Why Sustainability Investing May Be Retailing’s Crypto

It may seem like sustainability and ethical consumerism have been front-page news for a long time, but as a set of measurable corporate goals by which to tell the good guys from the bad guys — formally known as ESG — it’s only been a couple of years since a rulebook started to take shape.

In the past two years, the ESG movement has had an enormous impact on every aspect of retailing.

Minimum wages rose across the board. Shamed by allegations and in some cases evidence that Burberry and many other brands and retailers were destroying returns and excess inventory, all consumer-facing companies now have major plans to reduce energy use, waste, and so on. That’s what consumers want.

Those consumers with wealth flocked to funds that promise to invest only in companies that abide by ESG standards. Assets held in ESG funds surged in 2021 to $2.7 trillion, a 50% increase over 2020, according to data cruncher Morningstar. Wall Street firms were happy to oblige by rebranding funds as ESG and launching new ones.

Like crypto, sustainability-driven investing is a great idea that no one can accurately define.

For the moment, it is also an illusion in a real world staggering under relentless inflation, at war, apparently poised for a recession. Just as growth in consumer spending is slowing, the retail industry is trying to adapt to transparency demands and other requirements that are in many cases impossibly detailed, even in the best of times.

For example, last year the California legislature passed a law that penalizes manufacturers and brands for workroom labor violations. Lawmakers in New York State, headquarters of the fashion industry, have been considering a law that would require companies to produce verifiable reports on at least half of their supply chains — from the cotton farm to the mill to the dock to the workroom and, finally, to the store shelf.

As recently reported, McKinsey & Company forecasts that in the next five years, the added expense of all this will cause a surge in annual capital budgets of retailers of up to 15%, and almost an 8% increase in cost of goods sold.

But now, like crypto, the ESG-Industrial complex is having a “real wake-up call.”

That’s how a former investment executive of a Deutsche Bank subsidiary described her revelations about misleading ESG statements in her former employer’s 2020 annual report. The whistleblower, Desiree Fixler, told the Financial Times recently, “I still believe in sustainable investing, but the bureaucrats and marketers took over ESG, and now it’s been diluted to a state of meaninglessness.”

These developments in the Financial Markets will have an outsized impact on the retail industry and specifically private equity-backed companies. For more than a decade, private equity has been playing a growing role in the acquisition, financing, and dismembering of brands. According to a 2019 report by The Stakeholder Project, private equity-owned companies are “twice as likely to go bankrupt as public companies,” with 10 of the 14 largest retailer bankruptcies between 2012 and 2019 happening at private-equity-owned companies.

With ever-more onerous ESG and Sustainability requirements likely to emerge around the globe, capital available for the retail industry will shrink. AND, with that being said, brands will still be under even more pressure with sustainability initiatives due to doing what consumers overwhelmingly say they expect: MORE.

The inevitable question is who pays for it?

At an operational level for a retailer or brand, it comes down to the following question: How do we pass the cost on to consumers? Because, in the end, the customer must be willing to pay for it. Right?