If you work in the building product industry, you may have come across terms like ESG, EPD, Scope 3, or CBAM and wondered what they mean and how they pertain to your business. Each of these terms is related to the environmental impact of building products and can have a significant effect on sales. In this blog, we'll explore these terms in detail and discuss how they impact building product manufacturers.

What is ESG (Environmental, Social, and Governance)?

ESG (environmental, social, and governance) is a set of standards used to evaluate a company's environmental, social, and governance practices, in addition to its financial performance. These standards provide a framework for assessing the risks and impacts of a company's operations on stakeholders such as employees, customers, and the local community, as well as the company's overall sustainable practices. Companies that prioritize ESG factors are typically more transparent, have a positive social and environmental impact, and exercise strong governance practices. This focus on ESG can be a key selling point for building product manufacturers, as architects and engineers increasingly look for products that align with their clients and firm’s values and prioritize sustainability.

In recent years, there has been a growing trend towards sustainability and environmental consciousness within the AEC Industry. This trend is driven by a variety of factors, including concerns about climate change, resource depletion, and the negative impacts of some business practices on people and the environment. As a result, architecture and engineering firms that prioritize ESG factors and demonstrate a commitment to sustainability are often more attractive to owners and potential clients.

How to Use ESG as an Advantage

A 2021 NYU Stern School of Business study on ESG and Financial Performance found that, “Improved financial performance due to ESG becomes more marked over longer time horizons.” As consumers become increasingly concerned about the sustainability of products, they will be more likely to choose products from companies that prioritize ESG practices. By implementing ESG principles, building product manufacturers, architecture firms, and engineering firms can begin to differentiate themselves from their competitors and attract more environmentally and socially conscious clients. ESG principles can also lead to operational efficiencies and cost savings, as companies that prioritize sustainability often have lower energy and resource consumption. This can eventually result in a competitive advantage in terms of cost and profitability. Additionally, ESG principles help to build a positive reputation for building product manufacturers, which leads to increased customer loyalty and brand value. Building product manufacturers that focus on ESG principles now can start to build a future competitive advantage in terms of customer appeal, operational efficiency, and reputation. 

Sustainability Trends for Building Product Manufacturers

For building product manufacturers, this trend towards sustainability can have a major impact on the sale of their products. Architects and engineers who are concerned about the environmental impact of their purchases are more likely to choose products that are low impact, made with sustainable materials and processes, and that have a minimal environmental impact throughout their lifecycle. Building product manufacturers that prioritize ESG and can demonstrate their commitment to sustainability through transparent reporting and strong governance practices may be more successful at attracting and retaining these environmentally conscious clients.

Focusing on ESG may have other benefits for building product manufacturers. Companies that prioritize ESG differentiate themselves in a crowded market and stand out from competitors who are less focused on sustainability. Additionally, prioritizing ESG helps companies attract and retain top talent, as many employees are attracted to companies that prioritize sustainability and have a positive impact on society and the environment. According to Deloitte’s 2021 Millennial and Gen Z Survey, the modern workforce prioritizes culture, diversity, and high impact over financial benefits. An estimated 44% of millennials and 49% of Gen Zers rely on their personal ethics in determining the type of work and companies they would join. What’s more, employees that share the company’s values and can relate to its CSR (Corporate Social Responsibility) initiatives are much more likely to stay. Deloitte’s 2020 Global Marketing Trends Report shows that purpose-driven companies retain talent up to 40% more than their competitors.

Financial Incentives Drive Selection of High-Performance Building Products

In addition to the environmental and social benefits of using high-performance building products, there are financial incentives that can drive the sale of these products. Building owners who use high-performance building products may be eligible for a variety of tax benefits that can offset the costs of these products and make them more financially viable.

One potential tax benefit is energy efficiency tax credits. In certain jurisdictions, building owners may be able to claim tax credits for implementing energy-efficient measures in their buildings. This can include the use of high-performance building products that are designed to reduce energy consumption and improve the overall energy efficiency of a building.

Another potential tax benefit is the availability of credits for renewable energy systems. Building owners who install renewable energy systems, such as solar panels or wind turbines, may be able to claim credits that can offset the upfront costs of these systems. High-performance building products that are designed to work in conjunction with renewable energy systems, such as energy-efficient windows or insulation, may also be eligible for these credits.

Property tax exemptions are another potential financial incentive for building owners who use high-performance building products. In some jurisdictions, buildings that meet certain sustainability standards, such as LEED certification or Energy Star certification, may be eligible for property tax exemptions. By using high-performance building products that contribute to the overall sustainability and energy efficiency of a building, building owners may be able to save money on their property taxes.

