The impacts of climate change continue to dominate news headlines, with the world’s oceans having broken temperature records every day for the past year and this past April being the warmest on record in terms of air temperatures. The retail sector has a range of factors to consider as a result, from eco-friendly supply chain options to sustainable product materials and carbon neutral product deliveries.

Businesses are playing catch-up on many aspects of climate action, but the industry is running out of time and the risks to retailers are becoming more intertwined.

As climate change continues to be top of mind for consumers and investors, boards across the retail industry need to be thinking ahead when it comes to mitigating the related risks. There are five key climate change risks that retailers need to understand.

Disclosure risk

Both regulators and consumers are increasingly critical of brands’ approaches to environmental and sustainability initiatives. While ASIC says they “encourage boards to look out for any greenwashing”, two in five Australians are researching before purchasing a new product service to understand how it is impacting society or the environment.

Brands have a growing responsibility to not just communicate with investors, customers, communities and other stakeholders about their environmental, sustainability, and governance (ESG) initiatives, but also keep these audiences updated on how the initiatives are performing, where there have been shortfalls, and how the organisation is planning to change or improve in the future.

For brands that undervalue and underinvest in transparent communications, the consequences from regulators could be severe. Furthermore, with 88% of Australians feeling the government should issue bigger fines when companies damage the environment or society, the standards and expectations around environmental impact are likely to continue shifting.

Capability risk

Retailers should not be over-relying on external specialists to address climate change issues long-term. As well as hiring in-house talent, executives should be leading by example and consistently invest in their own upskilling to help drive change throughout their organisation.

Furthermore, no individual person should be relied upon to deliver climate change outcomes. Leadership should be uniting the business around shared goals, and success will come from listening to a diverse range of perspectives and ideas. This requires diverse leadership teams and workforces, particularly as the impacts of climate change are more severe for people with disabilities, rural and remote communities, First Nations communities, and people from low socioeconomic backgrounds.

Timing risk

The climate emergency demands immediate action, and delays in developing and delivering climate action will have detrimental consequences. For retailers, the impact of delayed climate action not only pushes the necessary investments to a later date, but almost certainly ensures that the investments required at that time will be larger and more complex. The outcomes of climate change are compounding over time, extending across entire ecosystems and economies. Planning ahead will not be enough for retailers wanting to remain competitive in both the short and long-term if it is not followed through by tangible action.

Scope 3 emissions

Often considered “the elephant in the room”, these emissions come from a retailer’s supply chain and are coming under greater scrutiny across the globe.

With mandatory ESG reporting around the corner, retailers that get ahead of the curve and disclose scope 3 emissions as well as Scope 1 and Scope 2, will drive trust with customers, and investors. Building trust with key stakeholders should not be undermined as it is an important part of a more collaborative approach to building climate resilience.

Technology can play a constructive role in helping retailers capture and analyse third-party data to ensure their entire ecosystem is working collaboratively towards common climate goals.

Profit risk

While investing in climate action comes with a financial cost, the long-term financial, social, and environmental benefits will far outweigh these initial impacts on the short-term profit margin.

Furthermore, big business has come under significant scrutiny in recent months amid the ongoing cost-of-living crisis. Consumers are starting to question where they buy their groceries, invest their superannuation, and take out home loans in light of corporations saying they are being socially responsible while publicising high – and in some cases – record profits. Businesses not investing in climate action but still recording profits could lead to loss of customer loyalty and brand reputation.

There has never been a more pressing time for retailers and their boards to understand how they can effectively drive climate action in sustainable ways. Keeping climate change risks top of mind will ensure these investments are not just effective today, but help the organisation thrive in the future as the impacts of climate change and industry-wide action continue to evolve.

Simon Berglund is senior vice president & general manager APAC at Diligent.