Mike Scott reports on the growing business case for decarbonising the built environment
The built environment has long had an outsize impact on carbon emissions, being responsible for about 40% of global emissions, in part because of the sector’s heavy use of steel and concrete, two of the most carbon-intensive materials on earth.
“Given that buildings account for nearly 40% of the world’s greenhouse gas emissions, decarbonising buildings is the key to decarbonising our future, and we are at a critical inflection point,” says George Oliver, chief executive and chairman of Johnson Controls, and chair of the Sustainable Markets Initiative’s Sustainable Buildings Taskforce. “The good news is that we have the technology to make a positive impact, harnessing the power of energy efficiency technologies, electrification and renewables.”
To align the sector with net-zero targets, 3-3.5% of buildings in mature cities need to be retrofitted every year, more than three times the current rate, according to real estate group JLL.
“Retrofitting existing buildings is the quickest and most cost-effective way to accelerate decarbonisation in the built environment,” says Guy Grainger, JLL’s global head of sustainability services and ESG.
But despite its obvious benefits – in terms of cutting carbon, reducing costs and as an investment proposition – energy efficiency has always been a curious blind spot, for governments and regulators, investors and building users alike. Unlike in the power sector, the sector is fragmented, with extended supply chains, mismatches between owners and users throughout the value chain, and diffuse sources of emissions, from the carbon embodied in buildings during construction to transport to and from premises, to energy use within buildings.
Decarbonisation has got a lot harder in 2022 for Europe and around the world, for all the wrong reasons
For governments, the numbers can seem daunting – millions of homes and businesses are involved in driving energy-efficiency improvements, whereas when it comes to energy companies, there are only a few organisations they need to deal with, says Philippe Delorme, executive vice-president of Europe operations at Schneider Electric.
Some governments, notably the UK’s, have also been reluctant to encourage efficiency measures for fear of being seen as promoting the “nanny state”.
Meanwhile, consumers and businesses have been put off by the upfront costs of efficiency investments, even though the payback periods have always been fairly short.
However, there is now a growing recognition that urgent action is needed, with two key drivers boosting the case for action. The first is the wave of extreme climate events around the world in 2022, which starkly illustrated the growing impacts of climate change on the built environment.
The second is the war in Ukraine, which has played a large part, in Europe at least, by highlighting the region’s over-reliance on one supplier, Russia, and on fossil fuels in general.
“Decarbonisation has got a lot harder in 2022 for Europe and around the world, for all the wrong reasons,” says Jonathan Maxwell, chief executive of energy efficiency investment firm Sustainable Development Capital (SDCL). While the rollout of renewable energy capacity – and the electrification of the global economy – continues to accelerate, it is starting from a very low base and electricity currently only provides 20% of energy.
“The only short-term vaccine is energy efficiency,” says Delorme. Efficiency measures are cheap, achieve rapid results and already attractive payback times have been slashed by rising oil and gas prices. “Every time we engage with customers, we drive savings of at least 30%,” he adds.
Investors and building occupiers are increasingly requesting that their buildings reflect wider net-zero targets and commitments.\
EU governments have spent 500 billion euros in the past 12 months to ease the pain of higher energy prices. At the same time, individual householders and companies are starting to see the impact on their energy bills, while investors and building occupiers are increasingly requesting that their buildings reflect wider net-zero targets and commitments.
Property developer Lendlease managed to cut its Scope 1 and 2 emissions by more than half (53%) over the past year by switching to low carbon non-fossil fuels on construction sites, powering its business with renewable electricity, and beginning the process of decarbonising heating networks across its development portfolio.
The global real estate and investments group, whose business model spans the entire property lifecycle, aims to be a 1.5C aligned company, achieving net zero for Scopes 1 and 2 by 2025 and absolute zero carbon, across all scopes, “with no excuses and no offsets”, by 2040.
However, with about 99% of its carbon footprint deriving from Scope 3 emissions, the vast majority from the embodied carbon emissions in building materials, it acknowledges it has a long way to go. To tackle this, it has started to specify low-carbon steel, concrete and aluminium products on new developments, and it is participating in industry groups driving decarbonisation of materials.
