The new licence to do business for contractors and project developers

In 2025, contractors and project developers must work to mitigate environmental impacts in support of sustainability ambitions to actively deliver a reduction in the emissions arising from construction projects.

While many contractors and project developers are already integrating sustainability requirements into contracting models, increasingly, the three drivers - regulatory commitments, funding requirements and planning consents - are becoming established as a baseline for a “licence to do business”.

Those not yet required by regulation to embed sustainability into their operations and projects will still face requirements from funders and investors, as well as sustainability obligations to obtain planning consent. In fact, it is common to see requirements on companies under all three limbs and this will accelerate during 2025.

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In the UK, the Taskforce for Climate-related Financial Disclosures rules already apply to many contractors. It is likely that sustainability reporting requirements will increase significantly in the next few years.

The new Labour government has committed to implementing the recommendations of the International Sustainability Standards Board (ISSB) which require general sustainability disclosures and specific climate-related ones. The timing for ISSB implementation is as yet uncertain but it is not possible to sit back and wait - because projects are long term commitments and pressures already exist from other reporting requirements.

This is in part because businesses and business partners in a supply chain are likely to be subject to EU rules on sustainability reporting, specifically the EU Corporate Sustainability Reporting Directive. These rules have extraterritorial effect, impacting businesses who contract with in-scope companies.

Reporting rules are also now supplemented by sustainability due diligence requirements in the form of the EU Corporate Sustainability Due Diligence Directive, among others, which require large companies to assess their supply chain partners for sustainability risks, requiring significant information sharing. As a compliance issue, companies in-scope of these sustainability regulations are pressuring business partners to disclose information or take action to meet their obligations.

Many banks and asset managers have made commitments to abate their “financed emissions” and all aspects of any projects which receive the benefit of that financing - which would include projects which borrowers participate in - will form a part of those emissions.

These sustainability and transition finance frameworks will inform where, how, and to what extent funders deploy their capital and investment, and at what price. Contractors and projects will need to provide information to banks and asset managers and collect data to enable them to report against them.

The relative competitive advantage of a project, and indeed a contractor’s participation in the project, will depend on the ability to demonstrate contributions towards targets and framework requirements.

Even in the absence of regulatory and funding requirements, it is increasingly likely that the planning consent under which a project has been permitted will include rigid conditions to meet overall carbon budgets, or to deliver biodiversity net gain or other environmental impact or improvements.

With all of these factors coinciding, contractors and developers will increasingly evolve their project delivery models, underpinned by extensive data collection and reporting. This trend continues to develop and these requirements will increase in 2025.

Michael Watson is Partner and Head of Climate and Sustainability Advisory, Pinsent Masons