The urgent need for climate action in the building and construction sector: Scrutiny, regulation and litigation are on the increase

Scientific evidence and extreme weather events are increasingly stark. All sectors of commerce and the globe face heightening risks from climate instability. The building and construction sector is highly exposed to direct and indirect impacts. Scrutiny, regulation and litigation are on the increase. Energy demand and activities in the building and construction sector contribute to over a fifth of global carbon emissions. Just a 1% increase in those emissions in 2022 equated to 10 million more cars circling the Earth’s equator. ^[1]https://www.unep.org/news-and-stories/press-release/not-yet-built-purpose-global-building-sector-emissions-still-high. There is no credible path to tackling climate change or biodiversity loss without a fundamental shift in the industry worldwide.

The implications are already being felt in the planning and delivery of infrastructure and capital projects. But our Environment and Climate team is tracking a rise in disputes across a widening front – from on-site disruption and design failures to energy costs and carbon pricing; and from contamination, including emerging contaminants, to tightening planning, environmental and reporting requirements. Just some of these risks are surveyed here.

• Construction sector must prepare for greater scrutiny, regulation and litigation
• Assessing damages for contamination requires a more comprehensive approach
• Weather extremes are prolonging project timelines and exposing design failures
• Carbon impacts may jeopardise planning consent and social licence to operate
• Greenwashing and biodiversity-related cases are also on the rise
• Emerging contaminants (notably PFAS) will spawn yet more insurance claims
• Clients, contractors, and counsel need to anticipate and mitigate these risks

Disruption related to climate change – adverse weather impacts

Our research – through HKA’s integrated CRUX programme analysing the causes of conflict on distressed projects – points to some of the disruption related to climate change. As might be expected, more claims and disputes are blamed on adverse weather conditions in sectors with projects on exposed sites or traversing large geographical areas (such as offshore wind, and highways) when compared with commercial buildings or manufacturing facilities on more self-contained sites.

Figure 1 – Percentages of projects with related claims or disputes

The CRUX dataset tracks capital and infrastructure projects over the last seven years. In that time, extreme weather events caused conflicts on more than one in seven (13.3%) of all projects in the Americas – seven percentage points higher than in the rest of the world. (Figure 2)

Figure 2 – Percentage of all projects with related claims or disputes

When unforeseen physical conditions are also considered, more than a fifth of projects worldwide were affected. Widening the cluster of causes further to include site access restrictions and late material deliveries – which can be attributable at least in part to environmental factors – the proportion disrupted exceeds 40% (see Figure 3). Africa, the Middle East and Asia were most heavily affected, Europe the least.

Disruption of global supply chains, which led to claims over late deliveries on around one in 10 projects, is often due to natural events. Tropical storms, for example, triggered force majeure provisions 10 times on a long-term LNG (liquefied natural gas) project in the Americas. Local snowfall and landslides also had an impact.

In the UK alone, research found that unpredictable weather extended project timelines by up to 21%, and in 2021, industries in which workers are exposed to the elements lost £94 million due to extreme heat.^[2]https://www.marsh.com/en-gb/industries/construction/insights/climate-change-and-impact-on-construction.html Meanwhile, we have seen construction delays due to flooding on projects from Australia to South America.

Figure 3 Percentage of projects affected by environmental factors – by region and globally

Contracting parties have been invoking force majeure clauses to avoid liability, with mixed results. Expert input from weather attribution scientists is needed to establish if the burden was beyond a party’s reasonable control. This can be complex and challenging. As extreme events become more frequent and, perhaps predictable, parties need to focus on how contracts define responsibility under force majeure.

Depending on the severity of the weather event’s impact, along with other disruptive factors, the time extensions sought on projects where it precipitated a force majeure claim or dispute ranged from 9.1% to 69.2% of planned schedules.  

Extreme weather events are also already giving rise to more negligence claims for design failure – for instance, to withstand flooding or high winds, and in material selection.

(Often) unforeseen contamination is a traditional source of dispute

Unforeseen contamination is a traditional source of dispute. Legal and financial obligations to remediate pollution or contamination arise from pollution incidents breaching statutory rules, but also civil disputes involving damages for common law nuisance or negligence, and contract breaches. We estimate that around 60% of cases concern alleged violations of indemnity, failures in clean-up performance or negligence. Fears of higher penalties, more rigorous enforcement, and extended regulations are driving these actions.

Pressure from project promoters to start works and speed completion compresses the pre-construction phase. Environmental due diligence and site investigation are often poor. We see desirability bias or otherwise a failure to account for likely contingent liabilities and obligations when scoping remediation. Another factor is the inadequacy of commercial or property agreements, including environmental indemnities, and price reductions or adjustments designed to transfer liability.

