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The IRS Identity Protection PIN: What is it and why do you need one?

08.12.22

Read this if you file taxes with the IRS for yourself or other individuals.

To protect yourself from identity thieves filing fraudulent tax returns in your name, the IRS recommends using Identity Protection PINs. Available to anyone who can verify their identity online, by phone, or in person, these PINs provide extra security against tax fraud related to stolen social security numbers of Tax ID numbers.

According to the Security Summit—a group of experts from the IRS, state tax agencies, and the US tax industry—the IP PIN is the number one security tool currently available to taxpayers from the IRS.

The simplest way to obtain a PIN is on the IRS website’s Get an IP PIN page. There, you can create an account or log in to your existing IRS account and verify your identity by uploading an identity document such as a driver’s license, state ID, or passport. Then, you must take a “selfie” with your phone or your computer’s webcam as the final step in the verification process.

Important things to know about the IRS IP PIN:

  • You must set up the IP PIN yourself; your tax professional cannot set one up on your behalf.
  • Once set up, you should only share the PIN with your trusted tax prep provider.
  • The IP PIN is valid for one calendar year; you must obtain a new IP PIN each year.
  • The IRS will never call, email or text a request for the IP PIN.
  • The 6-digit IP PIN should be entered onto your electronic tax return when prompted by the software product or onto a paper return next to the signature line.

If you cannot verify your identity online, you have options:

  • Taxpayers with an income of $72,000 or less who are unable to verify their identity online can obtain an IP PIN for the next filing season by filing Form 15227. The IRS will validate the taxpayer’s identity through a phone call.
  • Those with an income more than $72,000, or any taxpayer who cannot verify their identity online or by phone, can make an appointment at a Taxpayer Assistance Center and bring a photo ID and an additional identity document to validate their identity. They’ll then receive the IP PIN by US mail within three weeks.
  • For more information about IRS Identity Protection PINs and to get your IP PIN online, visit the IRS website.

If you have questions about your specific situation, please contact our Tax Consulting and Compliance team. We’re here to help.

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BerryDunn experts and consultants

Read this if you are a tax-exempt organization.

The IRS recently issued proposed regulations (REG-106864-18) related to Internal Revenue Code Section 512(a)(6), which requires tax-exempt entities to calculate unrelated business taxable income (UBTI) separately for each unrelated trade or business carried on by the organization.

For years beginning after December 31, 2017, exempt organizations with more than one unrelated trade or business are no longer permitted to aggregate income and deductions from all unrelated trades or businesses when calculating UBTI. In August 2018, the IRS issued Notice 2018-67, which discussed and solicited comments regarding various issues arising under Code Section 512(a)(6) and set forth interim guidance and transition rules relating to that section. 

The good news
The new proposed regulations expand upon Notice 2018-67 and provide for the following:

  • An exempt organization would identify each of its separate unrelated trades or businesses using the first two digits of the NAICS code that most accurately describes the trade or business. Activities in different geographic areas may be aggregated.
  • The total UBTI of an organization with more than one unrelated trade or business would be the sum of the UBTI computed with respect to each separate unrelated trade or business (subject to the limitation that UBTI with respect to any separate unrelated trade or business cannot be less than zero). 
  • An exempt organization with more than one unrelated trade or business would determine the NOL deduction allowed separately with respect to each of its unrelated trades or businesses.
  • An organization with losses arising in a tax year beginning before January 1, 2018 (pre-2018 NOLs), and with losses arising in a tax year beginning after December 31, 2017 (post-2017 NOLs), would deduct its pre-2018 NOLs from total UBTI before deducting any post-2017 NOLs with regard to a separate unrelated trade or business against the UBTI from such trade or business. 
  • An organization's investment activities would be treated collectively as a separate unrelated trade or business. In general, an organization's investment activities would be limited to its:
     
    1. Qualifying partnership interests
    2. Qualifying S corporation interests
    3. Debt-financed property or properties 

Organizations described in Code Sec. 501(c)(3) are classified as publicly supported charities if they meet certain support tests. The proposed regulations would permit an organization with more than one unrelated trade or business to aggregate its net income and net losses from all of its unrelated business activities for purposes of determining whether the organization is publicly supported. 

