ESG: Thoughts for the year ahead

In 2025, Environmental, Social and Governance (ESG) shifted to a more regulated, outcome-focused approach, with companies under increasing pressure to demonstrate measurable impact rather than broad commitments. Governments and regulators are enforcing stricter disclosure standards, pushing firms to improve data quality, transparency, and comparability, while investors are scrutinising ESG claims more closely to avoid greenwashing. ESG is very much a part of good governance, with a focus on managing long-term risk, compliance, and competitiveness in a rapidly changing global economy.

As we start the year, ESG considerations will remain a strategic imperative for businesses in 2026, particularly those operating within the retail and consumer sector. Retailers face heightened exposure due to the public nature of their sustainability and social engagement claims, the complexity of their supply chains and the close link between their products and brand values.

As the UK and EU move towards a more prescriptive ESG regulation, retailers will need to navigate a rapidly evolving compliance landscape – one that carries significant legal, operational and reputational consequences.

For retail businesses, 2026 looks to be a defining year. Below, we outline some of the key ESG themes shaping the sector for the year ahead.

Environmental

Circular economy

As retailers navigate growing sustainability expectations, the circular economy is emerging as a key theme shaping the sector. The circular economy refers to a model of production and consumption that seeks to reduce waste by reusing, repairing and recycling materials.

Consumers are increasingly demanding products that last longer and are produced more sustainably, pushing businesses to move beyond the traditional linear model of "make, use and discard" and embrace a more regenerative approach.

Retailers and consumer brands are already experimenting with circular business models, demonstrating both environmental and commercial benefits. Here are some standout examples:

• Second-hand and resale: IKEA's buy-back and resell programme allows customers to return used furniture in exchange for in-store credit, reducing waste whilst driving footfall.

• Rental and subscription services: Rent the Runway has built a premier fashion subscription model centred around renting clothing items rather than purchasing them brand new, extending garment lifespans and reducing textile waste.

• Reclaimed materials in Construction: The Councils in Tower Hamets and Hammersmith & Fulham have joined the ROMULUS scheme, which reuses locally reclaimed materials in new building projects. The initiative not only helps reduce waste and cuts construction costs but creates new opportunities for green jobs and community engagement.

• Repair Services: John Lewis has expanded its in-store repair service nationwide following strong customer demand, reinforcing the value of product longevity.

Policy developments are set to accelerate the adoption of circular practices. In the UK, the Extended Producer Responsibility (EPR) regime, which shifts the burden of responsibility to fund the disposal and recycling of packaging on producers, is likely to incentivise more sustainable packaging design.

The UK Government has established a Circular Economy Taskforce to develop the first comprehensive strategy, which is expected to be unveiled in the new year, for transitioning to a circular economy. The strategy will include a Circular Economy Growth Plan and sector-specific roadmaps outlining actions, timelines and policy recommendations to drive circularity.

Circularity is no longer a niche sustainability concept in 2026; for businesses it represents an opportunity to stay ahead of compliance requirements but also competitively position themselves in the market. As shown by the above examples, retailers are increasingly recognising the benefits of circular business practices as it can help unlock new revenue streams, strengthen brand loyalty and strengthen supply chain resilience.

Greenwashing claims

Greenwashing – the practice of making misleading sustainability claims about products or operations – continues to be a material ESG risk for consumer-facing businesses. Many jurisdictions are ramping up efforts to tackle this issue by leveraging tougher enforcement powers.

In the UK, there is now a strong framework in place:

• The Financial Conduct Authority (FCA) introduced an anti-greenwashing rule and guidance in 2024 requiring all sustainability-related communications by FCA-regulated firms to be clear, fair and not misleading, with potential criminal sanctions for reckless and knowing misconduct.

• The Economic Crime and Corporate Transparency Act (ECCTA) 2024 entered into force on 1 September 2025, and brings strict liability for "failure to prevent fraud" offence, making greenwashing a potential ground for criminal prosecution if companies fail to prevent misleading or unsubstantiated claims.

• The Advertising Standards Agency (ASA) has issued formal guidance and has been active in investigating greenwashing complaints. A high-profile example is ASA's recent ruling against Nike, Lacoste and Superdry over misleading sustainability claims in their advertisements. See our previous article here: A deterrent from advancing sustainability agendas across retail?

• Since April 2025, The Competition and Markets Authority (CMA) has also been provided with broader consumer protection powers under the Digital Markets, Competition and Consumers Act 2024 (DMCCA), which enables regulators to investigate and enforce DMCCA breaches (including instances of intentional greenwashing) directly, without being required to go through the courts, and grants powers to issue fines of up to 10% of a business' group annual turnover for breaches.

Given these developments, we anticipate intensified oversight and enforcement actions by regulators and enforcement agencies in the year ahead. Such greenwashing risks not only impact the balance sheet of businesses in the form of potential regulatory penalties and remedial costs but also cause lasting reputational damage. Businesses should therefore ensure that their sustainability claims align with industry guidance and can be backed with evidence-based explanations.

