As the year comes to a close, we took a moment to reflect on the key trends we saw in the green building market in 2022.
The last two years have been challenging for the construction and real estate sector, between the COVID-19 pandemic, the rise in energy prices and supply chain challenges. However, efforts to decarbonise the sector continue to push forward. Governments are increasingly understanding the vital role the built environment will play in reaching net zero carbon emissions by 2050 and financial institutions are channeling more money into the sector, whilst more companies than ever are strategizing their own path to net zero.
The year ahead won’t be easy, there is no doubt about that, as we will continue to face difficult global market conditions. But we remain optimistic. Green buildings make business sense and we have no doubt that with the right market drivers, we can transform the built environment and make sure every building on this planet is green.
Regulation for buildings increases
The policy sector saw some positive signs towards decarbonisation of the built environment. 80% of countries now refer to buildings as part of their Nationally Determined Contributions action plans, compared to around 69% in 2020. As of September 2022, 40% of countries have mandatory or voluntary regulations or codes for building energy performance. During COP27 in November we saw the launch of various initiatives which sought to support and strengthen policy action to facilitate transformation of the built environment. Two highlights include the Summary for Urban Policy Makers, which gave actionable policy guides for city and urban policymakers to decarbonize and build resilience of urban environments, as well as the UN High-Level Climate Champions 2030 Breakthrough Outcome for the built environment, which includes a series of near-term way-point actions needed across all levers for systems change from supply to demand to policy implementation.
Growth in green spending
Global green financing grew this year but it is still not at the levels needed for the pace of decarbonisation we need to meet net zero by 2050. The global green finance market increased more than a hundred-fold in valuation over the last decade, reaching a value of more than $540 billion. Green bonds now account for the largest share of the market, with China and the US leading the way at 13.6% and 11.6% of the market share respectively. That being said, a report estimated that investments as high as $270 trillion may be needed for the planet to meet a climate target of net-zero emissions by 2050 indicating we are still well behind our targets. When it comes to accessing climate finance, many of our clients used EDGE certification to unlock capital. We discussed how developers can access green finance within the Hong Kong market in our webinar with SGS and Standard Chartered. We also explored increasing the bankability of infrastructure projects in regards to the African continent in our webinar with IFC, the Bank of Africa and Standard Chartered.
Retrofit challenges require more action
Retrofit continues to challenge the UK residential market, as actions seem to fall behind commitments. In the UK, to meet its climate targets, there is a regulatory push to retrofit all homes to EPC band C standard by 2035. But only 29% of homes today meet this standard. The UK is only installing 6 % of the heat pumps needed by 2028, less than 3% of loft insulation and less than 2% of solid wall insulation. In March the much-criticised Green Homes Grant (GHG) for homeowners in the UK was scrapped, and many existing schemes are aimed at social housing and lower-income households meaning that the UK has a long way to go to transform its existing buildings. With approximately 80% of UK homes still to be in use by 2050, as we look to the year ahead, there must be a clear focus on facilitating the retrofit of the UK residential market.
Energy prices bring energy efficiency to the forefront
We saw a crisis unfold across Europe as energy prices soared due to Russia’s invasion of Ukraine, increased energy demand from the pandemic, natural gas and coal prices reaching record highs due to global competition, and extreme weather conditions causing supply issues. In the UK, prices rose consistently with the biggest jump in April which led to a 54% increase. These price rises extended beyond just Europe, the US saw a electricity-price rise of 15.8% its highest since August 1981. Some parts of Asia and the pacific too saw their own issues. Fuel prices in Indonesia rose 30% in September due to the local government removing subsidies in response to rising inflation rates. This crisis placed a huge amount of pressure on governments, energy companies and householders alike and put energy top of mind, causing many companies to really look at their energy bills, consider energy efficiency measures and look at alternatives such as renewables. In our recent blog post we unpacked further how the crisis highlighted the importance of energy efficiency.
Fears of Global Recession
Inflation skyrocketed across the globe this year, leading to complications the construction sector. The UK annual inflation rate jumped to 11.1% in October 2022, the highest inflation rate since 1981. Resultantly the UK is expected to be in recession for just over a year. Similar inflation rates are seen globally with an average 10.1% increase seen in the EU and a 7.7% rise in the US. But what does this mean for the construction sector? Following the 2008 recession construction companies saw a decrease in revenue by 54%. Already, builders have reported that their customers are putting new work on hold due to the bleak economic forecast. The cost of building materials hiked 24% in the past 12 months in the UK. Asia too saw inflationary pressures and materials shortages that caused slowdown across construction markets. Labour shortages and supply chain disruption also contributed issues within the infrastructure and real estate sectors. This coupled with global higher cost of living, will likely lead to a reduced output from the construction sector as we look to the year ahead.
The persisting impact of COVID-19
This year we were still very much dealing with the impacts of COVID-19. As people adopted a work-from-home approach and changed their shopping habits, the demand for commercial properties reduced significantly. Although the workforce has returned back to the office many adopt a hybrid working model and resultantly office sales still have not reached pre-pandemic levels and occupancy rates remain low. PwC estimates that 10-20% of the office real estate stock may need to be removed or repurposed. As many adopt this hybrid work models, the role of the office has transformed from not just a workspace but for a space for collaboration and a social space. Future office developments must address these requirements. This was reflected in our clients’ projects. The recently EDGE Zero Carbon certified Tata Realty office portfolio is a good example of how buildings can be designed not only to be energy and resource efficient but also to promote a healthy workplace environment.
Need for nature
There has been a global recognition of the importance of green spaces within the built environment this year. A study published by The Lancet Planetary Health estimates that 43,000 deaths per year are caused by a lack of green spaces, with other studies recognising the presence of plants and greenery as an important element in reducing stress and improving mental health. This year the Taskforce on Nature-related Financial Disclosures (TNFD) launched as a global, market-led initiative established in response to the growing call to factor nature-related risks into financial and business decisions. At COP27, there was also strong recognition for nature-based solutions in efforts to address climate change, ecosystem degradation and biodiversity loss. While this is still a relatively new area, momentum is gathering behind nature-based solutions.
Net zero buildings gaining traction
Net zero buildings are becoming increasingly at the forefront of conversations surrounding decarbonisation targets. The World Green Building Council’s Net Zero Carbon Building Commitment now how has a total of 169 signatories, which includes 135 businesses and organisations, 28 cities, and six states and regions. However, implementation is still not happening at the pace required to reach these targets. The recent UNEP Global Status Report for Buildings and Construction report revealed the building and construction sector is not on track to reach net zero carbon emissions by 2050. We delved into the reasons why net zero buildings are still slow in their development at a panel discussion at this year’s Reset Connect as part of London Climate Action Week. On a company level, we saw some progress towards increasing net zero buildings, with our client Lidl Hellas achieving EDGE Zero Carbon for one of its flagship stores and our client Tata Realty achieving the first EDGE Zero Carbon Projects in India for two of its office buildings.
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