The European Union is currently the most demanding and ambitious region in the world when it comes to sustainability.
Digitalization and sustainability (often referred to as ESG - Environment, Social, and Governance) are not new. There are international companies that have been producing sustainability reports for over 20 years, and many companies already use ERP systems (SAP, Primavera, etc.) or BI tools (Power BI, Tableau) in their daily management. However, most SMEs (Small and Medium-sized Enterprises) have not yet realized that we are going through the so-called 'fourth industrial revolution,' where sustainability is now quantified and addressed using technologies such as artificial intelligence, machine learning, and blockchain.
The European Union is currently the most demanding and ambitious region in the world when it comes to sustainability. Since the pandemic, within the goals set by the Green Deal Strategy, there has been a development of sustainability regulations at an unprecedented speed, including the New Environmental Taxonomies, the Corporate Sustainability Reporting Directive (CSRD), the Due Diligence Directive, the Green Claim Directive, among others.
The construction sector is one of the targets of this entire regulatory framework, as it has a significant environmental impact.
However, in Portugal, a relative passivity is observed among the majority of companies in the sector (especially SMEs) regarding preparation to meet all these new requirements. The philosophy of 'these are issues that only concern large companies' can become a threat to the profitability and even the survival of these companies. The lack of understanding about the true meaning of 'sustainability' can lead many companies to a point of no return. Often, when I talk to SME managers about sustainability, their first reaction is to ask me to talk to their marketing team or environmental engineer. This is symptomatic of the lack of knowledge on the subject.
If we observe how multinational corporations address this issue, we find that since the technological and regulatory acceleration caused by the pandemic, the role of 'Chief Sustainability Officer' (the highest-ranking person responsible for sustainability in companies) has been created, usually reporting to the CEO or CFO. Although an SME is not a multinational, it is beneficial to adopt certain good practices. Sustainability should be discussed directly with the CEO or CFO because, since the pandemic, sustainability has become quantified and linked to digitalization, with impacts that go beyond marketing and the concerns typically attributed to an environmental engineer.
This year, the first international accounting rules on sustainability will be established. With these rules, there arises the obligation to audit sustainability for the first time in history. Furthermore, the key performance indicators (KPIs) for sustainability vary from sector to sector and must be reported according to international reporting standards to enable the company to obtain dividends from banks, potential investors, or even Portuguese and European authorities (to access support programs such as PT 2030 or PRR).
The required sustainability KPIs now demand data that goes beyond the narrow scope of each company, encompassing information scattered across social networks, public statistical databases, and information related to partners within the value chain in which the company operates (e.g., suppliers). In other words, so-called big data and supply chain management play a fundamental role, and incorrect information can be classified by authorities and other stakeholders as "greenwashing" (false statements about sustainability), which can significantly penalize the company's reputation in the market, among its partners, and its sources of funding.
For all these reasons, it is important for the CFOs or CEOs of SMEs to be directly involved in the Sustainability Management of their company and to understand that they should have someone on their team (or external partners) with expertise in Data Science and Digitalization.
We are currently going through the so-called "fourth industrial revolution," and companies need to adapt quickly to this new context. Quoting Charles Darwin: "It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change."
Even if a company is an SME and not yet legally obligated to comply with the new European regulations, it will feel the need to do so quickly, both from the banking sector and its international customers. This is because the financial sector and large international groups (listed or not) are already required to follow the new regulations and demand the same posture from the companies they work with, even if they are SMEs. In fact, even major international brands in the Oil & Gas sector (like Total, for example) began developing sustainability strategies during the pandemic, without waiting for regulatory frameworks to be implemented by regulators. This occurred because they realized that their businesses would be heavily penalized on various fronts if they did not take action.
Construction companies operating in the European Union are among the most exposed to the new demands of the current 'fourth industrial revolution' (Sustainability + Digitalization), as European authorities have prioritized this sector. For this reason, several cement companies are already involved in international initiatives such as the 'Science Based Targets initiative' (SBTi). From requirements in public tenders to preferences expressed by private clients, it is crucial that companies in the sector swiftly implement a Sustainability Strategy, with active involvement from their CFO. More than just risks, the so-called "Sustainable Finance" brings a series of opportunities that can represent vital competitive advantages in terms of financing capacity. Unfortunately, the vast majority of Portuguese companies are still not exploring these opportunities simply due to a lack of knowledge.
Portuguese SMEs showed significant improvements in their balance sheets and financial ratios in the ten years following the 2008 financial crisis, commonly known as the "subprime crisis." However, during the COVID-19 pandemic, they faced greater challenges than their European counterparts in terms of cash support. Now, with Sustainability, new financing options arise in which Portuguese companies can benefit from Portugal's energy ecosystem that aligns well with the demands of financial markets.
It is, therefore, crucial that construction sector SMEs prioritize the implementation of a Sustainability Strategy on the agenda of their Managing Director and CFO. It should be noted that the efficient use of Sustainability as a competitive advantage must always be based on three inseparable pillars: Finance, ESG, and Digitalization.
Pedro Silva
CFO certificate in Sustainability and Data Science
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