It is also a founder member of Built by Nature, a scheme to accelerate mass timber construction in the UK and Italy. And it has developed strategies to reduce embodied carbon by 30% compared to the original design, when pitching to external clients.
There are a few dedicated energy efficiency investment funds, such as SDCL’s 2 billion pounds Energy Efficiency Income Trust, which invests in technologies including rooftop solar, energy storage, combined heat and power and industrial energy recycling in buildings ranging from data centres to hospitals, schools and universities and high-emission steel and chemical industrial facilities.
Italy’s superbonus scheme pays householders 110% of the cost of energy efficiency equipment such as heat pumps, insulation or solar panels
It also funds projects that reduce demand for energy at the point of use, including improvements in lighting, heating, ventilation, air conditioning, building energy management systems and controls.
Other ways to drive efficiency include “as-a-service” models, where customers pay for performance and do not need to make high upfront capital expenditures. One of the best-known exampes is at Schiphol airport in Amsterdam, where Philips (now Signify) took on the contract to provide lighting of the airport, installing LED lights and cutting electricity consumption by 50%.
Often such agreements are signed with energy services companies (ESCOs), who install, manage, maintain and remove any equipment, with energy performance contracts ensuring that the customer pays only for the service provided, with the earnings from the energy savings split between customer and provider.
Efficiency improvements can also be paid for through green bonds or sustainability loans, which have green criteria built into their terms of borrowing.
The EU’s Renovation Wave, the fourth iteration of the Energy Performance of Buildings Directive, calls for an increase in retrofitting and a reduction in emissions from buildings of 60% by 2030. A new Energy Efficiency Directive will add to the impetus for change in the bloc as well.
EU-level efforts are being bolstered by national policies. One is Italy’s superbonus scheme, which pays householders 110% of the cost of energy efficiency equipment such as heat pumps, insulation or solar panels, leading to a surge in the uptake of such measures. Germany has introduced measures to cut its energy consumption by 9% by 2030, including banning new fossil fuel heating by 2024.
A change has happened in the last six months. Corporations are realising that their buildings represent their brands
Even the UK, where there has been an institutional resistance to energy efficiency since former PM David Cameron cut an insulation programme, calling it “green crap”, is tentatively encouraging consumers to save energy and has announced plans to prohibit new gas heating systems and boilers by 2025, and ban them for all buildings by 2035.
In the U.S., the Inflation Reduction Act also beefs up building codes, encourages green technology and offers rebates for retrofits, so it will kickstart the U.S. market for energy-saving measures. Cities are also introducing their own measures. San Francisco, for example, mandated that all new buildings must be electric from 2021, Los Angeles has said buildings must be net zero by 2030 while New York aims to cut emissions from buildings by 80% by 2050.
“A change has happened in the last six months,” says Grainger. “Corporations are realising that their buildings represent their brands. Some buildings are becoming illiquid or overpriced and there is plenty of evidence that net-zero buildings are securing a premium. It improves the business case for retrofits.”
The biggest savings will be found in emerging markets, the International Energy Agency (IEA) stresses. “With emerging countries accounting for an ever-greater share of energy demand, the largest energy efficiency opportunities will increasingly be found in such countries as Brazil, China, India, Indonesia, Mexico and South Africa.”
The sector is set to provide even better returns thanks to the advent of digitalisation, says Delorme of Schneider Electric. “Digitalisation has massively increased the effectiveness of energy efficiency. The rise of digital has coincided with a massive fall in the cost of sensors and electronic equipment, while the cloud has reduced the cost of software. The next step is grid digitalisation, which will allow the integration of more and more renewables and more flexibility in the grid.”
Mike Scott is a former Financial Times journalist who is now a freelance writer specialising in business and sustainability. He has written for The Guardian, the Daily Telegraph, The Times, Forbes, Fortune and Bloomberg.
This article is part of the Winter 2022 in-depth Financing the Transition briefing. See also:
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ESG: The investment world’s troubled teen is forced to grow up
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Comment: To plug the green economy data gap we need regulators to mandate climate reporting
Comment: How companies can lead to make the energy transition work for people and planet
Sustainable buildings taskforce energy efficiency Sustainable Development Capital scope 3 emissions Energy Efficiency Income Trust EU Renovation Wave US Inflation Reduction Act