Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
Once considered a ‘nice-to-have’, ESG has rapidly become table stakes in the construction and real estate industry due to growing regulatory demands, increasing financial rewards, and mounting social responsibility. And with fast-approaching compliance deadlines and a limited supply of resources to help companies meet them, it is crucial for businesses and investors who have not yet embarked on their ESG journey to get started as soon as possible. But where do you begin?
An ESG strategy gives you a clear roadmap to understand and address your environmental, social, and governance requirements. The right ESG strategy is tailored to your unique needs, based on meticulous research and analysis, and prepares you to take meaningful action. Read on to learn why an ESG strategy is now critical for businesses. You’ll also discover our best practices for developing an ESG strategy that drives change and growth, based on our own ESG strategy framework here at Catalyst.
Why is having an ESG strategy so important?
Concerns about businesses’ corporate and social responsibilities have impacted investor and market decisions long before the acronym ‘ESG’ was officially coined in 2004. But today, with a climate crisis on the horizon, the pressure to commit to ESG practices is on from multiple angles: regulatory, ethical, social, and financial.
1. Regulatory
New legislative frameworks like the Energy Performance of Buildings Directive (EPBD) and the Sustainable Finance Disclosure Regulation (SFDR) outline ambitious targets for construction and real estate. Developers and investors must work quickly within these guidelines to help decarbonize EU building stock by 2050, improve the Energy Performance Certificates (EPCs) of their assets, and make zero-emission buildings (ZEB) the standard for new buildings—or face financial and reputational consequences.
2. Ethical
Data from the United Nations showed that 2023 was the warmest year on record, with greenhouse gas emissions (GHGs) reaching a record high (57.4 gigatons).
As a major contributor of GHGs—over one-third of the EU’s energy-related GHG emissions comes from buildings—the construction and real estate industry has a significant role to play in reducing this output and ensuring a safer planet for all.
3. Social
According to a 2021 study from PwC, both consumers and employees make decisions based on ESG. The majority of employees (86 percent) prefer to support or work for companies that care about the same issues they do. Meanwhile, 76 percent of consumers say they would cut ties with companies that treat employees, communities, and the environment poorly.
With the adoption of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) bringing these issues to the foreground, it is even more important for businesses to protect their reputation—and foster employee satisfaction—by adopting ESG initiatives that reflect shared values.
4. Financial
Today, there’s a direct link between ESG and valuation. A recent Deloitte survey showed that over 70 percent of companies have abandoned acquisitions over ESG concerns. On the other hand, 83 percent of respondents would be willing to pay a premium for an asset with a high ESG profile—up from 62 percent in 2022.
Similarly, Morgan Stanley found that more than half of investors (54 percent) plan to increase sustainable investments in the next 12 months. Almost 80 percent consider factors like a company’s reporting on its carbon footprint and commitment to reducing greenhouse gas emissions when making an investment.
However, Morgan Stanley’s data also revealed that many investors are put off by a lack of transparency in reported data and are concerned about greenwashing. This means that in order to secure and maintain investment, businesses need to adopt clear, trustworthy reporting practices, and follow through on their commitments.
Of course, increasing your assets’ appeal to investors isn’t the only way adopting ESG principles contributes to your bottom line. Making energy improvements can reduce your ongoing overheads and mitigate risk, too, enabling you to create long term value and future-proof your assets.
How to create a tailored ESG strategy in 5 steps
No matter what prompted your ESG transformation, meaningful change starts with the right ESG strategy.
Whether you are starting from scratch at a corporate-, fund- or asset-level, or upgrading your existing ESG initiatives, here are some best practices to develop a strategy that fits your needs, based on our ESG strategy framework at Catalyst.
1. Kick-off and project planning
Start by performing a deep dive into your business. At the outset, it’s crucial to understand:
- Where the benchmark is (for example, as outlined by EPBD, EU Taxonomy, or other directives you need to align with)
- Where everything currently stacks up in relation to relevant frameworks
- The scope and goals of your business
- Your legal requirements
- The legal and shareholding structure of your business
To do this, gather and review key documents. These will vary based on your business structure and needs, but can include:
- Your business plan
- Information on any existing ESG commitments
- Previous ESG reports
- Your investment strategy (for financial market participants)
This is also the time to get aligned with stakeholders and make your project plan. At Catalyst, we clearly map out the project timeline and set regular progress meetings from the get-go, so clients know exactly what to expect (and when) over the next few months.
2. Analysis
Depending on the requirements identified in step one, your analysis stage might include:
- Materiality assessments that consider the impact and likelihood of key ESG issues on your business, based on responses from your main stakeholders (employees and suppliers).
