Commercial - July 6, 2022 - By Jonathan Tan and Peter Cooke, Ratio Institute
Let’s Measure Sustainability with an Aim to Improve Operational Performance and Profits
As professionals dedicated to advancing sustainability in the food retail sector, there is a lot for us to be happy about. Based on our interactions with dozens of food retail chains over the last five years, we have seen a sharp increase in the number of companies that collect sustainability data and publish sustainability reports. Many are making substantial operational changes that enhance sustainability and increase profits.
Despite the good intentions driving these efforts, there is much room for improvement in how companies measure sustainability and use data-driven insights to inform operational improvements.
One common mistake we have observed: Companies publish in-depth sustainability reports packed with data on numerous metrics, but they do not consistently report on the same metrics each year. As a result, they don’t have clarity on the specific areas where they are improving and the areas where they are stagnating. Without such insights, they are unable to prioritize those operational changes that translate into the biggest sustainability and profit gains. These are missed opportunities.
Another common problem: Retailers report company-wide numbers like electricity consumption and greenhouse gas emissions without a full understanding of what those numbers mean and how to improve them.
A hypothetical example can illustrate this scenario. A company reports its total kilowatt-hour electricity usage across a portfolio of 100 stores but does not know which stores are the most energy-efficient and which are the least. It also does not know the on-the-ground practices, processes, and technologies that are driving efficiencies and inefficiencies. Without that knowledge, the retailer cannot identify the specific changes necessary to improve the inefficient stores. This limits visibility into future sustainability and financial performance.
These shortcomings in sustainability measurement and reporting are not unique to food retail. A recent McKinsey survey of more than a hundred investors and executives revealed that “they cannot readily use companies’ sustainability disclosures to inform investment decisions” due to a lack of consistency and relevance to financial performance.
Certification: A Systematic Approach to Tracking Sustainability
Ratio Institute is implementing two complementary approaches to improve sustainability measurement and reporting in the food retail sector. Our aim is to help retailers, their investors, and other stakeholders tap the full value of sustainability.
The first approach is certification. Last year, we launched our Sustainable Food Retail Certification Program, which provides companies with a comprehensive menu of nearly 250 store-level and company-wide sustainability practices that can reduce costs associated with energy, water, waste, and other areas.
From that menu, companies document the practices they are currently using as well as the ones that have not been implemented. They repeat this assessment annually. Many of these measures are low-cost technologies or no-cost behavioral changes by store employees. The certification enables companies to quantify the value of existing practices as well as the potential value of new practices.
There are several advantages to this approach. First and foremost, it immediately reveals specific opportunities to improve sustainability and financial performance. Certified stores can save between $70,000 and $120,000 per year by adopting the new practices. Second, it points to priority areas that companies should track over time in order to have visibility into future performance gains.
Third, it enables retailers to track, benchmark, and improve performance across a portfolio of stores in a consistent, systematic manner. Food retail companies can identify weaker-performing stores along with the specific changes that can put those stores on par with the strong performers. For instance, a company may discover that certain stores can achieve the biggest energy use and cost reductions by sealing leaks in walk-in freezers while others can save the most energy through new procedures to regularly maintain unobstructed return air on open display refrigerated cases.
Based on their on-the-ground knowledge of strong and weak areas across all stores, food retailers can develop intelligent company-wide sustainability strategies and provide investors and other stakeholders with useful insights on future performance.
A Single Sustainability Standard for the Food Retail Industry
Today, there is a lack of uniformity in how food retailers track company-wide sustainability. Traditionally, retailers have used metrics from many different voluntary, non-industry-specific reporting frameworks, such as Climate Disclosure Project and Global Reporting Initiative. This has made it difficult for investors and other stakeholders to compare the performance of food retail companies.
Again, the food retail industry is not alone. The same McKinsey survey of investors pointed to a “lack of alignment in standards” as the most significant challenge to effective sustainability reporting. The survey identified “ironing out the differences among reporting frameworks and standards” as a priority.
Ratio Institute is addressing this challenge with our second approach: the Food Retail Environmental, Social, and Governance (ESG) Reporting Standard. Published in May, the standard synthesizes and organizes a comprehensive set of sustainability metrics from five well-established voluntary reporting frameworks into an easy-to-implement reporting approach specific to food retail.
Food retail companies can use the results of the certification as inputs into their ESG standard report. As an initial step in preparing the report, retailers need to determine the metrics that are most relevant to their business operations—and most potentially impactful to sustainability and profits. Certification provides these insights.
Here’s an example of how adopting the standard can build on certification. A company’s ESG standard report includes total kilowatt-hour electricity consumption as well as the percentage reduction relative to a baseline year. These numbers become part of the company’s inventory of greenhouse gas emissions. The company wants its report to include a future target to reduce its average store electricity consumption from 70 kilowatt-hours per square foot to 50. It also wants to describe specific planned operational changes to achieve the target along with the profit implications. The company has already gathered this store-level data through its annual certification assessments.
To learn more, please join us in September at the Smart Energy Decisions Net Zero Forum, where we will be speaking about the value of sustainability reporting.
Jonathan Tan brings to Ratio Institute more than 20 years of experience as an entrepreneur and a business executive for both Fortune 500 and privately held companies. His career began with driving energy efficiency at food manufacturing and food packaging plants. He transitioned to energy-efficiency work at food retail outlets in the early 2000’s, focusing on refrigeration, HVAC, and lighting.
Peter Cooke comes to Ratio Institute with over 20 years of experience developing sustainability programs, including starting one of the nation’s first green hotel programs. That success led Peter to develop a similar program for Hannaford, New England’s largest grocery chain. Later, at Manomet, a sustainability non-profit, Peter founded the Grocery Stewardship Certification (GSC) Program in 2012.