What is an ESG Checklist?
An ESG checklist is a useful tool for evaluating an organization’s environmental, social and governance practices and the risks associated with each of these areas. ESG audits can be internal or external and typically support current compliance requirements as well as other pieces of your risk management strategy.
In today’s commercial real estate industry, Environmental, Social, and Governance (ESG) due diligence has become increasingly important. ESG is the framework used to assess the risks and opportunities associated with an organization’s impact on the world around them.
As the industry evolves, the bar is being raised for stricter requirements and increased transparency of environmentally sustainable and socially responsible best practices. This process presents challenges that can be confusing to navigate, but a customizable ESG checklist that is tailored to an organization’s specific needs and operations can help simplify matters.
Who Uses It and Why?
Any company or organization can use an ESG audit checklist to evaluate both its own performance as well as that of its suppliers and supply chain. Asset and portfolio managers, fund managers, wealth managers, banks and institutional investors, and anyone looking to assess the risk management activities and sustainability of a company during pre-acquisition due diligence can all benefit from utilizing an ESG checklist.
By identifying any gaps as well as any successes in ESG practices, an ESG audit checklist allows you to develop a solid plan of action going forward. In addition, it supports the ESG data that you share with your employees, stakeholders, and any regulatory bodies
Who Conducts an ESG Checklist?
What Risks does an ESG Checklist Evaluate?
ESG is a forward-looking lens for mitigating risk and making your assets more resilient and sustainable. As the acronym suggests, the risks fall within the environmental, social, and governance domains, examining all large-scale and long-term issues in each one. An emphasis on all three pillars is needed to properly evaluate how an organization measures and discloses its results with both quantitative and qualitative data.
Environmental Risk
- Evaluates the impact of the built environment on the natural environment
- Includes pollution of the air, water, or soil, as well as climate impact, carbon footprint, and energy use
Social Risk
- Examines the impact on the organization’s people, stakeholders, and the broader community that surrounds them
- Includes the well-being, reputation, or privacy of customers, employees, or suppliers, as well as issues related to diversity, equity, and inclusion (DEI)
Governance Risk
- Explores how the company shows compliance and transparency of their corporate operations
- Includes matters relating to finances as well as the organization’s general business operations
What’s Included in an ESG Checklist?
There is no single standard checklist as each commercial real estate property is unique with their own specific needs, requiring different strategies. What’s included is largely dependent on things like the maturity of the organization, the type of product manufactured, service rendered, or the social context of the organization. With all these varying factors, however, there are some overarching guidelines and categories that help identify risks and establish controls.
An ESG Checklist Consists of the Following Steps:
- Conducting Preparation Research
- Choosing Your ESG Framework
- Evaluating Energy Efficiency
- Assessing Safety, Health & Wellness
- Measuring Greenhouse Gas Emissions
- Calculating Climate Risk
- Considing Renewable Energy
- Determining Environmental Sustainability
- Preparing for ESG Reporting
- Preparation
- Understand the ESG landscape of the wider industry and sector in which your business operates.
- Understand your organization’s current ESG strategy, maturity, and risk factors.
- Understand the perspectives of both internal and external stakeholders, while balancing their needs with other audit requirements.
- Benchmark what competitors are doing.
- Be informed of ESG related changes to government policy and legislation.
- Choose your ESG Framework
- Choose one or more ESG frameworks according to your organization’s specific industry and its broader company goals. ESG reporting frameworks provide principles-based guidance that identify ESG topics and inform how to structure and prepare information. These standards offer specific requirements to help companies determine metrics to disclose for each topic.
- Evaluate Energy Efficiency
Once the first two steps have been completed, there are a few central categories that are shaping the industry and should be included in an ESG checklist when evaluating a property – the first is energy. Energy has a direct impact on the financial health and market value of real estate assets. ESG considerations related to energy typically encompass the use of:
- HVAC systems
- Windows
- Roofs
- Lighting
- Sensors
- Monitors
- Controls
- Appliances
- Overall energy use
- Assess Safety, Health & Wellness
The long-term success of a building depends on the well-being of its occupants. This step ensures that a building is structurally sound and free from any risks that could negatively impact the health and well-being of its occupants. ESG practices include:
- evaluating structural risks and indoor air quality
- examining for the presence of hazardous building materials such as asbestos, lead, radon, and mold
- assessing the effectiveness of life safety systems and the existence of an emergency preparedness plan
- Measure Greenhouse Gas Emissions
Owners and investors of commercial real estate seek to address environmental concerns by seeking ways to minimize the carbon footprint of their assets. One critical aspect of these efforts is reducing greenhouse gas emissions, which means setting net zero goals. An array of programs and systems are available to help reach net zero, including:
- Energy ordinances
- EnergyStar score
- Green building certifications
- Energy audits
- Retro-commissioning
- Calculate Climate Risk
Increased demands for ESG standards have highlighted the issue of climate risk. In an effort to assess the potential impacts of climate-related natural hazards an ESG checklist evaluates:
- Physical Climate Risks
- Natural Hazards of the physical property
- Resiliency measures
- Mitigation measures
- Consider Renewable Energy
With the increasing focus on reducing greenhouse gas emissions and improving sustainability, it is important for commercial real estate owners and managers to incorporate renewable energy sources into their operations with things like:
- Solar power
- Fuel cells
- Battery storage
- Electric vehicle (EV) charging infrastructure
When assessing renewable energy systems in commercial real estate, it is also important to include the following factors on an ESG Checklist:
- Technical feasibility
- Financial viability
- Energy production and storage
- Determine Environmental Sustainability
A thorough grasp of a site’s history and the potential for environmental hazards helps to identify and mitigate risks and ensure compliance with environmental regulations. An ESG checklist must take into account any environmental risks and opportunities by evaluating factors such as:
- Water efficiency
- Management of stormwater
- Presence of hazardous substances
- Potential for contamination
- Prepare for ESG Reporting
Any ESG audit checklist should include a plan for reporting the organization’s risks and mitigation plans to stakeholders and regulatory bodies. The report will verify that the information being reported is both accurate and complete. And the transparency of the report will also show that your organization is not greenwashing and that your commitment to ESG requirements and sustainability is genuine.
Overcoming ESG Obstacles
As the world and the commercial real estate industry changes, ESG requirements are evolving, which can present challenges for businesses seeking to manage risks as they grow. Some of the most common obstacles when conducting an ESG checklist include:
- Availability of and access to utility data
- Collaboration and coordination between tenants and property owners of REITs
- Centralizing all ESG data and metrics into one system
- An organization collecting a lot of really great data but not knowing what to do with it or how to report on it afterwards
AEI’s knowledgeable and experienced professionals perform ESG audits. If you could use assistance navigating this often confusing process, AEI is here to help. For a sample due diligence ESG checklist, reach out to speak with one of our consultants today.