Legal Notes: ESG requirements coming to future construction contracts
Environmental, Social and Governance (ESG) is one of the fastest growing areas of corporate management policy. ESGs are a set of standards covering a company’s operations that describe how it performs as a steward of nature, how it manages relationships with employees, suppliers, customers, and the communities where it operates, and how it deals with leadership, executive pay, audits, internal controls and shareholder rights.
If you aren’t yet familiar with ESGs, it’s time to get up to speed. They are beginning to play a role in construction contracts.
Sahil Shoor of Gowling WLG told the Daily Commercial News many construction industry leaders are now implementing ESG policies largely focused on reducing energy usage and associated emissions in response to increased social and environmental consciousness of consumers, investors and other stakeholders.
In fact, over 60 per cent of construction industry respondents to a survey conducted by Global Data say clients are demanding the application of sustainable construction methods.
ESGs can cover various aspects of construction company operations and their impact on carbon emissions: sourcing of materials, construction site assembly processes and disposal and recycling of any resultant waste, for example.
It’s not only clients who are looking for ESG policies from contractors. ESGs are becoming part of project planning processes even before contracts are tendered.
“Appropriate ESG disclosure, whether mandatory or voluntary, by Canadian public companies is becoming a norm that is being demanded by institutional investors in Canada and around the world as they decide where they will allocate their investment capital,” says Shoor.
Global insurance and professional services company Marsh McLennan says the same may soon apply from an insurance coverage perspective.
“Construction projects could come under scrutiny from insurers seeking details on the environmental impact of projects before committing to providing coverage.”
ESG policies should be more than clichés or “green washing.”
“Effort needs to be made to show that these policies have been adopted and is engrained within the company and its staff’s conduct,” says U.K.-based international law firm Taylor Wessing.
The executive and board levels of companies need to embrace their ESG policies and use them to develop verification and reporting structures to further assist them in directing their company operations.
Presently, there is no universal template for construction companies to follow. ESGs can and will vary from company to company and from project to project.
Canadian law firm McMillan LLP explains ESG considerations and metrics will change depending, for example, whether the project is a new build or a retrofit. They will also vary based on at what stage of the project the company is involved — design, construction, or operation and maintenance — and whether company involvement concerns the team running the project or the supply of the materials involved.
McMillan suggests companies might consider adopting ESG initiatives developed by some of the several industry related groups or organizations.
“Such initiatives each have their own nuanced focus and set of targets and, often, the parent-organizations administer a certification system to assess the progress or confirm the achievement of its standards based on a number of metrics which can be quite technical and specific.”
LEED and ICP (Investor Confidence Project) are two examples. Some jurisdictions are beginning to institute their own standards of ESG expectations, such as the Toronto Green Standard.
Shoor points out although ESGs have yet to be formally included as part of general construction contracts or tendering requirements in Canada, the U.K. provides some guidance to where ESGs might soon be headed.
“Most public sector construction contracts and some funders (in the U.K.) now require community benefits to be delivered as part of construction projects. The need to include provisions in construction contracts that reach the highest standards of those certification measures, and for delivery of wider ESG benefits, is becoming increasingly important in order that developers can commit to and demonstrate achievement of these credentials in the funding, letting and sale of their assets.”
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