Climate Impact November 14, 2022

So you think you know what ESG means?

Two experts help decipher today's most misunderstood business buzzword.

ESG is the business buzzword of the moment. In a dialogue moderated by Perkins&Will Director of Sustainability Kathy Wardle, two experts help decipher what it really means.

Photo of Chip DeGrace
Chip DeGrace is director of design purpose at Interface, a global manufacturer of high-performance flooring.
Kathy Wardle: ESG —short for Environmental, Social, and Governance—is an acronym that comes from the financial world. It’s an umbrella term that encompasses everything from sustainability to corporate responsibility, and gives investors a way to measure companies by more than just their profits. How do you explain ESG to those in the design world?

Chip DeGrace: ESG has become the fashionable term for talking about your business in a holistic way. Because it highlights your impacts, ethics, and moral integrity, it shows how companies can do business in a better way. Our founder, the late Ray Anderson, always said that business doesn’t exist to make a profit; rather, business makes a profit to exist in service of a bigger mission.

Headshot of Jennifer Leitsch
Jennifer Leitsch is managing director of climate change and sustainability services at EY, a global accounting and consulting firm.

Jennifer Leitsch: From a business point of view, you want to reduce risk and increase revenue. ESG looks at how a company’s financial position is impacted by environmental issues, its corporate practices, and its business ethics. This impact can be positive or negative. For a business in the design industry, there could be an opportunity to offer low-carbon building materials or design for energy efficiency. On the other hand, depending on a company’s historical practices, ESG disclosure could put a business at risk for reputational damage and changing consumer preferences. Sustainability is very similar, but it’s more about how your organization impacts the world around you. It’s important to think about both sides.

KW: What would you say is the most important part of ESG?

CD: The area of biggest concern is climate change, not just for businesses but for the entire community. Luckily, greenhouse gas emissions are something that businesses can get their heads around, and we have much better data on them now. For companies that are trying to reduce their carbon emissions, the opportunity is bigger and easier to act on than it’s ever been. We use nature as a model—not necessarily to have things be overtly natural—but in thinking about how we are part of an ecosystem: the connectivity of our impacts and everyone in our supply chains.

Our products are primarily petroleum-based, so we are always working on solutions that provide the same level of performance. We’ve developed a new backing platform that uses recycled and bio-based content, like agricultural waste and rapidly renewable plants. Most of our products are now made from 100% recycled yarn; nylon is the primary driver of carbon in our products, so replacing virgin content with recycled content makes a huge impact.

JL: Since the SEC [U.S. Securities and Exchange Commission] came out with proposed rules for climate-related disclosures, which all public companies will likely have to follow at some point, thinking about climate change will become a priority by law. But it really depends on what part of ESG is most material to your business. Even if your company is not public, ESG is a useful framework. It’s a way to share your values with potential partners and make sure that you are aligned.

KW: How can architecture and design firms help companies with their ESG goals?

CD: Architects and engineers have been focused on making hyper-efficient buildings to cut the carbon that is used to run a business over its lifespan. But what is of even bigger importance right now is the need to cut the up-front, or embodied, carbon that is released by the creation and transport of materials like concrete and steel—reducing the great big “burp” of carbon that is given off at the onset of a new space or building. Forty percent of global carbon emissions come from the building and construction industry: Operational carbon is 29% while embodied carbon makes up 11%. Once you burp, that carbon is out there. So carefully selecting materials, whether they come from salvaged sources, contain recycled content, or have a low embodied carbon profile, is really important.

We told Perkins&Will, who have done work for us for decades, that we wanted our new headquarters in Atlanta, Georgia to have low embodied carbon. They came to us with a very specific tactical plan where they were able to divert, recycle, or donate 93% of all the materials that would normally have been construction waste, and they specified a curtain wall and interior finishes that had low embodied carbon. We set the aspiration, but we rely on the architects and designers to activate the plan and put pressure on the contractors and suppliers, and they absolutely did.

JL: In addition to the impact that architects and designers can have in the environmental space, they can also play a part in the social—or people-focused—aspect of ESG. During the pandemic, we’ve seen that the way spaces are designed can really benefit occupant health and well-being. By creating healthy workplaces, companies are showing that they’re concerned about the people they employ.

KW: What is the first step that companies should take toward figuring out their ESG goals?

JL: At EY, one of the first things we recommend for clients is that they conduct a materiality assessment, which helps a company figure out which ESG topics are most relevant for them. An assessment includes engaging with relevant stakeholders, which could include investors, customers, employees, and suppliers. Another initial step is calculating your organization’s greenhouse-gas emissions, which will help you figure out what the low-hanging fruit is for reducing your carbon footprint. Organizations like the Science Based Targets initiative, consulting firms, and carbon accounting software can help you set and track progress against a goal for carbon reduction based on your industry and your growth trajectory.

CD: We have a 2030 science-based target requiring a 50% reduction in Scope 1 and 2 emissions, which are the emissions we have direct control over, from a 2019 baseline. For Scope 3, which are emissions outside our direct control, we have a target of 50% reduction from purchased goods and services and 30% reduction for business travel and employee commuting, within the same timeframe. Based on our latest numbers from 2021—our Scope 1 and 2 totaled 14,101 metric tons, and Scope 3 totaled 472,760 metric tons—we are on track to meet our targets. As you can see, Scope 3 is quite substantial, as it is for most organizations, but we are doing whatever we can to use the influence we have to reduce it. Our goal is to become a carbon-negative business, a restorative enterprise, by 2040.

KW: One of the benefits of formal ESG reporting is that it leads to greater disclosure and presumably greater accountability. Which ESG standard for disclosure do you use?

JL: The two standards that organizations can use are SASB [Sustainability Accounting Standards Board], which is designed for the investment community, and GRI [Global Reporting Initiative], which addresses the concerns of a broader set of stakeholders. The standards are complementary and some companies use both.

CD: We report using SASB because we’ve found it is the most manageable and specific to our industry. We also use a host of third-party verifiers for carbon-neutral claims and programs. In the spirit of leading by doing, we’ve decided to evolve our metrics reporting into a full ESG report this year.

SASB (Sustainability Accounting Standards Board) organizes its standards into the following categories
KW: What is one misconception about ESG?

JL: There’s this belief that ESG is all about giving back, that it’s corporate philanthropy. But I think we’ve evolved beyond thinking that organizations have to become successful first in order to contribute. Rather, companies are able to say that they’re successful because they’re contributing to society across this range of ESG issues and creating long-term value for their organizations. That’s a really exciting place to be.