What Contractors Need to Know About ESG
By Brian Gallagher and Michelle Palys
The environmental, social and governance (ESG) movement may have started among institutional investors and their financial partners, but it has expanded across almost all sectors and is becoming increasingly relevant for the construction industry. Many project owners are now requiring contracting companies to report on ESG measures because activities completed by contractors are considered part of the owner’s value chain and must therefore be incorporated into their own ESG reporting. In addition, ESG aspects of projects are increasingly becoming part of the project financing evaluation process. While ESG reporting is growing in significance, contractors are still learning how to track, measure and report ESG metrics across their organization.
Increasingly, the construction industry is being called on by regulatory, reporting and customer demands to address the social and environmental impacts of their operations. In part, this is a trickle-down effect of the Securities and Exchange Commission’s push for ESG disclosures surrounding emissions that result from assets not controlled by the reporting organization. Third-party procurement systems often require ESG reporting now, as well. In addition to top-down pressures, grassroots interest from consumers and employees—who often take sustainability into consideration when choosing a company to work for—is driving the change.
With ESG becoming an issue on which contractors will be evaluated and selected for projects, now is the time for companies to develop their ESG approach. Because this is a new arena for many, the place to begin is with research on what ESG implementation involves. For contractor companies, sustainability is likely the most familiar of the three ESG pillars since environmental issues surrounding construction materials and activities have long been a concern. Organizations tend to find the development of the social and governance pillars more challenging as they are considered complex novelties in the industry. The belief is that these concepts may require additional investment and deployment of resources to weave them into the cultural fabric and operation of construction organizations, but this is not necessarily the case. People-centric firms that have developed positive relationships with their workforce, along with effective systems, controls and checks and balances, may have important progress in the social and governance areas.
It’s being increasingly recognized that true sustainability is best achieved by improving life cycle costs and life cycle gains come about as a result of early planning, as well as careful and collaborative sourcing in a team effort with all the project stakeholders. This makes the preconstruction phase, where project conceptualization occurs, critical. Preconstruction teams should focus on:
- Sustainable site planning;
- Safeguarding water and water efficiency;
- Energy efficiency and renewable energy;
- Conservation of materials and resources;
- Indoor environmental quality; and
- Operations phase efficiencies.
One thing to keep in mind is that, according to the Construction Industry Institute, the tendency for construction organizations to focus on the environmental aspect of ESG often comes at the expense of the social and governance aspects, something that is already changing. Organizations can greatly benefit from addressing ESG holistically to avoid placing excessive emphasis on a particular pillar, which will enable them to achieve a more balanced and integrated implementation. Existing programs and standards are part of the ESG puzzle. The United States Green Building Council LEED program offers a proven framework for many of the environmental aspects, and the WELL Building Standard provides a structure for social equity, occupant health and safe spaces.
A good resource for learning about the social aspect of ESG is the International Living Future Institute. Its Just Program outlines six main categories that are intended to be “used as a nutrition label for socially just and equitable organizations.” The categories are diversity and inclusion; equity; employee health; employee benefits; stewardship; and purchasing and supply chain. Any diversity, equity and inclusion (DEI) programs that a company has embarked on will help form a basis for its ESG program. To ensure efforts are as thorough as possible, and to formalize them so the program stays on track, it is recommended to set up a DEI council with council members from different departments. The goals of the council should include increasing diversity in workforce participation, especially women and minorities and identifying and removing biases that may be hindering recruiting, promotion or retention in the company. It may be necessary to make changes in day-to-day operations and/or corporate or internal communications to achieve and sustain diversity.
Construction firms are in a unique position to extend the umbrella of their DEI efforts beyond their own company. Diversity in suppliers and procurement should be pursued by using minority- or women-owned businesses or small businesses. Doing so contributes to the economic growth and expansion of the communities served. It can be helpful to establish a supplier diversity program that is a joint effort between the company’s executive leadership and operations.
Foundations of ESG’s social aspect are health and safety programs that promote the well-being of company employees, along with comprehensive benefits packages. Training, education and investment in employees’ futures are also primary considerations. It’s important to extend this investment in well-being to the community in which the company operates by establishing, for example, a community fund that supports charitable and civic activities.
Meeting the requirements for ESG’s governance category requires strong leadership and management styles as well as the effective management of risk. It also requires that all business practices tie into core values that emphasize honesty, integrity, follow-through and transparency.
When entering the development phase of the organization’s ESG program, efficiency can be gained by understanding the needs and requirements of a company’s clients and typical project types. Because project types vary widely in size, scope, energy use, environmental and social impacts and many other variables, fully understanding these variables should inform the parameters of one’s ESG program. Once priorities have been established, company leaders should complete an inventory of what is already being done. Familiar tools such as a Gap analysis (wherein current performance is compared to desired performance and the “gap” between the two is assessed) can clarify how resources, money, technology or other assets can be deployed to achieve success.
Once goals and strategy have been identified, the next step is to develop a system of metrics and tracking. Third-party systems can be invaluable here. ESG reporting will harmonize the different ratings, indices, standards and rating systems to present a composite picture. A variety of software and other tools are increasingly available and will help standardize and organize the large amounts of data that come from various team members and partners. These tools can complement or integrate the suite of tools that have become vital to capital projects, including procurement management systems, BIM, web-based project management tools and other collaborative construction project management technologies. In addition to tracking, publishing data (internally and externally) is important as an accountability measure.
Construction companies will be expected to deliver investor-grade, high-quality ESG disclosures to allow owners and other stakeholders to make good decisions. Construction firms that embrace ESG will improve their image and reputation with owners, communities, investors and employees.
A step that cannot be skipped while developing an ESG program is informing and educating internal stakeholders. Doing so ensures that a company’s team members, at all levels, are inclusive leaders and strong individual contributors. This represents a proactive approach that will help the company reap the most benefits from its efforts.
The construction industry has an important role in shaping our communities and our impact on the climate. Leaders of construction firms have an opportunity and responsibility to lead the way in adopting ESG approaches in their businesses. A balanced and integrated implementation of the three elements of ESG will contribute to the health of the contractor’s company and can improve the bottom line. This is because improvements to performance in terms of environmental, social and governance measures reliably translate to improvements in productivity and project quality—and can even help control insurance costs. As such, ESG should be embraced as a competitive advantage as opposed to viewing it as just another “compliance” requirement. And beyond these many benefits is one underlying imperative: Being mindful of ESG is the right thing to do.