Global Vantage: Building Back Greener – ESG in the Construction Industry

Efforts to combat environmental, social and governance issues on infrastructure projects are receiving more attention than ever before. Antony Smith and Sheena Sood consider the impact of these ESG initiatives on the construction industry in our latest Global Vantage article.

Last April, we asked whether the post-Covid world would be ‘more accepting’ of the Equator Principles (“EPs”). One year on, whilst we have yet to see the back of Covid, the future for the EPs looks promising. Efforts to tackle environmental, social and governance (“ESG”) issues on infrastructure projects seem higher on corporate agendas than ever before, and we have seen a continuing trend towards managing ESG concerns across society as a whole. With the recent coming into force of legislation such as the European Union’s ‘Sustainable Finance Disclosure Regulation’ (“SFDR”), this focus on ESG shows no signs of slowing down.

Published by the ‘Equator Principles Association’, the EPs are a risk management framework, designed to support financial institutions in making responsible decisions to identify, assess and manage environmental and social risks on projects. Since their introduction in 2003, the EPs have grown from strength-to-strength and have been adopted by institutions responsible for the majority of international project finance, making them recommended reading for developers seeking private investment. The fourth edition of the EPs, the “EP4s”, came into effect in October 2020, extending the scope of the EPs to capture a wider range of project-related transactions than ever before. As awareness of the EPs and their aims grows, we expect this expansion to continue, cementing the role of the EPs as a key factor in international ESG efforts.

In addition to the EPs, a host of other international ESG initiatives have been introduced in recent years. Last month saw the SFDR added to this list, an EU Regulation mandating that regulated entities such as financial advisers disclose certain information related to their ESG considerations to clients and investors. These disclosures must be made in specified locations, such as on the regulated entity’s website. Whilst, by virtue of Brexit, the SFDR will not apply in the UK, similar domestic legislation is expected in the near future. Late last year, the Chancellor announced an intention for the UK to align itself with the recommendations of the Taskforce on Climate-related Financial Disclosures (“TCFD”), which aims to develop a regime of consistent, climate-related financial disclosures. This could lead to increased scrutiny as to the environmental impact of construction projects.

The existence of the TCFD emphasises the fact that there is a domestic understanding of the need to address ESG issues. Indeed, the UK Government looks set to ramp up its ESG efforts as part of its plans to stimulate the economy post-Covid, having announced in November 2020 a £134m investment “…to help UK businesses build back greener”. However, UK efforts are not confined to Government programmes. Private sector companies such as the Building Research Establishment have also shown an appetite for ESG, developing tools such as ‘BREEAM’, an assessment method designed to provide a standardised overview of the environmental performance of an asset. For developers, a positive BREEAM assessment could help to provide evidence of a project’s resilience to environmental risks and showcase the benefits that the asset brings to those that live and work in its vicinity.

As both the public and the private sector begin to recognise the value driven by addressing ESG issues, we expect that discussions surrounding them will continue to increase in frequency. Inevitably, these discussions are likely to involve the construction sector, which is often criticised for its impact on the environment. It is important that developers recognise that whilst these conversations may be difficult, and ESG requirements might at first appear onerous, they can ultimately lead to greater sustainability of projects, and in turn drive better profitability. At a time when many in the construction industry are facing a squeeze on their bottom lines, the sooner that this is understood, the better.