The missing news: Unaddressed items from the new guidance
With the changes provided by these proposed regulations we anticipate less complexity and lower compliance costs in applying Code Section 512(a)(6). While this new guidance is considered taxpayer friendly, the IRS still has more work to do. Items not yet addressed include:

  • Allocation of expenses among unrelated trade or businesses and between exempt and non-exempt activities.
  • The ordering rules for applying charitable deductions and NOLs.
  • Net operating losses as changed under the CARES Act.

The IRS is requesting comments on numerous key situations. Until the regulations are finalized, organizations can rely on either these proposed regulations, Notice 2018-67, or a reasonable good-faith interpretation of Code Sections 511-514 considering all the facts and circumstances.
We will keep you informed with the latest developments.

If you have any questions, please contact the not-for-profit consulting team

Article
IRS unrelated business taxable income update: The good news and the missing news

Did you know that there was more than a 40% increase (from $4.3 billion to $6.0 billion) in civil penalties assessed by the IRS regarding employment tax, for the 2016 fiscal year?

A recent report from the Treasury Inspector General for Tax Administration calls for more cases to involve criminal investigation by the Department of Justice. This is significant because the requirements needed to prove a civil violation under Sec. 6672 are nearly identical to the requirements of a criminal violation under Sec. 7202, and a criminal violation can result, among other penalties, in imprisonment for up to five years.

The issue of employment taxes encompasses all businesses, even tax-exempt entities. For fiscal year 2016, employment tax issues were involved in over 26% of audits of exempt organizations. One main reason why employment tax is a major issue? Its role in funding our government: employment taxes make up $2.3 trillion dollars (70%) of the $3.3 trillion dollars collected by the IRS for fiscal year 2016.

And noncompliance is a major issue, with roughly $45.6 billion of unemployment taxes, interest and penalties still owed to the IRS as of December 2015. This trend of increasing noncompliance, combined with the vital role employment taxes has in funding our government helps explain why the IRS has increased focus and enforcement in this area.

Should your independent contractor truly be an employee? Did you properly report fringe benefits as taxable income to the individuals who received them? Knowing the answers to these questions can help you stay in compliance with the law. If you have any questions about your employment tax situation, or how we can help you ensure compliance on this and other tax issues, please contact your BerryDunn tax advisor.
 

Article
The IRS cares about employment tax—why you should too.

Many of my hospital clients have an increased incidence of providing temporary housing for locums, temps and some employees and, as a result, have questions regarding the proper tax reporting to these individuals.   

First things first: the employment status of the individual needs to be determined before anything else.

If the person is an independent contractor (for example, a locum paid through an agency), a Form 1099-Misc usually needs to be filed for payments made to the individual (or agency) of $600 or more. A 1099-Misc is not required in the following circumstances:

  • The payment is made to a corporation or a tax-exempt organization.
  • Payments for travel reimbursement are excluded as long as they are paid under an accountable plan (which itself can be another topic for a blog). For example, an independent contractor submits a timely expense report to you with their lodging receipts for reimbursement. The amounts for the expense reimbursement do not have to be included on the 1099-Misc. If you pay the travel expenses directly or provide the housing, you also do not have to include these payments on the 1099-Misc.

If the individual is an employee, you should follow the guidance in IRS Publication 15-B, which can be found on www.irs.gov.

The basic rule of thumb is that every fringe benefit provided to an employee is a taxable benefit unless there is an exclusion listed in Publication 15-B.

