The Importance of ESG in PBSA: an interview with Daniel Smith

Today we discuss a topic that has become extremely relevant for every company’s strategy lately. We are talking about ESG, which stands for Environment, Social, and Governance. Under this umbrella are synthesised the principles that have to do with a firm’s resilience, and sustainability, from every possible perspective.

It is pretty easy to observe this concept’s rise in relevance in the corporate world by simply looking at annual reports where a year ago ESG was barely mentioned, and in previous years it was very often completely absent. In 2021 though there is plenty of discussion around it and the majority of firms have established dedicated committees to develop a specific strategy.

In interior design, construction, and architecture the trend is the same. To get a clearer idea of what is happening and how to better navigate this trend, we asked a few questions to Daniel Smith, Managing Director of Student Housing Consultancy, and Director at Good Management Group. Here is what he told us:

M: How would you define ESG and its principles?

D: Let's not overcomplicate this. ESG, CSR, or Sustainability is the business of doing good. ESG stands for Environment, Social, and Governance. It's a management concept that helps businesses to understand their impacts on people and the planet and helps investors to evaluate these impacts alongside the corporate governance of the company. ESG factors are becoming increasingly important to investors, employees, customers, and the general public. Every company now needs an ESG strategy no matter how big or small and it's particularly important for the real estate and finance sectors.

M: What are the developing ESG trends that are going to stick in the future?

D: Good data management. Sorry, I know it's a boring answer and maybe you hoped I'd recommend a revolutionary new energy source but good data management and communication is the key to every company's ESG performance. Ideally, this data should be real-time, automated and of course, accurate. This then allows you to do exciting things with that data which is going to drive real change and performance improvements.

Whilst we're seeing many more policies and press releases regarding ESG initiatives, we're still not seeing a dedicated focus on the data behind ESG performance or effective communication of this data. Whilst there are platforms that can score your performance, it's very rare to see an effective communications strategy around this.

Collecting quality impact data allows you to do two things:

1. Make strategic business decisions that help to future-proof the business, streamline operations and make a positive social and environmental impact.

2. Communicate your ESG performance effectively. It's one thing to shout about your latest charity initiative or how many trees you've planted but it's vital that ESG performance can be backed up with data and qualitative performance indicators. This is where KPIs are so important.

M: How would you define ESG KPIs? Would you use qualitative or quantitative factors?

D: It has to be both. The quantitative tells you whether your performance is heading in the right direction while the qualitative helps you understand whether you're having the right impact on behaviour change. If you're not changing the behaviour, you're unlikely to achieve long-term quantitative performance improvement.

For the built environment we work with several clients, large and small, who focus on operational building performance but we also work with developers and supply chains to build sustainable buildings from the ground up. Each client has bespoke KPIs that are typically driven by certifications and tried and tested ESG metrics. Let's look at the Environmental areas first of all. With the focus on Net Zero and the longevity of new builds, It's important to know the carbon footprint of the building first and foremost then create a strategy to improve environmental performance and sustain it over time. Ensuring that existing buildings are BREEAM certified (Building Research Establishment Environmental Assessment Method) to at least 'Very Good' is an integral part of our work and can be achieved through a variety of cap-ex and operational management strategies.

There is however no excuse for any new builds to achieve anything less than BREEAM 'Outstanding'. This goes way beyond simply switching to LED lighting, fitting a heat recovery or rainwater-harvesting system, it should also focus on business resilience and long-term operational improvements.

We look at GRESB (Global Real Estate Sustainability Benchmark) scores to ensure buildings continue to perform effectively post-completion and have developed an in-house data management platform that provides real-time dashboards of ESG performance to inform key business decisions. Each property should also be built with wellbeing in mind. We typically recommend WELL or Fitwel certification which assess the quality and safety as well as the community experience of buildings.

M: Who are the current market leaders? How are they setting an example for the rest of the industry?

D: Developers, Contractors, Architects, Operators, and investors have a huge opportunity to change the way we all think about building and managing property for the benefit of residents, the environment, and society as a whole. To be brutally honest though, there are very few ESG pioneers in positions that really matter. Unite are the best example within the PBSA sphere right now and for good reason. They are highly regulated as a PLC and therefore they have mandates to report on their impacts but equally, they have the ability and capacity to develop long-term business strategies where investors with shorter investment schedules cannot. 

They have taken a proactive approach by hiring a significant sustainability team and launching their Net Zero strategy in 2021. They are targeting Net Zero operations and Net Zero carbon buildings by 2030 including their wider supply chain and whilst the depth of their operational supply chain offsetting calculations isn't currently clear, everything they are doing is backed up by the experts at SBTI (Science-based targets initiative).

