December 6, 2023

Climate change has become critically important for the retail sector

Climate change has become a significant financial risk for companies, requiring their attention as a core business issue. For retail companies, climate change creates multiple risks regarding potential harm to physical assets such as stores and warehouses, product design and delivery challenges, uncertain supply chains, and the growing costs of insurance. Retailers are vulnerable to several types of climate-related transition risks – changes in policy, technological risk as emerging technologies impact competitiveness, market risks from changing investor priorities, litigation risk, and reputational risks tied to changing customer or community perceptions.

Physical Risks

Physical risks resulting from climate change can be event-driven (acute) or longer-term (chronic) shifts in climate patterns. The Intergovernmental Panel on Climate Change (IPCC), which represents a consensus of over 800 scientists in 140 countries, reported in 2021 that “it is unequivocal that human influence has warmed the atmosphere, ocean and land”, creating widespread and rapid changes in the atmosphere, ocean, cryosphere, and biosphere. Climate change is already affecting every inhabited region across the globe, with increasing climate extremes, including cyclones, tropical storms, flooding, heatwaves, heavy precipitation, and in some regions, droughts. Every additional 0.5°C of global warming causes amplified impacts in frequency and intensity of acute events and chronic changes; and ocean and land carbon sinks are increasingly less effective at slowing the accumulation of carbon dioxide (CO2) in the atmosphere.

In 2021, the IPCC produced a set of five new illustrative emissions scenarios covering the range of possible future developments, and under all emissions scenarios, global surface temperature will continue to increase until at least mid-century. Global warming of 1.5°C and 2°C will be exceeded this century unless deep reductions in CO2 and other GHG emissions occur in the coming decade. Even adopting scenarios with very low GHG emissions now, it will take 20 years to see discernible differences in trends of global surface temperature begin to emerge. Many changes are already irreversible for centuries to millennia. The IPCC concludes that human-induced global warming must be limited to at least net-zero CO2 emissions, along with strong reductions in other GHG emissions.

Canada is warming at twice the global rate. Mean global temperatures are already 1.1οC higher than pre-industrial temperatures. If the current warming rate continues, the world could reach human-induced global warming of 1.5οC as early as eight years from now, with Canada warming ever faster, resulting in serious consequences for economic activity, water and food security, and the health and well-being of countless individuals. The United Nations (UN) reports that climate-related disasters increased globally by 83% from 2000 to 2020. Increased frequency and severity of extreme weather events impact society’s adaptive capacity and ability to bear the costs of rebuilding and recovery after experiencing large losses. In Canada, increasing temperature and precipitation extremes are already contributing to the frequency and intensity of acute events such as floods, storm surges, wildfires, windstorms, heatwaves, and droughts. Severe weather damage in Canada caused CA$2.4 billion in insured losses in 2020.

Canadian appellate courts have recognized that climate change poses an existential threat to human civilization and the global ecosystem, with considerable economic and human costs. The Supreme Court of Canada has held that establishing minimum national standards of GHG price stringency to reduce GHG emissions is of national concern to Canada as a whole.

What does it mean for Canadian retailers? Extreme temperature changes can damage retail, storage, and distribution premises and prevent access. Acute events disrupt operations and supply chains, and create employee safety concerns. The Insurance Bureau of Canada reports that flooding in Canada causes annual average economic losses of over CA$1.2 billion, of which CA$800 million are uninsured. If acute events continue at this pace, insurance will become prohibitively expensive for some businesses and there is risk that it may become unavailable in some high-risk areas in the future. A 2019 S&P report observed that weather is already a significant swing factor in a retail company’s results.

Retail companies face significant indirect impacts from supply chain disruption, uncertainty in the availability and pricing of raw materials at risk, and changes in water quality and availability. Risks facing Canadian retailers are exacerbated when many of their suppliers are in countries that are feeling climate impacts even more, as it alters the availability of raw material. Climate risks affect supply chain management in that they increase the cost, and variability of cost, of producing goods and services; disrupt the delivery of goods and services in a speedy and timely fashion; can reduce the quality of goods and services provided; and increase the uncertainty and magnitude of supply chain disruptions. Depending on the region of Canada or globally from which retailers purchase their products, there are risks from drought and rising costs of inputs such as agricultural production and clean water for manufacture of food, drink, and apparel.

