According to the 2019 UNGC-Accenture CEO study, 99% of CEOs from large companies think sustainability issues are important to the future success of their business. Thus, retail and CPG companies are setting (and most have already set) their own sustainability strategies. Sustainability is also important to company employees, 86% of whom say they will more likely work for a company that stands up for environmental, social, and governance (ESG) issues.
So where does sustainability fit into the concept of ethical commerce in retail and CPG?To define ethical commerce, we need to look at the history and variety of terms used. The four key concepts are corporate social responsibility (CSR), sustainability, fair trade, and environmental, social, and governance (ESG). The first response to business ethics was CSR, a self-regulating business model designed to be socially accountable to stakeholders. CSR often resembles philanthropy, giving to worthy causes on a large scale.
Sustainability focuses on meeting the needs of the present without compromising future generations’ needs. However, the term sustainability is often attributed to environmental issues.
Another concept is fair trade which helps producers in developing countries receive a fair price for their products. The goals of fair trade are to reduce poverty, treat workers ethically, and promote environmentally sustainable practices; however, the term is often used to describe social, or human rights, issues.
ESG is an evolution of CSR with a metrics-driven set of standards. Environmental criteria protect the natural world; social criteria protect employees, suppliers, customers, and communities where the company operates; and governance includes company leadership, executive pay, audits, internal controls, and shareholder rights. A Harvard study shows that companies achieve the highest stock returns when they focus on material ESG issues, defined as industry relevant and directly related to operational and financial performance. ESG is not a philanthropic effort of “doing good” with leftover profits but a metrics-driven approach with long-term business strategies, or “doing well by doing good.” For retail and CPG, ethical commerce is a practice that focuses on both environmental and social issues directly related to operational and financial performances.
Demand increases for enterprises through earning consumer preference by achieving ethical commerce goals. Research shows a correlation between ethical commerce and financial performance. A Harvard study found that firms that adopted ethical commerce policies earlier than their peers outperformed over the long-term in the stock market (23% higher stock price over 17 years). Enhanced ethical commerce performance often leads to better financial resources, higher-performing employees, better marketing of products, and reduced consumer price sensitivity. Additionally, costs are reduced through positive factors such as innovation, waste reduction, economies of scale, and qualification for government credits or tax benefits.
For example, a Harvard study on pollution reduction attributed the link between environmental and financial performance to future cost savings by increasing efficiency, reducing compliance costs, and minimizing future liabilities.
Companies that are not taking an aggressive ethical commerce approach will continue to face more significant risks. Research from the Journal of Applied Corporate Finance says, “companies with a weak ESG proposition saw double-digit declines in market capitalization in the days and weeks after missteps came to light.” Companies that do not have a strong ethical commerce stance face the risk of new costs and constraints, such as emissions or single-use plastic regulations, and will have to catch up.
In summary, incorporating ethical commerce has become table stakes and successful retail and CPG companies moving forward will need strong ethical commerce strategies in 2022.
Justin Honaman is Head, Worldwide Consumer Products at Amazon Web Services, [email protected].