The continuing rise of Environmental, Social and Governance (ESG) issues up public and corporate agendas now makes them a key driver in investment decisions. Aside from making decisions that are socially responsible or morally right, the growing trend of ESG integration amongst companies and investors makes the need to address sustainability and societal issues within the construction industry increasingly important.
According to the Governance and Accountability Institute, more than 80% of the companies in the Standard & Poor's 500 now publicly report their performance on ESG standards. Investors are increasingly eager to invest in companies and products that integrate ESG factors, and their investment in real estate and infrastructure is no different. Individuals now regard the ESG credentials of companies as a critical factor in deciding whom they work for. Environmental performance can help real estate companies attract lucrative tenants who are increasingly seeking efficient, healthy and green certified buildings. Incorporating ESG factors can therefore lead to increased profitability through higher property values, attracting more/better tenants and improved return on investment.
The construction industry has a massive impact on the environment. The Chartered Institute of Building has identified that, globally, the built environment generates 30% of total greenhouse gas emissions and construction uses 32% of the world's natural resources. The built environment in the UK contributes to 45% of its greenhouse gas emissions. That is before factors such as air, water, noise pollution and destruction of natural habitats are taken into account.
The UK became the first G7 country to legislate itself into becoming a net zero carbon area by 2050. This amendment to the Climate Change Act 2008 will tighten up on current targets to put us on a path of net zero carbon.
As the biggest contributor to climate change, the construction industry has the greatest opportunity (and responsibility) to reduce emissions. To date, these efforts have largely focused on reducing energy usage and associated emissions. This has partially been down to government policies seeking to make the built environment more climate friendly, and continuing government regulation and support will be essential in continuing to drive down emissions. For example, government regulation requiring properties to be assessed and rated for energy performance has had an impact on the investment values of buildings that perform poorly or well. It is now relatively common practice to see construction documents require that a minimum Energy Performance Certificate rating is achieved.
There are now a whole range of ways in which those involved in real estate and construction seek to demonstrate their ESG credentials to clients, investors and tenants. Some of these measures include:
- BREEAM (Building Research Establishment Environmental Assessment Method) certification, which assesses an asset’s environmental, social and economic sustainability performance, using standards developed by the Building Research Establishment.
- WELL Building certification, which assesses human health and wellbeing performance in buildings, using standards developed by the WELL Building Institute.
- WiredScore's Wired Certification, which provides transparency on the quality of internet connectivity in office spaces and access information (internet is among the top three most important factors for tenants who are searching for office space, along with cost and location).
In addition to certifying "green credentials" of buildings, inclusion of community benefits within construction contracts is a key component in maximising social, economic and environmental benefits within construction. Most public sector construction contracts and some funders now require community benefits to be delivered as part of construction projects and there are toolkits available that contain recommendations and best practice guidelines in defining, procuring, measuring, delivering and reporting on community benefits within construction contracts. Many private sector developers and contractors also now commit themselves to delivering sustainability and social initiatives as part of construction projects as part of their commitment to the ESG agenda.
The need to include provisions in construction contracts for reaching the highest standards of those certification measures and for delivery of wider ESG benefits is becoming increasingly important in order that developers can commit to and demonstrate achievement of these credentials in the funding, letting and sale of their assets.