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Graphic with green earth and ESG letter tiles

People, Planet and Profit

Start with green building, advance to CSR and add in other commitments to giving back and doing better—and you’ve got an environmental, social and governance program. While it might sound like a big-time investment, ESG is something that companies of all sizes can pursue.
By Christie Chapman
April 7, 2023
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Business

How do you measure a company’s kindness? Or its tendency to do what its leaders feel is best for the community and the world at large? It might sound theoretical, but these sorts of questions are increasingly on the minds of company stakeholders, customers and employees—including in the construction industry.

Green building and corporate social responsibility are well-established concepts in construction. But a broader model has been gaining currency over the last decade or so: environmental, social and governance, which synthesizes green building, CSR and other categories into a more unified strategy. First coined in a 2004 United Nations report, ESG offers a way for companies to define and quantify all the ways in which they try to make the world a better, cleaner place.

Specifically, ESG can help companies attach a number or other metric to their accomplishments in sometimes-nebulous areas such as environmental sustainability, social consciousness and philanthropy. The rewards can spill over into things that are much easier to quantify, such as profits and employee retention. A 2020 study conducted by New York–based professional-services firm Marsh McLennan found that “top employers, as measured by employee satisfaction and attractiveness to talent, have significantly higher ESG scores than their peers.”

Developing an initiative that’s good for the planet and its people and boosts your competitive edge may seem like a no-brainer. But that’s not to say ESG policies and standards have been universally embraced. “There has been resistance by the construction industry to regulated changes that require investments, such as the Climate Mobilization Act in New York City that will level fines on buildings with poor energy-efficiency ratings,” says Tensie Whelan, director of New York University’s Stern Center for Sustainable Business. For the most part, though, when it comes to implementing an ESG-level sustainability program, Whelan says: “This is where the world is going. Those lagging behind will lose competitiveness.”

WHAT’S THE SCORE?

First, a word about the terminology you use for any new program you implement at your company. “I would use the word ‘sustainability’ rather than ‘ESG’; ESG is really meant to be a system of measurement or assessment,” Whelan says. She defines sustainability as “how companies aim to harmonize the needs of people, planet and profit, through tackling the risks and opportunities presented by ESG issues for their sector.” In other words, sustainability initiatives—that go beyond environmental impact to include other social concerns—can be measured and reported using ESG scores.

How do you put a number or other quantifier on your efforts to do good for the world? Some companies now choose to provide ESG disclosures to stakeholders and investors, often using an established framework to calculate their ESG score, such as the Global Reporting Initiative, Principles for Responsible Investment or the Sustainability Accounting Standards Board, according to the Vancouver-based Corporate Finance Institute, which offers an ESG Specialist certification. Make sure to select a framework when providing an ESG disclosure—if you present vague data without this context, you could be accused of “greenwashing,” making false, unsubstantiated claims about your sustainability efforts.

ESG initiatives are particularly relevant for construction companies, for many of the same reasons it makes good sense—ethically and financially—to incorporate green-building practices into your work. “The construction of buildings and structures has major effects on global greenhouse-gas emissions and is directly or indirectly responsible for approximately 40 percent of global carbon-dioxide emissions from fuel combustion, and 25% of overall greenhouse-gas emissions,” says Erik Sjödin, who leads the global management-consulting firm McKinsey & Company’s work in the engineering and construction sector. “This includes the construction process itself and the production of building materials, as well as the building’s entire lifecycle, as design and technology choices affect energy efficiency and operating emissions over the years.”

In addition to taking responsibility for the industry’s role in some of the very issues that sustainability programs seek to address, companies see multiple practical benefits to these programs. “Many construction and real-estate companies are building sustainability into their strategies because it makes business sense,” Whelan says. “For example, there are significant risks for buildings related to climate change. Regulators are trying to reduce the emissions of an industry that causes 40% of emissions, through laws and fines. And the industry itself is increasingly affected by damage from climate-influenced extreme-weather events.”

Among the more concrete long-term sustainability goals of ESG initiatives is the holy grail of creating a “net-zero value chain.” This means a balance between the amount of greenhouse gas produced by a company and the amount removed from the atmosphere—for example, by producing a certain amount of renewable energy to make up for using that same amount of non-renewable energy. Construction isn’t there yet, but toward that end, last year McKinsey joined forces with a group of leading industry players and launched the Net Zero Built Environment Council. “Participants across the sector are showing great openness for solutions that work toward a net-zero built environment,” Sjödin says. “We’re inviting stakeholders from across industries to join the initiative to foster and accelerate cross-industry collaboration.”

Meanwhile, the “social” component of ESG “has been historically underweighted in the U.S.,” Whelan says, “but the pandemic, Black Lives Matter, #MeToo and the tight labor market have caused more companies, regulators, nonprofits and others to focus on social impacts.” For the construction industry, an ESG program might address “worker pay, benefits, health and safety, ensuring gender and BIPOC [Black, indigenous and people of color] diversity, equity and inclusion across all levels of the company, and programs that encourage procurement from diverse vendors and suppliers.”

The “governance” portion of a company’s ESG program could include making sure the board of directors and management have values that align with those of stakeholders, ensuring transparency and avoiding conflicts of interest, as well as striving for inclusivity among company leaders.

Some companies are making progress with their ESG initiatives—and have the receipts to prove it. “Our commitment to sustainability motivates us to take critical steps to continually move toward a net-zero future, creating value for our company, our business and the world,” says Michael LeMonds, vice president of ESG and chief sustainability officer for Chicago-based Holcim US, a leader in sustainable building materials. “Alongside our customers, we have reduced carbon dioxide by 13,800 tons in one year with low-carbon products, invested $1 billion in plant-modernization projects in the last decade and recycled 50 million tons of waste annually to recover energy and develop sustainable solutions.”

