Insights

The rise of the “S” in ESG Reporting.

This article was originally written for GRESB: you can read in full on its site here.

The integration of ESG factors into investment decision-making and management is a dynamic process; the market is constantly evolving so the goalposts are always changing.

The first big driver is commercial. There is mounting evidence that ESG considerations have tangible impact on risks and returns. By proactively managing and disclosing environmental and social factors, businesses can generate new opportunities, gain competitive advantage, and protect/build brand reputation.

This trend is apparent both in the context of climate action, as evidenced by the introduction of mandatory climate-related financial disclosures, and in the social impact space. For the latter, following updates to the Social Value Act 2012, social benefits should now be explicitly evaluated in all central government contracts, a development which is expected to influence private sector procurement too.

Not all ESG issues matter equally. Their relevance varies across industries and organisations alike. The fundamental purpose of reporting is to communicate decision-useful information with respect to the most material ESG factors, i.e. those issues which are most likely to impact an organisation’s performance.

The ESG reporting landscape (which includes both regulatory and voluntary initiatives) is becoming increasingly complex. Navigating through the various guidelines and frameworks is a challenging task especially given the progressively more granular data that is being requested from reporting organisations.

Why has the “S” traditionally lagged behind the “E” in ESG?

With global real estate accounting for roughly 40% of the annual energy consumption globally, it is not surprising that environmental action has traditionally been at the forefront of the ESG debate in the built environment.

Conversely, the Social pillar has lagged behind due to challenges around the definition, scope and measurement of this type of “softer” considerations. Therefore, reporting social impact has traditionally been disjointed, output driven and incomparable.

The “S” pillar builds trust

The Social element may be more difficult to define and quantify, but it can make a big difference to trust, confidence, inclusion and effective stakeholder engagement.

We are constantly shaping the future of our cities; we build not only houses, but neighbourhoods and communities; and we are responsible for providing all the built infrastructure required for cities to thrive.

Our industry needs to re-think how we can collectively help address societal problems around poverty, inequality and mental health. This is what makes the built environment truly unique from an ‘S’ perspective.

Moreover, the concept of “value” is evolving and stakeholder expectations are changing towards a more holistic understanding of value going beyond short-term pounds and pence. This shift has spurred a stronger demand for greater transparency around material non-financial information including social factors.

So what do we mean by “S” in the built environment?

The concepts of the ‘S’ pillar and Social Value tend to be used interchangeably. However, these terms refer to slightly different albeit complementary aspects.

The “Social” pillar within the traditional ESG agenda customarily focuses on organisational policies and practices regarding human rights, business ethics, supply chain management, diversity and inclusion, and social impacts resulting from corporate operations.

Social Value comes in the context of the built environment exploring the impact that buildings and places have on people and communities. As such Social Value in the built environment is holistic in scope but inherently local to a particular area.

A way of combining the general societal perspective with the specific opportunities arising from Social Value is shown in Figure 1. This is by no means an exhaustive list; rather, it aims to provide more clarity on the type of considerations typically addressed in this space.

Read part 2 here.