ESG: a new name for a recurring issue, and no less tricky

'ESG’ (Environmental, Social and Governance issue) is now firmly established as an industry buzzword, gaining attention from both occupiers and investors alike. Businesses have begun looking inwards at their current ESG policies and enquiring whether they should be going further. Yet despite the term gaining popularity, CBRE Research is constantly being asked: what actually is ESG and where is the value in it?

Acting on ESG matters is often thought to indicate how ethically responsible a company is, increasingly driven by a new generation of young professionals entering the workplace. However, while it’s seen as an emerging trend, ESG issues have existed for many decades in different forms, under names such as Corporate Social Responsibility or the Triple Bottom Line – and what’s actually happening is simply that the agenda has moved on and become more sophisticated each time it gets renamed.

The environmental aspect of ESG is now getting much more attention, climbing up the agenda in the built environment which is responsible for around 40% of the UK’s carbon footprint. Third party environmental certifications such as BREEAM and WELL have helped quantify a building’s efficiency and are now thought to be essential to attract and retain occupiers.

But, it’s important to not ignore the Social and Governance aspects of ESG. Social issues encompass labour practices, talent management, product safety and privacy standards and well-being. Governance issues include matters like board diversity, executive pay and business ethics. Government policy has helped accelerate this area, not least through Section 172 of the Companies Act 2006, which aims to support the need for corporate responsibility by imposing a duty on businesses to engage with stakeholders. Guidance has also been issued by the Government to help companies comply with the Streamlined Energy and Carbon Reporting (SECR) regulations.

So it is now commonplace for corporates to report on such matters (CBRE’s own policies may be found here). Furthermore, many corporates are increasingly keen to ensure their reporting is done correctly and made in a genuine, authentic, and meaningful way. In doing so, they are able to avoid claims of ‘greenwashing’.

It is a real risk. When you scratch beneath the surface, it seems that many firms have lacked motivation to fully commit to ESG. For example, a survey by State Street Global Advisors in 2018 found that 80% of institutional investors have an ESG component as part of their investment strategies, but only 27% fully integrated these into long-term decision making.

In part, this reluctance can be seen to come from a limited understanding of the value which ESG policies add. ESG outcomes can be very difficult to directly measure. In the real estate sector, this lack of data has made it challenging for valuers to attach a numerical value to an environmentally friendly building run by a landlord committed to promoting ESG.

Despite this, there are examples from across the globe which have demonstrated the benefits of ESG. These include CBRE’s US Green Building Index and the National Australian Built Environment Rating System, which has shown that buildings with a higher star rating secure longer and valuable leases resulting in lower vacancy rates. This has recently launched in the UK after a number of pilots studied, proved buildings were not running as efficiently as they could be.

Old concept, new name … but likely to be on the agenda big time this year.