Making Sustainability Sustainable in the Consumer Goods, Food and Retail sector

The Sustainability Environment

We’re at a pivotal moment for sustainability.

Over the past decade, regulations on climate, nature and social issues have surged. Mandatory sustainability reporting and supply chain laws are becoming global standards. Consumer Goods, Food and Retail (CGFR) companies must now deeply understand their environmental and social impacts.

But this is only the beginning. Sustainability law is predicted to grow, particularly as governments turn their attention to biodiversity collapse, with deadlines for action looming under international sustainability frameworks. At the same time, markets, consumer sentiments and other stakeholder expectations will continue to evolve, and businesses will come under increased scrutiny.

It’s impossible to understate the scale of this transformation. Organisations must now address complex laws, anticipate their stakeholders' demands, and evaluate corporate decision-making in the sustainability context. From growth strategy and investments to corporate structure and supply chains, no area is unaffected. But companies who invest now will reap the benefits for years to come.

Our research

To understand how CGFR companies are responding to this new era of sustainability, DLA Piper commissioned research among 600 C-Suite level executives in the sector. Our research uncovers the long-term commercial risks emerging from short-term pressure to act on sustainability. Informed by these perspectives, this report highlights opportunities to strengthen business – not just compliance – and offers practical insight to help companies build a strategic response to sustainability.

Our research confirms in stark terms the scale of the sustainability challenge for businesses in the CGFR sectors:

• 68% of leaders surveyed admit that they can’t meet all of their existing sustainability obligations.
• 66% report they don’t have the financial resources to keep up with new regulation.
• Over half say they need to update and expand horizon scanning capabilities, but only 13% have completed the exercise.
• In a new era of widespread mandatory public disclosure, our research shows that only 15% of companies have complete oversight of their direct suppliers, falling to just 6% in relation to indirect suppliers.

Our research shows that leaders fear the actions they’re taking in haste today – or areas where they’re yet to act – may create problems for tomorrow and amplify the threat of litigation.

So how can you move from a short-term, reactive approach to a long-term, pro-active response? Recognize This report is your starting point, providing guidance on the steps to build a strategic response to sustainability.

Progress of respondent organisations in improving and scaling compliance to meet mandatory sustainability reporting requirements

It's interesting to note that 47% of respondents are yet to engage with their stakeholders. The level of stakeholder engagement required by new regulation goes far beyond traditional, investor-relations style outreach - stakeholder communities will need to be understood in the very widest sense.

These include providers of financial and human capital. They include political leaders, who set the policies and make the rules that affect how businesses operate. They include activists whose actions can impact the firm’s brand, reputation and licence to operate. Even more broadly – and perhaps most importantly – they include everyone affected by the firm’s entire product lifecycle.

This is a challenging environment for organisations in the CGFR sector. Leaders told us the primary drivers of sustainability risk are:

• growing legal obligation
• market scrutiny of sustainability practices and the reputational risks associated with it
• inadequate compliance resources.

The four primary drivers of sustainability risk

The growing body of sustainability regulation and law is wide in scope, highly interconnected and rapidly evolving.

New requirements are directly affecting CGFR sector businesses at both product line and enterprise level, as well as indirectly impacting the sector through suppliers, financiers and insurers. According to one source, sustainability regulation has increased by 155% in the last decade. Leaders recognise the need to expand their horizon scanning capabilities to stay on top of these changes. But only 13% of companies have completed the exercise.

Among the wave of recent sustainability regulation, disclosure requirements and sustainable supply chain obligations are perhaps the biggest gamechangers. Businesses are now required to make significant public disclosures on climate, nature and social issues and their strategies for addressing them in multiple jurisdictions. They must also carry out extensive due diligence on the environmental and social impacts, risks and opportunities in their value chains, and publicly, and transparently, report on them. That means businesses understanding and managing their scope one, two and three emissions, and other sustainability impacts, in far greater detail than ever before.

However, they’re currently a long way from achieving the required visibility. Only 15% of companies surveyed have complete oversight of their direct suppliers, and just 6% say the same about their indirect suppliers. What’s more, 11% of organisations are also yet to complete sustainability audits of their supply chains.

As the rules tighten on issues like deforestation-free products and preventing forced labour, provenance and supply chain integrity are becoming critical. Companies are getting closer to their suppliers to exercise greater control:

• 67% of leaders surveyed say they’re locking in sustainable suppliers with exclusivity agreements.
• 67% are sharing sustainability data with suppliers.
• 56% are looking to acquire sustainable suppliers to shore up access to ethical raw materials.

As the due diligence and reporting demands on suppliers grow, leaders also see the benefit of managing a smaller universe of suppliers. 65% are rationalising their supplier base to maximise oversight.

But leaders point to the long-term risk of market distortion as a consequence of these strategies:

• 62% are concerned that their supply chain interventions will inflate the cost of sustainable inputs.
• 55% expect some smaller suppliers to fall into distress because they can’t provide the data that brands need to comply, concentrating the power of larger companies.
• 59% are concerned about exposure to antitrust risk.

