Opinion: The Role Grocery Boards Need to Play in ESG Reporting

By Rashida Salahuddin, president and CEO, the Corporate Citizenship Project

The U.S. Securities and Exchange Commission's proposal in March to require certain climate-related disclosures and reporting from publicly trading companies added that much more urgency to the issue of environmental, social, and governance (ESG) reporting for grocery retailers.  

Increasingly, investors, customers and employees themselves are looking for transparency into the range of impacts that a given grocery retailer is seeing—or not seeing—from its ESG initiatives, whether these efforts are in the realm of combating climate change, diversifying the company's leadership, updating corporate policies or another area.  

Corporate boards play a critical role in guiding ESG efforts and reporting. However, to fully understand the role that grocery retail corporate boards can and should play in navigating their ESG reporting going forward, we first need to understand the problems with the current system. 

The State of ESG Reporting Today 

When grocery retailers issue ESG reporting in their annual reports, proxy advisory firms, such as Institutional Shareholder Services (ISS), take that information and essentially put it on a rating system, where all of the grocery retailer’s ESG efforts are graded on an ABCD/ - level. Some proxy advisers, including ISS, also assess companies for overall positive or negative social impact and assign them a score. For example, just by visiting ISS’s ESG Gateway1, you can see that ISS assigns Kroger a “C” ESG rating and was judged to have a 1.4 limited positive social impact. Walmart’s ESG corporate rating is a C-; the company was judged to have a -6.2 negative social impact. Proxy advisers rarely delve deep into the reasoning for companies’ ratings, which poses a challenge for investors attempting to assign context and meaning to a given rating. For grocery retailers' boards of directors, this challenge is even more significant. Because proxy advisers are opaque about their standards for achieving high ESG marks, it is very difficult to know which factors are most critical. Case in point: Kroger and Walmart have relatively similar corporate diversity, pay levels, and operations; however, they have significantly different ESG and social impact scores from ISS.   

In response to this opacity, a cottage industry of ESG consultants has formed to help companies seeking higher ESG rankings. The challenge is that proxy advisers such as ISS also offer these services. Many, including the SEC, have taken issue with this business model because of the potential for conflicts of interest.

This has echoes of the debacle more than 20 years ago with energy-trading company Enron Corp. and accounting firm Arthur Andersen LLP, as Enron kept debt off its balance sheet when reporting annual financial earnings, thus making them a subject of a federal investigation and sparking the conversation for a new set of standards to maintain financial integrity. Today’s ESG reporting realities set up a similar situation as companies may be tempted to do anything they can to earn a better grade and impress their investors. Shareholders and stakeholders want to see credible environmental and social change through a new set of ESG standards, but the current ESG system first needs to be resolved.  

What Needs to Change? 

With the current ESG evaluation system seemingly more focused on ratings than on bringing about change, proxy advisers issuing these ratings need to consider reforming their organizations to focus on either ESG ratings or ESG consulting, as maintaining both operations creates the challenges we are seeing with companies trying to leverage the system to boost their evaluations rather than focusing on effecting true change throughout the grocery retail industry.  

ISS is not the only issuer of ESG ratings; other proxy advisers use their own methodologies to rank and score grocery retailers, and reports at times are rife with inaccuracies, ultimately sowing confusion in the markets. Inaccuracies then take up considerable bandwidth for grocery retailers as they scramble to address misstatements appearing in the reports, consuming time that could otherwise be spent actually improving ESG performance 

Shareholders and other stakeholders who want to see grocery retailers measured against a consistent set of ESG standards are the losers in the current system. Without robust, consistent and transparent evaluation standards, ESG evaluations will not be as meaningful as they could and should be. 

The New ESG Standards for Grocery Retailers 

What, then, can grocery boards do to make ESG reporting more meaningful and ESG initiatives more impactful? A crucial step is ensuring that there are checkbox standards across all environmental, social and governance efforts and metrics on which the retailer reports with data easily accessible to investors for verifying that reporting. Without transparency, the system will continue to hurt companies putting their resources toward achieving their ESG goals while benefiting those willing to try to “game” the system. A transparent system would give ESG-conscious investors a leg up in understanding their investments while benefiting companies truly committed to doing the right thing.  

Rashida Salahuddin is president and CEO of the Corporate Citizenship Project. Born and raised in Los Angeles, Salahuddin has spent most of her career in public affairs, working for a wide array of companies in financial services, entertainment and energy. As the leader of the Corporate Citizenship Project, Salahuddin is working to address the challenges and ethical issues she has observed in the field of corporate governance. Additional information about the project can be found at corporatecitizenshipproject.com.