Instead of viewing ESG performance as another risk to be mitigated, Equib’s Mark Alcock says the infrastructure sector could generate worthwhile opportunities further down the line.
Ever since investment management company, BlackRock, announced it would only invest in companies with ESG risk compliance, the world changed for project managers on large-scale infrastructure programmes. But more than 18 months on, how are they responding to this new risk priority?
When BlackRock’s CEO, Larry Fink, announced in a letter to CEOs in January 2020, the impact was swift and far-reaching. ESG was catapulted to the top of the management agenda for both private and public sector organisations. As a result, senior-level decision makers at infrastructure companies and across the construction supply chain have become more focused on areas such as sustainability certification and reporting, and driving improvements in their ESG ratings.
At the same time, growing awareness of the global climate crisis has led governments around the world to introduce new environmental legislation focused on achieving net-zero carbon emissions by 2050 in line with the Paris Climate Agreement. In the UK, the Chartered Institute of Building has estimated that the built environment generates some 45% of the country’s total greenhouse gas emissions, and with environmental legislation tightening on the road to net zero, organisations such as the UK Green Building Council (UKGBC) have set out delivery frameworks for the construction industry to follow.
Most project managers on large infrastructure programmes are already aware that ESG risks are a primary concern for stakeholders. Indeed, many of the largest programmes have already addressed this by ensuring there is a dedicated ‘carbon manager’ in place to drive the project’s performance against its carbon reduction and energy-efficiency objectives. As such, some of the lessons already learned about governance best practice in the sphere of enterprise risk management are already being applied to mega projects.
Naturally, the growing focus on ESG performance is having a ripple effect across the construction supply chain. Most Tier One and Tier Two contractors have set environmental and community-focused objectives and report regularly against them. The fact that independently-produced ESG ratings are so easily accessible to investors and prospective clients has encouraged companies to be more proactive about setting their own ESG KPIs.
From the project manager’s perspective, ‘meeting ESG objectives’ is just one more element of the risk register, alongside factors such as staying on time and on budget and delivering a high-quality outcome – all of which remain critical to cost control and revenue generation. With the support of risk professionals, project managers must ensure all identified risks are factored into decision making appropriately and mitigation strategies are put in place.
Some of the mitigation strategies now being deployed to mitigate ESG project risks are experimental and depending on their success, could bring commercial opportunities for the companies and contractors involved in their delivery. For example, some mega projects are trialling the use of flywheels in power cranes and electric shuttle buses to move workers on, off and around the site. The latter typically involves the installation of EV infrastructure, which can be retained for the benefit of the local community once the project is complete – further boosting ESG ratings.
Another innovative area of ESG performance improvement being pioneered by project managers involves using a pre-determined volume of fly ash to reduce the embodied carbon generated through the use of concrete, based on an engineering understanding of the structural integrity required. Sourcing goods and labour locally can also bring significant transportation carbon savings.
Wherever possible, project managers must ensure that innovative mitigation strategies are planned in at an early stage. Once designs are complete, most of the opportunity to achieve carbon reductions and ensure a green outcome, is gone. The project manager must ensure that an awareness of ESG risks and opportunities is inherent in all management systems – from the design process, through to construction methodology, communications, staff management systems and local approval processes.
The role of risk manager in mega project delivery has evolved significantly over the years. Twenty or so years ago, the focus was on the golden triangle of cost, time and performance against requirements. Over the years, the risk remit has expanded to encompass factors such as environmental impact, stakeholder integration, resource continuity and people management. Seen in this context, it would be easy to view ‘meeting ESG objectives’ as just another risk factor to add to the mix – but this would be a missed opportunity.
Instead of viewing ESG performance as another risk to be mitigated, project managers, infrastructure companies and contractors should see it as a potential differentiator, which could generate worthwhile opportunities further down the line. By accelerating ESG mitigation strategies and investing in innovation now, they could reap significant commercial rewards on the road to net zero and beyond.
Mark Alcock is principal risk manager at specialist risk management consultancy Equib.