Acute events can hamper the availability of raw material and energy supply to retailers. For example, the atmospheric rivers and devastating flooding in British Columbia in November 2021 disrupted supply chains across western Canada, including two rail lines and four major transportation routes, “leaving truck drivers stranded, grocery store shelves stripped of food and access to the country’s largest port blocked.” The same month, storms washed out parts of the Trans-Canada Highway in Newfoundland and Labrador, and retailers experienced difficulty in moving goods throughout the province. Chronic physical risks, such as rising temperatures or changing rainfall patterns, can alter the yield of agricultural commodity inputs and degrade infrastructure.

Rising temperatures are resulting in diseases appearing in regions that have never had exposure to them, because the warming allows the diseases to spread, these risks varying based on the disease, region, extent of temperature change, and degree of adaptation. Risks for some vector-borne diseases are projected to increase with warming to 1.5°C, including shifts in their geographic range. In addition to the devastating effects on people, zoonotic diseases (travelling from animals to humans) can also reduce supply chain resources (materials and labour), and the resultant pandemics can seriously affect the purchasing power of consumers. Urban development and climate change are also considered to be factors in growing transmission of zoonotic diseases, the United States (US) Centers for Disease Control and Prevention estimating that three-quarters of new or emerging diseases that infect humans originate in animals.

One study notes that “structured assessment of the supply chain can help companies prioritize hot spots that offer the greatest opportunity for creating supply chain resilience – including areas of high GHG emissions and areas of high climate vulnerability. These priorities are identifiable parts of a supply chain where performance in managing climate risks will impact supply chain concerns about cost, speed, quality, and uncertainty.” It suggests that supply actions include:

It is also important to set targets and begin to track progress quantitatively, or if not yet possible, then qualitatively. For example, food, beverage, and agriculture companies can set targets that focus on sustainable agriculture training for farmers, or investments in research and development for suppliers to breed drought-resistant crops. Then retailers can evaluate the impact of supply chain actions and adjust actions and targets over time, the metrics helping a company understand the outcomes and impacts of its actions in reducing climate-related physical risks.

Physical risks to the retail sector will continue to grow for the foreseeable future and retail companies will have to engage in adaptation strategies in addition to trying to do their share to reduce carbon emissions. In many instances, the long term chronic physical effects on the retail market are not yet known, such as the impact on employees and consumers of sustained heat waves and growing pollution due to global warming or long term changes to the availability of key inputs for supply chains.

Transition Risks

Carbon emissions are a prime driver of rising global temperatures and, as such, are a key focal point of regulatory and market responses. Transitioning to a net-zero carbon economy will entail extensive policy, legal, technology, and market changes to address the mitigation and adaptation required. ‘Climate mitigation’ refers to efforts to reduce the sources of GHG emissions and reduce actual emissions, or to enhance the absorption of gases already emitted, thus limiting the magnitude of future warming. ‘Adaptation’ refers to adjustments in ecological, social, or economic systems in response to climate impacts, including processes and structures to moderate potential damage or to benefit from opportunities associated with climate change. The most vulnerable regions, companies, and communities are those that are highly exposed to hazardous climate change effects and have limited adaptive capacity. Countries with limited economic resources, low levels of technology, poor infrastructure, and inequitable access to resources have little capacity to adapt and are highly vulnerable.

Key issues facing retailers include growing consumer and regulatory demands to lower carbon footprints, engage in more effective waste management, eliminate single-use plastics, and develop ethical supply chains.

Policy Risks

Policy actions in regard to climate change continue to evolve, including Canada’s international commitment to reach net-zero emissions by 2050, carbon-pricing mechanisms to reduce GHG emissions, shifting energy use toward lower emission sources, adopting energy-efficiency solutions, encouraging greater water efficiency measures, and promoting more sustainable land-use practices. As discussed in Part III.2, Canadian securities regulators have proposed new regulation to require transparency in the actions of companies in moving to net-zero emissions. Retailers must understand and manage changes to policy requirements. One retail expert has observed that companies will show a higher level of commitment to mitigating climate change if governments put in place more regulation, forcing companies to comply; however, legislation to drive material change can take years and needs careful attention to standards because, even with it in place, companies may only choose to meet the minimum requirements.

One policy change is carbon pricing. Effective 2019, every jurisdiction in Canada has placed a price on carbon emissions, with federal minimum standards, allowing provinces and territories to use the federal pricing system or adopt their own pricing system tailored to local needs but meeting national stringency standards. The price on carbon is aimed at internalizing the cost of carbon emissions to businesses, creating incentives for reducing emissions.

