Sustainability Through Regenerative Retail At Walmart

In this episode of the Retail Visionaries Podcast, Kathleen McLaughlin, Chief Sustainability Officer at Walmart joins Oliver Chen, Retail & Luxury Analyst. They discuss Walmart’s ESG initiatives including creating opportunity, enhancing sustainability, strengthening communities, and upholding the highest standards of ethics and integrity. They also discuss the company’s approach to profits with a purpose. 

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Transcript

Speaker 1:

Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Oliver Chen:

Save money, live better, and leave things better than how you found them. Here at TD Cowen, we too believe in profits and purpose. We’re really excited to talk with Kathleen McLaughlin from Walmart about environmental, social, and governance priorities. This is the Retail Visionaries podcast series, a podcast about visionary ideas and people. My name is Oliver Chen. I’m TD Cowen’s Retail, Luxury and New Platforms Analyst. On today’s episode, we’ll learn more about Walmart’s ESG initiatives, which include efforts to advance supply chain sustainability, foster diversity, equity, and inclusion, create opportunities through jobs and sourcing, and build inclusive and resilient communities. We’re excited to host Kathleen McLaughlin, EVP and Chief Sustainability Officer for Walmart, and president of the Walmart Foundation. Kathleen serves on the boards of the council on Foundations, the World Wildlife Fund, World Resource Institute, and is an advisor to the Nature Conservancy’s Impact and Financial Markets team. She’s also recognized by Fortune as one of the world’s 50 greatest leaders, and prior to joining Walmart in 2013, she spent more than 20 years at McKinsey & Company. Kathleen, it’s wonderful to have you here.

Kathleen McLaughlin:

Oh, it’s great to be here with you, Oliver. Thanks for having me.

Oliver Chen:

Kathleen, we’d love it if you could start out by explaining, what does ESG mean for Walmart and how does it factor into your overall company strategy?

Kathleen McLaughlin:

Sure. Well, we like to talk about the idea of shared value, and that just means that the environmental, social, governance issues that matter most to our customers, to our associates, our investors, suppliers, communities and so on, are very relevant for our business success. And in fact, we’re going to strengthen Walmart as a company by doing a good job on those concerns through our business. And so for a lot of these topics, whether you want to talk about waste, packaging waste or climate change or opportunity for our associates, they’re obviously really important to customers and associates, but they’re also really important for our business. And if we do a good job working on those, we’re going to make our company stronger and we’ll make our community stronger, serve our customers better, attract associates, attract suppliers, and so on. So that’s why we call it ‘shared value’. It’s really approaching those topics at the intersection of what’s on people’s minds, in society and our business, in a way that really creates value for business and society.

Oliver Chen:

Kathleen, it’d be great if you provided some examples of what this means in practice. How do these factors work in conjunction to make your business stronger as well?

Kathleen McLaughlin:

Yeah, happy to. So I mean, one would be energy and the energy transition that the world is going through. And for us, we’ve been working since 2005 on initiatives to transition our own operations to renewable energy. And a number of years ago, we realized it’s bigger than that. It’s really about helping decarbonize or get emissions down to zero in our own operations worldwide, as well as helping to remove emissions from supply chains to do our part to address climate change. And that’s a concern that’s come up from customers, from associates, from community leaders, from many of the nonprofits we work with, from policymakers and so on. And we’re doing it in a way that creates value for our business, that enhances energy security for Walmart as a company and affordability of energy, as well as reducing emissions. So I’ll give you a couple examples.

One is for electricity, for our own operations, not only have we been procuring renewable energy, but we’re also generating renewable energy on site. We have one of the largest installed bases of solar energy, for example, in the United States. Think about all the Walmart real estate that we have. Our stores, all the rooftops, the opportunity to put in carports and so on. So that’s really important for our business. It helps us increase electricity that we can generate, that helps local communities. We’re participating in projects that offer solar energy to communities at good prices, low prices. It makes sense for our own company, it makes sense for the local community.

Another example would be EV charging. So we need to transition our own fleet of trucks, and yard trucks and our DCs and so on, to renewable energy sources, while we can also offer options for our customers by having EV charging stations in our parking lots. And that’s another one where already today we have one of the largest networks of EV charging in the country, and we’ve committed to really expanding that to thousands of EV chargers in the next few years. So that’s another example. So those initiatives help not only in the fight against climate change, but as I say, energy security, affordable energy, expanding energy that’s available in the countries where we operate. It all works together.

