As the UK shifts to a net zero economy, the UK Industry faces multiple challenges. We address the key issues and explain how we are helping our clients in "Q&A" form.

Highlights from this Q&A were included in The Times Scotland's Climate Change & Cop26 Supplement. You can read the article here: Construction industry building a framework for net zero target. 

1. What are the key agreements and legislation governing international and UK climate change?
2. What are the main challenges facing construction in meeting net zero?
3. What are the consequences for those who do not adapt to help achieve net zero targets?
4. What are the UK construction industry's particular challenges?
5. What is the UK construction industry doing to achieve net zero?
6. What measures are the Scottish government taking to achieve net zero?
7. Has Brexit/COVID-19 hampered the shift to a net zero economy?
8. What are the legal challenges for construction businesses in meeting net zero targets and how are Dentons helping clients?
• Getting to grips with new legislation, avoiding disputes and managing conflict
• Managing construction risk – a new approach to contract drafting
• Preparing and delivering ESG strategies
9. How can the UK construction industry benefit from COP26?
10. Last words: include your young talent in creating net zero solutions

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1. What are the key agreements and legislation governing international and UK climate change?

The following is a snapshot of the international agreements governing climate change:

The UK was the first country to commit to a net zero target (by 2050) with the implementation of the Climate Change Act 2008. In this Act, the UK government introduced carbon budgets, each of which sets out a five-year statutory cap on total greenhouse gas (GHG) emissions that the UK has to meet to fulfil its overall emission reduction commitments. To date, six carbon budgets have been set out covering the period from 2008 to 2037. The targets outlined in these budgets are increasingly progressive. For example, the fifth carbon budget set in 2016, sets a limit on GHG emissions from all sources (bar international aviation and shipping)¹ equating to a reduction of 57% in annual UK emissions relative to 1990. A sixth carbon budget for 2033 to 2037 was passed into law in June 2021, setting a new climate target to cut UK emissions by 78% by 2035. The Committee on Climate Change (CCC) has reported that the first and second budgets were met, and the UK is currently on track to meet the third but not the fourth and fifth budgets.

The Climate Change (Scotland) Act 2009, as amended by the Climate Change (Emissions Reduction Targets) (Scotland) Act 2019, set a target of reducing Scotland’s emissions to net zero by 2045. 

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2. What are the main challenges facing construction in meeting net zero?

The following are three key areas in which the construction industry can help the UK reach its net zero targets by 2045 (in Scotland) and 2050 (England).

2.1 Transition to using carbon-efficient methods of construction and low carbon materials

The industry must find ways to reduce carbon emissions in construction materials and the way it builds. Current techniques for manufacturing common materials such as steel and concrete produce considerable carbon emissions. The construction industry is already collaborating with materials manufacturers and academics to find ways to produce versions of these materials with lower lifecycle emissions. However, the costs of research, development and implementation are high. Government policies and incentives to support innovation in this process are expected which should help make the market for low carbon alternatives more competitive.

2.2 Decarbonise the UK's heat supply

The UK must decarbonise its heat supply, which will require a radical shift from carbon-based to renewable and other lower carbon forms of energy. 

The Prime Minister's Ten Point Plan for a Green Industrial Revolution envisages a massive scaling-up of the UK heat pump sector, enabling buildings to be heated using renewable and other low carbon electricity. (See also the Clean growth: transforming heating and the Energy white paper.) The UK government's "build back better" plan envisages a "thriving low carbon hydrogen sector" for a "cleaner, greener energy system". The recently published UK Hydrogen Strategy, published in August 2021, sets a goal for low carbon hydrogen production capacity by 2030: its delivery will require sustainable, home-grown supply chains. Implementation of this strategy will require new skills and readily available, easily understood information both for the supply chain and consumers. The strategy highlights a decision point in the mid-2020s: that is, the point at which government will have to take a view on which of the lower carbon heat technologies to focus on as the long-term replacement for gas boilers.

Finally, the UK government published its Heat and buildings strategy on 19 October 2021 which "sets out how the UK will decarbonise our homes, and our commercial, industrial and public sector buildings, as part of setting a path to net zero by 2050".

2. 3 Adapt buildings to sustain increasingly extreme climatic conditions

A key challenge is how to design new buildings and retrofit existing buildings to maximise their carbon efficiency and adapt them to more extreme climatic conditions.

