Society of Construction Law (Singapore) - Construction Projects (& Contracting), How Would Environmental, Social & Governance (ESG) Line Up?

Details: 31 October 2023; Hits: 3808

31 October 2023

INTRODUCTION TO CONSTRUCTION PROJECTS AND CONTRACTING

Singapore’s construction industry plays a fundamental part in the nation’s rapid urban development. From the commercial high-rise towers and iconic skyscrapers to the highly sought after residential projects, which are connected by the ever-expanding transportation networks, the construction industry plays a critical role in shaping Singapore’s urban landscape.
Multiple stakeholders are involved in any construction project in Singapore, from the owners, project financiers/investors, consultants and builders/contractors, to the end-users of the development itself. This explains why at the heart of any construction project, there is a web of contractual agreements to govern the relationship between the various stakeholders, including but not limited to responsibilities, timelines, and financial arrangements.
For the construction industry to continue operating in a responsible, ethical, and sustainable manner, it is critical that Environmental, Social and Governance (ESG) considerations are taken into account in the planning, execution and management of construction projects. This article will examine how ESG goals line up in the implementation of construction contracts and ultimately the project cycles.

ESG IN CONSTRUCTION

ESG is essentially a framework to evaluate and gauge the sustainability and ethical impact of an organisation’s operations.^[1] When one is referring to ESG in construction, it generally refers to the following as examples:^[2]

1. Environmental factors include water and energy consumption, waste management and greenhouse gas emissions;
2. Social factors include health and well-being, community impact and integration, and diversity and social inclusion; and
3. Governance factors include supply chain management, policies, and ethics.

ESG Approach to the Environmental Issues in Construction

Construction projects consume substantial amounts of water and energy and emit significant greenhouse gas (“GHG”) emissions. According to the United Nations Environment Programme, buildings account for nearly 40% of global energy consumption, 25% of global water consumption, and one-third of global greenhouse gas emissions.^[3]
The construction industry can play a vital role in reducing the environmental impact of construction projects by making sustainable choices in material selection and construction practices, such as the following:^[4]

6.1 Using sustainable materials – Reusing and recycling construction materials whenever possible, such as recycled steel, low-carbon concrete, and bamboo plywood, as these materials are less wasteful, more energy-efficient, and emit less greenhouse gases when produced.^[5]

6.2 Incorporating waste management plans – Construction companies can also implement waste management plans to ensure that construction sites adopt a sustainable approach in handling the waste produced. Waste management plans should include proper disposal of hazardous materials, reducing waste generated, and reusing materials whenever possible.^[6]

6.3 Adopting environmentally-friendly construction practices such as energy-saving, carbon-offsetting, and water conservation practices – Examples of energy-saving practices include using energy-efficient models of equipment, sensor technology, and installing solar panels at construction sites.^[7] Examples of carbon offsetting practices include purchasing carbon credits, reusing construction materials, and minimising waste.^[8] Examples of water conservation practices include using efficient irrigation systems, recycling water, and using alternative water sources such as greywater.

ESG Approach to Social Issues in Construction

Social issues related to diversity, social inclusion, and community integration may arise in construction projects. It is imperative for construction companies to implement strategies to improve the social impact of their construction projects, examples as follows:^[10]

7.1 Ensuring fair and safe labour practices – Companies should align their labour and employment policies with the labour laws in Singapore, such as the Employment Act. This not only helps to ensure compliance with the law, but also ensures that the company’s labour practices are fair and safe.

7.2 Incorporating accessible and inclusive spaces in construction design – In designing their construction projects, companies must consider the diverse needs of all users, particularly people with disabilities. Buildings must be accessible, incorporating ramps, braille signage and bigger hallways.

7.3 Engaging and giving back to local communities – To truly integrate with the local community, construction companies should embark on initiatives such as contributing to charitable causes, planning outreach programmes, participating in volunteering events, etc. Moreover, community engagement should be a cornerstone of their approach, which they can do so by consulting local residents and incorporating their feedback into project designs. For example, in an area where there are more families, construction companies can consider including more family-friendly facilities such as family toilets and parking spaces.

7.4 Promoting diversity and inclusion – Companies can enhance their commitment to diversity by enrolling their management in diversity training. This is a preventative measure that will help reduce discrimination and accidental bias both in the hiring process and during the course of work.^[11] Companies can also implement diversity policies or regulations that all employees should abide by, thus mandating diversity and inclusion throughout the company’s operations. These policies should not only underscore the importance of diversity but also provide a structured framework for addressing cases of discrimination and offering clear avenues for employees to seek recourse.

ESG Approach to Governance Issues in Construction

Poor governance can lead to a loss of trust among stakeholders such as investors, and cause reputational harm. Thus, companies should put in place systems and processes to ensure good governance throughout their operations, examples as follows:^[12]

8.1 Transparency in business operations/practices – Construction companies should be transparent in all aspects of their operations. They can do so by disclosing information relevant to stakeholders, including their financial performance, project timelines, and risk assessments. This can be done by regularly communicating with stakeholders and publishing relevant information on the company's website.

