Introduction

This post is part of a series of plain English Yonder communications, also featuring elements such as e-booklets, explaining the Building Research Establishment Environmental Assessment Method (BREEAM). That’s the world’s longest standing and most widely used scheme for gauging, rating, and certifying buildings’ sustainability. We’re vastly experienced, successful BREEAM accredited professionals and assessors, with an outstanding track record of helping construction sector organisations achieve valuable certifications.

Achieving BREEAM accreditations is often a vital part of a company’s wider environmental, social and governance (ESG) credentials, on which our experts also advise. Here, we explain what ESG is, how it originated and what’s behind its rapid rise to prominence, among other matters.

What is ESG?

ESG is a holistic approach which seeks to evaluate the extent to which commercial organisations go beyond their historic purpose of maximising profits, by contributing to the achievement of desirable environmental, social and governance goals. That broadening of ambitions implies an extension of the stakeholders whom businesses seek to prioritise, from traditional equity investors alone to groups such as employees, suppliers, and society overall.

Environmental actions by companies can include reducing the waste, resource depletion and carbon emissions producing or consuming their products cause. Social practices might feature financial and other support for charities working to relieve human suffering or protect animal welfare. Governance performance may embrace policies covering corruption, remuneration and accountability, for example.

Professional ESG activity involves generating concrete strategies, policies, and reporting, demonstrating an organisation is maximising positive and minimising negative impacts in these three areas.

Corporate arguments in favour of ESG include that it can enable businesses to identify risks, ensure they meet future legal and compliance demands, enhance their access to funding and improve their reputations overall.

When did it all begin?

It’s now widely accepted the term ESG was first coined in a report called Who Cares Wins produced during 2004 by various financial organisations for the United Nations. However, ESG was a new description for various strands of established corporate practice, which certainly didn’t begin when it was born.

Indeed, there are records from at least as far back as the early 15th century of successful businesspeople donating sizeable proportions of their money to benefit the poor, for example.

More recently, forerunners of today’s ESG practitioners included retailer The Body Shop, which was already selling ethically sourced, cruelty-free products made from natural ingredients in the mid-1970s. They also featured Ben and Jerry’s ice cream, which was donating 7.5 percent of its pre-tax earnings to social causes as far back as 1985 and has long used environmentally-sound production methods.

Why has ESG risen in importance?

ESG, as a wide-ranging single approach to company performance, has been thrust into the corporate mainstream during the twenty-first century by various factors. Perhaps the most obvious has been growing worries about the potentially catastrophic effects of human-induced climate change, which corporations – sadly including construction sector organisations – have done much to cause. There’s also been a rise in concerns about corporate performance over issues such as the gender pay gap, employee hiring and firing, and executive salaries.

These, and other factors, have led to pressure on businesses to adopt sound ESG practices from powerful groups such as consumers and investors. These influencers are aware that many multinational businesses now have more power to make positive differences even than governments, for example.

The unveiling of the 17 United Nations’ Sustainable Development Goals in 2015 also provided a powerful shot in the arm for the trend towards ESG strategies and activities. These UN aims are widely perceived as a much-needed authoritative and comprehensive checklist of legitimate objectives, with which companies’ ESG policies and practices can align. The goals, designed to be achieved by 2030, include ambitions relating to poverty, hunger, health, and education.

How big is ESG now?

Very. It’s estimated, for example, that in 2019 sustainable investment assets under management totalled more than £25 trillion and capital worth about £15 billion went into ESG funds, an increase of over 500 per cent since 2015.

Does ESG have its critics?

Yes. But the carping usually relates to aspects such as the allegedly unwieldy breadth of the concept or its abuse by some unscrupulous companies and seldom to ESG activities themselves. Hardly anybody now doubts the desirability of using sustainable building materials, for example.

The criticisms come from people and organisations with various motivations but are usually easily answered. Here are some of the common ones and our responses to them.

There’s been “greenwashing”: There’s no doubt some businesses have seen ESG as an opportunity to launder reputations somewhat sullied by other aspects of their operations. However, there’s little particular to ESG in this approach, as companies with doubtful images – such as bookmakers and cigarette manufacturers – were seeking to balance perceptions in this way long before the term was uttered, through older vehicles such as sports sponsorships.

Conducted properly, by expert organisations such as Yonder, ESG evaluation offers very limited potential for “greenwashing”. This is because it involves elements such as specific targets and quantitative reporting – rather than flowery waffle – based on verifiable evidence, that confirm an organisation is responsible.

Some companies seek to mislead about their ESG activity and performance: It’s important to understand we’re not talking here about businesses truthfully accentuating the positive in vehicles such as their PR and marketing. This selective but factual communication is perfectly legitimate and something which companies have long practised.

What is not justified is businesses wilfully misleading important audiences, such as investors, about their ESG activity and performance. Where such misbehaviour is proved, miscreants should face the full force of legal and regulatory censure.

Even here, however, it should be recalled that ESG is hardly the only topic on which companies have been known to deceive outsiders and this dishonesty certainly didn’t begin when the concept emerged. Just look at the businesses who’ve found themselves in hot water through the decades over under-declaring their profits for tax purposes, for example.

There’s no universally accepted framework for gauging ESG effectiveness: Correct, and inconsistency between alternative available ESG measurement and evaluation frameworks has historically been a particular problem for groups such as investors, trying to distinguish the wood from the trees when it comes to placing their money.

Robust and widely accepted ESG frameworks were always going to take time to emerge, however, especially given the breadth of activities the heading can cover – including some in which performance evaluation hasn’t always been straightforward.

But, as the concept leaves its infancy behind, it’s now clear certain robust emerging frameworks are becoming ever-more widely adopted. These include those produced by the Global Reporting Initiative and the Task Force on Climate Related Financial Disclosures.

The term is simply too wide-ranging: Critics point to certain facts – such as despite the growth of ESG this century, carbon emissions have hardly reduced overall – as evidence the term simply covers too many bases.

There’s no doubt spreading corporate ESG resources too thinly is a potential problem. That’s why an ESG strategy – closely related to factors such as overall business objectives, company history, existing brand image and relevant current activity – is essential, particularly for an organisation of any size. This should lead to a focused and consistent set of interlinked ESG activities.

Our own consultative approach involves defining and scoping a client’s ESG policies and reporting closely, in terms of materiality. In other words, we include relevant actions with significant impacts, or which substantively affect stakeholders’ assessments and decisions. This leads to reporting which involves highly meaningful and comprehensive disclosure but is not overly broad and is therefore effective in furthering the company’s reputation.

Company ESG performance is sometimes contradictory: Agreed, but this is partly the inevitable consequence of businesses managing their transition to a world where ESG is much more important than previously. Where a company closes a quarry, for example, it’s positive environmentally but the organisation may have less enlightened social or governance policies. The ideal is for businesses to create balances between environmental, economic, and social factors – the three pillars of sustainability – but where this doesn’t happen, perhaps because they over-focus on one of these elements, it certainly doesn’t invalidate the whole ESG concept.

Does a BREEAM accreditation enhance a company’s ESG credentials?

Undoubtedly. You can discover more about how this happens in an e-booklet that’s another element in this campaign.

Want to know more about ESG?

Just click the button on the right to download our free ‘How BREEAM demonstrates ESG credentials e-book’

If you want to know more about our expertise in helping organisations maximise their BREEAM ratings and how we can assist you with yours, please:

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Yonder Consulting

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Leeds LS1 4BA