Factor analysis

ESG is of increasing concern to investors, who acknowledge its importance to financial performance, talent retention and long-term value creation.

ESG (environmental, social and corporate governance) is an evaluation of a company's collective conscientiousness for social and environmental factors, which is typically measured by a rating that assesses the long-term resilience of companies to ESG risks.

Businesses are facing increasing expectations from stakeholders to take a proactive approach to manage ESG as part of their business strategy by, providing detailed ESG disclosures. However, the challenge lies in the limited knowledge and understanding of ESG, hindering its integration into business models.

This week, as part of our month looking at the workplace and Pragma's new services in this area, we look at how developers can incorporate a strategy into their offering to satisfy both tenants' and investors' ESG requirements.

Environmental
Environmental criteria includes the energy used, waste produced, and resources needed by a company and the consequences of these on the wider community and environment.

The built environment accounts for 40% of global carbon emissions, with operational emissions accounting for 28%, causing pressure on building owners and operators to reduce this carbon footprint.

Green certifications such as LEED, BREAM, and NABERS are useful measures of resource usage, however, focus is shifting to initiatives such as the World Green Building Council's Net Zero Carbon Buildings Commitment, which calls for all buildings to have net zero carbon emissions by 2050.

In 2020, Peel L&P became the first developer in the UK to achieve net zero carbon status for 11 of their buildings located in Manchester, Salford, and Liverpool, verified against the UK Green Building Council's definition. They use a Verified Carbon Standard project and tree planting for carbon offsetting and have saved 558 tonnes of carbon in a year.

Social
Social criteria involve the company culture, including the company values, relationships between employees and treatment of staff and how these impact the wider community.

The incorporation of health and wellbeing into building design and operation is a key aspect of social criteria that developers should deliver. The pandemic has led to an increased demand for workplace wellness features by occupiers, meaning it is now high on investors and landlords' agendas because of its role in attracting tenants.

The WELL Building Standard is an international system that measures, monitors and certifies a series of features to promote occupant wellbeing. There are ten concepts within WELL, including air, water, nourishment, light, movement, thermal comfort, sound, materials, mind, community, and innovation; all of which can be incorporated into design interventions and policies to enhance human health and wellbeing.

CBRE's headquarters in London have recently undergone an extensive redevelopment programme that aligns to their ESG strategy, aiming to optimise their workplace experience to prioritise wellbeing, productivity and hybrid working patterns. The building will submit to become WELL Certified Platinum, the highest rating in this standard.

Leading companies worldwide are joining the WELL portfolio, with JP Morgan and Citi having enrolled all their offices and branches globally.

Governance
Governance is the internal system of practices and procedures within a company that inform its operations. This considers policymaking and the distribution of rights and responsibilities among participants within corporations, and how this impacts stakeholders and the wider business. Governance performance of companies can be measured by assessing the company structure and oversight, company values, transparency and reporting, cyber risk and systems.

Diversity and inclusion, both gender and cultural, within a company structure is a key aspect of governance. Stakeholders are recognising the financial benefit of creating inclusive workspaces and are demanding greater diversity within corporate boards and in executive ranks, however, the measurement of this by developers is vital.

We recommend the use of data for measuring D&I and driving change. Organisations must look to review the company structure to develop a baseline, then use dashboard reporting to closely monitor the results and progress, then share this journey.

Developing an ESG Roadmap
To begin to develop a comprehensive ESG strategy, developers and investors must start by reviewing the current situation and what this means for the organisation, followed by benchmarking the organisation against others within the industry. Following this, we can help you develop, steps that will appeal to investors or those taking space within the asset.

Emily Brown