The Climate Horizon for the Construction Industry: using the TCFD process to map out risks and opportunities
This article was published in Lexology, and is republished here with prior written permission of Law Business Research.
By Clyde & Co LLP – Kristyn Glanville and Jacinta Studdert
Adapting to climate change should be treated by businesses as being part of a broader project to be ready to respond and bounce back from unplanned external disruptions, whether those are natural disasters, legislation changes, cyber threats, socio-political upheaval, and pandemics. Climate change acts as a ‘threat multiplier’ to these other challenges faced by businesses, the climate influences influenza patterns, labour movement.
Prominent barristers Noel Hutley SC and Sebastian Hartford-Davies have co-authored an opinion (1), which found that directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence. The advice concludes that: “In our opinion, these matters elevate the standard of care that will be expected of a reasonable director. Company directors who consider climate change risks actively, disclose them properly and respond appropriately will reduce exposure to liability. But as time passes, the benchmark is rising.“
Impetus to disclose risks
There is increasing external pressure on businesses to consider and disclose climate risks. This can include community pressure, activist shareholders, investors and government regulators. Many businesses are already voluntarily disclosing their climate change liabilities in line with the Task Force on Climate-related Financial Disclosures guidelines, intended to assist businesses to consider and map out these liabilities specific to their business (2).
In Australia, regulators including the Australian Securities and Investments Commission, and Australian Stock Exchange have all published guidelines outlining their expectation that climate change related risks would be identified, managed, and disclosed appropriately by businesses.
The potential for shareholders and investors to press for active management and disclosure of climate related risks is highlighted by the ongoing proceedings in McVeigh v REST (3). A super fund beneficiary has brought proceedings against the Retail Employees Superannuation Trust to seek orders declaring that REST has failed to disclose its climate change risk exposure to superfund beneficiaries, and that the trustees have failed to perform their duties and exercise their powers with care, skill, and diligence and in the best interests of their beneficiaries. As such, business should be considering the expectations of their shareholders generally, including institutional property developers who invest in property on behalf of investors.
Government responses to build resilience
In December 2015, the Australian Government announced a National Climate Resilience and Adaptation Strategy (4). The Strategy articulates how Australia intends to manage the risks of a variable and changing climate, including how it intends to factor climate risks into decision making, use an evidence based approach, and responding to new developments. It remains to be seen whether this statement of policy approach has translated to policy development consistent with these goals. It is significant to note that, this document emphasises that “Individuals and businesses, for example, are generally best placed to manage the climate risks associated with their homes and commercial assets.” As such, the Strategy envisages that government will not proactively manage this risk for private enterprise.
Other Commonwealth policies in place include:
- Critical Infrastructure Resilience Strategy (5).
- Updates to Australian Standards to include planning the adaptation of communities and infrastructure based on a risk management process.
Climate policy is also concurrently managed by State Governments and Local Governments, to varying degrees, and in a variety of ways. For the most part, planning and land use decisions are made at a local government level, although usually within the parameters of state legislation.
For example:
- In NSW, the Institute of Public Works Engineering Australasia in conjunction with the Northern Beaches Council and Local Government NSW have produced a practice note regarding management of asset resilience due to climate change (6).
- In NSW, the State Government announced a dedicated Resilience Agency dedicated to responding to natural disasters resilience and recovery (7).
- In NSW, the Sydney Coastal Councils Group has been considering how to manage existing seawalls and other protection measures, in light of projected changes in sea levels and storm surge events (8).
- In WA, technical guidelines have been introduced by Main Roads Western Australia to manage climate risks when designing and building roads (9).
Overview of climate risks for the construction industry
The risks to businesses associated with climate change are often considered in terms of three categories:
(a) Physical risks is physical damage to assets, labour, or supply chains due to increasing temperatures, rising sea levels, and changing weather patterns.
- Example: An extreme storm hits a construction site during works, causing damage to a construction site part way through a project. A worker is injured while trying to place emergency waterproofing. After the storm, staff spend several weeks upgrading stormwater controls and repairing the damage, leading to delays in completion.
(b) Transition risks are changes in policy, standards, technology, legislation, and market preferences as a consequence of, climate change.
- Example 1: There are extreme bushfires which are exacerbated by weather conditions associated with climate change. After a large bushfire in a growth area, there is a change in market conditions leading to fewer interested purchasers for an off-the-plan development because purchasers are concerned the development is in a bushfire impacted area.
- Example 2: A construction company focuses on building coal mining and gas extraction projects. After introduction of policies to disincentivise new fossil fuels projects, the company has to retrain its staff to work on other kinds of projects where there is market demand.
(c) Liability risks are legal risks as a consequence of climate change, where a business has not managed its climate change risks.
- Example: Shareholders sue directors of a company for failing to manage risks, as the company’s portfolio of rental properties in Far North Queensland were significantly damaged during extreme cyclones, but were underinsured.
What are some of the particular risks of climate change for construction and property industry?
The construction industry will face diverse challenges, depending on the market it is operating in, and what kinds of projects form the core of their business. The challenges for those working on major infrastructure projects will, for example, differ from those working on greenfields residential developments. We have provided some questions and examples of how these risks would impact on operations or profitability.
