As the business world increasingly embraces the importance of Environmental, Social and Governance (ESG) reporting, it’s noteworthy that the idea that companies should focus on not only revenue and society but also the planet which should be nothing new.
In fact, the idea is very old. Within the last two hundred years alone, we see many examples of how business leaders have realized that being kind to the world is simply good business. Charles Dickens even writes in 1843 that the common welfare of “charity, mercy, forbearance and benevolence” should be the first of a company’s goals.
While the nomenclature of ESG may be relatively new, according to Nancy Koehn, Harvard Business School professor and historian, “The arc of history in business is all about companies that had social ambitions and aspirations as well as commercial benchmarks and ambitions.” Seeming, the omission of commercial symbiosis with the environment has increasingly been left behind and forgotten.
Indeed, from Josiah Wedgewood’s successful pottery business in the 1700s that helped provide food, housing and training for employees to AT&T organizing blood drives for the Red Cross in the 1960s, doing good for society has happily been part of the fabric of many businesses.
Gradually, the idea of doing good beyond just people and profits began a long slow rise into our culture, and customers and clients became more and more interested not just in what companies did, but in how they did it and what the impacts to the environment were.
In 1989, the New York Times reported that, “a growing number of consumers are basing their purchases on environmental concerns….and companies are beginning to devise marketing strategies that address them.”
Today, now more than ever, our engineering and construction clients remain laser focused on the bottom line yet are now also expecting business to be better stewards of the environment and of all people. The public and investors are expecting to see this transparently incorporated through three contemporary focus areas – environmental, social and governance.
Moreover, according to Bloomberg, “a company’s assessment of ESG performance is increasingly becoming a key indicator alongside financials to inform customers, stakeholders and employees about the resilience and long-term viability of an organization.”
The development of an ESG program within a company demonstrates dedicated and socially aware leadership, which can result in an improvement in your brand and ultimately in your financial status. Indeed, while it may not seem obvious, doing good and accurately reporting on it can also improve your financial foundation.
As Harvard Business Review reports “mounting evidence shows that sustainable companies deliver significant positive financial performance, and investors are beginning to value them more highly.”
Being Good to the Environment
Within the engineering and construction industry, we all more so now increasingly understand the value of constructing environmentally friendly buildings, not just to save on energy costs for example, but by comprehending the positive impacts that reducing emissions does have on our planet.
According to the Office of Energy Efficiency & Renewable Energy, buildings owned and operated by businesses, federal, state, and local governments account for 18 percent of U.S. primary energy useand $190 billion in energy expenditures every year. Commercial buildings consume 35 percent of electricity and generate 16 percent of all U.S. carbon dioxide emissions. On average, 30 percent of the energy used in commercial buildings is wasted. In addition, buildings are responsible for around 40 percent of global energy consumption, a quarter of global water usage, and a third of greenhouse gas emissions.
As you can see from these numbers, energy reduction in commercial buildings can have significantly smaller negative impact on the environment, but results in an improved financial outcome. In addition, by developing and incorporating of sustainability and green building best practices, our industry can create demand for more skilled jobs and careers.
Leaders in the engineering and construction field have an incredible opportunity to significantly reduce the industry’s GHG emissions. For example, according to a recent report, if our industry were to cut GHG emissions by 80 percent by 2050, we could contribute significantly to fighting the changes to our climate as we continue to witness rising temperatures, severe weather, drought, and wildfires.
A new model noted in Science Daily concluded that reaching this target will require the “installation of highly energy-efficient building technologies, new operational approaches, and electrification of building systems that consume fossil fuels directly, alongside increases in the share of electricity generated from renewable energy sources.”
According to the United States Green Building Council, green buildings and communities reduce landfill waste, enable alternative transportation use, and encourage retention and creation of vegetated land areas and roofs. By building green, we can simultaneously reduce the negative impact our buildings have on climate change while also building resilience into our communities.
Moreover, there may be added incentive to going green. A new bill signed by President Biden provides significant funds to commercial interests battling climate change. The bill includes $60 billion for growing renewable energy infrastructure in manufacturing like solar panels and wind turbines. Whether it is utilizing solar or wind energy, constructing buildings with more energy efficient materials, reducing greenhouse gas emissions and managing energy consumption, it is important to be transparent to your key stakeholders and the best method is to prepare comprehensive ESG reporting.
