Challenges Faced in Implementing and Maintaining ESG Standards

Posted by Knight Frank Newcastle on 5th December 2023 -

While adopting ESG practices is necessary and becoming increasingly important, it is a complex area that is challenging to navigate. Harriet Hix and Joe Warren from the ESG Consulting team at Knight Frank explore the key challenges faced in implementing and maintaining ESG standards in commercial real estate.

A huge part of navigating the obstacles faced in implementing ESG standards is that there are different standards with differing boundaries.

What are some of the key ESG regulations?

Across the UK, a mix of ESG ratings are used, and they all follow slightly different measurements and benchmarks.

EPC ratings

In the UK, EPC ratings are deemed necessary by the government with requirements for leased commercial buildings to have a minimum of an E rating. A public consultation by the government has proposed a future target of EPC B by 2030; this is still under review and has not been confirmed. An EPC rating reviews a property’s theoretical energy efficiency based on its condition and main use. An EPC is required for all buildings when constructed, sold or rented. EPCs are valid for 10 years. Commercial EPCs are carbon-based ratings that indicate how energy efficient a property is, using an A+ to G rating scale, where A+ is the most efficient. The certificate also lists the potential rating of the building if all the cost-effective measures are installed.

BREEAM

BREEAM (The Building Research Establishment’s Environmental Assessment Method) is the world’s longest-established green building certification system. Delivered by BRE (Building Research Establishment), a non-profit centre for building science, more than 600,000 BREEAM certificates have been awarded in 93 countries worldwide. This is more of an all-round energy rating system with a greater focus on the environmental side of building by considering safety and wellbeing. The government doesn’t require it, but local councils make it part of their planning consent.

NABERS

NABERS is an internationally recognised rating tool that has been used to measure the efficiency of buildings. NABERS UK has been recently launched in the UK and is currently managed by BRE and has two certification options. The first is Design for Performance and is focused on the construction and renovation of buildings, while the second, In-use, focuses on annual operational energy ratings. As such, it is more energy-focused, with the In-use ratings only being valid for one year, ensuring that accreditations reflect the current performance of a space.

1. Lack of ESG standardisation

One of the biggest challenges is the need for standardised ESG frameworks and metrics in the commercial real estate industry in the UK and globally. Unlike financial report,ng for example, ESG reporting lacks uniformity. This inconsistency makes it difficult to compare ESG performance across companies and limits the effectiveness of benchmarking. As standards change, maintaining them can also be challenging.

2. Data availability and quality

Access to reliable and comparable data is critical for assessing ESG performance. Many companies need help with collecting and measuring the data required to report on various ESG factors. Additionally, data quality can vary, making it challenging to rely on this information and accurately evaluate sustainability efforts.

3. Cost implications

Implementing and maintaining ESG standards often comes with significant costs. These costs can include energy-efficient building retrofits, sustainable property management practices, and employee education and training for commercial real estate companies. Implementing these measures requires a long-term commitment and planning. These financial implications can be a barrier, especially for small and medium-sized businesses.

4. Reporting challenges

Effective communication of ESG initiatives and performance is essential for transparency and accountability. However, reporting on ESG can be complex, requiring the compilation of various data points, narratives, and performance indicators. Companies may need help finding the most effective reporting formats and aligning their disclosures with recognised reporting frameworks.

5. Stakeholder engagement

Successful implementation of ESG standards requires the active engagement of multiple stakeholders, including investors, tenants, employees, and local communities. Engaging and aligning the interests of these diverse groups can pose challenges, as they may have different priorities and expectations. Balancing stakeholders’ interests while driving sustainable practices requires effective communication and collaboration.

How to overcome these challenges with ESG standards

Whilst there are challenges to meeting and maintaining ESG standards, there are opportunities for organisations when considering these.

For example, we work with clients to help them plan their timeframes for particular targets. Together, we will pick a year they want to achieve something and develop a strategy to work towards that. If they’re going to develop their social impact, what charities do they want to support, and how much do they hope to donate? If they want to focus on green space initiatives, we explore how they can add biodiversity value, for example.  

We recommend that organisations pick 5-10 targeted areas they want to impact, then develop a strategy to measure those, with data to back up their findings. Once they have that data, we help to make calculated and tangible improvements, using specific facts and numbers, which the company can use towards regulatory frameworks. A materiality assessment can be undertaken to work out which areas they relate to most under the ‘E’ and ‘S’ of ESG principles. This helps prioritise areas of significant impact, financially and environmentally, guiding the development of targeted sustainability goals.

Implementing and maintaining ESG standards in the built environment is essential for addressing the environmental and social impact of the industry. Lack of standardisation, data availability, cost implications, and stakeholder engagement are among the obstacles companies face. Overcoming these challenges requires collaboration, improved data collection and reporting methodologies, and a planned journey of travel to sustainability.

How can we help to implement your ESG strategy and reporting?

Get in touch with Harriet Hix or Joe Warren, part of our dedicated ESG Consulting team, who can help create and deliver your ESG strategy.

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