The Environmental, Social, and Governance (ESG) framework has long been a cornerstone of responsible business practices, but its impact on the construction industry and local authorities is now coming into focus. With the introduction of new climate standards like NZCS1, NZCS2, and NSCS3 in Aotearoa New Zealand, compliance with ESG principles is becoming a paramount consideration.

While ESG discussions are relatively new on a national level, the construction sector has been grappling with these issues internationally for some time. Recent events in the North Island underscore the urgency for the New Zealand construction market to address ESG concerns promptly.

What Lies Ahead?

As ESG gains prominence in the financial realm, companies’ ESG credentials are taking center stage in procurement processes and decision-making across public and private sectors. This shift brings forth heightened scrutiny, presenting new challenges and risks for local authorities and businesses, especially within the construction industry.

Key ESG Concerns in Construction

Construction projects wield significant environmental impacts, contributing to climate change, resource depletion, and pollution. In New Zealand alone, the built environment accounts for 15-20% of total greenhouse gas emissions. Socially, engagement with local communities and supply chains poses challenges, as delays and disruptions can strain relationships and tarnish reputations. Governance issues, including transparency and compliance, are further compounded by complex supply chains and project intricacies.

Barriers to ESG Innovation

The integration of ESG considerations into construction contracts faces hurdles, with existing standard contracts in New Zealand lacking provisions for ESG. However, recent developments, such as the introduction of climate change clauses in UK contracts, signal a shift towards greater accountability. Yet, concerns linger about the added burden on contractors already grappling with tight margins and operational challenges.

Who Bears the Cost?

Amidst supply fluctuations, labor shortages, and rising costs, the construction industry faces the pivotal question of who bears the financial burden of meeting ESG standards. While investors, developers, and governments emphasize sustainability, the challenge lies in balancing these goals with competitive pricing. Funders and insurers, too, are recalibrating their criteria, tying funding and coverage to historical ESG performance.

Charting a Path Forward

Exploring alternative contracting models, such as alliance contracting, may offer a collaborative approach to achieving ESG targets while distributing risks equitably among stakeholders.

In navigating the evolving landscape of ESG compliance in construction, proactive strategies and collaborative efforts are essential for fostering sustainability and resilience in the industry.