeholders that retail companies should engage with if they want to develop and implement a strong climate strategy.

Since Scope 3 emissions are not in retailers’ direct control, they must engage with their upstream suppliers to reduce them. When it comes to small suppliers with limited resources, retailers may also have to partner with them to help them decarbonize. Retailers can also collaborate with their peers to finance innovative climate-friendly technologies, test out pilot projects, and establish best practices and benchmarks. For example, retail conglomerates Lululemon and H&M partnered with nonprofits to create the USD$250mn Fashion Climate Fund, which will finance the industry’s move toward clean energy and sustainable materials.

With respect to investors, retail companies should seek to understand their expectations on climate-related disclosures. Meeting these requirements can help unlock access to new capital, which may be needed to finance large-scale emissions reduction activities.

Understanding consumer sentiment is another key consideration. Retailers should engage with their customers to determine changing expectations over time, identify their spending limits for climate-friendly goods, and market-test green products. 

4. Set bold targets

For retail companies to meaningfully contribute to global climate action efforts, they need to set ambitious and credible emissions reduction targets. To date, few companies have done this.

Data from 2021 shows only 5% of global retail businesses committed to align their climate ambitions with the 2015 Paris Climate Agreement, while the Science Based Targets initiative (SBTi) shows just 75 retail companies have science-based emissions targets. Of these companies, 16 have set net zero by 2050 targets, as well as near-term, 1.5°C-aligned targets up to 2030. Many more companies will have to set targets if the retail sector as a whole is to decarbonize in line with global climate goals.

To help build strong climate action, retail giants H&M, Ikea, Kingfisher, and Walmart launched the Race to Zero Breakthroughs: Retail Campaign in June 2021. Retailers may consider joining this or similar initiatives to help with their target setting. 

5. Plan your mitigation activities

While the retail sector faces significant climate risks, they also have a wealth of climate opportunities to benefit from. One big opportunity is renewable energy. Retailers that switch to renewables could save on their energy bills and become less exposed to policy risks, like a tax on carbon. Another opportunity can be found in energy-efficient products, which can be attractive to consumers because of their money-saving properties. 

Here are some examples of climate mitigation objectives, and the actions retailers could take to achieve them:

Reduce Scope 1 & 2 emissions

  • Increase retail stores’ energy efficiency with LEDs
  • Retrofit buildings with more efficient heating, ventilation, and air conditioning (HVAC) motors
  • Set up on-site solar power generation
  • Decarbonize owned transportation fleet by upgrading to low emissions and/or zero emissions vehicles 
  • Decarbonize energy usage by switching to cleaner energy sources

Reduce Scope 3 emissions

  • Raise awareness of the importance of decarbonization across the supply chain
  • Include decarbonization in all procurement discussions
  • Make clauses about emissions reduction measures more transparent in supplier contracts and agreements
  • Track pricing from suppliers to identify decarbonization-related cost increases
  • Monitor decarbonized materials and processes to support transparent discussions with suppliers
  • Encourage consumers to exchange non-energy efficient products for more energy efficient ones
  • Track emissions at a product level to identify carbon-intensive goods
  • Invest in technology that makes emissions at the product level easily available to consumers
  • Apply for government grants that promote consumer adoption of green products, finance energy efficient products, support innovation in technology, as well as other research and development

Increase climate finance

  • Leverage green bonds to finance decarbonization efforts
  • Structure sustainability-linked loans to demonstrate to financial institutions a commitment to climate action
  • Channel research and development spending into climate-friendly areas

Final thoughts

For any industry, the process of decarbonization is expensive, lengthy, and complicated. This is particularly true for the retail sector, which covers a huge range of activities and relies on sprawling supply and distribution networks.

Since climate-related physical and transition risks vary from one region to another, retail companies — especially those with a global presence and extensive product portfolio — can’t afford to lose time on their climate plans. Climate change is already bringing about monumental shifts in the way the retail sector functions. Companies that get a jumpstart on decarbonizing can develop a business model that is resilient amid climate uncertainty. 

How Manifest Climate can help

Retailers face unique challenges on their climate journeys. Not only do they have to aggregate and organize climate data on their own businesses, they also need to keep track of the companies up and down their value chains.

Manifest Climate is the leading Climate Risk Planning solution. Our proprietary software and in-house climate experts help businesses identify climate risks and opportunities, build internal climate competency, better align their disclosures with global reporting frameworks, sharpen their climate management, and stay on top of market developments and peer actions. Request a demo to learn more.