Strong ESG Impact Driving A New Era in the US

As global economies are adjusting to the urgent need to address environmental, social, and governance (ESG) concerns, the US is still struggling to mandate ESG regulations. But, while the US is far behind the European Union (EU) in tackling ESG issues, companies and industries in their capacities are preparing for the future regulatory landscape.

A significant move has been in disclosing non-financial aspects of the organization, annually. According to the Governance & Accountability Institute’s 2021 Sustainability Reporting in Focus report¹ , 92% of S&P 500 firms published sustainability reports in 2020. The reports indicate how ESG has impacted companies’ decisions and investments toward making operational and functional modifications.

Impact of ESG on Key Industries in the US

Here’s how BSFI, retail, pharmaceutical, travel, and restaurant industries have evolved due to the impact of ESG in the past few years:

BFSI

For the BFSI industry, the concept, initially regarded as philanthropy, evolved over the years to become corporate social responsibility. With ESG concerns rising, banks and financial institutions are pledging broader commitments and making greater business-centric efforts to encourage companies to mitigate these issues.

Over 90 banks, representing USD 66 trillion in assets, have entered into a Net Zero Banking Alliance to align their investment and lending strategies toward achieving ESG goals using technology and policies². The Alliance includes 10 of the largest banks in North America.

In the US, while the ongoing debate on ESG regulations continues to divide Congress members, globally present US banks and financial institutions decided to follow in the EU’s footsteps. Here are key highlights –

Major US banks, such as Wells Fargo, JP Morgan Chase, BlackRock, Morgan Stanley, and Goldman Sachs, have started offering ESG-linked financial products³.
US Bank, a major commercial bank in the country, recently launched a full-service ESG practice within their fixed income and capital markets business⁴.
Nasdaq filed a proposal to the US Securities and Exchange Commission (SEC) for adopting rules to advance board diversity. Approved in August 2021, the adopted proposal required Nasdaq-listed companies to have at least one female director and one director who self-identified as a minority or an LGBTQ+⁵.

Along with these, BFSI companies are advising their business customers to invest in sustainable practices⁶ and report on ESG factors for supporting their investors’ interests. Their key challenge is the lack of a robust, granular, and comparable data framework to ease the ESG reporting process.

Retail

The retail industry has long faced ESG issues, including food safety, consumer protection rights, increased waste generation, fast fashion, child labor, and illegally traded diamonds⁷ . However, the onset of the pandemic magnified the concerns owing to the expanding expectations of consumers and stakeholders. As a result, the consumer-driven industry witnessed an upheaval in shopping patterns and shopper preferences. Surveys conducted in the US between 2020 and 2021 highlighted the following statistics–

79% of consumers wished to continue using self-checkout post-pandemic to ensure a long-term safe and hygienic shopping experience⁸.
55% of consumers shifted their choices to sustainable products and services⁹.
45% of consumers wanted retailers to pledge support for Black-owned vendors, brands, and suppliers¹⁰.
80% of consumers with electric vehicles often charged them while shopping¹¹.

The statistics indicate the growing push from consumers for retailers to adopt strategies and invest toward achieving positive ESG scores. Key strategies adopted by major US retail companies are as follows:

Contributing to a circular economy

Several brands such as Lululemon, Dick’s Sporting Goods, and Nike are introducing resale programs to reduce the environmental impact of their products¹².

Expanding workforce diversity and equity

Over 28 retailers, including Nordstrom, Sephora, Macy’s, and Gap, have pledged to dedicate 15% of their store space to Black-owned brands¹³.

Fighting climate change

Retailers such as Meijer¹⁴ and Walmart¹⁵ are increasingly using various renewable energy sources such as solar and wind power to reduce their carbon footprints.

Despite adopting a plethora of strategies, the industry’s ESG goals continue to be affected by its supply chain, which is most dependent on other countries such as China and Mexico. Companies will need to address the following challenges before they can achieve positive ESG outcomes¹⁶:

Ensuring a responsible value chain through product traceability.
Decarbonization
Establishing a responsible product design and manufacturing line.
Transparent reporting to dispel greenwashing allegations.

