The European Commission is calling for a 20-fold increase in renovation rates of existing buildings to help fuel a green economic recovery. Mike Scott looks at the critical role of banks and insurers in delivering its plan
It has long been evident that decarbonising the buildings sector should be a global priority. By most reckonings the built environment is responsible for around 40% of global emissions and represents one of the biggest opportunities to cut emissions along the value chain.
Until recently, however, progress has been limited and mostly focused on new buildings, where it is much easier to introduce more sustainable technologies and materials. “We have largely cracked the construction of new buildings, particularly commercial buildings. There is still work to be done on the specifications for new homes, but we’re moving in the right direction. The big challenge is retrofit,” says Ed Dixon, head of ESG at Aviva Real Assets. “Some 75% of buildings across Europe were built before any relevant EU legislation came into force.”
The focus on greening the building sector has increased hugely over the past year, he adds. One reason for this is the introduction of a raft of EU policies, including the “Fit for 55” plan to cut emissions by 55% from 1990 levels by 2030. “Fit for 55 is already having a big impact and the real central basis of legislation for buildings has not even come out yet – that will come at the end of the year,” says Brook Riley, head of EU affairs at building products group Rockwool.
The Energy Performance of Buildings Directive is due to be revised by the end of the year, introducing minimum energy performance standards for buildings to lease and rent. “Pretty much everything that can be done will have to be done to achieve these savings,” he adds.
But already the Fit for 55 package is making itself felt. While the EU has a mandate for member states to renovate 3% of public buildings a year, “it has always been symbolic at best, only including central government buildings, which meant that at best 0.45% of the building stock had to be upgraded,” Riley says. “Now city and regional authorities are included [in Fit for 55] and all public buildings, including municipal properties, schools and hospitals. That’s 9-12% of the building stock – a 20-fold increase,” Riley says.
In addition, the European Commission’s Renovation Wave Strategy calls for a doubling of renovation rates by the end of the decade and measures to ensure that these renovations actually make the buildings more efficient, “otherwise we fail on climate action and the green recovery,” he adds.
Improving Europe's built environment in the face of climate change is rising up the agenda for banks, ESG investors, and the property sector. Dr Raphael Mertens, chief risk officer at Allianz Real Estate, says. “Globally, there is an increased emphasis on the importance of future-proofing assets that incorporate high-standards in terms of ESG, digitalization, flexibility of use, connectivity and, features which can improve the health and well-being for the building’s users.”
For investors, the shift towards sustainable buildings means being diligent about selecting the responsive manager, developer and operator
And recent extreme weather events, from heatwaves in North America to devastating floods in Germany, India, Nigeria and elsewhere, have highlighted the damage that climate change will create for people and property around the world and the importance of future-proofing and resilience.
In Italy, Coima, a leading platform for the investment, development and management of real estate assets on behalf of institutional investors, recently announced plans for the €300m regeneration of Pirelli 39 in Milan, the first post-Covid redevelopment project in Italy and one that will be fully aligned with the NextGenerationEU ESG objectives, as well as WELL and LEED Platinum certified. This development will include a tower that will integrate 1,700 square metres of vegetation, capable of absorbing 14 tons of Co2 and producing 9 tons of oxygen per year, while 2,700 sq m of photovoltaic panels will provide 65% of the tower’s energy needs.
Manfredi Catella, CEO of Coima, said: “For investors, the shift towards sustainable buildings means being diligent about selecting the responsive manager, developer and operator. ... Truly responsible developers will closely follow the UN’s Sustainable Development Goals and will have robust sustainability goal-tracking systems in place for each development.”
Mertens of Allianz Real Estate agrees that large real estate investors have a significant part to play in reducing the sector’s carbon footprint. “By tackling the carbon footprint of one of the world’s largest real estate portfolios, we will play our part in reducing global emissions. Ultimately, all our investments must meet sustainability standards. In practical terms, we are targeting a reduction in carbon emissions from our global portfolio of 25% by 2025 and we aim to be net carbon zero by 2050.”
During the recent Responsible Business Summit Europe, Roelfien Kuijpers, global ESG client officer at global asset manager DWS, said investors should also lead by example. “As investors, there’s a lot that we can do in our capital allocation process, but there's also a lot to do ourselves as a company to be credible to our clients,” she said.
DWS is reducing its buildings-related CO2 emissions by significantly cutting its office space down to cover 60% of employees, and by occupying buildings that are certified to the LEED sustainability standard.
Insurance companies have a double role to play in this greening process, both as investors and in the fact that they provide cover for properties. “The insurance industry plays a critical and active role in supporting the global built environment in becoming more resilient to the impacts of climate change,” says Ekhosuehi Iyahen, secretary general of the Insurance Development Forum. “The sector’s operational requirement to integrate different risks into a system-wide view, assess the effects on specific communities and assets, and communicate the micro-and-macro level impacts are unique.”
Banks are increasingly looking to integrate green renovation financing in with ordinary mortgages
Insurers could also have a defining impact in pushing capital towards supporting a risk-informed net-zero transition, she says. “As things stand, however, such conversations are almost entirely absent from strategic plans, core policy programmes or financial market frameworks.”
Riley at Rockwool highlights the critical role banks are starting to play in the provision of green mortgages and other products. “There are €5tn-€7tn of outstanding mortgages in the eurozone. Banks are increasingly looking to integrate green renovation financing in with ordinary mortgages. In the Netherlands, if you can demonstrate that you have improved the energy rating of your house, you get a better rate of interest.”
ING, the Dutch bank that controls tens of thousands of commercial buildings through its mortgage lending, started offering better rates for more efficient buildings because greener buildings are worth more, so the greener its portfolio, the more it can lend.
In the UK, Nationwide is committed to selling more green mortgages, but it is struggling to get sufficient uptake. “People want to buy greener homes, but the delivery side is not there. And people just don’t know that the funding is available,” says Riley.
One problem, he says, is that “investors don’t really engage with the regulators responsible for green buildings. They focus on the people who deal with banking. They want to shift their money into greener buildings, but there’s not much of a constructive conversation about what they need to help them do that.”
There are signs this is changing, though. “Asset managers can help landlords to improve the fabric of their buildings and make the switch from gas to air source heat pumps. Often, they wait to make these kinds of changes until lease breaks, but these can be anything from five to 40 years away and the time for action is now,” says Dixon. “This is always seen as a cost, and something that is being imposed, but the sector needs to recast how it thinks about this. It’s an opportunity, not a burden.”
I’ve seen more engagement on this in the first seven months of 2021 than in my entire career
Examples of how Aviva has seized this opportunity include renewing the lease for a major retailer to be structured around decarbonisation; funding a rooftop solar installation for a logistics hub, and encouraging the occupiers of a London office block to join its demand reduction programme.
“We’re starting to look at this really commercially. It’s in our interests to be actively talking to occupiers and engaging them on these topics. We’re starting to design programmes to engage occupiers to capture these common benefits,” he adds. “This is good for our investors and good for occupiers.”
Moreover, occupiers have suddenly become much more interested. “I’ve seen more engagement on this in the first seven months of 2021 than in my entire career,” Dixon concludes. “The industry has fundamentally changed in the last 12 months.”
Mike Scott Mike Scott is a former Financial Times journalist who is now a freelance writer specialising in business and sustainability. He has written for The Guardian, the Daily Telegraph, The Times, Forbes, Fortune and Bloomberg.
GHG emissions retrofitting Sustainable buildings energy efficiency EU Energy Performance of Buildings Directive Fit for 55 NextGenerationEU SDGs LEED status green mortgages