The Rising Role of Sustainability Metrics in Ecommerce Financial Reporting and DTC Profitability

Key Takeaways for Ecommerce Brands:

1. Consumer demand for eco-friendly brands is rising, especially among younger generations
2. New regulations require sustainability disclosures in financial reporting
3. Sustainable practices can enhance brand loyalty, efficiency, and investor appeal
4. Forward-thinking DTC brands are adopting metrics tracking emissions, energy use, and supplier sustainability
5. Future ecommerce reporting will likely balance financial and sustainability metrics

Ecommerce financial reporting has long been a pain point for many DTC brands. Whether due to manual practices (Hi, there, generalist bookkeeper!) or legacy systems (the market is filled with accounting tools not optimized for ecommerce), DTC operators still struggle with ecommerce financial reporting as they look to reconcile their books and gain a full picture of the business’s health and potential.

And to complicate matters further, ecommerce sustainability is emerging as a key factor in DTC financial reporting, potentially impacting the long-term profitability and investor appeal in the ecommerce space.

In a way, it makes sense. The online retail industry produces millions of tons of packaging waste annually and leads – through shipping, deliveries, and energy consumption by data centers – to a massive increase in carbon emissions throughout the supply chain. Despite significant steps forward in recent years, projections indicate that by 2030 ecommerce logistics alone will generate around 25 million metric tons of CO2 in the biggest urban areas worldwide.

A backlash was inevitable – and it started on the consumer side. A recent report by ESW, a global leader in DTC ecommerce solutions, reveals a clear shift towards eco-friendly brands. Based on a survey of more than 18,000 consumers across 18 countries, ESW gave respondents sustainability scores, which reflect how strongly they feel about environmental issues.

Key findings include:

• The average global sustainability score is 55 out of 100.

• 33% of global respondents were classified as "environmentally attuned" shoppers, scoring 80 or above on the sustainability scale.

• Younger consumers are more concerned with sustainability than their older counterparts, with Gen Z and Millennials posting global average sustainability scores of 61 and 60, respectively, compared to Gen X's 53 and Baby boomers' 49.

• 55% of shoppers reported being more aware of greenwashing than they were a year ago, indicating a growing sophistication in how consumers evaluate brands' environmental claims. ‍

New Sustainability Reporting Standards for Ecommerce Brands

In response to the increased scrutiny, new standards have emerged, requiring companies to incorporate sustainability metrics in their financial reporting. In 2023, for example, the International Financial Reporting Standards (IFRS) – whose accounting guidelines were adopted by more than 140 jurisdictions – issued two sustainability disclosure standards, IFRS S1 and IFRS S2.

Effective for annual reporting periods from 2024, IFRS S1 and IFRS S2 require companies to disclose to potential investors all sustainability and climate-related risks and opportunities that could affect their cash flows, access to finance, or cost of capital. “These IFRS sustainability reporting standards”, said Janel Everly, a senior director analyst at Gartner, “act as a global baseline for providing a more holistic picture performance.”

The EU set a baseline of its own with the Corporate Sustainability Reporting Directive (CSRD). Entered into force in 2023, it pushes ecommerce brands to use CSRD compliance tools for reporting on sustainability, since under the directive, large companies and listed SMEs must report on the financial risks and opportunities arising from their sustainability performance. The problem, noted Everly, is that “many companies currently lack the systems and data needed to report on a broader definition of performance.”

‍How Sustainability Metrics Drive Ecommerce Profitability

While these regulations currently focus on larger organizations, they signal a clear direction for the future of financial reporting. DTC ecommerce brands, regardless of size, will soon need to adapt to a new reality. This could have far-reaching implications in two areas: the ability to attract investors; and long-term profitability. 

The economic mechanisms through which ecommerce sustainability metrics impact long-term DTC profitability are pretty straightforward. First, as consumers become increasingly environmentally conscious, brands prioritizing sustainability often experience increased customer loyalty, positive brand perception, and a higher market share. 

Additionally, by using sustainability tracking tools such as:

• Carbon footprint calculators
• Supply chain transparency solutions
• Packaging and waste tracking tools
• Energy and Water Usage tracking tools

Or by staying in the know by following initiatives like “Sustainable Brands” or “The Ellen MacArthur Foundation,” ecommerce brands can identify opportunities for operational efficiencies that result in cost savings over time, such as reducing energy use or optimizing supply chain logistics. Finally, as they mature and scale, sustainable practices can yield long-term benefits like improved risk management (e.g., mitigating changing environmental regulations or supply chain disruptions).

The investment landscape is also heavily influenced by ecommerce sustainable metrics and practices. Post-pandemic, investors are placing greater value on environmental, social, and governance (ESG) disclosures, with some funds focusing on DTC brands that use ecommerce sustainability metrics to track and report their impact. Plus, many investors view sustainable business models as more resilient, making them attractive for long-term partnerships.

Proactive DTC Brands Adopting Sustainability Metrics

Forward-thinking DTC brands are already ahead of the curve, incorporating ecommerce sustainability metrics and KPIs into their ecommerce financial reporting. These include:

• Greenhouse gas emissions

• Energy consumption

• Waste generation and recycling

• Supplier sustainability

The future of ecommerce financial reporting will likely see a holistic approach that balances traditional financial metrics with sustainability reporting tools and KPIs. This might include more granular KPIs such as detailed carbon footprint analyses across the entire supply chain; quantifiable metrics on packaging reduction and recycling efforts; energy efficiency measures for warehouses and data centers; and sustainable sourcing percentages for products and materials.

In the end, the brands that will thrive in this new landscape are those that view sustainability not as a burden, but as an opportunity for long-term success, leveraging ecommerce sustainability tools more strategically. As we move forward, the line between DTC brands' financial health and environmental responsibility will continue to blur, creating a new paradigm where the most successful ecommerce brands are also the most sustainable