Ethical retail in 2024: Key drivers, supply chain challenges, and regulations for businesses

The push for sustainable practice has been felt across almost every business sector. Retail is no different. With consumers growing increasingly conscious of our impact on the planet and ourselves, the question of ‘Where do the products I like actually come from?’ has become more prominent. As sustainability’s importance becomes more realised and apparent, businesses and governments globally have started putting their green foot forward.

Ethical retail refers to the practice of conducting retail business in a manner that prioritises ethical considerations and principles. Of course, the definitions of ethics and what is good or bad can span hours of discourse but in retail specifically, this usually refers to the social and environmental impacts of selling, producing, and procuring products. According to Nahuel Beccaria, Partner at RSM Argentina, ethical retail includes, “Ensuring fair working conditions, equitable wages, and safe work environments, as well as respect for labour rights throughout the supply chain. In addition, it focuses on environmental sustainability, seeking to minimise the ecological impact from the production to the disposal of products. Transparency and traceability are also essential, providing consumers with clear information about the origin of products and business practices, allowing them to make informed decisions.”

RSM’s retail specialists discuss the drivers, risks, and regulations behind ethical practices and regulatory compliance.

The drivers behind ethical retail

There are several factors that contribute to the rising demand for ethical retail:

Consumer awareness and preference

“An increased consumer awareness, fuelled by information accessibility through the web and social media, is prompting individuals to consider the ethical implications of their purchases,” says Jacqui Baker, Head of Retail at RSM UK. “Concerns over labour practices, such as sweatshops and child labour, drive demand for products that ensure fair treatment and wages for workers. Additionally, growing environmental consciousness leads consumers to prefer products with lower environmental footprints and sustainable sourcing practices.”

These concerns come with an increased desire for supply chain transparency, with consumers wanting to know the origins, manufacturing processes, and impacts of products, both socially and environmentally. As said by Beccaria, “This shift in consumer preference also highlights the desire for consumers to opt for products that reflect their ethical values. This is manifested through the prevalence of organic, fair trade, and cruelty-free labelled products, among others.”

For retailers, adapting to this consumer shift has been crucial. Christopher Shaker, National Retail Sector Leader at RSM US adds, “The ability to market products with labels that cater to consumers that are ethically and socially conscious is fast becoming a critical component of every retailer’s marketing strategy. In an environment where brand loyalty is less common than it once was with consumers, many retailers now have entire segments of their website dedicated to highlighting their efforts around ethical sourcing of products to differentiate from competitors and improve customer loyalty.”

Regulations and standards

To ensure fair work and ethical practices, many governments around the world have implemented stricter legislation on retail ethical standards. “These can range from labour and food safety standards to environmental policies. Laws and regulations around ethical labelling and sustainability are also on the rise, forcing companies to be more transparent about the origin and production methods of their products,” says Edgardo Rondó, Partner at RSM Argentina.

Beyond governmental regulations and standards, third-party entities have also published guidelines on the best ethical practices across the supply chain. The OECD, for example, has published guidelines for multinational enterprises that emphasise the incorporation of social, human rights, and environmental considerations. On the consumer side, the UN has published its guidelines for consumer protection to ensure ethical practice at the other end of the supply chain. There are also other global organisations such as Fairtrade International who work to ensure that standards are met to support local farmers and producers in developing countries – this includes fair pay and good working conditions.

Risk mitigation

The third main driver for ethical retail closely relates to the previous two, ultimately encompassing the potential pitfalls of not aligning with consumer preferences or regulatory compliance. In the 2022 Environmental, Social and Governance Special Report from the RSM Middle Market Business Index, 97% of respondents identified the desire to mitigate the impact of emerging regulations or new laws as a top factor in instituting a formal ESG plan.

“Companies are recognising that ethical and sustainable practices can help mitigate long-term risks, such as litigation, consumer boycotts, reputational damage, and supply chain issues,” adds Rondó, which leads us onto our next point.

The risks of ignoring ethical retail strategies

There are broadly two main buckets of risk that can have a damning impact on retailers if they fall short of creating and implementing an ethical retail strategy – both of which can significantly affect an organisation’s bottom line. These buckets are:

Reputational risks:

“While compliance with regulation is usually at the top of the boardroom list of risks associated with maintaining an ethical retail strategy, it may not be the most significant risk,” says Shaker. “Customer and investor satisfaction are often very high on the list of business risks related to ethical retail – and those risks can carry severe penalties. It is critical that retailers consider how their strategy with respect to ethical retail impacts the customers that buy their products, and the investors that they report to. Instilling confidence in both is critical to success for any sector in today’s retail ecosystem.”

“Furthermore,” adds Robyn Duffy, Senior Analyst – Consumer Markets at RSM UK, “Failure to meet ethical expectations can result in a loss of competitive advantage, as consumers increasingly favour brands aligned with their values. Financial repercussions are also considerable, including decreased sales, increased costs, and damage to shareholder value.”

Reputational risks internally can also be severe. Duffy continues, “Employee dissatisfaction may arise from perceived ethical shortcomings, leading to morale issues and high turnover rates.” As well as this, “Unethical practices can negatively influence employee morale and satisfaction, which, in turn, can decrease productivity and quality of client service. The lack of an ethical strategy can also limit market opportunities in segments where corporate social responsibility is valued, blocking the company's long-term growth,” Beccaria adds.

Compliance risks:

Retailers can face significant penalties if regulations are not met. As previously mentioned, governments across the world have varying laws and regulations to ensure that retailers adhere to ethical standards. As put by Baker, “Legal and regulatory consequences loom large, with non-compliance exposing companies to penalties, fines, and legal action, particularly regarding labour laws, environmental regulations, and fair-trade practices.”

There are plenty of retail giants that have faced significant public and financial backlash from committing severe breaches to ethical standards. Fines can reach into the hundreds of millions, and that is before the court of public opinion have had their say. In the worst cases of ethical breaches, criminal charges can be brought against individuals involved in the misconduct. Whilst criminal charges for regulatory negligence are not as common, the financial penalties can still be damning.

The takeaway

The demands of ethically conscious consumers and regulatory bodies are propelling the retail sector towards a more ethical future. Businesses that embrace ethical retail practices can gain a competitive edge whilst meeting regulatory requirements by building trust with consumers and investors. The risks of ignoring ethical retail strategies are significant, encompassing reputational damage, financial losses, and legal consequences. Therefore, prioritising ethical considerations in retail operations is as much a moral imperative as a strategic necessity for long-term success.

As the retail landscape continues to evolve, navigating the complexities of ethical retail will remain a critical challenge for businesses. Moving forward, collaboration among stakeholders, governments, and consumers, will be essential in driving meaningful change towards a more sustainable and ethical retail industry. Through a collective effort and commitment to ethical principles, the retail sector can play a pivotal role in building a more responsible and resilient global economy.

In the second part of our ethical retail series, RSM’s retail specialists discuss the challenges that retailers face in adopting ethical practices, as well as the steps they can take to overcome them.

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