Building new operating models for a cleaner, and more profitable, future
It’s looking like 2022 will mark the beginning of a period of accelerated infrastructure development. The global construction output is estimated to grow from $10.2 trillion in 2020 to $15.2 trillion by 2030. This next wave will likely be largely powered by designing, building and operating infrastructure that’s cleaner, smarter and more sustainable — and closely aligned with the transition to clean power and fuel and a universal push for greenhouse gas (GHG) emissions reduction.
E&C is key to reducing the built environment’s GHG footprint. With the building and construction accounting for about 37% of global Co2 emissions, the E&C sector has set a target to reduce CO2 emissions from 3 GtC (gigaton of carbon) to around 2 GtC by 2030 and then to zero by 2050. The emissions generated by the sector principally stem from materials and construction (embodied carbon) and the operation (operational carbon) of buildings.
Societal and corporate drives for greater environmental, social and governance (ESG) progress continue to mount, including increasing expectations that businesses can provide verifiable GHG emissions reporting. A recent PwC Pulse survey found that 60% of executives believe ESG and sustainability will be integral to longer term planning at the end of 2022. This marks a propitious moment for the E&C sector to both grow and support a greener capital-project delivery system now being demanded by more and more customers, investors, lenders and regulators.
Performing while transforming with GHG-reduction capabilities. The E&C companies that stand to benefit most are likely to be those that can quickly align and adjust to accommodate a net zero future. That will mean maintaining traditional operating models while, on parallel tracks, creating new models to help drive new revenue streams supporting green (or greener) infrastructure. Doing so will require myriad new capabilities — either acquired internally or via alliances or acquisitions — including building assets with more energy efficiencies, cleaner fuels and power and the adoption of new digital services to help reduce site-based carbon footprints.
GHG emissions measuring and reporting: A sweet spot for E&C firms? It will likely become increasingly critical for the sector to ramp up capabilities so they can provide customers with carbon ledgers as part of a “net zero as a service.” Such ledgers track emissions at all levels: Scope 1, GHG emissions directly produced by operations owned or operated by a company; Scope 2, indirect GHG emissions from purchased or acquired energy and power; and, especially, Scope 3, all other indirect GHG emissions not covered in Scope 2 that are produced in the value chain, including upstream and downstream emissions. Indeed, E&C firms could play an enormous role in GHG tracking and reduction given that the SEC in March 2022 issued a rules proposal requiring publicly-traded companies in the US to disclose climate-related business risks such as severe weather events and Scope 1, Scope 2 and, in some cases, Scope 3 emissions. On a global level, the formation of the International Sustainability Standards Board (ISSB) was announced at the COP26 conference, an important stride toward developing consistent ESG reporting standards worldwide. In May 2022, the UK’s Environmental Audit Committee recommended in a report that the UK government introduce a mandatory requirement for whole-life carbon assessments for buildings and that a timeframe for doing so should be established by the end of 2022 and recommended that the rules should be introduced no later than December 2023.
E&C firms can position themselves to benefit from a resurgence in infrastructure work by progressing on numerous fronts. Indeed, firms across the sector are at different points on the green-infrastructure maturity curve, so some will need to ramp up efforts more than others. Specifically, there’s mounting demand for players in the sector to sharpen their expertise in areas including digital twins, carbon ledgers, net zero as a service, supply chain control towers, and e-commerce portals for customers to collaborate on project development and delivery.
Here, we outline four major areas of transformation all E&C firms might consider to improve prospects for success as they help build a net zero world.
The E&C industry can play a pivotal role in helping its customers — especially owners and operators of buildings and other infrastructure — lower their GHG emissions and track those emissions throughout an asset’s life cycle. For the E&C sector, getting emissions reporting right for customers could also prove to be one of the most valuable and important revenue-generating offerings over the next decade. We recommend, therefore, that E&C firms incorporate emissions reporting into the processes already in place for financial reporting in order to help meet investor-grade standards.
Going forward, the winners will be those E&C firms that can successfully communicate a credible and verifiable approach to delivering projects with lower carbon footprints and facilities with lower carbon emissions throughout their life cycle.
In order for E&C firms to achieve net-zero capabilities, they will need to track and analyze data on three parallel levels: the product, project and carbon ledger.
The carbon ledger: Net zero as a service. Firms that become expert in creating carbon ledgers can offer this capability as a stand-alone net zero as a service — not only for the projects they build but for facilities built by others as well. Complete, verifiable carbon-ledger data — and the methodology of their calculations — on a given asset can be provided to the facility’s owner/operator as a service in the same way that E&C firms often now provide operations and maintenance manuals and material safety data sheets.
Delivering projects with a carbon ledger can be enormously complicated. It includes tracking vendor emissions data (e.g., suppliers and manufacturers, construction equipment, tasks and logistics) and industry-proxy or estimates for each component of a facility. Verifiable carbon ledgers must also cover the life cycle of a project. This means tracking carbon emissions of project development activities (means and methods of construction) and assessing activities identified in the work breakdown structure — including both direct and indirect tasks, materials and equipment associated with engineering, and procurement, construction and installation activities.
