New ESG baseline for professional services

In May, the Biden Administration issued its Executive Order on Climate-Related Financial Risk to establish a policy framework for maintaining the integrity of the US financial system as it relates to climate change. The Order was aimed at prioritizing climate change from an economic standpoint and raising the flag for the continued risks of physical assets, as well as the broader emerging economic risks to US businesses, its workforce, and communities related to the worldwide decarbonization movement — an economy-wide shift away from carbon-intensive energy sources and industrial processes.

At a glance, the Order targets financial markets and raises the importance of climate-related financial risk disclosures, but, as one might guess, when funding, financing, and insurance markets are impacted, trickle-down implications aren’t far away. What we know from this Order is that it directs key leaders in the federal government, namely Secretary Yellen, to develop a government-wide strategy to measure, assess, and mitigate climate risks. Such efforts include determining financing and funding needs to achieve a net-zero greenhouse gas emissions economy by 2050; it also includes environmental justice. A report is to be issued to the President by November of this year.

The report or plan of action will be consequential to every businesses owner, regardless of size or type, for a number of reasons. At a high level, we could imagine that any changes in federal policy that dis-incentivizes lending or funding toward projects or services that advance, promote, or rely on fossil fuel generation has the potential to cause dramatic shifts in money flows in the marketplace.

Here’s an example: the Order references government procurement and potential amendments to the rules that govern the process (i.e., FAR (Federal Acquisition Regulation). The Order also asserts that the federal government should “lead by example,” which is consistent with the Administration’s American Jobs Plan that proposes to leverage its buying power through its own procurement practices. Will this mean that there will be changes to federal procurement practices that will require professional service firms to meet a sustainability standard? Will this mean that state and local governments, who are equally focused on hitting their own net-zero targets, could require their professional service contractors to meet certain sustainability standards? Likely so. There are plenty of states and localities with existing green purchasing policies and programs so expanding to sustainable services is probably not too far off. From a climate standpoint, the point here is that it may no longer be enough in the marketplace for architecture and engineering firms to provide sustainable or resilient design services, for example. Clients — whether they are public or private — may begin requiring their service providers to demonstrate some level of sustainability in their own business operations, even if only for positioning and messaging in the marketplace.

Sustainability standard, based on ESG, now exists for professional services

Right before the COVID-19 pandemic came to the US, something else was happening on the sustainability front. A new standard for sustainability was developed specifically for professional service firms by NSF/ANSI: NSF/ANSI 391.1-2019 General Sustainability Assessment Criteria for Professional Services. This ANSI-approved standard defines a set of qualifying key performance indicators (KPIs) for professional service organizations and addresses the challenge professional service firms have had in the past in quantifying a uniform set of metrics and guidelines for achieving sustainability and being able to report adequately on meeting a standard. Notably, it defines “sustainability” in line with ESG factors.

To quickly level-set on ESG, the term is an acronym for “environmental, social, governance” and, when you boil it down, the term essentially refers to a corporate code of conduct related to these three factors and is usually contextualized in financial, banking, and investment circles to help broaden investment decisions beyond traditional return on investment to include factors that positively influence society. Because of this contextual disconnect, professional service firms may be inclined to ignore the buzz on social media or in the news and assume it “doesn’t apply to me.” However, that would be an unwise decision from a business standpoint and a missed opportunity for many reasons.   

ESG turns doing good into a competitive edge

The ANSI standard is scorecard-driven with points for meeting ESG metrics. Points are given for measurable reductions in energy consumption, greenhouse gas emission reductions, sound materials, and waste management practices, for example. Points are also given for corporate transparency, such as publicly reporting one’s greenhouse gas inventory. Establishing cyber security protections or implementing ethical business training and practices are also incentivized through the standard’s point system. Having policies and programs in place that support employees with flexible workplace policies, ongoing training, tuition reimbursement, social well-being programs, or community volunteer programs also qualify for specific social and labor KPIs. The standard takes these ESG KPIs further by pushing into supply chain by incentivizing business partnerships downstream that are also driving toward sustainability.

In addition to giving professional service firms the ability to score and assess the sustainability of their business, the new standard allows firms to set themselves apart from competitors and potentially have the advantage of preferential selection on projects and contracts. Handy metrics for comparing service providers on sustainability can be very useful to busy project developers and procurement officials so it’s easy to imagine this standard becoming a common reference point.

It’s also easy to imagine the traction this could get in the marketplace given the pace of ESG adoption by the investment community, likely impacts on project development, and the fact that we have an administration that prioritizes clean infrastructure — in whatever form the final legislative package takes in the coming weeks. Moreover, a national climate bank, which leverages public money to attract more private investment toward sustainable development projects (and which is now being coined in federal legislation as a “Clean Energy Accelerator”), would make this kind of ESG standard a very attractive prerequisite for selecting service providers.

What to do next?

Professional service firms should take a look at this new sustainability standard and assess how the points are allocated to determine whether your firm may already be performing at a level that could warrant certification. If not there yet, it very well could be that your firm, with some targeted action, is positioned closely for certification. Either way, the beauty of this standard is that it:

  1. gives professional service firms the opportunity to achieve a nationally-recognized sustainability standard;
  2. guides professional service firms, regardless of certification, in understanding what sustainability should look like (even beyond energy and carbon emissions) and how to measure it; and
  3. establishes a baseline for the professional services sector to be included as an important part of achieving economy-wide sustainability.

For far too long, measuring sustainability of economic activity has been focused on goods, and not services. This new national standard gives professionals (regardless of service type) the ability to aim for sustainability excellence and be part of the solution of doing right by the environment and the greater good of society. An added benefit is that early adopters can establish a track record of doing good before the standard becomes standard, and getting ahead of the curve is no small consideration when it comes to business. If COVID-19 has taught the business community one thing, it is a fresh new perspective on how fragile we all are, how vulnerable our business models might be, and how important it is to stay competitive.

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