ESG: Construction’s Next Big Thing?

Growing awareness and emphasis on ESG (Environmental, Social and Governance) considerations in the drive towards net zero mean that companies are increasingly having to face up to this issue as part of their business strategy. Failure to do so presents companies with very real risks, from reputational damage, difficulties with recruitment, and even the prospect of reduced access to funding, if a company’s policies on ESG matters do not align with accepted standards.

The construction industry has one of the largest impacts of any sector on the environment. So, what are the implications of ESG and net zero for the sector?

What do we mean by net zero and ESG?

The UK’s Climate Change Act 2008 has committed the country to achieving net zero status by 2050. Net zero means that any greenhouse gases added to the atmosphere balance out those gases that are taken out. ESG is a framework for a broad range of environmental, social and governance factors against which investors can measure the behaviour of a particular entity when deciding whether to allocate investment capital. It has evolved from other historical movements that focused on health and safety, pollution reduction, and corporate altruism.

The ‘environment’ aspect of ESG is the impact of an entity’s behaviour upon the environment, for example carbon emissions, impact on biodiversity and creation of waste. ‘Social’ measures how an entity treats its staff and customers and the community in which it operates. And ‘Governance’ measures how an entity is managed and how internal controls promote transparency and support shareholders’ rights and expectations.

ESG has really gone mainstream because of how important the framework has become in the investment community. There are a growing number of ESG rating agencies and reporting frameworks, all of which have evolved to improve the transparency and consistency of the ESG information that entities are now required to report publicly.

So how does the construction industry fit in?

The construction industry is a heavy user of resources, as it relies on complex supply chains for materials and produces significant levels of waste. The UK Green Building Council (UKGBC) states that in the UK ‘the operation of buildings accounts for around 30 per cent of emissions, mainly from heating, cooling and electricity use’. For new buildings, it says ‘embodied emissions from construction can account for up to half of the carbon impacts associated with the building over its lifecycle’. The United Nations Environment Programme reports that buildings are responsible for around 40% of global energy consumption, a quarter of global water usage, and a third of greenhouse gas emissions. So, the evidence is clear that construction will need to play a pivotal role in the drive towards sustainability and meeting climate change targets.

The UK government’s commitment to meeting net zero by 2050 presents a massive challenge for the construction sector. In 2020 the government published its ‘Ten Point Plan for a Green Industrial Revolution’. This includes proposals covering the built environment, for example speeding up the introduction of the Future Homes Standard, a set of standards coming into effect by 2025, to ensure that new homes produce fewer carbon emissions.

UKGBC has published a ‘net zero carbon buildings framework’, a series of guidance documents to provide the industry with ‘clarity on the definition of net zero carbon buildings’, in other words net zero for the built environment. Meeting this framework will be a fundamental part of the construction industry’s role in reducing its impact on the environment and thereby fulfilling its ESG credentials.

The Chancery Lane Project, a collaborative initiative among legal and other professionals, ‘whose vision is a world where every contract enables solutions to climate change’, offers freely accessible model climate clauses and tools for a range of sectors, including buildings and land. Therefore, ESG is becoming increasingly mainstream.

Potential ESG considerations for the construction sector

The E in ESG is clearly the biggest challenge in terms of change in the sector. Environmental considerations of key focus are the development of more sustainable materials and their improved durability and resilience, measures to address waste reduction and the potential for reuse, ethical sourcing, water conservation, potential toxicity, and how materials will be disposed of. A move towards a focus on building performance, in terms of energy consumption, the use of renewables and even zero energy use and greater innovation in building practices will need to be built into the projects of the future.

Social considerations include the improvement of workers’ conditions within the industry and the design of spaces that promote health and wellbeing and enhance the local environment. In the UK, from April 2022, large and quoted companies are required to make certain climate related and environmental disclosures in their annual reports. Whilst smaller companies and entities have no obligation to report on such matters, failure to at least address them in some way could potentially result in harms such as discriminatory practises, reputational damage, or pollution claims.

Having an ESG policy can therefore offer these companies a competitive advantage over rivals as well as forming part of a broader risk management strategy. Litigation on issues related to ESG is increasing so due diligence on the ESG risks facing a company is becoming increasingly important, in the context of finance provision and corporate sales or listings.

ESG: the Welsh perspective

In 2021, the Welsh Government launched ‘Net Zero Wales’ ahead of United Nations Cop26 climate talks that year. The plan covers over 120 areas, including energy, transport, waste, land use and forestry, education, and the public sector. By 2023, councils and other public bodies will be expected to publish plans on how they are going to reach net zero by 2030.

The Welsh Government has also committed £250 million towards building 20,000 homes for rent ‘to bold new quality and environmental standards with the aim for some of the stock to go beyond Net Zero and produce more energy than they use’. The devolved administration’s proposed Welsh Housing Quality Standard 2023 is heavily focused around how Wales can achieve net zero carbon emissions, in the context of social housing provision, by 2050. The Standard is proposing that social housing landlords should cease the installation of fossil fuel boilers to provide domestic hot water and space heating from 2026. A consultation on this and other measures has recently ended, and its results are awaited.

Zero carbon building initiatives are being widely adopted in the social housing sector in Wales and are clearly here to stay. Hugh James has been involved in numerous high-profile projects in the social housing sector utilising net carbon technologies and modern methods of construction in relation to new builds and optimised retrofit.

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The future of construction is now firmly linked to progress on developing ESG strategies. In many ways this is an evolution of previous attempts to raise the standards in construction such as BREEAM and the Code for Sustainable Homes. The next decade is likely to see wide-reaching policy changes which will revolutionise the way architects, engineers, and contractors design and deliver buildings.

Whilst much of this change will be aimed at reducing the industry’s impact upon climate change and the environment, provisions emphasising community and social benefits are also likely to appear in construction contracts. These considerations already appear in public sector construction projects and are likely to be replicated in the private sector too as public attitudes towards ESG gain increased acceptance.

Developers, and the wider construction industry, will need contractual models and ways of working that can demonstrate compliance with these standards. The Construction team at Hugh James understand the challenges faced by the industry in this area and can help businesses meet these from a legal perspective.