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ESG Principles: Environmental
Joe Appleton2. December 20217 min read

Environmental: The E in ESG

The “E” in ESG stands for Environmental. The state of the environment and the importance of environmental protection is constantly addressed in mainstream media, and it’s an important part of governmental policy, with far-reaching effects that influence the decisions of ordinary citizens too. Governments and citizens are working to limit environmental damage and improve our living conditions, and private enterprises should also do what they can to help mitigate the effects of climate change.

The role of private businesses in the fight against climate change is more important than ever before. According to statistics, almost 40% of all global greenhouse gas emissions are caused by the built environment. With private enterprises owning vast real estate portfolios and harmful office buildings, reducing an asset’s impact on the environment should be at the forefront of every asset manager’s ESG strategy.

While it would appear that this kind of asset optimization should be mandated by governments, it has to be said that governments have been slow to act against the threat of climate change. For example, despite the signing of the Paris Accord in 2016, global greenhouse gas emissions have continued to rise. Governmental policies have failed to combat the rise, and without direct action from business leaders and portfolio managers, there is little chance that the goal of the Paris Accord - to limit global warming to a figure under 1.5-2.0 degrees Celsius - can ever be possible.

Other ambitious targets set out by global governments include full carbon neutrality by as soon as 2050. Without serious action from all stakeholders, including governments, citizens, and private businesses, the dream of climate neutrality will always be out of reach.

For businesses, tackling climate change head-on can be incredibly advantageous, and even add significant value to assets, or attract fresh financing from forward-thinking investors. If you’re considering a bold ESG strategy with a strong focus on environmental protection, there has never been a more crucial time to factor environmental concerns into your business operations.

What Does “Environmental” Really Mean?

Environmental protection is important, but what does that mean for companies? The answer can mean many things, but in summary: a company must make decisions based on outcomes that have the least harmful environmental impacts. It’s important that companies not only make decisions based on these factors but also support these decisions with direct actions.

One of the easiest ways that a company can make a positive change is by switching energy providers and only consuming renewable energy. Another example could be to address how a company deals with waste management or deals with water consumption. Any positive action, from swapping light bulbs to LED lights or reducing the heating temperature by a single degree to using ethically sourced materials, or providing staff with incentives to use public transport, all count towards an improved ESG score.

The above examples are only a small snapshot of the possibilities available. For example, larger companies may benefit from taking a deep dive into raw material sourcing and swapping existing suppliers for ethically sourced products instead. Fair-trade business is just as important to the environment as it is to a company’s overall corporate responsibility.

But there’s more that can be done. Large companies often own large asset portfolios. By creating projects that encourage biodiversity, such as re-greening strategies, rainwater recycling stations, bike, and car-sharing programmes, designated electric car charging stations, and more, large companies can greatly reduce their impact on the environment, for the benefit of all of the planet’s stakeholders.

How Can Environmental Solutions Add Value?

Taking measures to protect the environment may seem like a costly strategy when in fact they can add significant value to a business, asset, or portfolio. These dividends will keep paying, offering short-term boosts to profits as well as long-term, large-scale savings, and much more. Here’s how.

By making small but significant changes to how a building or portfolio operates, asset managers can make substantial savings. While savings may not translate directly into profit, money saved is money earned. For example, by successfully measuring and assessing energy consumption and making changes to help reduce consumption, by switching to renewable energy, turning unnecessary lights off at night, and using smart technology to monitor and manage temperature controls, a company can measure a significant reduction in operating costs while reducing carbon emissions at the same time.

These same measures can have a drastic effect on the long-term value of a portfolio, asset, or company in general. By understanding and measuring areas of your portfolio that are actively harmful to the environment, and taking steps to remedy them, it’s possible to save an incredible amount of money through asset optimization. Linking your environment scores to financial KPIs across your entire portfolio is just one of many ways that businesses can target areas where they are losing money or missing out on opportunities.

Energy Use Intensity, for example, or an assessment of kWh expenditure per square meter that can be measured in real-time, or at least annually, can help business owners make valuable decisions. Like how a car driver measures kilometres per litre, and optimizes their car buying choice or driving style for the best economy, business owners can also take advantage of this thinking, cut costs, and make huge savings.

By linking unnecessary expenditures and decarbonisation strategies to key financial KPIs, companies can see the added value of a positive ESG strategy. However, there’s more to ESG than short-term financial gains. A good ESG strategy will also attract a new generation of forward-thinking investors who prefer to invest in climate-friendly and socially just ventures.

This last point is at the heart of ESG. By aligning a company or portfolio’s long-term goals with meaningful positive actions, it’s possible to attract an entirely new demographic of investors, who are looking for resilient, futureproof, and environmentally friendly projects. A company or portfolio with a positive relationship with the environment and a reputation for climate-friendly practices will be more appealing to the modern investor, and this adds value to a portfolio that will pay dividends in the future, both in financial terms and in terms of a company’s reputation.

A good reputation goes a long way and adds value to shareholders, whereas negative practices, such as causing oil spills, creating environmental hazards, and increasing pollution levels can have disastrous effects on shareholder value. Unsound environmental practices can invite regulatory sanctions, and in some cases, criminal prosecution. Two things that can irreparably damage a company’s reputation.

Embracing A Carbon-Neutral Economy

While there’s currently no legal mandate for the real estate industry to respond to the threat of climate change and other environmental threats, this situation may appear in the future as governments begin to make more ambitious pledges towards carbon neutrality. In Europe, there is a focus on developing a Carbon-Neutral Economy supported by an energy transition strategy. This, along with other strategies and proposals will help push the ESG agenda into capital markets, incentivizing sustainable investment. The approach in the United States isn’t as concerted, with no federal policies on the horizon governing the energy transition and other environmental concerns. Despite no official regulations at present, it won’t be long until ESG factors form part of mainstream business development, so it’s a wise idea to develop a strategy nice and early.

The Future

The interest in climate change is not a passing trend, and environmental protection will only become more important in the future as cities and regions face greater environmental challenges. Despite pledges and policies, greenhouse gas emissions continue to rise, populations swell, and water consumption, energy consumption, and pollution swell with it. At the same time, climatic events such as floods, wildfires, extreme weather, and hurricanes are occurring at a greater frequency, causing untold damage and even more uncertainty.

For economists and investors, a company’s overall sustainability, long-term creditworthiness, and ability to operate under a wide range of circumstances are key to assessing the overall value of a company, asset, or portfolio, and this will be more important in the future than ever before. However, to prepare for this uncertain future, companies, portfolio managers, and investors need to take stock of their current situations and tailor thoughtful strategies to safeguard their assets in the future.

While there is no current standard for measuring ESG, and no common framework in place, all businesses should start paying attention to their ESG strategies. Whether in the form of a benchmarking study or in-depth ESG score, the overall sustainability of a business will always be under the microscope and environmental protection should always be in the spotlight. However, the smartest companies will be those that can encourage an ESG strategy to be more than just a social responsibility factor, and use it to generate revenue and increase value at the same time.

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Joe Appleton

Joe Appleton is a content strategist, editor and writer at bee smart city. He is particularly interested in the topics of smart and sustainable cities and urban mobility.