The buildings and construction sector encompasses everything from our homes and workplaces to roads and bridges to the industrial facilities or manufacturing plants that power and supply our world. It is an integral and essential part of modern life and a key pillar of the economy – but one of the world’s largest emitters of greenhouse gases (GHG). To mitigate its environmental impacts, the buildings and construction sector needs to overcome challenges related to both operational and embodied carbon, says Melanie Beyeler, Senior Portfolio Manager at New Capital.
Accounting for 30% of total energy demands, primarily due to operational needs such as heating and cooling, the buildings and construction sector is a major energy consumer. It is estimated that it is responsible for 21% of global GHG emissions.
Without significant changes to the way buildings are managed, operated and constructed, emissions from the built environment could increase by between 10% and 15% by 2030.
Existing buildings: Importance of retrofits
Given that buildings have a typical lifespan of between 30 and 130 years, around 80% of the building stock that will exist when we reach 2050 has already been constructed. This highlights the critical need to retrofit existing buildings to improve their environmental footprint. However, the current retrofit rate is only about 1% per year, with buildings upgrades typically resulting in a reduction in energy intensity of less than 15%.
To achieve alignment with the goals of the Paris Agreement, retrofit rates would need to rise to between 2.5% and 5% annually by 2030. Moreover, these retrofits have to be extensive, encompassing insulation and glazing upgrades, as well as enhancements to heating and cooling systems. In addition, they need to incorporate passive and nature-based solutions to reduce service demands.
New buildings: Importance of building codes
Since 2010, the total global area of constructed buildings has expanded by around one third to just over 250 billion square meters, of which nearly 80% is residential. This increase in building floorspace is driving up the energy demand for buildings themselves and also for construction materials. Despite this, energy intensity per square meter improved by 3.5% from 2021 to 2022 due to stricter building codes and the enhanced performance of construction materials, particularly in colder climates.
Globally, there is considerable variation in building policy landscapes, with many countries still lacking comprehensive strategies to foster sustainability and improve energy performance in the building sector. However, an increasing number of countries are implementing stricter regulations around building energy use and CO2 emissions, aligning with international goals to limit the increase in global temperatures to 1.5°C compared to pre-industrial levels.
Operational carbon: Decarbonizing with heat pumps
Heating systems are responsible for around 50% of the emissions from buildings, with most systems still powered by fossil fuels. Heat pumps are one solution with the potential to deliver significant improvements, potentially cutting CO2 emissions from buildings by half. Suitable for a wide range of climates, heat pumps can be designed to provide both heating and cooling, or just heating.
Unlike traditional heating systems that are unable to reach 100% efficiency due to the production of thermal energy, heat pumps capture existing heat from the air, ground or water and transfer this “free” heat to buildings in order to heat the spaces within them or to heat water.
To align with the goal of reaching net zero emissions by 2050, the global stock of heat pumps would need to almost triple by 2030 in order to meet at least 20% of worldwide heating requirements. While manufacturing capacity is expected to grow in the coming years, the exact rate of expansion remains uncertain, as announcements for such projects are rarely made public.
Significant challenges remain regarding the broader adoption of heat pumps. There is a critical need for enhanced policy support and technological innovation, especially in reducing upfront costs, addressing market barriers that stand in the way of renovations to existing buildings and developing products and systems that use refrigerants with lower environmental impacts.
Embodied carbon: Decarbonizing building materials
Until now, the construction sector has primarily focused on reducing “operational carbon” that includes emissions from heating, cooling and lighting systems in buildings.
However, efforts to lower “embodied” carbon emissions − i.e. those stemming from the design, production and deployment of building materials like cement, steel and aluminium − have lagged far behind.
In 2020, emissions from embodied carbon accounted for 16% of all global CO2 emissions. Within the construction value chain, the sourcing and manufacturing of materials represent 92% of these embodied carbon emissions.
Conclusion
Investors can gain exposure to the ongoing transition in the buildings and construction sector in a number of ways.
Companies benefiting from the decarbonization of operational carbon include those involved in designing, developing, servicing, manufacturing, or installing efficient HVAC solutions, building automation systems, and other energy-saving smart technologies like energy-efficient heat pumps, smart meters, and smart water heaters.
Those with the potential to decarbonize embodied carbon are companies providing solutions such as energy-efficient glass, bricks, thermal insulation, façade and roofing elements, waterproofing materials, and other energy-efficient building materials.
For example, suppliers of building efficiency solutions help their customers reduce power requirements for cooling and enhance the thermal performance of buildings. Specialist distributors and service providers in heating, ventilation, air conditioning, and refrigeration (HVAC-R) sectors could stand to benefit from potential growth in refrigeration and air conditioning (AC) markets.
Decarbonizing cement and concrete will require increased use of admixtures to lower clinker content in concrete and support concrete recycling. Consequently, construction chemical manufacturers are expected to benefit from this transition.
In conclusion, for the buildings and construction sector to meet global climate targets, it must accelerate its efforts to reduce operational carbon as well as tackling the issue of embodied carbon, ultimately paving the way for a more resilient and sustainable built environment.
By Melanie Beyeler, Senior Portfolio Manager at New Capital
