Customers, clients, investors and the public are talking more and more about ‘ESG’ but what does it mean, how is it affecting the property and regeneration sector and, importantly, how can you make it work for you?
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ESG – Environmental, Social, Governance
These metrics essentially map out how a business is behaving as a corporate citizen, measuring its impact across a range of different areas.
For example, on Environment, how is a business minimising its impact on climate change? Is it taking steps to reduce its carbon footprint? How does it go about improving its local environment? For the property sector, this is particularly pertinent – around 40% of the world’s carbon emissions are estimated to come from real estate activity.
When it comes to Social impact, what is a business doing to foster diversity across its workforce? Does it work with suppliers that hold the same values as it claims to hold? Does a business donate to the local community or encourage employees to perform volunteer work?
Common questions on Governance include how accurately and transparently does a business report its affairs?
Do stakeholders get the chance to play an active role in decision making? Does the business have safeguards to prevent potential conflicts of interest among board members?
Why is ESG growing in importance?
In the past, such issues were often seen as “nice to have” but not essential in the same way as a business’s legal or financial responsibilities.
However, increasingly ESG factors are playing a greater role in every area of the economy, from retail to technology, property to finance and across the private and public sectors.
Improving your ESG can help in a wide range of areas including:
Access to finance: It is now commonplace for ESG assessments to be carried out by institutional and individual investors before making a decision on whether to put money into a company. More and more banks and other financial institutions also offer loan facilities at more attractive rates to businesses which meet certain ESG criteria while lenders such as HSBC offer preferential rates and even cashback on loans for projects which improve companies’ sustainability credentials.
In the property sector, a number of companies have either set up funds and lending aimed exclusively at sustainable projects and developers or setting up property portfolios which have specific ESG targets to attain, such as the Sustainable DC Property Fund from Legal & General Investment Management.
Getting things right on the ESG front can open your company or your development project up to additional funding streams while getting things wrong can be a red flag for investors and hence make financing schemes that much harder.
Reputation: Businesses which score well when it comes to ESG are held up as examples of great corporate citizenship, with accompanying positive profile raising; those who rate poorly on ESG criteria face an increasing risk of being ‘called out’ in the media, via campaign groups, journalists or activist investors with the potential to cause serious damage to their reputation, standing and their bottom line. Just look at how activist investor Cevian is making companies like Vodafone and Unilever change their practices.
Getting a bad name can seriously spook investors in the property world and the danger of getting things wrong on ESG matters is increasingly recognised in the sector. In a recent webinar poll conducted by Property Week, over 50% of respondents said that ESG was a material risk to their business.
“Bad practice [on ESG] will get called out more and more often,” warns Paul Cahalan, Head of Communications at design and engineering consultancy chapmanbdsp.
Customer/client sales: Consumers are increasingly drawn to spend money with businesses that score highly on ESG factors and shun those which are shown to fall short.
A recent survey found that over 84% of consumers said they were more inclined to be loyal to a brand whose values aligned with theirs. While consumer choice is likely to affect the residential property market more than the commercial property sector, it’s important to recognise that many clients – from landlords to occupiers and end users – also have their own ESG scores to think of and so will include ESG factors in their final purchasing decisions.
Another recent survey found that business leaders are increasingly likely to turn down working with companies whose ESG does not come up to scratch. And since 2021, public sector organisations have been required to expressly evaluate ESG-related factors in their procurement exercises with a minimum 10% weighting given to those factors when making procurement decisions.
Regulations: Sustainability and the journey towards Net Zero is shaping the thinking behind large parts of the regulatory regime in the UK property sector. For example, in the housing market, all newly rented properties will be required to have an Energy Performance Certificate (EPC) rating of C or above from 2025 with existing tenancies having to comply by 2028.
In addition, the 2020 Energy White Paper indicated that all commercial properties would be required to achieve an EPC rating of at least B by 2030 with suggestions of a ‘staging point’ of all properties having a ‘C’ rating by 2027.
Residential developers are also well used to working with quotas of affordable homes on new housing estates – the ‘S’ part of ESG.
What should I do about ESG?
Too many times, companies view ESG as part of their regulatory burden – a box to be ticked so they can carry on with their business as normal. As a result, responsibility for ESG issues is hived off to a company’s HR and regulatory function where compliance is the beginning and end of its function.
