ESG in the Built Environment Sector

The ever-changing ESG landscape continues to reshape the EU’s built environment sector. Our ESG team takes a look at some key legislative developments and trends of which businesses should be aware in the year ahead.

In the dynamic ESG landscape, 2024 will be another pivotal year. Recent and upcoming groundbreaking legislative developments will continue to reshape the corporate landscape in the built environment sector across the European Union. The ongoing paradigm shift towards increased transparency and accountability around the sustainability of business practices is set to continue at pace.

As businesses in the built environment sector navigate their ever-evolving ESG obligations, we explore some key trends and developments set to unfold in 2024.

Taxonomy Regulation

The Taxonomy Regulation entered into force on 12 July 2020. It lays down a classification system to determine whether an economic activity is “environmentally sustainable”. To be “environmentally sustainable”, an activity must:

1. Contribute substantially to one or more environmental objectives, including climate change adaptation and climate change mitigation
2. Not significantly harm any remaining environmental objectives
3. Be carried out in compliance with minimum social safeguards, and
4. Comply with technical screening criteria (TSC)

Detailed TSC have been developed for real-estate activities, including “Acquisition and ownership of buildings” and “Construction of new buildings”, to determine if those activities may be considered “environmentally sustainable”. Companies obliged to make disclosures under Article 8 of the Taxonomy Regulation are required to assess how and to what extent their economic activities associated with real estate are considered “environmentally sustainable”, or, “taxonomy-aligned”.

Continuing throughout 2024 and beyond, we expect to see an increased appetite from purchasers and developers to achieve taxonomy-alignment for new builds. Funders of real estate activities, such as banks and real estate funds/asset managers, will also have an interest in assessing taxonomy-alignment to meet their disclosure requirements.

In terms of practical implications, we expect to see:

• Involvement between all parties at an earlier stage of construction to ensure taxonomy-alignment is maintained up to the point of sale
• Specifications included in contractual arrangements with subcontractors and suppliers to ensure taxonomy-alignment
• Assurances regarding taxonomy-alignment included in contractual documentation, and
• Certificates regarding taxonomy-alignment provided upon completion

Corporate Sustainability Reporting Directive (CSRD)

The CSRD introduces a comprehensive new framework aimed at enhancing the transparency, reliability and comparability of corporate sustainability disclosures across the EU. Under the CSRD, many large and listed companies will be required to make detailed annual disclosures on their impact and performance relating to a broad range of environmental, social and governance factors in line with new uniform reporting standards.

With the CSRD having been brought into force at EU level last year, 2024 will be another landmark year on the path towards full implementation of the new framework.

The transposition of the CSRD into Irish national law is expected by no later than July of this year. It will bring certainty to Irish in scope companies on the full extent of their legal obligations.

The first phase of reporting obligations under the CSRD also commences this year. Any large company which is already subject to the Non-Financial Reporting Directive (NFRD) will be required to prepare its first CSRD-compliant sustainability report for its financial year commencing on or after 1 January 2024. All companies within the built environment sector which fall into that category therefore need to ensure that they are prepared for those reporting obligations. This means, for example:

• Ensuring that they have familiarised themselves with the reporting standards and conducted a “double materiality” analysis to identify their precise reporting requirements
• Identified and engaged with all relevant stakeholders on their double materiality analysis, and
• Put in place systems and practices to collect reliable sustainability information for reporting purposes

Other large or listed companies within the built environment sector which will fall within the scope of reporting requirements for financial years commencing in 2025 or 2026 should continue their preparations for CSRD reporting in earnest.

Throughout 2024 and beyond, all companies, whether or not subject to the CSRD, can expect to face an increased demand and expectation for stakeholder access to sustainability information.

More detailed information on the CSRD is available from our ESG hub.

Corporate Sustainability Due Diligence Directive

In another measure intended to complement the CSRD and further enhance the protection of the environment and human rights in the EU and more globally, the Council of the European Union and the European Parliament recently reached provisional political agreement on the proposed Corporate Sustainability Due Diligence Directive (CSDDD).

