For ESG, it’s location, location, location

Among other criteria, businesses are now looking to invest in areas that support ESG initiatives, reports Courtney Fingar.

As companies increasingly recognise their responsibility around sustainable development, environmental, social and governance (ESG) factors are no longer add-ons, but integral components of strategic planning.

Sustainability considerations are influencing site selection. Environmental impact is a top concern, with companies prioritising locations that offer access to renewable energy, efficient waste management and lower carbon footprints.

Proximity to sustainable sources of raw materials is becoming more important, as businesses aim to reduce their ecological impact. Social factors, such as community engagement, workforce diversity and access to healthcare and education, are also considerations.

On the governance side, businesses are looking for locations with robust legal frameworks, transparent regulatory environments and strong institutional support for ESG initiatives. This ensures not only compliance with international standards, but also the ability to operate in a stable, predictable environment that supports long-term sustainability goals.

The role of IPAs

Investment promotion agencies (IPAs) are key facilitators in this process, helping companies identify and evaluate potential sites through an ESG lens. By promoting regions that align with sustainable business practices, IPAs can attract investments that contribute positively to the economy and society. They can play a crucial role in gathering and providing detailed ESG-related data about potential sites, such as information on local environmental regulations, availability of green infrastructure and community development programmes.

“ESG and sustainability factors are increasingly driving company site selection, with a strong focus on minimising carbon footprints and embracing renewable energy,” says Wojciech Tyborowski, director of Invest in Pomerania. “For us, partnering with investors who share our commitment to sustainability is not just desirable, it’s essential for fostering long-term, responsible growth.”

Elias van Herwaarden, principal at advisory firm Locationperspectives, has observed a notable shift in corporate priorities when it comes to site selection.

“We have been asking companies for the last eight years whether ESG or SDG targets of the hosting communities played a role in their location decisions. Initially, the answer was no. But over the last four or five years, they say, ‘Yes, it’s important’.”

Sector or origin of company key factors

How large these criteria loom in site selection decisions can be dependent on the sector or origin of the company.

“There is a clear split, where companies in the renewable energy space are 100% after ESG parameters and those criteria being put into the [decision-making] model,” says Jens Manke, director for Germany and Central Europe at foreign direct investment consultancy OCO Global.

Robbie Epsom, EMEA head of sustainability and senior director at CBRE Investment Management, notes the growing influence of employee expectations on corporate sustainability goals.

“There’s a huge desire, particularly in the office sector, from big corporates to set ambitious sustainability goals, in particular net-zero targets, because their employees demand this as part of their early-career professional level interviews. And so a lot of big corporates, and even small and medium-sized enterprises, are trying to find office spaces that are energy efficient and meet sustainability requirements,” he says.

Office supply crunch

This demand is creating a supply crunch of suitable office space. “In the short term, there appears to be a supply and demand issue for offices that meet these high expectations, but eventually that will start to settle down as this becomes business as usual,” Epsom says.

There are variations in which aspects of ESG get higher priority in site selection calculations. “What I’m seeing is that with S and G it’s ‘check the box,’ and with E, people will check the box, but in practice compromises need to be made,” says van Herwaarden.

The introduction of key performance indicators (KPIs) in the EU Taxonomy and the underlying KPIs from the Sustainable Finance Disclosure Regulation (SFDR) are beginning to provide much-needed clarity, and potentially value points, for the sustainability aspect of buildings, according to Epsom.

The KPIs measure the alignment of economic activities with the EU’s sustainability goals and can be used to assess whether buildings or projects qualify as “green” under the EU’s criteria. For green buildings, this would involve KPIs like energy efficiency.

‘Clients favour ESG-compliant destinations, or at least destinations that are doing all in their power to become compliant.’

Elias van Herwaarden, Locationperspectives

SFDR is an EU regulation introduced in 2021 aimed at increasing transparency in the financial market regarding sustainability risks and impacts.

“The KPIs are giving both investors and occupiers a way to actually judge progress and performance on sustainability in a way that they know the market recognises. It’s been a real change from where we were even a year or so ago,” Epsom says.

He says on-site decarbonisation audits are also bringing better clarity. “Suddenly we have the data and the information we need to be able to have these meaningful conversations both up and down the value chain with both investors and occupiers. I’m seeing much more occupier engagement because we have that data to have a conversation around how we collaborate on this transition,” he adds.

IPAs can also bridge gaps by providing companies with the data they need to make ESG-compliant and sustainability-driven location decisions. IPAs with their own ESG goals may want to focus on attracting companies that share the same values and build relevant metrics into their investor targeting strategies. “It starts with that and it ends with being prepared for what the company might be requesting in terms of data and information,” Manke says.

Connecting to infrastructure

Achim Hartig, managing director of Germany Trade and Invest and chair of the OECD IPA Network, says the IPA’s impact on these factors depends on the remit.

“For IPAs on the national level like us, we are not supporting the companies by selecting construction materials or suppliers for them, although we ensure they can connect to infrastructure that provides the resources they need,” he says. “However, there are IPAs that have the whole value chain and the networks to do matchmaking between the demands of the company they’re wanting to attract and the supply of the sustainable materials.”

Hartig highlights the need for IPA advocacy and ongoing dialogue with policymakers. “In terms of how the aspect of sustainability bleeds into investment-attraction work, this is in many countries a chicken-and-egg situation, where sometimes the IPA is a little bit more advanced and the politicians have to get ideas and inspirations from them, and in other cases it’s the reverse,” he says.

“In my own experience, strengthening this dialogue with the ministries and being transparent about what we see when it comes to sustainability makes it possible for them to make better decisions.”

IPAs should lead by example and instill ESG at the heart of their development strategies and institutional frameworks.

“It’s very important for an IPA to really embrace ESG in their own practices. It is something my clients do appreciate. They will actually favour ESG-compliant destinations, or at least destinations that are doing all in their power to become ESG compliant,” van Herwaarden says.