Pharmaceutical

The pharmaceutical industry has historically been reluctant to commit to ESG issues. Companies have often been called out for fixing prices, throwing toxic waste, making false claims¹⁷, and withholding information from the public. The pandemic helped steer the reputation of pharma companies toward the positive side. As the industry stepped up to the challenge of developing vaccines for the new COVID-19 virus, the attitudes began to change. As a consequence of successfully collaborating with universities for COVID vaccine development, producing and distributing the vaccines worldwide in record time, and pledging to sell the vaccines on a non-profit basis to developing countries, pharma companies were called the saviors of people and economies.

The newfound image allowed the companies to realize the need to change their profit-centric approach¹⁸ to a strategy that benefits society. With investors and stakeholders shifting their focus toward ESG issues, firms are reevaluating how to reduce environmental impact and conform to the evolving ESG disclosure norms.

Following are the key highlights¹⁹:

Amgen has pledged to become carbon neutral by 2027 by using continuous purification methods in their facilities that generate 69% fewer hydrocarbons.
The Massachusetts facility of Sanofi, is designed for continuous drug manufacturing that reduces carbon emissions by 80% compared to the company’s earlier production facilities.
As Scope 3 emissions account for over 80% of the top pharma companies’ total greenhouse gas emissions²⁰, several pharma companies, including Pfizer, BioGen, Novartis, and Johnson & Johnson have pledged to encourage suppliers to reduce carbon emissions by adopting renewable energy sources.
Pfizer has signed a virtual power purchase agreement with Vesper Energy to solar power 100% of their North American operations by 2023.

While ESG is slowly penetrating pharma companies’ core business aspects, very few report the ESG factors transparently. According to a Bloomberg survey released in March 2022, most pharma and biotech companies listed in US exchanges do not release ESG disclosures. Those who report only limit their disclosure to just one pillar out of environmental, social, and governance²¹. Their key challenges²² are as follows:

Incorporating all the ESG objectives into the company’s core strategy, communications and operations.
Tracking the relevant ESG parameters and disclosing amidst the constantly evolving regulations, standards, and stakeholder expectations.
Ensuring ESG compliance while working in a collaborative environment to meet the evolving needs of the healthcare industry and developing countries.

Travel

The travel industry’s relationship with ESG intensified post-COP26. However, the industry has long questioned about high air travel emissions, airport energy consumption, social harm from over-tourism, environmental damage due to construction for tourists in ecologically sensitive areas, and waste generation in tourist places and hotels.

Recently, the US travel industry brought together various travel organizations to develop sustainable travel strategies. The 60-member Sustainable Travel Coalition helps assess issues and opportunities related to ESG in US tourist destinations and use best practices and funding to conserve the natural environment, reduce waste, and minimize emissions. They have already received support from the federal government as tax credits and investments to increase the number of EV charging ports, protect and restore natural tourist attractions, deploy renewable energy sources, and produce sustainable aviation fuel (SAF). Following are the ESG-focused strategies that travel companies²³ are adopting:

In its latest 2021 ESG Report, American Airlines announced that they are retiring more than 670 less-fuel efficient airplanes by the end of 2021 to modernize their fleet. The company has also made efforts to increase diversity, equity and inclusion at the board level²⁴.

JetBlue started early during the pandemic to introduce various measures to meet its net-zero targets by 2040. The company’s objectives include transitioning into SAF, adopting electric vehicles for ground service equipment, eliminating single-use plastics, and ensuring a minimum 80% recycling rate for audited domestic airplanes²⁵.

After flying an aircraft with passengers using 100% SAF²⁶, United Airlines has committed to adopting 100% green practices by 2050, without relying on carbon offsets²⁷.

