The concept of sustainability is increasingly important to all industries and businesses. Operating sustainably means taking future generations into account by meeting one’s own needs without compromising the needs of others. The idea is to foster widespread economic growth that also qualifies as sustainable, ethical and effective. Every company is called upon to comply with sustainable principles, ensuring value for the community while reducing their environmental footprint. Companies that operate sustainably enhance their public image because consumers are increasingly attentive to sustainability-related issues. Even in the investment world, when assessing the validity of corporate operations, environmental and social factors are increasingly taken into account alongside the cold, hard economic data. It is therefore becoming more and more important for companies to be ESG-compliant to grow and attract partners and investors. But what exactly is this, and what does the acronym actually mean?
ESG: The Meaning
The three words in the acronym ESG are: Environmental, Social and Governance (how a company is run). Picking apart the acronym ESG makes it easier to understand what it actually means. The components are criteria used in economics to assess investments in terms of environmental, social and governance-related issues. Concise as it may be, ESG is a concept companies can no longer overlook, including construction sector firms that wish to attract potential investors. Nowadays, to qualify as “responsible”, investments must incorporate sustainability and ethics-related factors. Assessing a company solely on its ability to generate cash is no longer enough. ESG criteria are a way of assessing such factors in a reasonably uniform manner. And it would be wrong to assume that sustainability and ethics are unrelated to the bottom line: companies that operate in compliance with these principles are more likely to have a prosperous future and grow their projects, clients and revenues.
It is fair to say that ESG criteria evolved out of the “old” PPP concept: People, Planet and Profits. Popular in the 1990s, the purpose of this concept was to show that companies could no longer focus on Profits alone; they also had to pay attention to People and the Planet.
The Three ESG Metrics
As we have seen, ESG is a combination of three criteria: Environmental, Social, and Governance. Let’s take a look at how these three elements translate into company valuations.
Environmental
What does assessment of the first criterion in ESG criteria consist of? Many different parameters are involved in defining a company’s environmental impact, from the energy policies it adopts to what it produces in terms of carbon dioxide and other substances harmful to the environment, strategies implemented to limit emissions, its use of raw materials, recycling policies, corporate mobility solutions, and so on. Indeed, the “E” in ESG encompasses all of the actions a company takes to reduce its environmental impact.
Social
The second ESG criterion is the potential social impact every single corporate action and decision has. To assess this factor entails considering parameters such as gender equality, respect for human rights, attentiveness to employee welfare, being careful not to operate in a discriminatory manner, and so on. When a company enhances its social efforts, it seeks to improve the well-being of the community in which it operates.
Governance
The first two ESG criteria consider an organization internally and externally; the third criterion focuses solely on a company’s internals. How is the company run? Is it a meritocracy? Are compensation policies ethically decided? Is there any evidence of corruption? The first two ESG criteria may to a considerable extent be assessed by external observers; assessing Governance requires carefully analyzing a company’s corporate identity from within.
ESG ratings
Agencies specialized in collecting corporate data put together their sustainability ratings by using ESG-related criteria. Supplemented by data from external and internal sources, their overall assessments take into account information from official company documents, union databases etc.. Companies benefit from a good ESG rating, notably advantages such as reduced capital costs. Conversely, companies with low ESG ratings are likely to suffer negative consequences, such as their bonds taking a hit.
ESG Factors and Construction
Not surprisingly, ESG criteria are particularly important for construction companies, especially when it comes to environmental performance assessments. It is common knowledge that in Europe, construction is responsible for about 40% of energy consumption and 36% of carbon dioxide emissions. When it comes to construction industry ESG ratings, the focus is skewed more towards environmental factors, entailing a rethink of the entire supply chain to accommodate the circular economy and sustainability. Construction companies keen to improve their ESG rating must, among other things, seek to use sustainable materials that are easy to recycle and recover, whenever possible prefer renewable energy, and properly dispose of construction and demolition waste. Promoting a sustainable new approach to building is a vital way of ensuring positive social consequences when renewing a local area.
