Why the construction industry needs to decarbonise

Out-Law Analysis | 13 Jul 2021 | 12:09 pm | 4 min. read

Buildings and infrastructure are amongst the largest contributors to global carbon emissions, making decarbonisation of the infrastructure sector essential if international governments are to achieve their climate change targets.

The buildings and construction sectors are responsible for 39% of global energy-related carbon emissions according to the World Green Building Council: 11% from manufacturing building materials and products such as steel, cement and glass; and 28% to heat, power and cool buildings while in use. Up-front carbon emissions released before the building or infrastructure is even used will be responsible for half the entire carbon footprint of new construction between now and 2050.

Of the 93 billion tonnes of resources extracted globally each year, over 40 billion tonnes is put into housing, with less than 10% of that total later being reused or recycled. With global materials use projected to more than double by 2060, according to the OECD, the sector must dramatically change its way of doing things in order to meet the world’s net zero goals.

Industrialising construction processesstandardising components and better, more effective, use of data will not automatically decarbonise the construction supply chain, but will give the industry the tools that it needs to identify new climate-compatible and net-zero carbon aligned ways of working. There are commercial imperatives too, with significant export opportunities available to those economies that can do this right, and first.

Investor and client demand

The appetite of investors to fund projects that match environmental, social and governance (ESG) criteria is rising exponentially around the world. Environmental issues, including decarbonisation, are a priority for many investors, including governments and multilateral development banks (MDBs). The European Bank for Reconstruction and Development (EBRD) has set a target to invest in projects that are aligned with Paris Agreement climate change targets by 2022, and the proportion of EBRD investment in ‘green’ projects has increased from 25% to 40% over the last five years.

Asset owners and developers are also now more likely to require assets to be procured, operated and maintained in a lower carbon way, with these requirements increasingly becoming a feature of tender documents and construction contracts. Contractors who are unable to deliver projects efficiently and sustainably will become less competitive, and ultimately end up losing work to those that can.

Quality ESG data will be crucial to future investment decisions. Investor decision-making will increasingly depend on reliable and comparable data on a project’s ESG credentials. For example, decisions on whether or not to invest in a new road may depend on data covering the likely carbon cost of constructing the road, its embodied carbon,), support for electric vehicles and similar factors.

The work of the Task Force on Climate-Related Financial Disclosures (TCFD) is helping to standardise the metrics and targets on which businesses should report. In the UK, some publicly listed companies are now required to publish climate-related disclosures, and the UK government and financial regulators have confirmed that they intend to extend these requirements to a broader range of issuers. Institutional investors and particularly pension funds, most also disclose their climate-related exposures – including to the projects in which they invest. Other jurisdictions are following suit, and guidance from expert consultants will increasingly be required around the collection and independent verification of data about the carbon performance of infrastructure.

Shareholders and brand reputation

Climate activism has become a feature of corporate accountability, with the 2021 AGM season once again featuring a number of high-profile shareholder votes on climate change matters in both Europe and the US. Significantly, shareholder resolutions on these topics this year received backing from major institutional investors including Blackrock and Legal & General, both of which have publicly committed to responsible investment in line with ESG criteria. It is now clear, if there had been any doubt previously, that climate change is a mainstream concern.

At the same time, the growth of climate change-related litigation led by non-governmental organisations (NGOs) and individual activists is becoming a risk which businesses cannot ignore. The total number of such actions issued globally almost doubled between 2017 and 2020, according to data from the London School of Economics, with 1,587 such cases brought by May 2020 in approximately 37 countries.

The financial, as well as reputational, risks of this type of action are very real: in May 2021, in a landmark case, a court in the Netherlands ruled that Royal Dutch Shell must cut its global carbon emissions by 45% compared to 2019 levels by 2030. While the court did not order Shell to take any specific action, it noted that the company may have to “forego new investments in the extraction of fossil fuels and/or … limit its production of fossil resources” as a consequence of the judgment.

Your company’s environmental credentials will also have a role to play in attracting and retaining talent. The generation that grew up “striking for climate” are now preparing to enter the workforce and seeking roles aligned with their values. A business’ purpose and its ESG commitments are increasingly becoming a priority for those seeking to shape their careers, particularly as we emerge from the Covid-19 pandemic.

The role of the supply chain

As construction processes become more industrialised, the role of partners throughout the supply chain and the asset life-cycle will become increasingly important. Many companies are now realising the importance of supply-chain engagement and incentivisation around ESG factors.

When seeking to decarbonise products and processes, it’s important to do so in a considered way, taking into account all relevant data. For example, care is needed to ensure that industrialised construction solutions do not reduce carbon emissions at one stage of the processing and construction of an asset, while creating them in another. Consideration for what happens to materials at the end of the life of the assets must be built into your decarbonisation strategy, and requires a way of thinking that is relatively new to many in the infrastructure sector.