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Clouds on the horizon: What climate change means for retail

Author; Daphne Howland, Cara Salpini, Kaarin Vembar & Caroline Jansen

Source: Retail Dive

From supply chains to marketing, weather-related changes have impacted how retailers do business.

The world is on fire and retail is to blame. At least partially.

Global warming is likely "the result of human activity since the mid-20th century and proceeding at a rate that is unprecedented," according to NASA, and is evidenced by a global rise in temperature, warming oceans and extreme weather events.

Over the last 40 years, the United States has sustained 246 weather and climate events where the cumulative costs reached $1 billion or more each — and together caused more than $1.6 trillion in damage, according to the National Centers for Environmental Information. Already this year, as of April 9, the U.S. experienced two weather disasters with losses exceeding that milestone — and such events have been clustered together in recent years. Last year, the country saw the fourth-highest number of billion-dollar events, behind 2017, 2011 and 2016, and the fourth-highest tab for them ($91 billion), behind 2017, 2005 and 2012, according to NCEI.

Retail has both played a part in the perpetuation of climate change and absorbed its impact. Supply chain and sourcing have already changed due to weather patterns, and according to at least one estimate, the apparel industry releases half a million tons of microfibers into the ocean per year. 

 
Credit: Kendall Davis for Retail Dive; Source: Cone Communications
 

But, there is a current of revolution on the horizon, with companies caving to consumer pressure to improve processes and prove that they are adopting sustainable practices. A 2017 study by Cone Communications found that 63% of Americans want businesses to take the lead on driving social and environmental change in the absence of government regulation. Additionally, shopping habits have also slowly started to shift, as consumers look to options like clothing and furniture rental as alternatives.

Retailers are in a good position to make decisions that could put the larger consumer goods industry on a more environmentally sustainable path. "Climate action must come from the ground up," Lynn Scarlett, co-chief of external affairs at The Nature Conservancy, has previously said in a statement about tackling climate change. "Already, we're seeing the greatest momentum come from people who are facing every day challenges due to climate change."

Changing weather, changing supply chains

While scientific discussion around climate change focuses on long-term trends and cost pile-ups, headlines tend to capture the dire consequences for human beings and their livelihoods in the immediate and short terms. Last year, for example, estimates from Hurricane Florence were that it could cost retailers some $700 million, according to Planalytics, which provides weather-related planning tools for businesses. Some businesses, like home improvement retailers The Home Depot and Lowe's, actually pick up sales in the aftermath.

But the reality is that individual weather events don't much jolt retailers' short-term bottom lines, either way. The immediate concern is, and should be, on safety, for customers and store staff, according to Paul Walsh, global director of consumer weather strategy for IBM.

"Anyone with a supply chain is going to be affected by climate change. ... It's as much an issue for us as for the Pentagon." Paul Dillinger Head of Global Product Innovation, Levi Strauss & Co.

However, retailers may want to take note of the havoc severe weather wreaks along the supply chain. "Anyone with a supply chain is going to be affected by climate change," Paul Dillinger, head of global product innovation at Levi Strauss & Co., told Retail Dive in an interview. "It's as much of an issue for us as for the Pentagon."

BSR, a global nonprofit organization that develops sustainable business strategies, has the specifics: "Physical climate risks from acute weather events and chronic climate patterns are disrupting the availability of raw material and energy supply, supplier operations, and local communities along the supply chain," according to a report it released last year. "There is a clear business case for companies to reduce these risks and strengthen supply chain performance by building the resilience of operations and communities along supply chains," the report reads, citing research on 99 companies that saved $14 billion through climate-related improvements, while reducing greenhouse gas emissions by 551 million tons of C02.

On the other side of the equation, retailers who do nothing to address environmental issues could be in for big losses. According to CDP, which helps companies measure and respond to the impacts of climate change, $4 trillion worth of assets will be at risk from changes to the Earth's weather by 2030.

 
Credit: Kendall Davis for Retail Dive; Source: CDP
 

Global climate change also has implications for inventory — the apparel that should be in stores, and at distribution and fulfillment points at which time of year is changing — according to a Planalytics report on climate change and supply chain conducted for the National Retail Federation. That research found that retailers and brands that "remove the historical impacts of weather can drive a 20-80 basis point annual improvement in profitability just in inventory management … by increasing total enterprise forecast accuracy between 2 and 6 percent on average, and up to 50 percent for specific product categories," according to the report.

