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.
Stakeholder and regulatory pressures are coming from every angle demanding business operators demonstrate action on environmental, social, and governance (ESG) issues. One in five investors say they decided to not invest with a manager because their ESG policies were inadequate, and as of 2021, 39% of investors are currently invested in ESG products, an increase from 33% in 2020. Globally over 70 countries have set a net-zero target, covering about 76% of global emissions. The Millennial generation—and Millennial women specifically—is growing as the new investor base and they are likely to direct their newly inherited capital towards opportunities that holistically earn returns, contribute to social good and align with their personal values.
How can business operators handle the pressures? The best place to start is by running a full ESG diagnostic that leads to a custom roadmap designed to meet the unique needs of an organization. Key components of an ESG diagnostic include: conducting an ESG gap analysis, managing and addressing transitional risks, and analyzing data.
Conducting an ESG gap analysis
Voluntary ESG frameworks such as the Global Real Estate Sustainability Benchmark (GRESB), the Task Force for Climate-Related Financial Disclosures(TCFD), and the UN Principles for Responsible Investment (PRI)can act as useful benchmarks to identify gaps, strengths, and opportunities in existing programs. Determining which framework to use depends on:
- The current level of ESG integration within reorganization,
- The investment structure and ability to influence operations, and
- What the company has defined as materially important.
GRESB as an initial starting point enables organizations to evaluate how deeply embedded ESG is at the organizational and asset level. The UN PRI considers how an organization has integrated ESG into investment analysis and decision-making processes, as well as in ownership policies and practices. Lastly, TCFD aims to provide fiduciaries with insight into how an organization assesses and manages climate-related risks. Both GRESB and the UN PRI provide insight into how organizations measure against peers, making it easy to identify risks and remain competitive. Evaluating an organization against any one of these benchmarks can assist with outlining the gaps and opportunities to include in an ESG roadmap.
Additionally, a materiality assessment is an instrumental tool in tailoring an ESG roadmap to the values of an organization’s stakeholders. Essentially, the assessment helps an organization prioritize which topics are material by determining which are most important to stakeholders and have the potential to impact the long-term viability of the company. Material ESG topics typically:
- Reflect a wider range of stakeholders and environmental, social, and economic impacts,
- Go beyond topics that have a significant financial impact on the organization, and
- May influence the company’s reputation, including how stakeholders perceive or interact with the organization
ESG frameworks and publicly available peer ESG reports are valuable sources to garner a list of topics. Stakeholders involved should be diverse, representing all facets of the company’s business operations—from the board of directors to the communities in which the company operates. Understanding what stakeholders expect from an organization and integrating that into the business strategy can help optimize retention and attraction. As a result of the materiality assessment, an organization will be better positioned to prioritize ESG topics in the core business strategy and develop metrics that track and drive performance.
Managing and addressing transitional risks
Mandatory and voluntary transitional risks, both current and future, are another key factor to consider when devising an ESG roadmap. Transitional risks are policy changes, reputational impacts, and shifts in market preferences, norms, and technology the result of the transition to a low carbon economy. Regulation and mandatory disclosure are becoming commonplace across the globe. Across North America, an increasing number of cities, counties, and states have enacted policies that require property owners to benchmark and report utility data, audit operations, and significantly improve performance. Currently, 25 U.S.state and local governments have committed to passing a building performance standard by Earth Day 2024. The European Union’sSustainable Finance Disclosure Regulation aims to improve transparency for financial market participants and advisors on how businesses are managing sustainability risks at the financial entity and product level. In conjunction, investors are increasingly requesting investment managers to report to voluntary ESG frameworks such as those mentioned above. Incorporatingmitigation measures into an ESG roadmap that addresses these transitional risks can ensure a company is in alignment with these decarbonization efforts and emissions standards.
Unequivocally, one of the most essential factors to inform an ESG roadmap is data analysis. ESG data is the building block to measuring the progress of initiatives aligned to an ESG strategy. Which data points are analyzed should be based on what the organization has deemed as materially impactful. For example, evaluating greenhouse gas data can assist in ensuring compliance with mandatory disclosures. An analysis should determine what data is currently readily available, what data is missing that is attainable, and what data is missing that may be more difficult to access. If data is readily available, data analysis should focus on evaluating the performance at an organizational and asset level and identifying improvement opportunities.
Building an ESG Roadmap
After completing a full ESG diagnostic, overall ESG ambitions, priorities, and objectives will start to formulate. These will set the foundation for an ESG strategy and roadmap. Eachorganization’sroadmap starting point may be different; it is important to be realistic in the timeline and implementation of each initiative aligned with material ESG topics. Having a good sense of what challenges may arise can assist in pragmatically deciphering a timeline.
Establishing ESG Governance
Establishing ESG policies first defines the intent of the ESG program and solidifies the accountability of the key stakeholders involved. Policies should clearly communicate an organization’s ambitions and objectives for the topic covered. For instance, for an organization where data is not yet collected or well understood, aspirations may be broader or more qualitative but should demonstrate steps are being taken towards quantifying progress. Next, policies confirm the applicable stakeholders that will need to abide by these procedures. It is important to set a defined scope as to whom the policies apply to across the organization. Lastly, the policies should articulate a company’s approach to factors in ESG. It’s helpful to dissect what the approach to ESG is within each business line. Providing training to the relevant stakeholders will ensure awareness of any new procedures at the onset.
An ESG roadmap is constantly evolving. As a company progresses, new priorities may unfold, new challenges may arise and stakeholder interests may shift. Thus, it is crucial to perform ESG diagnostics periodically and ensure the roadmap is uniquely and consistently meeting the demands and needs of an organization and its stakeholders.
This article was written by Allison Kirby, Associate Director of ESG & Sustainability, Energy and Sustainability Services, Cushman & Wakefield.
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