Katherine Bruce is a course tutor for the University of Cambridge online course, Delivering Sustainable Infrastructure: Theory and Practice for Construction. In this article, she explains the importance of using an ESG framework in delivering infrastructure and how project teams can utilize this framework in successful project delivery
The term ESG (Environmental, Social & Governance) was coined by investors in the early 2000s to describe the framework for assessing non-financial risks within their portfolios.
Today, ESG strategies have become widely adopted by listed corporates as a means of meeting stakeholder expectations, complying with regulatory requirements, and mitigating increasing risks.
An ESG framework is a prerequisite for many infrastructure projects to secure financing
Given the impact of infrastructure projects on society, the environment, and the economy, mitigating ESG risks has become essential.
Financial institutions are increasingly applying an ESG lens to projects. Several banks have set de-carbonization targets for hard-to-abate sectors such as power and utilities.
With the increasing expectations on financing, it’s essential for project delivery teams to understand the importance of evaluating infrastructure projects through an ESG framework.
The 5 key considerations project teams should keep in mind
1. Prioritise action through financial materiality
Each infrastructure project is unique, with its own set of ESG risks. This depends on factors such as project type, location, and scale.
To effectively manage these risks, it’s essential to conduct a materiality assessment for each project.
This process helps prioritize attention and focus on specific ESG risks by identifying and evaluating the financial risks associated with both the project’s impact on society and the environment, as well as society and the environment’s impact on the project.
A key part of the materiality assessment is quantifying the financial impact of these risks.
This allows for comparable metrics to be used by non-ESG specialists, helps to understand the magnitude of exposure, and supports more sustainable decision-making in the project’s design and construction.
2. Adopt a systems thinking approach
ESG risks should not be considered in isolation.
Infrastructure projects are a complex system with multiple variables and interdependencies.
Creating a visual representation of these relationships, such as a causal loop diagram, can help to identify leverage points and mitigate risks.
Often, reinforcing loops can amplify the impact of a risk, while balancing loops can obscure the potential for negative outcomes. A systems thinking approach can help to plan for different scenarios and implement appropriate mitigation measures, leading to a more comprehensive and effective risk management strategy.
3. Engage with stakeholders
Reputational risk is a significant ESG risk in infrastructure projects.
Negative ESG impacts can result in reputational damage, leading to negative public perception, loss of trust from stakeholders, and potential project failure.
Engaging with impacted stakeholders and end-users is crucial for mitigating reputational risks and potential financial impacts.
By engaging stakeholders in the project development process and considering their needs and expectations, organizations can build trust, enhance their reputation, and support the long-term success of the project.
4. Set KPIs and targets
Establishing key performance indicators (KPIs) and targets is critical for evaluating performance throughout the lifecycle of a project.
Targets and KPIs not only help teams align against a shared goal but also communicate their intentions effectively. To obtain a comprehensive view of performance, it is recommended that KPIs comprise of both leading and lagging indicators.
The Sustainability Accounting Standards Board (SASB) provides specific indicators for various infrastructure sectors that are connected to financial materiality, making it an excellent starting point for companies.
5. Monitor and report performance
Continuous evaluation of ESG performance is crucial for infrastructure projects throughout their lifecycle.
If performance falls below a predefined threshold, such as carbon targets, it should be escalated through governance channels to take immediate action.
While corporations often communicate their ESG performance through annual reports, infrastructure projects may benefit from software solutions with live tracking features that provide real-time updates to stakeholders, including financial institutions.
This is especially important given the dynamic nature of infrastructure projects and their multi-stakeholder involvement.
Manage risks, improve financial performance, and secure financing with an ESG framework
Setting up a strong ESG framework can help project teams manage ESG risks, improve financial performance, and secure financing.
Would you like to learn the practical tools and skills needed to enable you to integrate ESG considerations into infrastructure projects? Enrol for the University of Cambridge online course: Delivering Sustainable Infrastructure: Theory and Practice for Construction.
This 8-week online course offers extensive knowledge and practical resources to achieve sustainable development and create long-term value for all stakeholders involved in infrastructure.
This article was originally posted at:https://www.cambridge.org/core/blog/2023/05/31/the-esg-imperative-for-infrastructure-projects-a-call-to-action/
