ESG in Construction

Description

ESG (environmental, social, and governance) is the most important theme of the decade. Companies must perform well in all areas of ESG; being a laggard in any one of the 12 pillars outlined in our proprietary ESG framework will hurt their brand reputation and, ultimately, profits. It is easy to find examples of lacklustre governance in construction but much harder to find exemplary case studies. Companies that perform poorly in environmental and social issues likely do so due to poor governance. Early engagement with all stakeholders, including suppliers, subcontractors, and local communities, is key to helping construction companies excel at ESG.

The impact of the built environment on the planet is huge, with the worldwide cement industry responsible for between 4% and 8% of global CO2 emissions. To minimize negative environmental impacts, companies must design lean, design out carbon-intense and polluting materials, use sustainable building materials, and improve renewable energy initiatives. Renovations will help reduce embodied carbon, and projects will be facilitated by building information modeling (BIM) and digital twins. Adhering to environmental certifications or frameworks may not only help adherence to increasingly complex environmental regulations but also enable access to green finance and attract tenants and investors.

What are the main trends shaping the ESG theme in the Construction sector?

Technology trends

Smart cities and the industrial internet are two aspects of IoT with particular relevance to the construction industry. In smart cities and buildings, connecting communities to their lived environment, operational efficiency, and cost optimization remain key goals. Added benefits include the ability to monitor energy and water use, enabling a more sustainable world. However, data privacy issues have thwarted some previous smart city initiatives. Connected construction sites may use smart cameras to improve safety in the workplace, though facial recognition concerns may prohibit some companies from using the technology.

Wearable tech forms part of the IoT landscape and the connected construction site. Wearables such as smart helmets and smartwatches can be used to monitor employee safety, including measuring fatigue levels, detecting microsleeps, and alerting workers when they need a break. Wearables can also instantly inform site managers of any critical incidents.

Smart city technology enables the reaching of governmental, economic, and societal goals. Good smart cities initiatives will consider the needs and problems of citizens and have a positive social impact on the lives of people in the city. This can include reduced traffic and more efficient public transport. Smart buildings use energy-efficient automation to reduce carbon footprint, whilst smart meters can improve the visibility of energy and water use. Smart cities projects will have to address concerns about data misuse and continuing cybersecurity risks.

Macroeconomic trends

Successful companies will learn from the impact of COVID-19 on the sector and grasp opportunities for long-lasting change. Enhanced safety protocols and the adoption of AI-assisted technologies are positive side effects of the pandemic and can impact the construction sector in the future. Workers may have to re-skill to co-exist with new technologies. Employers must ensure that human workers are not replaced altogether to avoid negative social ramifications, such as mass unemployment.

Health and safety are one of the key pillars of GlobalData’s ESG framework. Construction regularly ranks as one of the most dangerous professions, and health and safety is an ongoing issue. Hazardous jobs on the construction site include working at heights and operating heavy machinery. Though progress has been made in recent years, incidents and causalities still occur in the workplace, and more must be done to eradicate them.

Analysis of our Influencers dashboard reveals that sustainability is most often tweeted about in the US, UK, and Australia. This could suggest that sustainability is more of a pressing issue in certain geographies than others, particularly in the Middle East. The lesser focus in the region may be due to several reasons, including economic priorities and cultural norms. Full global sustainability cannot be achieved through a fragmented approach. A collective push for environmental, social, and governance sustainability does not look likely soon.

What are the ESG challenges in the Construction sector?

Environmental challenges

Environmental performance measures how the corporate activity contributes to climate change, pollution, biodiversity, and the depletion of the world’s natural resources. The environmental impacts of the construction sector are wide-reaching, impacting climate change, pollution, biodiversity, and natural resources alike. Though the challenges are wide, they present many opportunities for improvement and long-lasting positive impact. The construction and real estate industries are responsible for approximately 40% of the energy used and 29% of all greenhouse gas (GHG) emissions produced within the EU, according to research conducted by the European Public Real Estate Association (EPRA) and the European Association for Investors in Non-Listed Real Estate Vehicles (INREV).

In the construction and real estate industries, climate change has most commonly improved operational efficiency in buildings, with the focus on energy use reductions. However, the operational emissions of a building are only part of the overall carbon emissions related to the construction sector, the other part being embodied carbon. As buildings continue to improve operational efficiency, embodied carbon will become a larger proportion of overall lifetime carbon emissions.

Social challenges

Many social challenges are impacting the construction sector. Health and safety are paramount, both during construction and use of built assets. Infrastructure and built assets are generally considered to improve the local community by providing spaces and amenities. However, the public perception of projects during construction must also be considered. Prolonged construction projects may impact local communities, attract negative media attention, and have harmful consequences. Given the hazardous nature of activities on a construction site, workplace safety is paramount for construction firms, with financial and other penalties applied to firms not adhering to increasingly stringent health and safety regulations.

Construction projects can positively impact local communities by providing infrastructure and amenities like roads, hospitals, schools, and community spaces. Companies must consider the impact of projects both during construction and once they are built. Negative public perceptions of projects during construction can greatly impact the public’s long-term use and, hence, the whole project’s cost-effectiveness.

Governance challenges

Governance assesses how a company’s internal controls are used to inform business decisions, comply with the law, and meet moral obligations to all stakeholders. The tendering process, whereby contractors are invited to submit proposals and place bids to work on a construction project, can drive low-ball bidders to attempt to secure work and projects. As contractors compete for work, they must make their offerings more attractive, often bidding to complete work at the lowest price possible. Unfortunately, such low prices often equate to low-quality work. Profit margins are thin, typically around 2%, so costs are driven down at every stage, culminating in larger issues. Cost and time overruns, compounded further by money locked in assets, can heighten financial risk.

Corruption can take the form of extortion, fraud, deception, collusion, and money laundering. Bribery is also a form of corruption. The most common form of bribery is kickbacks, which involve paying a commission in exchange for services. Another widespread form of bribery is facilitation payments, where money is paid to speed up or facilitate routine actions.