Environmental, Social and Governance principles seem under pressure from all sides, but amid the gloom, there is also an opportunity for a “positive reset” for ESG strategies, argues Andy Hay, CEO of Hollis
What do Donald Trump, greenwashing and sustainability fatigue all have in common? Each is responsible for putting pressure on ESG, or – to give it its full title – Environmental, Social and Governance principles.
Funds are making redundancies, and the built environment has seen headcount reduced in architecture practices, consultancies and more.
Some of this is due to political rhetoric, particularly from the United States. This has led to spending cuts and legislative relaxation in this area. It is natural that jobs have followed.
However, that’s not to say that ESG has fallen completely off the radar. Working throughout Europe, we are seeing portfolio managers remain focused on enhancing the resilience of portfolios, reducing the environmental impact of their operations and even over-specifying their buildings for certain markets.
Look to French legislation
The latter is seeing portfolio managers following a common approach across their buildings, using the most stringent legal standards as their baseline. In Europe, this means looking at French legislation, which is leading the way, and rolling out improvements and enhancements across all assets.
It may be that this difficult period represents a positive reset for the way that ESG advice and strategies are delivered.
Arguably, a course correction was needed. In the rush to meet demand, we reached market saturation ahead of a consistent and pragmatic regulatory environment.
As with any boom, you inevitably get some fluff and big promises that aren’t always achieved. The sector suffered from greenwashing, everywhere from construction product manufacturers, through to designers, consultants and developers. Some of the benefits were overexaggerated, and the reliable performance data and understanding were often missing.
Big headline targets
This does damage over the long term and has created an environment that has allowed naysayers to get a foothold and businesses to start rolling back on these commitments.
In parallel, we also had big headline targets – some political, some legislative. That also causes problems. Make the task too big and it can be hard for businesses to see their part within the wider context. Make the legislation too stringent and people will start to reconsider investments or work to the lowest possible level of compliance.
Neither are good. It can constrain innovation and create a void where people stop making the decisions that are best for the project and instead follow a tick-box exercise.
What was often missing was the pragmatic advice that clients wanted and needed.
That is where I hope we are now – or will end up. The industry is inevitably looking at its offer and adjusting what they deliver. The end result should be a realistic balance between what is achievable, what is commercial and what should be done as an ethical and responsible business.
We all need healthy buildings
We are seeing it ourselves at Hollis. The cost to benefit ratio on solar PVs, for example, has reached a point where the investment makes sense for asset owners.
Every project should be looking at how it enhances resilience, reduces energy and water consumption, emissions and carbon impact. Whether a new build or retrofit, it is incumbent on the sector to do this. That should include Scope 3 emissions and making sure that reductions are driven and passed throughout the supply chain.
We all need healthy buildings that are designed with occupant wellbeing in mind, and we should be making them as efficient to run as possible.
This is just good sense from an asset management perspective, and these decisions should be embedded in the process, not delivered as an add-on.
In many cases, ESG will remain an important part of financial due diligence and the valuation process too, especially for institutional investors, so it is not all doom and gloom.
As consultants, we should be seeking to create value and do the right thing. If you’re working in this space, now is a good time to fight your corner, show the value that you bring and challenge organisations to continue on this path.
And if you’re looking at it as a service line within your own business then don’t be too quick to lose these skills. Just accept that there is a shift needed.
My hope is that we see a second, more mature wave for this part of the market, with rigorous measurement and a clear understanding of the levels of return that can be achieved.
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