8.2 Establishing clear ethical guidelines and having strong internal controls – Construction companies should have a clear code of conduct that all employees are required to follow. This code of conduct should address issues such as bribery, corruption, and conflicts of interest. The company should also have a whistleblowing policy in place to encourage employees to report unethical behaviour.

8.3 Implementing effective risk management systems – Construction companies should have a robust risk management process in place to identify, assess, and mitigate risks associated with their projects. This process should be regularly reviewed and updated to ensure that it is effective. Such strategies can help minimise disruptions to a project, reduce construction costs and mitigate the risks that a construction company may have to undertake. The key elements of a good risk management plan are risk identification, risk analysis, risk response, risk monitoring and control, communication to all stakeholders, documentation of the risk management process, and risk management training.^[13]

KEY CONSIDERATIONS IN IMPLEMENTING ESG IN CONSTRUCTION

Benefits of ESG

There are many benefits to be gained by implementing ESG approach in construction, including:

9.1 Enhanced long-term profitability – ESG integration positions construction firms for sustainable profitability by optimising operational efficiency. For instance, the adoption of energy-efficient equipment and water conservation practices yields substantial savings in energy and water expenses.

9.2 Business resilience – Implementing rigorous risk management strategies safeguards a construction company's reputation and reduces exposure to potential risks. Measures such as diversity policies and ethical guidelines can also prevent risks that may arise from employee misconduct.

9.3 Improved public relations – Engaging with local communities during construction projects and participating in outreach initiatives fosters an improved corporate reputation. This, in turn, opens doors to positive public relations opportunities, bolstering the company's image.

With the increased prevalence and requirements of ESG considerations in today’s economy, ESG factors could highly likely affect the decision-making of the stakeholders in construction projects. Investors look at them to decide which construction projects they should put their money into, project owners use ESG factors when choosing suppliers and subcontractors, and younger prospective employees will consider ESG factors when applying for jobs.
Together, these factors provide a more holistic view into a company’s risk profile and performance. To put it another way, if a company does not take ESG factors into consideration and is known for discrimination against its workers, using cheap materials, etc, it will be more difficult for the company to obtain more business moving forward. Therefore, ESG factors can have a significant impact on the cost, profitability, and risks of a construction project, as well as its long-term performance and sustainability.^[14]

Challenges

However, as with any novel approaches/considerations, there are challenges when it comes to implementing ESG considerations in construction:

12.1 Cost Implications – While ESG initiatives are paramount, they often come with added costs. For instance, acquiring energy-efficient equipment can be financially demanding, especially when replacing existing models. Companies must be prepared to allocate additional capital to implement these strategies effectively.

12.2 Lack of ESG guidelines – As the concept of ESG is still relatively new, especially in construction, industry-wide ESG standards for construction companies have yet to be established. The absence of universal metrics makes it challenging for investors and stakeholders to assess and compare a construction company's ESG performance against their competitors.

12.3 Lack of Expertise – Given the novelty of ESG in construction, companies may lack the necessary knowledge and expertise to seamlessly integrate ESG principles into their operations. Addressing this knowledge gap becomes imperative for successful ESG adoption. For example, construction companies can consult ESG experts to help them implement ESG strategies.

INCORPORATING ESG CONSIDERATIONS INTO CONSTRUCTION CONTRACTING

One of the main ways to incorporate ESG considerations into construction is through embedding ESG requirements into the construction contracts. That way, parties to the contract would be obliged to comply with the ESG requirements as provided for in the construction contract.

Incorporating Environmental Considerations in Construction Contract

As explained above, environmental considerations in construction include using recyclable and sustainable materials, waste management and pollution prevention, and adopting environmentally friendly construction practices, all of which generally relates to the issue of combating climate change.
These requirements can be incorporated in the technical information/specifications of the construction contract, as they relate to the performance of the contract – examples include the specific materials used and the method of completion, and the corresponding pricing. The contract may also provide for assurances that the contractor/supplier complies with the necessary environment-related expectations requirement by the employer, and to appropriately address them along the construction-chain.
The Joint Contracts Tribunal (JCT) Design and Build 2016 standard form Contracts^[15] provides for the Contractor to suggest economically viable improvements in environmental performance when carrying out the works as possible variation, and/or for the Contractor to provide additional information to the Employer to permit the Employer to monitor performance and set targets.
In the context of Singapore, the most commonly used standard form contracts such as the Public Sector Standard Conditions of Contract (PSSCOC)^[16] and the Singapore Institute of Architects (SIA) Building Contracts^[17] should be amended to include environmental considerations in construction contract, which can then signal to the industry of the importance of incorporating environmental considerations in construction contracting.
The incorporation of environmental considerations in these construction contracts will further bolster the environmental protections that is afforded by legislation in Singapore, such as the Environmental Protection and Management Act, the Environmental Public Health Act, and the Park and Trees Act (just to name a few), for which the main goal is to protect the environment.
Potential Claims – Failure of a party to abide by the contractual provisions on environmental provisions could potentially lead to claims for breach of contract and/or enforcement of the environmental provisions. Furthermore, failure to exercise environmental considerations in construction projects could also potentially expose the wrongdoer to:

1. Tortious claims such as negligence and nuisance (especially when it affects the surrounding third parties); and/or
2. Criminal prosecution (when there is a contravention of any legislation) – for example, discharge of toxic or hazardous substances into any inland waters that is likely to cause pollution of the environment is prohibited under the Environmental Protection and Management Act.

