Host 1:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.
Host 2:
When you hear the term "sustainability," what comes to mind? Even today, the construction industry continues to thrive, and as the world continues to develop, consumers are becoming more aware of sustainability and thus, prioritizing energy-efficient solutions to produce better homes. However, there's a lot to consider when selecting products and materials to reduce emissions. With that in mind, which materials are most effective when reducing emissions, and what are companies doing to address sustainability? In this episode, we welcome two managing directors to discuss this topic. Let's welcome Paul Bromfield and Tim O'Neil. Paul, Tim, please introduce yourselves.
Paul Bromfield:
I'm Paul Bromfield. I'm a partner in our building and construction practice at L.E.K. Before L.E.K., I worked at a large building products manufacturer where among other things, I led the sustainability agenda.
Tim O'Neil:
My name's Tim O'Neil. Like Paul, I'm a partner in our building and construction practice, and prior to L.E.K., I also worked at a building products manufacturer.
Host 2:
Great. So let's get started. So what do B and C professionals perceive as the most important factors that make products sustainable? Paul?
Paul Bromfield:
Yeah, that's a great question. It was one we really wanted to answer as well. So we reached out to builders, architects, and general contractors, and we really wanted to understand what's most important to them, and what do they want from the building and construction industry when it comes to sustainability. They actually told us that the most important factors to them are, number one, more sustainable materials need to be used in the manufacturing process. They wanted to see more recyclable, more recycled materials, and energy-efficiency. Those were the top three things. So if you step back from that, it's really about impact. It's about money, but it's also really about tangible things that people can understand and are not black box. So reduced material usage, lower emissions. Now, they're really important things, but they don't lower down the list in terms of what professionals perceive as most important probably because the benchmark and point of comparison isn't completely clear.
Host 2:
So what products do B and C professionals perceive as having the biggest impact on sustainability, and are there areas where they're more or less satisfied with the sustainable offering?
Tim O'Neil:
Yeah. So the top two product categories noted by builders as having really an outsized impact on sustainability are HVAC and insulation. When you think about these two products, it isn't necessarily that they're made with sustainable or recycled materials, but these products very much have an impact on the sustainability profile of the buildings they go into. So HVAC and insulation have the ability to really drive substantial energy savings and efficiencies within these buildings, and that's really a big factor in terms of how construction professionals currently think about sustainability. So, relative to other categories, HVAC and insulation along with some others like windows and lighting are categories where construction professionals noted a high degree of satisfaction with sustainable products currently on the market. So, for these, again, current perceptions are very much tied to energy efficiency.
Interestingly, the third category that was ranked was concrete as having the biggest impact on sustainability, and this is really more around concrete's current carbon footprint. As you think about concrete and cement, and it being one of the largest contributors of emissions in building materials, they're fairly limited in terms of the offering. It's very nascent today as you think about sustainable concrete offerings. So, unlike HVAC and insulation, concrete was indicated as an area by construction professionals where there's more of an opportunity in the future. So siding and roofing are in a similar category with construction professionals where they would note fairly low satisfaction with current sustainable offerings, but they also note, really, an expectation that sustainable offerings will increase penetration going forward. So categories like concrete, roofing, siding, these can be thought of somewhat as underserved markets, and they're certainly ones that we're keeping an eye on as we think about new product developments and innovations in the future.
Host 2:
I understand. So, Tim, what is the willingness to pay for sustainability?
Tim O'Neil:
Yeah. The willingness to pay question is really important here, and it's something that we've been talking to a lot of our clients about. Currently, many sustainable products, whether it's made from recycled materials or having some energy efficiency benefit actually cost more than traditional products. So it is really more important to understand which customers are in fact willing to pay for a premium and how they think about the economics of any premium they're paying. So our respondents indicated the highest willingness to pay from their customers often upwards of 25% in some cases for those products that drive energy savings. So this is very similar to what we just discussed in the last question, and this is where we saw categories like HVAC, insulation, windows, and lighting score among the highest categories. As we thought about that, it's not really too surprising given that, in this case, homeowners and building owners can quantify these potential savings fairly easily, and then those savings or efficiencies then factor into the potential premium that they're willing to pay for sustainable products.
On the other hand, the willingness to pay a premium was much lower for some categories that don't really have that same energy efficiency impact on the building. So, for example, very low levels of willingness to pay for categories like drywall, cabinets, concrete, and framing. For categories like this, many customers are probably asking themselves, "What benefit is there to purchasing a sustainable offering? Is there something tangible like an economic ROI or a financial case, or is it just something that we can do and feel good about?" As you can imagine, if there isn't a clear economic case, many customers aren't yet willing to spend more and pay that premium for these products, and that ultimately results in fewer manufacturers investing in product development and innovation. So this is interesting for us because as we look at it, we think it points to a potential paradigm shift where it likely needs to happen in the market as we see accelerated adoption of sustainable products in some of these categories that are less tied to a payback around total energy savings.
Host 2:
So, Tim, you talked about cost and willingness. So, Paul, let's talk about some of the other barriers to sustainable product adoption. How can companies overcome these?
Paul Bromfield:
Great question. So professionals perceive that the biggest barrier is cost. Frankly, people don't always want to pay for sustainable product options, and that won't be a surprise to people. But actually, what's really interesting is that the other two big barriers are that there's limited awareness of the available sustainable product options, and B, pros think that there aren't enough sustainable product options out there. So it's not really that pros don't care about sustainability. It's just that they really want more choice, and these, we think, are really problems that building and construction companies can fix, they can address. So the question is, what should they do?
