Cop26 Perspectives

Green Future Under Construction

Embodied emissions a key challenge as industry initiatives unveiled at COP26 not matched by government action.

Built from cement, steel and aluminium; powered by electricity, gas and water – the built environments in which we work, rest and play are responsible for almost 40% of global greenhouse gas (GHG) emissions.

Despite construction being one of the most environmentally damaging industries in the world, less than US$3 out of every US$100 spent on new construction is invested in more energy efficient buildings, according to the #BuildingToCOP26 initiative. The consortium, which includes industry associations alongside the UN’s Race to Zero, the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute, held a series of events at the Glasgow summit to further catalyse climate action in built environments.

Out of the 186 countries that submitted nationally determined contributions ahead of COP26, 136 mentioned buildings, 53 mentioned building energy efficiency, and just 38 specifically referred to building energy codes. The majority did not include full building decarbonisation targets or address the emissions produced by building materials, meaning there is a dire need for countries and investors alike to turn their attention to the decarbonisation of the construction and real estate sector.

To properly transition to net zero by 2050, as well as making sure new builds are more energy efficient, the construction sector needs to identify and measure the ‘embodied carbon emissions’ in building materials. Embodied carbon refers to the emissions arising from the manufacturing, transportation, installation, maintenance and disposal of these building materials, notably steel and cement – two highly carbon-intensive industries in their own right.

“It is critical that investors and companies alike are aware of the impacts and opportunities embedded in the choice of building materials,” Dan Seligman, Director of Clean Energy Solutions at non-profit organisation Ceres, tells ESG Investor. “Investors can play an important role in encouraging adoption of clean technologies and products.”

Investors need to support the identification of and investment in low-carbon solutions, experts say, both to decarbonise building material production and the construction process itself.

The climate crisis is beginning to move up the sector’s agenda. Management consultancy firm McKinsey conducted a survey of 100 global senior construction executives earlier this year, and 53% said that sustainability is a key trend they expect to accelerate. Further, 10% said they have already increased investments in sustainability measures since the start of the outbreak of Covid-19.

“We believe that the decarbonisation and sustain­ability focus will shift inexorably toward construction and real estate, following scrutiny of other industries in recent years,” recent McKinsey research said.

“Light on binding targets”

Alongside the high-level intergovernmental negotiations, COP26 in Glasgow presented a platform for construction companies, investors and policymakers to accelerate transition to low-carbon operations and products.

As part of Built Environment Day at COP26, the UK Green Building Council (UKGBC) launched its Whole Life Carbon Roadmap. With the built environment responsible for 25% of the country’s carbon footprint, UKGBC published recommendations, including a net zero trajectory, plus policy targets and stakeholder actions required to limit global warming to 1.5°C.

The WBCSD also published its Business Manifesto for Climate Recovery, outlining 12 priority areas for reducing, removing and reporting emissions, including the built environment. The manifesto recommends that companies in the sector: set whole-life carbon building decarbonisation targets; implement building energy codes to reduce carbon and enhance building resilience; and secure public funding for buildings and infrastructure aligned with net zero.

The World Green Building Council (WorldGBC) updated its ‘Net Zero Carbon Buildings Commitment’, now requiring its 143 signatories to account for the whole emissions lifecycle of new buildings and major renovations from 1 January, 2023.

“[They] will also prioritise the efficient use of low carbon materials and construction processes, reduce reliance on fossil fuels in construction, and support the transition to a fully decarbonised built environment,” WorldGBC said.

Such initiatives were not reinforced by political commitments. COP26 was “disappointingly light on binding targets” from governments, says Peter Bachmann, Portfolio Manager of the Gresham House British Sustainable Infrastructure Fund II (BSIF II).

“There did not seem to be any impetus [from policymakers] to set deadlines for using fossil fuels in the production of steel building materials, for example,” he notes.

As a major employer globally, “politically, it’s not an easy industry to tackle” when wanting to ensure a just transition, Bachmann acknowledges.

The Laudes Foundation recently partnered with the Institute for Human Rights and Business (IHRB) to ensure social-related risks are addressed as the construction sector transitions. The #DignitybyDesign programme aims to create a pathway for building projects across Europe to embed social equity approaches in their decarbonisation plans, ensuring positive social outcomes for users, local communities and workers. The Laudes Foundation is an independent foundation that aims to help accelerate the transition to a climate-positive and inclusive global economy.

“The urgently-needed action on net-zero buildings will only gain broad-based support if it also addresses inequality and strengthens inclusion. This requires systemic change – overcoming barriers such as top-down decision-making, silos between actors, and financing and business models that drive a race to the bottom, while dramatically scaling responsible investment in the areas that need it the most,” said Annabel Short, Head of Built Environment at IHRB.

The challenge is different across regions, with developing countries often building more rapidly than developed ones, but with less access to low-carbon innovations.

There will also be opportunities for investors here, according to Elizabeth Chege, CEO of sustainable development consultancy firm WEB Limited Group and Chair of the African Regional Network, speaking at COP26. She noted that Africa has “yet to build 80% of the built environment that will exist by 2050”.