The Canadian Net-Zero Emissions Accountability Act requires the setting of national targets for the reduction of GHG emissions based on the best scientific information available, promoting transparency, accountability, and action in relation to achieving the targets of net-zero emissions in Canada by 2050. The Government of Canada must set national emissions reduction targets at five-year intervals for 2030, 2035, 2040, and 2045. It must develop GHG emissions reduction plans that have targets, strategies, and measurement of progress, and must take into account the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP). The statute has implications for retail companies that supply governments through procurement processes.

At the November 2021 United Nations (UN) Conference of the Parties meeting (COP26) in Glasgow, 103 countries committed to the Global Methane Pledge to reduce methane emissions by 30% by 2030, and Canada is a signatory to the pledge. Methane is responsible for approximately 30% of the global rise in temperatures to date and accounts for about 13% of Canada’s total GHG emissions. While methane emissions reductions from oil and gas will be a priority, agriculture and landfills are among the largest sources of methane emissions. Given how ambitious the targets are, Canadian farmers and industry partners will need to take action to reduce emissions, sequester carbon, and make their operations more sustainable, which will affect supply chains in the food sector.

Policy and regulatory changes regarding environmental issues more broadly are also likely to have an effect on retailers. Plastics production has a significant carbon footprint. The World Economic Forum reports that half of global plastic production is for single use and less than 10% of all plastic waste ever produced has been recycled. Globally, over 150 million tonnes of this waste ends up in landfills annually, and increasingly, enters our rivers, streams, and oceans as microplastics and litter. The Canadian government reports that Canadians throw away 3 million tonnes of plastic waste annually, only 9% of which is recycled, meaning that the vast majority of plastics end up in landfills and about 29,000 tonnes annually finds its way into our natural environment. The vast majority of plastic packaging is made from oil and gas, emitting GHG from ‘cradle to grave’. In April 2021, Moody’s warned that lack of progress in reducing plastics will result in a hit to supermarket share prices, given both environmental and health concerns.

In May 2021, the federal government issued an order to enable banning certain single-use plastic items, adding plastic manufactured items to Schedule 1 of the Canadian Environmental Protection Act. It enables the government to take regulatory action in support of reaching Canada’s zero plastic waste goal, banning harmful single-use plastics where warranted and supported by science, and establishing minimum recycled content requirements. Reducing plastics and retaining materials in a circular economy reduces GHG emissions. Municipalities are also adopting bylaws to reduce single-use plastics and other waste.

Governments at the federal, provincial, territorial, and municipal level have worked through national action plans for extended producer responsibility (EPR) towards greater responsibility to manage products at their end-of-life, including transforming product stewardship initiatives into full EPR programs, such as taking back bottles, apparel hangers, and packaging. EPR programs identify end-of-life management of products as the responsibility of producers, but these costs can be passed on to retailers, who then must recover the costs in pricing of goods and services sold. The retail and production sectors have worked with governments to support development of consistent EPR programs and set targets for plastics collection, recycling, and recycled content requirements. Product stewardship and EPR programs can result in provincial or municipal environmental fees, which impact retail costs, but they are viewed as key to a circular economy. Provinces are expanding existing EPR programs to cover more materials, including textiles, paper, and cardboard packaging.

Another policy risk for retail is regulatory sanction for ‘greenwashing’. The Canada Competition Act prohibits deceptive market practice, creating sanctions for companies that make environmental claims to the public that are false or misleading in a material respect in order to promote their products. The Consumer Packaging and Labelling Act requires that prepackaged non-food consumer products bear accurate and meaningful labelling information and prohibits the making of false or misleading representations to consumers. The Textile Labelling Act requires that consumer textile articles bear accurate labelling information and prohibits the making of false or misleading representations. The Competition Bureau of Canada has warned businesses that if they portray products and services as having more environmental benefits than they truly have, they may be found to be engaging in illegal greenwashing. Businesses should avoid vague claims such as ‘eco-friendly’ or ‘safe for the environment’ as the Bureau will enforce violations of the Competition Act, Consumer Packaging and Labelling Act, and the Textile Labelling Act for environmental claims that are false, misleading or not based on proper testing. Before making environmental claims, retailers should make sure that the claims are accurate and specific on how they are environmentally beneficial. Failure to do so may mean regulatory sanction and significant reputational harm.

In the US, the Federal Trade Commission has issued green guides that offer retailers guidance on marketers’ use of product certifications and seals of approval, claims about materials and energy sources that are renewable, and carbon offset claims. It lists more than twenty cases where it has identified greenwashing. For example, Nordstrom, Bed Bath & Beyond, LLC, and J C Penney were ordered to pay penalties totalling US$1.3 million for falsely labelling rayon textiles as made of bamboo.

