8 minute read 29 Nov 2021
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The current state of ESG reporting in the engineering and construction industry

By Erin Roberts

EY Global Engineering & Construction Leader

Construction and engineering insights from 25 years of experience serving the sector. Lifelong boy scout. Father of two. Passion for travel.

8 minute read 29 Nov 2021

Here’s how construction and engineering firms can help maximize ESG goal setting and reporting to become or remain an industry leader.

In brief

  • Environmental, social and governance (ESG) topics and reporting are an ever-growing focus for construction and engineering firms for unique reasons.
  • Health, safety and labor; contracts and competitive bidding; and carbon emissions from buildings and construction form the backbone of their ESG agendas.
  • ESG reporting programs of leading firms have four key parts: CEO endorsement, ambitious goals, industry initiative participation and being vocal on climate.

Iconic images from the 1930s of construction workers eating lunch on a girder atop 30 Rockefeller Plaza in New York may have been more publicity than normal practice, but health and safety in the construction industry have nonetheless come a long way in the last 100 years. Federal statistics show that the incidence rates of nonfatal injuries and illnesses are down significantly from just 20 years ago (1.7% in 2019 vs. 4.1% in 2000). The fatal injury rate, however, is 9.7 per 100,000 workers so, it’s no surprise that improving health and safety on the construction site remains a top focus for the industry, according to a GlobalData survey.

Core pillars of ESG for engineering and construction industry

Health and safety and the high reliance on labor mean social aspects of the environmental, social and governance (ESG) agenda have been and will remain a high priority for the engineering and construction (E&C) industry. Similarly, governance has long been a hot topic in the sector given the size and complexity of contracts, competitive bidding processes, and the need to engage with both public and private stakeholders and to prevent bribery, corruption and anticompetitive behaviors. The environmental agenda is in focus across all industries, but buildings and construction are responsible for 39% of carbon emissions globally, according to the World Green Building Council. Carbon reduction and environmental initiatives are therefore a business imperative for contractors.

Today, these areas form the core pillars of ESG agendas at E&C firms, which, like many industries, are continuing to enhance their focus on ESG and communicate the impacts to stakeholders. The focus has evolved from traditional philanthropy and employee volunteer work to more holistic integration of these topics in business strategy as recognition of their importance in growth and risk management has grown. Effective ESG programs now underlie corporate risk management and strategic business imperatives.

Increasing stakeholder expectations and growing regulatory requirements to promote ESG agenda

Stakeholders’ expectations are also driving companies to develop and promote their ESG agenda. A recent EY survey showed 98% of investors evaluate ESG performance based on corporate disclosures.

This focus is pushing boards and management teams to both do more and report more. There is a prevailing consensus that private enterprise needs to be a force for change to address the major challenges facing our planet and society.

Providing investors, regulators and stakeholders with the level of detail they require around ESG has become a significant but important undertaking for all companies, and increasingly a part of the CFO agenda. The EY 2020 DNA of the CFO survey showed 70% of CFOs said the growing focus on ESG concerns have a major impact on the CFO role. The data collected can also provide insights to process improvements, including potential efficiencies or cost savings.

3X

Millennials are three times more likely to seek employment with a company because of its stance on social and/or environmental issues, according to figures from Governance & Accountability Institute, Inc.

Reporting on ESG issues is challenging in the engineering and construction industry

Reporting to stakeholders on ESG issues is a challenging undertaking. Identifying which standards to follow, what to measure and which metrics to compile is difficult, not least because there are myriad different entities across the ESG space providing everything from standards, goals and guidance to company-level assessments. 

The lack of clarity around what and how to measure, combined with a lack of consistency both between companies and around specific disclosures, are all barriers to overcome. 

Our EY US Engineering & Construction Industry team performed a review of ESG-related disclosures  of the top 24 E&C companies in the US (9 public and 15 private) and evaluated them against 24 metrics covering ESG issues. Our study shows that even within the top 24 US contractors, disclosures to date are very mixed:

  • Leaders are making disclosures against at least 20 of the 24 metrics (80%-plus), while the bottom tier are covering only around one-third. 
  • Half of the companies reviewed produce a stand-alone sustainability report, in addition to their annual reports; of those that produce one, 67% are public companies and 33% are private. Furthermore, among those stand-alone reports, 25% were in compliance with Sustainability Accounting Standards Board (SASB) standards, while 29% were in compliance with GRI standards.

Environmental, social and governance reporting by engineering and construction companies

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Fifty percent of the top* 24 E&C firms in the US publish a separate sustainability report, in addition to their annual reports.

* The largest 24 engineering and construction companies in the United States, as determined by a combination of ENR's Top Design Firms, Top Contractors and Top Specialty Contractors listings.

Materiality should drive the quality and extent of disclosure, including management approach, metrics and context. E&C companies have identified areas such as decarbonization, LEED certification, diversity and inclusion, community development, and employee safety and well-being as the most material issues.