Incorporating Social Considerations in Construction Contract

In terms of social considerations in construction, many of these aspects, such as ensuring fair and safe labour practices, incorporating accessible and inclusive spaces in construction design, engaging and giving back to local communities and promoting diversity and inclusion, are not new in the Singapore construction landscape.
Legislations such as the Employment Act, Work Injury Compensation Act, Workplace Safety and Health Act and Foreign Employee Dormitories Act ensure that most of the social considerations are required to be complied with. Furthermore, public consultations are generally carried out in major projects that would affect the communities in the surrounding areas.^[18]
However, additional contractual mechanisms can add weight to the social considerations, such as:
1. Obligations to carry out due diligence and granting the rights to carry out audits on the supply chain and various aspects of the construction process to ensure that these legislations are complied with; and
2. The right to terminate or removal of errant suppliers/contractors who consistently breach their obligations under these legislations.
While the above-mentioned legislations do provide some form of deterrence in ensuring compliance with the social considerations, training and development are also critical to ensure that stakeholders are fully aware and understand the importance of social considerations in construction projects.

Incorporating Governance Considerations in Construction Contract

As for governance considerations in construction, to establish clear ethical guidelines, construction contracts can provide for a Code of Conduct and Ethical Guidelines to be followed by all parties involved in the construction project. This may include principles related to fair business practices, anti-corruption measures, and compliance with legal and regulatory requirements. To give further force to the Code of Conduct and Ethical Guidelines, the contract may also provide for the Contractor/Sub-Contractor/Supplier to remedy any non-compliance within a specified number of days and/or to engage a sustainability consultant to draft a corrective action plan.
With regard to implementing effective risk management systems, the construction contracts can clearly define procedures for identifying, assessing and managing risks associated with the project. To this end, by incorporating the appropriate multi-tiered mechanisms for the resolution of disputes, it can encourage a culture of ethical behaviour, transparency and accountability throughout the project’s lifetime, and any potential risk of disputes are quickly and efficiently dealt with to maintain good relations and early resolution of disputes before litigation/arbitration.

CONCLUDING REMARKS

In a multifaceted construction industry characterised by diverse projects and complex contracts, ESG brings forth a new era of responsibility and opportunity for construction companies. Whether it is addressing environmental concerns, promoting social inclusivity and diversity, or ensuring governance excellence, construction companies must embrace these principles.
Companies may face challenges along the way, from the cost implications of ESG initiatives to the absence of standardised guidelines, but they are surmountable with commitment and expertise. As construction companies navigate this transformative ESG journey, they not only secure their long-term profitability, but also contribute to more sustainable construction.
It would also be critical for construction companies to consider the management of its carbon emissions and/or footprint. These are aided by various standards, techniques, tools, internationally recognised rating systems and importantly the use of sustainable construction material, low carbon construction, to assist with managing the supply chain, minimising greenhouse emissions, and carrying out sustainable construction that ultimately factors in social concerns.

Contributed by:

Anil Changaroth - Co-Head ESG Practice, Building Construction and Projects Industry Group, and Partner, Appropriate Dispute Resolution Practice, RHTLaw Asia LLP

Syafiq Lim - Senior Associate, Appropriate Dispute Resolution Practice, RHTLaw Asia LLP

Ong Xin Wen - Intern, Appropriate Dispute Resolution Practice, RHTLaw Asia LLP

^[1]https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp

^[2]https://www.viewpoint.com/en-sg/blog/all-about-esg-in-construction

^[3]https://www.euenergycentre.org/images/unep%20info%20sheet%20-%20ee%20buildings.pdf

^[4]https://ugreen.io/how-esg-can-help-your-construction-business-thrive-in-a-changing-world/

^[5]https://neutrinobursts.com/energy-efficient-building-materials/

^[6]https://ugreen.io/how-esg-can-help-your-construction-business-thrive-in-a-changing-world/

^[7]https://www.dexma.com/blog-en/10-ways-to-reduce-energy-consumption-on-construction-sites/

^[8]https://www.aia.org/articles/70446-ten-steps-to-reducing-embodied-carbon

^[9]https://www.actionsustainability.com/tips-to-reduce-water-consumption-on-construction-sites/

^[10]https://ugreen.io/how-esg-can-help-your-construction-business-thrive-in-a-changing-world/