For retailers operating internationally, it is important to be aware that regulators are seeking to reduce greenwashing through various regulations, such as the European Union (EU) Taxonomy for Sustainable Activities, the EU Guidelines on Reporting Climate-related Information, the EU Sustainable Finance Disclosure Regulation, aimed at discouraging greenwashing in the financial sector, and the proposal for an EU Corporate Sustainability Reporting Directive. The EU also introduced ‘double materiality’, asking managers to assess how sustainability issues affect the company’s
business and how the company’s actions impact people and the planet. In November 2021, the European Commission tabled its plan to introduce mandatory due diligence for products sold on the EU market to make sure they are not linked to deforestation or forest degradation. Effective 2021, companies need to collect information about the products they have placed on the EU market to confirm they are not linked to deforestation, including taking “adequate and proportionate mitigation measures, such as using satellite monitoring tools, field audits, capacity building of suppliers or isotope testing” to confirm the product’s origin.

France has enacted a corporate duty of vigilance law that places a due diligence duty on large French companies and requires them to publish an annual vigilance plan. The plan must include reasonable measures to allow for risk identification and prevention of severe violations of human rights and environmental damage resulting directly or indirectly from the operations of the company, its subcontractors, and suppliers with whom it maintains an established commercial relationship. Measures include risk mapping and a system to monitor the effectiveness of measures implemented. A court can order the company to comply with its vigilance obligations, including ordering it to develop a vigilance plan, improve its vigilance measures, and/or impose a penalty for each day of non-compliance. The law also provides for civil liability; harmed individuals can bring a civil lawsuit to seek monetary damages resulting from a company’s failure to comply with its vigilance obligations where compliance would have prevented the harm. Since the law was adopted in 2017, there have been eight cases alleging violations.

Germany’s Lieferkettensorgfaltspflichtengesetz (Act on Corporate Due Diligence in Supply Chains) will come into force January 2023. It obligates companies with 3,000 or more employees to take appropriate measures within their supply chains “to prevent or minimize risks related to human rights or the environment or end the violation of duties related to human rights or the environment.” Companies must establish a risk management system; define internal responsibility for compliance; carry out regular risk analyses; implement preventive measures in the company’s own business and activities of subsidiaries, if the parent company exerts decisive influence, and vis-à-vis its direct suppliers; take remedial actions if a violation has occurred or is imminent; set up an internal complaints procedure; and establish due diligence procedures regarding risks associated with indirect suppliers, which will be applied when the company has substantiated knowledge of a violation. Failure to meet requirements could lead to fines up to €800,000.

Regulators are also starting to require companies to develop transition plans. For example, the United Kingdom (UK) government has announced that it will incorporate transition plans into the UK’s Sustainability Disclosure Requirements and strengthen requirements to encourage consistency in published plans and increased adoption by 2023. The TCFD has issued guidance on such transition plans, discussed in Part IV.2.

These regulatory developments are critically important for Canadian retailers operating in European markets to understand, but similar regulation is being considered in many jurisdictions globally, which will directly affect supply chains. Canadian legislators are studying all these international developments with a view to how to enhance the regulatory framework for climate mitigation and adaptation in Canada.

Market Risks

The Bank of Canada reports that climate change “looms as a potentially large structural change affecting the economy and the financial system”. Lenders are increasingly considering climate-related risks as they make decisions to lend to retailers. Climate change may result in unexpected re-evaluation of assets in debt and equity securities.

On challenge for the retail sector is that some parts of the sector face a highly-pressurized margin reality of retail today, where investment in sustainable development is likely to be perceived simply as incremental cost and detrimental to their achieving returns on income. The last decade of retail in North America focused on cost reduction and efficiency, as competitive intensity and the burden of digitizing has required outsized capital investment without immediate corresponding returns. While many retail leaders acknowledge the value and importance of these emissions-reducing initiatives on a human level, they have faced challenges in persuading senior executives and the board of directors. Yet all the market signals now are that there are financial, competitive, and reputational benefits for an ambitious climate action plan.

