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Property developers, ESG and accountability

Does a property developer’s ESG statement – more on this in a minute - matter to residents and businesses in local communities where they invest? Who holds it to account on ESG other than shareholders and investors? How can community groups and local residents use ESG statements & policies to shape development in their communities?

These are important questions because ESG is becoming so significant to companies large and small whose investors consider it important, and because companies themselves reference their ESG policies in justifying their actions.

So what is ESG and why should we care?

ESG refers to criteria increasingly used by investors to measure a company’s performance on Environmental, sustainability, Social impact and corporate Governance. Its growth is rooted in corporate social responsibility (CSR), which marked the starting point for businesses taking ownership of their impact on society.

Since Milton Friedman’s landmark 1970 essay ”The Social Responsibility of Business is to Increase its Profits” discussion on the role of business in society has moved in multiple directions, and in the last 2 decades there’s been a shift towards a wider understanding of how corporate decisions affect all stakeholder groups – not just shareholders. This philosophical shift culminated in the US Business Roundtable’s statement of purpose in 2019, in which 181 CEOs committed to lead their companies for the benefit of employees, suppliers, customers, communities, and shareholders alike.

In the half-century between these two conceptual landmarks, CSR was born and grew up. A catch-all for sustainable, socially conscious business practices, it offers a recognised route for businesses to be more socially accountable. Corporate citizenship means operating in ways that do not negatively affect the wider community, employees, consumers, or the environment. Ideally, the business would have a positive impact on them. Volunteering, awareness days, and employee perks all fall under the CSR banner, as do recycling policies and dedicated efforts to reduce carbon emissions. The remit is broad and entirely self-regulated, and usually features prominently in the corporate annual reports.

Without CSR, there would be no ESG, but the two are not interchangeable. While CSR aims to make a business accountable, ESG criteria make its efforts measurable. With CSR activities varying massively between businesses and sectors, there is a lack of comparable metrics available. ESG activity, on the other hand, is generally quantifiable to a far greater degree.

The rise of impact investing has led to the demand for ways to rank companies on their ESG performance. ESG scores and ratings have been developed, and targets are set and reported on. Numbers can be applied to how companies treat their staff, manage supply chains, respond to climate change, increase diversity and inclusion, and build community links.

For many businesses, CSR has never graduated beyond being an add-on to their main purpose and overall direction, a footnote in the annual report, an activity that is allocated half a day of effort and focus once per year. At worst, it has become a marketing tool, allowing an organisation to say what it is doing well without having to back up its claims or talk about areas where it may be failing.

ESG policies, in contrast, are criteria-led and require that they be embedded in the core of a business’s strategy, rather than side lined. The power of ESG lies in its integration into a business. And its momentum is being driven by asset managers, consumers, and employees demanding transparent, purpose-led business practices that align with their own priorities.

Why ESG is replacing CSR

In 2019, the Global Reporting Initiative revealed that 93% of the world’s largest companies by revenue already report on their ESG performance. That these corporations believe it is important to publish their work in this area reflects how central ESG has become to the way they do business. With potential shareholders increasingly focused on ESG issues as a means of ensuring long-term financial performance, businesses need to be open about their ESG policies in order to win investment. Both investors and corporations are continually developing and testing new ESG metrics and approaches which, in theory, are available to anyone who wants to see them.

Does defining ESG criteria make it easier to hold a company to account?

Not surprisingly and as many community activists know, holding companies to account on ESG is tricky.

Consider the “community involvement” criteria used by Vigeo Eiris, an ESG rating agency. The agency’s website claims that it looks at contributions to “territories” and “their human communities” as well as “concrete commitment” to the limiting of “societal impacts” of products and services and, finally, the “transparent and participative” contributions to “causes of general interest.” I wonder what objective metrics would help a community activist or even an analyst assess whether or not a property developer meets this ambitious standard., and whether such metrics would actually predict bad social outcomes in the future.

So how does ESG work in the property development sector?

This is how they describe their activity:

“Developers we are working with are reviewing the cost of their projects vs sustainability factors and are increasingly trying to ensure the right balance of maximising development value, whilst ensuring they’re meeting a high ESG standard. And it’s not just the E that’s taking their focus. The social impact element of ESG, while generally harder to quantify as it’s not always on the occupier’s agenda, is gaining traction, with developers wanting to excel at providing amenities for occupiers, whilst delivering facilities that can be used for social benefit to the local community.”

Hmmmmm. Perhaps it’s time to promote and embed a set of metrics based on community health & wellbeing into these investment projects.

Future blogs will examine the ESG policies of major landowners and property developers in London, if these are being implemented in schemes across the capital, and how evolving metrics around community engagement, health & wellbeing might be used to bring “full-fat” ESG into local communities.

Clare Delmar

Listen to Locals

18 January 2022


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