What is ESG?

ESG stands for Environmental, Social and Governance aspects. They are at the top of the agenda for many organizations as increasing legislation, enhanced stakeholder concern and requirements for transparency and disclosure continue to develop. ESG includes aspects that should be considered by the companies to comply with regulatory and social requirements.

ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics are not commonly part of mandatory regulations for financial reporting, though companies are increasingly making disclosures in their annual report or in standalone sustainability reports.

The ESG aspects are very broad in their scope and demand a very holistic corporate approach. The acronym was first coined in 2005 in a landmark study entitled “Who Cares Wins”, and since then it has replaced what has been known as sustainability or corporate social responsibility.

What does ESG mean for real estate?

As buildings account for 40% of the energy consumption, 20% of the water consumption, 36% of the energy-related greenhouse gas emissions in Europe, the built environment creates an estimated third of the world’s overall waste. The built environment also has a significant impact on the human health and well-being. Thus, ESG, representing environmental, social and governance aspects, needs to be part of the business strategies and business models for real estate and construction market players today. The ESG aspects should also be reflected in the strategies for individual buildings or portfolios of assets.

However, ESG is complex and it is much broader than a green building certification such as BREEAM, LEED or WELL. To reach a Net Zero Certification, a company needs a broader strategy and interventions than green building certifications. Green building certifications help to reach some of the ESG elements on the building level and it is a great activity within a broader ESG strategy.

At Savills, we start our work with the selection of the material aspects and SDG’s, translating them to an ESG strategy and policy of which a green building certification should be an integral part.

A building with an ESG strategy will have limited negative impact on the environment and its users. The ‘E’ aspects relate to the use of resources, positive impact on the biodiversity, GHG emissions, climate change adaptation and mitigation, to name the key ones; is very well understood and in many cases required by the increasing regulatory, but the ‘S’ may still sound a bit enigmatic for investors and property managers.

The rise of ‘S’

Today we notice the rise of social and governance issues, with a focus on diversity and inclusion (D&I) and human rights. The question is how to transfer these aspects to ESG charters for buildings. In real estate, we examine the impacts our built environment has on the health, wellbeing and social value outcomes affecting people, supply chains, residents, tenants and wider communities.

The aspects that should be adopted widely by the industry include the building’s diversity and inclusion policy, its impact on the users’ long-term health by creating a healthy indoor environment and providing people with healthy choices regarding daily commuting, nutrition and lifestyle in general. The building should be opened to the local community and play an integrating role for it.