Another example would be sourcing product sourcing. So for example, seafood. We’ve been working to enhance not only the surety of supply of seafood for our customers and the quality, but also address some of the environmental and social concerns that come with seafood, whether it’s fisheries, wild caught seafood or aquaculture and so on. So for example, working down in Chile, we have projects through our business working with our vendors, for example, Blumar, which provides feed for Chilean salmon, that’s farmed salmon, working to ensure that that feed is not connected to deforestation or conversion of critical ecosystems or addressing concerns around overfishing for the fish meal that goes into salmon feed. And that’s one example.

Also through philanthropy, our Walmart Foundation has donated to WWF, The World Wildlife Fund, to essentially create a much stronger fishery system across the Chilean coast. And so that would be to help Chile not only with the wild-capped fisheries, but also aquaculture. And that project includes things like bringing in different financing for improvements to aquaculture for water filtration, disease management and so on. And then also working on things like electronic record-keeping and monitoring of the catch of vessels for the wild-capped part of the fisheries. Innovations, for example, using seaweed as a way to sequester carbon in the ocean and also improve or prevent runoff of nutrients from aquaculture into the water.

Those are just a few examples. And for us as a retailer, making those kinds of investments, it’s really great in terms of the quality of our seafood, the availability, but also taking care of the planet and people who work in the fisheries. So it’s just another example of shared value.

Oliver Chen:

Kathleen, you had many great examples. One question related to your answers are, how do you think about prioritization of the abundant opportunities and your framework for thinking about which priorities may come sooner or be more important?

Kathleen McLaughlin:

Yeah. Well, we have three tests or screens that we consider when setting the priorities. And we do a lot of listening with customers, associates, suppliers, policymakers, and so on. And the three tests are, number one, what’s really important to those stakeholders that they really view as relevant for us as a retailer. Number two is, what’s the business value? And it could be a risk or it might be an upside opportunity. A new revenue stream opportunity for advantage. And then third, would our engagement in this topic make things better or not? Sometimes we can’t make a difference on everything just given our capabilities. We obviously would want to make things better in anything that we engage in.

And so with that, we’ve prioritized four themes. So I’ve talked a bit about sustainability so far. That’s certainly one. As a large retailer, we have a lot of food that we provide, household items, apparel and so on, ensuring sustainability of our own retail operations as well as sustainability of those products and the supply chains that produce those products. That’s a really important priority. So that’s number one. Number two, opportunity. As a retailer, we employ over 2 million people worldwide. We can create substantial paths to advancement for people in their careers. So for our own associates, our ability to take down barriers to hiring, we just, for example, eliminated degree requirements for most of our positions at Walmart. So the ability to remove barriers to jobs.

And then once people come and start working with us, to figure out where do they want to go and how do we give them skills on the job, how do we give them training, Walmart Academy, free college credentials, certificates, high school completion, English as a second language, those kinds of things, to help people advance into the careers of today and tomorrow in retail, which include not only retail management, but things like being a truck driver, that’s $100,000 a year job, working in the pharmacy, working in healthcare, working as a coder, these types of things. So we really focus on trying to differentiate in terms of the advancement that we can provide people for careers. So that theme of economic opportunity for our own people is really important.

Community, you mentioned that at the outset. Oliver is one of the key themes. We are in 10,000 communities around the world just by virtue of our physical presence. So using our assets to strengthen resilience of these communities in different ways. So of course, access to our products and our jobs, we pay taxes, those kinds of things. But beyond that, disaster preparedness and relief, we tend to be on the ground with trucks and products and shelter and partnerships with Red Cross and others in times of disaster. Unfortunately, there’s been an increasing number of significant natural disasters in the last few years. And this last year alone, we’ve invested $16 million just in philanthropy to respond to disasters.

Food security would be another example. In local communities, we have a pretty big food business. And in terms of our unsold food, we donate that locally. And we’ve invested over the years with Feeding America and others to build out a cold chain that allows fresh food to be donated and kept good for people to eat, which was a big shift in the last 10 years or so, in terms of the quality and the nutritional value of food and food banks and meal programs and so on. So that’s another way that we can make a difference. These are just examples, but really trying to strengthen the resilience of local communities. And then of course, local giving. We have a pretty significant program to help local nonprofits access donors, Walmart customers as donors, volunteers, we have a charitable registry. Nonprofits can use space in our stores. So we now have about 50,000 local nonprofits across the United States signed up on our local charitable giving platform that we call Spark Good. So it’s just a way to help our customers and our associates connect to other local organizations and really support their local communities.