Key challenges persist in quantifying Scope 3 emissions. While most E&C firms already report Scope 1 and 2 emissions, measuring and reporting an asset’s Scope 3 emissions can be particularly challenging given that they typically have long and complicated value chains and many firms may simply lack adequate resources. The sector’s general unpreparedness to track Scope 3 can lead to underreporting (or even non-reporting). This can be especially problematic because Scope 3 emissions often account for most of a project’s total emissions.
Weave a carbon emissions digital thread to green up projects. The carbon emissions digital thread can run from the initial carbon-emissions data collection and the analysis of that data at several layers: product data, project data and carbon emissions data. Adopting this digital thread often requires treating the project or asset as a ‘product,’ complete with a bill of materials to which carbon-emissions data attributes can be linked.
This digital thread can yield many benefits like reducing design, supply chain and construction costs, shortening development cycles and developing more sustainable designs — very important aims during the current push for greener buildings and building materials. This push includes the Biden Administration’s February 2022 announcement of the Buy Clean Task Force, created to guide the federal government’s purchasing of low-carbon materials, and the General Services Administration and the Department of Transportation’s guidance on the use of low-carbon materials in construction projects funded by the 2021 Infrastructure Investment and Jobs Act.
Capturing emissions in the cloud to help customers — and suppliers. Cloud-based data management and reporting helps support carbon ledger initiatives by enabling the automation of processes, standardizing data and increasing transparency. Achieving improved data management continues to grow in importance as emissions data is collected from multiple sources, including a combination of financial and non-financial systems — and, in many cases, from external vendors.
Forging alliances with technology vendors to help track emissions data may become a valuable option, if not a necessity. E&C firms will likely need to adopt cloud technologies to enable effective emissions recording and reduction as well as to aggregate third-party sustainability data. Taken a step further, cloud applications can also use ESG data to help accelerate sustainability research, innovation and solution development.
E&C firms that can offer asset owners verifiable emissions measuring and reporting (carbon ledgers) will help unlock new business models and revenue streams while leading in the green infrastructure boom.
Decide on the sources and key metrics you’ll rely on at every stage of design development.
Define process, governance and reporting architecture and tools to help gain confidence in your ESG/carbon reporting.
Develop a way to tell an authentic and coherent story that can differentiate your services and capabilities.
Mastering Scope 3 emissions could be the biggest opportunity for E&C firms to increase competitive advantage as many companies will increasingly need that data.
Organizations should embrace the message shareholders are sending around ESG concerns and make needed capital investments to help address those concerns.
E&C firms should assist owners to help achieve net zero and sustainability goals.
Many E&C firms are pursuing differentiated, more competitive operating models to help yield new revenue streams and wider margins. These models hinge on offering ESG-related product offerings at lower costs and faster R&D cycle times. They typically have a global reach and are geared to attract new investors, alliances and delivery partners. Often, these operating models are untethered to the parent company’s corporate overhead, core governance or financial performance.
Buying into — or carving out — clean-energy assets can create new operating models. Newly developing profit pools — largely driven by demand for clean energy and decarbonization — are prompting E&C firms to rethink traditional operating models. This could mean spinning off parts of the business and acquiring others or forging alliances with clean energy or clean-tech companies. It also could involve divesting lines of business or entire portfolios. In any case, the aim is to create a portfolio of new services to future-proof projects, such as “greening up” a legacy asset such as an aging steel mill (e,g., integrating renewable energy, nuclear blue/green hydrogen, bio-fuels or battery storage).
Reshaping business models. Some E&C firms are already reshaping operating models in this way. Take Fluor Corporation, which in 2011 became a majority stakeholder in NuScale Power, a developer of a carbon-free small modular reactor technology. NuScale merged with Spring Valley Acquisition Corporation, a special purpose acquisition company and went public in May 2022. Similarly, NET Power — which converts natural gas to zero-emissions power and was formed through a collaboration of several companies including Baker Hughes and McDermott— is helping to meet growing demand for clean power. Such carve-outs illustrate how large incumbents can enter a market in a nimble, venture-capital manner while adding value to — and strengthening the brand of — the parent company.
Align tax as part of your digital transformation. As E&C firms expand their net zero initiatives and capabilities — and the R&D help to support them — they should also align relevant tax strategies that can unlock cash and help drive growth. Your firm may be able to leverage R&D federal, state and local tax credits that can yield cash tax savings and trim technology adoption costs.
Eligible qualified research expenses can include:
Wages of employees in the US (e.g., technology solution and process development, improving cloud services and software).
Supplies used or consumed in qualified R&D activities.
Contract research expenses for third parties performing qualified R&D services in the US.
Payments to cloud service providers when used for development.
The E&C sector is poised to converge with the clean energy and clean technology sectors, and those firms acquiring the right capabilities and making the right M&A moves can be in a better position to succeed.
Successful E&C firms should be able to both straddle traditional business models and transform by building new parallel business models that can focus squarely on decarbonization of assets.
