ESG Audit

Viewpoint - 20/09/2023

Introducing the ESG Audit: An essential tool to understand your real estate

In this viewpoint, Head of ESG & Sustainability Federico Montella, explains how our ESG Audit can help businesses understand how they are doing across key ESG areas.

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Organisations face growing demand for transparent disclosure of all elements that relate to environment, social or governance (ESG). Calls come from clients, staff, investors, the government, even peers. We all want to know more about the businesses we work for and the real estate they occupy.

There is also an increasing body of legislation that businesses must comply with. Regulators and investors want access to credible, verifiable and comparable ESG metrics that tell a real story and demonstrate improvements over time. 

Against this context, an ESG Audit can provide not only the best starting point, but a way to continue to improve. It gives a way to clearly articulate how a business is doing in key ESG areas, leaving no stone unturned.

Introducing an ESG Audit

An ESG Audit is the motherboard of audits, which a number of other types of audit can stem from. Rather than drilling into specifics and areas of compliance, it encompasses all aspects of ESG, from sustainability and energy performance to social value and wellbeing.

Any business can carry out an ESG Audit, whether it owns or invests in a single property or a portfolio, and whatever stage it has reached in ESG terms. For a business that doesn't know where to start, the audit can help identify a direction. The results can kickstart a new strategy, providing a benchmark to measure progress against.

For a business mature in its ESG journey, it could identify a gap the team wasn’t aware of. A larger business may believe it is strong on governance, but is unaware of how this is trickling down to individual assets or how it ties in with tenants’ intentions. Increasingly, investors and owners want to carry out a due diligence exercise before acquisition or disposal. 

LSH recently carried out an audit for the Canal & River Trust’s mixed-use property One The Square in Bristol. The property has been recently refurbished to a high standard. The ESG Audit highlighted the building’s ESG strengths, while identifying areas for improvement.

The ESG Audit process

An ESG Audit requires gathering both quantitative and qualitative information. We send in a team of surveyors to inspect the asset. At the same time, we collect the data we need to carry out a desktop survey, which often requires an agreement with an occupier to share essential information about how they use the property. 

Once the audit is complete, the ESG Audit Report starts with an executive summary, which gives a traffic light view of the key areas with E, S and G. This gives an easily understandable snapshot of how the business is performing.

The report goes on to give detailed recommendations for different business areas. This could induce a recommendation to set recycling targets, to conduct green lease reviews or to work with local schools and colleges to understand what benefits they could derive from mentoring programmes. A business can see the low hanging fruit - the areas that could be improved with little intervention - as well as areas where a further action plan is needed. 

ESG audits can be carried out yearly, the first iteration acting as a springboard. Once you have implemented a strategy based on that initial analysis, you can see how you improve on it year-on-year. If you’re an institutional investor that has to report against GRESB, an ESG audit is the perfect tool.

Common findings

We see commonalities across ESG Audits. In almost all cases, there is a huge disconnect between an EPC rating and how a property performs when in use. Once we carry out a survey, our team can give a much more true-to-life representation of the actual energy profile. 

Social value is another area that businesses often lose sight of. Asset owners and managers could be unaware of the opportunities to create social value that sites are generating. It’s easy to provide charitable support, but difficult to understand how to deploy the right level of social value according to the needs of the community.

A third area that often comes up is a lack of focus on biodiversity. While businesses focus on other aspects of environmental performance, biodiversity is easy to forget. This is more the case for commercial property.

Important in today’s economy

We are in a challenging economic landscape and while businesses focus on the bottom line, it can be easy to push ESG to the back of the mind. But the current market makes it even more important to ensure real estate is performing well from all viewpoints.

Take the risk of stranded assets. If a property is not on an upward trajectory towards net zero and ensuring wellness, for example, its value will soon fall. We see proof of this in the flight to quality across the office market.

Investors and property owners need to understand this risk. If a property isn’t performing, question marks will be raised as to whether it should remain in a portfolio. 

On the flip side, if you have a long-term tenant, it’s possible to see how to improve the property to increase tenant happiness. Expectations for what real estate should provide have moved on considerably in only three years. In terms of staff retention, wellbeing is a must.  

Organisations could soon be facing increased legislation relating to ESG. The deadline for assets to reach an EPC rating of B or above is little more than six years away - time that is short by real estate standards. It takes a lot longer to upgrade a building than to upgrade software. 

It’s also a good time to seize opportunities. There is far more capital available today to invest in social impact investments. A growing body of organisations are looking at responsible investing, among other ESG priorities. To unlock that capital, you need to demonstrate how you will add value. 

Across the industry, an ESG Audit can tackle the risk of social washing, as well as greenwashing. By putting numbers against words, it is a valuable tool to demonstrate the value of your real estate and strategies. 

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