The general concept considers that it is imperative to find a balance between profitability and the benefits a business can deliver to those around it.
So, what does the "S" actually mean?Īddressing the social element of ESG involves a focus on the human obligations of a business, and the putting in place of strategies that impact people in a positive way and provide clear benefits of a social nature. A different style of analysis is likely to be required compared to that in relation to environmental objectives. In comparison, whilst businesses may be able to identify some areas of need relating to the "social" element of ESG, it can be significantly harder to quantify and measure the results or impact those initiatives are having on the "social" landscape. Real estate can be assessed by its EPC ratings, BREEAM certification, compliance with environmental regulations and the carbon footprint of the relevant building/s.
A business can be assessed in terms of its carbon footprint, net-zero initiatives, emissions generated from its everyday operations and ability to access sustainability linked or green loans. It is arguable that the environmental part of ESG is the simplest to identify, quantify, measure and standardise, particularly in terms of considering the direct impact the actions of an individual business have on the environment around them. Environmental versus Social considerations We look further at this guidance in terms of how metrics may be chosen to report on the social impact of projects and how this can assist us in the difficult task of quantifying their outcomes. Understanding the "S" in ESG assists us in determining how lenders and borrowers can work together with a view to meeting their social responsibility goals and to put in place loans that meet the recommended voluntary guidance for "Social Loans", as applied to the particular transaction, produced by the Loan Market Association (LMA), the Loan Syndications and Trading Association (the LSTA) and the Asia Pacific Loan Market Association (the APLMA). Within the finance sphere, "social initiatives" are a key concern for every party involved in a financing including borrowers, lenders, sponsors, stakeholders, asset managers and insurers, in particular in real estate financings where the development of real estate can have a significant effect on local communities. This article will consider the key points businesses and stakeholders need to be aware of in relation to the "social" element of ESG and ways in which businesses can identify opportunities for "social" initiatives, quantify those opportunities, take action to address them and measure the outcomes. When thinking about the best way to implement ESG initiatives and analyse their success, it is arguably much easier to quantify and therefore tackle the "environmental" aspects of ESG as compared to the slightly less easy to define "social" element. External factors also influence the growing focus on ESG: the regulatory landscape around ESG is growing at pace, and lenders are placing a much greater significance on the ESG profile of potential borrowers, with the aim of promoting sustainable business practices. Businesses are increasingly looking for ways to make their operations more ESG compliant a process which involves grappling with the parameters of each contingent part in order to set internal targets.
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