E&C firms should take the long view on what kind of company they hope to be in 2030 by identifying the green energy and cleantech spaces they want to specialize in and build those capabilities now.
Emerging tech/business models should have both agility and governance.
Additional sources of growth capital and tax efficiencies can be gained through vehicles such as SPACs.
Alliances help reduce risk of new start-up investments.
Many E&C firms are still grappling with pandemic-related workforce disruption, including hybrid work arrangements. They’re also coping with parallel issues, including changing workforce demographics and the need to attract employees with digital and other skills. What are the critical steps needed to move beyond crisis adaptation to reengineer more future-proof workplaces that are agile and promote a culture of inclusion, learning and mobility?
Change the culture to attract broader demographics. The E&C workforce can often lack diversity, especially regarding gender. Women account for less than 10% of E&C employment, and even less in field roles. According to a 2021 PwC global survey, only 6% of industrial products company diversity and inclusion (DE&I) programs have achieved the highest level of maturity when assessed against the four dimensions of PwC’s DE&I maturity model. Nevertheless, we see that industrials grasp DE&I’s importance, with 75% of survey respondents agreeing that it’s a “stated value or priority area.” The dramatic shift to work-from-home or flexible work was positively received by the majority of women across the industry. Another PwC survey found that 75% of female employees in the US (age 35 to 44) feel stressed or anxious and that 69% face challenges balancing work and personal demands. The industry can learn from this and find more ways to make workplaces more inclusive and hospitable to the needs and preferences of their employees.
As E&C firms should identify how they plan to transform in the net zero economy, they should also work to identify the talent needed to achieve that transformation. That could come in the form of upskills, recruitment from other sectors and via acquisitions.
E&C firms can make their sector more attractive to newer workers with the right data science skills.
As the worker shortage in the US persists, E&C firms should work to change their work culture by being more inclusive and attractive in order to enlist from a wider pool of demographic cohorts.
Pandemic-driven fluctuations in demand, plant shutdowns and labor lockdowns buffeted global supply chains, forcing many E&C firms to build greater agility and resilience and heightening the need for digitizing and mating analog or manual supply chain data processes. Yet supply chain challenges persist — including materials scarcity, global port slowdowns and stubborn labor shortages, exposing long-obscured vulnerabilities even in some of the most robust supply chains.
Ramping up digital capabilities will be crucial for E&C firms to make their supply chains more agile and resilient – and less costly. A PwC survey, for example, found that “digital champions” (companies with the most advanced digital capabilities) yielded year-over-year supply chain cost savings of 6.8%.
Project backlogs: A shot in the arm for E&C? Opportunities exist for recovery and sustained growth — with pent-up demand and design and construction project backlogs. E&C firms should prioritize how to manage resource constraints to increase backlog fulfillment. This will likely demand careful planning and execution, or companies may risk further shocking their supply chains with highly volatile materials ordering patterns that may only make matters worse.
Building digital supply-chain control towers: A must, not an option. While most E&C firms grasp the importance of digitizing and automating supply-chain data and processes, few have achieved a high maturity. Leading firms are using virtual control towers that provide real-time vision across processes and logistics that enables predictive analysis, making planning for disruptions that have yet to occur possible. Digitized supply chain control towers, then, can be critical for E&C firms to stay competitive, protect margins and enhance trust and reputation in the market.
Reaching to the cloud for supply-chain solutions. Specialty cloud solutions are emerging to address supply chain needs. They can help companies improve efficiency and provide visibility into sourcing, production and planning processes using advanced demand sensing, artificial intelligence and machine learning for automated decisions and can anticipate volatility scenarios. And, by providing visualization and transparency of the full value chain — including suppliers and other third-party partners — companies are better able to predict disruptions and respond swiftly while also improving planning and making better decisions for both suppliers and end customers. Cloud technology can also create synergies. Supply chain data from a cloud solution, for example, can also be used to feed into GHG emissions measurement.
Cyber-proofing the supply chain. While digitizing the supply chain brings numerous benefits, it can also widen the attack surface for cyber criminals. Building cybersecurity protection throughout the supply chain has, therefore, become increasingly critical to achieving not only cybersecurity itself but also supply chain agility and resilience. According to a recent PwC survey, 63% of US industrial products companies expect that third-party threats will increase in 2022 over 2021, with 58% expecting to see an increase in reportable incidents occurring at the supply chain software level. Companies are taking notice. In the last year, one in two manufacturers provided information-sharing or assistance to third parties to shore up their cybersecurity postures, 36% rewrote contracts with certain third parties to mitigate risk and 30% exited partnerships with third-party vendors.
Many E&C firms are behind the curve on digitizing and automating the supply chain processes — via building a supply-chain control tower — not only to yield efficiencies and greater accuracy but also to achieve a real-time (and even future) vision of the supply chain to act on predictive analytics.
As E&C firms continue to develop their digital, real-time supply chains, they also should take precautions to secure what could be a widening cyber attack surface.