What is Environmental Social Governance (ESG)?
Global sustainability issues such as climate change, data security, changing demographics and regulatory pressures are introducing new investment risk factors that may not have been previously considered by financial analysts. Environmental Social Governance (ESG) describes a comprehensive approach to these emerging factors that have been traditionally seen as supplementary to traditional financial risk management practices.
ESG encourages socially responsible investing and asset management by identifying and quantifying risks that are typically overlooked as externalities of no material impact – such as a company’s carbon footprint or its approach to workplace diversity, executive pay, or board governance.
With growing demand for socially and environmentally responsible investing and decision-making worldwide, ESG reporting and goal setting are quickly gaining traction as a way for investors to measure the impact and sustainability of their investments. As investors reevaluate their approach to investing, companies are increasingly feeling the pressure to create an ESG strategy that fully incorporates a wide spectrum of factors and drivers. Transparency has never been more important than now.
What does ESG mean for the built environment?
ESG criteria is shaping the development and operation of businesses around the world. For organizations with physical assets, green and healthy building strategies can start with newer or high-profile buildings and roll into portfolio-wide programs. The basic structure for ESG reporting remains the same, however the measurable environmental and social impacts for built environment owners and managers focus on building and infrastructure performance throughout their lifecycles. From green building compliance to indoor air quality and water testing, ESG consultants work with building owners and managers to test and improve the occupant, community, and investor experience.
A great resource to start unpacking the world of ESG reporting for real assets is the NAREIT ESG and Sustainability page and reports. GRESB, The Global ESG Benchmark for Real Assets, has been a market leader in ESG reporting for publicly-held and privately-held real estate and infrastructure Funds; and continues to push the market towards a more comprehensive structure of defining key ESG indicators and measuring approaches to a continuous improvement framework.
The “E” in ESG focuses on environmental issues such as energy efficiency, climate change, carbon emissions, biodiversity, resource depletion, air and water quality, water efficiency, waste management, pollution, materials selection, and more.
The “S” in ESG has an emphasis on awareness and transparency, reporting on social factors including working conditions (including the use of child labor), human rights, community relations, conflict management, health and safety, data protection and privacy, employee engagement and rights, customer satisfaction, workplace inclusivity such as gender and diversity, and community engagement.
Growth and improvement are at the center of any good ESG strategy. To be successful it’s important to create an infrastructure that supports and celebrates continuous improvement. This is where the “G” in ESG comes in. Governance factors include company leadership, policies and goal-setting, executive compensation, board composition, shareholder rights, audit committee structure, internal controls, political affiliations, lobbying and donations, bribery and corruption, diversity and inclusion, and more.
An ESG strategic framework brings additional depth to corporate policy and strategy, allowing organizations to focus on the triple bottom line as an intrinsic factor for growth and investment.
Transparency is key
Organizations must be able to measure their ESG initiatives and disclose quantitative and qualitative data about their operations in environmental, social and corporate governance areas. Investors use ESG reports to avoid investing in companies that might pose a greater financial risk because of environmental performance or other social or governance practices, and based on increased investor and consumer demand for responsible investments.
Today’s mad dash for carbon neutral targets and diversity metrics should be lauded, as they set the course for 2030, 2050 and beyond. However, the details of how to best implement market performance enhancements in this arena are best driven by accurately tracking ESG metrics and reporting transparently one’s own improvement pathway. It is tempting to pay far too much focus on marketing for lofty goals; but while understanding how a company “measures up” today doesn’t offer the same media cache, this benchmarking and goal-setting experience sets a realistic course for achieving long-term performance improvements. These metrics can be tracked in the three key areas of ESG, which can be used internally to engage all departments of an organization, and the life-cycle of built environment investments. Imperatives for the types of data to track and monitor can start with the following examples:
Environmental – Companies must show how they use energy and manage their environmental impact. It is arguably the most quantitative of the three ESG pillars. It highlights today’s focus on carbon neutrality and net-zero emissions, integrative processes, and materials health.
Social – Companies must demonstrate how they support and foster their people and culture – as well as the ripple effect on the broader community.
Governance – Companies must provide data on their internal system of controls, practices, procedures and regulatory compliance efforts.
Studies have shown that companies with strong ESG performance have demonstrated higher returns on investment, lower financial risk and better resiliency during a crisis. The Deloitte Center for Financial Services expects ESG-mandated assets in the United States to comprise 50% of all professionally managed investments by 2025. Continued evidence shows correlation between ESG reporting and performance with financial success, and examples are now out there to help inspire ESG embedding into organizational structures and metrics.
Beyond lowering financial risk for investors, your ESG initiatives can neatly integrate with overarching business strategy. ESG sets a company’s intentions in terms of environment and society – and holds you accountable. With the promise of better financial performance, lower enterprise risk, increased regulatory compliance and streamlined operations, implementing an ESG program in your organization should really be a no-brainer. Regardless of what information gets shared, tracking metrics internally and objectively can set you up for a future where you might choose to report or be reported on.
Ravi Bajaj, LEED AP+, WELL AP
Principal, ESG & Sustainability