Navigating ESG in the E-Commerce Industry: Sustainability, Responsibility, and Success

In today’s world, digital commerce is constantly expanding. Due to their convenience and accessibility, new e-commerce storefronts are regularly formed as businesses move away from the traditional brick-and-mortar business model. With their growing influence, it is important to understand how environmental and social governance issues impact the e-commerce business model.

Environmental social governance (ESG) assesses and measures a company’s material non-financial risks and opportunities using what is commonly known as ESG factors. Environmental factors such as energy efficiency, waste management, pollution control, carbon emissions, etc., all influence a company’s costs, reputation, and climate risk profile. The social aspects of ESG encompass factors such as employee wellness, diversity and inclusion, human rights, product safety, and consumer protection. Governance factors consider board and executive compensation, transparency, accountability, risk management, and ethics. Using these three pillars, a company can broaden its assessment of its business risk profile and identify long-term opportunities to help it achieve greater financial success. These same factors contribute to companies’ long-term sustainability and responsible business practices.

The Sustainability Accounting Standards Board (SASB) has compiled a list of metrics and policies specifically geared to the e-commerce industries. These categories include but are not limited to the following:

Companies typically have access to vast amounts of consumer information, such as basic consumer data and demographics, financial history, and purchase history. The use and storage of customer data, such as personal, demographic, content, and behavioral data, raises privacy concerns, leading to increased consumer and regulatory scrutiny. Companies must balance their need to utilize this data for commercial purposes with the importance of maintaining the confidentiality of customer data. To stabilize these interests, companies are encouraged to be transparent with their customers by disclosing how their personal information is used.

Management can assess its use of consumer data by measuring the number of users whose information is used for secondary purposes and the specifics of how it is used.

Data Security goes hand in hand with data privacy, meaning companies should take steps to keep consumer data secure. More importantly, data security over personally identifiable information (PII) is regulated in many jurisdictions, and non-compliance is often subject to significant fines. As consumers become more educated about the misuse of personal information and cybersecurity threats, having a transparent, robust policy becomes increasingly important. Companies should proactively find faults or weaknesses in their systems and document how they address these issues. Failure to develop a cyber policy over PII can lead to theft of PII data, significant fines, and damage to long-term brand value.

Management can use quantitative metrics such as the number of data breaches, the percentage involving personally identifiable information, and the number of users affected to measure the effectiveness of its cyber policies.

Skilled employees are an integral part of value creation in an e-commerce company, and as the industry matures, more and more employers are finding it harder to recruit qualified employees. Employees are vital in driving a company’s success. Talent is constantly sought after, and maintaining that talent is equally important, which is why some companies offer a work-life balance that influence the recruitment and retention of a diverse workforce. Furthermore, having a diverse workforce is important for innovation and helps companies understand the needs of their diverse and global customer base.

There are tools that are used to measure diversity and retention and they include conducting employee satisfaction surveys, tracking voluntary and involuntary turnover ratios, tracking the percentage of gender and racial/ethnic representation for different subsets of groups, and tracking the percentage of technical employees who are H-1B visa holders. Management’s use of this information can help guide retention and diversity efforts.

Product packaging and distribution significantly influence a company’s environmental impact and carbon footprint. Companies have an incentive to use less packaging as it is more efficient, reduces costs, reduces the number of trips, and in turn, they can pass these savings onto the consumer. Companies should also measure and disclose their total greenhouse gas footprint of product shipments as well as discuss and analyze strategies to reduce the environmental impact of product delivery.

In summary, ESG holds significance for e-commerce companies as it not only conforms to evolving societal norms but also yields concrete economic advantages. As the global emphasis on sustainability and ethical conduct continues, e-commerce firms that incorporate ESG values into their strategies are positioned to flourish within the dynamic realm of business.

Authors: Joe Holman, Principal and Practice Leader, ESG Services | [email protected] and Lore Bilbao, CPA, MAcc | [email protected]