“We can either choose to build sustainably or end up with bad buildings,” Chege said.

Widening the scope

The industry and its investors need to place more emphasis on decarbonising building materials in order to reduce embodied emissions, says Bachmann.

“Progress here is too slow,” he emphasises. “In contrast, once the buildings are built, there is far more progress around improving the energy efficiency of buildings.”

Embodied emissions currently account for 10% of global emissions – a quarter of CO2 produced by the built environment. WorldGBC estimates that more than half of total emissions from all new global construction between 2020 and 2050 will be attributable to embodied carbon.

“We are targeting net zero across our Scope 1 and 2 emissions by 2024, but 90% of our emissions are Scope 3 and embodied carbon – which we are finding much harder to measure,” said Neil Martin, CEO of Lendlease Europe, a multinational construction, property and infrastructure company, speaking at COP26 alongside Chege.

The more quickly steel and cement companies decarbonise and shift to low-carbon processes, the more quickly the construction sector’s overall emissions will decrease.

Investors across these sectors should be “asking companies to provide transition plans”, urges Seligman. This will make it easier to hold companies accountable. Corporate targets can be verified by organisations such as the Science Based Targets initiative (SBTi), he adds. SBTi is currently developing sector-specific target-setting guidance for steel, cement and aluminium.

Last year, LafargeHolcim, the world’s largest cement manufacturer, committed to becoming the first global materials company to have decarbonisation targets approved by SBTi. The company set interim 2030 targets to reduce Scope 1 and 2 emissions by 21% per tonne of cementitious materials against a 2018 baseline, reaching net zero by 2050 at the latest.

Further, investors are engaging with steel and cement companies through the Climate Action 100+ initiative. As part of CA100+’s global sector strategies workstream, the Institutional Investors Group on Climate Change published a sector-specific decarbonisation strategy for steel companies, outlining credible transition plans, as well as interim actions and targets that will accelerate progress to net zero.

Some progress is being made. A number of steelmakers are working to electrify the production process, which would emit just 20% of current emission levels caused by blast furnaces. Initiatives such as the European HYBRIT project are developing green hydrogen-based technologies to produce fossil fuel-free steel.

Without further regulatory action, companies are reluctant to move away from carbon-intensive practices, as alternative technologies such as carbon capture, utilisation and storage and hydrogen are not yet globally scalable, says Ketan Patel, Fund Manager at EdenTree Investment Management. “This applies to companies across the whole value chain from house builders, construction and engineering. A carrot and stick approach will be needed to ensure greater compliance,” Patel adds.

But there are leaders in all sectors. For example, cement manufacturers such as Hoffmann Green Cement are actively reducing the amount of clinker used in cement production. Clinker is derived from limestone and responsible for 90% of cement’s CO2 emissions, says Patel. “This is one easy way for the cement sector to more towards a more sustainable pathway.”

Gresham House also invests in a UK-based company called Waste Knot, which condenses non-organic commercial and industrial waste into pellets that can be used to directly replace coal in the cement and steel industries.

Solutions and standards 

The construction sector cannot fully decarbonise without substitute low-carbon products, experts warn.

Sourcing low-carbon products to replace steel and cement remains challenging, said Martin. For now, Lendlease is currently finding it easier to implement solutions to reduce rather than eliminate emissions during the building process, such as substituting red diesel for hydrotreated vegetable oil.

“There are currently very limited sustainable product choices for the construction sector to use,” agrees Paul Pavia, Head of Development at MEPC, a specialist asset management and development platform and subsidiary of Federated Hermes.

“We would like to see investors with long-term horizons backing newer technologies and sustainable product solutions so they can be upscaled and more quickly used in building,” Pavia adds.

Sustainable alternatives are emerging and finding funding support.

Built by Nature – a grant-making fund and new network of industry and climate leaders – was recently founded by the Laudes Foundation and launched ahead of COP26. It is designed to accelerate mass timber construction as a viable climate solution. It will also target initiatives developing low-carbon steel and cement.

A recent report published by Economist Impact and sponsored by Osborne Clarke encouraged private investors to fund the development of building automation systems (BAS). This would equip buildings with sensors that scan and adjust system settings, ensuring a 20% increase in efficient heating and cooling and an 8% increase in efficient lighting. Building owners could save between US$1.8–3.1 trillion in lifetime operating costs, the report said.

Investment in BAS currently remains low, the report added, with US$377 million provided by 500 investors as of 2021. However, the potential of the technology could incentivise more investment.

“As BAS and building management systems become more sophisticated, they provide the ability for users of the technology to have tangible returns on investment, whether in terms of data use and reporting, or increased efficiencies in energy use and management,” said Conrad Davies, International Head of Urban Dynamics in the UK for Osborne Clarke.

To help the construction sector “more easily identify sustainably sourced and produced products”, initiatives such as the Australia-based ResponsibleSteel standard could be employed on a wider scale, says Seligman. It has also developed a multi-dimensional ESG standard, including medium- and long-term Paris-aligned emissions targets, which will help investors assess steelmakers on their overall ESG performance.

“It is critical that we actively develop and promote the technologies that can reduce the construction sector’s impact,” says Seligman.

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