Investors with more than US$121 trillion in assets have signed the Principles for Responsible Investment, a commitment to integrate ESG issues into their investment decisions. Research by accounting firm PwC also shows that 77% of institutional investors plan to stop purchasing non-ESG products by 2022. At COP26, almost 500 financial institutions with US$130 trillion under management committed to financing the transition to net-zero emissions. They are committing to align their debt and equities portfolios by investing in retail and other companies that are taking meaningful steps to decarbonize. Retail and other companies need to be aware of these shifting sources of capital and potential opportunities.

BlackRock, which manages US$3.6 trillion of investments in securities, including CA$275 billion of assets in Canada, has its largest investments in retailers such as Apple Inc, Microsoft Corporation, and Blackrock CEO Larry Fink’s letter to its portfolio companies in 2021 said:

There is no company whose business model won’t be profoundly affected by the transition to a net zero economy… As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders – with customers, policymakers, employees and shareholders – by inspiring confidence that they can navigate this global transformation. But companies that are not quickly preparing themselves will see their businesses and valuations suffer, as these same stakeholders lose confidence that those companies can adapt their business models to the dramatic changes that are coming… we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.

In 2020, BlackRock examined 440 of its carbon-intensive portfolio companies, representing approximately 60% of the global Scope 1 and 2 emissions, and of these companies, it voted against the election of 64 directors and put 191 companies ‘on watch’, expanding its focus to over 1,000 companies in 2021. BlackRock has stated that those companies risk votes against directors unless they demonstrate significant progress on the management and reporting of climate-related risk, including their transition plans to achieve net-zero emissions.

Financial institutions are also shifting their debt portfolios, which may affect retail access to capital. Global growth of sustainable debt issuances, including green bonds and loans and sustainability-linked bonds and loans, has grown from less than US$100 billion in 2015 to US$730 billion in 2020, according to a 2021 report from DBRS Morningstar. Sustainability-linked loans are growing in Canada. For example, in 2019, Maple Leaf Foods Inc agreed to amend its existing credit facility with BMO Financial, which will “allow Maple Leaf Foods to reduce the interest rate on the lending facility if it meets targets on electricity use, water use, solid waste, and continuing to reduce its carbon emissions in line with its achievement of net carbon neutrality.” More than a dozen Canadian companies have followed suit, with Canada’s sustainable corporate debt market expected to hit CA$20 billion this year. Another example is that Teck Resources Limited executed a US$4 billion sustainability-linked revolving credit facility in 2021, under which “the price paid by Teck will increase or decrease based on the company’s performance in reducing carbon emissions, improving health and safety, and strengthening gender diversity in its workforce”. It aligns the credit facility with Teck’s goals of reducing carbon intensity by 33% by 2030 and becoming carbon neutral across operations by 2050.

The 2020 CDP Global Supply Chain Report found that about 94% of companies with science-based targets include Scope 3 emissions. Setting targets to reduce emissions throughout the value chain (Scope 3) is becoming a new business norm. Supply chain emissions can be reduced by optimizing a retailer’s own production processes, making different purchasing decisions to favour low-carbon products or services, purchasing from suppliers with a low carbon footprint, and engaging with suppliers to reduce emissions across the value chain.

As ESG commitments increase, including climate risk management, one survey found that six in ten institutional investors view greenwashing as their top concern with their integration of ESG factors into investment decisions. The lack of reliable and standardized ESG information to date has made it difficult to evaluate the quality of ESG-compliant actions. The development of global sustainability accounting standards, discussed in Part III.3, will begin to mitigate this risk considerably.

The reality is that the market risk of equal importance to climate change in the retail sector is the rise of what Stephens calls ‘apex retail predators’ like Amazon, Alibaba,, and Walmart, all of which have massively increased their market share of retail since the start of the pandemic and accelerated their move into insurance, banking, and finance as part of an “integrated retail consumer experience”, subjects well beyond the scope of this guide. However, it is important to note that how Canadian retail companies deal with these massive market shifts intersects with how they address challenges and opportunities in respect of climate change.

Technological Risks

Technological risks are important to the retail sector. Technological innovations that support the transition to a net-zero carbon, energy-efficient economic system will have a significant impact on the retail sector. The development and use of emerging technologies such as renewable energy, battery storage, carbon capture and storage, and waste reduction will affect competitiveness, production and distribution costs, and the demand for products and services from consumers. The massive shift in the past two years to online retail is requiring new technologies for marketing and distributing goods, disrupting longstanding practices.