And the fourth big theme is around ethics and integrity, which you would hope any company would set as a standard, but for us in particular as an international business, we feel that we can play a role in advancing, what does ethical business look like in the 21st century? So that would be topics like digital citizenship. We’re a large technology company, so what are the values that we bring to bear when we’re creating digital assets for our customers? The Walmart.com platform, e-commerce, for example. So principles around fairness, privacy, cybersecurity, preventing bias in the application of technology and so on. That’s really important to us. So that’s one example. And there are other things as well in terms of ethics and integrity. So these four themes, opportunity, sustainability, community, ethics and integrity. Those are our primary focus and the topics that sit within them and finding ways to alter our operations, our people practices, our sourcing, our governance practices, to really strengthen our company by addressing the issues that matter most to stakeholders.

Oliver Chen:

Kathleen, another cool part of the story is under your thought leadership and alongside CEO, Doug McMillan, Walmart became the first retailer to set approved science-based targets for emissions reductions in 2017. What are some of these targets? How did you arrive at them and how has achieving them gone? How has it intersected with your business priorities as well?

Kathleen McLaughlin:

Yeah, that’s right. People listening can remember back to the Paris Agreement. That was really the start of it, when there was pretty clear guidance from scientists about the level and pace of removing emissions from the atmosphere to keep the world within at that time, two degrees, warming over industrial temperatures, industrial period temperatures. With that guidance, we looked at our business and we estimated our carbon footprint. So from our own operations, the purchase of electricity, refrigeration for our freezer cases and our refrigerators in the stores in the DC’s distribution centers, transportation for our trucks, the use of onsite fuels, like think about rotisserie chicken cookers or things like that. And we said, all right, well, what would it take for us to reduce those emissions in line with the Paris Agreement? And there’s just some basic math around that. At that time, it was about two and a half percent reduction per year. And we said, let’s commit to doing that.

And then when more science came out about what’s been happening with warming, the scientists came back and said, you know what? We actually need to raise the ante. Instead of trying to keep the world within two degrees, we need to really keep it within one and a half degrees. So that sharpened the trajectory of reduction that we wanted to hit. And so we came out and committed to deliver zero emissions in our own operations by 2040. So that’s what we’re working on, and that’s considered a “science-based target”, meaning that the targets we’re setting are in line with what science says we ought to be doing to do our part as a retail business. So we’ve been working on it since then, and it means shifting our electricity to renewable energy. And as I mentioned, we do that through procurement and development of big offsite projects, wind farms and so on, but then also on our own properties, our own solar generation and so on.

We do it by transitioning our transportation, our trucks and so on, refrigeration, converting our equipment to low emitting equipment and then shifting our on-site fuels to renewables. Instead of having a diesel powered generator, for example, having an electrified one, and so on. That’s a program we have in place, the CAPEX for that, the OPEX is just part of our capital planning. It’s integrated into our business like anything else. The projects have to pencil in totality. So if refrigeration conversion is expensive, for example, we look for a way to offset that expense by renewable energy favorability in those deals. And so as a portfolio, we work to make that value-creating for our business. And as I mentioned earlier, there’s upside too in terms of energy security and affordability over time. So that’s our “science-based target” for our own operations. The other big part of our science-based target is, what about all the other emissions that we don’t control, but we can influence that are related to our business?

And for us, it’s primarily the products that we sell. So it’s the emissions that come from producing those products and the emissions that come from customers using those products. And so for that one, we also have a “science-based target” that we set at about the same time that we called Project Gigaton, because when we did the math on what it would mean to reduce emissions in our supply chain, it worked out to about a gigaton of greenhouse gas emissions by 2030. So we started this project where we identified six major sources of emissions that are related to our products. So number one, the energy from factories producing those products. So we could work with suppliers on things like energy efficiency or their own procurement of renewable energy. So for example, we have a program called Gigaton PPA where we offer our suppliers access to renewable energy at favorable rates or factory energy efficiency tools where suppliers can do audits of their factories and find practical ways to reduce their energy costs, which then also lowers emissions.

