ESG – a trend destined to impact government contracting

Industry leaders, investors, regulators, rating agencies, and governmental entities are all watching a strong trend that will likely become a competitive factor in government contracting in the future. The significance of the trend’s impact cannot yet be calculated, but it could be substantial.

Environmental, Social, and Governance (ESG) has been a topic of discussion at the corporate level of many large firms for a number of years. Investment groups also are discussing the various components of ESG, and many are seeking investment opportunities for projects that have high ESG metrics. Although no standardized way exists to measure ESG, companies that can point to initiatives and/or policies related to ESG often tout this in annual reports. Morningstar, Bloomberg, and MSCI use their own metrics to report on ESG ratings.

What follows is a quick tutorial on ESG along with some predictions of how ESG considerations may impact procurement, government restructuring, funding, and legislative initiatives in future months and years.

The E relates to environmental impacts and sustainability. Basically, it is gauged by how a company or an organization mitigates risks and procedures that create a risk of harm to the planet. Think of risks as including a carbon footprint, energy efficiency, water conservation, waste management, and other processes that factor into the environmental risk.

The S is tied to social factors such as societal relationships, commitment to diversity, charitable history, transparency, hiring practices, employee and citizen benefits, and public safety. Social attributes are measured in many ways but the concept is wrapped around inclusion, fairness, and public good.

The G relates to governance or the way an organization’s policies and practices are tied to operations. ESG components related to governance may be observed in efforts such as mission statements, planning documents, public outreach operations, and procurement practices. Good governance also is measured by how transparent an organization is and the kind of policies in place are in place to ensure fair pay, employee well-being, safety, productive environments, and ethical behavior.

ESG metrics are woven into almost every ‘hot topic’ being discussed on media outlets today.

The public discourse wrapped around ESG initiatives is clear evidence that both private-sector companies and governmental entities will maintain a significant focus on the components of ESG.

President Biden has made it clear that clean air, renewable energy, climate change mitigation, inclusion, public health, clean energy jobs, fair and adequate compensation for workers, and protection of the planet are among his highest priorities. It appears that other elected officials also are promoting the same policies. Some legislative bodies have recently enacted diversity laws. A few states have initiated efforts to require public companies located in the state to embrace racial and gender diversity when selecting board members.

In the U.S., some states have gone a step further. Corporate diversity laws enacted in Illinois in 2019 and in California in September 2020 aim to make publicly traded companies embrace racial diversity on their boards, and in March for the first time the University of Illinois will publish a report card evaluating how public companies headquartered in the state are faring in ESG metrics.

In February, Fitch Ratings and a few other rating agencies designated cybersecurity as a primary component of ESG. The announcement was not lost on government leaders. Anything that raises the potential of a cyber breach represents significant financial risk. A breach of any size is costly, disruptive, and hazardous for citizens. This move indicates that ESG issues will impact ratings in the future.

The University of Memphis updated its Master Plan that will be presented to the legislature this year to make it clear that cybersecurity will be enhanced. The Department of Energy in Washington also has warned of the threat of a cyber-criminal infiltration into the country’s critical infrastructure. As public entities on all jurisdictional levels focus on ESG, it only escalates the trend.

Just this month, the Securities and Exchange Commission (SEC) announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The task force will identify, analyze and report on compliance issues related to ESG issues.

In Texas, the Dallas Fort Worth International Airport is one of the state’s ESG leaders as a result of its goal to achieve net-zero carbon emissions by 2030. That accomplishment would place the airport two decades ahead of a global target of 2050. The airport’s planning documents include ESG components such as renewable natural gas for bus fleets and the effort to design a Central Utility Plant that will use zero carbon electricity.

City leaders in Chicago are working to create a more open environment for all vendors – one that will result in more transparency related to spending with local certified firms, minority contractors, and small contractors. A $25 million Vendor Impact Fund is designed to improve structural inequities and provide better access to affordable financing for all companies

Many executives in the waste and recycling industry are anticipating new mandates for recycling as well as potential incentives related to ESG. Local government leaders are beginning to hear about new fleet technology, greater organics processing, and other ESG initiatives from contractors that provide waste, recycling and landfill services. It is likely that no industry will avoid being impacted by ESG metrics in the future.

As this trend gathers strength and continues to circulate through industry, government, and regulatory agencies, there are clear indications that government contracting will soon be impacted in significant ways. Contractors seeking value propositions linked to competitive advantages in public sector contracting should not make the mistake of overlooking the future influence of ESG.

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(Featured image by pixel2013 via Pixabay)

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