ESG, which stands for Environmental, Social, and Governance, has become an area of focus for businesses of all types and sizes. ESG-focused companies adjust how they do business, how they share information and govern themselves, and what metrics they track. Those who practice ESG understand that doing so leads to more sustainable, ethical, and responsible operations. Most importantly, these companies also understand that ESG generates tangible value.
Each of the three components of ESG has an important role to play. However, the "E" often takes center stage when buildings are at play. This is primarily due to the building sector's significant impact on the environment and the associated costs for building owners and developers. For example, energy for building operations accounts for 27% of the U.S.'s total greenhouse gas emissions and is one of the largest operating expenses. The commercial building fleet in the U.S. costs over $190 billion annually to power.
Business owners and developers incorporating ESG into their long-term strategy can reduce their environmental impact, create a positive public image, and drive down operational expenses — a win-win.
Environmental, Social, and Governance (ESG) criteria are a broad set of standards for companies and investors to disclose and assess performance against non-financial measures like a company's impact on climate change and wider society.
While ESG is now a hot topic in the United States, the concepts are not new. The roots of ESG can be traced back to several periods in U.S. history — most notably the environmental and social movements in the 1960s and 1970s.
From this point, the ideology gained momentum, and the current term "ESG" was coined in the United Nations Principles for Responsible Investing (PRI) report Who Cares Wins in the mid-2000s. Following the publication of Who Care Wins, only 63 companies signed the associated agreement, and it was largely targeted towards investment firms.
Throughout the 2000s, ESG adoption slowly picked up pace, pushed forward by international agreements, like the Paris Agreement, Business Roundtable's (BRT) statement on the purpose of a corporation, and regular discussions at the annual Conference of the Parties.
These international meetings have significantly increased awareness around the idea, increasing research and reporting on ESG's role in long-term business success. As a result, investors are placing a higher priority on the issue, pushing companies in all sectors to make ESG part of their strategy. As of 2021, 99% of S&P 500 companies publicly disclosed some form of ESG information.
This focus on ESG has also permeated the U.S. political landscape, where President Biden proposed a statute in 2022 that will require "significant" U.S. federal government contractors to provide climate disclosures. While this requirement only applies to a niche selection of companies, it may signal future changes for ESG regulation in the United States.
The growing focus on ESG is also prevalent in the world of development. Investors, tenants, communities, and local governments are asking building owners and developers to consider how their projects will impact the local environment and community. While this can seem like a headache for developers, it's an opportunity for companies to strengthen their businesses for the long term.
First, buildings have a significant impact on the environment through waste generation, resource use, and emissions. Second, historical building design and operations are often inefficient, and there is substantial room for improvements that will increase performance and drive down costs.
Gathering baseline data on your existing building's environmental impacts is critical to improving performance and capitalizing on the associated benefits. Processes like energy audits, generating a greenhouse gas inventory, and improving supplier communication are great starting points. With this data in hand, it is easier to create long-term goals and develop a sustainability roadmap to guide the performance improvement process.
The first step is understanding how your building impacts the environment and where operational efficiency can improve.
As previously stated, buildings use a lot of energy — it is the leading operational expense for buildings in the U.S.
On average, energy for commercial buildings in the United States is comprised of 60% electricity and 34% natural gas. When this is broken down further, the largest energy use is space heating (32%), followed by ventilation (11%), lighting (10%), and cooling (9%). This averages an overall energy requirement of 22.5 kWh per square foot.
The U.S. government has found that 30% of this energy is "wasted." Increasing energy efficiency can significantly improve the bottom line. Installing "Prop Tech" solutions, improving natural ventilation, and adding onsite renewable energy systems are all viable solutions. Another consideration is that the U.S. government offers incentives to help building owners make these changes, so it's a great time to start.
And that savings equates to real dollars. With an average cost of 12.52 cents per kWh and the average size of a commercial building, annual energy costs are between $46,000 and $53,500 based on when the building was built. A 30% savings can exceed $15,000 in annual savings.
Water use is similar — commercial buildings consume 17% of publicly supplied water in the U.S.
Already, 40 U.S. states are expected to face water scarcity issues in the next several years. Not only will this drive water costs up for building owners, but it may also mean that water use is restricted. Water efficiency and recycling systems will help buildings be resilient during these drought periods.
This makes properties more desirable to tenants and attractive for city planning departments that are concerned about future water issues.
While waste disposal costs are not nearly as significant as energy costs, they are steadily climbing as landfills near capacity. Some estimates show that landfills in the U.S. will be full in the next 22 years.
Additionally, waste is a hot topic for city planners considering how their communities will handle an influx of businesses or residents. Reducing waste and improving recycling can cut down on these costs, be favorable for planning departments, and be a major part of other materiality ESG metrics for your business.
GHG emissions have become one of the leading metrics in the ESG space. This is due to increasing global awareness of GHGs' impact on global warming and the quantity of emissions the built environment is responsible for — 40% of annual emissions.
Not reporting on your Scope 1, 2, and 3 emissions is a growing concern for developers. Studies continue to show that consumers place a high importance on business sustainability. Luckily, many frameworks are in place to help define the GHG reporting process, and both software solutions and consultants are available to facilitate the process.
Beyond making improvements and reducing operational costs, publicizing environmental data goes a long way. Whether by releasing annual reports or making the data available on a company website, it should be publicly accessible. This transparency shows potential tenants and investors that you are taking an active stance on ESG, builds consumer trust, and elevates your brand. As an example, reporting by portfolio managers to GRESB is increasing by 20% annually. Investors increasingly rely on GRESB data to make investment decisions — those who do not report or have poor scores stand to lose out.
Another great way to signal your commitment to sustainable performance is by achieving a building certification such as LEED. Sustainable building rating systems have a well-defined set of publicly available requirements that buildings must achieve to reach certification. This provides credibility to your sustainability practices. Plus, LEED overlaps with many social and governance programs that are part of a larger ESG strategy.
The landscape of ESG can seem complex. From understanding your baseline resource use to developing a sustainability roadmap, implementing sustainability programs, and annual reporting, it is a long process that takes ongoing commitment. Many developers can't manage the entire process in-house.
That's where Emerald Built Environments comes in. We specialize in improving the environmental performance of existing structures and new builds, and annual reporting. Whether it's through developing unique sustainability strategies, optimizing resource use, or improving transparency, we can help you reduce your environmental impacts and cut operational costs. Learn how we can help you capitalize on sustainability.