So that would be an example. A second arena is around packaging and shifting out of higher emitting types of packaging toward low carbon. So reducing virgin plastic, for example, using more recycled content or just reducing packaging in the first place. That’s a big one for us. A third one is around waste. So when there’s food waste upstream on farmer fields, if people are leaving crops on the field, that’s waste, that’s emissions because they decompose on the field. So working with suppliers to find ways to utilize that produce, that maybe it doesn’t meet a specification to sell a tomato, maybe it doesn’t quite meet the size, the look of the tomato, but you know what? It can make tomato sauce, so why not buy the whole crop and use it in different ways. So that would be another example.

A fourth big area is around regenerative agriculture practices, avoiding deforestation, avoiding conversion. So we’ve got policies that we’ve put in place not to buy certain commodities that might be at risk coming from deforested land and pretty complicated mechanisms, sometimes, to trace commodities back to source and utilize satellite data and other tools to make sure that commodities aren’t coming from areas that have been deforested. And then there’s product design. Can you design a toaster to be more energy efficient? Can you design laundry detergent to work in cold water so you don’t have to run the hot water cycle? Those kinds of things. So these are different areas where we’ve been working with suppliers to identify projects, set goals, work on progress on those, share best practices, share tools. So far we’ve got over 5,000 suppliers that have been engaged in this with us. And collectively they have identified and implemented 750 million metric tons of reduction and avoidance of emissions through these types of projects.

So we’re almost to our goal. And we just completed our reporting period about a couple of weeks ago. We haven’t disclosed that publicly yet, but we’re getting really close to hitting that goal, which is exciting. And we’ll keep going. This is really about innovation in the supply chain. Innovation that actually creates better cost structure, it creates more efficiencies, it improves quality, and yes, it also lowers emissions. So we’re always looking for those double bottom line or shared value outcomes where it’s great for the planet, it’s great for the people working in supply chains, and it’s great for business.

Oliver Chen:

Kathleen, that dovetails with another topic you’ve talked about throughout a bit, but Doug McMillan in 2020 announced that Walmart aspires to become regenerative. That sounds big and ambitious, but I wonder about what it means in practice. What does regeneration mean to Walmart?

Kathleen McLaughlin:

Well, it is big and ambitious. And to be clear, this is an aspiration. We want to become regenerative. We are not saying we are regenerative at this point. What we mean by that is, we would like our business model in totality to be adding back rather than be extractive. And that’s a tall order for a retailer. We sell food, we sell apparel, we sell things for people to use in their daily lives. Our vision is that we have a system where people can live in harmony with the planet and that the things that we’re doing are actually regenerating the planet. We’re not taking more from the planet than we’re using. So what that means, for example, is in agricultural products that the way that we’re farming is replenishing soil health. If we’re taking water out, we’re replenishing the water, the water cycle still works. The pollinator health is taken care of, biodiversity is preserved. So that’s one example.

Or I talked about packaging. We need packaging to carry items around in. You need to put the milk in something, for example. But what is that something? And can we design packaging that, yes, it’s using certain materials, but at the end of life that’s getting reclaimed and repurposed and that we’re minimizing the amount of material we need in the first place. Or imagine a world where developing that material actually creates a net benefit in the first place. So those are the kinds of things we’re talking about in terms of planetary impacts. And then the same thing for people.

Retail supply chains, for example, have the promise of lifting people out of poverty. And there are folks who are working in fisheries or the production of products, right here in this country or around the world, where being part of producing the food that Walmart customers are buying and using, that’s prosperity for them. It’s jobs for them, it’s prosperity for their families, it’s career paths and so on. That’s what it can be. How do we make sure that that’s true for everybody? So what role can we play in providing jobs and advancement for our own people so that people are better off for having worked at Walmart than if they hadn’t had the opportunity to come here?

Or people in supply chains. What can we do to help advance people who are working in these chains, working with suppliers obviously, and communities and policymakers and so on… These are people who don’t necessarily work for us directly, but what role can we play working with others to have work be a source of purpose and livelihood and prosperity for people? So it’s really an orientation. It’s a way to come at things, and it goes beyond what the world might’ve been talking about 10 years ago, saying, well, we need to be sustainable.