First, we think that it really starts by explaining the benefits that sustainable product have. Building and construction, manufacturers, distributors, pros themselves need to educate property owners on sustainability to ensure awareness and also, to just really promote product offerings that are available in the market and which are already out there, which people may not be aware of. I think many companies think that they're doing that, but it's not really having the full effect that's needed.
Second, there probably needs to be more investment in product development. Pros are asking for more products. We heard that from some of the findings that Tim just shared. So innovation really needs to develop not just sustainable options, but also lower cost options that are sustainable. I think what we've seen is sometimes that really requires looking beyond the organization, looking outside the walls of the company. So billing and construction companies really need to ask themselves, "Are there partnerships, are there other parties that we should be reaching out to that can help us realize our sustainable product options and help us to be more innovative?"
Host 2:
That's pretty insightful, Paul. So what are building and construction companies doing to address sustainability? Either of you. Tim?
Tim O'Neil:
Yeah. When you look at what companies are doing today, you can really classify their actions to address sustainability in a few different buckets. The first one is operations. So this is really around improving the production process to reduce waste or use less water as an example. The second is products. So this might be new products, new technology, or product enhancements. This might include using recycled materials in the product, for example. The third is supply chain and the value chain. So this is improving the emissions, really, beyond the factory. So what happens with distribution and end-use of the product? Then, the last is around external investments. So this might include things such as carbon offsets or carbon trading.
So we looked at what they're doing in each of these areas and analyzed the sustainability goals of 35 publicly traded companies in the building products space. When we did that, we saw that operations is really the biggest area of focus thus far. So, to give you an example, 54% of public companies that we looked at have announced operational initiatives with tangible goals. The tangible goals piece is really important here because there are more companies that are actually out there with objectives, but without stated goals that are clearly tying back to what they're doing. So operations being the biggest with 54%. On the supply chain side and the value chain side, that's where we saw 43% of companies with specific goals. For products, it was 23%, and for the public, for the external investments thinking around carbon credits and offsets, it was 17%. Now, maybe to caveat that 17% with external investments, there may actually be more that companies are doing in that case, but it just might not be something they publicize as much.
So what's surprising about this data is the product category. So only 23% of companies are committed to product innovation goals that drive sustainability. But as we talked about a couple questions earlier, this is really where we see building and construction professionals demanding the most in terms of sustainability. This is what they're looking for. So, as we look forward, this is an area we'll be very much keeping our eye on over the next few years is, "What's happening with product innovation, and how is that tied to sustainability?"
Host 2:
So, beyond the goals, what are the key success factors for building and construction companies to pursue their sustainability agendas?
Paul Bromfield:
So this is a question that a lot of building and construction companies are wrestling with, and we talked to a number of executives, really tried to distill down what we see as some of the key success factors into a few areas. Probably the number one is true leadership by an advocacy. That phrase, it has to begin at the top. It's particularly important with sustainability. The company leaders have to embrace sustainability. They have to keep talking about it and highlighting it as a major priority if it's going to be considered and taken seriously by the organization.
So then, leadership is key, but it's not enough. It has to move further down into the organization, and the second thing that's probably really important is that sustainability has to become something that's really routine, something that almost becomes part of the fabric of the periodic management meetings, and updates, and other key organizational meetings. So one example of that is there really needs to be standardized periodic updates within management processes, within reporting manuals, or whatever the processes of the specific company are. Really, a key part of that is that the sustainability agenda is turned into a goal that's owned by key leaders and cascaded down.
Another key factor that we heard is it's really important to adapt the processes that you have to embrace sustainability, and it's really important to use those existing processes rather than try and invent new processes. The inventing and new processes just complicates the organization, and it can mean that in some ways, sustainability is something that's just separate from what we do. I think we hear pretty strongly that it's important to use the existing R&D, the business analytics, and performance management processes to embed a focus on sustainability across the organization. So an example of that would be when there's a new product submission, maybe an internal cost of carbon for the business case for that product is something that just needs to become pretty routine, and standard, and adopted.
The third thing that we heard is that targets really need to be thoughtful, but they also need to be realistic, and they really need to take account of what can be done on the sustainability front when at the same time, the organization may have committed to significant revenue goals. You really have to balance those two priorities. You have to solve the equation, and solving that equation probably needs to be done over an immediate and shorter term period rather than trying to completely figure that out over the long term. So, specifically, it's better to have two-year realistic progress that's realistic in terms of what the organization is trying to do from the revenue standpoint and from the sustainability standpoint. That is going to be more meaningful than setting, say, a 10-year aspiration.
Finally, transparency is really important. Setting public measurable goals, and then reporting on progress regularly in a pretty open way. That really communicates a focus to employees. It communicates that this really is a commitment to the wider organization. It shows that it's a commitment for what the company is doing overall. So, in summary, leadership, integrated processes, having meaningful, but realistic targets, and just being transparent about what you're doing. These are some of the real critical success factors to pursue a sustainability agenda.
Host 2:
Excellent. Well, thank you, Paul, for that. To close out, sustainability is a nuanced challenge in building and construction, but investors can develop frameworks to evaluate opportunities to improve sustainability while combining them with traditional growth selection and criteria such as market size and growth. There is value in building green and investing in sustainable building products and materials today and in the near future. Again, thank you, Paul and Tim, for your insights today.
Tim O'Neil:
Thank you. Happy to be here.
Paul Bromfield:
Thank you.
Host 1:
Thank you, our listeners, for joining us today at the Insight Exchange, presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