Understanding The Societal Impact
Beyond reporting key environmental ESG results for your company, it’s important in ESG development to conduct and report on the societal opportunities of your work.
For example, it will be key to elaborate within your ESG reporting about how you are training employees, how you may be developing wage equality across your organization, as well as programs and initiatives to improve workplace health and safety.
In addition, especially in this industry, detailing transparency efforts within the supply chain can go a long way in earning stakeholder trust. Examples of such supply chain transparency include disclosing responsibly sourced raw materials, partnering with minority/women/small/veteran owned businesses, and suppliers that implement humane labor practices and promote diversity. Customers may have taken such things on faith, but increasingly these stakeholders are making choices based upon a company’s social reputation when purchasing products. Products from companies that report such insightful data are selected over similar products from companies that are not so focused.
Within the construction industry, there is growing diversity and inclusion.
As noted earlier, readers of our ESG reports must understand exactly how we support the health of our employees (the recent pandemic taught us all how important such initiatives can be). And just as necessary, is for us to detail our progress in racial equity within our organizations. To grow and be profitable, we need to provide greater inclusivity in our workforce and offer access to these important services to more in need. Moreover, strong social ESG systems positively influence the growth of a diverse pipeline of potential employees which in this current jobs market is key to the future growth and health of the engineering and construction industry
Providing Ethical Governance
Governance in an ESG report may not seem as dramatic and exciting as environmental or societal impacts, but it is just as important. Governance engages the company’s stakeholders and leadership to examine the organizational values, how to prepare for environmental and social risk, as well as a company’s sustainable performance and remuneration over the long-term.
Organizational leadership has a direct connection to company culture and its performance outcomes. The ESG report’s creditability is centered on the organization’s commitment to the successful implementation of sustainability focused programs and initiatives organizations. It is also important to reflect upon how your leadership and board are committed to improving the company’s ESG metrics by linking job performance and compensation to organizational sustainability success. If the C-Suite does not truly believe and invest in the sustainable values and culture that are advertised, negative ESG performance as the inevitable outcome will hurt the long-term financial performance of the business.
Ethical governance must also include how the organization interacts with regulatory and policy environment. Company’s that walk the walk are organizations that are engaged in local and regional policy development. These activities address sustainability in a meaningful way that advances businesses interests by focusing on the opportunities that improve organizational performance within ESG and can be measured and reported. Leadership involvement in shaping industry policy is a best practice and can help advance the company’s reputation as a leader in the industry.
Challenges and Opportunities
So far, the focus of this article has been on the importance of combining profits with societal good (which it turns out is a fantastic duo), and then reporting on it in a transparent way. But we also need to address some of the challenges in ESG reporting.
Providing true quantitative measures in your reporting is necessary, but unfortunately, some ESG reporting can include grey areas that may make it hard for investors or customers to truly understand your company’s positive impact on society.
Because there are no specific regulated standards for ESG reporting, some companies unfortunately have taken advantage of the system by inflating their sustainability or social progress initiatives.
In fact, for publicly traded companies, the SEC has developed a climate and ESG task force to investigate potentially fraudulent claims contained in an ESG report. Obviously, such oversight is positive progress, but they have no jurisdiction over private firms that do not voluntarily report.
Experts agree that there needs to be increased transparency, a better criterion for providing ESG information, developing appropriate and measurable sustainability taxonomies.
While it is generally easier to set standards and goals for environmental reporting, it is more challenging to create an enforcement framework and organization to do so in a regulatory effort. Fortunately, there are several ESG reporting formats that support companies’ unique reporting challenges. These reporting systems have improved markedly over the years and now support ESG reporting that reflects industry norms. Embracing the reporting movement will contribute to stakeholder confidence and attract investment allowing for sustainable growth of your business.
Effective ESG programs now go beyond traditional philanthropy work, investment in environmental protection and restoration, supporting the diversity and equity values meaningful to employees and communities in which your company resides, and investment in policy making are all examples of how business is no longer simply traditional. Leaders should realize that it is a wholistic approach that spans many different aspects of your company. If done well, the financial implications of integrating ESG performance into the overall business strategy can allow you to sustainably manage both growth as well as risk.