However, with regulation in the property sector increasing and the direction of travel going only one way, it makes sense for companies in the industry to get ahead of the curve and think of ways to proactively address ESG issues rather than waiting for legislation to make them move.
“We think companies in the sector which can ‘out-behave’ others will be more successful in the long run,” says Benjamin Davis, CEO of property investment fund Octopus Real Estate, which has over £3.5 billion under management and which has lent over £5.7bn to the residential, commercial and development sectors since 2015.
He adds: “The business benefits of getting ahead of regulation are becoming more compelling. And ESG should also cut across every aspect of your business – just like everyone in the business does spreadsheets and creates documents. Don’t treat it as a separate thing.”
Seeing ESG as an opportunity rather than a burden could revolutionise how you approach your business – and bring some major rewards.
Can ESG really boost my business?
“ESG is the first question which real estate investors ask about,” says Benjamin Davis.
“This is because they know that it will go to the long-term value of the investments which they make. For example, there is a 10% valuation difference in office space according to ESG factors.”
In the residential sector, ESG can also make a big difference. LendInvest, an AIM-listed debt asset manager which has lent over £1bn to housing developers, says that as energy prices keep rising, the priority which tenants and home owners place on the energy efficiency of their houses is getting ever higher. Some housebuilders also have a number of their Key Performance Indicators (KPIs) linked to various ESG targets.
Pursuing an effective ESG policy – and communicating it well – can also bring benefits internally. With the competition for high quality staff ratcheting up, working for an employer which does good for the planet and for its people is an attractive additional benefit for candidates. While it’s unlikely to replace pay and conditions in the hierarchy of staff needs, working for a forward-thinking company which shares your values is increasingly important, particularly for younger workers.
Research from insurance broker and risk advisor Mercer found that top employers rated by employee satisfaction and attractiveness had significantly higher ESG scores than their peers while millennial and Generation Z employees – who will make up 72% of the global workforce by the end of the decade – place greater importance on environmental and social concerns than their predecessors do and will expect more from employers on these issues. Mercer concluded that companies which get left behind on ESG issues risk losing the battle for talent.
How should I publicise my company’s ESG work?
When talking about your ESG commitment and living your values, getting communication right is key.
Media organisations and the public at large are becoming increasingly sceptical of companies’ claims of responsible business and care for the planet.
The term ‘greenwashing’ is on the rise in the wake of activities which portray a company as environmentally friendly when in practice it is anything but – take this recent example from the BBC of how an ambitious tree planting scheme ended up in costly failure. That’s why such activities need to be very carefully planned and executed in order not to backfire.
In a similar vein, it is true that talk is cheap – warm words need to be backed up with concrete actions.
A good example of this is long-standing Cool Blue client Barker and Stonehouse.
The company approached us to help communicate its sustainability strategy to customers, press and key stakeholders. Here’s what we did.
There are some sensible steps you can take to draft, execute and maximise your ESG strategy:
Think about your values. What are you in business for? What impact do you hope to make? What things does your company stand for? Use these as the basis for your strategy and actions.
Use existing activities. You may already be carrying out more than you realise which can feed in to your strategy, from colleagues volunteering to charitable donations. Don’t leave anything out!
Draft an ESG policy/framework. This doesn’t need to be lengthy or complicated, but it should outline values, contain examples of those in practice and explain ways you plan to improve.
Consult with staff, colleagues and stakeholders. If you want your strategy to be truly effective, it needs everyone’s buy-in and ideas.
Redraft and recirculate. Take on board the results of your consultation, revise your strategy and then resend it to staff, colleagues and stakeholders
Publish and activate. What’s the point in having a strategy if no-one knows about it – and if you can’t back up your words with actions?
How we can help
Cool Blue has experience in helping clients of all sizes in a wide range of sectors with their ESG needs.
We can help you with:
Formulating your ESG strategy – what should go in, what should be left out and how to make it really work
Drafting and design – making your strategy say the right things and ensuring it looks as good as it sounds
Communicating ESG across your audiences – ways to make everyone from your bank to your budding customer understand what you are doing and why
Activations that do good and get noticed – creating eye-catching and authentic ways to ensure everyone hears about what you are doing
Helping retain credibility and make further connections – because an ESG strategy launch is only a starting point
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