The CSDDD is a far-reaching proposal which will oblige companies within its scope to carry out significant due diligence to identify actual or potential adverse impacts on the environment and human rights within their own operations and across their value chains and to then prevent, mitigate and/or bring an end to those adverse impacts. It is also proposed that certain companies will be required to implement a climate change transition plan to ensure that the company’s business model and strategy are aligned with the EU’s climate change targets under the Paris Agreement.

The precise scope of the CSDDD is not yet final but it is expected to apply to large EU companies with more than 500 employees and a net worldwide turnover over €150 million. It is also likely to apply to certain smaller companies within high-risk sectors and to non-EU companies with significant turnover in the EU.

The provisional agreement includes agreement on enforcement measures, including injunctions and substantial fines, which may be as high as 5% of a company’s global turnover.

We will provide further updates as the legislative process continues in 2024.

Deforestation Regulation

The EU’s Deforestation Regulation entered into force on 29 June 2023. It will largely replace the EU’s Timber Regulation from 30 December 2024. Although the deadline is not impending, operators and traders such as developers, contractors, etc, that import relevant commodities , like wood or related products such as wood flooring, into the EU market will need to start reviewing their supply chain for such goods.

The Deforestation Regulation will go much further than the Timber Regulation by prohibiting coffee, cocoa, soya, cattle, oil palm, rubber, wood and certain related products sourced from lands that have been deforested or forests that have been degraded after 31 December 2020. Related products are wide-ranging including:

• Sheets for veneering
• Certain wood flooring
• Particle board
• Tools
• Builders’ joinery and carpentry of wood
• Tableware and kitchenware
• Prefabricated buildings of wood
• Vulcanised rubber
• Unvulcanised rubber, and
• Leather

To import and export timber and timber products from 30 December 2024, operators and traders will have to ensure that the relevant commodities and related products that they place or make available on the EU market are ‘deforestation free’::

1. They must be produced in accordance with relevant legislation of the country of production, and
2. Are covered by a valid statement certifying that extensive due diligence has been carried out as to the source of the timber or timber product

Enforcement powers are extensive including temporary exclusion from public procurement processes and confiscation of revenue gained from the trade of the relevant commodities or products.

Circular Economy

The Government and the Environmental Protection Agency (EPA) have identified the construction and demolition sector as Ireland’s largest producer of waste. The level of recycling of waste produced by this sector is considered too low. This is in part due to the difficulties with re-classifying waste aggregates as reusable material. To address this issue, in October 2023 the EPA published National End-of-Waste Decision EoW-N001/2023. This establishes criteria for determining when recycled aggregate ceases to be waste under article 28 of the European Union (Waste Directive) Regulations 2011 – 2020. The criteria allow for the replacement of virgin aggregates with recycled aggregates in uses such as general fill, road construction, railway ballast and other non-structural uses.

Aside from the publication of the EPA’s National End-of-Waste Decision EoW-N001/2023, it is expected that the Minister for Environment, Climate and Communications will make regulations regarding the re-classification and re-use of certain construction and demolition waste as recycled aggregates. This will provide further statutory footing to this practice and should provide reassurance for developers and contractors as to what waste can be reused on site.

The Government’s approach to construction and demolition waste is part of their “Waste Action Plan for a Circular Economy” and Circular Economy Strategy. Other waste streams have also been targeted under the schemes, such as the change in 2023 requiring certain producers of packaging material, packaging or packaged products, which could include certain developers and contractors, to become a member of Repak.

Conclusion

In summary, 2024 will see not merely a continuation of ongoing trends but will see another defining year where legal frameworks and industry practices converge to usher in a new era of corporate responsibility. We recommend that those in the built environment sector take note of the upcoming legislative changes concerning ESG to ensure they ready to fully comply with the new requirements.

For more information and expert advice, contact a member of our ESG team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.