The Finance Sector Can Accelerate The Transformation to a Net-Zero Built Environment, Here's How!

Real estate is the most valuable asset class worldwide, comprising two-thirds of global wealth. The construction industry accounts for over 13% of global GDP and 12% of employment. However, its substantial size is responsible for a staggering 40% of global energy-related carbon emissions, or 14 Gt per year. This is due to its significant share of global final energy use and consumption of 40% of raw materials worldwide. To achieve a net-zero carbon footprint in the built environment by 2050, annual investments of USD $1.7 trillion will be necessary, and this will create half a million additional direct jobs.

Real estate assets are a growing and valuable component of institutional investment portfolios. Meanwhile, policymakers and regulations, increasing public awareness, and changing demand drivers are compelling stakeholders in the finance sector to prioritize sustainability in their portfolios, which affects business in the short, medium, and long term. Combining these factors, the finance sector has a distinctive opportunity to shape demand and drive transformation in the built environment.

The journey towards achieving net-zero emissions in the built environment by 2050 is challenging. To reach this goal, all parties involved must strive to ensure that newly constructed buildings have net-zero operational emissions by 2030. Additionally, all buildings, including existing ones, must achieve net-zero emissions by 2050. Moreover, embodied carbon emissions resulting from material production and construction processes must be at least 40-50% lower by 2030 than they are today and ultimately reach net zero by 2050. Unfortunately, we are not currently on track to meet these targets.

To make substantial progress towards these goals, halving emissions by 2030 is the first essential step, and it must happen immediately. This is due to the long lead times inherent in building projects, which can range from 8 to 10 years. Therefore, companies that are currently planning and designing construction projects must already incorporate these targets for 2030 to stay on track.

To achieve the extensive transformation required at the necessary speed and scale, all stakeholders must share a common vision of reducing emissions by half by 2030 and reaching net-zero across the entire life cycle by 2050. Furthermore, they must collaborate profoundly and radically to make this vision a reality. This collaboration must occur among governments, the finance sector, businesses throughout the entire value chain, science, and civil society. The collaboration must focus on the following three critical levers for market transformation, according to WBCSD and GlobalABC (2021):

1. Whole-life carbon (WLC) and life-cycle thinking and concepts must be adopted across the value chain and market to align consistently on key indicators, metrics, and targets.

2. Carbon must be treated as a cost. The WLC emissions costs must be internalized and reflected in the price of products and services throughout the value chain, including in governance mechanisms, procurement, and taxonomy, from governments and the financial sector.

3. A positive and reinforcing supply and demand dynamic that incentivizes low-carbon solutions along the value chain must be fostered. Signals from government and finance are required, but most importantly, collaboration between industry players throughout the entire value chain.

The role of the finance sector

Stakeholders in the finance sector have a significant impact on the environmental effects of the built environment. They achieve this impact through loans and investments in built assets, as well as indirectly investing in value chain businesses. When mobilizing financial capital, they have the ability to establish requirements for low-carbon solutions in building projects and throughout the value chain. Investors, asset managers, banks, advisors, and insurers all have an influence on whether and how buildings are constructed. They play a critical role in the early stages of buildings, where decisions have a significant impact on their future emissions. This includes determining the energy performance of buildings and establishing requirements to reduce emissions from building materials and the construction process.

To understand how the finance sector can exert this influence, let's examine the factors that currently hinder our progress.

Challenges and opportunities

The challenges facing the transition to a net-zero built environment are numerous and complex. For example, there is a lack of genuine collaboration and understanding between the construction, real estate, and finance sectors, despite their deep interconnection and reliance on each other. Insufficient data availability, poor data quality, and limited transparency are impeding measurement, benchmarking, and target-setting processes for achieving net-zero emissions pathways. There is also a skills shortage in the built environment and finance sectors regarding understanding, writing, and effectively utilizing reporting and disclosure documents to drive investments towards net-zero emissions goals.

Additionally, financial services organizations have traditionally prioritized short-term financial returns over environmental, social, and governance (ESG) returns, which can be more challenging to assess.

However, within these challenges lie opportunities. Stakeholders can discover new ways of working together, and legally binding contracts, for instance, can assist in ensuring the proper incentives, procurement methods, and metrics are in place to support net-zero emissions goals for project delivery (see WBCSD's Decarbonizing construction – Guidance for investors and developers to reduce embodied carbon). 

