With the global construction industry accounting for almost 40% of total energy-related greenhouse gas emissions, tackling climate change clearly needs to start at home. That presents big opportunities for companies supplying products and services that make the built environment more energy efficient.
According to the World Economic Forum, operating buildings (keeping them warm, lit and otherwise habitable) generates about 30% of global energy-related emissions, with construction (including producing the steel and other materials they require) adding another 10%. The construction industry also consumes about 40% of the world’s extracted raw materials.
Absent solutions that address the environmental impact of buildings, population growth and urbanization mean the problem is only going to get worse. Worldwide, structures equivalent to the size of Paris are going up every week – which begs the question of how we’re going to meet the Paris Agreement’s climate goals.
Energy-security concerns in light of the Russia-Ukraine conflict have added fresh urgency to the need to become smarter about how we use finite energy resources in homes, offices and factories.
Investors will sense an opportunity. Solving the built environment’s energy-consumption problem requires massive spending over many years, which will drive growth and profits for select companies – upgrading just the UK’s housing stock in line with the national net-zero-by-2050 target will cost £525bn, according to the Construction Leadership Council. However, the tricky bit for investors is figuring out where to put their money.
One way to identify the potential beneficiaries of the green-building revolution is to “follow the carbon” – i.e., measure the greenhouse gases generated across the entire construction lifecycle, and calculate the extent to which a company’s products or services reduce emissions relative to the traditional method of doing things.
The businesses this analysis flags as helping to reduce the carbon footprint of the built environment are extremely diverse – including some that seem a long way from workers in hard hats and safety boots. For example, the employees at California-based Autodesk predominantly write computer programs. We calculate their construction-modeling software prevents millions of tons of carbon being put into the atmosphere every year.
As anyone who has carried out work on their own home will know, the construction sector can be frustratingly inefficient. That’s partly because it has been slow to adopt the digital tools that have improved the efficiency of other manufacturing and industrial processes. In fact, construction ranks almost last in McKinsey’s Industry Digitization Index, between hospitality and agriculture and hunting.
Digital modeling software – like that produced by Autodesk – is increasingly being used to calculate the operational cost and environmental impact of buildings in a way that has not been possible until recently, even before the builders break ground. Building information modeling allows architects to optimize a building prior to construction and, by creating a “digital twin” of the structure, the same technology can significantly reduce carbon emissions throughout its lifecycle.
Digital solutions have the potential to generate huge efficiency and energy-management gains in buildings, and therefore demand for them is likely to increase as efforts to tackle climate change accelerate. Businesses in other sectors will benefit from similar tailwinds, including those that offer more efficient technologies for heating, cooling and lighting our homes and places of work – both those we occupy currently and those yet to be built.
A recent article by McKinsey underscored the extent of the opportunity and necessity to retrofit existing assets, highlighting that roughly 80% of the predicted building stock for 2050 is already in existence. A great company example is Trane Technologies, a leader in Heating and Ventilation (HVAC). Trane has set itself the challenge of reducing its customers’ carbon footprints by 1 gigaton of CO2e by 2030, much of which will be achieved through replacement and upgrades to less efficient systems.
But while the “carbon-avoided” methodology is a useful starting point for investors looking to align a portfolio with the growth being fueled by the decarbonization of construction, investors need to be careful. Transitioning to a low-carbon economy is going to be extremely disruptive, which will be a significant risk for companies. Therefore, while looking for businesses that supply products and services that avoid emissions, it is important to focus on business leaders with the ability to outperform their competitors within the industry.
With that caveat, following the carbon can be a useful way to identify companies across industries that may benefit from the needed green building boom. If the world is going to get anywhere close to its emissions-reduction targets, it can’t come soon enough.
