The construction sector needs to become more agile to meet the challenges of energy transition when it comes to climate change, and one of the most prominent financial instruments supporting companies is sustainability-linked bonds, writes Ebru Özdemir.
Ebru Özdemir is chairperson of Limak Group, a conglomerate with interests including construction, energy, cement, technology and tourism.
The world is finally talking seriously about the energy transition challenge when it comes to fighting climate change. This is a hugely significant development made possible by years of campaigning and scientific research. But decarbonisation of our energy supply is not the only problem.
Indeed, one of the most acute challenges we face, which rarely makes the headlines, is tackling emissions from the construction industry.
A United Nations Environment Programme (UNEP) report published last month found that the construction and operation of buildings accounted for 36% of global energy demand and 37% of energy-related CO2 emissions in 2020.
This looks only set to rise further. Global construction is forecast to grow 6.6% in 2021 and by 42% by 2030. With this growth comes an increased risk of pollution and waste.
Arguably the most ambitious plan for climate action is the EU’s landmark €1.8tn Green Deal, which promises to “build a new growth strategy” to make Europe the first climate-neutral continent by 2050.
“By acting now,” European Commission President Ursula von der Leyen said in a statement, “we can build for our future by design and choose a better, a healthier, and a more prosperous way.”
This presents a critical opportunity for the construction industry to address its current practices and carbon footprint urgently.
So what are the main challenges?
By far, the largest source of greenhouse gas emissions in construction comes from operating and use of buildings rather than their construction, with McKinsey estimating this contributes up to 69% of total emissions along the construction value chain.
Studies have shown that more than 50% of carbon emissions can be reduced in existing commercial buildings through upgrades to factors such as lighting and heating/cooling systems. And with roughly 80% of the predicted building stock for 2050 already built, the importance of improving the efficiency of our current buildings cannot be underestimated.
Sustainable building practices are growing, but not fast enough. According to the UNEP, there was a 13.9% increase in green building certifications and energy efficiency investments went up by 11% in 2020. However, the same report concluded that this is not sufficient to reach the goals of the Paris Agreement.
The level of investment needed to decarbonise our built environment is vast. New sustainable buildings are predicted to represent a $24.7 trillion investment opportunity by 2030 just in emerging markets.
At the same time, we need to accelerate the use of renewable energy, sourcing materials from sustainable suppliers and improving the durability of the materials.
In short, there is a lot to be done, and considerable effort from both lawmakers and the industry is required. In this context, the EU Green Deal is perfectly placed to bring about the necessary shifts in Europe and beyond.
Plans to implement legislation to target emissions and improve the efficiency of buildings will put the necessary pressure on the sector to tackle its most significant source of greenhouse gas emissions.
The deal’s push for a circular economy will undoubtedly encourage increased use of recycled materials and improvements to energy efficiency in building design.
It will also create a landscape where attracting finance and working with other European partners is dependent on demonstrating higher standards when it comes to sustainability and addressing climate risks.
The construction sector needs to become more agile to meet these changes, and there are already opportunities for financing to encourage adaptation. One of the most prominent financial instruments supporting companies is sustainability-linked bonds.
In October 2021, the EU issued its own inaugural green bond, raising a total of €12 billion to be used exclusively to fund sustainable investments across the EU.
Part of this must be used to support the radical changes needed in the construction sector. Much attention has been paid to how fossil fuels contribute to the climate crisis, but it’s time more scrutiny was put towards construction.
The previously cited UN report states that to reach net-zero by 2050, building emissions must be halved by 2030. If we are to have a future, not just as a global citizen but as a sector, we must act quickly to reduce emissions to a level that aligns with the Paris Agreement. Only a concerted effort from the policymakers, investors and the industry can create the necessary change in time.
The EU Green Deal presents a critical opportunity to kickstart this process for the construction sector. We can’t just build for the future. We have to build for now.