Designers are already incorporating low carbon design features into new buildings such as green roofs and walls that can sequester carbon dioxide, improve insulation of the building and absorb excess rainwater. A new approach to design takes into consideration the whole life of a building from design to decommissioning and the recycling of its materials.

Improving energy efficiency in existing buildings is even more vital as most buildings that exist now will still be standing in 2045/2050: their emissions need to be reduced to achieve net zero targets. Again, a holistic approach is needed. Installing heat pumps is not enough: properties must also be insulated and sealed. Airtight doors and windows, LED lighting and efficient glazing will all reduce a property's carbon footprint and ensure future sustainability.

Many in the construction sector will find these goals demanding. For example:

• for some, acknowledging that climate change is here, and needs to be addressed now, will require a change of mindset;
• businesses must (if not already) invest time and money into researching new methods of construction, new technology, carbon-efficient materials and new ways of working and collaborating with their supply chains to effect change;
• new skills will be needed (for example, in installing heat pumps) which means training and funding;
• new construction methods and materials manufacture must factor in processes that minimise or eliminate waste; 
• the industry must promote a holistic approach to design and build which ensures that buildings reaching their end of life can be repurposed or recycled; and
• clients might need to accept higher prices to enable net zero targets to be incorporated into their new developments (for example, heat pumps are currently more expensive than boilers).

The UK and Scottish governments must implement policies and funding strategies to support the industry both in reducing carbon emissions across the supply chain and in enabling the wholesale retrofitting of existing properties. This process has already begun – see, for example:

• the UK government's Ten Point Plan for a Green Industrial Revolution; the Hydrogen strategy (UK); 
• the Scottish government's published indicative Nationally Determined Contributions which "outlines Scotland's contribution to preventing warming of more than 1.5 degrees"; 
• the UK government funding launched in summer 2021 for research to boost UK resilience against climate change;
• the Net Zero Strategy: Build Back Greener (published 19 October 2021); and 
• the Heat and buildings strategy (published 19 October 2021).

Industry bodies are already playing their part in supporting their members to make the shift. Examples include the CLC's CO2nstructZero campaign. (See more examples below.)

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3. What are the consequences for those who do not adapt to help achieve net zero targets?

Those who do not adapt their business practices will come under increasing pressure from their customers and the general public who will hold them accountable in the national – and global – drive to reach net zero targets. Those who fail to act in the face of such pressure could find their reputation and commercial interests damaged.

Already, we have legislation that requires landlords to maintain minimum levels of energy efficiency in buildings if they are to be commercially let. Over time, those minimum levels will ratchet upwards, and buildings that are more expensive to upgrade to meet them will fall in value. More generally, as the Environmental, Social and Governmental (ESG) agenda works its way through institutional investors' portfolio management, real estate assets that are not, or cannot at reasonable cost be made, "zero carbon ready" may well be shunned. The government is also considering plans to set requirements for mortgage lenders to help householders improve the energy performance of their homes – plans that could well be extended to commercial developments. Finally, potentially the biggest trigger for action will come if and when government moves to shift more of the burden of public support for low carbon technologies from electricity to gas bills, as it appears to be starting to do.

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4. What are the UK construction industry's particular challenges?

Most heavy industry faces challenges in meeting net zero targets. Construction's particular challenges arise from facts such as the following: 

• construction is a heavy carbon emitter and is/will be the focus of many planned government initiatives and policies as well as public scrutiny. Note also that: (i) heavy mobile machinery is likely to be among the last sort of vehicle to convert away from diesel (probably to run on hydrogen rather than batteries); and (ii) construction sites need power sources and are not often able to use the grid for this purpose. Currently, they rely heavily on diesel powered generation;
• substantial retraining will be needed across the industry to develop the new skills required to implement net zero technologies, manufacture and install new materials and working methods;
• small businesses and sole traders make up the vast majority of the construction sector. These businesses have neither the resources nor the staff time to devote to new ways of working or retraining. As clients start to specify net zero methods and materials, small businesses might not be able to meet such requirements. They need government guidance and support, industry body support and larger, better resourced organisations to share the results of their research and development; and
• the transition to net zero for construction will involve the large-scale retrofitting of existing buildings which will to a large extent rely on the public and independent businesses taking responsibility for upgrading their own homes and workplaces (along with bearing the costs). UK and Scottish government measures are needed to encourage public action.

