ESG requirements affect all industries, and the building and construction industry is no exception. As a major user of international labour and imported raw materials, it is perhaps even more exposed to ESG risk than other industries, and our built environment has a direct and tangible impact on social and environmental outcomes.
According to the European Commission, the building and construction industry has significant impact on many sectors of the economy, local jobs, and quality of life, all the while requiring vast amounts of resources (approximately 50% of all extracted materials), generating 35% of the EU’s total waste, and between 5-12% of total national greenhouse gas emissions.
Building and construction projects often entail the intervention of multiple contractors, subcontractors and suppliers, with complex and technical contractual mechanisms, subject to various applicable laws. Projects need to consider the mandatory laws of the site, the law applicable to a given contract, and the laws that could apply to a specific actor due to its incorporation or action in a given country in the project supply chain. Amongst these requirements is the fast-evolving ESG EU legislation. At the forefront of this legislation are the draft Directive on corporate sustainability due diligence (“CSDD”) and the Directive on corporate sustainability reporting (“CSRD”), which pose the difficulty of being applicable to (i) EU sizeable or listed companies or groups, or (ii) non-EU entities generating more than 150 million euros net turnover within the EU via an EU subsidiary or branch.
Actors in the construction section will increasingly need to consider ESG risk allocation in their contractual clauses, with (i) owners attempting to impose stringent conditions, associated with penalties should targets not be achieved, (ii) contractors seeking to delegate risk by passing it on to their subcontractors and suppliers, and (iii) subcontractors seeking to limit reporting requirements or themselves trying to pass on the same risks further down the contractual chain.
In this whirlwind of constraints, actors in the industry can apply well established contractual tools (subject to any mandatory laws), such as:
- the contractualisation of ESG obligations, the non-respect of which would amount to a breach of contract;
- so-called stabilisation clauses, to capture the state of legislation and norms to be applied at the time of signature of the contract;
- back-to-back mechanisms and hold harmless clauses throughout the supply chain;
- penalties or liquidated damages for failure to abide by the ESG requirements;
- incentives in the form of bonuses could be agreed if the targets are met or performance is higher.