Challenge or Opportunity?

The investment community’s spotlight on ESG is creating a groundswell for retailers to establish benchmarks.

Challenge or Opportunity?

October 2021   minute read

When bankers, potential investors and business associates ask about your company’s sustainability initiatives, the diversity of your workforce, or the health and safety of your employees, what will you be able to share?

The increasing interest in answers to questions like these are leading many convenience retailers, both publicly traded and privately held, to develop environmental, social and governance (ESG) plans and benchmarks.

The banking and investment communities have long expressed interest in issues that focus on people, the environment and prosperity. It’s becoming more common for financial institutions to consider ESG factors when making corporate loans and providing borrowers with lower interest rates based on their sustainability profile and attention to climate risks, as well as areas such as executive pay, political affiliations and working conditions.

Setting the Strategy

Ultimately, how a company approaches ESG planning and programs boils down to its values, vision and long-term goals.

With about 2,700 retail sites, Parkland, headquartered in Calgary, Alberta, Canada, is a convenience store operator and independent supplier and marketer of fuel. Christy Elliott, chief sustainability officer at Parkland and executive sponsor and chair of the company’s sustainability taskforce, shared that Parkland’s sustainability strategy links directly with its overall enterprise strategy.

“If our enterprise strategy doesn’t fit with what we’re trying to do on sustainability, none of it hangs together—it can’t be something on its own to be the most effective,” said Elliott, adding that ESG only makes sense if it’s linked to Parkland’s broader business and low-carbon strategy.

“Whether you are a publicly traded company working on ESG or a privately held company calling it CSR or sustainability, it’s all part of developing a strong and balanced long-term business strategy,” said Adam Hammes, manager of sustainability at Des Moines, Iowa-based Kum & Go.

The G: Governance

The “G” in ESG is often forgotten amid considerations over climate risk, societal implications and other “E” and “S” risks and opportunities. However, understanding governance risks and opportunities is critical.

Governance covers a broad range of corporate activities including board and management structures, as well as a company’s policies, standards, information disclosure, auditing and compliance. It’s also the least complex ESG component to measure since structure, policies and controls are easy to demonstrate and likely have been tracked for some time.

Governance components often include setting goals and/or implementing risk improvements in the following categories:

  • Separation of CEO and board for balance of powers
  • Executive, management and employee 
  • compensation disparities
  • Policies on gender pay equity
  • Inclusive corporate rights and responsibilities for the board, executives, management and employees
  • Supply chain management
  • Tax strategy
  • Risk management

The S: Social

While climate change is frequently front and center in the conversation about ESG concerns, social issues are increasingly prominent. The social piece of ESG focuses on the internal operations of employee relationships, having a diverse and inclusive workforce and customer and community relationships. The social and environmental components often overlap, especially for carbon-intense industries that engage in programs like tree planting, recycling, managing food waste and reducing single-use plastics.

BlackRock Inc., the world’s largest asset manager, is pushing companies for greater ethnic and gender diversity for their boards and workforces. The money manager, which oversees more than $7.8 trillion of assets, is asking U.S. companies to disclose the racial, ethnic and gender makeup of their employees—data known as EEO-1—as well as measures they’re taking to advance diversity and inclusion.

Listen to Convenience Matters podcast “Why ESG Is Becoming Important to Retailers.”

The E: Environmental

Company-adopted environmental practices for the fuels and transportation industries can vary from recycling to fuel system leak detection to carbon emissions.

For now, ESG “is a voluntary program that’s being directed by the financial institutions,” said Jeff Hove, vice president of the Fuels Institute, in a Convenience Matters podcast, “Why ESG Is Becoming Important to Retailers,” adding that ESG planning requires companies to track metrics that are material to greenhouse gas emissions (GHG) and build toward a low-carbon future. “Because ESG is ultimately driven by investor demands, it is possible for new interests (social equity is on the rise) to also play out in the ESG plan. Climate change and the emissions that exacerbate climate change, however, will most likely be the leading concern by investors,” he said.

“The transportation fuels industry is carbon intense, and most people realize that transportation right now leads the way for greenhouse gas emissions,” said Hove, adding that ESG does not demand a zero-emissions economy.

“It’s asking the industry to look at where emissions are coming from under the ‘E’ aspect of ESG. And that can be anything from your kilowatt hours consumed for the different locations of doing business to the carbon intensity of that electricity. For the most part, we’re really looking at the carbon intensity of the gasoline, diesel, ethanol, the biodiesel—anything that’s in your fuel mix,” Hove said.

Risks associated with climate change are driving the ESG agenda, and as a source of GHG emissions, convenience retailers should be documenting the steps they are taking to decarbonize and reduce GHG emissions.

ESG Scoring

An organization’s ESG score is a numerical measure of how it is perceived to be performing on a wide range of ESG topics. Yet because ESG planning currently is nonstandardized and subject to debate, the metrics that should be included to determine an ESG score for c-store retailers are still undetermined.

A handful of organizations developed guidance and standards to assist with ESG metrics and materiality determinations—information that could be considered “decision relevant” to an investor:

  • Sustainability Accounting Standards Board (SASB)
  • Edison Electric Institute (EEI)
  • Global Reporting Initiative (GRI)

ESG scores are not intended to be perfect 10s, and companies embarking on ESG planning should not expect to score high out of the gate. Adopting an ESG program, setting a baseline and goals for improvement are the first steps on the journey and create opportunities for retailers to share with the public the steps they are taking to measure and improve their ESG programs.

Many industry observers are beginning to equate a good ESG rating to healthy profits. An ESG score also provides an easy way for savvy job hunters to compare the relative merits of their prospects, and scoring well may help businesses hire the best talent.

