How to build a credible strategy for ESG adoption
In this article, Christiane Conrads summarises the key findings of a new report from PwC about formulating ESG strategies to attract investment.
Any company or country that wants to be taken seriously by international investors, or wants to attract FDI, must have a serious and credible ESG strategy. PwC, which has recently conducted an international sentiment report on the subject, has found some common themes that investors are looking for. Below is a summary of our findings:
The highest ESG standards prevail globally
Investors, particularly limited partners (LPs) and investment committees, expect the highest ESG standards to be followed globally. They prioritise sustainable and socially responsible investments and seek opportunities that align with these standards. Adhering to the highest ESG standards is crucial for long-term value creation and risk mitigation.
Building trust through serious transformation: Investors need to see that transformation is being taken seriously. This involves demonstrating a genuine commitment to sustainable and socially responsible practices. Transparency in the transformation process, including clear communication of goals, progress, and outcomes, is essential. By showcasing a serious approach to transformation, it is possible to build trust.
No excuses for projects built from scratch
Projects built from scratch present an opportunity to do things right from the beginning. Investors expect a strong focus on sustainable and socially responsible practices, including environmental considerations, social impact, and governance standards. These factors should be prioritised and no excuses should be accepted, thereby setting a high standard for future developments.
Concerns and focus on securing resources and an experienced workforce when planning or completing projects
Investors and stakeholders expect robust planning and execution strategies to ensure the availability of necessary resources and skilled labour. Addressing these concerns is crucial for the successful implementation of projects and attracting further investments.
Diverse and inclusive city communities
In urban development, it is crucial to prioritise people by demonstrating a focus on creating diverse and inclusive city communities. The emphasis should not solely be on addressing the needs of affluent populations, but also on creating neighbourhoods and transportation systems that cater to a wide range of socio-economic backgrounds. This inclusive approach will contribute to the overall sustainability and liveability of cities.
Adoption of UN Sustainable Development Goals and #4GuidingPrinciples
Investors expect the adoption of UN SDGs as uniform targets and global standards. They also recognise the #4GuidingPrinciples as a leading methodology for successful ESG transformation. Aligning with these frameworks demonstrates a commitment to addressing global sustainability challenges and integrating ESG considerations into business strategies.
These goals are not in competition with each other, but rather they need to be balanced and harmonised. The #4GuidingPrinciples are recognised internationally and applied by numerous legislative bodies, courts, and administrations as well as standard setting bodies (like rating and certification schemes).
These principles provide a helpful methodology for achieving transformation goals and offer a systematic approach to implementation. By consistently applying them in all processes and areas, implementation projects can be simplified, and the attainment of goals can be ensured (see below).
‘Investors expect a strong focus on sustainable and socially responsible practices, including environmental considerations, social impact, and governance standards.’
PwC report
Risk mitigation, transparency and compliance
Commitment to reducing dependencies on fossil fuels
Investors expect a commitment to reducing dependency on fossil fuels and providing evidence of success in this regard. This aligns with global efforts to combat climate change and transition towards renewable energy sources. Demonstrating progress in reducing reliance on fossil fuels enhances the attractiveness of investments.
Mitigation of sustainability risks
Mitigating sustainability risks is particularly relevant for international insurance companies. Investors expect robust strategies to address environmental (e.g. physical risks) and social risks, ensuring the long-term viability and resilience of real estate investments.
Transparency and compliance with reporting frameworks
Transparency is key to building trust in the transformation process and supporting compliance with reporting frameworks. Investors expect clear and comprehensive reporting on ESG performance, demonstrating accountability and adherence to global standards.
Adoption of standardised reporting frameworks
Investors encourage the adoption of standardised reporting frameworks, such as the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB). Aligning with these frameworks ensures consistency and comparability in reporting, making it easier for investors to assess ESG performance across different real estate projects and companies.
Sustainable finance integration
Investors are increasingly interested in sustainable finance options for real estate investments. They seek opportunities to align their investments with sustainable development goals and support environmentally and socially responsible projects. Integrating sustainable finance practices, such as green bonds or sustainability-linked loans, can attract a broader range of investors and provide additional funding for sustainable real estate initiatives. Projects should have sufficient data and information to assess and classify an investment as sustainable.
Need for competition and collaboration
There is a general wish to understand the market and governance process and develop trust, and a growing desire for collaboration between industry and government organisations to share valuable ESG knowledge through the exchange of best practice.
Six topics of urban development
For urban development projects, the ESG ambitions and goals for the specific project must be based on internationally recognised methodology. From a wide range of best practice projects, six focus topics have emerged. These should not be treated in isolation, but as interconnected elements that need to be evaluated and integrated into an ESG template.
