With the growing concern over climate change risk, investors and clients have been seeking detailed information about the environmental practices of the construction industry.
Buildings represent about 38% of the United States’ greenhouse gases. The production of materials, their transportation to sites and the practices of contractor crews all contribute to emissions and any improvements in those areas will lead to reductions.
A recent Faegre Drinker online panel session explored the impact of environmental, social and governance (ESG) on construction companies. One panelist, Washington, D.C.-based Faegre Drinker attorney Walé Y. Oriola said, “ESG is very broad and all-encompassing and difficult to distill down what it means.”
The Securities and Exchange Commission may propose new rules regarding ESG involving how companies manage risks and relationships with employees, stakeholders, customers, and suppliers. In addition, institutional investors and federal agencies are incorporating ESG into their projects and investments at record amounts next year, Oriola said.
The Biden administration has three executive orders requiring disclosure of climate risk in federal government contracts. He said that the SEC proposed climate risk rules that will affect private companies supplying products and services to public corporations.
Oriola suggested three steps. One, companies should assess their readiness to comply with ESG principles. Secondly, companies must start capturing data on emissions from their processes and projects for ESG reporting. Third, they should craft a narrative of their ESG without overemphasizing their progress, which can avoid greenwashing charges.
“We think reputational harm is quite huge in this area, so you want to be sure that if you’re going to be putting yourself out there and you interact with any type of this ESG factors — be it on the social factors or the governance factors — that you do document everything that you do,” he said.
Panels in the industry said ESG has changed their business even if understanding the movement remains challenging. For example, Alex Munoz, senior vice president of Cincinnati-based Messer Construction, said he found benchmarking approaches to ESG “all over the place” in the construction industry. Then Messer discovered an organization that has become the Sustainable Accounting Standards Board, now part of IFRS Foundation’s International Sustainability Standards Board. Munoz said the standards offered good guidelines for reporting ESG.
“It allowed us to see what areas construction companies should be focused on when measuring themselves under the ESG umbrella,” Munoz said. “That helped us to complement what we were already doing well and showed us some of the areas that were beneath our radar and which we could put into kind of our strategic plan.”
Other panelists noted the plethora of third-party validation programs, such as The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, which has developed a framework for types of information companies should disclose involving climate change.
Rachel Clingman, chief legal officer and executive vice president of Chicago-based engineering firm McDermott International, Ltd., said 51 bids last year required ESG reporting on emissions. Clients wanted forecasts on emissions from construction activities, completed projects and supply chain participants.
“It is very difficult to get your arms around what carbon lays in the supply chain, but we’re trying,” Clingman said. The bids had to include waste reduction and recycling, human rights reporting, value chain compliance and a host of other factors. In addition, they ask companies for annual carbon emissions and trends in reducing them and future commitments to net zero or other ESG goals.
McDermott developed its carbon reporting software to measure emissions in the project design phase. By tweaking the design before construction, the company can sometimes significantly reduce carbon, Clingman said. By changing parts of a recent seabed pipeline project, McDermott decreased project emissions by 16%.
Involving third party consultants to assist with ESG initiatives can often lead to simple changes in construction practices that lower carbon and save money. Jim McMaster, senior counsel at the renewable energy company RES Americas in Denver, said a consultant helped the company create “smart goals” that were specific, measurable, obtainable, relevant and time-based.
The company discovered it spent hundreds of thousands of dollars in diesel fuel to power idling trucks. In many cases, workers did not have to idle vehicles due to cold weather or other circumstances. McMaster said that RES reduced idling, saving at least $100,000 annually in fuel costs.
Barriers still exist to making projects more sustainable. Munoz said even closer collaboration will be required among architects, building owners and contractors to reduce carbon on construction sites and within structures. He said that new products such as low carbon concrete will need to be incorporated by both crews and building owners into the process.
Munoz said that building owners may need some convincing that paying more for sustainable materials will benefit them by decreasing lifecycle costs. “They want to put their asset to work and get a lot of value for the most efficient cost,” he said. “I think that this is going to take a different mindset.”
Clingman said many companies are making “reasonable” investments that contribute to a better environment and save money, citing McDermott’s decision to place a solar installation next to a fabrication yard. It will eliminate many emissions and move the company closer to its net zero 2050 goal.
“But the things we can do that are economically reasonable won’t get us there,” Clingman said. “It may require regulation or penalties.”
Asked about monitoring contractors, Clingman said McDermott follows the same strategy as it does for safety. Contractors have had to report previous safety issues, she said, and now they must report on human rights issues, such as whether they use forced or underage labor. Carbon remains harder to assess because small companies do not have the mechanism to measure it.
McMaster said his company visits Asian manufacturers to ensure they follow sustainable practices has become necessary when pursuing ESG. “You do have to do your due diligence to make sure you’re not putting yourself at risk,” he said.
Panelists also recommended C-level endorsement of ESG, communications to employees showing the success of programs and sustainability committees to help share information and ideas.