The Sustainable Mistake: Business Continuity at Stake in ESG Era

Businesses exist with the sole purpose of growing. It’s in their nature. If they are not built to grow, they cannot be called as such. That is why, year after year, companies sit down and discuss ways in which they can become better, aim higher and analyze the current state of the market. It is a strategic process that aims at preserving the company in a steady, growing motion. When we talk about sustainability, the question remains the same, but the stakes are higher: What is the best that my company can do to address environmental, social and economic development? That is what should be asked, but it’s definitely not what is being asked. Instead of companies aiming the highest in terms of ESG, they follow the route of compliance. They expect that by following these minimum requirements they will obtain all the benefits at the expense of only a few compromises. This is certainly not true. We are currently experimenting with a transitional economy where business-as-usual models are decaying in the face of evolving markets that are more socially responsible and more concerned about the environment. Ignoring the utter importance of this radical market change and following the lowest-but-compliant ESG standards will not only demonstrate a lack of leadership but will most definitely put your companys’ business continuity at risk. 

Green building has provided a framework for defining leadership and driving market transformation. For more than 25 years, several green building certifications have shaped how assets are built and valued in terms of sustainable performance. Certifications such as LEED, WELL and Energy Star have been at the forefront of this transformation, which has led to the huge impact green buildings have in shaping a well-rounded ESG strategy. In 2022, green building certifications topped AFIRE’s International Investor Survey Ranking for the “most important ESG criteria,” which clearly showcases that the No. 1 reason attracting investment right now is having assets with green building certifications. 

Understanding this reality, the International Finance Corporation (IFC), a member of the World Bank, launched the EDGE certification in 2015 with the objective of bringing a more accessible certification to emerging markets in Asia, Africa and Latin America. This certification would encourage a more affordable and easier way to certify projects only by lowering energy and water consumption by 20 percent. The IFC’s strategy delivered, providing an entry-level certification for developing countries that would get them started in ESG and benefit from its perks. This is how it worked: Companies in these regions would be incentivized to pursue the EDGE certification and use it to shape their ESG strategy; once committed, green financing would be widely available (primarily from IFC sources) to these projects. In theory, this is what a good ESG strategy is supposed to do, but there’s a catch: How is green funding that, according to Harvard, is oriented to decarbonization and other socially desirable ends supposed to serve its purpose if invested in projects that only aim to reduce  energy and water usage? 

Sustainability is such a powerful concept because it envisions a world where the economy, society and the environment must stay in perfect balance with each other to ensure that natural and social resources are utilized in a way that allows people, businesses and the planet to thrive. Sustainable building certifications were conceived with this idea in mind, which is precisely why they have such an outstanding impact when measuring ESG performance. In this regard, EDGE comes up short. Environmentally, EDGE’s reach is limited by energy, water and the embodied energy of materials. In a comparative study of LEED and EDGE certifications by the Istanbul Technical University, it was found that among all LEED credits, only 40 percent are covered by the EDGE certification. This is due to the fact that “EDGE’s measures are mostly focused on building physics, mechanical equipment, water efficiency and materials whereas LEED assess projects’ performance with a broader understanding of sustainability.” 2030 and 2050 goals require this understanding so that they can be addressed as they are supposed to. 

The objective of being resource and carbon neutral is to create sustainable business models that impact all operations. In this regard, the EDGE Zero Carbon certification aims at decarbonization through the reduction of energy use on-site by 40 percent and 100 percent compensation through renewables or carbon offsets. Although this certification achieves zero carbon emissions, it only does so by counting energy use on-site and omitting emissions caused by user transportation. This non-holistic approach to net zero not only fails to consider carbon caused by practices from waste generation and water consumption, but also forgets that net-zero water, energy and waste are fundamental components of the net-zero race. Even more importantly, a true systemic approach must not forget the social side of sustainable development. The same study reveals that LEED’s credits, in comparison to EDGE, adopt a more integrative approach which genuinely understands that sustainability itself is an interdisciplinary concept. A solid ESG strategy must recognize that social impacts, occupant comfort and people’s health are to be considered holistically with the environment and business growth. 

The key purpose of ESG as a framework for businesses is to ensure their alignment with the ongoing transformation of the market. Companies understand that having an ESG strategy increases their chances of securing green investment now, but it’s unclear how this will change in the future. The world’s biggest economies are ahead of the game, and this happened because they made the sustainable choice way before the Southern Hemisphere even started playing. Companies know this, yet, nonetheless, they keep aiming at lower standards for their respective subsidiary branches in these regions. What no one is realizing is that not taking full advantage of these emerging markets will have repercussions. Aiming for half-baked strategies and standards may do the trick now but there is absolutely no certainty that they will hold up in the future. The economy is moving toward a sustainable model, and not betting confidently on it may put your business continuity at stake. 

We cannot be sure how ESG standards will change in 50 years, but we can be certain about how the next 30 years will look. Pledges have been taken: all new buildings must be carbon neutral by 2030 and all buildings must be resource and carbon neutral by 2050. These are ambitious goals that will only be achieved through ambitious standards that genuinely understand the interdisciplinary nature of sustainability – recognizing and applying this knowledge holistically will take you further in the ESG race, position you as a leader in the industry and secure your business’ continuity. The sustainable model is here to stay and will dictate the future of business: industry leaders must decide whether they choose the route of compliance or the pivotal choice of doing things differently. The stakes have been set.