The sustainable investor for a changing world

To reach net zero, overhaul the built environment

Buildings account for over a third of global energy-related CO2 emissions. Focusing on reducing these – both operational and embodied emissions – represents a significant opportunity for investors over the next decade, as Nicolas Toupin explains.

Over their life cycle, buildings account for 37% of global energy-related carbon emissions.

The largest sources are 

  • Generating heat and electricity – 18% of global emissions
  • Manufacturing construction materials – 10%
  • Using fossil fuels in buildings – 9%. 

Without timely and ambitious action, this impact will grow further over the coming decades. By mid-century, 68% of the global population is expected to live in cities, where buildings account for 50-70% of emissions.

This drive towards urbanisation, together with population growth, means the global building floor area is expected to double by 2060 – with more than half that growth in the next two decades. Emerging markets in Africa, Asia and the Pacific will mainly drive demand.

According to the International Energy Agency, the buildings sector is not on track to achieve global net-zero emissions by 2050. The IEA warns that all new buildings and 20% of the existing stock must be ‘zero-carbon ready’ by 2030, while emissions by the sector need to fall by 6% annually between 2020 and 2030.

Currently, less than 1% of existing buildings qualify as net zero.

Exhibit 1: The building and construction sector’s share of global final energy use and CO2 emissions (2020)

Source: Taken from IEA 2021 and Global Alliance for Buildings and Construction

There have been some gains in energy efficiency and decarbonisation, but these have been offset mainly by rising energy demand in buildings, particularly for cooling equipment, appliances and connected devices.

Although progress has been made in decoupling energy consumption and floor area growth through the rollout of building energy codes and stricter energy performance standards, annual energy intensity cuts need to occur five times faster over the next decade to align the sector with global climate targets.

By 2030, the amount of energy consumed per square metre must be 45% below 2020 levels.  

Embodied emissions

Between 2020 and 2050, about half of all emissions from new buildings are expected to come from embodied sources, i.e. from materials and construction, with the other half from building operations. Consequently, decarbonising the value chain requires action from all stakeholders: policymakers, developers, designers, builders, owners, occupiers – and investors.

Embodied carbon emissions include all emissions from construction, renovation, deconstruction and demolition. In contrast to operational carbon emissions, which can be reduced over time through upgrades or switching to renewable energy sources, embodied emissions are effectively locked in once a building is designed and building work begins.

Reducing embodied emissions requires a rethink of construction processes based on the principles of reusing, reducing and sequestration. This includes the use of recycled or low-carbon materials for building structural elements, and materials that sequester carbon.

This may mean moving away from concrete and steel towards materials such as cross-laminated timber or new concrete mixes that absorb CO2.

Full sector decarbonisation also necessitates a stronger focus on refurbishment.

In the EU, up to 80% of buildings that will be in use by 2050 already exist. At the same time, about 97% of buildings in the bloc are currently not energy-efficient enough to be aligned with future emission reduction targets. To meet the goals of the Paris Agreement, the pace of renovations in the EU needs to increase from 1­-1.5% to 2-5% per year.

Operational emissions

Tackling the carbon footprint of building systems – i.e. lightning, heating, air conditioning or IT servers – offers a quick win due to their large emissions reduction potential and co-benefits including greater comfort for tenants.

These emissions can be addressed via two main avenues

  • Investing in low-carbon technologies
  • Developing digital devices. 

We believe investable decarbonisation technologies such as heat pumps, distributed renewable electricity and energy storage should be deployed together, rather than treated as individual items, to achieve greater emissions reductions.

Digital services can offer multiple benefits and enable energy consumption monitoring, greater engagement with tenants and optimised building management.

EU support for sector decarbonisation

To support the EU’s goal of cutting greenhouse gas emissions by 55% by 2030, the European Commission announced a renovation wave in 2020 to double the annual renovation rate of residential and non-residential buildings over the next decade. It wants emissions from buildings in the EU to fall by 60%, while final energy consumption and heating and cooling-related energy use is to be reduced by 14% and 18%, respectively.

The Commission also emphasised the role of renovations in reducing energy poverty, which affects millions of Europeans.

The renovation strategy focuses on the worst-performing buildings and aims to accelerate the rate of deep renovations (defined as refurbishments that cut energy consumption by at least 60%). These are currently applied to only 0.2% of the EU’s building stock each year.

Building sector decarbonisation is one of the main pillars of the EU’s REPowerEU strategy.

To reduce the bloc’s reliance on Russian energy imports, the Commission has proposed raising the Energy Efficiency Directive’s 2030 target from 9% to 13%. It also aims to accelerate the rollout of heat pumps by installing 10 million units over the next five years.  

In addition, the EU plans to mandate the installation of rooftop solar panels on new non-residential and residential buildings by 2027 and 2029, respectively.

What does this mean for investors?

We believe moving to zero-carbon buildings is one of the biggest investment opportunities of the next decade, and one that also offers multiple co-benefits to sustainable development and human health.

As we can see from the above, reducing emissions from the built environment is a critical component of the transition to net zero. Investors in construction and real estate should be questioning whether they are supporting zero-carbon new buildings or improving the performance of existing building stock.

Data on emissions footprints, energy use and the embodied carbon of materials will help establish this.

Ignoring these signals means exposure to regulatory and reputational risk and potential stranded assets as policies and societies move forward and occupiers look to energy efficient and climate-friendly buildings.

For views on investing in listed real estate, listen to Talking heads – An attractive, defensive investment: real estate debt ( 


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