What is ESG Investing?
ESG stands for ‘Environmental, Social and Governance‘ and is a set of criteria to evaluate companies’ progress in terms of sustainability. It takes into account the impact the business has on employees, customers, communities and surrounding environments.
- Environmental factors: These include a company’s carbon emissions, energy consumption and waste production.
- Social factors: These include diversity of management, talent retention and employee satisfaction rates.
- Governance factors: These include board diversity, executive compensation packages, accountability standards and corporate culture.
ESG Investing (also known as ‘socially responsible investing’, ‘impact investing’ or ‘sustainable investing’) refers to investing which prioritizes optimal ESG factors or outcomes.
While there is no definitive taxonomy of ESG factors as they are often interlinked and it can be difficult to assign them a monetary value, investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.
Who calculates ESG Scores?
ESGs are typically calculated by third-party companies who specialize in the field. There are a number of companies including MSCI, Sustainalytics and ISS that provide ESG scores for thousands of companies, each using their own methodology to calculate scores.
Scores run from 0-100, where anything above 70 is considered a good score.
While ESG metrics are not commonly part of mandatory financial reporting, companies are increasingly making disclosures in their annual report or in a standalone sustainability report.
Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.
In 2006, the ‘Principles for Responsible Investments‘ (PRI) was released by the United Nations. This set of guidelines for the incorporation of ESG factors into business policy and strategy is widely considered the official point of reference for all things ESG investing.
ESG and the Construction Industry
According to investment professionals analyzing the construction sector, the complexity and diversity of the industry means it has particular, and very impactful, ESG risks associated with it.
One area in particular where ESG and construction intersect is the use of sustainable design concepts and sustainable materials in construction projects.
From the perspective of an ESG-investor, there are a few reasons to consider sustainable design and building materials for your next construction project:
1. Carbon Emissions and Government Regulation
39% Of CO2 emissions from global energy use and processes accounted for by building & construction. [source: World Green Building Council]
The carbon impact of products and services refers to greenhouse gas emissions that are released during the use stage of either a product or service life. Although not all products and services produce greenhouse gas emissions, those that do tend to be responsible for a significant portion of emissions released globally.
To reduce emissions, governments worldwide have begun implementing regulatory limits to curb emissions in key sectors.
The United Kingdom set an ambitious target of cutting carbon emissions by 78% by 2035 as compared to 1990 levels. They also require all greenhouse gas emissions to net zero by 2050. The European Union has followed suit and announced a goal of 55% reduction of admissions by 2035.
The United States pledged a goal of a 50-52% reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030 and to reach 100% carbon-pollution-free electricity by 2035. They aim to reach net zero emissions economy-wide by no later than 2050. Recently, the White House announced a ‘Buy Clean‘ task force to focus on the production and purchase of low-carbon materials made in America for use in federal construction projects.
Given the growing urgency of addressing climate change, companies that don’t manage their carbon risk, or align to low carbon business models, will face increasing exposure to regulatory frameworks and associated operational costs, as well as the loss of competitiveness in the market.
As global carbon budgets are tightened, the carbon impact of products and services is a key ESG issue that investors are mindful of. Strong management and reduced exposure to carbon issues will significantly enhance the future resiliency of companies.
2. Demand for Sustainable Businesses
73% of consumers would change their habits to reduce their environmental impact. [Source: Nielsen]
Consumers as well as job-seekers are more and more pressuring leaders and businesses to follow sustainable practices.
By 2025, Millennials and Gen Zs will compose more than 75% of the workforce. According to a recent study by marketing firm Cone Communications, over 85% of both groups believe that it is the responsibility of companies to address urgent social and environmental issues – and they find it a top priority to seek out employment at companies that demonstrate a commitment to sustainable practices.
Making sustainability a priority will not only attract employees and customers, it will also attract investors, as they are increasingly considering ESG factors before investing money and resources in a particular company.
And ESG funds and investments can perform just as well, or better, as non-ESG funds. In 2020, 14 of 17 ESG-focused exchange-traded funds (ETFs) outperformed the S&P 500 as a whole, from January to May.
Click here for our article on the Circular Economy.
3. Financial Savings Through Design
60% of the urban development required by 2030 is yet to be built (2019) – we can build back better. [Source: World Economic Forum]
A better future starts in the design stage of any construction project and constructing and outfitting buildings that are environmentally friendly, as well as sustainable and long-lasting, is quickly becoming the new standard.