The lodging exclusion begins on page 15 (of the 2016 publication), and there is an example regarding a hospital listed near the bottom of that page in the left column. For lodging to meet the exclusion, it must pass three tests:

  1. The lodging must be furnished on your business premises. I’ve seen some guidance that allowed the exclusion when the lodging was in close proximity to the business premise (within a mile, etc.).
     
  2. The lodging is furnished for the employer’s convenience. The employer furnishing the lodging to the employee must have a substantial business reason for doing so other than to provide the employee with additional pay. For example, the employee is on call for emergencies 4 or 5 days a week, so must live in close proximity to the hospital.
     
  3. The employee must accept the lodging as a condition of employment. The employer must require the employee to accept the lodging because they need to live on your business premises to be able to properly perform their duties. We recommend including this condition of employment directly in the employee’s written employment contract.

If lodging does not meet all three of these tests, then it must be treated as a taxable fringe benefit with the appropriate payroll taxes withheld from the employee’s pay.

If you are also providing meals, the discussion on employer-provided meals also begins on page 15 of Publication 15-B, with the discussion for meals provided on your business premises starting on page 16.

A discussion related to transportation benefits begins on page 18. We have also had some questions from clients regarding transportation. For example, one client had an employee who dropped down to part-time status and moved from Maine to Florida. The employee agreed to continue working at the hospital one week a month, and the hospital agreed to pay for the flight back and forth. The individual continued to be treated as an employee. The flight is the employee’s commuting expense, and there is no exclusion for reimbursement of commuting expenses. Therefore, the flights had to be included in the employee’s compensation and reported on his W-2.

Many of these taxable benefits are being paid through an accounts payable system rather than payroll, and so can be easily missed. Withholding for these benefits at each pay period is much easier to accomplish rather than all at once at year end. It’s important for your HR department to communicate with the payroll office whenever unusual employment terms and benefits are being offered to employees to ensure proper tax treatment.

Article
When it comes to temporary housing for hospital employees, IRS publication 15-B can be your friend

Read this if you are a plan sponsor of employee benefit plans.

Employee Retention Credit (ERC)

There is still time to claim the Employee Retention Credit, if eligible. The due date for filing Form 941-X to claim the credit is generally three years from the date of the originally filed Form 941. 

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to COVID-related governmental orders or that experienced a significant reduction in gross receipts. 

The amount of the credit can be substantial. For 2020, the credit is 50% of the first $10,000 of qualified wages per employee for the qualifying period beginning as early as March 12, 2020, and ending December 31, 2020 (thus the max credit per employee is $5,000 in 2020). For 2021, the credit is 70% of the first $10,000 of qualified wages per employee, per qualifying quarter (thus the potential max credit is $21,000 per employee in 2021). 

For 2021, employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages. For 2020, employers with 100 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages while employers with more than 100 full-time employees in 2019 may only claim the credit for qualified wages paid to employees who did not provide services. For purposes of determining full-time employees, an employer only needs to include those that work 30 hours a week or 130 hours a month in the calculation. Part-time employees working less than this would not be considered in the employee count.

There is additional interplay between claiming the ERC and the wages used for PPP loan forgiveness that will need to be considered. 

Student loan repayment programs

One of the benefits younger employees would like to receive from their employer is assistance with student loan repayments. A recent study indicated an employee would commit to working for an employer for at least five years if the employer assisted with student loan payments. Some employers have been providing such a benefit and, until 2020, any student loan payments made by the employer would have been considered taxable income. 

Beginning in 2020 and through 2025, at least for now, employers are permitted to provide tax-free student loan repayment benefits to employees. In order to receive tax-free payments, such a plan must be in writing and must be offered to a non-discriminatory group of employees. In addition, the tax-free benefit must be limited to $5,250 per calendar year. Now may be the time to consider offering student loan repayment benefits to help retain and attract employees.

