Oxygen Finance

How Local Councils Are Putting ESG At The Heart Of Their Decision-Making

With voters citing the Environment as their top concern (according to polling from Ipsos MORI released in November 2021), it’s clear that the impact of ESG (Environmental, Social, and Governance) on local authority decision making is only set to become more pressing in the forthcoming years.

As the public becomes ever more attuned to ESG issues, many local authorities are pushing to implement more initiatives and lead the way. After all, local leaders are often in the best position to make headway on ESG, as they are closest to the issues.

In this article, we review the different ESG factors and some of the options available to local leaders who are ready to rise to the challenge.

Environmental measures

The Local Government Information Unit / Municipal Journal State of Local Government Finance Survey 2020 tells us that 98% of local councils are committed to tackling climate change and the erosion of our natural environment – the ‘E’ of ESG.

When it comes to protecting the environment, the UK is leading the charge, setting an example for other countries to follow. As local governments in the UK work to reduce their own carbon emissions, they too are tackling the growing problem of climate change. The Local Government Association, (representing local councils in England and Wales), has identified 230 local governments that have declared a climate emergency and are taking action to reduce their own carbon emissions.

Local government aims are in part influenced by the guidance of the 17 Sustainable Development Goals (SDGs) as defined in the UN’s 2030 Agenda for Sustainable Development. The SDG principles set out aspirations for a sustainable future and encompass an array of crucial themes, including climate-change commitments, labour and workplace standards, social equality, industry innovation, infrastructure, health, and clean growth. The UN’s SDGs can ideally provide a way to measure how sustainable a city is and allow that city to be more aware of the environmental issues that are taking place.

Uncovering the daunting impacts of the climate emergency, the Local Government Association (LGA) surveyed 89 councils and found that lack of funding was the most significant obstacle. Yet, local leaders also know that adopting a progressive industrial strategy that is low carbon will help them position their areas for future growth and prosperity.

A truly progressive and sustainable industrial strategy is inherently expansionary. It requires an increase in spending on education and training to support low-carbon industries, new infrastructure to carry renewable energy, more public procurement on green goods and services, and fiscal measures to provide incentives for energy efficiency. This increased demand for labour is likely to cause unemployment rates to drop. As the economy benefits from these new jobs, it will give people more money to spend, which is then returned to the government through reduced reliance on it for support and increased taxation.

Examples of ways that local authorities can create greener cities include implementing cycle to work schemes, park and ride schemes, congestion charging, bus lanes, implementing tram networks, the introduction of solar panels, retrofitting housing stock with insulation, or low-carbon heating to reduce the effects of climate change.

A common example of green infrastructure is fibre-optic broadband. Along with the many other benefits, fibre broadband supports the digital economy, reducing the need for travel. For example, with increased homeworking and remote GP appointments, the need for people to commute is greatly reduced.

Another way that local authorities can meet their ESG commitments is through upgrading their existing assets. The Re:fit EPC framework enables public sector bodies to implement and accelerate energy efficiency programs and energy-related improvements to their buildings and other assets. Programmes supported by the Re:fit framework include upgrading LED lighting and replacing boilers.

Adaptation projects are another green option, although in reality they tend to be better at delivering cost avoidance rather than a direct return for the contracting authority. Central government provides financial support to local authorities to deliver climate adaptation projects, subject to a competitive bid process. The most recent guidance can be found on the LGA website.

Local governments in the UK are uniquely able to drive effective change to the sustainability of financial systems. One of the key assets that make this possible are Local Government Pension Schemes (LGPS). The government’s September 2016 statutory guidance on ISSs (Investment Strategy Statements) gave even more clarity about what is expected of the LGPS in relation to ESG policies.

All 89 England and Wales funds now have ISSs that reference ESG policies, yet local authorities face increasing pressure from Non Government Organisations (NGOs) to divest from fossil fuels and have been criticised by the NGO ShareAction and ClientEarth citing the fact that only 12 of the new ISSs have any mention of climate change.

