Shona Frame: Ten steps to ESG success for construction companies

Shona Frame: Ten steps to ESG success for construction companies

Shona Frame

Shona Frame, a partner and construction sector expert at law firm CMS, sets out tips for companies to deliver successful environmental, social and governance practices across their business.

The focus on environmental, social and governance (ESG) considerations within the construction sector continues to ramp up with carbon reduction being a particular concern.

With the industry accounting for an estimated 38% of global energy-related CO2 emissions, further investment and innovation will be required.

As much of this burden is likely to fall on the construction industry, adopting a range of measures to maximise ESG performance will be vital.

Here are 10 tips on what companies can do to achieve a positive outcome:

1. Get ahead of the regulatory curve

Governments across the world are now invested in ESG through climate change commitments, diversity policies and corporate governance legislation.

Some aspects of ESG reporting are already mandatory for many UK businesses with further requirements on the way. While challenging, companies that can be proactive in understanding and addressing the currently required levels of performance as well as those coming down the tracks will find themselves in a stronger position.

2. Pivot to ESG funding

Investors and funders are taking a much keener interest on ESG with asset managers rushing to find high-quality ESG-focused businesses as investments. In response to this, we’re seeing a new approach within the industry. Some construction companies are, for example, agreeing loan facilities with interest rates dependent on meeting ESG targets while others have successfully issued green bonds.

3. Assess and manage ESG risk

As ESG regulation increases, businesses have little choice but to incorporate it into their risk management frameworks as failure to do so could affect many aspects of their business including reputation issues, insurance costs and ability to bid for projects. Recent studies have found a direct correlation between ESG performance and the probability of experiencing workforce accidents, controversies, or fines from regulators.

4. Focus on the human factor

Along with the urgent push on decarbonisation, social aspects of ESG including community impact, skills training, health and wellbeing, diversity and inclusion, and labour relations are all highly relevant to construction companies and must be at the heart of their strategic focus.

5. Enhance supply chain management

The global pandemic highlighted the importance of incorporating ESG factors to safeguard supply chain sustainability. Businesses that invest in strong supplier data and professionally governed relationships with sub-contractors will reap the benefits.

6. Be ready for ESG-compliant procurement

Governments have exceptional power in influencing corporate behaviour and are increasingly using this to promote an ESG agenda. With UK government procurement accounting for nearly one-third of the nation’s construction expenditure, businesses must adopt and clearly demonstrate sound ESG practices to access this as well as other markets.

7. Engage with stakeholders

To maximise the benefits of an ESG strategy, it’s vital that companies engage closely with all stakeholders, from investors, funders and regulators, through to suppliers, customers, the wider community and, perhaps most importantly, employees. There are clear signs that employees are becoming increasingly tuned into ESG matters making them a key factor in attracting and retaining talent.

8. Identify ESG baselines and KPIs

While it is currently down to individual construction companies how they identify and measure ESG standards, regulators are increasingly looking to introduce compulsory reporting across all areas of the industry. It’s therefore advisable to begin implementing these procedures, reflecting national regulatory reporting requirements, where these exist, and a baseline taking account of key non-regulatory requirements.

9. Invest in good data collection

Businesses seeking to demonstrate their ESG compliance and achievements need robust tracking and reporting which can be verified through an audit. Data credibility is essential here. This requires transparency about data sources and methods used for collecting data, and an open discussion on its reliability and accuracy.

10. Monitor and report your progress

Once a company has set its ESG targets, established key performance indicators and collected data, monitoring and reporting on progress becomes the final but essential piece of the jigsaw. While some reporting may be purely internal, increasingly this is being required for company accounts, wider shareholder communications, contract tendering, and as a means of obtaining and maintaining sustainability-linked funding. It is therefore essential that reporting is robust and defensible.

By following the above advice, companies will enhance their ESG standards. Balancing ambitious goals with a credible and demonstrable approach is key in this journey and will result in meaningful progress as the regulatory landscape continues to develop.

Further details on how to achieve ESG success can be found here.

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