‘Contractualising’ climate and sustainability no longer optional in 2025

While some contractors and projects are already integrating sustainability requirements into contracting models, increasingly, the three drivers – regulatory commitments, funding requirements and planning consents – are establishing this as a baseline for a ‘licence to do business’. Those not yet required by regulation to embed sustainability into their operations and projects may still face requirements from funders and investors, as well as sustainability obligations to gain planning consent. In fact, it is common to see requirements on companies under all three limbs and this will accelerate during 2025.

Sustainability reporting and due diligence

In the UK, the Taskforce for Climate-related Financial Disclosures (TCFD) rules already apply to many contractors. Nonetheless, it is likely that sustainability reporting requirements will increase significantly in the next few years.

The new Labour government has committed to implement the recommendations of the International Sustainability Standards Board (ISSB) which require general sustainability disclosures and specific climate-related ones. The timing for ISSB implementation is as yet uncertain but it is not possible to sit back and wait. This is in part because businesses and business partners in a supply chain are likely to be subject to EU rules on sustainability reporting; specifically the EU Corporate Sustainability Reporting Directive (CSRD) which came into effect on 1 January. These rules have extraterritorial effect, impacting businesses who contract with in-scope companies.

Reporting rules are also now supplemented by sustainability due diligence requirements in the form of the EU Corporate Sustainability Due Diligence Directive (CSDDD) among others which require large companies to assess their supply chain partners for sustainability risks, requiring significant information sharing.

As a compliance issue, companies in scope of these sustainability regulations are pressuring business partners to disclose information or take action to meet their obligations.

Funder and investor requirements

Many banks and asset managers have made commitments to abate their ‘financed emissions’ and all aspects of any projects which receive the benefit of that financing – which would include projects which borrowers participate in – will form a part of those emissions. These sustainable and transition finance frameworks will inform where, how and to what extent funders deploy their capital and investment and at what price. The relative competitive advantage of a project, and indeed a contractor’s participation in the project, will depend on an ability to demonstrate contributions to targets and framework requirements.

Contractors and projects will need to provide information to banks and asset managers and collect data evidence.

Planning conditions

Even in the absence of regulatory and funding requirements, it is increasingly likely that the planning consent under which a project has been permitted will include rigid conditions to meet overall carbon budgets, or to deliver biodiversity net gain or other environmental impact or improvements.

All of these forces driving change coincide to require contractors and developers to deliver projects in a new way, underpinned by extensive data collection and reporting.

With the challenges of climate change and sustainability obligations, construction contracts are playing a pivotal role in creating a framework to accelerate decarbonisation of infrastructure and the uptake of nature-positive solutions, as well as ensuring that companies can introduce legally binding sustainable objectives into their business practice and projects.

There are examples of sustainability provisions in standard form construction contracts, as well as pro bono initiatives which advocate for sustainable contracting.

The International Federation of Consulting Engineers (FIDIC) red, yellow and silver books include an obligation on the contractor to take all necessary measures to protect the environment during the course of the works, comply with any environmental impact statement, and ensure emissions and other pollutants do not exceed those stated in the specification or prescribed by law.

The Joint Contracts Tribunal (JCT) Design and Build contract 2016 contains a supplemental provision intended to encourage contractors to suggest “economically viable amendments” to the works, which “may result in an improvement in environmental performance”.

The Association of Consultant Architects (ACA) Framework Alliance contract includes requirements related to sustainability that can be set out in a “project brief” together with a definition of “sustainability” which includes references to waste management as well as training workers in sustainable practices.

Additionally, the New Engineering Contract (NEC) developed secondary Option X29 in order to incentivise parties to reduce the impact of works on climate change. Option X29 implements two tools:

• Climate change requirements: Option X29 enables active management of implementation by raising the status of these requirements from normal “scope” obligations by asking for a Climate Change Plan to be updated through the life of the contract. This forms a basis on which progress can be measured.
• Performance table: The purpose of this is to incentivise performance, up or down. It provides a tool to align the suppliers commercially with the climate change outcomes needed and can be used to incentivise performance over and above the climate change requirements, as well as to specify the consequences of failure.

Of all the standard form approaches Option X29 goes furthest in terms of both encouraging a proactive and collaborative approach to achieving sustainability outcomes and envisaging financial incentivisation being linked to those outcomes. Even when other forms are being used, there is a lot that can be learned through the Option X29 approach that could be adapted for use on other, non-NEC contracts.

The Chancery Lane Project (TCLP) have drafted a number of climate-aligned clauses that can be utilised and adapted to suit business and project requirements, and available for no charge, for users everywhere. For example, ‘Tristan’s clause’ intends to add an incentive to use “Green Construction Materials” via a “Carbon Budget”. The TCLP clauses can also be ‘mixed and matched’ together with other contract forms.

While parties to a construction contract have not traditionally felt obliged to adopt these kinds of clauses, the drivers mentioned above are increasingly requiring their inclusion as part of the conditions applying to the development.

This trend continues to develop, and these requirements will increase in 2025. 

James Hay and Charmandip Bhart of Pinsent Masons contributed to this article.