The six major topics of leading urban development practice encompass the following:
1. Spaces and society
Urban spaces and societal structures are closely linked to the cultural and social environment. It is essential to protect cultural identity while enhancing diversity and integration, as they play a key role in urbanism.
2. Economy
Financial flows are crucial considerations in urbanism, as they contribute to the generative economic capacity of cities and regions. Attracting (international) investors and ensuring the resilience of the local economy while promoting sustainable returns are important considerations.
3. Environment
The physical environment consists of various elements that need to be considered in the setup of an urban masterplan, and therefore constitute a key element of the ESG template. These elements include climate change, water management, pollution control, circular economy practices, biodiversity preservation and reduction of embodied carbon.
4. Social
Urban planning, including the creation of spaces and access to facilities, significantly influences how people interact within a city. Thoughtful design can have a major impact on health, wellbeing, and overall quality of life for residents.
5. Technology
Environmental, social, and economic developments are closely linked to technological advancements. Consideration should be given to materials, resources, energy efficiency, transportation (mobility), utilities, and digitalisation in the context of urbanism.
6. Processes and governance
Sustainable urbanism can only be successful if all relevant processes and stakeholders are considered, involved, and coordinated from an early stage. Early interaction allows for the incorporation of relevant aspects into the design, planning, development, and construction phases of the project.
In conclusion, the ESG transformation of the global real estate sector presents both a strategic opportunity and a cultural imperative for companies and countries that can set themselves apart by integrating ESG principles into investment decisions or urban development projects. n
Christiane Conrads is a partner and global real Estate sustainability leader at PwC
The four guiding principles
1. A positive contribution to the environment and/or society
The first fundamental principle of ESG compliance requires that any measure taken must contribute positively to the environment and/or society. Such measures should not contradict environmental and/or social goals. This implies that while intentionally promoting ESG targets, no other ESG goals should be substantially compromised (it is known as the ‘no-harm’ requirement).
For example, in order to follow ESG standards, where solar panels are installed, such panels should be produced in an environmentally friendly process which avoids contamination of soil and other pollution risks. They should also be produced in compliance with social minimum safeguards ensuring human rights and high labour standards. This first principle ensures a balanced approach to a sustainable development.
2. A holistic lifecycle approach
To achieve an overall positive impact on the environment and societies, it is essential to adopt a lifecycle approach that considers all stages of activities and investments, rather than focusing solely on specific periods. This holistic approach is crucial for successful ESG transformation, as it allows for a comprehensive assessment of the net impact on the environment and society throughout the entire lifecycle of any economic activity.
By considering all phases, from resource extraction to production, use, and disposal, the potential negative impacts can be identified and mitigated, while positive contributions can be maximised.
When it comes to real estate investments and development projects, this lifecycle perspective becomes particularly important. It involves evaluating the environmental and social impacts of existing properties, during the holding phase, and retrospectively and prospectively.
By taking a proactive approach to planning and construction, it becomes possible to maximise the lifespan of properties and anticipate future changes, such as demographic shifts or need for repurposing.
This proactive mindset allows for better and easier implementation of changes in the future, ultimately leading to cost savings. For instance, by considering potential changes and repurposing options from the outset, properties can be designed and constructed in a way that maximises their lifespan and facilitates future adaptations.
In addition, it is essential to consider the issue of embodied carbon in real estate projects as part of the lifecycle assessment. Embodied carbon refers to the carbon emissions associated with the extraction, manufacturing, transportation, and construction of building materials.
By considering embodied carbon throughout the lifecycle of a project, from the initial planning and construction phases, to eventual demolition or repurposing, it becomes possible to minimise the carbon footprint associated with the project.
By adopting this comprehensive approach, real estate investments and development projects can generate value for the environment and societies, ensuring a tangible benefit that goes beyond short-term gains.
3. The principle of double materiality
The principle of double materiality involves a comprehensive analysis of the sustainability risks associated with an economic activity. It evaluates both the impact of the activity on the environment and society (inside-out perspective) and the influence of environmental and societal factors on the activity (outside-in perspective).
Originating in (sustainability) reporting, this principle aims to prevent a narrow focus and ensure balanced reporting.
4. A detailed data basis.
Without adequate and trustworthy data, it is challenging to identify developments in areas like climate change, biodiversity loss, or worker and human rights protection, and to enact controls for higher environmental standards and social justice.
The critical role of data availability and transparency is evident in the ESG transformation, marked by growing demands for transparency and reporting on sustainability risks and impacts from both regulators and stakeholders. A sufficient basis of ESG data therefore forms the basis of all ESG strategies and their implementation.
There are significant challenges in managing data, including identifying key metrics in environmental, social, and corporate governance areas, and establishing frameworks and processes for reporting and auditing. Internal control mechanisms to ensure the plausibility and comparability of sustainability information with other company reports are becoming increasingly important.