X5 Group’s Elena Konnova explains why ESG’s retail agenda is shaped, how it’s changing business, and how X5 impacts other companies through supply chains
expert: Elena Konova, Director of Corporate Communications and Head of Sustainability at X5 Group.
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Previously, it was sufficient for a company to obtain a “license” from the state – that is, to comply with the laws and regulations governing the scope of the company’s activities. Now technology has greatly increased the number of channels and the speed of direct communication between society and business, interactions at the level of public opinion are becoming more intense: people are quickly grouped in relation to valuable positions. Therefore, we can now say that in addition to the “license” from the government, the business must also confirm the “license” from the community.
There were three motivations for implementing ESG standards in the X5:
1. Demand from consumers and employees
An increasing number of customers in daily life are concerned with environmental issues. We see steady growth dynamics for this group of people, although they are not yet the majority. Of course, there’s a serious gap between those customers who say they’d like to see sustainable packaging or products, those who say they’re willing to pay for it, and those who actually pay for it if green solutions cost more. The first – about 80%, the second – 40%, the third – no more than 20%. But this is already a serious, and what is important, a very active part that makes up the agenda, and raises the rest at the level of value.
2. Internal application in the administration
This factor can also be called ‘business maturity’. There are examples when individuals from a new generation come to senior management who already have values associated with ESG development. More often than not, those who are in charge now overestimate their own positions. They begin to think about what kind of world they will leave as a legacy to their children and what needs to be done to improve the situation. For some, movies, books or scientific articles become a catalyst for some – conversations with their children, and for some – a personal experience: when they see how glaciers are melting on their favorite mountain roads or forests are destroyed. And they ask themselves, “What can or should my company and I do to stop this process?”.
3. Inquiries from investors
X5 is a public company, so the position of shareholders and investors is a delicate moment for us. A large role is played by investment funds here, which can limit the purchase of company shares if they do not follow certain values. Also, investors themselves are increasingly reluctant to invest in the stocks of those who do not adhere to ESG standards. Finally, investors pay attention to ESG’s ratings, for example, from RAEX.
Now this is the position of Western investors. The “greening” of their Russian investors is slower. But they also follow the global trend: if two or three years ago about a fifth of investors said they would have a barrier to entry for a company with a low ESG level, today there are more than half of them.
Choosing sustainable development priorities
When there is a demand for change, you need to prioritize. From the global sustainable development goals, we chose those that are most relevant to our company. For us, these goals were:
the health – promotion of a healthy lifestyle and the availability of healthy and high-quality products,
Work crew – ensuring decent working conditions and equal opportunities for employees,
planet – encourage responsible consumption and careful use of resources,
- Communities Supporting local communities through the development of charitable works.
When articulating these objectives and transforming them into specific programs that can be developed here and now, the opinion of all the above-mentioned stakeholders must be taken into account, who should be asked how important these objectives and specific programs are to them. Our review board puts a lot of emphasis on feedback.
We didn’t switch to ESG practices all of a sudden: We’ve done many things from a range of social practices before, but the main difference here is in the concept of “sustainability”. In the past, our participation in any initiative depended on the personal opinion of the manager, for example. But the situation changes dramatically when these goals become strategic along with criteria in terms of market share, revenue or margin, when the company makes public promises about them and reports on their implementation, integrating them into operations and the incentive system.
X5 became the first Russian retailer to join the United Nations Global Compact, an international business initiative in the field of corporate social responsibility and sustainable development. This means that the company is committed to submitting annual reports on environmental, social and corporate governance activities and sharing experiences with others.
How it works – using eco-friendly packaging as an example
In order for eco-friendly packaging to appear on our shelves, it is necessary to make it clear to suppliers which ones can be considered good and which ones should be disposed of. It was not possible to take a ready-made national standard: it does not exist. So we had to formulate our understanding, and this is how our idea of an industry standard for supplier packaging was born.
To do this, the company has engaged the largest producers of raw materials, leading suppliers, experts, industrial associations and recycling companies. Creating the standard required 1.5 years of active dialogue. We have published aggregate recommendations for 13 product categories. We now offer training on our own business services and mentoring seminars for suppliers. We are also improving accounting systems so that we can measure the percentage of “good” packaging on the shelves and set goals for ourselves to increase it by working with suppliers.
Other X5 Environmental Initiatives
In December 2020, X5 joined SBTi (Science-Based Targets Initiative). By 2050, the company intends to achieve carbon neutrality.
In the Pyaterochka and Perekrestok networks, customers can refuse to print paper receipts.
At nine perichristoxes in Moscow and two in Saint Petersburg, you can buy household chemicals in bulk, in your own reusable containers. This is a joint venture with eco-friendly household chemicals brand BioMio.
Vprok.ru hypermarket online couriers collect plastic bags from customers who bring products with them. Last year, 2 tons of bags were sent for recycling.
In 2020, X5 delivered for the treatment of about 620 thousand tons of waste generated during the operation of the company. By 2023, it is planned to increase the share of solid waste recycled to 95%.
5 distribution centers in Pyaterochka were converted to electricity from hydroelectric power stations.
Perekrestok supermarkets implement a smart shield system that reduces energy consumption by 10%, and Pyaterochka stores offer a smart one to reduce it by 4.9%.
X5 also strives to ensure that the majority of products on the shelves are produced in a responsible manner. To do this, the company works with suppliers: launching joint programs, advising on certification and environmentally friendly packaging, issuing general ESG recommendations to partners.
How do you find the balance between E and S?
Environmentally friendly products are often more expensive. For example, because its production technologies are still new and have not yet become bulky and cheap. This inevitably creates a problem of equilibrium between the components of the ESG: how to change the approach to the environment and at the same time maintain the price so that the burden on the population does not increase?
The first decision is to give the buyer a choice, put products with different cost and components on the shelf, and create a line of transitions.
The second is to change purchases. For example, more effectively include local suppliers in the group – their products may seem cheaper due to logistics and at the same time they may be more natural. But the opposite also happens: large global brands can be very healthy, and some domestic manufacturers can abuse chemicals.
G stands for becoming transparent to the community
The “license” from the community includes accountability, transparency and answers to all the questions that people may worry about in the company’s activities: does the company reduce emissions, does everyone in the company really have equal opportunities, etc. Thus, G, at its core, is transparency and a willingness to dialogue.
First of all, public companies go through the full cycle of building such transparency, but there are exceptions among non-public companies – if they are under pressure from regulators or local communities, or if this is a conscious decision of business owners.