Your Guide To Understanding ESG — Plus How It Can Help Create Smarter Workplaces

• ESG is shorthand for a company’s attributes that contribute to its socially responsible standing, separate from its financial performance. 
• A company’s efforts in environmental, social and governance areas can be summarized in an ESG report to enable investors and other stakeholders to identify socially responsible organizations. 
• Many elements of ESG performance can be measured with devices embedded in the workplace.

This article was originally written by M Moser’s Steve Gale for Work Design Magazine.

Poor misunderstood ESG

We all know what we mean by sustainability, but the term ESG (Environmental, Social, Governance), on the other hand, is much less understood but just as frequently quoted. So here’s a guide for people in our workplace sector, not for the investment industry (that was the original audience for ESG disclosure). Apart from the three letters “ESG,” this piece is acronym free and deliberately avoids the jargon, methodologies and details of the many organizations involved in the ESG industry.

What really is ESG?

ESG is shorthand for a company’s attributes that contribute to its socially responsible standing, separate from its financial performance. A company’s efforts in environmental, social and governance areas can be summarized in an ESG report to enable investors and other stakeholders to identify socially responsible organizations. It is in addition to the company’s annual report, but much less standardized in format.

A company ESG report can have a variety of formats, or none at all, depending on its jurisdiction and its own take on the subject. Some countries are rapidly becoming more standardized and prescriptive, for example in the EU, while others have no mandate. The U.S. is planning to introduce a disclosure law this year having resisted up until now. Bottom line: not all companies are required to report ESG performance, and those that are have very different approaches.

Why do we have ESG reporting?

The three letters were first used in a 2004 report commissioned by the United Nations called Who Cares Wins, which promoted ethical investment and subsequently spawned a huge and growing industry in defining and supporting its aims, along with a mind-boggling swarm of acronyms that would be a challenge to list, let alone remember.

The idea was to promote ethical capitalism as a logical reaction to the free-market economics which defined Reaganomics and Thatcherism. Many institutions and consumers reject the dogma that a company’s sole purpose is to create shareholder value and look to other responsibilities for the good of society in the long run. Factors like diversity in management, employee health and wellbeing, and commitment to sustainable business practices have become enshrined in ESG values.

Ethical investment

A growing interest in sustainable behavior means that many investors want to identify companies that subscribe to ESG objectives. ESG reporting is supposed to give detail and clarity to asset managers so they can do this. A simple example is the EU disclosure framework that requires asset managers to classify their funds according to the sustainability ratings of the companies in them. This model has three sustainability categories which makes it easy for subscribers to see roughly where companies stand, and they are as follows (don’t ask me what happened to Article 7!).

• Article 6: Funds without a separately defined sustainability scope
• Article 8: Funds that promote environmental or social characteristics
• Article 9: Funds that have sustainable investment as their objective

The challenge for fund managers is to evaluate companies from the wide and florid range of ESG reports on offer.

Standardization

It would be great if companies all used the same format for ESG reporting, and some regulators are working hard on this. The reporting principles have not been around long enough to garner agreement on their measurement and expression, and many ESG components cannot be expressed numerically like entries in a balance sheet. This leaves plenty of scope for creativity and potential greenwashing, leaving analysts to sort the wheat from the chaff, which damages confidence in the system.

The EU has made a huge effort to address this recently with a regulation update which now defines the elements to be disclosed, and requires sustainability claims to be audited, as well as increasing the number of firms within scope. It also requires the disclosure of supply chain carbon (scope 3 emissions in the jargon) which will need a lot more analysis and data collection than before. Fortunately, member states are allowed some time to comply with these new regulations.

The U.K., being outside the EU, is not covered by these laws — it has the Companies Act and other regulations concerning energy consumption and carbon emissions — and the U.S. currently has no ESG reporting mandates but may do so soon. This does not mean that companies in these jurisdictions do not comply with standards, many of them do, it currently means they do so by choice.

ESG ratings

The investment industry has used credit rating agencies like S&P and Moody’s for decades, and now there is a plethora of agencies which do a similar job for ESG performance. They all use different methods and rating scales but their claim is to make it easier for asset managers to judge ESG performance and make investment decisions. They consider all factors, not just environmental ones, for example community relations, diversity, human rights and board membership. Bundling these, and many more, factors into one number is a miracle of analysis and compression.

ESG and the workplace

A company’s ESG ambitions will influence the design of the workplace, and going the other way, the workplace performance will feed into a company’s ESG profile. Here are just some examples of areas where designers can make a difference — energy consumption for heating and cooling spaces, embodied carbon in building materials and furniture, availability of space for the local community and impact of facilities on neighbors and nearby wildlife, variety of settings catering for different psychological and neurological needs, configuration of spaces to reflect the visibility of leadership and transparency of decision making, consideration of people with long and short term disabilities or childcare needs, and so on.

None of these elements will be new to designer readership, but it is important to emphasize the very real two-way connections to this relatively new discipline of ESG reporting.

A smarter workplace

A modern workplace is not a static object, it is like a machine, and needs monitoring to keep it in serviceable condition. Sub-metering can show which systems use the most energy, daylight detection and presence sensors can control the lights, people counting sensors will show under-used and over-pressed spaces, artificial intelligence can actively connect use patterns and building services.

Many elements of ESG performance can be measured with devices embedded in the workplace. In our company, we are testing these systems in our premises around the world to yield savings for clients and contribute to their ESG ratings and simplify reporting. Workplaces need to be smarter to benefit the many stakeholders, including the planet, and to keep up with evolving ESG regulations.