The trend towards Environmental, Social, and Governance (ESG) considerations has accelerated over the last two years. And much of this focus is on real estate. My focus here is on ESG for UK based start-ups and SMEs across the built environment.
There’s good reason for this increased focus given that the built environment accounts for 39% of global carbon emissions. With the upsruge in extreme weather events globally, and with the impact of COVID-19, there is also now a much greater awareness of how our buildings and public spaces affect our health, our wellbeing, our communities, and indeed even our infrastructure.
ESG in real estate has moved from niche to normal. This is a result of capital requirements, new and emerging regulatory requirements, and a growing demand from investors, clients and employees. And we’re seeing larger asset owners and investors take up the challenge.
But from many of my conversations, it’s clear that challenges remain for start-ups and SMEs. Taking action now is critical as investors are increasingly looking to evaluate companies based on ESG considerations.
The current context for ESG in real estate
The ESG landscape is complex and fast moving and there is no one agreed approach or set of reporting standards.
This is problematic for a number of reasons. For investors, this makes it difficult to benchmark. For real estate companies, it makes it difficult to communicate ESG credentials to tenants and investors. It also leads to a risk of ‘greenwashing’ or virtue signally by companies reporting only against those ESG criteria that make a company look good and/or only tell part of the story. Another real danger is companies making commitments without a baseline and plan. I’ve seen this time and again in commitments to Net Zero.
On disclosure requirements, the EU is very much leading the way. Recent requirements on corporate sustainability reporting will have an impact far beyond the EU’s borders, namely the Corporate Sustainability Disclosure Regulations (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) [you can read an update on progress here]. For those companies in scope to report against CSRD, the detailed reporting requirements are set out in the European Sustainability Reporting Standards (ESRSs) which cover the full range of governance, environmental and social issues.
In the UK, in November 2023, the Financial Conduct Authority published new Sustainability Disclosure Requirements (SDR). The Requirements include rules and guidance to improve trust and transparency to the market for sustainable investment products.
While many SMEs will not fall under the scope of the requirements, the regulations set an important framework which SMEs must be cognisant of with respect to accessing finance and/or being part of larger value chains.
It is worth noting that although there are a number of new and emerging regulations which will have a significant impact in this space, there are a whole raft of existing elements which can fall under the banner of ESG which are already codified in law. For example, in the UK, this covers topics such as Modern Day Slavery, various tax requirements, and Equal Pay.
While many SMEs are still take a ‘wait and see’ approach, there will be missed opportunities in doing so.
Where to start
1. Understanding what questions to ask
If you’re new to ESG, a good starting point is the Principles of Responsible Investment (PRI) guide to real estate. PRI is an investor initiative working in partnership with UNEP Finance Initiative and UN Global Compact. While the guide is very much aimed at investors, it has valuable points for asset owners and managers looking to consider ESG.
Better Buildings Partnership, a collaboration of the UK commercial property owners working together to improve the sustainability of existing commercial building stock, have produced a Responsible Property Management Toolkit. The focus is on environmental and social considerations throughout the property management lifecycle. The Toolkit is targeted to asset managers, property managers and facilities managers on embedding sustainability within property management services.
2. Considering the ‘why’
What are your objectives and what’s driving your interest? Is the aim to access capital, to be able to respond to new and emerging regulatory requirement, or to meet the growing demands and expectations from investors, lenders, tenants and your own employees?
3. Consideration of material factors
Materiality broadly refers to how and why certain issues are important for and can impact on your business. It can include financial, reputational, legal, stakeholder effects, as well as others.
Each business will have a unique set of issues. Below are just some examples of material factors that may be relevant to your business.
4. Start collecting information
Key to an effective ESG strategy is determining that information which is most relevant. Once this is determined, it is possible to then start collecting the necessary information and data to make better decisions.
Much of this information should be readily available but may sit across various parts of the business. You may also identify gaps or opportunities for focused improvements, for example on energy use, workforce diversity and so on.
Essential here is that your approach must be evidence based with a clear set of quantitative and qualitative indicators.
5. Embed ESG
For ESG to be meaningful and have impact, there’s a need to consider how it’s embedded across your company. It’s much more than one persons’s job. Instead, it should underpin and shape strategy and operations. While ultimate responsibility needs to sit at the senior exec level, there are elements that will touch on every employees’ role.
And if relevant, at Board level, you’ll need to ensure you people with the requisite knowledge and skills to act as a ‘critical friend’ in respect to ESG.
6. Review, refine, review
Developing an approach to ESG is a starting point – material considerations change over time and there will be the need to respond to new disclosure requirements. In addition, it’s important that business assess their approaches to ESG on an ongoing basis and do so with a critical eye.
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Keyah Consulting works with companies across the built environment to develop their approach to ESG. If you’re ready to explore what ESG might mean for your business, get in touch.