A 2021 study by MIT reports:

Over the last quarter of a century, no asset class in real estate has seen more transformation than the retail sector, due to advances in technology, innovations in the supply chain and ever-advancing changes in consumer behavior. Where once consumers flocked to suburban shopping malls and the brick-and-mortar stores of city streets, ecommerce – combined with next-day delivery capability – has completely altered how we purchase all forms of goods. Coinciding with this transformation, climate change across the globe has now reached a point where it is unquestionably impacting our environment, economy and resiliency as a society. The question we must now ask is which of these forms of consumer behavior leads to lower carbon emissions, and is better for the world in which we live.

New technologies are being developed and deployed to help lower GHG emissions, including delivery fleet electrification, drones, and autonomous vehicles, although they need to be deployed in conjunction with postal and other services that already have a broad delivery reach. Innovations in how packages are boxed or returned can have huge emissions reductions outcomes, MIT reporting that in both traditional e-commerce and combined retail strategies, boxes account for some of the largest carbon pollutants in the ecosystem, and removal can have some of the greatest reductions in retail carbon emissions, up to 36% percent of total e-commerce emissions. It reports that by reducing 80% of cardboard boxes for e-commerce and replacing them with the GHG emissions of paper bags, it will reduce 50% of e-commerce excess-GHG attributed to returns.

As retailers gain understanding of the embodied carbon of packaging, they have the opportunity to make different choices regarding plastics, cardboard, and/or 100% recycled materials. There are both risks and opportunities associated with transport logistics in getting products from suppliers to warehouses, retail stores, and consumers. Retail trade is closely linked to emissions created by costly transport of products as a significant source of GHG emissions.

A number of technological developments will reduce emissions, such as bundling packages, locker use whereby last delivery is to a local centralized location, reducing much of the ‘last-mile’ carbon footprint, and better locations logistics to distribute packages from. The MIT study also reports that advanced technologies such as Reality Capture and Image Recognition can allow consumers to more accurately size products before they purchase, leading to fewer returns and thus a lower carbon footprint.

Post-pandemic, there are uncertainties associated with the extent to which there will be a return to in-store shopping, but there is no question that in-person retail will shift with emerging digital in-store technologies that compete with the online customer experience, including digital purchases in store, autonomous shopping carts that follow the consumer around the store, and curb-side pickup. There are also shifts in supply and demand for technologies to be responsive to changing consumer expectations for ease and accountability of shopping and the ability to access timely product information on the carbon footprint of items they are purchasing as they are looking at products in the store.

Reputational Risks

Climate change is increasingly a source of reputational risk tied to changing customer and community perceptions of a retailer’s contribution to, or detraction from, the transition to a net-zero carbon economy. Retailers are facing rapidly shifting consumer preferences and face reputational risk if their business strategies do not address climate change. In the retail food sector, consumers are increasingly pressing retailers to reduce single-use plastics, shift from recyclable to reusable materials, and minimize food wastage and spoilage. The generations that are increasing in purchase power, Millennials, Gen Z, and soon, Generation Alpha, are very concerned about climate change and waste, and are more likely to be skeptical about green marketing claims, seeking information to substantiate claims. Accounting firm Deloitte’s 2021 Canadian food consumer survey found that 71% of consumers are concerned about the source of their food for health, ethical, and carbon footprint related reasons, and 61% are concerned with excessive packaging in the retail sector. There are growing reputational risks in selling products associated with deforestation, land-use change, and emissions-intensive animal products.

Consumers are demanding change, with Gen Z and Millennials at the forefront of these requests. NYU Stern’s Center for Sustainable Business completed extensive research into US consumers’ actual purchasing of consumer packaged goods (CPG), using data from bar codes of products purchased; it found that 50% of CPG growth from 2013 to 2018 came from sustainability-marketed products. Products that had a sustainability claim accounted for 16.6% of the market in 2018, US$114 billion in sales. Products marketed as sustainable grew 5.6 times faster than products that were not.

With reputational risks also come opportunities. A study by IBM and the National Retail Federation reports that 40% of consumers are now ‘purpose-driven’, willing to pay a premium for products and services that align with their values, including reducing climate impacts and supporting sustainability. It found that 77% of consumers want sustainable and environmentally responsible products and support recycling; 72% seek out natural ingredients; and 71% are willing to pay a premium for brands that practice sustainability and environmental responsibility and the traceability of their products. Almost 80% of Gen Z and Millennials have purchased or want to purchase pre-owned products, and a growing number are trying renting products. IBM and the National Retail Federation found that 90% of consumers are aware of new shopping technologies and are keen on experimenting with the latest tools that are responsive to their needs.

