The idea is that this will lead to long-term investments in sustainable business.
The term has become increasingly prominent in the business, economic, social and political environment and in society at large over the past 10 years. Essentially, it takes a holistic position that sustainability extends beyond exclusively environmental issues and also considers the well-being and health-related factors of staff, customers, and consumers in a given institution.
Allied to ESG is the EU Taxonomy, a classification system that aims to clarify which economic activities are environmentally sustainable in the context of the European Green Deal. The goal is to prevent greenwashing and to help investors make what are seen as informed, sustainable investment decisions.
Essentially, the “Environmental” part of ESG relates to the impact of an organization on the planet. “Social” relates to the impact that an organization has on people. This includes staff, end-users and the wider community. “Governance” deals with how organizations are governed and measured and whether that information is accurate, consistent and transparent, and benchmarked by independent third-party assessors.
“ESG is more than good intentions. It is about creating a tangible, practical plan that achieves real results. Success is not about climate change, diversity and disclosure alone. It is about embedding these principles and more across your business – from investment to sustainable innovation,” comments the Big Four consultancy PwC.
“From net zero to the circular economy, when you put ESG at the very heart of your operation, you take bold steps towards delivering a sustainable business advantage and measurable value. It is an approach that makes possible the operation, culture and financial changes needed to future-proof your business,” PwC adds.
Regarding the influence that the EU Taxonomy exerts from a regulatory and market demand perspective on architecture and urban development in an urban environment city, Zsombor Barta, ambassador of the Hungarian Green Building Council (HuGBC), argues that regulatory compliance encourages cities to align local regulations with common standards, promoting uniformity in sustainability practices across the EU.
“Market competitiveness enhances the competitiveness of cities that prioritize sustainable development, attracting businesses and residents seeking environmentally responsible living and working environments. This improves the overall urban quality of life through greener infrastructure, better air quality, and increased green spaces,” he says.
ESG issues in real estate, for example, impact the wider population and city environment by promoting sustainable building practices, improving air quality, and enhancing energy efficiency. They can improve quality of life by reducing environmental footprints, creating healthier living spaces, and fostering community well-being through green infrastructure and responsible development.
A popular forerunner to ESG was the concept of “sustainability.” This is generally seen as a broad principle that guides a company’s business practices, while ESG is a framework that measures that firm’s performance against ESG factors.
“Sustainability could be seen as the motivation, while ESG is the reported outcome,” says the U.K.-based Corporate Business Institute. “Sustainability and ESG have become fashionable terms that are often used interchangeably. However, understanding the nuances and differences between these concepts is crucial. Sustainability, at its core, encompasses the long-term viability of a company’s operations, taking into account its environmental, social and economic impacts,” the institute explains.
“ESG is a holistic approach that considers the interplay between these three dimensions, recognizing that a sustainable organization not only thrives economically but also contributes positively to society and reduces its environmental impact. The three pillars are seen as providing a structured framework for assessing how well a company manages risks and opportunities related to sustainable issues such as carbon emissions and ethical business practices,” the Corporate Business Institute adds.
In practice, sustainability could be regarded as using resources in a way that can be maintained over time without depleting them. This involves conserving natural resources such as energy, raw materials and habitats. According to the UN, “sustainable development” requires an integrated approach that takes into consideration environmental concerns along with economic development.
Companies will be subject to ESG reporting obligations starting from this year. Although the guidelines are already known, the detailed regulations are still awaited, according to Zsolt Kákosy, senior director of property management at Icon Real Estate Management.
The “Governance” element of ESG further strengthens the role of both property and facility management firms in a building, as these professionals provide the long-term data necessary for preparing ESG and sustainability reports.
Concerning the social elements of ESG, the U.S.-based Well accreditation system is dedicated to the interiors of buildings. By applying Well at scale, organizations can measure and improve their health performance across multiple locations.
“Using our robust set of Well features and our proven process, organizations can map, measure and quantify their health and well-being efforts. With this data, they can measure their impact on people while also comparing their progress internally and against industry peers,” argues the sustainability expert and Well assessor Regina Kurucz.
“While additional ESG costs can pose challenges, they often lead to long-term savings, enhanced asset value, and reduced risks. Initial investments in ESG development are outweighed by benefits such as increased investor interest, tenant demand, and regulatory compliance, making ESG development a worthwhile endeavor despite the upfront costs,” adds HuGBC’s Barta.
From an investment perspective, with more education and pressure from banks, tenants and investors, real estate landlords will realize the need to comply with EU Taxonomy and that spending on ESG compliance is not only a cost but can also be a highly profitable investment.
“In today’s landscape, investors are using ESG as a screening method for choosing where to invest. Properties that do not have any ESG efforts or activities are passed over for projects that are dedicated to ESG and which incorporate sustainable practices into their concept,” argues Hubert Abt, CEO at Workcloud24.
“We need more and more (third-party) verified data for ESG and other types of sustainability reports because credibility and transparency is an extremely important part of these new reporting schemes and investment requirements,” concludes Barta.
This article was first published in the Budapest Business Journal print issue of January 24, 2025.
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