The nature and extent of clean-up required depends on the circumstances and standard of remediation required by the relevant statute, court order or contract. Damages have traditionally focused on investigations, removal, treatment or containment of the contaminants, fines and monitoring. Complementary or compensatory works to offset interim losses may also be required. However, such a bottom-up analysis can underestimate actual losses by not considering the potential reputational impacts, lasting competitive disadvantage, or loss of market share. We are seeing more comprehensive approaches to estimating damage, and with our economics team, have factored share value into these calculations.

Emerging contaminants are increasing

Lawsuits related to alleged exposures to ‘forever chemicals’ are increasing. These per- and polyfluoroalkyl substances (PFAS) are a diverse and large group of synthetic fluorinated organic chemicals with a vast range of industrial, professional and consumer uses. PFAS are persistent in the environment and hard to remediate. Plumes can travel far further than conventional hydrocarbon contamination. Regulatory PFAS guidance is rapidly evolving to cover a broader range of specifications, and further decreasing what are deemed safe concentrations. Over 6,400 PFAS-related lawsuits have been filed globally since 2005.^[3]www.avivainvestors.com/en-gb/views/aiqinvestment-thinking/2023/03/forever-chemicals/ Health-related costs in Europe are estimated at €52-85 billion a year.^[4]https://www.pfassciencepanel.org/true-cost-of-pfas

Site construction can mobilise PFAS and introduce new pathways for exposure and receptors (including a building’s occupants). It has been shown that the porous nature of concrete can allow PFAS to bind and slowly release over years or decades.^[5]https://www.researchgate.net/publication/358170153_Release_of_perfluoroalkyl_substances_from_AFFF-impacted_concrete_in_a_Firefighting_Training_Ground_FTG_under_repeated_rainfall_simulations PFAS have been found on many development sites, but there can be information gaps in affected sites’ historical records. Arguments over responsibility are arising and stalling developments.

Developers face significant unexpected costs and enforcement. Insurers are also receiving claims and coverage actions from policyholders seeking defence and indemnity for PFAS-related claims. Such insurance can now be hard to secure. PFAS are already a hot topic, and we foresee a further rise in insurance disputes over coverage and retrospective liability.

Carbon footprints jeopardise planning consents

Increasingly, climate change is a material consideration in planning decisions, prompting challenges to new road, air and national infrastructure. Projects increasingly also need society’s permission – a social licence to operate.

HKA has recently been involved in several investor-state arbitrations over developments that failed on grounds related to climate change. The Energy Charter Treaty (ECT) was introduced to promote international energy cooperation and the security of hydrocarbon energy supplies. It provides protection for energy investments, including safeguards against expropriation and unfair treatment. The agreement came into force in 1998. Given its primary focus on oil and gas, however, shifts in global energy and environmental policy have seen many countries consider withdrawal. In 2020, the ECT protected around 51 coal power plants at risk of becoming stranded assets under the Paris Agreement’s scenario for limiting global warming.^[6]https://www.iied.org/sites/default/files/pdfs/migrate/17660IIED.pdf An estimated €345 billion of fossil fuel assets in the EU, UK and Switzerland are currently protected.^[7]Olivier Moldenhauer, Nico Schmidt, “ECT data analysis: results and methods”, Investigate Europe, 23 February 2021 https://www.investigate-europe.eu/en/2021/ect-data/

While we have been involved in presenting states’ arguments for integrating climate obligations in the context of the ECT and specific disputes, the extent to which these are taken into account rests with the arbitrator. Meanwhile, we advise those considering future investments within countries that have withdrawn, or soon will, from the treaty, to secure protection, and alternative treaties or contractual protection mechanisms. As the resolution window under the ECT’s neutral dispute forum narrows, disputes should be raised and arbitration sought promptly.

Surge in high-risk greenwashing cases

As climate change litigation has rapidly evolved, other areas of risk are increasing in significance – notably, greenwashing and biodiversity.

