€275 billion of annual investment in EU energy efficiency renovations will be needed by 2030.
EU policy needs to better incentivise investments into renovating existing buildings to both decarbonise the sector and ensure energy security, according to a trio of reports.
Globally, the built environment is responsible for 40% of global greenhouse gas (GHG) emissions, and 36% of the EU’s total emissions from its energy mix. In order for the real estate sector to decarbonise in line with 1.5°C of global warming, 50% of all existing buildings need to be net zero by 2040, increasing to 85% by 2050, according to the International Energy Agency. This can be achieved by using more sustainable materials and power sources and improving the energy efficiency of existing built environments.
Russia’s invasion of Ukraine has raised energy security concerns, prompting policymakers to introduce new measures (REPowerEU) to reduce member states’ reliance on Russian gas by accelerating the transition to renewables.
An additional €275 billion a year of investment in EU energy efficiency building renovations will be needed by 2030, compared to the current annual spend of €85 million-€90 million, said a report by research and data provider Moody’s.
Part of this investment will be met by the EU’s €672.5 billion Recovery and Resilience Facility (RRF), which has dedicated 37% of its funds to climate-related expenditure between 2021-27, but the rest must come from investors, Moody’s said.
The report acknowledged steps the EU had taken to stimulate investment in building renovation, such as the mandatory Energy Performance Certificates and minimum energy performance standards for existing buildings from 2027.
“Investors and policymakers need to look at the demand side – not just the supply side – and improve the buildings that we already have,” Roland Hunziker, Director of the Built Environment at the World Business Council for Sustainable Development (WBCSD), told ESG Investor.
Wielding effective policy
REPowerEU, which was introduced on 11 March, should go further to push improvements in energy efficiency, according to a report by Agora Energiewende, a German think tank.
Agora’s recommendations, which include installation of new gas boilers and scaling up of heat pump installation, would reduce EU buildings’ existing fossil gas use by 480 terawatts an hour (TWh) by 2027 compared to 2020 levels of 1,400TWh.
“One of the preferred methods for improving the sustainability of a building is to replace boilers with heat pumps – but, if the building isn’t renovated at the same time and energy waste isn’t accounted for, then it still won’t be energy efficient,” Hunziker pointed out. “Investors need to ensure there is a holistic approach accounting for the whole building,” he said.
Moody’s also highlighted that the Energy Performance of Buildings Directive requires member states to upgrade the worst-performing 15% of non-residential building stock to be more energy efficient by 2027 and 15% worst-performing of residential buildings by 2030.
“The impacts of the EU Taxonomy Regulation are also being felt strongly by the real estate sector,” added Rasmus Grosen Olsen, Sustainability Manager at Nordic private equity real estate firm NREP.
The climate delegated act of the taxonomy has outlined that, for building renovation to be considered a sustainable economic activity, it needs to achieve 30% energy saving and comply with minimum energy performance requirements.
“In order to qualify as an Article 8 fund under the EU’s Sustainable Finance Disclosure Regulation, with proven sustainability characteristics, it is necessary to complete a building Life Cycle Assessment (LCA) to ensure all factors are considered, from extraction of raw materials to the construction phase, use, and finally demolition and disposal,” Grosen Olsen noted.
An LCA assessment of all EU-based buildings will be mandatory within two years, which Grosen Olsen said is driving “unparalleled levels of transparency when it comes to reporting”.
There are “better and better tools” to help investors measure the energy efficiency and decarbonisation of their real estate assets, said WBCSD’s Hunziker, but it is difficult for investors to know how to act on the data.
“Do they divest so the poorly performing assets are no longer on their books? Or do they stick with the investment and bring it up to speed? How do they best ensure improvements?” Hunziker said.
To advance understanding of transition risks in the real estate sector, the UN Environment Programme Finance Initiative (UNEP FI) and the Carbon Risk Real Estate Monitor (CRREM) initiative published a report summarising the experience of over 70 real estate investors and banks who piloted use of the monitor. Analysing 340 residential and commercial real estate assets globally, CRREM found only a few were aligned to net zero.
The strongest performers provided the best data and data transparency, the report said. However, challenges regarding access to reliable and granular data on property-related GHG emissions and related metrics still remain, it added.
“Under our 1.5°C target, the huge challenge in the real estate industry is to improve climate efficiency in existing buildings,” said Unn Hofstad, Sustainability Manager at Storebrand Real Estate.
“We welcome CRREM as a tool for analysing risks and opportunities in the context of science-based reduction targets, supporting strategic decision-making and optimising measures at the asset and portfolio level.”