Key Take-aways

  1. There is a growing trend of favouring environmentally friendly products.
  2. Businesses are responding by focusing on decarbonisation efforts that are marketable and visible.
  3. Clear commitments to carbon neutrality by 2040-2050, with partway targets by 2030 are being set, with sector-wide targets increasingly being agreed upon.
  4. Legislation sets to increase transparency and reporting.
  5. The progress on decarbonisation of the sector is promising.

The retail industry is a major carbon contributor; it’s responsible for 40% of EU emissions, with much of it occurring within the retail value chain. Decarbonising this sector is crucial to achieving the Paris Agreement’s targets. As consumer awareness and support for regulation grow, they create a positive feedback loop encouraging businesses to decarbonise for both commercial and environmental benefits.

While factors such as price, design, and availability still play a major role, environmental aspects may be the decisive factor once consumers have to make a final decision between two or more products. A 2022 report suggests that 87% of consumers in Sweden choose products from companies perceived as sustainable, up 10% from two years prior. Similar trends are seen in the UK and US, with 76% (BCG) and 78% (McKinsey and NielsenIQ) respectively stating sustainability as important to them and expecting brands to do their part.

Consequently, businesses are focusing on decarbonisation efforts that can be conveyed to the consumer. This includes using renewable energy in production and improving circular capabilities by encouraging consumers to repair or return products to the retailor.

Businesses are also voluntarily showcasing sustainability efforts in reports and plans, exceeding legal requirements. Increasingly, consumer-facing companies are committing to carbon neutrality by 2040-2050, with European sector organisation EuroCommerce, targeting a sector-wide 50% reduction of greenhouse gas emissions by 2030 and net-zero by 2050, aligning with the UN’s “Race to Zero”. Some EuroCommerce members, like the one in Sweden, set even more ambitious goals, aiming for global environmental benefits of Swedish companies to surpass their emissions before 2040.

Key legislation encouraging decarbonisation and increasing transparency

Several key legislations are already in place, with many more on the horizon, to ensure that strict goals and targets for decarbonisation exist. These laws also provide transparency requirements that allow the public and regulators to monitor these measures. This is particularly noticeable in the EU with its Green Deal and Fit for 55 legislative packages. These legislations can be categorised into three types: 1) Waste, Emission & Recycling, 2) Supply Chain, and 3) Reporting & Transparency.

Firstly, key legal frameworks such as the Waste Framework Directive, European Climate Law, Emissions Trading Systems and the increased responsibility on recycling textiles[1] are in place to ensure decarbonisation through waste minimisation, efficient resource use, and reduced emissions from production.

Secondly, legislation like the Effort-Sharing Regulation, Carbon Border Adjustment Mechanisms, and Regulation on Deforestation ensure that companies cannot “outsource” their emissions to other countries. These initiatives are putting more pressure on companies to account for their entire line of emissions, which is the least tracked type of emission to date.

Thirdly, the recently enacted Corporate Sustainability Reporting Directive and the draft Corporate Sustainability Due Diligence Directive aim to enhance transparency and goal tracking by requiring companies to use a unified reporting system, allowing for comparisons between companies. The “Race to Zero campaign”, recognising the value of such transparency, launched a tool in March 2023 allowing for reviews of individual businesses’ progress to meet their pledge of carbon neutrality. Further, the proposed Empowering Consumers Directive and Digital Product Passport will bring additional transparency to consumers, clearly showing the environmental impact of products sold in the EU.

The role of the social climate fund and the impact of green claims regulation

In addition to these legal instruments, there is the social climate fund and overarching trends in contracting, such as including an Ethics Code of Conduct and Sustainability Code of Conduct as part of the contracts between suppliers and retailers.

We also notice more activity regarding green claims regulation and case law in conjunction with the increase of green claims in advertising. Active efforts of regulators combat false claims of environmental benefits, which in turn increases the pressure on companies to take active steps towards decarbonisation to continue the use of green claims and remain competitive.

The future outlook of decarbonisation in the retail sector

In the future, we are likely to see more enforcement activity and greater consumer scrutiny pushing companies to compliance, as well as companies returning production to domestic markets in the EU, as “outsourcing” carbon emissions will no longer be possible. Decarbonisation of the retail sector is not only a competitive advantage, it’s also crucial to ensuring a sustainable future for the planet.

The growing public pressure and increased regulation in the sector also comes with increased legal, reputational and financial risks for businesses. Therefore, businesses need to act now and adopt effective strategies to reduce their carbon footprint across their value chain. Bird & Bird’s international Retail & Consumer group is well placed to advise on this increasing legislation, with deep expertise in the sector across international markets. From navigating green claims and advertising, to conducting due diligence on supply chains and operations, our experts can advise on these issues in this rapidly changing space.

Despite the challenges, there’s also plenty of opportunities ahead for innovation and solutions that allow businesses to reduce emissions and continue to grow.