COP28: Where are we and where do we go next with sustainable construction?

The latest UN Climate Change Conference has now commenced at COP28 in Dubai. As countries from around the world meet to discuss how to limit the global temperature increase to 1.5 degrees by 2050 (as per the Paris Agreement), one of the key focus areas will naturally be how to reduce global carbon emissions.

A key contributor to emissions is the construction industry, and while it’s slowly starting to embrace contractual requirements regarding sustainability, widespread adoption is yet to be seen. Here we consider some of the trends we are seeing in relation to ESG clauses in construction contracts, the related challenges, and some practical considerations to meet them.

The climate construction conundrum

The construction industry worldwide is responsible for at least 30 per cent of greenhouse gas emissions, as well as being environmentally disruptive, whether it be from environmental damage on sites, production of waste through demolition works or the mining, production and transport of raw materials such as concrete and steel.

The GCC continues to be a driver of growth in the global construction industry both in terms of the scale of investment in projects and their size. Awards for the building, infrastructure and industrial sectors were valued at $39.9 billion in Q2 2023, an increase of 110 per cent from Q2 2022.

At the same time, countries around the world, including within the GCC, have committed to net-zero emissions plans, with the UAE targeting 2050, and Saudi Arabia 2060. Achieving these targets alongside the pace of development in large infrastructure projects will require a fine balance to be struck to incorporate sustainable construction practices without significantly impacting the overall time and cost of completion.

Therein lies the conundrum: how do the region’s key stakeholders in construction balance their strategic growth with these net-zero targets, whilst maintaining profitability?

How are construction contracts dealing with sustainability?

An organisation at the forefront of driving sustainability in contracts globally is the UK’s Chancery Lane Project. They have pioneered the drafting of numerous model clauses for construction and other contracts to promote decarbonisation and emissions reduction through a collaboration of over 2,500 lawyers and business leaders from around the world. Addleshaw Goddard has been heavily involved in this initiative, helping to create a number of the sustainable construction clauses published by the Project. One example is “Tristan’s clause”, which aims to encourage sustainable sourcing of construction materials by reference to an agreed carbon budget. If the budget is bettered, the contractor receives a bonus, but if not they’re exposed to a liquidated damage regime.

Despite much encouraging work, it’s sadly the case that we are yet to see such clauses being embraced widely in practice, as the focus remains on the economic drivers of a project: completing on time and to cost. With the inflationary pressures caused by global events there is a concern that sustainability has taken a back seat.

Nevertheless, in the Middle East we have started to see clauses dealing with protection of the environment being incorporated, including minimising waste materials so they are not sent to landfill, using sustainable materials to reduce carbon footprints, minimising emissions and water use, and measures to protect the environment around work sites.

The challenges

While it’s encouraging to see the development of sustainability clauses in construction contracts, there are challenges that must be addressed to achieve the desired objectives and widespread adoption.

Key stakeholder involvement

There remains some work to be done between key stakeholders across the construction industry. At the highest level, public and private sector employers must embrace sustainability as an agenda-topping item alongside traditional budgetary and time constraints in order to drive behavioural change.

Equally, contractors must be incentivised to adhere to net-zero and sustainability obligations in contracts whilst still being able to maintain profitability at a time where global construction costs remain high and pressures on supply chains continue.

It remains to be seen how these competing objectives can be adequately balanced whilst tackling the issue of sustainability.

Measuring compliance

There is also a general lack of a level playing field when it comes to how we measure sustainability, although the situation is improving. The International Sustainability Standards Board, formed by the IFRS Foundation in November 2021 following COP26 in Glasgow, is being developed to set out standards for a comprehensive global baseline of sustainability disclosures focused on the needs of investors and financial markets. Additionally, the EU’s Corporate Sustainability Reporting Directive came into force in January requiring all EU businesses to report on their environmental and social impact and on the business impact of their ESG policies.

We are therefore starting to see baseline metrics being established and clear ways of measuring them, but further work is needed to ensure that all parties are aware of and understand the standards by which they will be judged. Otherwise, a lack of awareness or understanding will likely continue to lead to disputes, particularly regarding variation claims if contractors are required to change their work methods to meet unclear requirements.

ESG disputes

Environmental disputes also continue to work their way through the global construction industry with an increasing trend of environmental issues resulting in large claims against governing bodies of companies. These have involved claims ranging from environmental contamination to failure to set proper emissions targets and managing climate risks.

Such cases have had varying degrees of success, but they may increase as the sustainability landscape shifts, particularly where the metrics for measuring the standards parties are required to meet, and the consequences of failures to do so, become clearer.

Practical considerations

The key to addressing these challenges is constructive engagement between employers, funders, contractors and the supply chain as to the sustainability requirements of a construction project and the means to achieve them from inception. This could include:

1. Tender processes where the evaluation of bidders is based not solely on costs data but also their carbon intensity data and the use of low carbon materials (e.g. green steel, low carbon concrete).

2. Incorporating ESG clauses in construction contracts with measurable metrics attached from the outset so that it’s clear what contractual parties are required to achieve. Without this compliance will be difficult, and disputes inevitable.

3. Incentivising contractors and their supply chains to achieve a lower carbon footprint through bonuses.

4. Regular audits between key stakeholders to monitor compliance and troubleshoot issues as they arise.

The construction industry clearly presents a challenge from an ESG perspective, but also a huge opportunity. The difference that can be achieved by simple and achievable improvements is significant. The environmental impact of a construction project can be improved not only during the build phase, but also by producing a more environmentally sustainable built asset to reduce emissions during its operational phase. We are privileged to support a number of clients who are looking to ensure they are leading the charge when it comes to this important issue.

Arun Visweswaran and Alex Hirom are Partners, Addleshaw Goddard (Middle East) LLP. Josh Gibbons is Managing Associate, Addleshaw Goddard LLP.

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