Yes, we need to be sustainable, but we need to be more than that. At this point, if you look at what’s happening with the climate, if you look at what’s happening with nature, if you look at what’s happening with people around the world, we are now at a point where, as a global community, we are looking for ways to elevate, to restore, to renew. We need to do more than just hold steady. We actually have to repair. And that’s the notion, is really helping be part of a transformation in business and in society towards something that’s even more than sustainable.

Oliver Chen:

Kathleen, as you step out as a really powerful leader, what’s your advice to other leaders who are navigating these changes and these different kinds of priorities as well? And part two of this, what are your biggest challenges ahead?

Kathleen McLaughlin:

Whether you’re leading a team or a department or a company or just any role that you have in life, there are opportunities that are within your range of decision-making for you to make a difference toward regeneration. As I said, it’s sort of a mindset. And one of the key themes that may have come across in our conversation today, Oliver, is one about synergy and integration, that really everything is part of a system and things go hand in hand. So my advice would be, whatever your role is, to consider all the things that you do day to day and the decisions that you can make, and where are there opportunities for you to make those decisions in a way that strengthen your family or your business or your team, and also help create a more lasting positive outcome for a social issue or an environmental issue that’s related to that.

If you’re a person living in a family, it’s just, how are you running your household? What are the choices that you’re making? How could you do things in a different way that might be better for the planet, create more opportunity for those in your neighborhood or your community? If you’re running a department or a business, a lot of times people say, well, I have a small company, I don’t have all the resources of a Walmart or a large company. You don’t necessarily need that to get started. So if you’re running a department or a company, what are the decisions you’re making? How are you spending your money? Where do you get to invest it? What are you purchasing and what are the ways that you could set principles or policies or parameters around those choices that would be good for your own business and your company, but also create a benefit for communities or for the planet?

And just start with that. Start with what you can control, what you have decision-making control over, and bring a broader lens to the problem-solving around that, and look for those opportunities of synergy. In terms of big challenges that we’re facing, I think the biggest one, and you see this right now, watching the news or in dialogue with people, we’re talking about pretty major transitions in society that we’re going through, whether it’s energy transition or transition of food systems or transition of cities and communities and how people live, transportation, housing, and so on. These are big shifts and our challenges, how to do those or be part of those transitions in a way that brings people along. There’s a risk in any transition that there are winners and losers that get created. How do we avoid that? How do we anticipate and help create solutions that solve for people, especially the vulnerable, and find ways to have a solution that brings people along?

And it might change the order that you do things in. It might change the type of steps that you’re taking, but that’s really the challenge of our time. And for us all to have that broader intention of better outcomes for everybody, and how can we work together? How can we collaborate together to get to that place?

Oliver Chen:

Yeah, that’s quite important. Thinking hard against the most vulnerable as well. And Kathleen, last question. Which factors do you think are least well understood? What do you wish that investors and those listening to this podcast understood better? And any closing remarks you may have as well.

Kathleen McLaughlin:

Well, I would say for investors, there’s so much confusion about ESG. What is it? There are all kinds of scorecards out there, reading company performance against ESG factors and so on. These issues are no different than any issues that you would consider when assessing the value creation prospects or the growth prospects of a business that you’re investing in. So in the same way that you need to do your analysis about the industry and, what’s the company’s strategy and your own view on what’s distinctive or what’s not, where are their vulnerabilities, it’s the same thing for these kinds of issues. And a lot of the scorecards out there are not helpful in that regard because there may or may not be data. You really need to understand, what’s that scorecard based on, and is that valid for the analysis you’re trying to do? Sometimes there are scores out there that are based on broad reputational data or what have you, that don’t really have anything to do with the practices of the company.

So I’d say the biggest thing is, this isn’t like some totally separate exercise. Any analysis you do for a company to decide whether to invest, you want to understand opportunities and risks. These topics are just like any others, technology, market entry, new product development, R&D, these are the same kind of analysis, whether you’re talking about those kinds of things or the climate strategy, the people strategy, etc. So it’s really, there’s no easy button doing the analysis, getting the facts. I would say ask companies for data. I think the more that we have companies disclosing data on an equal footing, the easier it will be for everybody to understand where people stand and who’s making progress on these issues.

Oliver Chen:

Kathleen, it was great being here with you, learning so much across many buckets of opportunity, from opportunities to sourcing to community to ethics, and really addressing how Walmart is touching the world and making it a better place and driving both profits and purpose. Thanks for your time.

Kathleen McLaughlin:

Thank you. It’s great talking with you, Oliver.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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