A deep dive into the most pressing ESG drivers related to the corporate footprint, and an approach to performing an internal and external assessment to produce insights to drive decision making.
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Background on Environmental, Social and Governance (ESG)
Over the last decade, ESG has shifted from a domain focused on externalities to one focused on business imperatives and is now central to the corporate agenda. The pace of change is increasing rapidly, with companies experiencing the reputational, financial and economic impacts of shifting stakeholder expectations along with other societal and environmental trends. Changes across the legislative environment have also compelled organizations to respond and ready themselves for sweeping reforms and new disclosure requirements.
ESG frameworks help stakeholders understand how an organization is managing the risks and opportunities related to environmental, social and governance aspects of their business. As ESG and our world evolves, executives have the opportunity to drive significant change across these areas. Those that are proactive can take advantage of several key opportunities to generate both positive environmental and societal change as well as generate increased shareholder value. This can include:
• increasing diversity, transparency and resiliency across the supply chain;
• improved operational performance and long-term cost reduction;
• increased competitiveness in attracting and retaining diverse talent; and
• short and long-term risk mitigation, considering both the geopolitical, physical and transition risks inherent in place-based decisions.
This article examines the most pressing ESG drivers related to the corporate footprint and describes an approach to performing an internal and external assessment to produce insights to drive decision making.
IMPLICATIONS FOR LOCATION STRATEGY LEADERS
Given the impact that footprint decisions have on structural costs and social outcomes, real estate is a logical starting point for organizations seeking to drive positive change and achieve their internal ESG objectives. “The built environment is responsible for about 42% of annual global CO2 emissions,” highlighting the vital role of real estate in achieving a low carbon future. In a 2022 survey, 60% of real estate industry respondents reported that ESG initiatives are driving new business opportunities for their organization. These opportunities present themselves across all three pillars of ESG (as shown in Figure 1, below).
Organizations endeavor to manage sites and facilities in a responsible manner to meet the expectations of investors, employees and the community in which they operate. Where a site is located will impact, among other things, talent availability and diversity, commuting and transportation emissions, material and resource access, and energy consumption. By integrating ESG location factors and metrics into the decision process, companies can assess their progress against their ESG objectives and future state goals, as well as identify optimal sites for expansion, consolidation or relocation. Leveraging only traditional location factors can derail an organization’s ESG efforts. A more nuanced layer of factors and site characteristics must be captured to allow an organization to align its real estate strategy with its broader ESG goals.
CRITICAL LOCATION FACTORS IMPACTED BY ESG
CEOs and their teams should factor ESG into their decisions to stay aligned with their organization’s ESG goals, remain competitive in the market and identify locations that will prove sustainable for their long-term business needs. Critical location factors (CLFs) are commonly leveraged by site selectors to assess a location’s fit for a particular project or to benchmark an organization’s existing footprint against future scenarios. CLFs capture geographically variable operating condition factors that are critical to the operation of an organization’s business. When including ESG in a decision framework comprised of CLFs, both external market considerations and internal business considerations should be assessed to understand an organization’s performance against its ESG goals and identify opportunities for improvement. The following CLFs represent a subset of a broader universe of location factors, which are most relevant when evaluating ESG risks and opportunities.
A) Talent Availability
Talent is typically a leading CLF when assessing a location’s fit and ability to support an operation. As ESG frameworks and taxonomies have become more prevalent, social issues have become a key consideration when assessing the health and fit of a particular talent market. For example, during the Great Resignation, a majority of workers who quit a job cited low pay, no opportunities for advancement and feeling disrespected as a main reason for leaving. The decisions on how to optimize workplace design—including hybrid work strategies that balance flexibility with productivity—have become key drivers in promoting employee opportunity, worker safety and diversity, and equity and inclusion, but also as a means for the reduction of energy, waste and carbon emissions.
All of these trends highlight the importance of factoring ESG into the talent conversation, both from an external and internal standpoint. For example, a company focused on increasing employee belonging may look to locations with a labor market that has demonstrated a willingness to Return to Office (RTO). However, for a company prioritizing a reduction in carbon emissions, locations with available and efficient public transportation systems may prove more favorable. In either example, these companies must look beyond simply finding just a sufficient talent market.
