What Is ESG in Construction?

Environmental, social and governance (ESG) has become the buzz acronym for construction in recent years—and with good reason. Here’s how following an ESG framework helps firms reduce risk, deliver better outcomes and enhance reputation.
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As the world faces the impacts of climate change, social and economic inequality and the ongoing recovery from the COVID-19 pandemic, more businesses are putting in place practices that seek to tackle these challenges. 

Essential to the success of the construction industry’s efforts in overcoming these and other challenges is its recognition of and adherence to the principles of environmental, social and governance (ESG) policies.  

Many businesses have sought to operate ethically for years. Ethical investing dates back to the 1960s, when “socially responsible investing” saw many firms steering clear of regimes with poor human rights records, such as apartheid South Africa. 

ESG was more specifically outlined for the first time in the early 2000s, notably in a 2004 United Nations Global Compact Report, “Who Cares Wins: Connecting Financial Markets to a Changing World,” and a year later in “Freshfield Report” from the UN Environmental Programme’s Finance Initiative. 

ESG Defined 

The British Business Bank describes ESG as a collective term for how a business impacts the environment and society, “as well as how robust and transparent its governance is in terms of company leadership, executive pay, audits, internal controls and shareholder rights.” 

The Confederation of British Industry (CBI) argues that today’s investors increasingly want to invest in sustainable businesses with good investment models, “and integrating ESG factors will set a business on the journey that its investors will be wanting to see evidence of”. 

Getting the basics of ESG sorted isn’t difficult, argues the CBI. “Consider it a journey where there are clear benefits at every stage post. Once you start measuring your environmental data, this will get you to start thinking of ways to cut energy, water and waste usage. So you are now on a cost saving exercise.”  Meanwhile, having an attractive business culture – part of the ‘S’ – will help to maintain low staff turnover, the CBI says, and attract the talent needed to secure growth.  

And focusing in on the governance of one’s business – not least on risk management – will not only appeal to investors but customers and supply chain. “Good risk management practices will also bring their own costs savings in terms of insurance coverage and premium pricing,” the CBI adds.   

When it comes to construction, consultancy Marsh McLennan highlights the scope of ESG as going beyond the mere reduction of carbon emissions.  

It says that just as important are things like where and how building materials are sourced, the reduction of waste, supply chain management and maintaining the health, safety and well-being of staff and communities. 

Another consideration would be the attitude of senior management in terms of reporting “the environmental and social ramifications of their business as well as the systems and mechanisms whereby they direct and manage the firm.” 

Give me an E, give me an S, give me a G 

The “E”—environmental—in ESG construction can cover a range of considerations, according to Allianz Global Corporate & Specialty, including the type of materials being used on a project; the utilities used during a scheme’s construction; the construction methods used, from “traditional” to modular or volumetric; waste management strategies; and future-proofing design. 

The benefits of having a good environmental policy in construction cannot be understated. From design through to delivery, the use of responsibly sourced materials on a project, a proper waste management programme and ensuring that the delivery and operational life of a built asset doesn’t impact the environment are all elements investors and other stakeholders will be looking for. They also lead to better outcomes for the end user. 

When it comes to the “S”—social—element of ESG, this can include investing in fair and equal opportunities and conditions for employees, according to the British Business Bank, along with ensuring that products used in a construction project are safe and customer data is secure; preventing abuses within the supply chain; providing training and supporting health and safety, plus well-being; and investing in local community projects. 

It’s important to maintain good relationships with the communities in which a project is being built. Marsh McLennan says it is “vital to assess the social consequences of its activities through the ESG lens to ensure continued positive outcomes and gauge the significance of construction in people’s everyday lives.” 

Meanwhile, the approach to good governance—the “G” in ESG—is vital. Well-run businesses, managed by talented, diligent individuals, will by and large “do the right thing” by their stakeholders, again resulting in better outcomes for the business and better results for wider society.  

Don’t take things for granted 

But there is no room for complacency. As S&P Global points out, there have been a number of high-profile cases of poor corporate governance in recent years, including Volkswagen’s emissions test scandal and Facebook’s misuse of data. 

Again, the role of institutional investors is important, pressing for things like better leadership quality, better representation of women on corporate boards and in executive ranks, and equal compensation and mobility for women and people of colour. 

Specifically, in construction, law firm Dentons says governance “refers to themes surrounding corporate governance and behaviour, including ethics, corruption, transparency, response to sanctions, political contributions, anti-competitive practices, human rights abuses and corporate sustainability.” 

How a firm stacks up in terms of ESG is becoming increasingly important. Dentons adds, “Do not underestimate the emotive impact of ESG issues—and their potential, if mishandled, to damage a company’s reputation and profit margins,” noting the discovery of modern slaves in a company’s supply chain or illegal waste dumping from one of its projects “will almost certainly attract unwanted publicity.”  

Evaluating ESG 

When it comes to keeping an eye on ESG matters, things have historically been a bit “hit and miss.” As consultant PricewaterhouseCoopers (PwC) points out, ESG performance can be tracked and measured using company-reported data, while a series of different metrics are available.  

Rating systems such as WELL, BREEAM and LEED can also play a part in assessing the environmental credentials of a project.  

Much like having someone in a company who is prepared to be a digital champion, firms must buy into the rationale for following ESG protocols. To that end, many companies have created ESG boards who regularly publish ESG reports and updates as part of their corporate calendar, detailing the progress being made across all fronts.  

Yet PwC also points out that evaluating ESG performance can still be “challenging,” due to the inconsistent quality of ESG reporting. Responding to this state of affairs, last year the International Financial Reporting Standards Foundation announced the creation of a new International Sustainability Standards Board “to develop—in the public interest—a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.” 

At the end of the day, it makes good business sense to follow ESG strategies via a structured framework.  

The British Business Bank argues that embracing ESG lowers risk through better corporate governance, helps lower costs through better procurement and waste management practices and enhances a firm’s reputation, attracting employees, customers and investment in the process. 

If these factors lead to better run, profitable businesses, which look after their staff and clientele, along with better projects delivered to the highest possible standard for everyone to use, then the work involved in sticking to ESG principles will always have been worth the effort. 

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