By example of the way forward, UK pension scheme Border to Coast’s self-funded climate change policy is launching later this year in response to the heightened focus on ESG considerations and sustainable investment decisions. The policy details how they will vote against company Chairs in high polluting industries if their climate change policy is not sufficient, back climate initiatives at company meetings, encourage invested-in companies to publish how they are performing with regards reducing greenhouse gas emissions, and a range of other measures, alongside the adoption of the Net Zero investment framework.

LGPSs can also take ethical stances in relation to their investments, including divestment of controversial companies such as tobacco companies or fossil fuel producers, providing leadership to institutional investors.

In another example of innovation in ESG, West Berkshire Council’s historic £1 million Community Municipal Investment (CMI) will bring the district closer to its goal of making West Berkshire carbon neutral by 2030. Residents and community groups are invited to invest directly with the Council to help build a greener future for the district. Similarly, Warrington Borough Council has launched a green bond to help finance its solar and battery storage sectors.

With regards to investment, local authorities have shifted their focus from investing in traditional financial institutions such as banks and building societies to lending to other authorities. They provide not only stability, liquidity, and yield, but also uphold ESG values.

Social measures

Social value is at the heart of what local authorities provide, and the ‘S’ in ESG. From social housing, to care services for those in need, to a wide range of recreational services, local authorities keep communities going strong.

Procurement can make an outsized impact on social value due to the number of products and services they source. Many public sector organisations, and local authorities in particular, are placing a heavier weighting on social value within their tendering exercises.

In the past social value may not have featured within a tender, at best appearing as a few CSR-related questions within the quality section, but nothing enforceable through contract management. Today, although price and quality continue to be the lead scoring metrics, up to 20% of the total weighting for some tenders is allocated to proving social value to the contracting authority.

More importantly, as this is part of a tender’s scoring it must be quantifiable, which presses organisations to commit to specific, measurable targets. For example, ensuring that a certain number of apprentices are hired within the contract term, and other forms of local job creation. This is particularly prevalent in public investment decisions within certain industries, for example construction where a local, on-site workforce is vital.

Understandably, many of the projects that have been featured under the first ‘Environmental Measures’ section could equally have been listed here. The reduction of pollution has considerable benefits both in terms of public health but also in how people feel about their environment, encouraging better citizenry. Improvements to council housing make a significant difference to the lives of the tenants, increasing their pride in their home, and by extension, themselves and their community. Cycle to work schemes have an obvious public health benefit, and the introduction of sustainable industrial strategies creates the demand for high-paying, skilled jobs to develop and maintain the required infrastructure, improving the lives of both workers and their families. The fact that so many policies have multiple benefits attached makes the argument for their introduction even more compelling.

A major initiative during the COVID pandemic has been the systematic early payment to council suppliers to protect supplier working capital during unprecedented commercial conditions. However, now that the impact of COVID is receding, councils can see the social value in maintaining early payment for small local suppliers in a more sustainable, robust manner.

This is why Oxygen Finance introduced FreePay, an early-payment service that allows local authorities to pay small and micro businesses early, for free. It runs in parallel with authorities’ regular early payment programmes but allows many of their local suppliers – small and micro businesses – to benefit from advance payment without charge. It’s an example of how councils can bring social value directly to the local supply chain through the strategic use of their working capital.

Governance measures

True ESG is not just about the environmental or societal implications of decisions – the ‘G’ of governance matters too.

Councils and public organisations must have strong governance to run properly. The population looks to local authorities for examples of good governance, especially since they are in the public eye. Local authorities are determined to uphold the highest standards of conduct and behaviour, which is why they are so strong when it comes to governance.

Public sector investment decisions are based on objective and reliable advice, which helps to maintain strong governance. Local government must publicize the minutes of committee meetings on their website to allow for a sufficient level of scrutiny.

Furthermore, democratic accountability ensures that local politicians are held to account for their decisions, for good or ill, which provides checks and balances that even today can sometimes be left wanting in corporate governance.

With national and international commitments on the climate and other ESG measures appearing closer on the horizon that ever before, the world is looking to governments to lead. But lest we forget the old saying that “leadership starts at home”. Now is the time for local government to act on this sentiment and deliver ESG initiatives that make a difference, right on their citizens doorstep.


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