The core challenges will include:
Health and Safety Risks – the need to consider and minimise risks to construction workers from heat/extreme weather while on site. There is scientific evidence suggesting that climate change may also accelerate the risk of pandemics or influenza.
- Question: How would your business manage WHS risks associated with extreme heat, where workers are onsite during high temperatures, or bushfire related smoke haze? How would your business respond if its workforce was disrupted by a major disaster?
Management of construction processes – Many Construction Environmental Management Plans and ESD Plans include assumptions about the probability of storm events and floods in designing implementing controls, for example, planning wastewater treatment capable of processing stormwater for a 1 in 20 year storm event. Failure to implement appropriate controls can lead to pollution events and skirmishes with regulators, for example if an ESD system is overwhelmed during a storm, and contaminated water exits the site.
- Question: As the scientific knowledge on the probability and intensity of storm and flood events emerge, do these assumptions need to be revisited and should more onerous controls be implemented?
Changes to building standards, zoning and planning controls to anticipate climate risks – As risks such as extreme heat, floods, storms, and bushfires emerge, this may lead to regulators implementing more onerous controls into either mitigation of these risks through construction design, or sterilising some land from development that is considered too risky.
- Example 1: Developers decide not to proceed with greenfields developments, as zoning controls change to restrict development at the acquired site due to bushfire concerns.
- Example 2: A construction company with a D&C contract for a project must adhere to strict controls required under approval conditions, to engineer against extreme flood risks. This significantly decreases the profitability of the project as these costs were underquoted when bidding.
Insurability of risks – It is likely that some forms of risk will become uninsurable, as insurers are unwilling to extend insurances in locations at high risk of extreme weather. Conversely, businesses may find they require additional insurance coverage to manage risks to assets or employees.
- Example: A construction company finds its insurance premiums for workers compensation insurance increase, due to a large number of claims in the previous year when workers were injured during an unexpected flash flood while on site.
Contractual issues – Climate change related extreme weather events may lead to extended delays, costs, or force majeure events. This may in turn cause projects to breach timelines, or have to be redesigned and re-negotiated mid-project.
- Example: An extended bushfire season means there is heavy smoke haze. Due to worker safety concerns, this means that commencement of a time sensitive project is delayed.
Supply chain issues – The ability of raw materials, supplies, and labour can all be influenced by extreme weather. This can include disruption of the mine or processing company, or disruption of major roads or ports necessary to ship the materials.
- Example 1: Extreme floods at a major overseas raw material processor increase the costs and delays of obtaining those materials.
- Example 2: A large number of employees are unable to attend work due a major large bushfire requiring them to evacuate their homes.
- Question: How would your business manage the risks of extreme weather causing lengthy blackouts?
Technology changes – Many common construction materials, such as steel and concrete, are substantial contributors to carbon emissions. Likewise, many construction processes (such as transport of materials, and operation of machinery) can generate substantial emissions from burning fossil fuels. As such, there may be technology change to reduce these emissions, which may increase costs for capital expenditure or materials, and introduce a learning curve for adoption.
The climate horizon for construction
Notwithstanding these challenges, many of these risks are capable of management. Going through the TCFD process can help map these risks, and identify opportunities for improving business interruption and continuity planning strategies.
Further, not all developing trends will necessarily be bad, rather, require construction companies to undertake horizon scanning and anticipate changing market demand. For example, there may be opportunities for construction companies to:
- Respond to government and public demand for climate-resilient public spaces and infrastructure, for example, upgrading public infrastructure to ensure it meets community needs in a changing climate.
- Respond to community and market demand for sustainable development projects, and gain social licence amongst the community through involvement in ‘green’ projects.
- Respond to changing demographics. For example, it is anticipated that climate change will drive immigration to Australia from climate vulnerable regions, such as the Pacific Islands. As such, there will be demand for housing and employment from new immigrants.
Helping businesses deal with climate change risk is an area where Clyde & Co is particularly active, with extensive experience advising a range of clients in many sectors on navigating the rapidly evolving risk landscape they face.
As a leading firm in the construction sector, Clyde & Co is well-placed to assist clients in mitigating and adapting to the risks resulting from climate change as highlighted in this article. If you would like to understand how we can help you in this regard, please get in touch with Jacinta Studdert and Kristyn Glanville.
(1) https://cpd.org.au/2019/03/directors-duties-2019/
(3) http://climatecasechart.com/non-us-case/mcveigh-v-retail-employees-superannuation-trust/
(4) http://www.environment.gov.au/climate-change/adaptation/strategy
(5) http://www.tisn.gov.au/Documents/CriticalInfrastructureResilienceStrategyPolicyStatement.PDF
(6) https://www.lgnsw.org.au/files/imce-uploads/122/Building_resilience_infrastructure_assets_Northern_Beaches.pdf and https://www.ipwea.org/publications/ipweabookshop/pn12-1
(7) https://www.governmentnews.com.au/rfs-chief-fitzsimmons-to-head-new-nsw-disaster-agency/
(Source: Glanville, Kristyn, and Jacinta Studdert. “The Climate Horizon for the Construction Industry: Using the TCFD Process to Map out Risks and Opportunities.” Lexology, 17 Sept. 2020, www.lexology.com/library/detail.aspx?g=3b9c1dbd-d91f-4528-958c-d46cb30c81e6.)
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