Greenwashing by companies and governments is seen to project an eco-conscious image not supported by meaningful reductions in environmental impact. As demand for environmentally friendly and sustainable goods and services has grown, so has the prevalence of greenwashing, whether of company credentials, products or services.^[8]Greenwashing: The Lawyers Guide to Environmental Misrepresentation (2023). Inside Practice The risk of litigation against such misrepresentation remains high even if the number of actions is no longer increasing.^[9]https://www.reprisk.com/research-insights/reports/a-turning-tide-in-greenwashing-exploring-the-first-decline-in-six-years?msclkid=09bd8a3c639b157785a3ed003473d612 For the first time in six years, there was a decline in greenwashing cases in 2023-24, of 12%. The fall was higher (20%) in the EU’s banking and financial services sector, most likely due to stricter regulations. However, overall, the number of cases graded as ‘high-risk incidents’ surged by more than 30%. Greenwashing class actions are also becoming more complex as they address corporate pledges on carbon neutrality and long-term sustainability.^[10]https://globallitigationnews.bakermckenzie.com/2024/07/31/united-states-navigating-the-new-rise-of-greenwashing-litigation/

Legislation will spur further litigation. As countries strive to meet environmental commitments, the construction and engineering sector is a regulatory target. Companies must consider the rapidly evolving and multifaceted regulations around greenwashing before making claims regarding the sustainability of development projects and constituent materials. Within the EU, important anti-greenwashing regulations on the horizon include the Green Claims Directive, currently under negotiation, and the Empowering Consumers for the Green Transition Directive, due to be transposed into national laws by March 2026.^[11]https://www.inhouselawyer.co.uk/legal-briefing/esg-horizon-scanning-what-to-expect-in-2024/

With requirements for transparent corporate disclosure also on the increase, greenwashing is a fertile area for potential disputes, not least over material selection and supply chain promises.

Biodiversity impacts raise regulatory risks

Biodiversity regulation is another arena for almost inevitable conflict. Over half of global GDP is heavily dependent on nature.^[12]The business case for nature (worldbank.org) In December 2022, the landmark Kunming-Montreal Global Biodiversity Framework was agreed. Adopted by 196 countries, this UN-driven pact sets goals and targets for 2030 to protect and restore nature.^[13]https://www.cbd.int/gbf In March 2024, the European Council (EC) criminalised wide-scale environmental damage ‘comparable to ecocide.’^[14]EU Council passes new ecocide rules, but what does that mean? – EnvironmentJournal Similar laws are being considered in England and Scotland.^[15]Ecocide Bill [HL] – Parliamentary Bills – UK Parliament^[16]Neil Macdonald: Ecocide – a potential new crime for Scotland? | Scottish Legal News

The European rules aim to spur litigation and deter environmental offences that mostly go unpunished under existing EU and national legislation.^[17]Crime and punishment – EEB – The European Environmental Bureau High-emission industries and those that cause severe or widespread damage to the environment will be targets. In June 2024 the EC also adopted a first-of-its-kind regulation on nature restoration. Measures are to be put in place to restore at least 20% of the EU’s land and sea areas by 2030, and all ecosystems needing restoration by 2050.^[18] Crime and punishment – EEB – The European Environmental Bureau New biodiversity laws are already bringing government and the construction sector into conflict – for example, in the UK, under Biodiversity Net Gain,^[19]https://www.gov.uk/government/collections/biodiversity-net-gain and nutrient neutrality in England.^[20]https://www.local.gov.uk/pas/topics/environment/nutrient-neutrality-and-planning-system We are seeing a rise in biodiversity-related disputes in the construction sector.

Fast-tracking build leads to conflict and litigation

Environmental litigation is poised to expand on these and other fronts. Heightening public and political awareness, stricter regulations, and global efforts to deliver change are increasing scrutiny of infrastructure and capital projects and consequently, the corresponding risk of litigation related to sustainability. The near-universal determination to ‘speed the build’ is compounding this risk and almost invariably self-defeating as it results in many avoidable failures – better to go slow to go fast.

For now, traditional pollution, emerging contaminants and project delay cases continue to dominate. Indemnity and insurance disputes are rising, as are claims over climate-related design failures. Significant sums are in dispute with suppliers on several major projects over increased costs blamed on carbon pricing changes under the EU’s Emissions Trading Scheme.

Balancing environmental, economic and political pressures will be fiendishly difficult for legislators (and others). Developers may find getting planning consent for major infrastructure much harder. Ultimately, more biodiversity disputes are anticipated, along with diverse cases over corporate governance.

The need to anticipate, investigate and mitigate these and other environmental risks can only increase.

Learn more about HKA’s integrated CRUX programme or to discuss how HKA Environment and Climate experts can help you in times of dispute or advisory, please contact Dr Alexander Lee (alexlee@hka.com), who would be delighted to speak with you.

About the Author

Alex Lee (MSc, PhD, FGS, CSci, CGeol, EuGeol, ASoBRA, SiLC), Principal 
​​Dr Alexander Lee​ has over 25 years of experience in ground risk and remediation. He is a Chartered Geologist and Scientist and a Specialist in Land Condition (SiLC). He is a critical thinker and industry leader with a history of influencing and writing UK guidance. He has been cross-examined in litigation and regularly provides expert opinion, analysis, and advice within dispute values of up to £700 million.