Finance & Investment
How ESG Is Forever Changing Investing, Design in the Built Environment

A call to action

This is a call to action for C-suites to be transparent in their intentions with investors and designers in reshaping the built environment sector. If C-suites, investors and designers align on environmental, social and governance (ESG) objectives, then they are more likely to realize mutual success in the future.

ESG alignment focuses on transparency of intentions to benefit all stakeholders — including shareholders who are interested in knowing that all measures have been taken to mitigate their investment risk; or increasingly, to capture new social, environmental or economic opportunities arising from changing global expectations. We refer to this intentional alignment as “the multi-stakeholder lens.”

Investment funds often remind us that past performance is no guarantee of future results. And “forward-looking statements” are not yet factual and intentional at best. This is similarly true in the design community. Design solutions are based on a future pro forma that has yet to be realized over a project horizon. In both investment and design, simply returning profits to investors is no longer a good enough measure of success. If any stakeholder does not see benefits in the design of a capital project, then gaining support is unlikely.

A call for a multi-stakeholder lens

ESG criteria define broader parameters for investment risk and design performance. The objectives and outcomes of investment and design are increasingly being held to a higher level of expectations that benefit all stakeholders. Thus, a multi-stakeholder lens focuses on the benefit not only to shareholders as investors; but also to customers, employees, suppliers and communities, to name just a few.

Ultimately, the integration of a stakeholder lens also has the potential to benefit shareholders — in part, by mitigating risk. Enterprises are increasingly under public scrutiny for the business activities of their entire supply chains and lifecycles of their products and services. This end-to-end accountability underlies, for example, the Extended Producer Responsibility laws currently taking hold in the European Union.

As noted above, applying a multi-stakeholder lens to the built environment requires a laser focus on intent. The intentions of investment and design must be aligned. Two recent declarations in the business and design communities, in particular, proclaimed their commitments to this alignment — and ultimately, to the greater common good.

• In 2017, the Montreal Design Declaration defined design as “the application of intent: the process through which we create the material, spatial, visual and experiential environments in a world made ever more malleable by advances in technology and materials, and increasingly vulnerable to the effects of unleashed global development.” Over 700 professional associations, design schools and stakeholders signed the declaration in the presence of UN agencies. The declaration concludes that "All people deserve to live in a well-designed world.”

• In 2019, the Business Roundtable revised its Statement on the Purpose of a Corporation — declaring that “companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.” This captured a new vision of intent for corporations, looking beyond the dominant view of the past 50 years that defined a corporation’s primary purpose as maximization of shareholder return. The new declaration was signed by 181 CEOs of major corporations — presumably by many of your organizations, or the clients of designers.

Taken together, especially when considered alongside evolving societal expectations of companies with regard to ESG, these two declarations will forever change investing and designing. Sustainable value creation now involves a much broader range of interests to be addressed by stakeholder capitalism – a view that business should deliver for all stakeholders, from their employees, to suppliers, to the planet.

To that end, we see a pivot in how we define the objectives of design and investment in the built environment: from what we are designing, to for whom we are designing.

A shifting paradigm for design in an evolving investment landscape

Changing the main objective from “what” to “for whom” poses new, fundamental questions about what successful design in the built environment in an era of stakeholder capitalism looks like, and highlights the promise of design in shaping a more sustainable and equitable world.

Despite a growing awareness and increased calls for a multi-stakeholder lens, this shift isn’t easy; it requires that we fundamentally rethink what we do and how we do it. The path to true multi-stakeholder capitalism isn’t paved with pledges for net zero by 2030, nor incremental tweaks and changes to policies and practices.

Design — or indeed, design thinking — holds great promise in fundamentally reshaping the systems and organizations that must play a role in delivering a more inclusive economy and society. In the built environment, this means reflecting on the entire value chain — from the materials we purchase, to the spaces we inhabit, to the interplay with our communities — in order to make choices that benefit the broader system of stakeholders over the long term. From circular design perspectives, this means eliminating (not merely reducing) waste; keeping materials in use longer by upcycling, rather than recycling; and restoring natural ecosystems and ecosystem services of cleaning water, purifying air, and sequestering carbon and other nutrients in soils.

As an executive collaborating with a design team, you play a critical role in the journey of building a sustainable brand in the eyes of your shareholders, customers, employees, suppliers and communities. The health and wellness of today’s population and future generations depend on the health of our planet. Stakeholders expect companies to account for what was once conveniently called “externalities” — ranging from carbon, waste and pollution resulting from all scopes of business activities, to post-consumer end of life for products and services.

Below, we share a few ways to begin the pivot and ask, “How can we design better for a broader range of stakeholders?”

Designing to restore the planet

We consider both the planet and future generations to be critical stakeholders. Globally, the built environment generates 30 percent of total greenhouse gas emissions; construction uses 32 percent of the world's natural resources. What’s more, 40 percent of solid waste within landfills is attributable to construction and demolition activities. We’ve written extensively about how the synergy of decarbonization, regeneration and circularity in the built environment presents significant opportunities for brands to boost their own sustainability commitments.

