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Europe is on a mission to become the world’s first climate-neutral continent by 2050, but this is not a small feat. To achieve such a status, the EU is having to crack down on the way businesses are run and how people conduct their everyday lives in Europe. As a way to reduce the environmental impact caused by retailers, the European Union has started to define and impose new regulations that retailers must comply with. These directives are coming in waves and impacting certain players differently than others, thus raising questions and needing clarification. There are many of these sustainability regulations already in effect, but they are continuing to develop and become more stringent as the EU strives to become more sustainable and environmentally conscious, especially as it seeks to lead the world on the road to a more sustainable future.

Rules, regulations, and directives...the next wave of change

The number of directives, regulations, and reporting standards are multiplying faster than businesses and retailers can keep up. All of these codes are being set up to tackle ways to reverse the damage done by businesses with large value chains that touch various corners of the world. Overall, the objective is to ensure that there is visibility of their operational impacts and measurable metrics that can be used to benchmark and improve. While the number of regulations are many, and often they are being continuously rewritten and replaced as things evolve, IADS members have shared a few key ones that are already impacting their decision-making and investment processes.

The Corporate Sustainability Reporting Directive (CSRD) forces companies to publicly disclose detailed and transparent information on how sustainability issues affect their own business (covering Scope 1 and 2 emissions) and what impacts a business has on people and the environment (covering Scope 3 emissions). To achieve the latter, CSRD will soon require a double materiality assessment which identifies all potential negative and positive impacts connected with the company’s operations and value chain. CSRD aims to create a standard framework for companies to report on their sustainability efforts, thus enabling investors and stakeholders to make informed decisions about investing in sustainable businesses. The CSRD encourages companies to reduce their environmental footprint and contribute to the EU’s green economy.

The EU Deforestation-Free Regulation (EURD) was adopted to ensure that companies curb the impact their operations have on deforestation as well as protect indigenous people’s rights. This regulation mandates extensive due diligence on the value chain for all operators and traders dealing with products derived from cattle, cocoa, coffee, palm oil, rubber, soy, and wood. Risk assessments will have to include a broad view of whether the goods were produced in compliance with relevant local laws and with the informed consent of indigenous people. As the EURD requires a lot of communication and collaboration around the world with remote communities, it will be challenging to achieve compliance without the proper traceability tools (which are not mature yet).

The EU Green Claims Directive aims to set rules on how companies can market their environmental impacts and performance in order to eliminate misleading environmental messaging. As department stores pull together various brands and labels in one marketplace, it is very difficult for them to ensure there are zero misleading claims on the products across all their categories. This directive might eventually require retailers to educate and set their own guidelines for the brands in their stores.

The silver lining: sustainability regulations also present opportunities

Despite the uneasiness that new regulations can bring thanks to the many unknowns and new boundaries set, there are still many ways that businesses can play these new standards to their advantage. There are three main areas of opportunity with the upcoming sustainability regulations that are going into effect: innovation, collaboration, and financial opportunities.

First of all, in order to meet the new guidelines and reporting standards that require traceability and tracking of Scope 3 GHG emissions for benchmarking, there will need to be a lot of innovation. Retail supply chains are disjointed and will require a complete overhaul in order to be able to achieve what these new regulations set out to control.  Unfortunately, this means that the number of solutions and ‘quick fixes’ are multiplying, making it difficult for impacted businesses such as retailers to sift through the noise to understand which tools to adopt and which processes to invest in. While this may seem unclear at the moment, there will be a time when a winning solution will emerge, and it will probably be thanks to a successful use case from a player such as a mega-retailer.

Secondly, department stores and other types of legacy businesses will need to rely on communication and learning from each other's successes and failures in order for the industry to make advancements in these uncharted waters. Collaboration is the next key opportunity to help the industry grow and develop. With the current regulatory landscape, compliance is not simply black and white. Therefore, all businesses need to come together to work towards a common standard which can hold retail adjacent stakeholders accountable for their business practices to ensure everyone is on an even playing field in the journey to advancement. The road to achieving such a standard seems daunting, but there are coalitions and associations such as the Sustainable Apparel Coalition and Amfori that are leading the way in how such benchmarking can be achieved. It is not perfect, but it is an important first step in regard to setting the foundation for collaboration among all players in the retail value chain.

The third major opportunity that retailers should jump on is financial opportunities thanks to low-interest government loans that are being issued to help businesses make their operations more efficient which in turn makes them more sustainable. This kind of financing can allow retailers to significantly reduce energy consumption, leading to lower utility bills and an improved property value. Such investment plans are also key to innovation as technology plays a large role in operation efficiency, therefore the loan can also support digital transformation milestones.  Some IADS members have already taken advantage of such opportunities and found that it is a great way to get the C-Suite on board as it is an opportunity to invest in the business while also meeting regulatory requirements.

As new opportunities emerge, it is important to act now

Overall, the problem that retailers are facing is that regulation is moving faster than technology at this point. This means retailers are having to scramble and rely on piecing together data from various sources and tools in order to come up with the right information to put on their non-financial sustainability reports. Since the regulatory landscape is moving at such a fast pace, it is important for retailers to stay on track, or even better, get ahead of the curve.

A number of IADS members have found that addressing regulatory requirements before they go into effect has been a great strategy to ease the process. For example, CSRD does not require double materiality assessments until 2024, but some IADS members have already started to conduct this evaluation to be sure that the business runs smoothly in the coming year. Acting in advance has also helped ease their minds as the process was much easier than anticipated and they can now focus on ’business as usual’ projects rather than chasing after being compliant.

It is no secret that keeping up with and complying with regulations is extremely complex, but some members have noted that it is especially helpful to build a relationship with EuroCommerce, a retail and wholesale association that informs their members about EU policy and legislation, among other things. This highlights yet again the importance and need for collaboration across industry players.

Conclusion: there is a such thing as first-mover advantage

What is the lesson learned? We continue to echo our latest White Paper ‘Reinventing department stores through sustainability’ in saying that the most important step is to get started and get started now. It is important to recognize that there is no clear path to take, but the longer businesses wait to tackle the new regulations, the harder and more expensive it will be to transition the business.

*Department stores should use these sustainability regulations as ways to make their core business more efficient while taking advantage of government handouts such as low-interest loans, especially while there is still a bit of flexibility in how activities are regulated. It is also key to start building collaborative relationships with all players to not get left out of the important conversations and decisions as to where the industry goes next.

In the retail sustainability landscape, it pays to be a first mover.*

Credits: IADS (Mary Jane Shea)