THE HUMAN FACTOR

There’s much talk of environmental sustainability in ESG—but a feature that differentiates ESG discussions from the more narrowly defined green building is the “people” part of ESG’s “people, planet, profit” equation. This includes office workers and residents who want to save money and stay healthy. “Tenants are concerned about emissions, but also looking for lower and less volatile energy bills,” Whelan says. “Tenants are also concerned with the health implications of chemicals used in construction, amongst other topics.” Sustainability programs—measured by ESG standards—take a more holistic view, accounting for these concerns.

And again, scoring high on sustainability can help a company draw talented employees. “In addition to avoiding regulatory risk, improving resilience to extreme weather and attracting tenants,” Whelan says, “sustainability initiatives can help attract and retain employees.”

Before embarking on a sustainability program, it’s important to note that companies don’t reach these goals in isolation. “Owners, developers and investors are increasingly committing to achieve net-zero targets in the long term, and are already cutting emissions in the near term,” Sjödin says. “Doing this requires close collaboration and partnership across the value chain, especially among contractors, engineering firms, building materials and technology manufacturers, financers, insurers and certifiers, among others.”

Construction companies in particular can be valuable participants in this process. “Forward-thinking construction companies can provide expertise on design, materials and technology choices,” Sjödin says. “They can work with the owners, developers and financers to make trade-offs among alternative designs and the implications on carbon-dioxide emissions, cost and time.”

This expertise can be especially valuable for those taking a longer view of their projects’ impacts, since it can cost more to build sustainably. “Construction companies can also provide value for engineering and industrialized construction by helping construct green buildings that compensate for sometimes costly green materials and technologies,” says Sjödin. “Furthermore, they can digitalize the process to increase efficiency and enable real-time tracking, all to ensure that what is built is truly green.”

GETTING STARTED

While it can be tough to nail down a one-size-fits-all template, experts provide tips for companies wishing to develop their own sustainability initiatives.
Identify priorities. “The first step is to identify priorities relevant to the industry and business, looking at the operations and impact—regardless of how positive or negative—to find the opportunities to make the biggest difference,” LeMonds says. “Once a baseline is set, goals can be set in the areas most relevant to the business.”

It’s important to know what you want to quantify, as precisely as possible. “Setting highly specific goals provides a guidepost by which to compare progress and results,” LeMonds says. “This also allows for a clear path forward, and identifying key areas of improvement. For example, we have set specific goals to reduce emissions and recycle water within our own operations, and have established a supplier code of conduct to move toward a net-zero future.”

Set ambitions. “Construction companies that want to grow, attract talent and be the preferred partners of leading owners, developers and investors can set clear ESG ambitions that translate into tangible actions, capabilities and, ultimately, assets,” Sjödin says. “In practice, that might mean establishing expertise with the latest building technologies, securing privileged access to green materials that may be in shortage, providing reliable digital tracking of emissions, electrifying worksites and logistical flows, offering value-engineering services to minimize incremental costs of more sustainable designs and many, many more things.”

According to Lucy Pérez, a McKinsey senior partner, there are three levels of ambition when it comes to ESG. “Minimum practice” focuses on “risk mitigations and do-no-harm measures” such as meeting mainstream reporting standards and participating in philanthropic endeavors. “Common practice” consists of “substantive efforts, mostly beyond the core business,” including voluntary compliance, comprehensive policies and philanthropic programs that “aim for above-industry performance.” “Next-level practice” refers to “the full integration of ESG into a company’s strategy and operations,” Pérez says. “Companies on this level approach ESG decisions by seeking a deep, evidence-based understanding of their own business and its broader potential effects.”

Assess needs—and update. “Creating an ESG strategy calls for continuously considering the needs of a range of stakeholders as well as society itself,” Pérez says, “while recognizing the particular ways in which the organization can excel and drive value creation.” LeMond adds: “Continuous improvement is critical to incorporate for any company implementing newly established sustainability goals. We are constantly evaluating our goals. … Operating in a mode of constant improvement and evaluation shows a continuous recommitment to the mission.”

Creating a strong ESG initiative requires companies to know themselves versus merely taking a paint-by-numbers approach. “Forward-thinking companies have a clear understanding of their strategy, their strengths and gaps, and they often focus on identifying initiatives that matter most to their business models,” Pérez says.

Focus on scalability. For a company that’s small or just starting its ESG journey, experts suggest going after low-hanging fruit. “It’s important to start small, and finding the easy wins builds momentum internally,” LeMonds says. “With the continuous-improvement principle in mind, a company could then expand the program and branch out from the most obvious initiatives established.”

He cites an example of this type of expansion from Holcim: “Creating and amplifying low-carbon cement is a clear and obvious approach to our work as a building-materials company, but we have continued to leverage innovation to find additional opportunities to build progress for our planet, by electrifying our fleet of vehicles.”

While specific goals matter, it’s also important to keep an eye on the bigger picture—and to foster a company culture that supports these initiatives. “Sustainability can be looked at from several vantage points and implemented at varying levels and angles,” LeMonds says. “From renewable energy to low-carbon cements, to incorporating electrification and innovative carbon-capture research, our company culture to always put sustainability first pays off by finding unique and research-backed methods of accelerating our progress.”

At minimum, even the smallest companies can seek out ways to be greener, as a start to a fuller ESG program. “Companies of all sizes can begin to incorporate more environmentally friendly practices,” LeMonds says. “The important piece is to lay the appropriate groundwork to set yourself up for success.”

by Christie Chapman

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