ESG is a journey, not a destination. 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.
In addition to this strong commercial imperative, we are also witnessing a growing appetite from the UK government to push the boundaries. 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.
The Social Angle in ESG Reporting
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.
A strategic and long-term focus on the social element provides a unique opportunity to help rediscover the role of our industry in society and our purpose as built environment practitioners. 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.
Fundamentally, Social Value in the built environment should be about improving the quality of life of people. Given the variety of projects and diversity of communities that the development process affects, a one-size-fits all definition of Social Value is neither feasible nor appropriate.
The idiosyncratic nature of Social Value gives built environment practitioners an opportunity to move away from box ticking to developing project-specific environmental, economic and social outcomes and interventions. This tailored approach seeks to inform strategies that respond to local needs and priorities and, in doing so, enhance wellbeing and improve the quality of life of affected communities.
Reactive to proactive position on “S”
As we entered 2020, the question around re-thinking the role of Social in decision-making took on a new meaning. The Covid-19 crisis seems to have become a watershed moment for the ‘S’ pillar, having put a spotlight on the weak points of our societies when it comes to health and wider social inequality.
Some of the pain points that have come to the forefront are: evolving societal expectations associated with the growing inequality between wealth and poverty; access to affordable housing; connection to nature; gender and diversity gap; and increase in mental illness.
As a consequence, the expectation is that there will be an increased focus on businesses’ social responsibility towards their employees, supply chains, and communities in which they operate.
Ultimately, the three pillars of ESG are profoundly interconnected and require an integrated approach to maximise overall benefits and explore synergies. Social and environmental issues are effectively two sides of the same coin, and governance is the frame that ties them together. We can’t hope to deliver on the Paris Agreement commitments in a sustainable way without developing a proper understanding of key social factors and performing a balanced assessment of environmental and social implications.
Decarbonisation pledges currently being made by both the public and private sectors must be managed holistically to ensure that the transition to net zero does not deepen existing social inequalities but rather is used as a force for good that improves livelihoods and “levels up” communities.
The Future of ESG Reporting
We still have a lot to learn when it comes to maximising social benefits throughout the lifecycle of a built asset. Capturing this information in a way that is specific and tangible enough to inform meaningful decision-making at portfolio / corporate level is even more challenging.
Nevertheless, the perfect should not be the enemy of the good. The greater complexity around the ‘S’ pillar should not be used as an excuse for inaction or piecemeal interventions. This trend is particularly acute in the built environment sector where the awareness of the link between built assets and quality of life of occupants is growing markedly.
By elevating the ‘S’ on the ESG agenda, we might just get close to squaring the circle through the adoption of a more holistic understanding of “value”. Embracing a longer-term time horizon and broadening the scope of metrics used to measure success would alleviate concerns associated with pressures organisations face for short-term returns.
The real challenge will be to find the right balance between harmonising social reporting requirements (to enhance transparency and increase uptake) alongside the flexibility needed to effectively address local needs.
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