Ensuring alignment with the increasing number of guidelines, standards, tools, and certifications for assessment and reporting is crucial for data availability, quality, and transparency. This includes projects like the World Green Building Council's BuildingLife initiative, the RICS professional statement on whole life carbon, and the Ashrae-International Code Council (ICC) Whole Life Carbon Approach Standard.

To ensure that sustainability-related disclosures and strategies are valued by both investors and built environment professionals, training and upskilling are necessary. This will integrate non-financial concerns with financial impact and make them part of the central decision-making process for investments. The Urban Land Institute (ULI) Europe's C Change project, which is currently addressing transition risk in valuation, is an example of progress in this area. Changing corporate culture will further ensure strong returns on investment while creating value beyond shareholders, managing risks of transitioning to net-zero emissions, and safeguarding people and the environment.

To achieve net-zero emissions, it is essential to understand these challenges and opportunities and adapt strategies and solutions accordingly.

No-regret actions for finance sector stakeholders

To reduce the full life-cycle emissions of built environment projects, there are four key interventions that stakeholders in the finance sector can take: Accountability, Ambition, Action, and Advocacy.

Stakeholders can achieve accountability by implementing standardized data measurement and transparent reporting. By setting credible, science-based net-zero emissions targets, they can raise their ambition. 

Taking action involves developing climate transition plans and prioritizing whole-life carbon in decarbonization strategies and decision-making processes. 

They can also work with the public sector and organizations such as WBCSD, BuildingToCOP Coalition, and Global Alliance for Buildings and Construction (GlobalABC) to advocate for policies and regulations that promote sustainable finance and level the playing field for the market. 

These no-regret actions are crucial for stakeholders in the finance sector to take in order to make progress towards reducing emissions in the built environment.

To achieve a successful transition, asset owners and investors must set clear portfolio- and asset-specific targets and timelines. They must also integrate critical climate and ESG factors into their requests for proposals, investment mandates, manager selection, and stewardship engagement with portfolio companies. Incorporating related risks (and opportunities) into valuations and ultimately, investment decisions is crucial.

For asset managers, the lack of consistent, comparable, and decision-useful information on climate impact is still a significant barrier to better implementation. However, growing demand and regulatory pressures are motivating every firm to overcome data challenges through proprietary work or third-party solutions. Standardized frameworks and local/regional taxonomies can provide the asset management industry with enhanced tools for assessment, benchmarking, and reporting. The WBCSD's report "Net-zero buildings - Where do we stand?" lays the foundation for a harmonized whole-life carbon assessment and reporting framework.

Finance providers can gain a better understanding of the emissions associated with the products they are financing by using appropriate data, tools, and standards, including the cost of carbon and transition risk considerations. The ability to accurately measure and standardize (whole life) carbon emissions could help them link their financial offerings to carbon targets and potentially provide lower costs for low-carbon projects. However, to achieve this, they need clear and transparent information to reliably assess the business case and build trust with the market.

Insurance providers must develop methodologies to assess and quantify different climate change scenarios and integrate both physical and transition risks into their decisions to enter or exit an underwriting.

Lastly, investment advisors and data providers can facilitate top-down learning by sharing and disseminating best practices and becoming significant players in the standardization and harmonization of data and target-setting. This includes initiatives such as the Carbon Risk Real Estate Monitor (CRREM), Science Based Targets initiative (SBTi), and GRESB.

What's next? Achieving a breakthrough in buildings

Achieving a significant reduction in global built environment emissions from 14 Gt per year to 7 Gt per year may seem like a challenging task. However, by prioritizing whole-life carbon emissions alongside cost, the finance sector can help accelerate this transition. There is evidence that construction emissions can be halved cost-effectively, and retrofitting building portfolios to net-zero emissions is also becoming more competitive.

The next step is for all stakeholders, including finance, national and local governments, and businesses along the value chain, to collaborate and co-develop roadmaps for a net-zero built environment. These roadmaps should include a clear vision, actions, and accountability and build on the levers for market transformation in the built environment. By taking a united approach and decisive action, stakeholders can overcome the fragmentation of efforts seen so far. The emerging Buildings Breakthrough initiative, with commitments from national governments to transform their built environment, provides a platform for collaboration to achieve a future where the built environment is a solution to tackle climate change.

The urgency is high, as 2030 is already upon us for the built environment. We cannot afford to wait any longer.


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