﻿Shelter is one of the basic human needs required for survival. However, as our population continues
to grow, so does demand for shelter, the construction of buildings and their damaging
effects on our planet. While the construction industry represents 13% of global GDP, it is
responsible for 40% of global energy consumption and 33% of greenhouse gas emissions.
Companies have come under intense scrutiny over the past decade as investors and consumers demand
transparency and accountability. This has led to the rise of ESG which stands for Environmental,
Social and Corporate Governance. It is a rating system that measures the
sustainability and ethical impact of a company. So, will the ESG rating system
reduce our impact on the environment? Will it help us build better? Or is it just another
greenwashing tactic that will curb progress and bankrupt the construction industry?
It’s tough to think about a buzzword trendier than ESG right now. More and more companies
are being asked by investors to disclose their ESG data and ratings. Since it’s a
fairly new concept with a lot of gray area and ambiguity, it has become a divisive topic.
Elon Musk, who does not mince his words, has called ESG a scam that has been weaponized by
phony social justice warriors. I don’t know if I’d take it that far,
but I am concerned about its effect on the future of construction because whether we like it or not,
it is coming for every industry. In fact, global ESG assets are projected
to reach 50 trillion dollars by 2025. So let’s look at what ESG means for us.
An ESG score is a measure of how well a company addresses environmental, social, and
governance risks in its operations. E stands for environmental issues which includes sustainable
materials, energy efficiency and carbon footprint reduction. Buildings can use eco-friendly,
renewable and sustainable materials like hemp, bamboo, and recycled steel.To reduce the carbon
footprint of buildings, we can use renewable energy like solar power. We can also repurpose
old buildings instead of building new ones, build passive houses and use low-carbon materials like
mass timber instead of concrete and steel. S stands for social issues which includes health
and safety, community engagement and labor rights. The construction sector accounts
for 20% of all worker fatalities in the U.S. We can reduce this number through safety protocols,
training and PPE. Companies should also protect labor rights, especially those of migrant workers,
who make up 25% of the construction workforce. They must be compensated fairly and provided
housing, healthcare, and other benefits. G stands for governance issues which includes
diversity, executive compensation and transparency. It is no secret that the
construction industry is male dominated. A diverse board can offer different perspectives
to the decision-making process, which can lead to better outcomes and innovation. Ethics and
transparency can also help reduce costs and inefficiencies and improve accountability.
So now we have a fairly good understanding of how ESG principles can be adopted by
the construction industry. We may not agree with every single principle, but most of us agree with
the concept of corporate responsibility. Pursuing profits is very important, but not at the cost of
destroying our planet for future generations. During my building science research journey,
I have come across genuinely good companies and products like Hemp Wool and Hemp Wood that
can help us build better. But they are small businesses, dwarfed by big corporations who
can offer inferior products at lower costs. ESG ratings could help small businesses grow
and encourage investors to support them. At the same time, there are 5 reasons why I am concerned
about making ESG scores mandatory. The first is reduced productivity. While
retail and manufacturing sectors have reinvented themselves, construction seems stuck in the past.
Productivity in construction has averaged only 1% a year over the past two decades,
compared to 3.6% in manufacturing. Growing labor shortages, supply chain instability and inflation
have encouraged construction companies to turn to off-site building and automation
to improve productivity. I am concerned about ESG regulations stifling these efforts since
funds might need to be diverted from automation to secondary processes to boost their ESG score.
The second is the cost to consumers. The construction industry seems to operate on
razor thin margins which leave little to no room for investment in R&D unlike the pharmaceutical
industry. Architecture and construction work on a per-project basis to avoid overhead. As this
Ernst & Young article points out, there are significant costs involved in realizing new
sustainability ambitions. In the short-term, the costs will outweigh the financial benefits.
To stay afloat, I could see companies further sacrificing quality or even worse, passing along
the cost of ESG to us, the consumers. The third is greenwashing. We touched on this
topic in my video on carbon credits. I have visited certain factories that claim to build
100% recyclable, net zero homes that will end homelessness and the housing shortage. Most of the
time, those claims have no basis and I always try to cut through their BS in my podcasts and videos.
However, other journalists regurgitate lies and help deceptive companies gain more traction.
In 2021, The Economist discovered that the world’s 20 biggest ESG funds held investments
in fossil-fuel producers, oil producers, coal-mining, gambling, alcohol and tobacco.
Next, is subjectivity. ESG ratings are controlled by four market leaders: MSCI, Sustainalytics,
RepRisk, and ISS. Each of the four agencies uses their own proprietary methodologies,
metrics, weighting, and even definitions of ESG. There is no single, unified standard
behind ESG ratings. All these inconsistencies can leave investors confused about whether or
not their money is actually backing an ethical and sustainable company that can deliver a decent ROI.
Early last year, a Bloomberg study showed about 70% of investors thought ESG investments were
“very profitable” but in 2022, US-issued ESG bonds declined for the first time ever.
It’s important to note the context though. 2022 was a financially difficult year;
inflation rates hit 40-year highs, the bond market tanked and the stock market had its
worst year since the 2008 financial crisis. Asset managers stepped back, adjusted their
strategies and poured millions into assets that aren’t correlated to the stock market. Even if
the stock market flatlines this year, these low-correlation assets can continue to climb,
one of them being art. In fact, contemporary art prices have more than doubled the S&P 500's total
return over the last 26 years. This market used to be hard to get into, but the Masterworks platform
lets you invest in multi-million dollar paintings without actually spending millions.
Masterworks has built an impressive track record, with each of their exits so far being profitable.
With over 700,000 members and a waitlist, it’s tough to get into, but you can skip this
waitlist using the link in the description for VIP access to their latest offerings.
(See important disclosures: masterworks.com/cd)
My last concern is E being held back by S and G. This one is a tricky subject. I understand
the importance of Social and Governance issues, but their criteria seem very broad,
particularly when it comes to DE&I or diversity, equity and inclusion policies. I know what it's
like to fight for a seat at the table and I would love to see more women in construction.
But I personally lean towards merit-based systems like MFE or merit, fairness and equality.
I made a video a while back on how the average cost of shelters in California is $700 per
square foot, as much as luxury homes. Would these companies score high ESG ratings despite their
inferior quality products and outrageous costs? As this Reuters article points out “ESG is more
about generating profits and less about saving the planet”.ESG could turn into an unnecessary
expense and a distraction from real progress. I see value in the idea of an ESG rating system,
but the execution concerns me, just like the carbon-credit system. Fortunately,
the SEC has launched a Climate and ESG Task Force to identify any misconduct on climate
and ESG-related disclosure and investment. The construction industry has a lot of room
for growth, but is ESG the answer? Let me know what you think about this system in the
comments below. I’m now offering early access to ad-free videos on Patreon as a thank you to
everyone supporting me. I’ll link my Patreon page in the description. Also check out my
videos on carbon credits and tree planting scams. Don’t forget to hit the like button,
subscribe button and the notification bell too. Thanks for watching. See ya.