The construction industry as a whole is responsible for at least 30% of greenhouse gas emissions and is renowned globally for being incredibly environmentally disruptive, whether it be from local environmental damage on construction sites, the production of waste through demolition works or the wider damage caused by the mining, production and transport of raw materials, such as concrete and steel.

The GCC region continues to remain a driver of growth in the global construction industry both in terms of the scale of investment in projects and the size of projects. Awards for the building, infrastructure and industrial sectors were valued at $39.9bn in Q2 2023, an increase of 110% from the same period in 2022.

At the same time countries around the world, including within the GCC, have committed to net-zero emissions plans with the UAE targeting 2050 and the Kingdom of Saudi Arabia targeting 2060.  Achieving these net-zero targets while continuing the pace of development in large infrastructure projects will require a fine balance to be struck between incorporating sustainable construction practices without significantly impacting the overall time and cost of completing such projects.

This is the conundrum:  how do key stakeholders in construction projects in the region balance their strategic growth with these net-zero targets, while continuing to deliver profitability?

One organisation that has been at the forefront of driving sustainability in contracts globally is the Chancery Lane Project, based in the UK.  They have pioneered the drafting of numerous model clauses for construction and other contracts to promote decarbonisation and emission reduction, through a collaboration of over 2,500 lawyers and business leaders from around the world.  Addleshaw Goddard has been heavily involved with the project over the past few years and helped create a number of the sustainable construction clauses published by the Chancery Lane Project.  One example is "Tristan's clause", which aims to encourage sustainable sourcing of construction materials by reference to an agreed carbon budget. If the carbon budget is bettered, the contractor receives a bonus, but if it is not achieved then the contractor is exposed to a liquidated damage regime. Addleshaw Goddard is also a founding member of a legal group established by the Energy & Environment Alliance to promote sustainability in legal contracts used within the hotel sector.

Despite much encouraging work, it sadly remains the case that we are yet to see such clauses being embraced widely in practice, as the focus remains on the economic drivers of a project:  completing on time and to cost.  With the inflationary pressures caused by global events there is a concern that sustainability has had to take a back seat.

Nevertheless, in the Middle East, we have started to see clauses dealing with protection of the environment being incorporated including minimising waste materials to ensure they are not diverted to landfill, using sustainable materials to reduce the carbon footprint, minimising carbon emissions, minimising water use and taking steps to protect the environment in the vicinity of the site where the works are taking place.

While it is encouraging to see the development of clauses in construction contracts that tackle sustainability, there are some challenges that need to be addressed for these clauses to achieve the desired objectives and widespread adoption. 

Key Stakeholder involvement 

There remains some work to be done between key stakeholders across the construction industry at various levels. At the highest level, public and private sector employers need to embrace sustainability as a top of the agenda item alongside traditional budgetary and time constraints in order to drive behavioural change. 

Equally, contractors need to be incentivised to adhere to net-zero and sustainability obligations in contracts whilst still being able to maintain profitability at a time where global construction costs remain high and pressures on supply chains continue. 

It remains to be seen how these competing objectives can be adequately balanced whilst tackling the issue of sustainability. 

Measuring compliance

There is also a general lack of a baseline or a level playing field when it comes to how we measure sustainability, although the situation is improving.  The International Sustainability Standards Board, formed by the IFRS Foundation in November 2021 following COP26 in Glasgow, is being developed to set out standards that will result in a comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. Additionally, a new EU Directive (the Corporate Sustainability Reporting Directive) came into force on 5 January 2023 which requires all EU businesses to report on the environmental and social impact of their business and on the business impact of their ESG policies. 

We are therefore starting to see baseline metrics being established and clear ways of measuring them, but further work is needed to ensure that all parties are aware of and understand the standards to which they are to be judged. Otherwise, a lack of awareness or understanding of the metrics is likely to continue to lead to disputes particularly regarding variation claims if contractors are required to change their work methods to meet unclear requirements. 

ESG Disputes

Environmental disputes also continue to work their way through the global construction industry with an increasing trend of environmental issues resulting in large claims against governing bodies of companies. These have involved claims ranging from environmental contamination to failure to set proper emissions targets and managing climate risks. 

Such cases have had varying degrees of success, but it is possible that they may increase as the sustainability landscape shifts particularly where the metrics for measuring the standards parties are required to meet, and the consequences of failures to do so, become clearer.

The key to addressing some of these challenges is to have constructive engagement between employers, funders, contractors and the supply chain as to the sustainability requirements of a construction project and the means to achieve them from the inception of the project.  Ways in which this could occur are:

1. Tender processes where the evaluation of bidders is based not solely on costs data but also their carbon intensity data and the use of low carbon materials (e.g. green steel, low carbon concrete).
2. Incorporating ESG clauses in construction contracts with measurable metrics attached to them from the outset so that it is clear regarding what contractual parties are required to achieve. Without this compliance will be difficult, and disputes will be inevitable.
3. Incentivising contractors and their supply chains to achieve a lower carbon footprint on projects through bonuses.
4. Conducting regular audits between the key stakeholders to monitor compliance and troubleshoot issues as they arise.