Few sectors are more prone to ESG (Environmental, Social and Governance) issues than Consumer & Retail. C&R companies are closely linked to people and the environment, which is creating specific responsibilities and specific dependencies (i.e.: risks). The impact of climate and regulatory changes is far-reaching. How do you manage this and other non-financial risks for your business and do you know what is coming?
The ambition is clear. The United Nations' Sustainable Development Goals (SDGs) have set the global agenda to meet global challenges in the areas of poverty, health and the climate change amongst others. Specifically with regard to climate, the European Commission's Green Deal leaves little to the imagination: by 2050, the European Union must be climate neutral. This seems far away, but regulatory changes are brought into force today which requires immediate action. More and more shareholders, investors and customers are voicing that same opinion: do everything that is possible to make the company resilient for the impacts of climate change - there is no alternative. And this is no longer a nice to have; failure in addressing your non-financial issues can bring serious risks to business: not only risks to brand value (including related fraud risk factors), but also increasing risks from non-compliance with a growing body of legislation, carbon taxes, and physical risks in the supply chain.
Last January the European Union launched the Green Consumption Pledge and the first companies are committing to concrete actions towards greater sustainability. The Pledge is intended to empower consumers to make green choices, for instance via green products claims such as the carbon footprint of their flagship products. Big and reputable brands can clearly contribute here but, as we also learned from financial fraud cases, with pressure being put on targets and results, this leads to an increase in risks of falsified outcomes. Evidence is increasingly surfacing of organizations that have been involved in the manipulation of their sustainability data. Reasons for this include pressure to comply with regulatory demands, to demonstrate green performance to shareholders, or simply to attract new investors or clients.
Legislation such as the Non-Financial Reporting Directive (NFRD) and the increasing number of international guidelines and standards, such as The European Green Deal and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), are powerful catalysts for change. The NFRD will be updated in 2021 and expectedly this will mean that all companies with more than 250 employees will need to report on ESG. Currently this is only applicable for listed companies with more than 500 employees. Furthermore ESG assurance over this reporting will likely become mandatory. Companies will then have two more years or even shorter to prepare for ESG disclosures (including climate risk) which will have its impact on the underlying (finance) processes.
The European Green Deal has found a forceful tool in the EU Sustainable Finance Taxonomy to deliver on its environmental objectives. The taxonomy covers environmental issues relevant for the C&R sector, such as circularity, pollution, water and again climate change. Within a few years companies eligible under the NFRD will need to report revenues, OpEx and CapEx for activities covered under the EU taxonomy.
For example, for plastics, you would need to report annual operational expenses and investments done to reduce them. If you are in the furniture business, you could be required to report the amount of sales from circular products and again related investments to bring these to market.
Due to expected regulatory changes and the interest of the financial industry to disclose high portions of EU Taxonomy-aligned investments in their portfolio, many more companies than just the ones eligible under the Non-Financial Reporting Directive (NFRD) will expectedly be requested to report their Revenues, CapEx and OpEx on the basis of the EU Taxonomy categories to secure access to appropriate financing.
It is not all about regulations and reporting. The pandemic is forcing companies to pay more attention to their role in society, their impact on the world, and what society expects from them.
Many companies are now opting to accelerate their ESG efforts and moreover, their ambitions are being raised, for example regarding steeper ambitions on decarbonization.
In the end this means that each company needs to revisit its ESG strategy.
Parallel to this, we are seeing consumer preferences becoming more sustainable. The younger generations in particular find it important to recognize their values and standards in the products they use and in the companies that are selling those products. In this context, companies are considering alternative scenarios for their supply chains and, in some cases, questioning whether the complex global supply chains built up over the last 20 to 30 years are the right model for the future.
In some sectors, particularly in consumer goods, the crisis has also increased pressure on large companies to take responsibility for the smallest and most vulnerable players in their supply chains – smallholder farmers in the developing world that produce cotton or cocoa for developed markets, for example.
Therefore, sustainability has a direct impact on the day-to-day operations of companies, especially in the Consumer & Retail sector.
The above illustrates why it is of the utmost importance that companies start today to gain a deep and thorough understanding of the environmental and societal risks associated with their activities. So what to do?
1. Prepare for upcoming regulations now
The EU regulations primarily will drive further disclosure requirements that urge for timely preparation. This entails understanding the requirements, interpreting these for the company's activities and – most importantly – to design and implement these into systems and processes in order to deliver data that can be relied upon. We recommend to watch the developments and start considering the consequences immediately. KPMG is on top the developments and has developed methodologies already to apply the EU Taxonomy for example.
This may already be applicable to your 2021 financial statements when the EU taxonomy is concerned.
2. Redesign your ESG strategy
The developments do not only come with risks. The opportunities lie in developing an even more integrated strategy, to redefine the value you want to create with related ambitions, targets and indicators that drive the business value. As pioneers in ESG at KPMG since 1992, we have been leading the space for a few decades now and would be ready to assess your strategy against the external developments and requirements – be it from a risk or impact perspective.
3. Take a longer term and unconventional risk mindset
The climate crisis as the most urgent example requires an unconventional risk mindset, moving away from traditional risk management and with more dynamic and long-term assessments. Scenario analysis can make a valuable contribution to understanding and then managing these risks for different uncertain pathways to future states.
The structured approach that KPMG has developed for this purpose helps our clients to ultimately be more future-proof and to think about 'business not-so-usual'. Our experience as a member of the TCFD has been translated into science-based, data driven insights that informs strategic decisions.
We are confident that the above raises your awareness of the importance of ESG issues for the future of your business. We hope you see the need to act now: for many companies this requires new steps into unchartered territories such as scenario analysis, indicator setting, finance integration. We would be ready to assist you!