B) Building Suitability, Infrastructure and Utilities
Rethinking how facilities are built and maintained—including the use of recycled and sustainable materials—is vital to driving energy, waste and carbon efficiency, as well as supporting community and societal vitality. Organizations should have a thorough understanding of the size and composition of their portfolio to assess ESG goal alignment and identify opportunities for change. Optimizing real estate footprint can bring many benefits, including increasing savings through reducing energy and resource consumption, increasing property value and reduced capital costs. Companies should also review access to sustainable approaches to natural resources, including the usage of renewable energy and implementation of water conservation strategies.
Transition risks must also be considered and tracked. Some regulations and policies continue to evolve to support broader community ESG efforts, and these transitions can have outsized impacts on an organization’s portfolio. For example, the industry mix of a location may be heavily reliant on fossil fuel or carbon-intensive industrial practices, and as regulation drives reduction in these activities, an organization’s assets in that location may experience a drop in value. Policy changes can also drive significant shifts in construction practices. For instance, New York City Local Law 154, passed in 2021, requires all newly constructed buildings to operate solely on electricity, and Build Clean Concrete, passed by New York State, represents the first state-level mandate to implement greenhouse gas emission limits on all state agency projects.
C) Risk Management
As our environment continues to be altered by climate change, organizations must identify and assess their exposure to climate-related threats as well as evaluate the annualized cost of inaction. According to the World Meteorological Organization, seven of the world’s warmest years have occurred since 2015 and the Environmental Protection Agency (EPA) reports that extreme weather events, such as hurricanes, heatwaves, tornadoes, and forest fires, are becoming more prevalent. Furthermore, the UN reports that rising global sea levels are driving increased climate-related migration, and in some cases the risk of displacing entire communities or nations (e.g., the Maldives and Solomon Islands). Certain areas of the U.S. have become uninsurable or cost-prohibitive for homeowners, as insurance companies either exited regions or increased policy costs by 60% to 80%. According to an analysis from First Street Foundation, a nonprofit that studies climate risks, approximately one-fourth of all U.S. real estate (35.6 million properties) face increasing insurance policy costs and/or reduced coverage due to increased climate risks.
Both physical risk (e.g., severe weather events) and transition risk (e.g., climate-related migration, asset devaluation, supply chain disruption, talent market degradation, etc.) present clear challenges to corporate executives and must be factored into an organization’s real estate strategy.
D) Supplier Access
During the COVID-19 pandemic, consumer demand spiked as nations passed generous fiscal support in the hopes of keeping the global economy afloat, and supply chains were severely disrupted as global networks were disconnected by COVID-19 policies and border closures. This resulted in severe worldwide supply chain disruptions and exposed the flaws of existing supply chain networks. As organizations seek to the resolve these flaws and close gaps in their supply chain, leadership is presented with an opportunity to align their supply chain with their broader ESG efforts, achieving a resilient and effective supply chain network.
This opportunity extends beyond geographical assessments of an organization’s supply chain network. Incorporation of social responsibility, environmental and governance considerations into an organization’s supply chain strategy can have large benefits. Supplier diversity programs, programs which involve partnering with suppliers that may fall under a variety of categories, including minority-owned, women-owned, veteran-owned, can yield many benefits. For instance, companies with robust supplier diversity programs outperformed their peers in terms of financial performance, with a 133% greater return on procurement investments. Organizations that prioritize supplier diversity have access to more opportunities for community engagement, greater innovation, and reduced costs. Studies have shown that sustainable policies for the sourcing of construction materials alone can lead to a 28% reduction of carbon emissions. As ESG efforts continue to become a focus for corporate leadership, supply chain will be a vital area of focus to drive an organization towards its ESG goals.
