What contractors need to know about ESG

Environmental, social, and governance (ESG) reporting requirements initially began among institutional investors and their financial counterparts. However, it has now widened its reach to nearly all sectors, including commercial real estate and construction, where it is gaining increasing importance. Leaders of these firms have an opportunity to embrace ESG and pioneer their adopting throughout the industry.

The demand for commercial real estate enterprises and construction companies to submit ESG reports is growing. This is because their operations are perceived as an integral part of the project owner’s value chain and, as a result, must be incorporated into the project owner’s own ESG reporting.

Increasingly, commercial real estate is being called upon 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 (SEC) 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 firms will be evaluated and selected for projects, now is the time for commercial real estate companies to develop their ESG approach. Because this is a new arena for many, the place to begin is with research into 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 prevailing assumption is that integrating these principles might necessitate further investment and resource allocation to blend them into the cultural ethos and functioning of commercial real estate and construction entities. However, this doesn’t always hold true. Companies that are people-focused and have fostered strong bonds with their workforce, coupled with efficient systems, controls, and checks and balances, might already be making significant strides in the social and governance dimensions.

The growing consensus is that authentic sustainability is optimally realized through the enhancement of life-cycle costs. These life-cycle benefits emerge from initial planning stages, and meticulous, cooperative sourcing involving all project stakeholders. This places a significant emphasis on the preconstruction phase, where the project is conceptualized, marking it as a crucial stage. 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
• Operations phase efficiencies

Accordingly, the tendency for 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 (USGBC) Leadership in Energy and Environmental Design (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 (ILFI), whose 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 their 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 councilmembers from different departments. 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 within 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.

Commercial real estate 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 being served. It can be helpful to establish a supplier diversity program that is a joint effort between the company’s executive leadership and operations.

The social pillar of ESG fundamentally rests on health and safety initiatives that bolster the wellbeing of a company’s workforce, complemented by extensive benefits packages. Investment in training, education, and the future of employees are also essential elements. Extending this commitment to the wellbeing of the local community where the company functions is crucial as well, which could be achieved through the establishment of a community fund to aid philanthropic and civic endeavors, for instance.

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.

While initiating the development stage of an organization’s ESG program, efficiencies can be harnessed by comprehending the demands and requisites of a company’s clientele and customary project kinds. Given the vast differences in project types concerning their size, scope, energy consumption, environmental and social implications, and numerous other factors, a thorough understanding of these variables should guide the formulation of the 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 strategies 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 systems to present a composite picture. A variety of software and other tools are more readily 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, building-information modeling, web-based project management tools and other collaborative construction project management technologies. In addition to tracking, publishing data (both internally and externally) is important as an accountability measure.

Commercial real estate firms will be expected to deliver investor-grade, high-quality ESG disclosures to help 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.

Commercial real estate holds a significant position in shaping our societies and influencing the climate. Therefore, the leaders of commercial real estate companies carry both an opportunity and a responsibility to pioneer the adoption of ESG strategies within their businesses. A balanced and harmonious execution of the ESG triad can enhance the vitality of a contractor’s company and even boost the financial results. This is because enhancements in environmental, social, and governance measures reliably lead to improvements in productivity, project quality, and can also aid in managing insurance expenses. Thus, ESG should be considered a competitive edge rather than merely another “compliance” obligation. Beyond these numerous advantages lies a fundamental necessity: paying heed to ESG is simply the right course of action.

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