While environmental, social, and governance (ESG) performance is increasingly becoming a focus in the design and construction industry, there remains quite a bit of confusion over the goals behind ESG and their impact on design firms. Some of the questions that seem to be percolating around ESG are:
- Is it about concern over profits?
- Is it about corporate responsibility?
- Is it about climate change?
- Is it about advancements in science and technology?
- Is it about workforce?
- Or, is ESG just about responding to changes in societal norms and expectations?
The answer is that ESG, and related performance ratings, is all of the above (and then some) and, foundationally, it’s about the public’s health, safety, and welfare.
First, Some Context
Internationally recognized ESG performance frameworks and standards are centered on financial institutions recognizing the direct correlation between business success or failure (aka, profits) and the health of the planet and its people (aka, the public’s health, safety, and welfare) (HSW)). This recognition is what is driving the need for financial institutions to understand the economic activity that they are evaluating, investing in, and insuring. Organizations developed ESG risk ratings to understand this and to help financial institutions compare the businesses and projects in which they are investing.
Because ESG fundamentally helps financial institutions invest their money in companies that are mitigating environmental and societal risks, the public’s HSW is front and center. In mathematical terms, financial institutions might view ESG as follows: higher profits = higher ESG performance ratings = stronger commitment by a business (and its stakeholders) to protect the public’s HSW.
Where Design Firms Fit In
Requirements to comply with ethical standards as set forth by professional organizations and licensing boards uniquely position licensed professionals in the market to advance ESG performance. One ethical standard, in particular, that design professionals have is to protect the public’s HSW. In certain ways, protection of the public’s HSW has always involved management of environmental and social risks, as discussed further below. The difference in today’s world of risks is that the level of risk and urgency around environmental and social risks has risen due to years of unconsidered environmental and societal risks. Firms that understand the link between ESG and HSW and who view their ethical obligations on projects with a growth mindset (instead of a fixed mindset on past environmental and societal risks), and who also govern their practices accordingly, will undoubtedly have a competitive edge as ESG markets grow.
Design firm services play a critical role in advancing ESG goals by helping to design and build structures and infrastructure that lean into future risks and address pressing emerging risks. By prioritizing ESG factors for clients, design firms are helping to build projects that will likely be seen as more attractive to potential investors and financiers and will help owners secure favorable funding and financing terms. Let’s explore some ESG factors to consider, starting with the “E” factors and correlations with HSW.
Heightened Environmental Risks
ESG frameworks and standards hone-in on growing environmental risks; the most well-known and urgent is climate change. It is hard to argue against the established fact that buildings are responsible for 39% of global energy related to carbon emissions (28% from operations and 11% from materials and construction). Climate experts unequivocally assert that greenhouse gas emissions are the root cause of increased global warming and, in turn, causing unavoidable increases in climate hazards. The connection between what and how we build and increased climate hazards posing threats to the public is no longer up for debate. The pressing concern is how quickly society can act to both mitigate worsening climate impacts by lowering emissions and help society adapt to current climate and near-term climate conditions. It is critical that design firms quickly step up to this challenge and assess ethical obligations in a changing world to include ESG factors.
It’s important to note that ESG performance standards and ratings also view the protection of biodiversity as a key environmental risk. The stark truth about biodiversity is that wildlife populations have declined by an average of 69% in the past 50 years, and the global pace of deforestation in the tropics and subtropics is estimated to be equal the size of California during a short 13-year period (2004-17). Some wonder what these biodiversity declines mean for humans. Experts tell us that the disruption in ecosystems by human development not only has cascading impacts on other wildlife and the Earth’s capacity to store carbon, but is also directly connected to the health of humans, as we’ve seen through increasing infectious diseases and impacts on farming and food supplies. The correlation between biodiversity and public HSW is clear. Other ESG/HSW commonalities include project impacts on water pollution, natural resource constraints (e.g., freshwater, energy, and building materials), and the negative health impacts from solid waste generation and the challenge of increased pollution through disposal.
Additionally, ESG performance ratings examine whether companies have environmental policies and procedures in place. Depending on the size of a design firm and resource capacity, it may be a best practice to consider having environmental policies and procedures in place consistent with standards from the International Organization for Standardization (ISO). Outside of internal company policies and procedures, ESG frameworks and standards look to value chains. How a design firm promotes procurement policies and procedures for clients in their selection of contractors or other project consultants, and the materials specified, is squarely within ESG considerations and advancing the protection of HSW.
