For decades, companies have been encouraged to develop ESG—environmental, social, and governance—financial strategies where companies prioritize what they believe will create a positive benefit to society in the long-term, often by addressing climate change or issues like diversity or racial inequality.
For the environment segment, ESG might assess carbon emissions, air and water pollution, waste management, renewable energy initiatives, and water usage. For social impact, ESG programs consider employee gender and diversity, fair labor practices, human rights at global locations, data security, and customer satisfaction. For governance, ESG guidelines can monitor executive pay, lobbying, diversity of board members, large-impact lawsuits, and potential corruption.
The future is moving toward a more inclusive, sustainable economy, and the global capital markets agree. Bloomberg Intelligence estimates ESG-related assets are set to exceed $50 trillion by 2025, representing more than one-third of the total $140 trillion assets under management.
Since investors are looking for positive ESG reports, companies are moving in that direction. For example, Procore Technologies, a construction management software company well known in the industry, released its 2022 Environmental, Social and Governance (ESG) Report, which highlights the company’s guiding principles, efforts, and aspirations related to ESG.
The ESG Report details Procore’s ESG pillars including establishing oversight and management of ESG at multiple levels of the company, from the Board of Directors to a cross-functional ESG Committee that develops and drives ESG initiatives across the company’s business operations. As Tooey Courtemanche, founder, president, and CEO of Procore, says, “With today’s construction technology, it’s no longer just about building, but about building better and leaving a legacy behind for future generations.”
Building on ESG
Speaking of builders, according to Allianz Global, a global corporate insurance carrier, potential ESG considerations for construction and design companies include:
On the environmental side:
- Material selection – use of components that are produced using less energy
- Water consumption – both during construction, as well as over the lifecycle of the building
- Construction methods – less carbon-intensive and more environmentally-efficient
- Use of new and innovative technologies
- Waste management – reducing and reusing
- Future proofing design – anticipating future climate change and constructing a climate-resilient built environment
For social investment:
- Community impact – transportation (public/private)
- Accessibility – economic, and in consideration of impairment/disability
- Procurement (including supply chain management)
- Stakeholder engagement
Strong sustainability metrics are attracting investors, who recognize they make property more marketable, can attract lucrative tenants, increase property value, and lead to higher profitability. Construction professionals need to meet the challenge of climate change, not only for the greater good, but to attract investment and minimize their exposures to claims and litigation.
ESG considerations are generally made after all other business objectives are met to meet the needs of various stakeholders, and decisions to switch to renewable electricity, for example, are economically driven and based on facts, science, and risk management data. At that stage, formulating the actual ESG statement is easier.
For public, listed companies, the SEC (Securities and Exchange Commission) has proposed a new set of mandated disclosure mandates requiring corporations to provide transparency on ESG performance across their operations and, critically, their supply chains. For some companies, emissions from their supply chains, which make up what’s called Scope 3 emissions, can be as much as 95% of a company’s overall contributions to greenhouse gases.
As Deloitte explains, for many companies, the SEC’s proposed rule introducing mandatory disclosure on Scopes 1, 2, and 3 emissions is a true tipping point. In the future, companies that don’t properly track, report, and reduce their Scope 3-related emissions could be subject to costly legal action and a higher cost of capital and insurable risk premiums.
Risk Management and ESG
Getting to the core of the issue, companies need a way to track and analyze the data that is available to determine the impact each element of their supply chain makes. Green Badger, a SaaS (software-as-a-service) developer for managing sustainable construction, released a mobile application for the built industry to automate ESG reporting along with LEED (Leadership in Energy and Environmental Design) certifications.
Available for download on Apple’s App Store for iPhones and Google Play for Android phones, “Green Badger LEED Automation” provides full access to the entire Green Badger product database to instantly document and validate thousands of green, sustainable products. Customers also can save time by creating erosion or indoor air quality inspections while walking the jobsite, instead of waiting to return to the office and transcribing report data. The app allows users to manage one project or dozens of building projects.
By tracking ESG issues, you can uncover risks that impact profitability—and there are many kinds of risk. For example, Trimble Viewpoint notes a company that obscures the fact that it uses a lot of pollutants is at risk to be penalized with hefty fines and suffer reputation damage. A company that doesn’t protect its customers’ financial data is at risk to be hacked and forced to pay for ransomware. A company that doesn’t track change orders in realtime is at risk for losing revenue and upsell opportunities.
Some ESG factors, such as cybersecurity readiness and adherence to safety guidelines, are directly related to the risk exposure of the organization. Other measures, such as employee diversity and fair executive compensation, are more preventative. All ESG in construction relates to a company’s level of exposure to risks, and how well they are managing those risks.
Most companies use an ESG framework to standardize tracking, follow best practices, and to generally understand the complex risk landscape. SASB (Sustainability Accounting Standards Board) is one of the most well-known and comprehensive. The SASB framework addresses a broad range of issues that impact project financials, including health and safety, data security, greenhouse gas emissions, and resource management. Other popular frameworks include the UN’s “17 Goals” of Sustainable Development, Certified B Corp, and the Global Reporting Initiative.
Why ESG now? Simple, the technology has finally caught up. We’re finally able to put a number on the impact of ESG issues, thanks to better data collection and analysis. In the past, ESG questions were fringe issues communicated with anecdotes rather than facts and analysis. Today, technology advancements have made it much easier to pinpoint the specific value and impact of ESG-related factors.
ABI Research reports companies will continue to focus on ESG initiatives despite political pushback. Companies will continue to listen to stakeholders, including customers, partners, employees, and investors when addressing ESG initiatives. As Deloitte puts it, “Ultimately, it’s about being good stewards of our planet. Companies that follow ESG can expect added value in the form of brand and product differentiation, workforce attraction and retention, and price premiums. The question comes back to: do you have clarity on the ESG footprint of each product and service you’re purchasing and the decisions you can make to drive material sustainability improvement?”
Institutional investors want to know, because they are also monitoring their own risk–on climate impact, diversity, governance issues, and social issues. Regulators want to know–and will soon be looking for proof. And consumers want to know, too. A focus on improving the environments we all live, play, and work in is our collective responsibility. What role and impact will you have? Will you be progressive and “woke” or just getting along?
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