Automatic enrollment for employee deferrals in 401(k)/403(b) plan

Most employers offer an employer-sponsored retirement plan such as a 401(k) plan or 403(b) plan to their employees. However, the federal government and several state governments are concerned that employees are either not saving enough for retirement and/or do not have access to an employer-sponsored retirement plan. Some states are mandating the establishment of an employer-sponsored retirement plan, or mandatory participation in a state-sponsored multiple employer plan (MEP). Other states are mandating that employers who do not sponsor a 401(k) or 403(b) plan provide automatic employee payroll deductions into a state-sponsored Individual Retirement Account (IRA) type vehicle sponsored by the state. If you do not already sponsor a 401(k) or 403(b) plan you should confirm if your state has any requirements.

For those employers who do sponsor a 401(k) or 403(b) plan, you should consider implementing an automatic enrollment provision if you have not done so already. Automatic enrollment requires a certain percentage of an employee’s wages to be withheld and deposited into the 401(k) or 403(b) plan each pay period, unless the employee elects otherwise. While the current law does not require an employer to use automatic enrollment, there is pending legislation that would require an automatic enrollment provision in any new retirement plan. Even though existing plans would be grandfathered under the pending legislation, it may be worth implementing an automatic enrollment provision in the 401(k) or 403(b) plan to help and encourage employees to save for retirement. 

If you have questions about any of these or other employee benefit topics, please contact our Employee Benefits Audit team. We're here to help.

Article
Employee benefit plan updates: The Employee Retention Credit and student loan repayment programs

Read this if you want to understand the new lease accounting standard.

What is ASC 842?

ASC 842, Leases, is the new lease accounting standard issued by the Financial Accounting Standards Board (FASB). This new standard supersedes ASC 840. For entities that have not yet adopted the guidance from ASC 842, it is effective for non-public companies and private not-for-profit entities for reporting periods beginning after December 15, 2021.

ASC 842 (sometimes referred to as Topic 842 or the new lease standard) contains guidance on the accounting and financial reporting for agreements meeting the standard’s definition of a lease. The goal of the new standard is to:

  • Streamline the accounting for leases under US GAAP and better align with International Accounting Standards lease standards 
  • Enhance transparency into liabilities resulting from leasing arrangements (particularly operating lease contracts)
  • Reduce off-balance-sheet activities

What is the definition of a lease under the new standard?

ASC 842 defines a lease as “A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” 

This definition outlines four primary characteristics to consider: 1) an identified asset, 2) the right to control the use of that asset, 3) a period of time, and 4) consideration.

(For a deeper dive into what constitutes a lease, you can download the BerryDunn lease accounting guide here.) 

How will this affect your organization?

  • Lease arrangements have to be classified as finance, operating, or short-term leases. In general accounting for the lease asset and liability is as follows:

    • For finance leases, use the effective interest method to amortize the liability, and amortize the asset on a straight-line basis over the lease term. Note that this has the effect of “front-loading” the expense into the early years of the lease.

    • For operating leases (e.g., equipment and some property leases), the lease asset and liability would be amortized to achieve a straight-line expense impact for each year of the lease term. ASC topic 842 establishes the right-of-use asset model, which shifts from the risk-and-reward approach to a control-based approach. 
  • Lessees will recognize a lease liability of the present value of the future minimum lease payments on the balance sheet and a corresponding right of use asset representing their right to use the leased asset over the lease term. 
  • The present value of the lease payments is required to be measured using the discount rate implicit in the lease if its readily determinable. More likely than not it will not be readily determinable, and you would use a discount rate that equals the lessee’s current borrowing rate (i.e., what it could borrow a comparable amount for, at a comparable term, using a comparable asset as collateral).
  • It will be critical to consider the effect of the new rules on your organization’s debt covenants. All things being equal, debt to equity ratios will increase as a result of adding lease liabilities to the balance sheet. Lenders and borrowers may need to consider whether to change required debt to equity ratios as they negotiate the terms of loan agreements.

Time to implement: What do you need to do next?