Key Social Risks, or “People Risks”
The societal risks targeted by ESG performance standards, similar to the environmental risks described above, are wide-ranging, but let’s focus on the risks related to the public’s HSW specifically. Firms should be cognizant that certain materials sourced from certain geographic locations are associated with child labor and persistent human rights violations. Investing time to understand these connection points could provide valuable client insight and positive ESG outcomes.
Procedures and policies to protect employees when conducting on-site construction observation fall under “social” risks within ESG frameworks, with the end goal of avoiding work-related injuries, which as discussed below can also mitigate claims. How a firm handles occupational safety and health in supply chains is another consideration. Design firms that incorporate training for their employees to understand and mitigate environmental risks or safety risks are another important social factor. Other social performance qualities relate to diversity and inclusion practices, as well as policies and procedures that can prevent discrimination claims or claims of dishonest practices. A firm’s code of ethics can help mitigate social risks, as discussed below.
Codes of Ethics
A design firm’s code of ethics can protect the public’s HSW by establishing a set of professional standards and guidelines for the firm and its employees to follow. This code of ethics may include provisions related to responsible design and construction of buildings and other structures, the use of safe and sustainable materials, and the consideration of public health and welfare in the design process. By following these ethical guidelines, design firms can help to minimize the risk of harm to the public, ensure that buildings and structures are safe and functional, and promote the general well-being of the public.
A code of ethics might require designers to have a thorough understanding of building codes and safety regulations, to consider the potential environmental impact of their designs, and to consult with experts in relevant fields, such as specialty consultants, when necessary. By prioritizing the public HSW in this way, a design firm’s code of ethics can help protect the public and promote the responsible practice of design.
Correlation to Claims and Litigation
Just as ESG frameworks and standards can align with a design professional’s HSW obligations, a firm’s governance strategies (the “G” in ESG factors, such as controls, resiliency strategies, and transparency procedures) can minimize the risk of claims and litigation. ESG ratings and performance standards want to know not just whether a firm had lawsuits filed against it, but also how vulnerable firms might be to future lawsuits. With reduced claims exposure, firms are highlighting to financial institutions that they are also managing their financial health, both directly in terms of having to pay judgments or settlements because of poor quality controls and procedures, but also in terms of staff time and resources. Managing a claim can be disruptive to business operations and can divert significant time and resources away from the primary focus of generating revenue through billable hours and future business pipelining. Reputational risks stemming from claims and litigation are an additional consideration.
Public Health, Safety, and Welfare is the Crux of ESG
ESG performance, and associated ratings systems, exist to help financial institutions in lending, underwriting, and investing in sustainable development out of recognition that profits and losses directly correlate to certain key ESG factors and considerations related to environmental, societal, and governance risks and opportunities.
The risk factors to profit are wide-ranging but, ultimately, what institutions want to avoid is investing in businesses that have red flags in terms of legal or reputation risks stemming from harm to the environment or harm to people and communities. The profitable “opportunities,” on the other hand, are businesses that seem to “get it” and are planning ahead to be resilient against disruptive risks—whether it’s attracting talent or staying informed on environmental strategies to navigate the uncertain future ahead. Those businesses will rate well against ESG factors, which also means those businesses take their HSW obligations to a new level to account for future and emerging risks. In other words, instead of looking backwards, those businesses are looking ahead.
With increasing focus on ESG in the business world, clients and their investors, lenders, and underwriters are looking for professionals and businesses who are knowledgeable and proactive on ESG issues. A strong ESG track record can help design firms differentiate themselves in a competitive market and attract clients who are committed to sustainability. Furthermore, a commitment to ESG can also have a positive impact on employee morale as it shows that the company is committed to creating a better world.
In conclusion, the link between ESG performance and a design professional’s license to protect health, safety, and welfare is self-evident. By considering ESG factors, design firms will not only fulfill their ethical obligations, but also improve their market reputation, reduce exposure to claims and litigation, and attract clients who are committed to sustainability, which more and more has become an exponentially growing market.