Materiality – Environmental, Social and Governmental Factors
Materiality refers to the degree that the presence or absence of a factor influences the viability of an action or decision.
“ESG (environmental, social and governance) is a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” http://markets.ft.com/research/Lexicon/Term?term=ESG
In portfolio management critical factors are used to evaluate opportunities and decide whether a company, product or project is likely to be a good investment. Traditionally, these material factors have been limited to financial return and risk. More recently, social consciousness has increased, increasing the importance (materiality) of environmental, social and governance criteria, once considered to be immaterial, to evaluate the viability of an investment.
Projects are Investments
Environmental, social and governance (ESG) concerns have become increasingly important aspects of investment analysis. Since projects are investments, it is appropriate to include ESG issues as criteria for deciding upon which projects to prioritize and as factors in planning.
Environmental issues show up as criteria for deciding whether to take on and on how to execute projects. For example, the project to lay a pipeline or to construct a housing development, or even a single house, must consider the impact of the project on the environment. Will the project destroy wetlands, pollute rivers and streams, injure the health of people in the community, etc.? How will any of those things effect the organization’s image and sales? How will the community be affected over time?
Social factors address the relationships among stakeholders – clients, project team members, and others who will be influenced by or take part in the project. As an example, a project to automate and modernize the operation of school food services, was initiated with a principle driving force behind the decision being the ability to shield students receiving free meals from having to publicly expose their status. Implementing an automated cashless point of sale system enabled students to simply enter their Id and move on. While there were financial issues involved, they were secondary to the primary social issue. A project to automate or eliminate a project must consider the impact on the people who are to be required to change their way of operating or lose their jobs.
Governance refers to the way the project will be led and managed as well as the regulations, policies and procedures that will dictate how the project will unfold, how costs will be accounted for and what processes will be followed.
ESG Factors in Project Planning
Most project managers are not involved in portfolio level decision making. They are involved in, and expected to lead, the planning process. Environmental, social and governance factors are material to the planning process.
Regarding governance, in one project, failure to consider the impact of regulatory requirements on the project schedule led to delays and excess costs. The project had to be approved by a governmental agency before any work could begin. The planners expected the approval to be a brief process. They brought on contractors earlier than they were needed, spending unnecessary time and materials costs for the two months that it took to finally obtain the approval. Another project manager insisted that
Environmental issues impacted a process improvement project that required a building renovation to enable cabling and wiring. The project was initially planned without considering the removal of asbestos. Contractors were scheduled to start work at a point in time. When the need for the asbestos issue was raised at the last minute, the testing and remediation work took an additional three weeks. This required that the scheduled start date for the contractors had to be moved. This created a ripple effect that delayed the project for two months more. The project team had to be re-positioned in the contractor’s schedule because other previously committed work at different clients.
Will cutting costs and increasing short term profits win out over concern for the environment and sustainable people centered processes?
Social concerns are perhaps the ones most likely to be overlooked in projects. Here we must consider the impact that the project will have on employees, clients and others. Role and responsibility changes raise training issues as well as union contractual issues. As roles and responsibilities change there may be significant anxiety on the part of employees who must adapt to new and uncertain conditions. How will social relationships change? How will that impact morale and productivity?
Will customers experience service disruption? If so, how, by whom and when will they be prepared for it? How will expectations be managed?
Will employees be expected to work extended hours? How will they be compensated for it? Will they agree to do it? What impact will it have on their families and social lives? Will it demotivate?
How will a new process and organization structure effect diversity?
As an increasingly large number of people become conscious of the need for sustainability, environmental protection, social responsibility, environmental, social and governance factors will play an increasingly important role in project portfolio management and project planning.
This will not stop organizations from utilizing technology to eliminate or radically change jobs. Automation, applied artificial intelligence, and robotics are here to stay and will increasingly make for a new normal. People will lose their jobs. How society will respond is an open question that depends on the value given to social responsibility. At the project level, those involved in process automation and digital transformation projects will continue their work, hopefully, with understanding and compassion for those who will be disrupted.
Greed coupled with a lack of consciousness or caring about the long-term impact of actions like the dispensing of opioids or the attempt to bypass emission controls, will continue to be a driver of decisions that can result in harmful actions. This will be exacerbated by the loosening of governmental controls, should that continue.
However, it seems as if a enough people, especially young people, will vote with their Dollars, Pounds, Renminbi or Euros to motivate political and business leaders to consider the environmental and social impacts of their actions and be held accountable.
But, what about project managers and performers? We are left with personal, value-based decisions. At what point does one say no, I won’t work on that project because it will cause harm? At what point does one become a whistle blower? Tough questions that call for courage and valuing truth, environmental protection and social responsibility.