The starting place for implementation is ensuring you have a complete listing of all known lease contracts for real estate property, plant, and equipment. However, since leases can be in contracts that you would not expect to have leases, such as service contracts for storage space, long-term supply agreements, and delivery service contracts, you will also need to broaden your review to more than your organization’s current lease expense accounts. 


We recommend reviewing all expense accounts to look for recurring payments, because these often have the potential to have contracts that contain a lease. Once you have a list of recurring payments, review the contracts for these payments to identify leases. If the contract meets the elements of a lease—a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration—your organization has a lease that should be added to your listing.

Additionally, your organization is required to consider the materiality of leases for recognition of ASC 842. There are no explicit requirements (that, of course, would make things too easy!). One approach to developing a capitalization threshold for leases (e.g., the dollar amount that determines the proper financial reporting of the asset) is to use the lesser of the following: 

  • A capitalization threshold for PP&E, including ROU assets (i.e., the threshold takes into account the effect of leased assets determined in accordance with ASC 842) 
  • A recognition threshold for liabilities that considers the effect of lease liabilities determined in accordance with ASC 842

Under this approach, if a right-of-use asset is below the established capitalization threshold, it would immediately be recognized as an expense. 

It's important to keep in mind the overall disclosure objective of 842 "which is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases". It's up to the organization to determine the level of details and emphasis needed on various disclosure requirements to satisfy the disclosure objective. With that objective in mind, significant judgment will be required to determine the level of disclosures necessary for an entity. However, simply put, the more extensive the organization's leasing activities, the more comprehensive the disclosures are expected to be. 

Don't wait, download our lease implementation organizer (Excel file) to get started today! 

Key takeaways and next steps:

  •  ASC 842 is effective for reporting periods beginning after December 15, 2021
  • Establish policies and procedures for lease accounting, including a materiality threshold for assessing leases
  • Develop a system to capture data related to lease terms, estimated lease payments, and other components of lease agreements that could affect the liability and asset being reported
  • Evaluate if bond covenants or debt limits need to be modified due to implementation of this standard
  • Determine if there are below market leases/gifts-in-kind of leased assets

If you have questions about finance or operating leases, or need help with the new standard, BerryDunn has numerous resources available below and please don’t hesitate to contact the lease accounting team. We’re here to help. 

Lease accounting resources 

Article
ASC 842 lease accounting—get started today before it's too late

Read this if you are at a financial institution. For more CECL information, tune in to the latest episode of BerryDunn’s CECL Radio podcast. It features Susan Weber and David Stone discussing how to handle unfunded commitments and debt securities during CECL preparation.

I love a big surprise! Of course, I mean the fun, uplifting kind—like birthday parties, a best friend’s unexpected visit, or that special anniversary gift. Not that other kind of surprise that’s more like biting into an apple only to find half a worm. Calculating a loss reserve for unfunded commitments is not a new concept, but the reach and significance of it may end up surprising institutions. How much? A review of 2020 public filings and disclosures shows that some adopters saw unfunded commitment reserves increase millions of dollars, from one percent of total reserves pre-adoption to six percent or more post-adoption. In this article, we take a close look at unfunded commitments under CECL, in an effort to help you avoid that “other kind” of surprise.  

Within the CECL standard (Accounting Standards Codification (ASC) 326 – Financial Instruments-Credit Losses), key considerations for estimating reserves tied to unfunded commitments are covered in section 326-20-30-11. The section lays out three key fundamentals: it applies to credit commitments that are not unconditionally cancellable, and that institutions should consider how likely the commitment is to be funded, and its expected life. 

First, let’s look at unconditionally cancellable—this essentially means that unless an institution can, at any time and for any reason, cancel its commitment to lend, then the commitment has to be included in this part of the estimate. Institutions may be surprised to discover that a portion of its commercial sales pipeline should now be included in unfunded commitment balances. Why? Because commitment letters issued to business loan applicants are often considered legally binding and they typically do not contain language that would make them unconditionally cancellable by the institution. This makes sense when you realize the primary goal of the commitment letter is to assure the applicant that the bank is committed to making the loan. This discovery, in turn, has led those involved in CECL implementation to develop (1) processes to ensure commercial loan pipelines are sufficiently detailed enough to know what, when, and how these commitments should be included in the calculation, and (2) internal controls that assure the accuracy, completeness, and timeliness of the information. 