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5. What is the UK construction industry doing to achieve net zero?

Construction bodies are collaborating with the government on a wide range of initiatives to help the sector transition to a low carbon economy. Examples include:

• CO2nstructZero is the construction sector's response to the government's Ten-point plan for a Green Industrial Revolution. The Construction Leadership Council (CLC) has identified nine priorities for carbon reduction in three areas relevant to construction: namely, transport, buildings and construction activity. These priorities align with the UK's 10-point plan and are based on the CCC Sixth Carbon Budget. They focus on:
  • transport: zero emission vehicles and onsite plant, modern methods of construction and low carbon modes of transport and incorporating readiness for zero emission vehicles;
  • buildings: retrofitting to improve energy efficiency, low carbon heat solutions in buildings and energy performance of new and existing buildings; and
  • construction activity: implementing carbon measurement, designing out carbon, the circular economy – reducing embedded and operational carbon and innovative low carbon materials (prioritising concrete and steel).
• The CLC's Zero Avoidable Waste Routemap, produced in collaboration with Defra and BEIS, makes recommendations "for everyone in the supply chain" on "how to manage construction waste to increase efficiency, reduce carbon and save cost" to the government and businesses engaging in construction, demolition and waste excavation. It sets milestones leading to the overall goal of achieving Zero Avoidable Waste by 2050.
• The UK Green Building Council (UKGBC) has published a 10-year plan, "Ambitions for 2027", as a roadmap towards implementing its mission to "radically improve the sustainability of the built environment, by transforming the way it is planned, designed, constructed, maintained and operated". It focuses on making sustainable development second nature.

In addition, many businesses are experimenting with and adopting digital technologies such as Big Data and smart machinery to improve efficiency, Building Information Modelling to improve collaboration, drones for multiple uses including the monitoring of difficult to access sites, the creation of digital twins of physical buildings and so on.

You can read more about the UK construction industry is doing to address climate change here: UK construction sector initiatives focused on achieving net zero; and The UK's approach to climate change and How the construction industry can help achieve net zero targets: an overview.

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6. What measures are the Scottish government taking to help achieve net zero?

Recent measures taken by the Scottish government in its drive towards meeting net zero targets include:

• The Scottish Construction Leadership Forum, a collaboration between Construction Scotland and the Scottish government, was established in March 2019 "to develop and implement an action plan of improvement initiatives aligned with Government policies and the Construction Scotland Industry Strategy" (see source). Initiatives include a partnership with the Construction Scotland Innovation Centre on an initiative to help "the industry redirect itself away from dependence on imports and support a green recovery".
• The launch of the Climate change – Net Zero Nation: public engagement strategy on 16 September 2021 "sets out our overarching framework for engaging the people of Scotland in the transition to a net zero nation which is prepared for the effects of our changing climate".
• The Energy efficiency, zero emissions and low carbon heating systems, microgeneration and heat networks – skills requirements: consultation analysis was published on 7 October 2021, and is an "independent analysis of responses to the consultation on Scottish skills requirements for energy efficiency, zero emissions and low carbon heating systems, microgeneration and heat networks for homes".
• The Heat in Buildings Strategy – achieving net zero emissions in Scotland's buildings "sets out [the Scottish government's] vision for the future of heat in buildings, and the actions we are taking in the buildings sector to deliver our climate change commitments, maximise economic opportunities, and ensure a just transition, including helping address fuel poverty". (See also the press release.) 
• The New Build Heat Standard – scoping consultation: analysis analyses the responses made to the scoping consultation into the New Build Heat Standard.
• The Electricity network constraints and the 2024 New Build Heat Standard: research considers "the network constraints issues associated with the electrification of heat for domestic new build developments".
• The Decarbonising heating – economic impact: report considers "the potential economic impacts arising from a shift towards low carbon heating technologies in Scotland, over the period to 2030".

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7. Has Brexit/COVID-19 hampered the shift to a net zero economy?

In the Trade Cooperation Agreement (TCA), concluded in December 2020, the EU and UK each reaffirmed their ambition of achieving economy-wide carbon neutrality by 2050 and their commitment to the Paris Agreement (limiting global warming to 1.5 degrees). This agreement therefore effectively crystallised the level of climate protection in place at the end of the transition period (31 December 2021). Any move away from these levels by either party will be dealt with under the TCA's dispute resolution terms.

