ESG factors in investment decision-making has become a “hot potato” topic because it’s largely misunderstood, broadly defined, and the guardrails for companies to report on metrics have not yet been standardized. That said, it’s not too early for design firms to engage meaningfully, given their role in all things climate and many things social.
To start, ESG—Environmental, Social, and Governance—is fundamentally a framework for investors and financial institutions to manage emerging risks and optimize related opportunities as it relates to E, S, and G issues in the companies for which they invest, underwrite, or lend. The overall framework has a multitude of standards and metrics by which to account for risks and opportunities, depending on investor-focus, jurisdiction, and financial materiality concerns. While one single standard hasn’t been agreed upon globally, what the financial community cares most about as it relates to ESG and design firms are the following:
- capacity of a design firm to avoid environmental-related claims, including local community pushback, that could result in project delays or cancellation, redesign, or remediation;
- a strong project history that has avoided property and personal injury claims because of compromised structural integrity and the safety of a building, especially in light of expectations for increasingly severe and frequent climate-related weather events;
- a firm’s competitive market position ahead of energy transition risks and its innovation in the efficient use of natural resources (energy, water) and low/no carbon materials during construction and low/no emissions during operations;
- an understanding of a firm’s project types and the impact of increasing environmental regulation that could cancel, delay, or diminish revenues; and
- ethical breaches in bidding or procurement that could result in large fines, settlement costs, damaged reputations, and being de-barred from future projects.
For all these reasons, it’s important for design firms to strategize, even double-down, in embedding ESG thinking into business models to capture the opportunity and protect against risks. ESG, and a tremendous amount of related federal policy, has prompted the stars to align for design firms. Notably, how often have design firms struggled to convince owners to invest in and think about total cost of ownership, rather than just the up-front costs of a capital asset? It’s a perpetual challenge that ESG long-term thinking and investment seems to have unblocked. It will take time, of course; there’s much dust that needs to settle. By the end of 2022, there will likely be much more clarity, but one thing is for sure: investors and the financial community cannot un-see the benefits of clear ESG documentation.
Understanding how a company governs itself and is positioned in the market to navigate the uncertainty of environmental and social factors is financially material to performance and here to stay. Getting ahead of this new world with strong ESG literacy and business planning is a smart bet that design firms should take. For more information, register for our upcoming webinar on October 12, Demystifying ESG for Design Firms: Risks and Opportunities.