In the last few years, environmental, social, and governance (ESG) strategies and ratings have become increasingly important to many stakeholders, including banks, investors, regulators, customers, and employees.
BCG analysis shows that strong ESG performers have an advantage when it comes to attracting talent, securing financing at a lower cost of capital, and reducing regulatory risk. For these players, having a potent ESG strategy leads to greater profitability and higher market valuations.
That’s why the Xella Group—one of the world’s leading manufacturers and suppliers of building and insulation materials—decided to partner with BCG in 2020.
But many companies in the construction materials industry hesitate to develop robust ESG strategies because they mistakenly believe that it is impossible for firms in hard-to-abate sectors to obtain good ESG ratings. Some may believe that companies can only score well once they have already implemented multiple ESG initiatives. The truth is that ESG rating agencies look not only at a company’s current behavior (at its environmental footprint, for example) but also at its commitments and plans to lower emissions in the future. Other companies might hesitate out of fears that ESG projects involve high costs and yield few financial returns. In fact, ESG-related improvements have the potential to bring down spending.
Despite these concerns, a handful of leaders in the building materials industry have already started developing ESG targets, increasing transparency, taking steps to reduce their environmental footprints, and pursuing favorable risk ratings. These are important strategic moves for companies that wish to be good corporate citizens amid rising regulatory pressure and greater public scrutiny.
After launching multiple ESG pilot projects, Xella Group wanted to coordinate and bolster its ESG activities in order to reduce costs, improve profitability, and stake out a reputation as an ESG leader in its field. Therefore, Xella partnered with BCG’s global network of sustainability experts, who have helped develop strategies for leading players in many industries, including building materials, steel, chemicals, and mining.
A team of BCG consultants worked with Xella over a ten-week period to update the company’s existing ESG strategy and to develop ambitious targets.
Focus on Material ESG Topics
The first step in the project was to analyze company data and conduct dozens of interviews with senior managers and other key executives to map 30 of Xella’s ESG initiatives at different stages of maturity and implementation.
From an environmental perspective, Xella’s products are energy efficient and sustainably produced using recycled inputs and cradle-to-cradle processes. In terms of social performance, the company has a proven track record of safeguarding the health of its employees, and it has lowered the frequency of lost-time injuries by more than 50% since 2017. Xella encourages employee engagement and has made strides toward building an inclusive workforce. Women make up 20% of Xella’s management team—one of the highest percentages in the materials industry. Finally, when it comes to governance, Xella demands ethical conduct from its own employees and has a zero-tolerance policy toward fraud, bribery, and any sort of anticompetitive or discriminatory behavior among its suppliers.
After mapping these initiatives, our team then leveraged BCG’s databases to benchmark Xella’s performance against key competitors across a range of metrics, including carbon intensity, energy consumption, employee satisfaction, and the ratio of women to men in the workplace. This enabled Xella’s leadership to define key ESG strengths and discover areas for further development.
Next, Xella and BCG conducted a thorough materiality assessment to set the right focus areas for the revised ESG strategy. Using frameworks from the Global Reporting Initiative (GRI) and the Sustainable Accounting Standards Board (SASB), as well as industry reports and publicly available data on peers, our team compiled a long list of the ESG topics that were most likely to impact Xella’s financial condition or operating performance. We also gathered input from more than 100 internal and external stakeholders—including employees, customers, suppliers, investors, and industry associations—to identify additional critical items.
Xella then prioritized the 15 topics it considered to be the most important to stakeholders and critical for business success. We clustered these topics into four focus areas:
Set the Right ESG Ambitions
Having determined the most-important ESG focus areas, Xella and BCG set out to define the right level of ambition for the company over the next decade. Exhibit 1 reveals Xella’s selected ESG goals for this period. To establish a set of ambitious, yet realistic targets, our team applied a combination of different external and internal lenses, including:
Link ESG and Business Strategies
Once Xella had defined its updated mid- and long-term ESG targets, our team identified a set of initiatives and quantified business cases for reaching these targets. We formulated a guiding principle that each ESG initiative should also make Xella’s business model more robust, profitable, and ultimately more sustainable in the long run.
The business impact of many environmental initiatives is relatively easy to quantify. For example, if a company installs solar panels on top of its factories to replace some grid electricity and reduce CO2 emissions, the initial capex spending from the installation is quickly paid for by lower electricity costs. Similar logic applies when old equipment, such as curing ovens, are replaced with newer, more energy-efficient technology. Xella is taking these steps—and others—to become more sustainable. (See Exhibit 2.)
Implementing initiatives for participating in the circular economy will also contribute to Xella’s long-term business performance. By using a new crusher to process production waste, Xella will be able to reduce disposal costs and either reuse its waste or sell it in secondary markets to generate additional revenue. Such activities as gradually increasing granulation quotas will allow the company to reuse more recycled materials and save on purchases of primary raw materials. Finally, by putting mechanisms for collecting waste from customer sites in place, Xella can increase customer satisfaction and gain access to a new stream of relatively inexpensive feedstock for its production.
All businesses can generate further indirect benefits by carrying out social and governance initiatives. A highly engaged, well-trained, and safe workforce will naturally be more productive and motivated to deliver stronger results. Higher levels of diversity are often associated with increases in creativity, productivity, customer orientation, and better decision making. Having a strong focus on compliance and a zero-tolerance policy toward corruption and bribery can go a long way in mitigating business, legal, and reputational risks. Companies should consider pursuing well-executed social and governance programs to produce such outcomes.
Once they have developed a comprehensive ESG strategy, companies should take the next step of communicating their ESG commitments to the world. This process can be hard to navigate, as more than 100 players operate in the complex global ESG-rating-and-reporting ecosystem, where a wide range of methodologies exist. Public companies receive ratings automatically, while private entities must choose whether to receive a rating and which agency (or agencies) to work with.
Xella was eager to receive an ESG rating because of its strong track record and the ambitious targets it has set for the 2020s. The company asked Sustainalytics, one of the largest and most respected rating agencies, to initiate coverage and perform an objective external assessment of Xella’s ESG performance. Xella and BCG provided Sustainalytics with full transparency into Xella’s ESG activities, policies, risk-mitigation strategies, management structures, and targets.
In November 2020, Sustainalytics named Xella the top ESG leader among 115 rated peers in the construction materials industry. The Sustainalytics rating objectively confirms that “the company is at low risk of experiencing material financial impacts from ESG factors, due to its medium exposure and strong management of material ESG issues.”
BCG also advises firms to take the initiative in publishing a high-quality sustainability report. Investors value ESG scores from rating agencies, but many investors also engage directly with companies and view these documents as key research tools when making their own assessments of ESG performance. In addition, rating agencies often treat the sustainability report as a primary source of information, so having a comprehensive report allows companies to tell their own stories and present their ESG accomplishments in the best light possible, instead of waiting for agencies’ ratings to define them. BCG helped collate the data and other material that Xella is currently using to develop its own sustainability report.
After helping many private and public companies, BCG has identified seven actions that companies should take to develop their ESG strategies, just as Xella is doing today:
By executing strongly in these seven areas, companies can improve their ESG performance and gain recognition as ESG leaders in their fields.