Regulation overhaul needed to accelerate ESG success in housebuilding

A joint study from Southampton-based law firm Womble Bond Dickinson and The University of Cambridge has found that clearer Environmental, Social and Governance (ESG) regulation is needed to accelerate success and growth opportunities in the housebuilding sector.

The research, titled ESG: Investing in the built environment, explores how ESG principles are impacting the operations of companies within the UK built environment sector.

With a focus on the real estate, banking and investment sectors, the study aims to deepen understanding of ESG principles and issues, highlight the benefits of sustainable investing and set out certain potential hurdles. Chief among them is regulation.

The lack of clarity relating to regulation in this space is leading to differences in approach that experts say limit UK growth opportunities.

The report advocates for further guidance surrounding the UK Green Taxonomy as investors and companies want clear guidelines defining environmentally sustainable investments.

Whilst environmental targets and measurement are the stand-out principles of ESG, the report outlines the risk presented by the lack of UK Green Taxonomy which would provide clarity on sustainable activities, disclosure requirements and key performance targets.

The report also shows that the environmental aspect of ESG is taking the lion’s share of the focus and that investors could be driving this. It cites a recent survey of 1,000 sustainability investment managers across Europe revealing that overall, investors prioritise the environmental dimension over the other dimensions of ESG.

Nicola Giddens, partner at Womble Bond Dickinson, said: “Investor decisions are shaping the UK housing sector, and this is evidenced in the rise in green lending and sustainability-linked loans, as well as the development of ESG-focused frameworks and standards to support the decarbonisation of the housebuilding sector.

“It is great to see lenders setting up benchmarks and advising national housebuilding bodies like the UK Green Building Council, setting the bar high for what good ESG practices look like.

“However, this also adds further complexities and a lack of cohesion that could limit UK growth opportunities.

“Housebuilders are left choosing which investor-driven standards they should align themselves to, potentially missing out on vital areas that would benefit their own stakeholders, whose needs are specific in nature.

“A set of standards set by a bank headquartered in London may not take into account the social value that could be achieved at a regional level.”

Charlie Reid, partner at Womble Bond Dickinson, added: “What is clear from our research is that ESG is now guiding both investments and critical operational decisions.

“Unsurprisingly, concern for climate change is one of the most common drivers of ESG adoption in the companies we studied and there is rich evidence that banking and investment companies are actively engaged in the issuance of green and sustainable finance products to support net zero or low carbon projects.

“However, the report shows that the lack of clarity on the timing and content of the UK Green Taxonomy must be resolved by the government to ensure consistency and defined standards of reporting across the market.

“Without clear benchmarks, housebuilders have endeavoured to create their own key performance indicators and reporting against those goals which is a great start, but self-regulation is not something that is sustainable.

“The new legislation should help drive confidence in data and help develop the ESG lending market further.”

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