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ESG compliance by retailers could win customer connect, marketshare gains

ESG Funds are fast becoming a core element of financial portfolios where investors are putting their money into companies that demonstrate ethical practices across heads of Environment, Social and Governance.Premium
ESG Funds are fast becoming a core element of financial portfolios where investors are putting their money into companies that demonstrate ethical practices across heads of Environment, Social and Governance.

  • Shoppers, on the other hand, have also turned discerning, seeking more product information, looking for sustainable packaging, fair practices, and transparency in how the product is produced and manufactured

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NEW DELHI: Retailers complying with ethical and transparent sourcing practices could benefit from better customer connect and gain market share at the expense of those who don’t, analysts at brokerage Jefferies said in a report.

While this compliance will initially entail higher costs for companies, but over a period of time, as more companies move towards responsible sourcing, increased availability of vendors could drive costs down, analysts at Jefferies said in a report tracking ESG practices in the country’s organised retail sector.

To be sure, environmental, social, and governance, or ESG, practices have gained momentum as investors, consumers and industry stakeholders expect more transparency around everything from ethical sourcing to fair wage systems followed by large companies.

Analysts at Jefferies said there are several costs associated with better sourcing practices including those of due diligence to trace material origination, switching from vendors offering lower pricing, setting up auditing mechanisms, legal costs etc. “However, as industry as a whole moves towards responsible sourcing, the choice of vendors should increase and associated costs to ensure compliance should come down," they said.

Shoppers, on the other hand, have also turned discerning, seeking more product information, looking for sustainable packaging, fair practices and transparency in how the product is produced and manufactured. This is over and above the functional benefits a product provides.

For instance, several new-age direct-to-consumer brands use cruelty-free, fair trade, zero waste, ethical, organic, vegan tags to draw in younger shoppers.

Retailers, especially those with integrated manufacturing, have been taking active steps including improving transparency of sourcing and associating with organisations promoting sustainable sourcing, authors of the report said. “We expect retailers with superior sourcing practices to benefit from a better customer connect and gain share at the expense of the ones that don’t."

However, there are various costs involved when introducing environmentally and socially relevant products, processes and packaging in the market, the analysts said in the report.

“Companies may need to invest cap-ex, tweak production lines and switch to higher priced vendors. Also, tying up with recyclers and NGOs also has associated costs. However, in some cases, companies may be able to unlock long-term cost savings through process overhaul," they added.

Meanwhile, companies which use the plank of responsible and sustainable sourcing practices can also command premium pricing. A purpose driven positioning will help brands attract premium customers and thereby improve the mix, according to the report.

Citing examples from organised Indian retailers, the report highlighted jeweler Titan that procures 40-45% of gold through exchange programmes and Reserve Bank of India-designated banks which import gold bars from the London Bullion Market Association. Apparel retailer Trent Ltd. encourages its suppliers to be in alignment with SMETA 4 Pillar Certification to promote labour standards, health and safety, management systems, business ethics and environmental safety.

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