I've been impressed with Unite's commitment to some of the more social elements too including diversity, equality and inclusion initiatives and some of the projects undertaken by their charitable foundation.

While Unite is a big organisation, this shouldn't take away from the opportunities all operators have to impact their local communities and the people that occupy their buildings. University is such a formative time in a person's life and they will remember the experiences they had living in these buildings, therefore it's a great opportunity to show young people 'what good looks like' and influence their lifestyle for years to come. There are also opportunities for employment in the local community and other easy to interact with grassroots initiatives.

If we (the real estate industry) could ensure that the private equity firms that run a lot BTR and PBSA schemes start thinking more long-term about their impacts alongside their returns then this will change the industry, society, and the planet for the better.

Another good example is The Student Hotel which recently secured a loan facility with Credit Agricole that gives them preferential rates if certain ESG criteria are met as they grow. This demonstrates that a credible ESG strategy can have positive impacts.

*ESG Strategy, Source; Unite Students

M: Where would you start with an ESG strategy?

D: Start by having conversations. Talk to your colleagues, investors, students. Find out what's important to them and what their expectations are. It's cliché, but this is a journey. We all know we need net-zero carbon, zero waste, clean water, clean air, good jobs. What's important is how you are contributing, talking about your journey. No one has all the answers but it's important to start right now, where you are, with what you've got. As a director of an ESG & sustainability consultancy, it would be remiss of me not to say "speak to the experts first." which is why we offer a free consultation in the first instance. We see organisations large and small tagging ESG on to another role within the organisation when that person often has no prior experience or qualifications in environmental sustainability or social responsibility. Angela in HR might be a whizz at recruitment but she probably doesn't know her SDG from her GRESB or her CDP from her TCFD. It's vital that organisations get the right support and set up the right structure from the start.

There are then four key steps that we take new clients through.

• Review your impacts across the board. Survey your stakeholders, investors, employees, residents. Measure your carbon footprint
• Develop the right ESG management structure for your business and work with your ESG team or a consultancy to create a winning strategy based on recommendations from your review and consultations.
• Implement your new strategy through training, communications, and policies that are clear and communicable to all your stakeholders including your supply chain and residents.
• Manage your data to ensure you can report your ESG performance accurately and continue to make strategic business decisions with ESG engrained into the process.

This concludes our interview, and I hope you will find it as useful and insightful as I did. In these few replies, there is a lot of information that not only gives a clear idea of what ESG is and why it has become so important over the last year or so, but also gives a useful roadmap to start implementing a new business sustainability strategy.

For us as designers, we suggest some steps that through the interior, and management can help our clients on the path to the implementation of a full ESG strategy in PBSA. Going in order:

Environment:

• Use sustainable materials and finishes that will allow reaching the LEED GOLD certification.
• Facilitate recycling providing every communal kitchen and, when possible, even the rooms, with bins to differentiate. The staff should be involved in reminding the students about this. The training of the staff itself would become then a Governance target, along with the ones that we’ll see later.
  To this end, even creating graphical elements integrated with the interior design of a space could be a great solution to encourage the right recycling.
• If the technology allows it, monitoring the resource (energy, water) consumption of every room and subsequently rewarding the virtuous ones could be another interesting way to involve the students in this process.

Social:

• Designing high-quality spaces that help the students’ performance to reach high levels of satisfaction. For instance, using stain-resistant textiles will make a place easier to clean preventing complaints from future residents.
• Create a strong sense of community aimed at reducing significantly the potential feelings of isolation and solitude that affected many students, especially in these two years of the pandemic. There are many ways to favour the interaction between students, and design can help too. Visually interesting elements or even spaces provided with selected books can help a lot.

Governance:

• Support the structure and local institutions to realise cultural initiatives and rise peoples’ awareness. For these kinds of activities, such as talks or group initiatives, interior design can contribute as well through flexibility and multifunctionality.

Of course, as Daniel Smith said, earlier in the interview, every step like this is not sufficient on its own, but it should rather be part of an ecosystem supported by a solid infrastructure of reliable and replicable data.

ESG has become one of the main strategic tools for companies to monitor their performance and improve their sustainability and efficiency. As Dan Smith claimed a company’s strategy must be rooted in data, whether they are qualitative or quantitative (possible both!), and considering how much importance it has gained in just over a year, this is a trend that is likely to become even stronger in the future. We will keep doing our best to play a positive role as interior designers.