Steps to improve supply chain transparency

Scaling up on price and scaling back on product range

The growing cost of compliance and threat of litigation are top challenges for organisations when it comes to meeting new sustainability obligations.

To offset risk, companies report that they’re taking defensive action on pricing, product ranges and sustainability commitments:

• 70% are increasing prices to protect margins.
• 64% are scaling back some product lines.
• 52% are reining in sustainability commitments and targets, to minimise the claims they’ll need to validate and defend.
• 47% are cutting back R&D on sustainable products and services.

Steps to manage growing cost of compliance and litigation

But far from insulating them from scrutiny, leaders anticipate that any retreat from sustainability will ramp up attention in the long run. Some 63% of those surveyed are concerned about reputational damage if investors, customers and employees question their organisation’s commitment to environmental and social governance.

Eroding stakeholder confidence may also impact the bottom line. 55% of leaders fear that it will weaken their company’s competitive advantage, if they can’t offer the sustainable offerings customers want; or if poor sustainability performance raises their cost of capital.

Surprisingly, a majority of companies in the CGFR sector reported that they’re considering major changes to their corporate structures and operations. The aim being to remain under reporting thresholds, and outside the jurisdictions with the highest regulatory standards.

Despite the enormous complexities involved, almost all businesses surveyed are considering dual structures to separate EU and non-EU entities. Nearly half are pushing forward with these plans, with the other half actively considering them.

At the same time, the majority say they’re relocating, or considering relocating, some of their operations and manufacturing facilities outside of Europe.

These steps may represent commercial decisions that were already in motion. For example, shifting operations to mitigate higher production costs or access key talent. But efforts to circumvent sustainability regulation may expose organisations to a range of risks and inefficiencies over the long-term:

• 57% of the leaders we survey believe these strategies are likely to dilute their progress towards sustainability.
• 66% are concerned about greater regulatory uncertainty and risk stemming from changes to structure and location.
• 59% pointed to decentralisation risks in other compliance competencies – such as bribery and corruption, areas where many companies have centralised their compliance activities.

Adjusting corporate structures and geographical footprints may also make compliance less efficient. 60% of participants predict greater reporting complexity if they separate out their EU operations.

Limitations to Dual Structures

Adopting dual structures may work as a transitional strategy, while organisations grapple with new sustainability reporting requirements. But it’s likely to come unstuck over the long term. As we saw in the banking sector following the global financial crisis, ring fencing is not without its challenges.

From a reputational perspective, removing parts of a group from EU sustainability obligations will be difficult to explain to stakeholders. Companies will still need to justify their unsustainable products, services and practices, even if they’re out of scope.

And in a practical sense, it’s also unlikely that CGFR organisations of any size will be beyond the reach of EU sustainability law, however they organise themselves. CSRD rules apply to non-EU entities that trade or source from within the Union. Plus, a key principle of the Directive is ‘completeness’. Groups must disclose the sustainability effects of their operations, for good or bad. Where a non-EU division is having an impact within the Union, that must be reported.

Meeting short-term demands and laying the foundations for long-term success needs a strategic response. Our research highlights areas that are critical to building a holistic approach to sustainability, where leaders say they face big challenges.

Highest priority challenges for meeting new regulatory requirements

Leadership and culture

Despite an awareness of the increased risk of short-termism evident from the survey, organisational culture and attitudes to risk may be hindering more strategic responses to sustainability. Low risk appetite, political apathy and creating a culture of transparency and accountability are top challenges cited by leaders in our research.

Data management and quality assurance

For both sustainability reporting and supply chain due diligence obligations, businesses will need a huge amount of data on not only themselves but also their supply and value chains. The ability to collect, validate, manage and analyse all that data is vital. But organisations say they lack the necessary data collection and quality assurance infrastructure, or the financial resources to build it.

Leaders acknowledge that they’re behind the curve on upgrading data capabilities:

• Only 32% feel they’ve made the necessary improvements to data collection for sustainability metrics.
• Just 20% have completed steps to strengthen their analytics capabilities to interpret the data they gather.
• Fewer still (15%) have finished upgrading their data management systems in line with new reporting requirements.

There are external challenges, too. The majority (54%) of leaders say new regulation isn’t clear on what data will be sufficient, and 57% say the same about what validation is required of reporting data.

Stakeholder engagement

The sustainability agenda is forging a different relationship between businesses and their stakeholders. In particular, leaders cite scrutiny from regulators and customers as sustainability challenges, which can lead to litigation and reputational risk. Despite a regulatory obligation to understand everybody affected by their products and services, organisations have not yet prioritised stakeholder engagement.

Organisations are under unprecedented scrutiny as they decide which sustainability levers to pull, and the threat of litigation looms large. Companies in the CGFR sector fully expect to face sustainability-related litigation, especially as a result of new mandatory reporting requirements. Yet only 13% of CGFR leaders say their organisations have prepared litigation defence and mitigation strategies.

Further, engaging external stakeholders on sustainability issues is now a legal requirement under the CSDDD. Yet only 13% of organisations have completed steps to do so. 47% haven’t even begun.

