ESG in Construction Risk Management: A Strategic Roadmap for Controlling Risks and Maximizing Profits

Introduction

ESG broadly refers to analyzing a company's environmental, social, and governance policies, their effects, and the company's advancement compared to benchmarks. Risk management is a function of an ESG program. The performance of a company's ESG initiatives is being monitored by a wide range of stakeholders, including communities, consumers, workers, and government organizations. For instance, ESG data, such as ESG scores or ratings, may be used by lenders and investors to evaluate a company's risk exposure and potential future financial performance. To make informed advocacy and purchasing decisions, communities and consumers may be interested in learning about a company's environmental and social policies (DasGupta, 2022; Sabbaghi, 2022).

Thus, components of the environmental, social, and corporate governance (ESG) agenda have been and will continue to be a high priority for the construction business due to health and safety concerns and the industry's strong reliance on labor. Similar to this, governance has long been a hot subject in the industry due to the scale and complexity of contracts, competitive bidding procedures, and the necessity to interact with both public and private parties as well as to avoid bribery, corruption, and anticompetitive activity (Binhadab et al., 2021; Jha, 2019). All industries are focusing on the environmental issue, but buildings and construction cause 39%¹ of the world's carbon emissions. Thus, contractors must prioritize these business-critical environmental and carbon reduction measures. In the construction sector, which, like many industries, is continuing to strengthen its emphasis on ESG and convey the implications to stakeholders, these areas now represent the main pillars of their ESG agendas. Because their value in terms of growth and risk management has increased, the focus has shifted from conventional philanthropy and employee volunteerism to encouraging a more comprehensive integration of these subjects in business strategy. Corporate risk management and strategic business imperatives are increasingly supported by effective ESG programs (Baldi & Pandimiglio, 2022).

Including ESG considerations in corporate decision-making is sound risk management, regardless of the size of the business and sector. Every firm deals with a range of ESG-related problems, some of which have the potential to be significant and harm a company's finances or image. The likelihood of an ESG-related event or scandal is also enhanced for any firm that ignores environmental, social, and governance concerns. In other words, ESG risk is a common business risk, and ESG risk management should be a typical component of a company's risk management procedures. Most businesses are addressing some of these risks despite lacking an official ESG strategy (Singhania & Saini, 2022). Although the term “ESG” might sound like a hip new buzzword, a business, in the case of the construction sector, has probably been managing certain environmental, social, and corporate governance risks for a while. The urgency and method of the appeals to solve these concerns distinguish them now. More than ever, companies must define clear goals for risk reduction, use effective metrics to track their success and provide comprehensive reporting. The good news is that several services are available to assist with ESG risk management, so it need not be a burden. Particularly for medium-sized businesses, which can hardly afford to encounter a significant ESG scandal, the advantages of acting considerably outweigh the costs of in action (Galletta et al., 2023; Zhang et al., 2023).

The scope of this chapter is to highlight the importance of ESG risk management in the construction sector and to investigate the research trends in the field. Also, the chapter is organized as follows: Section 2 presents the importance of ESG in construction management, Section 3 highlights the issue of monitoring and reporting on ESG performance, Section 4 illustrates the engagement of stakeholders in ESG in Construction Risk Management, Section 5 presents the continuous improvement of companies in the construction sector based on the ESG performance, Section 6 present a set of case studies of Successful ESG Integration in Construction Risk Management. Finally, Section 7 concludes the chapter and proposes future research ideas.