Finally, building owners may be able to claim depreciation deductions for energy-efficient improvements or renewable energy systems installed in their buildings. This can include high-performance building products that contribute to the overall energy efficiency of a building. By claiming these deductions, building owners can offset the costs of these improvements and make them more financially viable.

What are EPDs (Environmental Product Declarations)?

Building product manufacturers can use Environmental Product Declarations, or EPDs, to communicate the environmental impact of their products. EPDs are standardized communication documents that provide information on a product's life cycle impact, including its carbon footprint, operational energy use, and operational water use. Building product manufacturers can leverage EPDs to provide transparency and demonstrate the sustainability of their products to architects and engineers. This can be a powerful marketing tool, as clients are increasingly interested in the environmental impact of the products they purchase.

EPDs are also useful for organizations looking to understand and reduce their carbon footprint, as they provide a comprehensive account of an organization's direct and indirect greenhouse gas (GHG) emissions. These emissions are classified into three categories, known as Scope 1, Scope 2, and Scope 3, according to the GHG Protocol.

• Scope 1 emissions are direct emissions from the organization's operations.

• Scope 2 emissions are indirect emissions resulting from the purchase of energy such as electricity, heating, and cooling.

• Scope 3 emissions include both upstream and downstream indirect emissions that are not under the direct control of the organization.

On average, Scope 3 emissions account for up to three-quarters of a company's total environmental impact, making them an important focus for a science-based decarbonization plan. By including GHG emissions from all scopes in an EPD, businesses can identify emissions hotspots in their value chain and prioritize emission reductions based on the product life cycle stage, helping to lay the foundation for a successful decarbonization strategy.

What is Scope 3?

As previously mentioned, Scope 3 refers to indirect greenhouse gas emissions that occur as a result of a company's activities. Scope 3 emissions, also commonly called value chain emissions, can come from a variety of sources, such as the use of a company's products, transportation, and waste disposal. Reducing Scope 3 emissions should be a major focus for building product manufacturers as they look to reduce their carbon footprint and appeal to environmentally conscious architects and engineers.

Scope 3 emissions are often a significant contributor to a company’s overall carbon footprint, and reducing these emissions can be a challenging but important goal for both building product manufacturers and architecture and engineering firms. One way to reduce Scope3 emissions is to focus on the design and production of products that have a minimal environmental impact throughout their lifecycle. For example, building products made with sustainable materials and manufacturing processes can help reduce the overall carbon footprint of a building.

In addition to reducing the environmental impact of their products, building product manufacturers can also focus on reducing Scope 3 emissions from transportation and waste disposal. This may involve working with suppliers and logistics partners to reduce transportation emissions, or implementing waste reduction and recycling programs to reduce the environmental impact of waste disposal.

By reducing Scope 3 emissions, building product manufacturers can not only appeal to environmentally conscious consumers and clients, but also help mitigate the impact of climate change and reduce their overall environmental footprint.

What is CBAM (Carbon Border Adjustment Mechanism)?

CBAM, or the Carbon Border Adjustment Mechanism, is the European Union’s new carbon border tax. CBAM aims to level the playing field for domestic businesses that are facing competition from imported products that are produced with higher GHG emissions. CBAM works by imposing a carbon price on imported products that is equivalent to the domestic carbon price, which is typically achieved through a carbon tax or cap-and-trade system. By equalizing the carbon price of domestic and imported products, CBAM aims to reduce the competitive advantage of imported products that are produced with higher GHG emissions and to encourage the use of low-carbon products.

For building product manufacturers, the impact of CBAM can vary widely depending on the nature of the products being manufactured. In general, building product manufacturers that are based in countries with stringent GHG emission regulations may benefit from CBAM, as it helps to reduce competition from imported products that are produced in countries with less stringent regulations. On the other hand, building product manufacturers that are based in countries with less stringent regulations may be disadvantaged by CBAM if it makes their products less competitive in the EU market.

Building product manufacturers can ensure they benefit from CBAM by reducing the carbon price of their products or shifting focus to products with inherently lower carbon cost. Carbon price reductions can be achieved by producing products with lower-carbon or recycled materials, improving production processes, or purchasing carbon offsets.

Key Takeaways

Understanding and utilizing tools and methodologies like ESG, EPDs, Scope 3, and CBAM can be important for building product manufacturers looking to appeal not only to environmentally conscious clients, but also to any client looking to reduce their carbon emissions or energy use intensity (EUI). These methodologies help companies assess and communicate the environmental impact of their products, which can be a key factor in clients’ purchasing decisions. By prioritizing ESG, providing EPDs for clients to assess the environmental impact of their products, reducing Scope3 emissions, and taking advantage of CBAM by reducing the carbon price of their products, building product manufacturers can differentiate themselves in a crowded market and appeal to customers who are looking for sustainable and environmentally friendly products.