"More and more it's viewed as critical and fundamental to prepare for and execute against the weather volatility that we've seen," Walsh told Retail Dive in an interview. "The fact that IBM bought The Weather Company is one sign. There's an overlap — in sustainability efforts and resiliency efforts and the integration of weather and insights. So when we start to see these tremendous swings of weather — that kind of volatility is hard to keep up with. The way you do keep up with it is to leverage these technologies to be able to respond on an enterprise scale."

Apparel efforts to clean up

The dirty secret in the world of apparel is its continued negative influence on the environment. According to the Ellen MacArthur Foundation, an organization involved in advocating for a circular fashion cycle, it is estimated that by 2050 the fashion industry will use up a quarter of the world's carbon budget.

Together the apparel and footwear industries account for an estimated 8% of global climate impacts, according to a 2018 report by Quantis. Dyeing and finishing, yarn preparation and fiber production life cycles are currently the three main drivers of the industry's global pollution, the report found. The apparel industry's impact on climate change increased 35% between 2005 and 2016.

"Most of these impacts are a direct result of apparel's reliance on hard coal and natural gas to generate electricity and heat," according to the report. Countries including China, India and Bangladesh are the largest manufacturers and heavily rely on coal-based energy.

Last year, shoppers received a reality check when stories surfaced detailing an apparel industry practice in which some brands regularly destroy merchandise. The backlash started in July 2018, when luxury fashion house Burberry revealed in its annual report that it was burning items to protect its brand integrity. Soon after, news trickled out that many companies allegedly had been doing the same, including Urban Outfitters, Eddie Bauer, Michael Kors, Victoria's Secret and J.C. Penney. The news sparked a wave of consumer outrage and became a touchstone for those calling for industry change. 

 
Credit: Kendall Davis for Retail Dive; Source: The Business Commission
 

Despite some calls for boycotts of the brands that got tagged  and the resulting announcement from Burberry that it would stop burning excess goods — the industry still has a long road ahead to address the full impact its global supply chain and general practices have on the planet. Secondary Materials and Recycled Textiles (SMART) reported that an average of 81 pounds of clothing per person is thrown away annually, with 85% of what is discarded going to landfills.

According to research by Quantis, the most direct way to improve the apparel and footwear industry's part in climate change is to focus on renewable and efficient energy across the supply chain. Setting an industry-wide target of 60% renewable energy by 2030 would bring a 39% reduction in climate change, according to the report. Changing business models to adapt to climate change could also have a positive impact on the job market: A report by the Business Commission found that sustainable business models could create 380 million new jobs by 2030.

Calls for action in general around climate change have ratcheted up as predictions for the future impact grow more dire. A report by the Global Fashion Agenda stated that if production and consumption of apparel continues, "fashion's environmental footprint will continue to contribute to the negative impacts on the planet" through water usage, carbon emissions, use of chemicals and waste generation.

The pressure to be a sustainable brand

The impacts of climate change have also affected how brands market their products, as a shift toward conscious consumerism tips shoppers in favor of environmentally friendly brands. Over half of U.S. shoppers consider a company's values when making a purchase, according to a Forrester report emailed to Retail Dive, and 75% of consumers are concerned about helping the planet in their day-to-day lives, per a Gartner L2 report.

That's brought socially responsible certifications to the forefront in some ways, as companies look to prove that they're running better-for-the-environment businesses. B Lab's B Corp certification is a popular one for companies trying to show off their sustainable status, and many of those businesses are digitally native brands like Allbirds, Casper and Leesa. Bigger brands like Patagonia and Athleta have also achieved certification, but it's hard to find any on the list that aren't serious about their sustainability initiatives, according to Anthea Kelsick, chief marketing officer of B Lab.

 
Credit: Kendall Davis for Retail Dive; Source: Gartner L2
 

"The commonality amongst all of them is that they are brands that are mission-driven and purpose-driven," she told Retail Dive in an interview. "In terms of trends, we are finding it's less of a trendy thing these days and more of the status quo. More and more of the companies that are approaching us have that built into their DNA already."

Avedis Seferian, CEO of Worldwide Responsible Accredited Production (WRAP), a social compliance certification body for apparel, footwear and other sewn products, has also seen growth in the number of businesses looking to certify factories. According to him, there are 2,700 factories that currently have a WRAP certificate, with close to 2.5 million employees. Those numbers are growing year over year, and he places much of that growth on the power of third-party certifications, and on businesses themselves for becoming more interested in being socially responsible.

"The reality is that if you're checking your own supply chain, there is a credibility gap there. You have a vested interest in making sure these factories pass," he said of retailers who do audits of their own factories. Hence the benefit of an independent program, which does not hold any biases toward a given retailer. The interest in the environment, both from consumers and from business leaders, is also leading to a mind shift in how companies approach certifications and social responsibility, according to Seferian.

