Not just a buzz word—Environmental, Social and Governance (ESG) is a framework that helps financial investors understand how an organization manages risks and opportunities related to sustainability issues. For the investment community, reviewing ESG reports gives them a more complete understanding of the companies in which they invest. Because these investments are financial, it is important to balance ESG principles with how they impact the company’s bottom line.
So what does this mean for a company’s day-to-day work and projects? While every situation is unique to a company’s specific operations, this article identifies the areas where work efforts can make a meaningful and authentic impact to an organization’s ESG goals. Spoiler alert: most work has ESG implications.
ESG Overview
The idea of sustainability began entering civil discourse decades ago. For many, though, it has remained a nebulous concept, difficult to quantify. In an effort to make sustainability more tangible and quantifiable, ESG efforts have evolved with various metrics to set and measure both corporate goals and associated progress.
Participation in an ESG rating system has been voluntary. Clear regulatory guidelines are lacking, making it difficult to measure performance. Perception and rhetoric have provided the early basis for participation. More recently, however, there has been a shift toward identifying Key Performance Indicators (KPIs) and providing a more objective process to measure and rate ESG programs.
KPIs establish goals in areas that characterize a sustainable, responsible or ethical corporate behavior. Sustainability values are being translated into mission statements, equipping committees with tools to evaluate information and formulate actionable plans to make progress toward goals.
To take corporate sustainability one step further, these values are being measured against ESG frameworks that are now considered another component of a company’s overall performance. Only those companies seeking high ESG ratings can be included in the responsible investment portfolios being sought by the financial community.
ESG Defined
Environmental
The E in ESG refers to efforts to improve environmental factors. More specifically, it refers to a company’s efforts to minimize negative environmental impact and risks. Values associated with environmental criteria might include mitigating climate change, protecting drinking water supplies and other aquatic life, reducing the volume of waste transported to landfills, and lowering the toxicity of wastes being generated.
Projects taken on by companies that champion “Environmental” efforts may focus on reducing energy consumption, therefore reducing carbon emissions and water consumption. For example, a company may select the newest, most efficient technology to run a new facility. Another might choose to transition to a renewable energy source. These real-world projects translate into measurable reductions in carbon emissions, water consumption and waste generation.
Social
The S in ESG represents social criteria. Social factors for a company and its stakeholders evaluate how that organization relates to the people and communities in which they operate. Social values can face inward—focusing on diversity and inclusion, safe and healthy working conditions and employee relations. Social values can also face externally—looking to establish goals related to protecting Environmental Justice (EJ) communities, reducing the demand on a community’s limited natural resources, or prioritizing the community’s values.
Governance
The G in ESG is about governance—the vision statements, policies, funding and top-down cultural support of sustainability initiatives in a company. It is essential to have strong governance alignment for effective environmental and social progress. An internal system of controls and processes allows a company to operate in compliance with laws, regulations, and their stated goals—benefitting both internal and external stakeholders.
Transparency with employees, shareholders and the public is a critical element in governance outcomes, allowing the transfer of knowledge about the company’s initiatives and progress to motivate and propel ongoing sustainability actions.
ESG in Action
With an understanding of environmental, social and governance, we can begin exploring the aspects of daily actions and projects that impact the ESG framework. How does a project affect ESG outcomes? Can those impacts be quantified? If you implement an initiative to improve ESG outcomes, how do you know it’s working? How do you capture that for an ESG report?
To quantify the impact of a project or initiative on ESG outcomes, it’s important to measure it against the ESG values the company seeks to align with in its day-to-day operations. This requires distilling ESG goals into KPIs that can be measured throughout planning and implementation of a project or initiative. This is a complex yet necessary step that engages engineers, environmental scientists, human resource professionals and public relations specialists. Each proposed project or initiative can be evaluated against the selected E, S and G KPIs and then weighed against the financial benefits or burdens of the project. This balancing act helps identify the best possible solution.
Using an example of an electrical design engineer working from home on a transmission line, let’s assess how this fairly typical situation affects ESG principles by identifying several KPIs and posing a series of questions to evaluate progress during the project planning and implementation process.
Environmental Considerations
- KPI: Reduce energy loss and conserve energy
What design choices lead to energy or material usage efficiencies? Can those efficiencies be quantified? How much more efficient is one design over another in carrying electricity from A to B?
- KPI: Reduce supply chain materials needed
Can the transmission line be designed to use fewer towers and therefore less steel in its construction?
- KPI: Protect environmentally sensitive areas
Can the selected route avoid impacts to wetlands and endangered species?
- KPI: Transition to renewable energy sources
What is the purpose of the transmission line? Can we bring renewable power to market?
The answers to these questions provide a narrative of a project’s potential impact on the environment. Not all answers will be simple; many have a mixture of pros and cons that require some consumption of energy and resources.
One challenge is recognizing the beneficial impacts of design choices. One of the primary functions of an engineer’s role is designing for efficiency and incremental improvements. Identifying the external environmental benefits, however, is a step beyond a typical project review.
Social Considerations
- KPI: Prioritize energy delivery to EJ communities
Who does the transmission line serve? Does the line go to a previously underserved community? Does the project cut through an EJ community? Is it a new facility that will create jobs in a community?
- KPI: Improve community safety
Will the new line replace an existing line? Will it lower wildfire risks for surrounding communities?
- KPI: Increase diversity and inclusion among our employees
How diverse is my group or division? What impact can I have on our hiring practices?
- KPI: Provide a safe and healthy workplace
Do we have adequate safety plans and emergency measures in place to protect our employees? What additional training or resources can we provide to ensure safety?
Social KPIs focus on relationships, both inside the company and outside. Authentic outcomes focused on social values may include seeking project opportunities that enhance or serve EJ communities or finding ways to make employees’ jobs safer and more equitable.
Engineers may need to incorporate other input from the project planning team to address the social implications of each project. Working with human resources, public relations and community stakeholders can enhance projects that align with social and governance criteria.
Governance Considerations
For KPIs and projects aligned with a Governance value, an organization seeks to create new visions, policies and committees. They also measure the success of existing programs including social and environmental policies.
- KPI: Ensure quality of project
Am I following our procedures and meeting quality and oversite requirements?
- KPI: Improve compliance with environmental requirements
Have we had regulatory inspections or audits? What is our compliance trend? Can we proactively seek ways to improve our processes?
- KPI: Improve compliance with health and safety requirements
Have we had a safety inspection or audit? What are our trends, lessons learned or near misses? How do we improve outcomes?
- KPI: Continuous improvement
Do I know and understand our company goals? Am I acting to support or enhance them?
Governance is the backbone of furthering a sustainability mission. These efforts create task forces that implement, evaluate and improve projects in alignment with the overall company vision. Transparency becomes the key to communicating both intent and outcomes to the various stakeholders, from employees to shareholders to the investment community.
Keep in mind that each outcome has a cost-benefit analysis that must be incorporated into the project’s bottom line. ESG portfolios are an investor’s tool for ensuring that the money they provide has an adequate return on investment. The most reasonable path is to evaluate potential actions and choose to make improvements in the areas that make sense not just for ESG goals, but also financially.
ESG Here to Stay
ESG factors will continue to have a growing influence on infrastructure projects and company initiatives in the coming years. Regulatory change is driving reporting transparency; shareholders are requesting greater alignment with ESG values; consumers are voting with their dollars. Set your organization up for success by taking the time to assess and document the ESG impacts of your projects, day-to-day work and initiatives. Ultimately, integrating ESG factors into an organization’s business practices helps build a more sustainable future.
LEARN MORE: Interested in ESG and how to make it work for you? Watch our free on-demand webinar.
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