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Published 25 April 2023
If ESG principles are not already high on the agenda in the boardroom of construction companies (and throughout the organisation), then they should be. ESG (Environmental, Social and Governance) is much more than just a trendy acronym and touches on all aspects of life and the workplace.
The construction sector has had a huge impact on the environment, bringing climate change issues to the fore. The United Nations 2019 Global Status Report for Buildings and Construction found that the buildings and construction sector accounted for 36% of final energy use and 39% of energy and process-related carbon dioxide emissions in 2018, 11% of which resulted from manufacturing building materials and products such as steel, cement and glass. As a consequence, it is widely acknowledged that the construction sector has a significant role to play in minimising its impact on climate change. Key areas where changes can be made are in the choice of materials (including transportation considerations), waste management, the energy usage of the completed building and future-proofing design.
NEC4 Option X29
The new Option X29 clause published by the NEC is a small, but important, step towards tackling climate change and could help the construction industry to achieve net zero emissions and sustainability targets in the creation and operation of buildings and infrastructure. It is the first climate change clause to be published by any of the standard form contract authoring bodies.
The NEC consulted on the new clause in April 2022 and the final version first became available in July 2022 as a standalone secondary option. It has now been incorporated into each relevant main contract. The intention is that the clause will be used “to support, incentivise and tangibly demonstrate carbon reduction initiatives on future builds across the sector”. It recognises that action is needed to reduce the impact on climate change in both the creation of a built asset and its future operation, maintenance and demolition. There are three main elements to the clause:
The Climate Change Requirements will form part of the scope of the works that a contractor must provide. They can be requirements in respect of the works themselves or requirements as to how the contractor is to provide the works. A failure to comply with the Requirements will be a breach of the contractor’s obligations. If the failure relates to the works then this will be a “Defect” which the contractor will have to correct at its own cost. If the failure relates to working practices then this will not be a Defect but will still need to be addressed. No suggested requirements are provided in the clause. However, the Guidance Note suggests that they could include things such as levels of recycling, use of renewable power on-site or electric vehicles, reducing waste generation, designing out waste and, designs that reduce carbon emission. Careful consideration will therefore be needed in drafting appropriate Requirements. They should be measurable and achievable and not so onerous that they will deter prospective bidders. Depending on the procurement process used, the Requirements can be set by the client or agreed jointly with the bidder.
Option X29 also provides an option to include a Performance Table, to manage performance of matters that may impact climate change. Performance targets can be set with positive and/or negative incentives (usually financial). These targets are different to the Climate Change Requirements as they are targets which the contractor is being incentivised to achieve. Failure to achieve a target will not be a Defect that has to be corrected. If desired, performance targets can be set as stretch targets over and beyond the levels required by the Climate Change Requirements. Again careful consideration will be needed in setting the targets and, in particular, any negative incentives to take account of the potential risk being imposed on the contractor. It may be appropriate to place limits on the amounts to be paid to, or deducted from, the contractor. Use of the Performance Table will help ensure that targets are capable of objective measurement as it includes details such as unit of measurement and date for when performance is to be measured to be included. No standards or recognised definitions are specified in the clause so parties may wish to adopt recognised standards such as BREEAM ratings.
The Climate Change Plan will set out the contractor’s strategy for achieving the Climate Change Requirements. It should set out the stakeholders, timescales and tasks to meet the milestones. The form and content of the Climate Change Plan can be included in the Climate Change Requirements. The Climate Change Plan is in effect a statement of intent and there are no direct contractual sanctions if the contractor fails to comply with the plan. However, a failure to deliver the Climate Change Requirements will need to be addressed.
Option X29 includes a clause to allow the contractor to propose changes to the scope of works in order to reduce the impact of the creation, operation, maintenance or demolition of the works on climate change. However, changes can only be made by the mutual agreement of the contractor and project manager.
To reflect the fact that clients and contractors are often now required to disclose their climate change credentials, Option X29 also includes a clause that allows information relating to climate change to be used, disclosed and publicised to others.
While the intention behind the new optional clause is to be lauded, contractors must carefully analyse the risks that they are accepting in agreeing to the Climate Change Requirements and performance targets.
There is of course no reason why climate change requirements cannot be included in a construction contract without the use of Option X29 but adopting the clause highlights the need to consider climate change issues and using the framework provided clearly demarcates what is required by the parties. Other drafting options could, however, be adopted. The Chancery Lane Project, for example, provides a range of over 120 model clauses, some specifically drafted for construction contracts.
Although additional costs will no doubt be incurred, there are benefits to be reaped. A building with green credentials that has been designed to be energy efficient will attract a premium price tag. Not only are potential occupiers concerned by energy costs, they will also want to fulfil their own ESG goals. Lenders and investors will regard a focus on environmental sustainability as a positive indicator of a sustainable and resilient business. Working for a company that is actively trying to protect the environment will also be attractive, improving staff recruitment and retention. With corresponding obligations being passed down the supply chain, the use of Option X29 will be a driver for change and help to mitigate the impact of construction on the environment.
Social and Governance principles
Environmental considerations are of course just one aspect of a business’s ESG framework; Social and Governance principles must also be considered. To appreciate their relevance, you need look no further that the Building Safety Act 2022 (see our Building Safety Act collection for further information). At its heart, is the need to produce safe and better buildings in which people can live and work. The ground-breaking reforms give residents and homeowners more rights, powers, and protections. The enhanced regulatory regimes for building safety and construction products are being brought about by a web of secondary legislation with regulations and schemes being introduced covering the whole lifecycle, including the design, construction and occupation of a building. No organisation working in the construction sector will be untouched by this significant piece of legislation. In addition, there is a myriad of other regulatory and reporting obligations to comply with; for example Modern Slavery Act, diversity reporting and the gender pay gap.
In a time of skills shortages, recruitment and retention of key staff is vital. A firm promoting social inclusion and the health and wellbeing of its employees will have a significant advantage in recruiting and retaining staff. A focus on EDI and flexible working practices can help to maintain a more productive and innovative work force.
The construction of buildings and infrastructure can have a significant impact on the shaping of our towns and local communities. The construction sector therefore has a part to play in improving people’s everyday lives.
Having shown the breadth of issues that can fall within the ESG banner, it is almost certainly the case that many of these issues are already been discussed, but perhaps just not with the ESG tag attached. Working towards a strong ESG framework may initially seem to be burdensome but there are clear benefits to be realised. A well thought out ESG strategy will attract investment, provide a competitive edge and demonstrate a sustainable and resilient business.
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