While the airline companies seem ahead of the curve in addressing ESG issues, cruise travel companies still struggle with marine pollution concerns. All the travel companies are facing challenges in providing all relevant ESG data that could effectively ensure they reach net-zero emissions by 2050

Restaurants

The restaurant industry has not shown much concern over ESG, despite being pulled into controversies over wastage generation, poor working conditions, and carbon emissions. However, the enhanced awareness of ESG issues across industries in the post-pandemic world threw light on the foodservice business, compelling them to reimagine their operations.

US restaurants are often associated with food wastage. The country’s Environmental Protection Agency (EPA)²⁸ reported that 30% to 40% of food ends up in landfills or in an incinerator, causing high GHG emissions. To address the issues, EPA, in a joint agreement with the US Department of Agriculture (USDA) and Food and Drug Administration (FDA), has launched an action plan – US 2030 Food Loss and Waste Reduction Goal – to reduce food wastage by 50% by 2030. Several foodservice chains are making efforts to comply with the plan and build a positive brand reputation, as follows:

Starbucks has pledged a series of sustainability targets, including reducing waste, conserving water, and reducing supply chain emissions, by 50%. The café chain has also expanded its plant-based menu, adopted reusable cups, invested in restoring forests, replenishing water, and promoting regenerative agricultural practices²⁹.
Yum Brands, in its recent Global Citizenship & Sustainability Report, announced several initiatives to demonstrate their focus on ESG goals, such as investing USD 50 million in 30 social impact programs across nine countries, introducing plant-based offerings, and encouraging suppliers to join an emissions reduction training program with the target to reduce 50% GHG emissions by 2030³⁰.
Burger King’s parent company, Restaurant Brands International announced its commitment to reduce GHG emissions by 50% by 2030 based on the Science-Based Targets Initiative Criteria and Recommendations³¹. The company is also testing plant-based chicken nuggets³², streamlining menus³³ and pledging to phase out packaging materials with toxic perfluoroalkyl and polyfluoroalkyl substances (PFAS) by 2025³⁴.

While foodservice chains are committing to ESG targets, they fail to fill the gaps borne out of the following key challenges :

Lack of transparency in ESG reporting.
Lack of alignment of expectations between the corporate and suppliers to tackle the climate risks and meet ambitious emissions and water reduction targets.
Failure to address risks within the agricultural supply chain.
Failure to analyze water risk across the supply chain.

Technological Considerations to Achieve Future ESG Compliance

While the different industries have unique ESG goals, their challenges mainly revolve around accurate and relevant measurements and reporting. An effective strategy³⁶ will have –

Proactively engaging with stakeholders to establish ESG goals.
Using digital technology to improve sustainability performance.
Applying innovative approaches to address the issues of wastage, sustainable sourcing and transparency.
Considering all key performance indicators (KPIs) to reach the specific ESG goal
Improving data traceability and quality.

Technology has emerged as a critical tool that can help companies not only track the ESG parameters. It also proactively acts to ensure positive outcomes. Following are the key ways technology can help companies address their challenges:

Automated data collection

Leveraging IoT, RFID codes, APIs, and virtual twinning, you can ensure accurate, relevant, and continuous data collection from the entire supply chain.

ESG data platform

Deploying a cloud-based data platform allows the aggregation of all the ESG-related data into a single source of truth, facilitating analysis of operations across the value chain in real time.

Business application tools

Business-specific AI-driven tools can enable the delivery of necessary information for you to take proactive data-driven decisions.

As ESG standards and rating systems evolve, AI can self-learn to ensure you can progressively improve your ESG scores.

Ensure Your ESG Approach is Right

Very few truly understand the best approach to ensuring a future-ready ESG solution. Xebia has the tools, experience, and domain expertise to implement ESG-focused solutions efficiently. No matter which industry your business is categorized in, Xebia’s expert team integrates the most appropriate ESG contributors for effective measurement and reporting. Built on the Appian low-code platform, the ESG data platform is customizable and easy to use so that you can identify the KPIs and compare and modify them against the relevant ESG standards and frameworks.

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