ESG Bona Fides Are in Demand in Construction

As efforts to address climate change accelerate and become more mainstream, construction firms will see increased demand for sustainability-related credentials. Green building practices are nothing new, but experience in the field will be vital in a competitive marketplace. In addition, developers and other stakeholders will demand that contractors demonstrate a real commitment to environmental, social and governance (ESG) principles in the procurement process. 

The construction industry is a major contributor to the release of heat-trapping gases that drive climate change. According to a 2019 report from the International Energy Agency, the buildings and construction sector accounted for 36% of final energy use and 39% of energy and process-related carbon dioxide emissions in 2018, 11% of which resulted from manufactured building materials and products such as steel, cement and glass.  

Governments at all levels have pursued incentive programs to make the built environment greener, including tax credits and deductions for energy-efficiency projects and even mandates to reduce greenhouse gas (GHG) emissions from existing buildings, such as Local Law 97 in New York City.  

The United Kingdom now requires that all companies bidding for government contracts worth more than £5 million per year must commit to achieving net-zero GHG emissions by 2050. The European Union’s recent revision of the Energy Performance of Buildings Directive requires disclosure of the emissions potential of new buildings over the building’s entire life cycle, effective beginning in 2027. 

The U.S. is making strides as well. On June 1, 2022, the Biden administration announced a major new initiative to encourage green building practices. Called the National Initiative to Advance Building Codes, the program will spend $225 million of Department of Energy funding in the Bipartisan Infrastructure Law to support the implementation of updated building energy codes and will provide other incentives and support to communities adopting updated codes. The administration also announced that the federal government will lead by example in pursuing “above-code” resilience and energy-efficiency standards, with the goal of achieving net-zero GHG emissions across new and existing federal buildings by 2045. 

As building codes evolve to require energy and water efficiency and other green practices, demand for contractors with relevant experience will increase. This is not a new phenomenon. In late 2020, the American Institute of Architects adopted its first update to its Form A305 (Contractor’s Qualification Statement) since 1986. The new A305 now includes requests for information on sustainability certifications achieved for past projects, the contractor’s safety record and information on whether the contractor is a minority-owned business, woman-owned business, service-disabled veteran-owned small business, woman-owned small business, small business in a HUBZone or a small, disadvantaged business in the Small Business Administration’s 8(a) Business Development Program.  

All of these updates to Form A305 are intended to make it easier for project developers to assess the ESG qualifications of construction contractors in the RFP/RFQ process. And as with the increased demand for green building experience, construction firms would be wise to assess their competitiveness in this evolving environment. It’s not just project proponents who are asking. Increasingly, investors, insurers, tenants and other key stakeholders are demanding that construction projects prioritize the climate and other key tenets of ESG. 

Many major construction firms are already ahead of the curve. Some have retained sustainability consultants to assess their baseline emissions profiles and other sustainability measures and have adopted ambitious ESG goals. Some have published stand-alone sustainability reports alongside their other public reporting. Still others have taken meaningful steps to reduce the environmental impact of their operations. These measures may include, among others: 

  • Electrification/decarbonization of construction vehicles and business fleets;
  • Sourcing recycled products; 
  • Diverting construction waste from landfills; 
  • Increasing local sourcing; 
  • Seeking out low-carbon materials to replace high-carbon options; and 
  • Selecting suppliers with strong commitments to ESG principles. 

 The importance of ESG in the construction industry is a wave that shows no signs of receding. Firms that have not yet begun to reduce the environmental impact of their own operations, or do not have a robust portfolio of prior green work, will find their competitiveness in the marketplace hindered. And opportunities will abound for those firms who have long prioritized sustainability. 

David Amerikaner is a member of Duane Morris’ Real Estate Practice Group and focuses his practice on land use, project development, environmental law, eminent domain, and sustainability. 

 

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