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ESG Industry Report Card: Retail

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ESG Industry Report Card: Retail

Highlights

Ratings in the global retail industry have a moderate exposure to environmental and social factors.

Consumer behavior is a key facet in the impact of environmental and social factors (whether favorable or not).

Customers' preferences, perception of brands, and demographics are risks because most products in the retail industry are discretionary.

The ESG Risk Atlas

May. 21 2019 — To calibrate the relative ranking of sectors, we use our environmental, social, and governance (ESG) Risk Atlas (see "The ESG Risk Atlas: Sector And Regional Rationales And Scores," published May 13, 2019). The Risk Atlas provides a relative ranking of industries in terms of exposure to environmental and social risks (and opportunities). The sector risk atlas charts (shown below) combine each sector's exposure to environmental and social risks, scoring it on a scale of 1 to 6. A score closer to 1 represents a relatively low exposure, while 6 indicates a high sectorwide exposure to environmental and social risk factors (for details see the Appendix). This report card expands further on the Risk Atlas sector analysis by focusing on the credit-specific impacts, which in turn forms the basis for analyzing the exposures and opportunities of individual companies in the sector.

We consider changing consumer behavior a key facet in our assessment and view governance factors as specific to each company, rather than the industry as whole.

Environmental Exposure (Risk Atlas: 3)

The environmental risks for the retail sector are weighted toward the inherent exposure to direct and indirect impacts from climate change and emissions and use of plastics. Weather is already a significant swing factor in a company's results, more serious long-term shifts in seasonal shopping would require retailers to have adaptable selling seasons.

Emissions regulations are a long-term environmental risk as the complexity of logistics has increased for most retailers. This includes tighter regulation of greenhouse gas emissions, the cost to comply, and the impact on optimal customer delivery options. A retailer can own and outsource capacity for logistics to provide flexibility in addressing this risk because they can select lower emission service providers.

We also see a risk of future regulations to reduce the use of plastic packaging for consumer products. In line with FMCGs, retailers across Europe have been working with national governments and local municipalities to reduce single-use plastic bags.

Social Exposure (Risk Atlas: 3)

Social risks and opportunities intersect when retailers address consumers' preference for rapid delivery, price transparency, traceability of products, and increased focus on clearer and meaningful labelling in diverse markets ( urban, suburban, and rural).

Retail's exposure to social risk leans toward customer brand perception, preferences, and demographics. Retailers must adapt their product offering and distribution strategies as buying patterns shift for environmental (or health) reasons and/or rapid delivery trends. Price transparency and fairness for suppliers and customers influence retailers' public image, yielding potentially immediate adverse political or customer actions. In France, the government passed various regulations including field-to-fork bill which apart from including price transparency for suppliers/farmers, also ensures a ceiling to the price points the end consumer pays to curb price wars. It also includes a ban on plastic water bottles in school canteens, plastic straws, and hot-drink stirrers, animal welfare regulations, and wide environment-friendly practices. Another sensitivity is the safety of goods and food as retailers are indirectly held accountable for quality issues and swift corrective action, notably when safety or health issues have been detected.

Human capital management is critical in this labor-intensive sector as mobile applications and technology change the retail landscape. Accordingly, risks that retailers have to manage include the quality of the customer-facing workforce and an organization's ability to execute change. The compensation, health, and safety of a retailer's direct and indirect (through supply chain transparency) workforce is another social risk for retailers. 

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