MANAGING ESG RISK IN THE CONSTRUCTION INDUSTRY
As a major user of international labour and imported raw materials, the construction sector is exposed to high levels of environmental, social and governance (ESG) risk.
According to the European Commission (EC), the construction industry requires vast amounts of resources. Approximately 50 percent of all extracted materials globally are used in construction, 3.97 percent of final energy use and 32 percent of global natural resources. The construction industry generates approximately 35 percent of the European Union’s (EU’s) total waste and contributes between 5-12 percent of total national greenhouse gas emissions in each member state.
Construction projects bring together multiple contractors, subcontractors and suppliers, in complex contractual configurations, subject to various applicable laws. Projects need to consider the mandatory laws that apply at the site location, the law applicable to any given contract, and the laws that could apply to a specific party by virtue of its incorporation or operations in a given country in the supply chain.
Against a backdrop of fast-evolving ESG legislation in the EU, which will undoubtedly give rise to disputes, industry players need to address ESG risk in their contracts.
EU ESG legislation
The EU is in the process of adopting a suite of ESG regulations that will affect the construction industry. Of note are Directive 2022/246/EU on corporate sustainability reporting (CSRD), which entered into force on 5 January 2023, and a proposed Directive 2022/0051/COD on corporate sustainability due diligence (CSDDD), which will likely come into force after 2024.
These directives were developed as part of the 2019 European Green Deal, a set of policy initiatives by the EC with the overarching aim of making the EU climate neutral in 2050.
Jan-Mar 2024 issue
Reed Smith