The combined effect of Brexit and the COVID-19 pandemic has added diverse, additional burdens not only to the construction sector and its global supply chains, but also across British industry. Border delays, enforced isolation measures for employees, new immigration laws and lorry driver shortages, to name but a few, have forced many to review their supply chain arrangements to secure necessary labour, goods and materials for projects. Many expect shortages of both materials and labour to continue.

The resulting uncertainty might yet have a positive effect. Maybe it has shaken up traditional working methods and injected a fresh source of entrepreneurial creativity into the day-to-day running of businesses. Most (not all) businesses have also risen to the government's challenge of collaborating more effectively to avoid supply issues escalating into disputes with contract partners. Surviving relationships could prove to be a strong foundation for collaboration and joint experiments on new construction methods and the development of future net zero focused strategies.

Legislation is needed to support the shift to a net zero economy as well as new government policies. Several new and significant UK government policies have been launched ahead of COP26 as promised (see for example, the Net Zero Strategy: Build Back Greener and Heat and buildings strategy).

There have been delays to their publication and the legislative process and, no doubt, the disruption caused by the COVID-19 pandemic will not have helped.

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8. What are the legal challenges for construction businesses in meeting net zero targets and how is Dentons helping clients?

We help clients understand the framework of international agreements and treaties and the domestic legislation and regulation that governs climate change. Adapting early to change can enable:

• the development of new, potentially lucrative supply chain relationships;
• more rapid scaling-up of new products and processes;
• costs reduction in the longer term;
• an enhanced reputation; and
• an enhanced ability to win new work and attract the best staff.

We help prepare businesses for future new or stricter legislation and policies in the ESG sphere and their transition to working methods and a sustainable and low carbon business culture. It is far preferable to adapt to new working methods now, than wait until they are imposed through regulation. (An example would be equipping your housebuilding business with the skills and capacity to install heat pumps ahead of the ban on gas boilers: there should be "first-mover" advantages to be gained in these areas.)

8.1 Getting to grips with new legislation, avoiding disputes and managing conflict

For the UK to meet its statutory net zero targets, governments will need to introduce a whole stream of new regulations and policies – all of which will create new legal obligations, processes and risks for business leaders to manage. This process is already underway: see, for example, the Net Zero Strategy: Build Back Greener and Heat and buildings strategy published on 19 October 2021, the Environment Bill, which is progressing through Parliament, and the Hydrogen strategy published recently.

We help clients understand new statutory liabilities such as these, manage any potential risks they might create and establish and maintain productive commercial relationships to avoid disputes where possible. Should disputes arise, we support them in managing conflict using the most appropriate and cost-effective dispute resolution processes.

8.2 Managing construction risk – a new approach to contract drafting

We advise and negotiate on obligations and duties arising under construction contracts to ensure that risks to our clients are balanced appropriately for each individual project. As new government net zero policies and legislation are introduced, the balance of contractual risks is likely to shift. The industry may need to adapt its approach to some of the usual contract terms. For example:

• as building design increasingly incorporates green design (such as the installation of heat pumps and green roofs) and as employers start to require "net zero" buildings (with whole life sustainability and the use of low carbon products and construction processes placed at their heart), contractors might insist on their obligations being spelt out in more detail – rather than, for example, contractors agreeing (in certain standard form contracts) to comply with all current standards and legislation;
• design and build contractors might also refuse to approve all or part of the employer's requirements and insist on employers, who want a net zero building, being responsible for ensuring that their design will produce the required levels of sustainability. Contractors are, for example, unlikely to agree to provisions that require the infrastructure of a building to be such that it can be recycled at its end of life, maybe 25-40 years (or more) from now;
• force majeure clauses might also need attention. For example, with major climate events increasing across the globe, a "1 in a 100" or even "1 in a 1,000" year event might now be determined "foreseeable" – meaning remedies under force majeure provisions would be unavailable.