Working Together

In 2019, Parkland’s management team initiated a sustainability task force with leaders that represent the company’s functional units. The team completed a materiality assessment and reviewed ESG priorities important to Parkland, its shareholders and customers and identified five strategic ESG issues:

  1. Climate change
  2. Safety and emergency preparedness
  3. Product transportation and storage
  4. Diversity and inclusion
  5. Governance and ethics

Elliott of Parkland noted the importance of having a diverse group of internal stakeholders to shape an ESG strategy. “The first thing is to think about the material sustainability issues important to the business. For that process to be collaborative, you need a lot of voices in the room and a lot of brainstorming. Initially you may come up with 40 issues, but you’re going to be better off choosing five or six key issues and working from there because it needs to be manageable,” she suggested.

Next, companies should consider where they want to be from an ESG perspective: How will the business operate in a responsible, effective and profitable way in a low-carbon world? “What will help you develop that answer is coming up with the key issues you’ll need to be thinking about and addressing,” said Elliott.

Long-Term Impacts

At Kum & Go, sustainability as part of an overall ESG viewpoint is seen as smart business and the right thing to do. Hammes suggests that companies identify the priorities that fit their business model, culture and values. “Kum & Go approaches this like other business priorities: using data, being agile and tapping into expertise for continued learning and innovation. Although we’re a medium-sized operator and privately held, we still use ESG tools and benchmarking to ensure we are competitive and ‘punching above our weight class’ in the areas we identify as priorities,” he said.

Kum & Go has conducted internal stakeholder engagement and benchmarking against peers by using the U.N. Sustainable Development Goals and SASB standards. “We expect to continue using additional tools like external stakeholder engagement and benchmarking against the Global Reporting Initiative (GRI) reporting standards,” said Hammes, adding that this helps inform Kum & Go’s overall planning process. “It’s an ongoing iterative approach versus one-and-done,” he said.

Soon enough, however, businesses might be driven to ESG by more than altruistic sentiment. Since his confirmation as the chair of the U.S. Securities and Exchange Commission in April, Gary Gensler has made reforming ESG disclosures concerning climate change risk and human capital a top priority, and the SEC’s regulatory agenda confirms as much.

In May, President Joe Biden issued an executive order encouraging regulators to assess climate-related financial risk. Congress is considering measures that would require increased ESG disclosures, including the Improving Corporate Governance Through Diversity Act, the Diversity and Inclusion Data Accountability and Transparency Act and the Climate Risk Disclosure Act.

Telling the ESG Story

Ensuring that all stakeholders understand a business’s ESG position is not just the communications team’s role. Every employee effectively acts as an ambassador and representative of the company’s ESG ethos.

“People want be part of something. It’s exciting to feel like we’re a part of change and making a real impact. That’s an exciting place to be,” said Elliott.

Parkland published its inaugural sustainability report in 2019, signaling the company’s intentions to be transparent moving forward: “We recognize that a significant aspect of sustainability involves transparency … While we move forward in our sustainability journey, we are excited to build on this inaugural report and continue improving sustainable business practices throughout our organization.”

Kum & Go published its second CSR report in 2020, highlighting its work to deliver more renewable fuels and EV charging to customers and its investments in solar installations, environmentally friendly construction materials and packaging. “We publish an annual CSR report with ongoing internal and external communications focused on getting the word out,” said Hammes, adding that it is Kum & Go’s priority “to continue improving and evolving these efforts.”

Casey’s, based in Ankeny, Iowa, published its commitment to environmental and social responsibility via its 2021 ESG Report—the first one created by the convenience retailer.

Why These Metrics Matter

Scot Case, the vice president of CSR and sustainability at the National Retail Federation, explained how sustainability took root in the early 1990s as an environmental initiative and moved to the early 2000s with a focus on the human element of corporate social responsibility goals. By 2010, ESG emerged from the investor community as a call for companies to report their environmental, social and financial metrics under a common framework.

As metrics have become more sophisticated, they can fit within the language applicable to a company’s ESG goals. “What are we measuring, and who cares that we’re measuring it? That’s where ESG becomes relevant for all retailers,” said Case.

For smaller retailers that want to grow and increase their store count, Case explained that investors and financiers will look at whether the business understands the potential impacts of climate change and regulations and other elements of ESG. “If I’m a small operator and I want to get bigger, an ESG framework could help me understand risk that I might otherwise be unaware of and help me respond to potential investors, bankers or potential acquirers,” Case said, adding that retailers of any size should understand their risks and opportunities.

“An ESG framework can provide valuable insights to the business, and ESG can be as complicated as you want to make it,” he said.

The increased attention to ESG may have started in the public markets, but it will almost certainly have downstream effects for retailers.

Craft Your Own ESG Plan

The Fuels Institute is developing an online ESG application tool, ESG Integrity, for retailers, and it will be live before year’s end. The platform allows retailers to capture and analyze data and store information, while generating an annual report to determine their sustainability-focused ESG goals and achievements.

The application helps create a transparent and auditable report that can be updated monthly or quarterly and serve as a guide and reduce the time spent on developing a company-specific ESG plan.

“Where a retailer can start inputting metrics—like how many gallons of fuel, how many kilowatt hours or other environmental practices—our tracking application will allow the user to include these types of inputs in their ESG plan and help determine what the impacts are,” said Fuels Institute Vice President Jeff Hove, adding that another benefit is that companies will be able to track their own progress through a record-keeping system.

“If we get a critical mass of participating organizations, we can start creating a benchmark for the industry” that will allow companies to compare their performance against themselves and others, he said.

“If or when ESG planning becomes regulated, having these benchmarks will also give us an opportunity to share the industry’s knowledge with regulators so that potential programs and requirements are rooted in experience and market facts rather than aspirational objectives,” Hove said.

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