Legal Q&A: Building momentum to net zero
Ewan Wilson, Associate, CMS Cameron McKenna Nabarro Olswang
IN recent years, the movement towards a more sustainable approach to projects has slowly gained momentum within the construction industry. In the wake of Glasgow’s COP26 and a sharpening global focus on environmental policy, this momentum is only set to continue in 2022. However, with current global events and challenging supply chain issues causing understandable concern, it is worth reminding ourselves of the clear advantages of greener construction projects.
Net zero
In April 2022, the UK government updated its ‘net zero’ strategy, including a ten-point plan for the green industrial revolution. The framework sets out the government’s proposed approach to ensure that we meet the ultimate goal of achieving ‘net zero’ status by 2050 by attaining a balance wherein our output of greenhouse emissions is equal to the carbon removed from the atmosphere. The Scottish government has proposed a slightly more ambitious target of achieving net zero status by 2045.
The adoption of the Climate Change Act in 2008 paved the way for the push to environmentally friendly construction by enshrining emissions targets in legislation. An amendment in 2019 updated the government’s objectives to include net zero status by 2050. While the goalposts have been shifted slightly in terms of the overall aims of the act, it is indicative of a wider multi-sector push for green credentials. Globally, the construction industry accounts for around 40% of global carbon emissions. The International Energy Agency notes that in order to achieve net zero status by 2050, direct carbon emissions from buildings would need to decrease by 50% and indirect emissions from the construction industry would need to reduce by 60% in power generation emissions. It will come as no surprise that this requires significant investment.
Green investment
The government have pledged an initial £12bn across multiple sectors to ‘go green’, and it is estimated that this figure is set to be tripled by private sector investment. The desire for institutional investors to invest in green projects that meet sustainable investment criteria is growing exponentially.
In order to achieve net zero status by 2050, direct carbon emissions from buildings would need to decrease by 50% and indirect emissions from the construction industry would need to reduce by 60% in power generation emissions.
Once considered a ‘nice to have’ feature, the delivery of construction projects that are sustainable and environmentally conscious is quickly becoming one of the most desirable aspects of any investment portfolio.
Under the UK government’s ten-point plan, environmental, social, and governance (ESG) matters are now of vital importance as investors look to create green portfolios to showcase their commitment to sustainability.
The desire to pursue environmentally mindful construction does not exist in a vacuum – it is not limited to those funding a project alone. It has now permeated all development stakeholders – from developers to purchasers, tenants to portfolio managers – and the appetite to engage in environmentally friendly construction remains strong despite other pressures such as inflation and supply chain shortages.
The contractual impact
What does this mean for construction contracts on a day-to-day basis? It is increasingly common for parties to express their commitment to ESG matters within construction contracts. In particular, employers are striving to make direct references to their own policy documents or guidelines in a bid to link these to existing obligations within appointment documents. This will obviously depend on the sophistication of an employer’s environmental policy and can range from relatively vague aims to specific criteria.
The absence of a standardised approach means that contractual obligations within the market vary from an obligation to be ‘mindful’ or have ‘due consideration’ of general environmental policies to obligations to adhere to specific criteria when carrying out works.
For example, the inclusion of defined targets within a specific reporting period which measure the total emissions arising as a result of performance of the services. This requires agreement between the parties to note how the environmental impact of the services is to be recorded but serves as an example of one way in which commitment to sustainable construction can be formalised. Undoubtedly there is a balance to strike between ensuring that a development conforms to sufficient environmental standards to attract tenants, purchasers, or further investment, while ensuring that contractual obligations can be achieved within the budget.
The desire for institutional investors to invest in green projects that meet sustainable investment criteria is growing exponentially.
While there is no standard approach, a stricter adherence to ESG policy is likely to become the norm as we get closer to interim government emissions targets in 2030 and 2035. The increased focus on green investment has certainly not been lost on the industry and will intensify further as external pressures mount and emissions targets loom.
This can already be shown through the introduction of NEC’s secondary option clause X29 which aims to incentivise carbon reduction and the collaborative approach to environmentally friendly drafting trailblazed by the Chancery Lane Project.
By committing to sustainable construction, industry professionals are not only working to meet employer requirements but are taking a proactive role in attracting the backing of institutional investors. A more sustainable development will also create a greater pull for tenants who are increasingly conscious of rising energy costs. However, this all comes at a time when the industry is facing unprecedented market and pricing instability.
Traditionally, risk for the innovative solutions this calls for has been passed down the supply chain, but that appears increasingly unrealistic given the wider challenges the industry is facing. NEC in its consultation on X29, has expressly advised that for emissions targets and sustainability to be wider project goals for which risk is shared.
Conclusion
Global supply chain issues exasperated by current events are already having a detrimental impact on construction projects getting off the ground. However, despite supply chain challenges and the rising cost of materials, the climate emergency and the construction sector’s contribution to emissions requires change and innovative thinking. To the external market of purchasers and investors, sustainability is no longer a box ticking exercise but a fundamental component of a sound investment. It is with this ethos that construction specialists can secure their position in the much greener landscape of the industry future.
Ewan Wilson, Associate, CMS Cameron McKenna Nabarro Olswang ewan.wilson@cms-cmno.com
