How Is ESG Impacting Location Selection?

People want to work for companies that prioritize corporate sustainability goals, and they are voting with their feet.

Demographic data, the political environment and environmental considerations have long been part of the location selection calculus. However, over the past several years, Environmental, Social and Governance (ESG) criteria have become critical to assessing the sustainability of investment decisions for many corporations. 

• Companies are thinking more about the environmental impact of their location decisions—prioritizing access to public transport and bike paths, analyzing how much plane travel will be routinely required, considering the importance of LEED-certified buildings, weighing the impact of their operation on the local environment. 

• When selecting locations, companies are now carefully considering how local regulations could impact the company’s reputation and weighing the potential risks associated with geopolitics on the global stage. 

• The broader social environment is increasingly considered a critical location factor as companies prioritize where they want to be based on the level of openness and diversity. 

The reason for this intensified focus on ESG criteria? The talent companies are looking to hire and retain are increasingly focused on corporations’ policies and accountability. People want to work for companies that prioritize corporate sustainability goals, and they are voting with their feet. 

In addition, locations selected using ESG criteria will be more resilient to the adverse impacts of both climate change and the nature crisis, which are key considerations for organizations that will only grow in importance.

An approach to incorporating the philosophy of ESG into location selection methodology can be the framework of Transformational Drivers comprising three pillars—Planet, People and Progression. Assessing locations’ performance on the Transformational Drivers in addition to the traditional critical location factors (costs and conditions) studied provides a more nuanced view of a market’s mid- to long-term suitability for investment. Some examples of this combined analysis are:

• Planet (Climate Change Adaptation) + Operating Costs: Locations could see their cost advantage being eroded due to the financial implications of poor mitigation and adaptation to climate risks, for example, increased capital costs, increased utility costs, loss due to business disruptions, damages to property, investments to mitigate the danger to personnel, etc. 

• Planet and Progression + Operating Conditions (Risk): It is important to assess a location’s risk of natural disasters and its vulnerability, as well as adaptation to climate change, since the risks are linked. As per the IPCC Sixth Assessment Report, multiple climatic and non-climatic risks can interact, resulting in compounding overall risk and risks. For example, climate change can increase the frequency and intensity of floods, while poorly planned urban development can render a location vulnerable to flash floods caused by climate change-induced heavy rainfall.

• People and Operating Conditions (Talent Availability): A location that performs regarding People can, in turn, improve the quality and availability of its labor pool, a key traditional critical location factor, by not only attracting qualified talent but also enhancing the quality and sustainability of its existing workforce.

• People and Progression + Operating Conditions (Risk): Assessing the location’s performance on both the People and Progression drivers, as well as its Risk profile, will allow an organization to gain insights into its potential political and social stability, since increasing discrimination against groups of people could lead to unrest.

Planet: This pillar allows an assessment of the location’s ability to mitigate and adapt to the impact of both climate change and the biodiversity crisis. This is relevant for footprint decisions due to the detrimental impact on human wellbeing, as well as financial costs (both day-to-day and one-time) of the physical risks associated with climate change. For example, a 2021 Swiss Re report predicts that global property catastrophe premiums are set to increase up to 41 percent (USD 183 billion) by 2040 due to climate risk, with USD 110 billion coming from advanced markets. 

Locations that have successfully combined climate resilience and environmental considerations with development will be able to offer a better quality of life, making them attractive relocation destinations for talent. An organization that chooses to invest in such locations will not only likely be able to successfully attract talent for in-office roles but also be able to demonstrate tangible action on an issue important to today’s workforce—sustainability. This could form a key piece of the organization’s employer branding strategy.

When measuring a location’s performance regarding Planet, it will be helpful to answer the following questions:

• What are the acute and chronic risks faced on account of climate change? What measures have been taken to mitigate and adapt to these risks?

• Is there a strategy or roadmap to transition to green infrastructure and renewable energy? What is the stated horizon, and how has the implementation progressed?

• Does the location face a risk of water scarcity? Does the community have access to safe drinking water and sanitation, both of which are crucial to human health and well-being?

• What is the air quality given that it has a documented impact on health and wellbeing? An estimated 7 million people die each year due to air pollution.

• With green cover serving as a carbon sink, as well as being an indicator of social equity, how well is the location conserving its biodiversity and green space?

People: Talent guides real estate decisions. By measuring a location’s performance on key social issues, we can gain insights into long-term attractiveness for talent. The community an organization chooses to invest in not only impacts its ability to meet its diversity, equity and inclusion goals but can also form a part of its employer branding, helping it distinguish itself when competing for talent. 

When measuring a location’s performance regarding People, it will be helpful to answer the following questions:

• How inclusive is the community? To what extent are the LGBTQ+ community, ethnic minorities, immigrants accepted? What is the level of religious tolerance?

• What is the level of economic inclusion? How easily are economic opportunities available to social groups?

• How does the location fare on gender equality?

• Since access to education and healthcare are some of the primary non-financial metrics to evaluate social well-being and equality, how does the location fare on these metrics?

A focus on people is essential, not only to be able to attract talent but also from a branding perspective. A women-focused brand, for example, would find it challenging to justify investment in a location that discriminates against them through restrictive healthcare regulations. 

On occasion, organizations have sent a clear message regarding their stance on pressing diversity, equity and inclusion issues through their location decisions, such as a large financial services organization choosing not to locate in American states that had passed restrictive gender identification regulations.

Progression: While the metrics measured in the first two pillars provide information at a given point in time, the third pillar, Progression, assesses trends. This provides critical insights into the governance aspect of ESG by measuring the scope and effectiveness of regulations and policy interventions. This, in turn, will help organizations to identify the location’s trajectory, spot fundamental shifts in underlying dynamics and assess whether the location will be able to support their growth and long-term strategy. 

When measuring a location’s performance regarding Progression, it will be helpful to answer the following questions:

• How much progress has the location made in building climate resilience and mitigating risk?

• What are the dynamics underpinning attitudes towards various demographics, and how have they been evolving?

• Have levels of social tolerance and trust in institutions varied, and in what way? What are the underlying causes, and will they result in lasting change?

• Are innovations and technologies being adopted to strengthen the location’s performance regarding environmental and social issues?

When assessing progression metrics, it is important to keep in mind that certain locations have made significant progress prior to the time periods being assessed. In such instances, their progress will now only be incremental. To ensure an accurate analysis, such locations must not be unfairly penalized. For example, Singapore has seen only a marginal improvement in its 10-year performance in the area of sanitation and drinking water as compared to Malaysia. However, it is important to note that Singapore had already significantly improved the quality of this metric in prior years, to the extent that now only marginal improvements are possible.

Locations should be compared at a regional level on account of the difference in the availability, granularity and reliability of data. It is also important to note that given the continuously evolving nature of the ESG landscape, new data and perspectives will soon be available, allowing for an increasingly nuanced analysis.

In order to compete for talent and make informed location decisions, traditional factors alone will not be sufficient. An organization must supplement its ESG policies with an understanding of transformational factors to remain competitive in the evolving global landscape. 

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