‘What happens if we fail to meet our project’s ESG targets?’

We’re building a modest set of commercial units in Birmingham. The contract requires us to report on our carbon output, diversity, environmental impact and other related key performance indicators (KPIs), but I am worried we might not be able to achieve the goals that were set out at the start of the project. Am I opening myself up to a dispute?

In recent years, the construction industry has seen an increase in climate change drafting into construction contracts. This has included bespoke drafting as well as updates to standard form contracts, such as NEC4 and JCT 2024, to cater for the growing importance of environmental, social and governance (ESG) principles and climate change to a construction company’s green credentials. 

ESG and climate change related clauses can include an obligation on a party to report on the progress of project-specific ESG and climate-related goals. But how might an obligation to report on a party’s progress towards such goals impact that party if the progress reported is not in accordance with the ESG and climate goals set out at the start? 

NEC’S suite of secondary option clauses includes clause X20, Key Performance Indicators. KPIs are used to incentivise contractors based on performance, measured by reference to an incentive schedule. The items in the incentive schedule could relate to ESG or climate issues. However, typically there is no penalty for failing to meet a KPI. 

In 2022, NEC published clause X29, Climate Change. This secondary option clause leaves the parties to decide between themselves what climate actions they require and the impact of those actions on their risk profile. For example, parties can agree to include a set of climate change requirements into the contract scope. These can include, for example, levels of recycling, use of renewable power on site or designs that reduce carbon emissions.

The consequence of failing to meet a climate change requirement depends on the nature of the failure. If a failure constitutes a defect (usually a failure relating to the works), this can result in termination under clauses 11.2(6), 20.1 and 91.2 of NEC4 ECC. However, a failure that relates to working practices would not constitute a defect.

Clause X29 also provides for a non-mandatory performance table. This allows the employer or head contractor to benchmark performance against targets and parties can agree positive or negative financial incentives.

The updated JCT 2024 suite of contracts moves some of the obligations that previously appeared in the supplemental provisions of the 2016 version into the contracts’ terms and conditions. Compared to the NEC4 suite, it is relatively soft touch when it comes to sanctions for failure to comply with ESG and climate goals.

Clause 2.2.2 JCT Design & Build 2024 (and clause 2.1.3 JCT Minor Works) requires: “The contractor shall provide to the employer all information that the employer reasonably requests regarding the environmental impact of the supply and use of materials and goods which the contractor selects.”

The clause is a tool to assist an employer or main contractor in understanding and monitoring the environmental impact of a project. It does not impose any environmental or sustainability requirements on the contractor.

A supplemental provision called ‘Performance Indicators and Monitoring’ requires a contractor to supply an employer with information that allows the employer to monitor performance by reference to the performance indicators. However, this clause lacks clarity around the consequences of failing to meet the performance indicators. It also only requires the contractor to submit proposals to improve its performance if a performance indicator is unlikely to be met.  

If the obligation to report on such goals is a contractual one, failing to do so is likely to put the relevant party in breach. The risk of reporting failed ESG or climate goals should therefore be properly considered by the parties when negotiating the contract. Parties should give due consideration to the following:

Whether or not a dispute will arise following a party’s failure to achieve the ESG or climate-related goals depends on the type of contract and the distinct provisions agreed. Regardless of the type of contract entered into, if a contracting party is concerned about the possible implications of failing to meet its ESG or climate-related obligations, it is always preferable that they obtain legal advice.

Yolanda Walker is a partner and Kate Jordan is an associate in the infrastructure, construction and energy team at DWF Law.  

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