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For the construction industry, the impact of climate change is already felt in design and engineering, MEP works, project deliveries and site conditions. Private developers and contractors have now to comply with specific standards and regulatory requirements that are causing change on ongoing projects which may increase disputes.
A mounting pressure to meet climate goals
A 2021 report by the International Energy Agency (IEA) (Tracking Buildings 2021) found that buildings remain off track to achieve carbon neutrality by 2050. To meet this target, all new buildings and 20% of the existing building stock would need to be zero-carbon-ready as soon as 2030. On 12 October 2021, the UAE issued its National Climate Change Plan for 2017-2050 (UAE’s Government Portal). The primary objectives of the Climate Plan are to:
- Manage greenhouse gas (GHG) emissions while sustaining economic growth.
- Minimise risks and improve capacity of adaptation to climate change.
- Enhance the UAE’s economic diversification agenda through innovative solutions.
The second of the three objectives directly concerns the construction sector, with proper measures taken to achieve high levels of readiness and to manage current and future climate risks. Amongst the governmental initiatives adopted to combat climate risks are:
- Estidama: Estidama (sustainability in Arabic) is considered one of the most transformative measures to improve the efficiency performance of new buildings in Abu Dhabi and to promote sustainability ratings in the design, planning, and construction phases of new urban developments.
- Green building regulations and specifications - Circular No. 198: Dubai has developed a mandatory code for all buildings that sets energy, water, materials, and waste compliance standards.
- Energy service companies (ESCOs): Etihad ESCO facilitates the creation of a performance market for ESCOs and develops energy efficiency projects, focusing on efficiency technologies, building retrofits, district cooling and capacity building with a target of retrofitting 30,000 buildings by 2030 to reduce carbon emissions.
These and other steps to achieve sustainable infrastructure (such as Federal Law No.24 of 1999 on the Protection and Development of the Environment), may attract further uncertainties in the construction sector in terms of meeting constantly changing regulatory landscapes to reach environmental goals.
Project risks associated with climate change
Benchmarking existing regulations against environmental goals is pushing regional countries to further consider the need to fill in any legislative gaps for steering the construction sector to meet sustainability requirements and address climate risks. This, in turn, gives rise to a number of project risks, including:
Reduced productivity
Given the magnitude of the construction sector and the large number of outdoor workers, the potential socio-economic impacts of heat stress need to be addressed. GCC countries already apply reduced work hours during the summer period. Increasing heat waves may drive working hours down further to safeguard the health and safety of workers. Also, the strain on power supply in the aim of cutting GHG emissions coupled with reduced power output due to warmer cooling water puts the reliability and the availability of power supply at risk. Both of these factors may have an impact on the timely delivery of projects.
Failures to take account of climate change related events during the design and construction stage
In terms of physical climate risks, heavy precipitation and flooding, due to climate change, is predicted to increase. Consequently, claims in this category are increasing, including the failure of building structures and infrastructure drainage systems to address floods from rare but severe storm events and, eventually, rising sea levels.
Construction professionals must take into account more frequent and more severe weather events in the region, including violent dust storms, locally known as shamal winds, high temperatures, occasional but severe rainfall and resultant cracking and subsidence. While contractors, in the aim of staying competitive, have limited themselves to significant budgetary constraints, more investment may now be required during the design and engineering stages for projects to meet extreme weather events. Historically, regulatory changes and standards demonstrate that it takes time for designs, materials and workmanship to adapt to new requirements. It is expected that a changing legislative landscape will give rise to new disputes over compliance and potential defects.
Change in scope
In terms of transition climate risks, governments in the Middle East and North Africa are taking action to reduce their carbon footprint, with states such as Saudi Arabia and the UAE seeking to play a leading role in the world’s energy transition markets. The mounting pressure to reduce GHG emissions to meet global net zero pledges will increase the scope of construction disputes. More stringent regulatory requirements, such as achieving higher levels of sustainability ratings, may trigger the re-engineering of certain elements, causing late changes to project designs. Such regulations are likely to cause more disputes in the short term arising from change in scope, whether in design and engineering or construction.
It is expected that, across the region, new regulations will be introduced to improve the performance of buildings and sustainability ratings, which calls for the adoption of a new approach to design when it comes to energy and water savings, procurement of resources and enhancing the planning, construction and operation of buildings. The aforementioned UAE Green Building Code is a testament of these policy changes. Other similar codes have been released in Qatar and Lebanon.
Impact on insurers
Climate change will have far reaching effects on the underlying insurance industry. It will present a wide-range of emerging risks as outlined above that will have direct and indirect effects on the global construction industry. Insurers will need to help construction businesses manage the future of climate related risks and liabilities to mitigate losses.
In terms of physical risks, each climate event carries immediate and latent damage to construction projects, which insurers may be liable to indemnify. The increased volume and concentration of claims will drive down insurance companies’ profitability and will increase premiums for insureds.
Another monetary impact to both insurers and their insureds is the disruption of supply chains. The rise in prices associated with disruptions due to a climate event will serve to drive up the cost of labour and liquidation damages associated with delays. Similarly, an inability to access a construction site due to a climate event will likely delay a project and cost an employer significant sums.
The constantly evolving rules and regulations to encourage construction companies to transition to a lower carbon economy leaves the industry open to sanctions. Attempts may be made to pass on direct monetary sanctions to insurers, by insureds, who have unwittingly failed to comply with these regulations. Indirectly, any modifications to ongoing construction projects that are non-compliant with regulations, will attract remedial costs in terms of material, labour and time. All could be notified to insurers.
Insurers should also heed the reputational risk of underwriting construction projects involving fossil fuels, oil pipelines and non-renewable energy production. Insurers risk a loss of business if it is not seen to be actively supporting green projects, which will have a knock-on effect on the value of its assets.
What’s next
According to the World Economic Forum, buildings and construction are responsible for 40% of global emissions (taking into account both building materials and operating emissions), and addressing the problem will require collaboration across sectors and with the government.
Improvement of energy efficiency is critical in design and construction, as well as the operations of buildings. Cooling and powering desalination plants, by far the biggest energy consumers, should transition to renewable energy sources, such as solar power. Decarbonisation should also cover the materials sector, including steel and concrete production. Separate to the transition movement is the need to protect assets from severe weather events and physical risks.
Comment
Developers and contractors should spend more time to mitigate both physical and transition risks in the planning and design stage. One of the reasons for disputes arising from change in scope is proceeding with the construction without an approved final design. Also, an early agreement in construction contracts on changes in the law and the party who bears any liability arising from such changes is advised.
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Construction and engineering
Insurance and reinsurance
United Arab Emirates