Social

Delivery drivers labour practices

The rapid growth of online shopping in recent years has transformed the retail landscape with retailers placing much greater reliance on outsourced courier services. The BBC's recent Panorama investigation entitled Evri: Where is My Parcel? has brought questions surrounding the employment status and fair pay of delivery drivers back into renewed focus.

The episode featured undercover reporting and courier testimony describing the immense workload pressures placed on Evri delivery drivers, who are paid on a per-parcel basis. As a result, some couriers have resorted to corner-cutting to complete deliveries on time and meet expected delivery volumes, leading to instances of missing parcels in some cases.

These pressures have been exacerbated by the introduction of Evri's "small packet" sizing in January 2025, which couriers state have further reduced their earnings as they are paid sometimes as little as 35p per small packet delivery. UK minimum wage law allows piece-rate work, but only if average hourly earnings meet or exceed the statutory minimum once all working time is accounted for. For workers aged 21 and over, that threshold is currently £12.21 per hour. This includes time spent on tasks that are necessary to perform the job, including the time spent loading vans, attempting deliveries, waiting at depots and dealing with mislabelled parcels. When pay is triggered only once a parcel is scanned as delivered, a substantial part of the working day is effectively removed from the wage calculation.

BBC's investigation highlighted that changes to Evri's pay rates have led some of their workers to claim that they were earning less than UK minimum wage once fuel vehicle costs and unpaid time were factored in. This has sparked calls from Labour MP, Liam Byrne, to recall Evri to Parliament with a view to conduct a full and thorough investigation.

With Ofcom reporting high consumer dissatisfaction levels for certain delivery firms – and renewed political scrutiny now focused in this area – the regulatory environment may tighten in the year ahead. These issues present a material risk under the social pillar of ESG, which encompasses labour standards, worker wellbeing and human-rights due diligence.

For retailers, delivery partners form a critical part of their supply chains. Retailers are increasingly expected to demonstrate that robust labour standards apply not only to direct employees but also to outsourced and gig-economy workers involved in last-mile delivery. Retailers should therefore treat delivery partners as they would any other supplier, requiring transparency on pay structures, workers classification and grievance mechanisms. Retailers that proactively address labour-standard risks within their delivery networks will be better positioned to maintain consumer trust and demonstrate credible ESG leadership in the upcoming year.

Governance

Executive remuneration

The matter of executive remuneration is set to lead the governance agenda in the early part of 2026. As annual reports begin to land in Q1 and Q2, the Investment Association (IA) has reconfirmed its flexible approach to executive pay in its Principles of Remuneration 2026 but has warned in its in its annual letter to London-listed companies that companies should avoid generic "boilerplate" arguments to justify large executive pay increases. The IA maintains that companies should provide tailored, well-substantiated rationales for their pay structures, demonstrating a "strong link between pay and performance" and to avoid "benchmarking" where companies argue higher pay is required to match competitors. While some City leaders such as the London Stock Exchange argue higher executive pay is needed for UK companies to remain globally competitive, investors are signalling that 2026 must prioritise accountability, transparency and performance alignment.

Executive pay has long since been a contentious governance topic, especially for companies within the retail sector. Frontline retail workers continue to face wage pressure and job insecurity, making large discretionary bonuses and above-inflation pay awards for executives a sensitive issue. A key governance question for 2026 is whether listed retail businesses are pushing executive pay too far at a time when social expectations around equity, social responsibility and responsible governance are central to stakeholder expectations.

Reporting

By 2026, a wave of UK and international regulatory reforms will fundamentally reshape how retailers report, govern and demonstrate their environmental and social performance. For a sector that is already at the forefront of ESG scrutiny from consumers, investors and regulators, the next year represents a critical period for retail businesses to prepare for sustainability accountability and transparent reporting requirements.

Below are some key changes to the UK ESG reporting landscape:

• UK Sustainability Reporting Standards (UK SRS): From 2026, the UK will begin phasing in the SRS, an ISSB-aligned framework designed to modernise how companies report on sustainability-related risks, climate data and governance practices. The SRS is comprised of two core standards including the UK SRS S1 (covering sustainability-related financial disclosures) and UK SRS 2 (focusing on climate-related disclosures including metrics and targets around greenhouse gas emissions).

• Enhanced Environmental Reporting: Under the Energy Savings Opportunity Scheme (ESOS), in-scope organisations have a mandatory requirement to undertake energy-use assessment and report on energy performance every four years with this data being published publicly by the Environment Agency. The purpose of the scheme is to incentivise larger organisations to implement energy-saving measures to reduce carbon emissions. ESOS Phase 4 is currently in progress, with the qualification period running between December 2023 to December 2026.

• ESG Ratings Regulations (FCA Consultation): The FCA has launched initial consultations in December 2025 on bringing ESG ratings providers within its regulatory remit. This move is designed to improve governance, reduce conflicts of interest and enhance transparency in how ESG scores are produced.