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.
Social disruption from climate change, inequality, and public health are some of the defining issues of our times and the real estate industry plays a crucial role in addressing these challenges by harnessing strategies that protect and enhance property, people, and the planet.
There is a widely held consensus, however, that the S in ESG is the most difficult to define. Compare social with environmental reporting, suggest critics, in environmental reporting we have clear standards, scientific benchmarks, and legislation. Governance is similar, it is suggested, that the way businesses must behave held to clear standards compares favorably to the requirements for social reporting. A 2021 GlobalESG Surveyby BNP Paribas indicated that 51% of investors surveyed found the S to be the most difficult to analyze and embed in investment strategies. Doom and gloom, it seems, for those of us urging more focus on social.
What is Social?
The kind of thinking that allows for half-baked social reporting is, however, rapidly becoming old-fashioned as governments around the world have woken up to the importance of social reporting, in the UK and across the European Union, with echoes in the North American market too.
Let’s do definitions first: Social is broadly defined as the effect of projects or programs of work in local communities. This means that social impact goes hand in hand with economic outcomes: spending with local businesses and small and medium enterprises (SMEs), employing local people, and supporting those that have difficulties accessing the labor market, for example. Social is interested in seeing the positive benefits from living and working in a community that comes into contact with the client’s assets and mitigating negative impacts where possible. The focus is on identifying and delivering locally appropriate outcomes for businesses and communities that they operate in.
Simultaneously, and particularly in the real estate sector, there is a health and well-being component to social. Physical health can be affected directly through toxic exposures and indirectly by the impact of real estate development on human behaviors, such as physical activity and healthy eating. Mental health is also directly influenced by access to daylight, green space, and biophilic design, and indirectly by the impact that urban and building design has on wider social interaction and connectivity. Market leaders are already prioritizing occupant experience in their investments and in some cases, health promotion is being incorporated (particularly post-pandemic) as part of wider value drivers.
If the past twenty years have had a focus on the growing maturity of environmental reporting, the 2020s look very much like they will be the social years. Following the cataclysmic impact the pandemic has had on communities around the world, and the disproportionate impact it has had on marginalized communities, the time is right for social to take center stage. Governments and investors across the world are waking up to this reality. Put shortly, legislation is coming, and investors are already beginning to expect it.
In the UK, the Social Value Act has been in place since 2012, but it wasn’t until the release of Public Procurement Note 06/20 during the first year of the pandemic that UK businesses really started to take note. Meanwhile, in 2021, Northern Ireland joined the rest of the UK in procuring with social in mind. Welcoming the legislation, Finance Minister, Conor Murphy noted the importance of creating jobs for people in deprived areas and delivering environmental benefits by requiring contracts to employ low or zero carbon practices. While this legislation relates to public sector procurement, the momentum that is building strongly implies that legislation for real estate is on the way.
Elsewhere, the European Union is quickly following suit. The draft version of the EU Social Taxonomy is closely modeled on the UKSocial Value Act and its release in the next month or so looks likely to provide the sector with a clear framework for reporting social within the bloc.
Earlier this month, a provisional deal that would require major corporates to report on how their businesses impact both people and the environment was struck in the EU Parliament. The Corporate Sustainability Reporting Directive (CSRD) will require that major businesses –defined as organizations with over 250 employees and a €40 million turnover –report their social and environmental impact against common standards to require businesses to report on environmental, and human rights, social standards and work ethics issues. The policy is an amendment to 2014’s Non-Financial Reporting Directive (NFRD) which set out its aim to encourage: “investors, civil society organizations, consumers, policymakers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business”.
For investors, the role of social is becoming central. At EVORA we have worked with a number of organizations stewarding, for example, public sector pension funds who are rightly asking for comprehensive social strategies, social reporting frameworks, and a social vision for the businesses entrusted with their money. Investors want to know that their funds are invested in a socially sustainable way: are local people finding work, and what is the return on their money for their local communities? These kinds of questions can only be answered satisfactorily by organizations that have developed comprehensive social strategies, have clear data collection frameworks, and above all else, a real commitment and vision to delivering social change at scale.
The era of social
The market is changing rapidly. There was a time when an environmental strategy was a “nice to have” but those days are long gone. Today we are seeing the same change happening for social. Market expectations now mean that businesses can no longer present an ESG Strategy without a comprehensive analysis of the communities that they impact and an understanding of how they can do more to maximize the benefits that their assets deliver.
We have now arrived at a point where the social component of ESG reporting can no longer be ignored. Social is a concept whose time has finally come.
This article was written by Sarah Coughlan, Associate Director, EVORA Global.