HCR Law Events

14 June 2023

Environmental, social and corporate governance

The built environment is responsible for approximately 40% of energy consumption and 30% of energy-related greenhouse gas emissions worldwide. This is coupled with the emissions associated with the overall construction of buildings and the supply chain, as well as heating, cooling, and lighting systems.

Increased stakeholder activism means that the construction industry is facing scrutiny over its environmental, social, and corporate governance (ESG) record. Businesses risk reputational damage if they are perceived not to be improving ESG, and those with a strong ESG record are considered strategically resilient. ESG is also a key part of procurement decision-making in public and private sectors, and both funders and investors are establishing their own ESG criteria to ensure investments are sustainable.

Overview of ESG

In the UK, all companies bidding for government contracts worth over £5m a year must commit to net zero by 2050. On an international level, new proposals in the EU require mandatory disclosure of the emissions potential of new buildings over their whole lifecycle. This reflects the responsibility of construction businesses when making decisions on where and how to build a new building, what materials to use, how to clear a site and so on. These considerations are fundamental in how well the industry can respond to the climate crisis, increasing regulation and social demands.

ESG action points

Construction businesses should be mindful of the challenge presented by climate change to meet the demands of stakeholders who recognise that energy efficiency increases property value and marketability. For example, skyscrapers have been identified as problematic given the need for air-conditioning and heating. Energy efficiency can be implemented through innovative tools allowing mechanisms to be built into plans at the design stages.

Building Information Modelling creates a digital model of building structures, including design and functions, while digital ‘twins’ collate data on how buildings will be used. This allows for efficiency features that maximise use of natural light and heating, as well as smart monitors, to be implemented early on, boosting ESG performance.

Careful consideration should also be given to how ESG risk and liability is allocated in construction contracts. Some industry bodies are addressing the issue, for example, through NEC’s new X29 clause. However, most traditional standard-form contracts do not accommodate such risks, failing to acknowledge the level of investment required to implement mechanisms to reduce carbon emissions.

What next?

It is likely that new policies will alter current ESG measurement and reporting requirements. In the UK, standardisation has been implemented by mandating the use of the Taskforce on Climate-Related Financial Discloses framework. Leading businesses will need to be flexible and responsive to derive value from frameworks like this, by conducting scenario analysis across their portfolios. Construction businesses operating in multiple geographies should be aware of developing reporting regulations, as standards may differ by country. Early adoption of these advancements will strengthen stakeholder and public confidence.

Developers are now creating their own checklists to rationalise the position, such as the NABERS UK scheme for rating operational energy efficiency in UK offices, albeit in the real estate sector. Overall, businesses should be utilising a methodology that works for them whilst striking a balance between ensuring data is accurate and avoiding labour intensive processes.

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About the Author
Sardeep Gill, Associate

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