A growing segment of the consumer population expects to see retailers making efforts to reduce carbon emissions and to do so in a manner that is fairer and more equitable for a broader set of employees, customers, suppliers, and distributors, embedding diversity, equity, and inclusion in their climate action plans. The risk of retail companies failing to take ESG factors into account are significant, as both employees and customers want to see ethical, responsible companies.

A 2020 survey of 3,000 people across eight countries found that 70% of survey participants said they were more aware now than before the pandemic that human activity contributing to climate change threatens the planet and, in turn, threatens humans. More than two-thirds responded that economic recovery plans should make environmental issues a priority and 87% said retail companies should integrate environmental concerns into their products, services, and operations to a much greater extent than they have in the past.

Also in 2020, more than 100 businesses signed a statement acknowledging that the pandemic and climate crises are interconnected and must be tackled jointly, committing to divest from fossil fuels and invest in low-carbon, resilient solutions to prioritize green jobs and sustainable growth, calling on governments to match their efforts with a recovery plan aligned with reaching net-zero emissions well before 2050. Consumer-facing information is being increasingly scrutinized for its integrity. Forbes magazine reports that it is crucial for retail companies to embrace transparency in any claims regarding sustainability:

With many people spending on average 12 hours per day in front of a screen, customers can research anything they want. It’s as though each business lives in a glasshouse. With a few strokes of the keyboard, anyone can find out if an organization has unethical labor practices or unfair hiring standards. They can also prove if a retailer fails to adhere to the values that it preaches. And within minutes, customers can share such harmful information with thousands—perhaps millions—of other people. Today’s consumers shop with their values and reward companies that take these principles seriously. And evidence suggests that inclusive, diverse and environmentally sustainable companies have an even better chance of taking a share of consumer spend. Customers want more details about the products they are buying than ever before. In the food world, the farm to fork movement has been popular for some time. Recent research proved that this will only continue: More than two-thirds (68%) of consumers agree that they are going to continue to limit food waste post-crisis.

A similar mentality is migrating into apparel and home goods as well. Consumers demand information about their clothing and bedding, including the raw materials to make them, where they were manufactured and how they were transported. Having a digitally connected supply network that leverages technologies like artificial intelligence, Internet of Things and other traceability solutions is not only more cost-efficient and less wasteful, but can also communicate sustainability details directly to the customer. Such technological platforms possess the power to become a new form of marketing unto itself.

The fact that during the COP26 meeting in November 2021, millions of consumers globally marched to express concern that governments and businesses were making hollow commitments on climate change, is evidence that consumers are watching, and willing to act on their concerns.

Retail executive Joe Jackman observes that another reputational risk is that, increasingly, employees want to work for companies that support their communities and espouse similar values, especially the younger generation of workers; thus, having robust climate governance in place supports talent retention and becomes another rallying point for employees. He notes that since the pandemic, people are putting much more emphasis on what they can control within their immediate circle, seeking out what retailers’ mission or purpose is and how they are meeting those commitments as part of their employment and consumer choices.

Litigation Risks

There is increasing litigation related to the failure of companies to mitigate impacts of climate change, failure to adapt, and the insufficiency of disclosure around material financial risks or misrepresenting environmental credentials. As the value of loss and damage arising from climate change grows, litigation risk is also likely to increase.

In the retail sector, litigation risk can arise under securities law, corporate law, and/or consumer protection legislation. For publicly-traded retail companies, securities regulation in Canada is tightening with respect to disclosure of climate-related risks, and retailers that fail to disclose material risks and strategies to address them could be subject to regulatory sanction or civil lawsuits by investors. In the US and Europe, regulators have commenced investigating and charging companies for misrepresenting the extent of their sustainability disclosures. The US Securities and Exchange Commission (SEC) formed a task force in 2021 aimed at investigating potential misconduct related to companies’ sustainability claims and is working on a new disclosure rule to require enhanced climate disclosures by issuers.

Oatmilk company Oatley is facing three securities class actions on behalf of all purchasers of American Depositary Shares during a specified period in 2021. They allege that Oatley and its directors and officers made materially false and misleading statements about sustainability and financial metrics in an initial public offering (IPO) that raised US$1.4 billion in May 2021. Two months after the IPO, a short seller published a report that Oatley had engaged in improper accounting practices and greenwashing, which caused the market price to drop and resulted in the class actions. The case is ongoing, with the US District Court in October 2021 ordering the filing of additional information to allow it to determine whether to consolidate the class actions and appoint lead plaintiff.