E) Regulatory and Compliance Issues
Recent developments from government regulators and international sustainability standard-setters show signs of convergence. Within the U.S., the SEC’s proposed climate change disclosure rule will require that public companies provide an accounting of their greenhouse gas (GHG) emissions, the environmental risks they face and the measures they are taking in response. Additionally, the SEC has issued a final rule requiring registrants to provide enhanced and standardized disclosures regarding cybersecurity disclosure rules. Standards differ in other geographies, for instance, within the UK, mandatory Task Force on Climate-related Financial Disclosures (TCFD), began in April 2022, and, in 2023, the UK announced intentions to mandate the International Sustainability Standards Board (ISSB), which will result in a high-quality, comprehensive global baseline of sustainability disclosures. In the European Union, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), which requires companies to report on the impact of corporate activities on the environment and society.
EMBEDDING ESG INTO FOOTPRINT STRATEGY
Companies are at varying stages of rethinking their footprint in the context of ESG. By understanding the vulnerabilities and potential impacts and opportunities, leaders can adapt their footprint to reduce risk, increase resiliency and invest in locations to achieve ESG objectives. Figure 2, below, provides a framework for defining a future state informed by internal and external assessment of critical location factors and defining actions to embed ESG into a footprint strategy.
Figure 2: Framework for Defining Footprint-Related ESG Actions
Backcasting is the act of developing the optimal future state or vision and then working backwards from that vision to determine the necessary actions required to achieve that state or vision. Backcasting allows for more flexible and creative solutioning, and when combined with both an internal and external assessment of operations, it can allow for a holistic approach to achieving an organization’s ESG goals.
This framework provides a four-step process that CEOs and their teams can use to assess their footprint using internal business considerations and external market factors to pressure test their future state and define actions to advance progress.
1. Define the Future State. Many organizations start this journey by benchmarking their positions against peers and conducting a materiality assessment to establish a baseline of where their organization is relative to its ambitions. The output from this step should be the establishment of guiding principles and characteristics of the desired footprint, including specific ESG targets to achieve locally, regionally or globally.
2. Conduct Internal Assessment. Evaluate current practices and policies and scan for applicable regulatory reporting requirements, identify voluntary reporting trends and assess compliance. Sample internal factors to consider in this step include:
• Environmental factors: adoption of sustainable development, design and construction practices; implementation of energy management strategies; securing green building certification, etc.
• Social factors: implementing cybersecurity policies and frameworks; ESG training and development to garner employee engagement; contributing to community organizations through financial assistance or skill-based volunteering, etc.
• Governance factors: establishing fair and equitable labor standards; appointing dedicated positions to focus on integrating ESG strategies across the enterprise; collecting and sharing of relevant metrics and data on organization’s progress towards reaching ESG goals, etc.
3. Perform External Assessment. Determine the ESG-related CLFs to assess in the existing footprint, collect metrics associated to each and assign weights for each of the scenarios to test sensitivity of the footprint. This approach should capture global, regional and local ESG data and can reveal risks and opportunities in order to make better-informed strategic choices and investment decisions.
4. Define Actions. Quantify the optimization opportunity through tactics such as consolidation, evaluation of capital structures and reduction of portfolio costs and risks. Additionally, through the integration of smart building and digital workplace strategies, organizations can increase productivity and reduce energy consumption, waste and carbon emissions. Develop a tailored action plan, and outline specific initiatives to address gaps, risks and opportunities. Set specific timelines, identify responsible parties and establish metrics for measuring progress. Roadmaps should be flexible to account for the ever-changing environment from a technology, policy and market standpoint.
THE CALL TO ACTION
As organizations continue to face mounting pressure from customers, suppliers, investors and regulators to improve ESG performance, establishing a future vision, baselining an organization’s footprint and constructing scenarios to test the sensitivities of locations can provide critical insights to guide decision makers in optimizing their footprint and aligning it to their ESG goals. ESG frameworks and standards will undoubtedly evolve, necessitating that CEOs and their teams continue to educate themselves on the regulatory environment, understand the material issues of operations and external market factors and take appropriate steps to adapt their footprint.
The post Optimizing Your Footprint To Achieve ESG Outcomes appeared first on ChiefExecutive.net.