Andreas Winter-Extra, Partner at Kompas, explains how private finance can play a pivotal role in the built environment’s transition to net zero.
Against the backdrop of record-breaking global temperatures, COP28 served as a pivotal moment for public and private sectors to come together and collaborate on ways to accelerate the built environment’s transition towards net zero. The rapid adoption of proven approaches and emerging technologies is a strategy for mitigating the built environment’s global emissions. While the need for more regulation is evident, success also hinges on creating an environment that incentivises private investment into innovative technological solutions.
It’s not a simple transition
Private capital funding into the climate sector totalled US$638 billion in 2023 with investments spanning a range of solutions reflecting the complexity of the industry. However, investing in the energy transition is not as simple as just making the switch to renewable resources. It is a long road, which involves a gradual phase-in and phase-out process, whilst also addressing the need to reduce energy demand from major carbon emitters like the built environment.
The built environment is responsible for 37% of global greenhouse gas emissions and we are seeing a whole range of innovation in the sector, from low-carbon cement solutions where companies like Material Evolution are leading the way, to smart glass technology from companies like Tynt. However, the question remains how to deploy these technologies at scale, with pace and efficiency.
Context is key
The diversification of innovative solutions is essential, but we must bear in mind that context is important. What works in one country may not work in another due to differences in infrastructure and specific needs. A nation’s capital should be deployed in a manner that aligns with a country’s unique circumstances.
Identifying the significant contributors and main levers for decarbonisation will require a comprehensive whole-life assessment of the built environment in each country/region, enabling targeted regulation and an incentive structure that guides investors and inhabitants to make the right decisions.
While the general levers for decarbonisation for new and existing buildings are roughly the same across the globe, their respective importance differs widely.
Europe, for example, has a large existing building stock, which means that the main levers will be the reduction of operational carbon through the electrification of heating sources, demand optimisation, insulation, as well as the life-extension of buildings. Tearing down existing buildings and replacing them with more efficient ones makes sense in very limited circumstances.
Regions with more building activity and fast-growing populations, on the other hand, will see a more significant impact from reducing the carbon impact of building materials – as well as good insulation and ventilation.
However, the transition to these materials won’t be plain sailing. The UN Environment Progamme’s recent report, ‘Building Materials and the Climate: Constructing a New Future’, highlighted the potential of many existing low-carbon earth- and bio-based building materials that facilitate sustainable construction. Yet cultural reservations or preferences for ‘modern’ materials such as steel and concrete may hinder their adoption.
How to incentivise private capital investment?
To navigate the complexities of climate action effectively, a realistic and logical approach is essential. This involves a comprehensive understanding of the evolving relationship between policymakers and industry players.
Industry investors play a pivotal role, not just in deploying capital but also in demonstrating that tech solutions are market-ready. They must encourage policymakers to drive demand through public procurement, clean energy import targets, and clear regulatory roadmaps to initiate change from the heaviest emitting sectors. Additionally, they must leverage their influence to urge policymakers to create the necessary regulatory framework to address heavy-emitting sectors like the built environment.
Firstly, regulation must provide a clear framework for the path to a decarbonised built environment and level the playing field within the industry. Established players, innovators and the finance community need clarity when making decisions. Implementing binding regulations will empower leaders to innovate and encourage laggards to speed up.
Currently, many climate agreements and guidelines are voluntary and ‘nice-to-have’, leaving companies apprehensive about adopting climate-friendly products and practices if their competitors fail to follow suit, fearing a competitive disadvantage due to higher costs. An excellent example of the impact of regulatory guidelines is the automotive industry, where the phase-out of internal combustion engines was mandated by law, enforcing an entire industry to change course and allowing companies to invest heavily into new technologies without this fear.
Secondly, existing regulatory guidelines need to be reviewed and revised where they hinder progress and innovation. Often, low-carbon building materials are being held back by building codes that do not reflect what is already possible and the progress that has already been made.
Finally, financial incentives need to be in place to support the development of more climate-friendly materials and technologies. This will help drive the adoption of emerging technologies through schemes that ensure technological risk and reduce higher up-front costs.
The need for collaboration
Long-term commitments, including net-zero goals, are vital, but making these commitments attractive hinges on the private sector’s role in driving demand ahead of regulation. We need to work together to create an environment that incentivises investors to put their cash into climate-tech companies and connect start-ups with corporates on the look-out for market-ready technologies, creating an ecosystem that fosters the development and adoption of more sustainable solutions.
Beyond COP28, we hope to see a spotlight on the importance of engaging more private finance players in discussions, recognising their critical role in accelerating tangible climate solutions.