Environmental, Social, Governance: Mapping the ESG universe

Against a backdrop of a global public health crisis, ensuing recession and widespread political unrest, 2020 saw an unprecedented rise in market demand for ESG investments. This trend is only expected to continue as the supply side responds to increased demand by expanding the range of available ESG financial products.

The environmental strand of ESG includes a broad array of climate externalities associated with economic activity. Much of the focus has so far been on greenhouse gas (GHG) emissions, but the list of potential environmental impacts is virtually endless. The social aspect of ESG is even more difficult to account for in its entirety. It includes, but is not limited to, issues such as child and slave labour, corruption, workplace safety and discrimination. As a concept, ESG doesn’t only disincentivise negative impact investments; it incentivises economic activity that positively affects nature and society, such as ecosystem restoration and job creation. The role of senior corporate leadership in driving this transition is crucial: climate adaptation plans must be financially viable and risk-ready. The governance strand of ESG is effectively concerned with exactly this: business-positive sustainability.

The built environment sector has a special role to play in the ESG landscape. Construction and real estate firms are turning their attention to ESG reporting and benchmarking, in order to demonstrate their value and attract new investments. But the plethora of existing frameworks and initiatives around ESG can generate confusion and hinder these efforts. EFRAG, who are working on a framework for non-financial reporting standards on behalf of the EU Commission, have identified nearly one hundred different initiatives in this field. Some are more high-level and consist of general recommendations, while others are very detailed and prescriptive in terms of the disclosures that they mandate. Here we present an overview of some of the main players in this field.

The Task Force on Climate-related Financial Disclosures (TCFD)

TCFD was established in 2015 as an international panel of experts. In 2017 the panel produced its first list of 11 disclosures, consisting of mostly qualitative statements about climate-related policies and practices. The list does not include GHG emissions metrics. Over 1,500 entities have expressed support for the TCFD, with around 30% of building materials and construction companies declaring their alignment with the taskforce’s recommendations.

Visit the TCFD homepage

The Global Reporting Initiative (GRI)

GRI was founded in 1997 and published its first guidelines in 2000. In 2016, the guidelines were developed into a suite of global standards for sustainability reporting. These were the first such standards to be made available for use by companies, cities and regions. Periodically updated and expanded, they consist of over a hundred specific disclosures covering all aspects of ESG, as well as conventional economic and financial considerations. About three quarters of the world’s largest companies are estimated to use GRI standards for their ESG reporting.

The World Economic Forum and the “big four”

In September 2020, the World Economic Forum, together with Deloitte, KPMG, EY and PwC published the report Measuring Stakeholder Capitalism. Therein is listed 21 core disclosures (and a further 34 “expanded” disculosures) considered to be the most common and established ESG metrics. The list is divided across four pillars: Governance, Planet, People and Prosperity. The majority of the listed disclosures are aligned with established frameworks, such as GRI standards.

Download the WEF report: Measuring Stakeholder Capitalism

The Climate Disclosure Standards Board (CDSB)

CDSB is an international consortium of businesses and environmental NGOs established at the 2007 meeting of the World Economic Forum. Its Framework for reporting environmental & climate change information consists of a relatively loose set of recommended disclosures covering environmental and governance considerations. Around 370 companies across the world use the CDSB framework.

Download the CDSB framework

The Climate Disclosure Project (CDP)

Established in 2000, the CDP is a platform be used by companies, cities and regions to disclose environmental and governance data. The data is inputted annually by the organisations across three detailed questionnaires, covering climate change, forests and water scarcity. There is an additional set of questions for the specific attention of high-priority economic sectors. Those for the construction and real estate sectors focus on the assessment of life cycle emissions, net-zero carbon standards and investments in low-carbon R&D. Over 9,600 companies, 800 cities and 120 regions use the CDP platform.

Visit the CDP homepage

The Sustainability Accounting Standards Board (SASB)

SASB was founded in 2011 as an independent non-profit organization dedicated to guiding the disclosure of financially-material ESG information. It is concerned mainly with environmental investments. In 2018, SASB published a set of 77 industry standards, of which three are especially relevant to the built environment: Home Builders, Real Estate, and Real Estate Services. Each of these standards provides a narrow list of metrics (fewer than 20) that are particular to each industry. For example, home builders must disclose the number of lots and homes delivered on redevelopment sites in a given year. Around 500 companies use SASB standards for ESG reporting, and nearly 200 institutional investors use SASB standards to support their investment decision-making.

Visit the SASB homepage

The Global ESG Benchmark for Real Assets (GRESB)

Established in 2009, GRESB is a commercial platform for ESG reporting and benchmarking, focused on real estate, with diverse reporting for management, development and infrastructure activities. The data is inputted by participants on an annual basis, via a detailed questionnaire which looks at both the whole company and its individual assets. This enables GRESB to generate a Scorecard and Benchmark Report for each company. The Scorecard provides a score, rating and summary analysis of performance against industry and climate benchmarks. The Benchmark Report contains more detailed information. With this wealth of data, GRESB produces a set of Public Results, which measure the global progress of the real estate and infrastructure sectors towards sustainability goals. GRESB’s membership comprises around 1,200 property companies, real estate investment trusts, funds and developers. The infrastructure segment includes a further 540 funds and assets. The total number of assets under the ownership of GRESB’s member base exceeds 96,000.

View the GRESB Public Reports for 2020

Even within this small selection of initiatives, there is considerable variation as to how ESG is defined. Scope, detail and coverage levels differ according to the framework. Most initiatives tend to focus on environmental concerns, perhaps reflecting a degree of alignment between environmental initiatives – at least on more established metrics, such as GHG emissions. Most environmental metrics are quantitative and based on natural sciences, and thus more easily measured and benchmarked. Social metrics, on the other hand, are often qualitative, relatively young in terms of development and reliant on subjective interpretations of value.

Most investors are not sustainability experts. As a consequence, there have been attempts to condense ESG performances into one-dimensional score and ranking systems, such as the Dow Jones Sustainability Index or the Refinitiv ESG Score. These measures can be useful for high-level screening, but investors should be wary of using them for the purposes of like-for-like comparison. Sustainability is an intricate, multifaceted concept, and thus a multiplicity of criteria is necessary to capture its totality.

Given the complexity of the landscape, consensus is emerging on the need for a convergent and standardised set of established ESG disclosures. Recent public policy announcements have made a significant push in this direction, with further legislative and regulatory actions expected in future. On the global stage, the EU leads the way with its ambitious plan for sustainable finance, linked to the European Green Deal. The above-referenced EFRAG report forms part of this plan. Further policy initiatives include a Taxonomy for Sustainable Activities, Green Bond Standards, the Non-Financial Reporting Directive (NFRD), and the Regulation on sustainability-related disclosures in the financial services sector (SFDR). The UK Government has committed to introducing mandatory TCFD-aligned disclosures across the economy by 2025.

It has long been said that changes in mindset and practice across the built environment will be essential if climate catastrophe is to be averted. The flourishing ESG market suggests that movement is being made in the right direction.