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Green buildings need state support

11 June 2021

Why the global transition to net zero can’t succeed without government incentives and regulations.

Stroll through a residential neighbourhood in any large Australian city and you will probably notice row after row of rooftops lined with energy-absorbing solar tiles and slates.

Thanks to tough government regulations and generous financial incentives, solar energy production in Australia has grown into a $7.6bn industry, with nearly 2.8m solar-panel systems powering one in five homes as of the end of March this year.

But despite more countries pledging to achieve net-zero carbon emissions over the coming decades, few will emulate Australia’s success unless governments act more decisively, according to Zsolt Kohalmi, Global Head of Real Estate and Co-CEO, Pictet Alternative Advisors.

“The real-estate industry can benefit from a proactive regulatory environment and the right incentives,” he said.

Given the scale of global retrofitting required to meet carbon-emissions targets, governments need to play an increasingly active role, including more ambitious financial schemes and support to speed the transition.

Barriers to investment

Buildings account for 36 per cent of global energy use and 39 per cent of energy-related CO2 emissions, according to the International Energy Agency (IEA), making the built environment a critical contributor to climate change.

Yet investment in making them more energy efficient fell by an estimated 15 per cent last year as the Covid-19 pandemic ripped through the global economy, said the IEA in a 2020 report. “Investment needs to accelerate significantly if the world is to meet its sustainable development goals,” it concluded.

One barrier to further investment is the thicket of global, regional and national green-building certifications around the world. Investor-led sustainability ratings add an additional layer of complexity, creating a confusing and disjointed landscape. As real-estate consultant Knight Frank put it: “Key challenges for cross-border real estate investors are knowing how to match and compare criteria across different standards and deciding which matter.”

Setting standards

One government getting it mostly right is Singapore. It set green building standards as early as 2006, first targeting new buildings and then existing ones.

According to the government’s Building and Construction Authority, 43 per cent of all buildings by floor area already meet these environmental standards; the goal is to reach 80 per cent by 2030.

Progress is also being made in Europe, with countries such as the Netherlands bringing in more stringent energy-performance-certificate (EPC) ratings for all office buildings from 2023. The regulations will require them to meet a minimum “C” rating or risk sanctions.

Retrofit challenge

Over the coming years, millions of existing residential homes and offices around the world will need to be retrofitted.

In the UK, for example, as much as 80 per cent of the country's 2m commercial buildings and 29m residential homes will need to have their windows, insulation and heating and water systems upgraded to meet the country's net-zero targets.

In the US, President Joe Biden recently announced a $2.25tn infrastructure plan, including $213bn to “produce, preserve and retrofit more than two million affordable and sustainable places to live.”

In October, European Union (EU) authorities published its Renovation Wave Strategy designed to set standards and guidelines for retrofitting 35m buildings throughout the bloc by 2030.

The plan, part of the EU’s wider European Green Deal, aims to introduce stronger regulations, standards and information on the energy performance of buildings.

It also intends to establish stronger incentives for public and private sector renovations, including the phasing in of mandatory minimum energy performance standards for existing buildings, updated rules for EPCs and possibly extending renovation requirements.

We want everyone in Europe to have a home they can light, heat or cool without breaking the bank or breaking the planet.

“We want everyone in Europe to have a home they can light, heat or cool without breaking the bank or breaking the planet,” said Frans Timmermans, Executive Vice-President for the European Green Deal. “The Renovation Wave will improve the places where we work, live and study, while reducing our impact on the environment.”

Investor pressure

Analysts have been quick to point out the immensity of the challenge.

“When you think Europe-wide, we're dealing with different climates across the region, different construction practices, different regulations,” said Ben Smith, climate-change director at engineering, architectural and design group Arup.

A technical solution that is right in one building type or sector in one region may not be the right solution elsewhere.

There has been mounting pressure for “greener” buildings from market participants since the start of the pandemic. Commercial tenants are focusing increasingly on the ESG footprint of the buildings they occupy and on showing their shareholders that they care; they are thus making improvements to reduce their carbon footprint.

At the same time, institutional investors in real estate are increasingly looking to show their stakeholders that they are making long-term sustainable investments by buying greener buildings.

Pictet’s Kohalmi argues that the pressure to create greener buildings may need to come from all participants to ensure success. “To really make a meaningful reduction in the built environment’s carbon footprint, all stakeholders — tenants, investors and regulators — have to work together successfully.”

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