Competing in a market on the cusp of a post-recession boom is an economic Thunderdome where only the strongest survive. Companies that made it through 2020 are formidable, to say the least. They’re relentless, resilient and ready to ascend. Investors have also evolved. Millennials — one of the largest generations in history — are “poised to reshape the economy” as they move into their prime spending years. While they may be willing to take big risks, they’re looking for investments that align with their ideals.
Enter ESG Investing: the investment in companies that score highly on environmental, social responsibility and governance scales (as determined by third-party, independent companies and resea
rch groups). While this valuation approach isn’t a new concept, ESG criteria hasn’t held much influence in the past. Recently, however, unique circumstances in the global market have awoken this sleeping giant and the faster you can get on its team, the better.
Our good friend Darrell Bishop confirms the hype is real: “18 to 24 months ago, if there was a list of 10 criteria that a portfolio manager was evaluating, ESG fundamentals probably would have been near the bottom of that list. Now, they’re at the very top.” We’re going to concentrate on the E in ESG because while the term does cover social and governance policies, Bishop notes that, “environment and sustainability are really the biggest contributors.”
ESG and the Construction & Building Materials Industry
We recently went over the state of the industry in our Embodied Carbon article, but here’s a recap: between the Paris Accord and the US’s new administration, the heat meter on our industry is at an 11. Regulations (a.k.a. the bare minimum) are rising along with the demand for transparency. It’s net zero CO2 emissions or bust. Bad news for the dinosaurs who have been stalling progress for decades, but a phenomenal opportunity for the mavericks, disruptors and sustainability-crusaders of the industry.
How Investors Assess ESG
Broadly, the investment approach screens publicly-traded companies for predefined objectives and organizations either score points or earn a black ball based on what’s discovered. Simple? Not even a little.
Even though investor preferences mean ESG cred can result in a higher valuation, the Wall Street Journal recently noted that “sustainable” remains an undefined term and highlighted several other nuances that make assessments complex:
- ESG characteristics signal low-risk to investors who aren’t looking for the valuation to rise much further. They’re banking these stocks will be able to sustain higher buybacks, producing better returns down the road.
- Stocks with less exposure to new government restrictions on carbon emissions, biodiversity, water use or stronger labor standards end up being more highly valued. No need to climb a mountain that you can just go around.
Score variability between indexes happens as well. When you look at Tesla and Shell, MSCI considers the two opposites as ESG equals, while S&P ranks Shell higher because of their net-zero by 2050 plans, a gender-balanced board and conservative fiscal approach. Tesla loses points for labor indiscretions, a CEO continually in the SEC crosshairs, and the not-so-subtle fact that electricity is still often generated by burning coal.
Like we said, it’s complex.
How You Can Win
Start with building materials. It’s the simplest, most direct path to ESG points. Companies like CarbonCure, for example, lower a project’s CO₂ emissions by literally injecting carbon dioxide into the concrete mix. But partnering with a supplier is a lot like getting married, so here’s what you need to look for on the first date:
The Bare Minimum
Meets government regulations.
ESG Advantages Are Clear And Obvious
Pitch decks and performance reports are the lifeblood of most startups with a new product concept. In turn, they make it easy for you to help your investors recognize benefits.
Makes Sound Economic Sense
Shareholders are probably not going to be happy with an improved ESG score if it hits them in the pocket.
Covers the S & G of ESG
Think Shell – the O&G company who looks better to S&P than the electric car company run by the world’s richest man.
Brings Media Clout
Ride on the coattails of past awards or social-cause partnerships. News links like this are credible, easy to share and clearly demonstrate ESG value.
Offers Bonus Advantages
If a material can also help you get a project done faster, safer and on budget, that’s how you know they’re the one.
It’s important to note that many companies offering innovative solutions are new yet not all startup management teams are created equal. Look for leaders who were demonstrating their commitment to sustainability and innovation before it was cool.
The Bottom Line
While not every aspect of construction offers an opportunity for improving ESG performance, opportunities do exist and the best time to implement a change was yesterday. While you’re making changes, tidy up any egregiously unsustainable practices that could nullify your good deeds.
If finding a marriage-worthy partner feels daunting, consultants and investment partners like our pal Darrell from Haywood Securities are huge assets. They keep their finger on the pulse of what’s out there, and (more importantly) which ones make the most sense, business-wise.
Speaking of making sense, ZS2’s TechBoard and TechPanels not only offer an ESG solution, but also competitive material costs, time savings and lower labour costs (41% less expensive than 2×4 stick framing).
If you’d like to know more about what makes us marriage material, let’s chat. Who knows, we could be the ESG performance partner of your dreams.
Editorial contributions by ZS2 Advisory Board members Amy Roesler and James Maxim