A few specific examples of how companies can work with investors and designers to restore the planet for future generations include:

• Regenerative design, where we transition from “doing less bad” to “doing good” in the built environment

• Net-zero and energy-positive buildings, which address how buildings can actually sequester carbon to transform buildings from net-negative to net-positive environmental impacts

• Healthy and low-embodied-carbon materials, exploring how materials impact human health but also global carbon emissions and climate change

• Biophilic design, which asks how nature has solved similar problems

• Sustainability bonds, which include adjustable rates based on covenants for actual facility performance

Many of these strategies are identified in Cuningham’s online tool, “An Interactive Tool for Circular Economy Strategies in the Built Environment,” which we will elaborate upon later in this series of articles. In total, these sustainability strategies can be used to create value for various stakeholders while building a foundation for, or strengthening, a broader ESG strategy.

Shareholders

More than ever, shareholders must now consider material risks to business continuity. Such risks may include the full range of ESG concerns including climate risk, community impact, discrimination, harassment, board representation and workforce bias. Proactive practices that mitigate these risks by considering all stakeholders can increase investor confidence. How these concerns are considered in the built environment expresses brand values and behaviors in tangible ways including:

• Business continuity

• Climate risk

• Natural habitat conservation

• Fair labor practices

• Environmental Product Declarations (EDP)

• Health Product Declarations (HPD)

• Waste management

Customers and consumers

Consumers are increasingly willing to “vote with their feet” on ESG issues that are important to them. The built environment is no exception. Especially in the multi-family sector, people are starting to demand sustainability as they evaluate which apartment communities best suit their values in terms of how they were developed and how they are managed. The sense of home and how we use our space at home is also evolving, precipitated in large part by the pandemic. Beyond this, design is also emerging as an important enabler of service delivery and consumer experience, for example, in health settings. Example concerns in the minds of customers and consumers may include:

• Environmental quality

• Financial affordability

• Amenities and convenience

• Engagement with surrounding community

• Sustainably sourced materials

Employees

An adage held that people spend a third of their lives “at work.” But what we mean by “at work” is no longer that clear. In a world of remote and hybrid work, alongside an emerging future of work marked by changing skills and shifting generational priorities, the responsibility of brands to forge connection and care for employees will continue to become more complex. Here, too, design plays a critical role in building physical and digital spaces that bring people together. A few examples include:

• Designing the employee workplace experience to reflect brand values

• Fostering diversity, equity and inclusion in employee engagement, talent retention and attraction

• Minimizing workplace stressors, such as daily commutes, that may adversely affect employee health and wellbeing

• Providing flexible work arrangements allowing employees to integrate their work life and personal life

• Providing collaborative spaces and tools to maintain social cohesion

Community

Community includes not only the area and the people who live around your offices, but also those cities, towns and villages in which materials are harvested and manufactured, stored and transported, or ultimately disposed. We need to design “beyond the property line” of the project. In addition, the construction industry is considered a major factor in expanding social and economic mobility among diverse populations and communities. To design for communities requires acting locally and globally, while considering circularity and equity across the entire value chain. A few examples of how we can design to benefit communities include:

• Vernacular design, which focuses on the use of local materials

• Supply chain and circularity, to reduce waste and pollution in local communities

• Human rights and blockchain, to ensure transparency in ethical sourcing

• Job creation, including in underserved communities

• Community Benefit Agreements

• Community health and wellbeing

• Local and regional workforce participation

Suppliers

Research from Oxford Economics predicts that, despite the sharp downturn in construction activity due to the coronavirus pandemic, the industry is poised for a 35 percent increase in output to reach $5.8 trillion in 2030 — a slightly faster growth rate than the overall economy. Design can play a role in supporting equitable access to this growing market by:

• Using procurement as a social impact strategy — for example, by specifying living wages

• Driving opportunity for diverse, local and regional suppliers to be included in projects

• Working toward transparency and accountability across Scope 1, 2 and 3 greenhouse gas (GHG) emissions

• Emphasizing embodied and operational carbon in off-site manufacturing, transportation to site, onsite construction, and post-occupancy facility management

• Evolving supply chains from least-cost awards to greater value cycles with strategically aligned business partners

Steps you can take to ready your organization

We believe organizations that adopt a multi-stakeholder lens for their built environment projects will become the leading sustainable brands in this decade of action through 2030. To start, you should ask the company for which you are designing: Which design choices will address their needs and contribute to our broader ESG goals and targets, and how can we best share our commitments and progress against these? We call this the cycle of assess, integrate and communicate.

A few tactical steps you can take include:

Assess

• Engage with your most critical stakeholders to understand their expectations and what this means for your most material ESG issues to integrate into your strategies and reporting efforts

• Build internal capabilities to stay laser-focused on emerging trends and opportunities in ESG and design and to get ahead of the curve; many organizations are implementing AI-based tools

Integrate

• Align functional strategies and tactics of corporate real estate and facilities with public and investor relations in declarations of enterprise sustainability goals

• Identify suppliers, builders and contractors willing to share risk and reward in achieving your sustainability commitments with performance-based service contracts

• Seek financial lenders with high sustainability ratings for their investment and loan practices (e.g., projects with least negative impacts on biodiversity)

Communicate

• Adopt recognized frameworks and standards for sustainability reporting to achieve fact-based ratings

• Integrate annual reports to include both financial and sustainability metrics, especially those driven by plant and fleet operations

Now is not the time to stand still. By understanding this multi-stakeholder lens, shifting decision-making from “what” to “for whom,” and integrating this perspective across your organization, you can help your company navigate the rapidly evolving ESG landscape while contributing to a more sustainable and inclusively designed future for all stakeholders.