Recent lawsuits on greenwashing indicate a sea change in how investors are seeking to hold retailers accountable. Truth in Advertising reports more than 20 ongoing lawsuits against US retailers as of April 2021 under competition, consumer protection, and advertising legislation. In the Tide litigation, the US National Advertising Division recommended that Tide modify its plant-based claims on its product labels to avoid conveying the unsupported message that the laundry detergent is 100% is derived from plant-based ingredients. A week after Tide agreed to implement the decision, a class action suit was filed against the company, alleging petroleum was involved in the cleaning components and the branding and packaging of the product is deceiving and defrauding plaintiffs and consumers; that lawsuit still pending.

Other retail examples include a lawsuit alleging that Coca-Cola is in violation of the US Consumer Protection Procedures Act for falsely advertising itself as sustainable and environmentally friendly while generating more plastic pollution than any other company globally. Chiquita was sued for marketing representations on its website regarding its environmentally safe business watercourses; and the Court allowed claims for unfair and deceptive trade practices and breach of express warranty to proceed. Consumers sued Keurig, alleging that the disposable coffee pods were not recyclable in a practical way, the Court concluding that the claims were adequately pled under the reasonable consumer test. The company manufacturing and selling Banana Boat sunscreen is being sued in two class actions pursuant to US competition law, false advertising law, the Consumers Legal Remedies Act, and for civil damages for falsely, misleadingly, and deceptively marketing its sunscreen as ‘reef friendly’ when it contains ingredients that are harmful to coral reefs and marine life. A class action against Allbirds, filed in June 2021, alleges the company is misleadingly claiming that its running shoes have a low carbon footprint, and is falsely claiming to use sustainable and humane practices to get wool from sheep.

In France, the major supermarket retailer, Casino, is being sued by a coalition of NGO and Indigenous peoples following a field investigation by NGO Envol Vert, which found that Casino’s suppliers regularly purchase beef from three slaughterhouses involved in deforestation and land-grabbing activities in the Amazon and Brazil’s Cerrado savannah eco-region. Indigenous organizations are seeking compensation for the damage caused to their ancestral lands and the impact on their livelihoods. These cases illustrate how litigation risks are increasing.

Accounting firm EY Canada reported in 2020 that the retail, health, and consumer goods sector has one of the lowest scores for both coverage and quality of climate-related financial disclosures. It assessed the coverage and quality metrics on the basis of how they align with the TCFD recommendations. On average, retail companies covered less than half of the TCFD recommendations, with risk management disclosures being the least covered. EY found that, generally, disclosures were comprised of high-level discussions and most companies did not provide a detailed description of the board’s responsibility for oversight of climate-related risks and opportunities. The majority of retail companies did not describe how processes for identifying, assessing, and managing climate-related risks were integrated into the organization’s overall risk management. Less than half of those companies disclosed their Scope 1, 2, and 3 GHG emissions, and many disclosed no information on emissions.

The EY report found that retail companies are not utilizing climate scenarios, which is reducing their ability to stress test exposure to climate risks and assess resilience in a future decarbonized economy. EY found that while retail companies are attempting to provide an estimation of the financial impact of climate-related risks and opportunities, estimations are still not integrated into companies’ financial statements. Less than 10% of the assessed companies provided some form of quantitative estimation of the financial impacts of their climate-related risks and opportunities. While the EY analysis does not specifically separate out Canada, it finds that the UK, France, and Australia retail sectors have been more effective in disclosure and governance, meaning that the Canadian companies examined are lagging. Each of these findings creates openings for lawsuits by investors as their expectations that climate risks are being managed are increasingly viewed by courts as reasonable.

Unrelated to the retail sector, but certainly important to note is the recent court decision in the Netherlands regarding Royal Dutch Shell, in which the District Court of The Hague recognized that 85% of Royal Dutch Shell’s emissions were Scope 3 emissions, the Court ordering it to reduce the CO2 emissions of its entire corporate group of 1,100 companies by 45% by 2030 across Scope 1 to 3 emissions, as compared with 2019 levels. The Court expressly held that the standard of care included the need for companies to take responsibility for reducing Scope 3 emissions, especially where these emissions form the majority of a company’s emissions.

In the US, there are a growing number of class actions alleging that companies gave materially false or misleading statements to investors regarding their management of investments based on carbon emissions and potential for stranded assets, and while results to date are mixed, a number of cases are now proceeding through the appellate courts. A number of investors and other organizations have developed scoring metrics that grade companies on their emissions reductions performance.