As a construction professional, you are no doubt aware of the importance of sustainability and corporate social responsibility. Nowadays, the term ESG, which stands for Environmental, Social and Governance, is being heard more and more in the business world and therefore in the construction industry. In this blog, we want to explain exactly what ESG means, what ESG reports are and what it means for you as a developer.
What is ESG?
ESG refers to the three main pillars on which companies are assessed: environmental, social and governance. The idea behind ESG targets is that companies should not only deliver financial results, but also take into account their impact on the environment, their impact on society and good governance. So it’s about finding the right balance between revenue, social interests and potential environmental damage, and being transparent about it.
When you talk about ESG standards, you are using these three important pillars to measure sustainability and ethical impact. Many people think of ESG or sustainability in terms of things like energy use, climate and CO2 emissions, but it is also about things like health, safety and transparency.
ESG in construction
ESG is also becoming increasingly important in the construction industry, as (it is expected) all medium and large companies will have to report on their ESG impacts from the 2025 financial year. This means that they will have to be able to report in detail on the Sustainable Development Goals and their impact on all three aspects: sustainability, social and governance. And not just their own impact, but the impact of the whole chain. The exact date of entry into force is not yet known. For the time being, the change is expected to take effect from 2024 for reports published in 2025.
For construction companies, the rise of ESG means paying more attention to sustainability, social responsibility and good corporate governance.
What will change for builders?
For construction companies, the rise of ESG means paying more attention to sustainability, social responsibility and good corporate governance. Construction projects often have a significant impact on the environment and the communities in which they take place. By integrating ESG factors into business strategy, construction companies can focus on sustainable building practices, reduce environmental impact and create positive social impact. And even if you don’t think it’s important, it has to be. Soon, when you apply for an environmental permit, the environmental impact of your project will be one of the factors assessed. You will also have to meet strict sustainability requirements for the building code. So if you want to be in the game in the future, you will have to go along with these sustainable developments. The good news is that you will not be worse off for it, as we will see below.
Is ESG mandatory?
The law is expected to apply from 1 January 2024 to all companies currently covered by the Non-Financial Reporting Directive (NFRD). From 2025, reporting on sustainability policy and performance will also be mandatory for all medium-sized and large companies not currently covered. These will be companies that meet at least two of the following criteria: more than €40 million in net sales, more than €20 million in total assets, or more than 250 employees.
So at the moment, ESG reporting is not mandatory for companies in the construction sector. Nor will it be for small builders for the time being, but that does not mean it cannot be requested. In fact, large construction companies have to report on their entire chain, a chain that you as a subcontractor may be part of. In addition, more and more investors, clients and other stakeholders are assessing the ESG performance of companies, including contractors. Institutional investors in particular are already selecting their projects on the basis of ESG objectives.
You will also increasingly need to demonstrate your ESG performance in order to obtain financing. It may therefore be beneficial for your company to voluntarily prepare and publish ESG reports now to demonstrate transparency and credibility to external parties.
In particular, sustainable structures are of great interest to investors.
What are the benefits of ESG?
There are several benefits to implementing ESG principles in your business. Firstly, it can lead to cost efficiencies. By building sustainably, you use energy and materials more sparingly, improving both your financial results and your environmental performance. In addition, social responsibility, such as good working conditions and community involvement, can contribute to your sustainable and social image. This can help you attract talented employees. With your ESG reports, you can show that your organisation is not a greenwashing operation, but is truly sustainable. Above all, sustainable buildings are very attractive to investors. They invest for the long term and are therefore most interested in future-proof, low-risk buildings. As a developer, you want to capitalise on this.
What’s in an ESG report?
An ESG report provides an insight into a company’s environmental, social and governance performance. The report often includes quantitative data, such as energy consumption, CO2 emissions, waste separation, material recycling and the number of workplace accidents. It also highlights qualitative aspects such as diversity and inclusion policies, engagement with local communities and the composition of the board of directors. Companies must report not only on their own targets and performance, but also on those of the entire chain.
Although ESG reporting is not currently mandatory, it is expected that there will be more regulation in this area in the future. The criteria for ESG reporting are gradually becoming more stringent. It is therefore expected that more and more companies, including smaller ones, will have to comply after 2026. It is therefore advisable to keep abreast of developments and be proactive in order to easily meet future ESG reporting requirements.
The good news is; much of the requested information probably already exists within the organisation.
Getting started with ESG yourself
If your company does not already produce ESG reports but is interested in starting to do so, there are several steps you can take.
- First, it is important to raise awareness within the organisation of the importance of ESG and the benefits it can bring.
- Next, you can set internal ESG targets and create a plan to achieve them. The good news is that much of the information you need probably already exists within your organisation.
- The trick is to bring it to the surface. Your systems are critical. If you work with an intelligent document management system (DMS) or common data environment (CDE), it is easy to monitor and report on your ESG performance.
- When all information is transparent, you can measure progress in real time and communicate with stakeholders.
Producing ESG reports may sound like a lot of work, but more importantly, it provides a valuable framework for construction companies to integrate sustainability, social responsibility and good corporate governance into their operations. And by working with construction software, you can make collecting the necessary information and preparing the reports much easier. Taking a proactive approach to ESG can not only make a positive difference, it can also enhance your company’s competitive advantage and reputation.