What is ESG and why is it important?

Sustainable, responsible and effective corporate practices are inherently linked with improved performance across the built environment. Here, we examine the role that an environmental, social and governance (ESG) centred approach can play.

The role of environmental, social and governance (ESG) policies and procedures in managing for long-term business success is gaining traction in many parts of the world. An ESG framework aims to assess the ongoing sustainability and performance of an organisation or business, considering risk management, key stakeholder expectations and an ever-tightening regulatory landscape.

The positive outcomes from ESG improvements speak for themselves. These include lower carbon and environmental footprints, increased understanding of impacts on society and reduced regulatory or compliance risks. Other benefits are less obvious, but equally important, such as enhancements in talent acquisition and retention, operational cost savings and impact on branding and reputation. Here, we look into the details of what ESG covers, how it has developed and why it is important.

What is ESG?

The many subject areas that ESG can cover can sometimes make it appear confusing, but it can be simply understood as a holistic view of the most significant environmental and social issues that impact on an organisation’s performance – and how the organisation manages these impacts for long-term success. It looks at risk management, as well as potential opportunities presented to a business across three pillars: environmental, social and governance.

Initially, ESG looked at these impacts from the outside in, ie what are the main environmental, social and governance risks of the outside world on the organisation? Increasingly, ESG considerations now include the concept of ‘double materiality’. This means not just considering the outside world’s impact on the organisation, but how the organisation manages its impacts on wider environment and society (such as its emissions on the climate or its supply chain on labour conditions).

‘Environment’ is the pillar that often receives the most attention within ESG discussions: it comprises environmental risks and impacts, including carbon emissions, resource use, nature and biodiversity, and resilience and adaptation against risks of the climate crisis.

For the ‘social’ pillar, common considerations are diversity, equity and inclusion, with the understanding that the more equitable and inclusive a society is (including your workforce), the more innovative and productive it is. Health and safety, physical and mental wellbeing, learning and development, labour conditions, modern slavery policies and supply chain risks and impacts all sit under ‘social’.

The ‘governance’ pillar brings everything together, with a primary element of risk management: it considers to what extent a business is identifying, mitigating and managing risks around environment and social issues. Aspects like board structure, ethics and compliance also sit under this pillar.

This is strategic level work. It might be related to environmental topics (like energy, carbon or wastewater), or it might be related to social topics like inclusive design, social value or company culture. But to be effective, it is always influencing change at a strategy level.

ESG development and evolution

The origins of ESG are slightly opaque and have developed and changed across several decades. It is fair to say the ESG movement began as part of a push to provide enhanced non-financial disclosures for investors and financial stakeholders. Its outputs provided information as to where capital should be placed, in the context of understanding broader risks and opportunities for investments.

There are many national and international organisations and movements that have developed in recent years that have shaped the ESG space into what we understand today.

The United Nations Global Compact is a movement for businesses around the world to adopt sustainable and socially responsible policies and, critically, report on their implementation. In 2004, The Global Compact released a report called “Who Cares Wins –The Global Compact Connecting Financial Markets to a Changing World”, which is commonly recognised as the first outline of the importance of ESG and how it can lead to organisational success. It explored the idea that organisations that run on ESG lines are better poised for success and are profitable and sustainable in the long run.

If an organisation itself is resilient and sustainable, that means more opportunities for success.

Rob Gillies, global environment social governance manager at Buro Happold

If a business considers issues like environmental and social impacts, highlights any associated risks and then puts in mitigations, then success (through shareholder value, profit, reputation) is more likely. Increasingly, businesses realise that not taking appropriate action on ESG concerns might affect bottom lines, might preclude them from working in certain areas, and may dissuade investors from providing capital because ESG requirements aren’t being met.

Rob Gillies is global environment social governance manager at Buro Happold. Considering the power and potential of ESG, he said, “Leaders of businesses, governments and local authorities pay attention to the things they see as key to their business. What the ESG agenda has done is show that it isn’t purely about the financial. It helps asks the question: what are the wider environmental and social impacts for us, and what can we do about them?”

ESG frameworks and standards

There is growing evidence that companies see ESG policies as not just a box-ticking exercise, but as fundamental to growth and long-term success. For example, McKinsey identified that nearly half (44%) of companies surveyed identified these growth opportunities as the impetus for implementing environmental improvement and sustainability programmes.

Legislation, regulation and multiple forms of global pressures shape how ESG policies are enacted today. ‘Who cares wins’ was a groundbreaking report, and in the subsequent years distinct legislation has shaped discussions. The Paris Agreement of 2015 is an international treaty on climate change that aims to limit the temperature increase to 1.5°C above pre-industrial levels. Much environmental work in the ESG space is shaped by the Paris Agreement.

When coming up with an ESG strategy, it is important to identify the material topics you need to address. What are the biggest concerns you have as a business? What is the most important thing for shareholders and stakeholders?

Richard Twinn, sustainability consultant at Buro Happold

In the same year, the UN’s Sustainable Development Goals (SDGs) were created. These are 17 objectives that provide a “shared blueprint for peace and prosperity for people and the planet, now and into the future”. Many corporate ESG policies are formed around the SDGs.

Regional and global ratings, standards and frameworks are also increasingly influential with a number specific to the built environment sector (such as WELL and GRESB). One influential framework is the Task Force on Climate-related Financial Disclosures (TCFD). This looks at how investors can assess the financial risks associated with the climate crisis and will shortly be joined by a similar framework for nature.

Richard Twinn is a sustainability consultant at Buro Happold, with a focus on ESG and corporate advisory. He said, “TCFD is a climate resilience reporting and disclosure process. Because TCFD is framed around money, it has made a lot of businesses an awful lot more interested than they otherwise might be. TCFD has forced companies to look at look at specific climate risks, put a price on them and tell their investors and stakeholder how they intend to deal with them.”

Outcomes and enacting change

ESG outcomes will differ between various organisations and sectors. In the built environment there is a focus on driving down greenhouse gas emissions from construction and renovation and a buildings’ lifetime operational emissions.

Other common areas of focus for positive outcomes include how new or re-developments can support the regeneration of our natural environment and biodiversity, encouraging development of the circular economy (with its reduction of raw material extraction and subsequent environmental damage) and reduction of air, water and land pollution.

Another area that deserves more focus is adaptation. The climate is changing and with it are other natural environmental and potentially big societal changes, so how should businesses adapt? In the built environment, that means: how do we adapt buildings and infrastructure to cope with extremes of climate and weather? This needs to be built into short-, medium- and long-term planning.

Learn more about Buro Happold’s ESG advisory services here.