"In the past, you'd set up a company, you'd go with the flow and find the cheapest vendor and kind of just get yourself established before you started looking at social responsibility. Now that's not the case anymore. Now it's baked in." Avedis Seferian CEO, WRAP

"We are seeing the smaller ones, though, recognizing that you've got to get this thing right from the get-go," he said. "In the past, you'd set up a company, you'd go with the flow and find the cheapest vendor and kind of just get yourself established before you started looking at social responsibility. Now that's not the case anymore. Now it's baked in."

While those certifications mean a lot from one business to another, consumers aren't always doing the research to find out which brands are environmentally friendly and which aren't. At the same time, retailers and brands increasingly want their customers to know, Supriya Jain, principal at Gartner L2, told Retail Dive in an interview. That's meant incorporating sustainability into quarterly metrics and making information on environmental practices front-and-center for shoppers.

However, a sustainable brand image can be easier to maintain for small startups than for, say, a big-box retailer. It's harder to incorporate sustainability into every aspect of the consumer journey as a larger brand, Jain said, but that doesn't mean they're not capable of it. In fact, the conscious consumerism movement has also encouraged retailers that already have sustainable practices to start publicizing those more so shoppers don't have to look far to figure out if they're buying from an environmentally friendly brand.

"[There are] brands that are realizing that they're already doing so many things in that vein, but never realized that they should be publicizing it," Jain said. "'We have all these things that we could be talking about, but we don't put it front-and-center on the online experience or in our emails.' So it's more like: 'How can we actually just tell those stories better and lead with the initiatives that we already engage in?'"

The future of retail amid climate change

Given the effects of climate change already felt by retailers, many have taken steps as a result.

Companies are beginning to operate with the idea of a circular economy in mind, in other words, putting items back into circulation before the end of their useful lives. According to a Gartner L2 report emailed to Retail Dive, 18% of businesses were investing in the circular economy, and that number increased to 26% in 2016 and 28% in 2017.

Rent the Runway was a catalyst in normalizing apparel rental, and other companies have followed suit. Direct-to-consumer brands Fernish and Feather have built business models around furniture subscription services, and now larger retailers, such as West Elm and Ikea are offering similar options. Outdoor retailers have also built sustainability into their businesses: The North Face last year unveiled its Renewed line, which features damaged and refurbished items, and REI last week announced an expansion to its gear rental services.

 
Credit: Kendall Davis for Retail Dive; Source: Gartner L2
 

Retailers are "working with global resources to make sure they are not only making their products in a sustainable way, but also that they are socially responsible in the creation of those products, providing jobs for people who need them and not impacting the working conditions of those employees," Michael Brown, a partner in the consumer and retail practice of global strategy and management consultant firm A.T. Kearney, said in an interview with Retail Dive.

In late 2018, 43 retailers, brand and organizations — including Adidas, Gap Inc. H&M Group, Levi Strauss & Co. and Target — launched the Fashion Industry Charter for Climate Action backed by the UN. The charter aims to reach net zero emissions by 2050 by implementing initiatives such as utilizing sustainable materials, using low-carbon transport and improving consumers awareness.

Patagonia announced earlier this month that it is now focusing on "mission-driven companies that prioritize the planet," and is being more selective in the companies it chooses to make its iconic corporate vests for, according to a Bloomberg report. The company is hoping to attract more companies that have the B Corp designation, something that Patagonia also holds. Additionally, more than 6,000 Amazon employees published an open letter on Medium addressed to Jeff Bezos and the Amazon board of directors, calling for the company to rethink its approach to climate change, and pointing to reasons Amazon's Shipment Zero may be insignificant in creating real change.

"We're a company that understands the importance of thinking big, taking ownership of hard problems, and earning trust. These traits have made Amazon a top global innovator but have been missing from the company's approach to climate change," the letter said.

But are these efforts enough to curb the overwhelming effects of climate change? Maybe not.

"Consumers, especially millennials, are indeed more loyal to sustainable brands, and indicate some willingness to pay a green premium," Pei Yun Teng, A.T. Kearney's global director of social impact at strategy, said in an email to Retail Dive. "However this premium may fade, as sustainability has moved beyond niche to mainstream, and becomes a basic expectation for consumers. It is critical that brands are authentic here: simple greenwashing can easily be exposed and backfire, and consumers are certainly ready to punish “bad” brands that violate their trust."



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