Most leading US contractors are also reporting against goals in areas such as sustainable infrastructure, waste management, energy conservation, use of renewables, pollution prevention, renewable/recycled materials, employee training on sustainability and workplace ethics/working conditions. Examples of progress in these areas are plentiful, with impressive gains being made in areas such as waste management, where millions of tons of construction waste have been diverted from landfills, or employee safety where internet of things (IoT) sensors have been installed to allow for real-time monitoring of jobsite conditions. One other particularly noteworthy area is education, where certain E&C companies have long-standing programs and associations aimed at minority- and women-owned businesses, subcontractors, construction managers as well as smaller contractors and entrepreneurs. 

The path to credible reporting in engineering and construction industry 

Setting goals, establishing what to measure, identifying which metrics to compile and ensuring that everything is done in a way that complies with standards is a challenging process. A complex ESG landscape means, at present, that there is no right answer, but the reporting programs of leading organizations have four essential components. These hallmarks ultimately help deliver companies that are better run, more responsible and that make decisions to deliver the necessary product, service and business model innovations that contribute to a flourishing society.

  • 1. Obtain CEO endorsement of initiatives.

    Leading CEOs from across all industries are taking pivotal roles in helping develop standards, goals and guidance. In the E&C sector, CEOs have joined initiatives such as CEO Action, the largest CEO-driven coalition that pledges to advance diversity and inclusion within the workplace.

  • 2. Set ambitious ESG goals, considering value chain.

    Climate related pledges and goals are becoming increasingly common with ambitious but achievable targets being established, including those arising out of COP26, the 26th iteration of the Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC), which brought together the 197 members of the convention to take concerted action on climate change. Several E&C companies have identified 2030 as an appropriate year by which to achieve environmental targets. Examples of environmental goals set for 2030 include reducing on-site greenhouse gas and water consumption by 50%, achieving science-based net zero emissions, and delivering a 50% reduction in scope 1 and 2 emissions and waste generation. Companies are also considering their wider supply chain with select annual reports now highlighting reductions in scope 1, 2 and supply chain emissions. 

  • 3. Participate in industry-leading initiatives.

    Acting on climate change is a high-profile area to consider, but industry-leading actions should span ESG. Recent noteworthy examples from E&C companies include establishing gender targets across senior leadership roles and the wider workforce, amending credit facilities to include borrowing costs linked to sustainability and diversity goals and embedding net zero, resilience and social value targets into client account management programs and the work the company bids for. 

  • 4. Be vocal on climate.

    E&C companies should not merely outsource emissions to a subcontractor or third parties, but focus on ensuring that the overall carbon footprint of each project is reduced. This means integrating low-carbon technologies and processes into engineering, procurement, construction and installation. This encompasses both sustainable engineering for customers’ operations and fully reducing the footprint of their own fabrication, marine and construction activities.

    Embedding ESG across the organization, including purpose, culture, goals, value chain considerations, incentives and disclosures, shows that companies are genuinely embracing multi-stakeholder capitalism.

    Research shows that assurance is becoming an important part of reporting on nonfinancial information. The World Business Council for Sustainable Development reported in 2020 that of its 158 member companies, 94% of reports reviewed have some form of assurance on their sustainability disclosures through external assurance or internal audit assurance (vs: 81% in 2014), according to a McKinsey study. The topics most commonly being assured are greenhouse gas emissions and water and waste. Assurance around diversity and inclusion is becoming more common, especially since human capital is now required in the 10-K and to be responsive to large investor demands. Human rights and supply chain metrics are also beginning to be included in scope.

ESG materiality and integrating ESG into business strategy  

Understanding where your company is on the ESG maturity curve is a helpful and important step to further develop an ESG agenda. An essential component on this journey is the shift from ad hoc reporting on single sustainability initiatives to a much more integrated approach where ESG is a central tenet of business management and planning.

ESG materiality and integrating ESG into business strategy

For E&C firms to thrive in this new era of accelerating transformation and stakeholder capitalism, they will need to embrace ESG as a strategic business imperative. This means addressing heightened expectations by understanding how your company is viewed by all stakeholders. Delivering improved business performance from your ESG strategy will come from the development of aggressive goals, and measuring and reporting progress against those goals in order to drive stakeholder engagement and value as well as integrating ESG into broader strategy relating to capital allocation, supply chain management, marketing, partner choices and investments.

Akanksha Ailawadi Jain, Assistant Manager, EY Knowledge, GDS India has contributed to this article.

Summary

Effective ESG program development is much more crucial than merely checking off a list. The key to any ESG strategy is to decide what is material to determine appropriate metrics and goals. Materiality should be the engine driving the quality and level of disclosure. This includes the approach of management, as well as metrics and context.

About this article

By Erin Roberts

EY Global Engineering & Construction Leader

Construction and engineering insights from 25 years of experience serving the sector. Lifelong boy scout. Father of two. Passion for travel.

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