Next up—how likely is it that the commitment will be funded? For unused portions of existing loans and lines, this may mean taking a look at average utilization rates. For in-scope pipeline commitments, institutions may find that they need to dig through information that is not commonly held in a central system to come up with a success or close rate. The likelihood of funding may vary widely between products or segments, and over its expected life. For example, the expected funding of a residential or commercial real estate construction line may approach 100%, whereas only 40% or less of a revolving line may ever be used. These funding rates become the basis for “discounting” the unfunded balances subject to reserve estimation and should be re-evaluated on some periodic basis, which can be detailed in the institution’s CECL model documentation related to governance and monitoring.

Finally, let’s look at the expected life of the loan component. This language and expectation are consistent with on-balance sheet credit, leading institutions to (1) make sure they are able to segment their off-balance sheet commitments in the same pools used for boarded loans, and (2) apply the appropriate pool reserve factor to unfunded commitments over the expected life of that type of loan. One-way institutions may accomplish this is by making sure that they are using the same fully adjusted reserve factor and expected life assumptions for unfunded pools as they do for their funded pool counterparts. 

You may discover that your CECL model or software vendor does not provide for unfunded commitment calculations, or only provides support for the available credit portion of loan facilities boarded to your core loan system. In either case, this means institutions must consider, support, and complete calculations outside of the model. Writing clear step-by-step instructions and ensuring a robust independent review/approval process will help off-set risks posed by such manual calculations.

Could you use an experienced resource to help you document or validate your CECL model?  

No matter what stage of CECL readiness you are in, we can help you navigate the requirements as efficiently and effectively as possible. For more information, visit the CECL page on our website. If you would like specific answers to questions about your CECL implementation, please visit our Ask the Advisor page to submit your questions.

For more tips on documenting your CECL adoption, stay tuned for our next article in the series. You can also follow Susan Weber on LinkedIn.

Article
Unfunded commitments and CECL: You may be in for a big surprise

Read this if you are a business owner or are interested in business valuation. 

BerryDunn’s business valuation team recently authored a book titled A Field Guide to Business Valuation for Owners and Leaders of Private Companies. It is being published by Business Valuation Resources, the leading provider of valuation textbooks, in September. 

A book’s cover can say a lot about a book, and this one is no exception. The title of this book is A Field Guide to Business Valuation. We have organized the book like a field guide used by bird watchers, and encourage readers to keep it on hand as a reference. It doesn’t necessarily need to be read cover to cover. Jump around. If a question comes up about a particular topic, turn to the section that addresses that matter. Or, if learning all about business valuation sounds appealing, by all means read it cover to cover. You may find more to certain topics than you initially thought. Here are some of our notes about the book.

We wrote this book based on data from the field. It is based on our experiences helping business owners estimate, preserve, and increase business value. We work with people who don’t have a business valuation background. We regularly use simple analogies to help people understand complicated topics. We get used to answering the same questions that come up, and we have had many opportunities to hone our answers. After years of explaining business valuations in conversations and presentations, we wrote this book to provide more people with a greater understanding of how businesses are valued. 

This book is intended for business owners and their advisors who would like to learn more about how to estimate what a business is worth, what factors affect value, and how to make businesses more valuable. After reading this book, the reader should be conversant in business valuations and comfortable with the overall valuation framework. It is not an exhaustive dissertation on business valuation. There are many other (very thick) books that get into the details, picking up where this book leaves off. This book is for people who want an understanding of how businesses are valued but don’t have the time to read heavy textbooks. 