- Gap analysis that compares your current ESG practices with your goals and compliance requirements, identifying areas for improvement.
- Alignments with directives that identify how your current assets or practices map to relevant directives, such as EPBD or SFDR.
- Benchmark setting to establish a set of standards that can be used to measure and report on progress.
By performing these various analyses bespoke to your needs, you can effectively prioritize the ESG issues that matter most for your business and use them to inform your ESG strategy.
3. Peer review
At the same time as your analysis phase, you should also conduct a peer review. This is a detailed examination of other companies or organizations in your space, in which you assess their ESG performance, strategies, and outcomes. These peers could be direct competitors, market players you aspire to, or peers from other geographical markets.
At Catalyst, we use a rigorous multi-step methodology to systematically evaluate a client’s peers and competitors. This helps to effectively position you in the market, and gives you a clear benchmark and recommendations to help you stand out in your industry.
4. Define KPIs
With the results of all these analyses and assessments in mind, it’s time to prioritize the most critical KPIs to focus on.
Again, these should be specific to your unique requirements, company values, and goals, as outlined in the previous steps. Each KPI or metric should be linked to the most impactful ESG issues revealed by this extensive research.
This stage can also include setting actionable targets and producing policy documents that outline the new changes. Both of these activities help you to avoid greenwashing and solidify your commitment to making sustainable changes.
5. Outline action steps
Setting KPIs is great—but in order to hit your targets and achieve your ESG goals, you need a clear implementation plan.
With your goals in mind, think about what needs to be done to reach them. Some actionable next steps might include:
- tracking your KPIs with specific software
- EU Taxonomy alignment
- developing a net-zero action plan
- GRESB implementation
- social impact services
The most important thing? Don’t let your ESG strategy stay on the page. While we know that it can feel like a daunting undertaking, the benefits of implementing your ESG strategy far outweigh the risks of not having one.
3 reasons to develop an ESG strategy now
There has never been a better time to kick off your ESG strategy. Here’s why.
1. ESG isn’t a luxury—it’s a necessity
With new legislation and an increasingly urgent need to address the climate crisis, ESG considerations are no longer optional. They’re now essential to remain competitive and lay the foundation for sustainable growth.
Luckily, investing in ESG and making it a fundamental part of your operations offers a host of benefits: from enhanced corporate reputation and improved employee engagement, to financial impacts like reducing risk and attracting investors.
2. The time for change is now
Recent directives call for significant improvements at an unprecedented scale. For example, we anticipate that in Ireland alone approximately 51 percent of non-domestic buildings will be affected by the EPBD and will need to be improved by 2030.
These timelines are short, and with a scarcity of both skilled workers and experienced consultancies, businesses need to start planning now.
3. Future-proof your business through strategic, sustainable growth
As we’ve mentioned, there are a whole host of financial reasons to develop an ESG strategy. Adopting ESG principles helps you to mitigate risk, appeal to investors, and increase access to capital.
Having an ESG strategy also empowers you to prioritize your resources and investments based on where they’ll have the most impact. This means you can make better decisions and ensure stable growth, both now and into the future.
Prepare for the future with an ESG strategy
Developing an ESG strategy does not just help you meet compliance requirements; it can also enhance your reputation, engage your shareholders, increase investment, and improve the environment.
By using a comprehensive ESG strategy framework tailored to your business’s unique needs like the one outlined above, you can create a strategy aligned with your goals, values, and ambitions.
But move fast—as demand for ESG services grows, slow adopters risk getting left behind. Maintain your competitiveness and prepare for the future by starting your ESG journey now.
This article was written by Taylor Roughan, Financial ESG Consultant at Catalyst.
References
O’Leary, Ciaran. “What You Need to Know About How the EPBD Will Affect Construction and Real Estate.” Catalyst. Accessed June 26, 2024.
“Fast Facts: Temperature Rise.” UN. Accessed June 26, 2024.
“Energy Performance of Buildings Directive.” European Commission. Accessed June 26, 2024.
Kinghorn, Ron, Niloufar Molavi, and Kevin O’Connell. “Beyond compliance: Consumers and employees want business to do more on ESG.” PwC. Accessed June 26, 2024.
Segal, Mark. “Over 70% of Companies Have Abandoned Acquisitions Over ESG Concerns: Deloitte Survey.” ESGtoday. Accessed June 26, 2024.
“Individual Investors’ Interest in Sustainability is on the Rise.” Morgan Stanley. Accessed June 26, 2024.
O’Leary, Ciaran. “EU Taxonomy Alignment Can Increase Access to Capital and Future-proof Your Assets.” Catalyst. Accessed June 26, 2024.
