The Environmental Price Tag: Profitability and Decarbonisation in Retail

In today’s marketplace, consumers increasingly prioritize environmental considerations, striving to minimize the environmental impact of their purchases. This shift has catalysed a surge in new consumption practices, with a growing demand for biodegradable packaging and recycled materials.

The rising tide of environmental awareness has compelled the retail industry to reassess its operational paradigms. Decarbonisation efforts have emerged as the defining ethos of the decade, with brands vying to reduce greenhouse gas (GHG) emissions. However, amidst this transformation, a pivotal question looms over the future of retail and lifestyle enterprises, which often operate within narrow profit margins and volatile market dynamics. What is the cost of decarbonisation?

While some retailers have embarked on initiatives to cater to evolving consumer preferences, others have embraced a more comprehensive strategy aimed at achieving net zero GHG emissions. Is one approach inherently superior to the other? Arguably so. Nevertheless, both signify a positive departure from inertia. According to research published by Deloitte US, the economic repercussions of climate inaction could amount to a staggering $178 trillion by 2070.

For the retail sector, a critical consideration revolves around the financial implications of decarbonisation initiatives.

GHG emissions footprint in the retail industry

To navigate the intersection of decarbonisation and profitability, it's imperative to comprehend the primary areas of environmental impact within the retail supply chain. Reports from the 2022 World Retail Congress underscore the sector's role in global plastic consumption, accounting for a substantial 40%, while over 25% of global emissions stem from retail supply chains.

Similar to other industries, retailers generate Scope 1 and 2 emissions through their daily operations, encompassing manufacturing facilities, offices, stores, and transportation systems. These emissions are exacerbated by energy consumption for lighting, heating, and transport. Addressing Scope 1 and 2 emissions often represents the initial step towards decarbonisation, involving transitions to energy-efficient lighting, adoption of renewable electricity sources, and utilization of electric vehicles.

However, the more formidable challenge lies in mitigating Scope 3 emissions, which emanate from third-party entities such as vendors, logistics providers, and distributors. Despite retailers' limited control over these external emissions, they significantly contribute to the overall GHG emissions footprint of end products. According to an article by McKinsey, approximately 80% of many companies' total carbon footprint comprises Scope 3 emissions.

Within retail logistics, encompassing the transportation of raw materials, finished products, and last-mile delivery, GHG emissions remain a significant concern.

Transportation and logistics activities contribute a substantial 24% to global CO2 emissions, with last-mile logistics accounting for approximately 30% of this figure.

Cost of inaction

The repercussions of climate inaction extend far beyond environmental degradation, exerting profound economic ramifications. As governments worldwide enact stringent regulations, non-compliant retailers face punitive measures, compounded by inefficiencies stemming from outdated infrastructure and high-GHG emissions transportation.

Moreover, consumer preferences increasingly favour products that are sourced, manufactured, and transported with lower environmental impact. The looming spectre of climate change further exacerbates the cost dynamics, as dwindling natural resources and escalating fuel prices amplify production and logistics expenses.

Consequently, these costs inevitably trickle down to consumers, posing a dilemma for cost-conscious individuals and environmentally conscious consumers alike.

Additionally, the disposal of unsold inventory further compounds environmental strain, contributing to GHG emissions and incurring financial losses for retailers.

Investing in decarbonising retail supply chains

The imperative for transforming the retail industry transcends mere rhetoric, necessitating concerted efforts to reduce Scope 1, 2, and 3 emissions. While addressing internal emissions is relatively straightforward, mitigating external GHG emissions requires collaboration with suppliers, customers, and regulatory bodies.

Investing in product and logistics optimization, alongside procuring renewable energy offers a tangible pathway towards emissions reduction. Such measures, facilitated by robust monitoring mechanisms, hold the potential to substantially diminish retailers' GHG emissions footprint while enhancing operational efficiency. “Our analysis shows that a low-carbon future is not only a societal imperative but an economic one. We already have the technologies, business models, and policy approaches to simultaneously combat the climate crisis and unlock significant economic growth, but we need governments, businesses, and communities globally to align on a pathway toward a net-zero future,” Dr Pradeep Philip, Deloitte Economics Institute mentioned in a recent article.

A return on investment in decarbonisation

Realizing the economic benefits of decarbonisation mandates a paradigm shift within the retail industry, prioritizing long-term viability over short-term gains. However, this transformation cannot be confined to isolated endeavours; rather, it demands widespread industry-wide adoption.

The market dynamics further bolster the case for decarbonisation, with a recent report by Diversitech Global indicating 70% of millennial and Gen Z customers reflecting a growing willingness to pay premium prices for products with lower environmental impact.

Regulatory imperatives, coupled with technological advancements in data analytics and AI, further incentivize retailers to embrace decarbonisation efforts, offering avenues for operational optimization and efficiency enhancement.

Ultimately, the convergence of environmental consciousness, regulatory pressures, and technological innovations underscore the reduction of GHG emissions as an indispensable cornerstone of retail profitability in the 21st century. By embracing decarbonisation practices, retailers not only mitigate their GHG emissions footprint, but also fortify their competitive edge in an increasingly discerning marketplace.