The book is designed for people who want to learn how to perform valuations themselves. While it doesn’t contain all the details necessary to master the craft of business valuation, it is a great introduction to the topic. 

Our focus is on the valuation of privately held businesses, not publicly traded companies. Public companies can be valued based on their stock prices or various intrinsic valuation models. The value of private and public companies is affected by different factors. 

We hope this book answers questions, provides new insights, and is an enjoyable read. Stay tuned for more details about availability and opportunities to learn more about the content. If you are interested in learning more, please contact Seth Webber or Casey Karlsen.

Article
We wrote the book on business valuation—and it's available now

Read this if you are a construction or architecture and engineering firm looking at ESG initiatives at your organization.

Environmental, Social, and Governance (ESG) is an ever-growing topic that may have a significant impact on the future growth and sustainability of your company. Beyond the awareness of ESG, the key question is, “Why should I care?” While there are a multitude of answers to this question, there is one answer that can propel your business forward to outpace your competitors and create value. 

ESG initiatives for construction, engineering, and architectural firms can be broken down into four separate value creation opportunities: growth through competitive bidding, cost-reduction, investment optimization, and cultural enhancement. Here we look at the benefits of each that your company can leverage to improve your competitive advantage.

Growth through competitive bidding

According to recent data, the construction industry accounts for nearly half of total CO2 annual global emissions, including 27% from building operations, 10% in building materials and construction, and 10% in other construction activities. Combined with the US goal of net-zero emissions by 2050 set by the White House, there is a heightened focus on environmentally sustainable construction. As reduced emissions goals evolve at the state and local government level, there are increased opportunities for ESG-focused companies to expand into new geographic markets and continue to grow in existing ones. Particularly for government-driven projects, there has been increased screening of contractors for their prior and current sustainability performance. By improving your ESG profile, you may be able to get more government projects moving forward. 

Cost-reduction

When it comes to cost-reduction, ESG initiatives are often thought of in a negative light. Through a strong ESG program, there are a multitude of cost-saving opportunities. Operational costs can be reduced by implementing ESG initiatives that promote reduced water and energy consumption. Some key cost-saving opportunities for contractors, architects, and engineers may lie in the Social (behavior around people, political and social issues) and Governance (corporate behavior, including compensation and profits) pillars of ESG. Cultural enhancement is linked to reduced employee turnover, which can increase productivity and reduce labor and overhead costs. A strong ESG approach also lowers the risk of regulatory and legal intervention, which can reduce costs by eliminating project delays and mitigate risk of liability. 

Investment optimization

Shifting focus to employ an ESG-conscious approach could help minimize exposure to long-term investment risk due to environmental and sustainability concerns. While there are certainly upfront costs when implementing an ESG strategy, failure to act or explore now may eventually result in even greater expense in the future. Regulatory frameworks are in the process of being created that will ban or limit the use of certain building products. The cost of removing banned products and installing eco-friendly ones in the future will likely exceed the cost of using eco-friendly products today. ESG is a forward-thinking process that requires some up-front cost and effort that most believe will pay in dividends in the future. 

Cultural enhancement

ESG-conscious companies can attract and retain talent, improve employee morale and motivation, improve productivity, and lower costs. ESG components in the workforce can range from health and safety precautions on job sites to well-being initiatives and staff learning and development programs. Studies show that the Millennial and Gen Z generations place a larger importance on a company’s ESG program than former generations. These two generations will overwhelmingly account for the majority of the workforce in the next five to 10 years. ESG programs that place a focus on employee well-being are beneficial for the employee, employer, and in turn the environment. 

Implementing a strong ESG approach doesn’t happen all at once. By making small inroads in some of the areas mentioned above, you can better position your company for success in the future and take advantage of the many opportunities ESG may provide. 

If you have questions about ESG or have a question about your specific situation, please contact our construction team. We’re here to help you find and navigate new opportunities.

Article
Value creation and ESG: Building a better future—and business