Sustainability is no longer a collection of non-financial objectives or simply a matter of being a good corporate citizen. Climate, nature and social issues, and how they are underpinned by good governance, are becoming issues of systemic risk and business opportunity. A new norm for businesses in scope of relevant laws and, in many instances, for those not directly in scope but part of the value chain of those that are.

The transition of our whole economy to address sustainability concerns is well underway, but there is still a long path ahead. As overwhelming as the volume of pressures from policymakers and stakeholders is on businesses right now, it is expected to escalate in the coming years. Our research indicates that the CGFR sector is feeling the strain, in a market context when they are facing more pressures than ever before. 

But these new imperatives should not be viewed just as a burden. The transition represents an opportunity for CGFR businesses – not only to strengthen their responses to sustainability challenges but to improve their resilience and functioning overall.

Tackle strategic questions

• Understand what sustainability means to your business. There is no single definition of what precisely is encompassed by sustainability. What it includes will depend on where your sustainability risks arise and what your strategic priorities, values and ambitions are as an organization.
• Ensure your leadership is aware of the wider context. Your board, management and senior leadership teams will be able to make more effective decisions when they can place emerging sustainability requirements in the wider context.
• Develop a cross-functional approach to managing sustainability risk. Many of the drivers of sustainability have indirect impacts across traditional organizational structures and will affect different roles in different ways. Bringing these perspectives together will enable you to manage your risk and spot opportunities better.

Map and address exposure

• Map your regulatory exposure in disclosure and reporting. With the plethora of mandatory disclosure and reporting requirements and lack of convergence, many businesses would benefit from mapping their wider direct and indirect exposure to inform their strategic approach to compliance.
• Review your communications, historic and current. Increased stakeholder scrutiny may expose you to any gaps between what you are saying and what you are doing or inconsistencies across your organization.
• Map your supply chains and engage with suppliers. Supplier codes of conduct will not be enough under the new rules. Understand which suppliers are the most strategically important or represent the greatest areas of risk. Work with these suppliers to invest in education and training, design monitoring and due diligence processes against key metrics, and develop escalation protocols to remediate any issues.

Get ahead of scrutiny

• Strengthen your policy, legal and regulatory risk management framework. Ensure that your approach to sustainability horizon scanning takes a holistic approach that recognizes the interdependencies of the various regulations and works across your functions. Set your scope far enough in advance to allow you to effectively plan your response – the key sustainability regulations take longer to implement than many businesses assume. Consider obtaining a baseline of your current regulatory exposure to help you set your parameters for scanning in the future.
• Get your data in order. Put a data governance strategy in place. Understand how you are using proxies and be prepared to explain your rationale for them. Review your data infrastructure.
• Implement pre-litigation strategies: Assume you will be sued. Put pre-litigation strategies in place to allow you to be highly reactive to any future challenges.
• Don't let the disclosure tail wag the dog. Don't treat disclosure and reporting as mere compliance exercises. Ensure that your materiality assessment adequately covers the topics required by sustainability diligence and reporting so that your reports reflect your actions and strategy rather than the other way around.
• Use negotiation points to gain more targeted information from suppliers. When renegotiating contracts or entering into new agreements with suppliers, use the opportunity to update your procurement protocols and due diligence questionnaires to get more targeted information on sustainability practices and impacts.

Building on DLA Piper’s market leading ESG legal practice, we have successfully developed and deployed an integrated legal and in-house Business Advisory service offering that seamlessly supports clients in their response to the ever-changing ESG regulatory landscape. In particular, we focus on global laws that mandate companies to report on Sustainability and ESG.

In conjunction with our Business Advisory team, we advised a large, multinational company on their journey to prepare to comply with:

• the EU Corporate Sustainability Reporting Directive (CSRD)
• EU Taxonomy Regulation
• EU Corporate Sustainability Due Diligence Directive
• as well as other ESG mandatory reporting requirements.

The process

To successfully implement this project, we developed a scalable, phased approach to mandatory sustainability reporting. Our model provided project management throughout and created a comprehensive business transformation experience. Our approach was made up of four stages and provided our client with concrete goals and milestones each step of the way.

Phase One - Co-defined Initial Project Plan and Gap Analysis Framework

• Developed a clear view of the requirements of the in scope laws.
• Co-defined an initial project plan with impacted stakeholders that reflects company’s compliance program strategy.
• Develop Gap Analysis Framework and identified requirements, areas and topics for initial gap analysis based on Project Plan.

Phase Two - Performed Initial Gap Analysis

• Performed a current state review and gap analysis based on the high priority activities identified in Phase 1.
• Identified and prioritised gaps and estimated resources and timeframes to address.
• Prepared recommendations for Board and business units.

Phase Three - Designed Compliance Program

• Co-designed program to address gaps in processes, policies, data collection and reporting practices.
• Developed a detailed roadmap, set up governance and accountability structures.

Phase Four - Operationalised Compliance Program

• Operationalised compliance roadmap, incorporating updates to policies, (data collection) processes.
• Met reporting and requirements for implementations of regulations by the appropriate deadlines.

This four-stage process provided our client with greater assurance, increased capability and a greater understanding of their reporting requirements.