In addition to tax credits, incentives, rebates and financing alternatives, the design and operation of sustainable projects is another way to achieve financial savings.
A study done by the U.S. Green Building Council found that the initial cost of a green building is only 2-3% higher than its non-green counterpart; however, they consume 25-35% less energy and their operation and maintenance cost is 14% lower than their traditional counterparts.
4. Green Building Premiums
“Identifying a clear rental premium for high-end BREEAM ratings is a big factor for investors who are looking to differentiate their buildings from the rest of the market.” – Kate Horton, Partner London Capital Markets
It is significant for occupiers, investors and developers alike to understand the impact green ratings have on the building’s value: studies have found that green buildings also sell and rent at a higher price.
Another study found that BREEAM certifications resulted in premiums of 22.1% and 14.7% on housing rent and sale prices respectively, compared to non-certified buildings in the same neighbourhood in the UK. As for LEED-certified buildings, they saw premiums of 7.8% on rental prices and 9% on sale prices. (source)
According to Nils Kok, associate professor at University of Maastricht and chief economist at property valuation firm GeoPhy, the trend that green-certified buildings sell at slightly higher prices, rent at slightly higher rates, and typically have occupancy that is a little higher is also seen in New York, Singapore, Sydney and Toronto. (source)
Real estate consultancy Knight Frank found an 8-18% sales price premium for green-rated buildings compared to equivalent buildings without a BREEAM (UK) or NABERS (Australia) rating across these markets. (source)
Prime office buildings in Melbourne and Sydney with a NABERS rating of 5+ enjoy a 17.9% premium on sales price compared to equivalent unrated buildings, while even those with a lower NABERS rating enjoy an 8.3% premium, according to the same research by Knight Frank.
The results for higher rental and sales prices are found across the globe and in different sized markets – suggesting a strong, global pattern between sustainability and value.
"As ESG continues to rise quickly up the agenda for both occupiers and investors, we expect to start seeing a ‘green value premium’ for assets strongly aligned with ESG characteristics. Initially, this is likely to materialise through increased liquidity of an asset at sale. We see a clear risk that ‘non-compliant’ buildings will lose value fast as they near obsolescence and eventually become ‘stranded’." - Kate Horton, Partner London Capital Markets
Growth of Sustainable Investments
As more companies begin incorporating ESGs into their business plans due to pressure from investors, some have seen improved performance as well as increased stock prices.
Prior to the pandemic, a 2017 study found that 63% of respondents had increased their investments in companies with high ESG ratings, and 44% were willing to pay a premium for this type of investment.
30.7 trillion USD currently sits in sustainable investment funds worldwide, and it is predicted this could rise to around 50 trillion USD in the next two decades. (source: CNBC)
For real estate specifically, global investment in energy efficiency in the buildings sector rose an unprecedented 11.4% in 2020 (despite the pandemic) to around $184 billion, up from $165 billion in 2019. For the first time since 2015, annual growth in energy efficiency investment has exceeded 3%. (source)
This rise was highly impacted by the accelerated return of spending in European economies, with large government-led initiatives, particularly in Germany, Italy, France and the United Kingdom.
In the United States, energy efficiency investment increased 3% in 2020.
More and more asset owners are looking to certify their entire building portfolios as green, driven mainly by investors seeking to future-proof against climate transition risks, regulatory pressures and consumer sentiment.
It is important to note that despite its strong rise, ESG investing does not simply mean your money is automatically being invested in solutions that help solve climate change. You actively need to screen out businesses based on negative ESG impact, focusing investments on companies addressing specific sustainability themes and offer solutions to these issues, as well as explore the products being made by the companies you are investing in.
That said, investors see a triple bottom line from sustainable investing: strong financial returns, and a lasting impact on both people and the planet. And these benefits are worth considering when choosing your next building materials as the demand for sustainable investments will only increase in the future.
ESG - Investing for the Future
StoneCycling's Waste-Based and Bio-Based products can add to a building's BREEAM and LEED ratings, which in return delivers lower operation and maintenance costs and premiums on rental and selling values of property. Through storytelling we additionally hope to raise awareness of the societal impact of green buildings - making ESG investing more mainstream and hopefully have investors naturally integrate sustainable real estate throughout their portfolio.