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Subcontractor Performance Risk

Sharpening the Focus on ESG

Cheri Hanes | August 25, 2023

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Environmental, social, and governance (ESG) has become a higher priority for more contractors. According to KPMG's recent 2023 Global Construction Survey, nearly 54 percent of construction industry respondents fully envision ESG benefits and are aggressively pursuing maturity and improvement. Nearly 37 percent see some benefits of ESG and are taking a targeted approach.

A number of factors are driving contractors to sharpen their focus on ESG issues. First, there's a broad public awareness that the industry and its output (buildings) are responsible for almost 40 percent of all carbon emissions. Construction activities also consume a lot of natural resources, generate significant amounts of waste, and pose other environmental risks.

Contractors also need to align with project owners' ESG goals. A contractor's activities are part of the owner's value chain, and therefore, contractors' ESG-related activities factor into owners' ESG goals. Having the protocols in place to track key ESG metrics and providing owners with this information when needed will be a competitive advantage for many contractors.

While there are straightforward compliance-related factors, another important reason to boost ESG efforts is the dire need to attract and retain talent. Surveys show that—especially among millennials and Generation Z—the actions a company takes with regard to ESG factors matter. These generations are not interested in working for organizations that are not good corporate citizens. According to a proprietary model developed by Associated Builders and Contractors, in order to meet the demand for labor, the construction industry will need to attract an estimated 546,000 additional workers on top of its normal rate of hiring in 2023, and a bigger ESG focus may help contractors attract new talent.

With all that in mind, greater attention to ESG has the potential to be a real differentiator in the construction industry. Fortunately, the industry is not starting from zero. The construction industry has been monitoring activities in many ESG-related areas for decades already. However, there are more reasons now to look to do even more.

Boosting ESG Effort

When looking to further ESG initiatives, here are some considerations.

Understand your why. ESG may seem to be a purely compliance-based exercise, but it represents much more. Reasons are as individual as firm cultures, so dive deep to identify and communicate your "Why." What is the driving factor for ESG within your firm? How does your ESG journey relate to your internal purpose, competitive and business opportunities, talent retention, and a mix of all of these? It takes many hands to do this work; the motivation behind it needs to be clear and compelling and widely understood to get the best results.

Gain leadership commitment. Placing the responsibility for progress on ESG measures on the C-suite will help drive success. The voices of top leadership will be needed to effectively shift the vision from one of mandatory compliance to one of exploring potential opportunities. Leaderships' communicated support for the effort is critical to overall buy-in and success.

Consider engaging a consultant. A good consultant or ESG analyst may help firms avoid unnecessary effort, focus on solutions that will help them achieve their goals the fastest, and understand which approach will best suit their needs. They can also help firms to avoid greenwashing. 1Recent news items highlight this risk.

Decide what is material. These ESG-related factors provide a strong starting point for construction companies to assess their sustainability performance and develop appropriate strategies. It's essential to identify which ESG topics are most material to the company's operations, industry context, and stakeholder expectations so that construction companies may focus on ways to measure them.

Environmental Factors
  • Energy consumption and efficiency
  • Greenhouse gas emissions
  • Water usage and conservation
  • Waste management and recycling
  • Use of sustainable materials and practices
  • Biodiversity and habitat preservation
Social Factors
  • Occupational health and safety
  • Workforce and subcontractor diversity and inclusion
  • Labor practices and fair employment
  • Employee training and development
  • Community engagement partnerships and impact
  • Stakeholder relations
Governance Factors
  • Board diversity and independence
  • Executive compensation and transparency
  • Anticorruption and ethical practices
  • Risk management and compliance
  • Shareholder rights and engagement
  • Supply chain management and responsible sourcing

Set goals and targets. Carefully craft goals that are specific, achievable, and time bound. Measurable goals for each metric may be aligned with the company's sustainability strategy.

Conduct a gap analysis. By conducting a gap analysis, contractors can identify the areas where they already have pertinent activity and where additional focus is needed.

Implement systems and processes to collect accurate data. This may involve gathering information from disparate sources such as project teams, human resources departments, supply chain partners, and subcontractors. Data quality needs to be high. Everyone involved needs to understand the importance of data accuracy and completeness.

Consider supporting technology. Tech solutions may be necessary to collect and compile the data. To move from aspiration to reality, tech solutions may be used for materiality assessments, supply chain tracking, life cycle assessments, and the visualization of current and potential future states, just to name a few applications.

Be ready to share. Currently, ESG reporting is not a mandatory requirement for many. There will be more requests for contractors to share their commitment and progress in meeting ESG-related information and sustainable business practices. As previously mentioned, when part of the supply chain, contractors' ESG efforts will factor into the owner's ESG programs. In fact, according to KPMG's 2023 Global Construction Survey, 32 percent of owners recognize the need to integrate ESG to gain better access to capital to fund projects. And, it's important to note that whatever is shared should be factual and all information kept in context as any exaggerations or omissions of information could be viewed as greenwashing.

Final Thoughts

There are no shortcuts for getting ESG-related goals and programs right; this is an ongoing journey. Regular assessments can uncover lessons learned for continuous improvements, including updated goals, metrics, and data collection practices based on what's been learned, incorporating changing regulations, and emerging trends. While ESG-related initiatives take thought, time, and resources, they can be incredibly worthwhile and lead to integrating sustainability practices into core operations and, very likely, create some very positive, long-term impacts and a competitive advantage.

With a sharpened focus on ESG issues, the construction industry will be well positioned to make a massive difference in helping build for a more sustainable future, both for its clients and the industry itself.

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1 Greenwashing is a marketing ploy where companies promote themselves (and their products or services) as concerned with environmental sustainability or being environmentally friendly but actually are making an effort to seduce customers who are environmentally friendly into buying their products or services.