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Making ESG worthwhile
The motivations, challenges and top tips for making Environmental, Social and Governance programmes effective
INNOVATION & IMPROVEMENT
Lyons O'Keeffe
Associate, Campbell Tickell
Lyons O'Keeffe
Associate, Campbell Tickell
Issue 75 | December 2024
Over the past two years, I have helped clients in the private equity, debt and infrastructure space with their Environmental, Social and Governance (ESG) strategy and compliance and I believe that many of the lessons and best practices are equally applicable to the Social Housing sector.
Why is having an ESG programme important
There are a mixture of compulsory and voluntary factors behind the need for an ESG programme.
1. Regulatory requirements
Many financial and corporate entities are caught by regulation requiring transparency around their ESG claims and activities, and preparedness for climate change. Much of this is to allow investors to properly assess the ESG risk and opportunities associated with an organisation and to direct capital towards sustainable investment. The UK and Europe are leading this, with Asia not far behind. These regulations are part of a suite of initiatives to reach a carbon-neutral or more sustainable future.
While these regulations may not yet impact the social housing sector directly, they impact funders, who will need ESG information from the Registered Providers (RP) they fund.
2. Investor expectations
Increasingly, investors are demanding ESG data, disclosures and evidence of an effective programme to ensure they properly understand the ESG information behind the entities they are investing in. While this may be to understand the positive impacts their investments are having or the opportunities that might arise from a more sustainable future, it is just as likely to be driven by risk management. Are there reputational risks to my investment? Am I financing uneconomic assets?
3. Showcasing sustainability and impact
Naturally, organisations would want to promote the environmental or social value they are creating to raise profile and attract capital or resource. Entities should aim to show their ESG aims, their progress to date, and their future goals. Ideally, there is data available to back up the story – e.g. tonnes of CO2 removed, pay gaps revealed, policies in place.
4. Increasing value
An organisation that has evaluated and mitigated the risks and pursued the opportunities associated with ESG is likely to be more value creative than one that hasn’t.
5. Managing risk
This is one of the most important reasons. Entities that are not monitoring and reacting to ESG factors are not understanding the risks to which they are exposed. Examples include fines for environmental and regulatory issues, taxes associated with carbon usage, reputational issues around equality, and stranded assets.
What are the key ESG programme challenges?
There are challenges associated with developing a credible and useful ESG programme:
- Broad concepts: Environmental, Social and Governance factors are very diverse and don’t necessarily sit together neatly. This results in huge programme diversity, so they can be difficult to compare or benchmark.
- Formal frameworks and regulations: These tend to be new, evolving, proliferating and in some cases not very clear. There are broad interpretations and differing approaches regarding compliance to meet the obligations imposed – and little precedence to aid judgement.
- Investor or stakeholder expectation: There may be tension in ESG terms as to what an entity wants to do and what is being expected of it. The Sustainability Reporting Standard for Social Housing (SRS) is a great asset for dealing with this, as it standardises expectations.
- Data: Unlike financial data, ESG data isn’t generally sitting around available to be analysed – it must often be generated, and this may be complex, e.g. carbon emissions, scope 3. Also, some things are just hard to determine – for example, tenant health benefits associated with improved accommodation. How would you actually go about collecting that data in practice?
- Adoption: Having an ESG programme that is actually implemented within an organisation vs. a policy sitting on a shelf.
Steps to a successful ESG programme
The guidelines below are helpful for any organisation looking to put in place an ESG strategy and implement an ESG programme:
- Think carefully about what your strategy is going to be. What is material to your organisation? The best ESG strategies are obvious and easily remembered. They need to be practical and really resonate with your organisation.
- Have a data strategy that will prove your ESG story. Make sure you have a method of collecting the information you will need. Case studies can also provide supporting evidence.
- Get ‘buy-in’ from your organisation, and other stakeholders. Following a specific standard framework is helpful e.g. SRS.
- Integrate the ESG process into your everyday decisions. Have process manuals, policies and procedures that reflect and implement your strategy.
- Embed training and understanding. Reasons why there is an ESG policy. How it fits into the broader strategy. How it creates value.
“The best ESG strategies are obvious and easily remembered. They need to be practical and really resonate with your organisation.”
