As the construction sector strives to reduce its environmental impact, how can good financial advice make a difference?
The construction sector has significant potential for reducing its environmental impact and pressure from investors, regulators, governments as well as insurers to act is on the rise.
Construction is a resource-heavy industry: it requires the extraction of raw materials, chemicals are used on site and fuel is burned by excavators and lorries. Globally, the built environment generates 30% of total greenhouse gas emissions and construction uses 32% of the world's natural resources, according to the Chartered Institute of Building (CIOB).
Environmental issues are currently high on the political agenda since ESG related topics are trending and the UN Climate Change Conference 2021 is approaching fast. The UK plans to become a net-zero carbon area by 2050 and the European Union has made similar targets legally binding.
The construction industry's efforts to reduce carbon emissions will make a real difference to whether the countries can meet their targets. In 2017, the construction industry has agreed with the UK government to halve emissions in the built environment by 2025, for example by creating buildings that are eco-friendly by design. Further, the UK's Environment Bill is expected to set legally binding targets for biodiversity, air quality, waste and water. Businesses in construction need to prepare for its introduction.
Investors are shifting their portfolios in real estate and infrastructure towards companies and products that integrate ESG factors. ESG-focused investment has an increasingly influential cohort of backers. A November 2020 report released by PwC Luxembourg showed that 77% of institutional investors plan to stop purchasing non-ESG products by 2022.
A group of global insurers have joined forces with leading banks and asset managers to launch a new alliance that seeks not only to align investment portfolios but also underwriting towards net-zero emissions.
Major insurers and banks will shortly have to adhere to the TCFD – the climate related financial disclosures. These will force continuing change in the way that insurers both raise capital, invest premiums and underwrite risks.
Lloyd's has made commitments in its ESG 2020 report and is also developing underwriting policies around a climate action plan with specific reference to housing and the construction industry.
While the pressure from stakeholders may create some challenges for the construction industry these developments are also an opportunity to turn green credentials into a competitive advantage. Investors, insurers and other stakeholders are increasingly likely to show appreciation and account for a construction business's efforts to reduce the environmental impact.
While creating environmentally friendly buildings, the construction industry should also consider how to reduce its impact on the environment during the construction of these buildings. Managing carbon emissions also helps companies manage cost, as reducing one will more often than not also lower the other. Some companies are even looking beyond net zero to consider how they can become carbon negative.
The Construction Playbook details how the UK government and the industry can jointly deliver public sector works more efficiently while minimising greenhouse gas emissions of projects. The Playbook also refers to minimising the use of resources, reducing waste, increasing biodiversity and delivering positive social impact.
Options for construction firms are plentiful:
One way of demonstrating environmental credentials to clients, investors and tenants is the BREEAM (Building Research Establishment Environmental Assessment Method) certification, which assesses an asset's environmental, social and economic sustainability performance, using standards developed by the Building Research Establishment.
There is, however, also the risk for designers and contractors that new green developments end up not meeting the thermal efficiency or emission performance obligations contractually required by funders and employers – some of which could be viewed as contractual (rather than negligence based) liabilities. Further, construction firms may not meet the emission targets or waste reduction required by governments and regulators.
At present, the insurance industry globally is not sufficiently comfortable with greener technologies such as timber building or off-site fabrication and Lockton is working with the underwriting community to develop new products to allow this much needed shift to carbon neutral construction to be viably insured.
This could open up new liabilities for contractors and design firms, which should, therefore, consider reassessing their liabilities to deal with such emerging risks.
Stephen Davey – Partner, Global Financial & Professional Risks, Lockton