8.3 Preparing and delivering ESG strategies

The integration of measures to address Environmental, Social and Governmental (ESG) issues are increasingly a commercial priority for boards and management across the construction industry. We support our clients in preparing for and navigating the risks associated with those issues. For example, by:

• encouraging clients to address ESG issues as soon as possible and to create an ESG strategy for their business. Very broadly speaking:
  • "environmental" covers climate change, ecosystems, biodiversity and the circular economy (which maximises the efficient use of resources and avoids waste);
  • "social" covers people and society and includes not only employee rights but others impacted by the business, such as an organisation's supply chain (ensuring, for example, that it does not buy products produced by child or forced labour or through illegal deforestation); and
  • "governmental" includes not only regulatory obligations relating to anti-bribery and corruption but also the need for businesses to establish internal governance structures to implement their ESG strategy and hold those at decision-making levels accountable for the commitments;
• creating an ESG strategy which involves a re-evaluation of all aspects of a business – from using re-usable coffee cups in the site office to developing relationships with new suppliers and ensuring projects are designed and constructed with net zero targets at their heart;
• advising on whether carbon offsetting is an option for clients in setting their carbon neutral targets; and
• stress-testing clients' ESG claims to ensure they can be substantiated, to avoid claims of "greenwashing" and to safeguard commercial reputation.

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9. How can the UK construction industry benefit from COP26?

COP26 is the latest in a line of international meetings focused on dealing with the effects of climate change. The key aim is to agree on actions that will limit the global temperature rise to 1.5 degrees centigrade – a limit that is fast approaching.

The UK, as president of COP26, has ambitious goals for the Glasgow meeting. It wants: a global commitment on net zero by 2050; more swift progress on adapting to climate change and enabling and encouraging countries affected by climate change to build defences, warning systems and resilient infrastructure; and increasing funding to support these aims.

It is widely accepted that the construction process emits a significant percentage of the UK's carbon emissions. Many in the industry are already working hard to find and implement measures to enable a shift in the industry to carbon neutrality. COP26 could be a very necessary wake-up call for those who are unaware of their own or their supply chain's carbon footprint. Examples of key measures that will help the UK achieve its targets that we can expect to be referenced during COP26 include:

• zero carbon buildings;
• decarbonising heat;
• government regulation, current and proposed, and the duty of each businesses to step up to its responsibility to effect change and contribute to achieving the net zero target;
• efficiency improvements (including minimising waste);
• electrification (renewable);
• a smaller, less CO2 intensive, fossil fuel sector;
• use of low carbon fuels;
• reduced industrial emissions;
• carbon capture, utilisation and storage (CCUS) (emissions reduction technology);
• increasing reliance on batteries; and
• carbon pricing – applying a cost to carbon polluters to encourage emissions of greenhouse gases.

The fact that COP26 is being held in Glasgow will draw UK media's attention to its proceedings: we can expect wide coverage. In the wake of Brexit and a global pandemic, COP26 will focus British businesses on the issues, the science and the statutory targets – and what is needed to achieve them. It will also highlight the commercial opportunities for those who act quickly. While many larger businesses will already have created environmental strategies and set up net zero research and development funding, COP26 will help engage the thousands of smaller businesses who make up the wider supply chain.

COP26 is likely to be a showcase of British and global climate change innovation. This publicity will help the supply chain understand what the government and industry bodies are already doing to support their transition – and where that support can be accessed. Businesses will be able to learn more about simple changes that are relatively easily achievable – as well as bigger issues that should be on their action lists if they want their business to survive and thrive. For example, if you are in the business of installing gas boilers, what are you doing to retrain your workforce so that you can win work to fit heat pumps? If you are a concrete supplier, do you know the manufacturer's plans for shifting to low carbon concrete manufacturing?

The scale of the job ahead – and the cost for those who do not engage in change – may come as a shock to some businesses who have not been following government and industry progress. COP26 offers a prime and unique opportunity for Scottish and UK-wide businesses to learn more and take the first steps to reducing their carbon footprint.

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10. Last words: include your young talent in creating net zero solutions

COP26 will present a stark warning of the dangers of ignoring climate change and lack of action. Construction businesses should treat it as an opportunity to learn more about the issues, the threats and the innovative work being undertaken by others in the industry. It is a prompt for urgent action on multiple levels: personal, commercial, UK-wide and global. Everyone has a part to play.

As a last word to industry leaders, do not forget or underestimate the role that younger employees can play in this shift. The targets might seem a long way off to experienced directors and managers who expect to be retired by 2045. That is certainly not the case for those entering the sector now. Those businesses without a robust net zero policy may find it hard to attract young talent. Younger generations' desire for change is strong and, in some cases, militant. Ignore them at your peril! Their energy and different perspective combined with your experience could produce innovative ideas and solutions. 

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1. The Carbon Budget Order 2016