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Forward thinking | Article - 2 Min

Buildings are becoming more efficient – but not quickly enough

2 Authors - Forward thinking
24/10/2023 · 2 Min

‘Smart buildings’ software can help enable progress towards alignment with net-zero targets.  

This article has been written by Fotis Chatzimichalakis and Luciano Lilloy of Impax Asset Management. Impax is a specialist asset manager, investing in the opportunities arising from the transition to a more sustainable economy. Impax is a delegated manager of BNP Paribas funds.

Buildings generate 40% of global CO2 emissions and consume over 30% of all energy. Making offices and homes more energy efficient is therefore key to achieving climate targets, especially as the built environment continues to expand.

Headway has been made: Between 2010 and 2022, the average energy intensity of buildings globally fell by 14%. Regulation has helped drive progress as energy efficiency rules apply to a rising proportion of commercial and residential real estate. New buildings are built to higher efficiency standards mandated by governments and tenants.

Improve energy efficiency faster

For the world’s buildings to align with net-zero scenarios, however, energy efficiency improvements need to accelerate. Retrofitting existing buildings – which consume nearly 55% of global electricity and will often remain in use for decades to come – with new technologies will be pivotal to progress. For example, the US Environmental Protection Agency estimates that buildings in the US waste about 30% of the energy they pull from the grid.  

The likes of lighting and heating, ventilation and air conditioning (HVAC) systems are only replaced every 15-plus years, but newer systems can drive significant CO2 emissions reductions – and cost savings – especially in regions with very cold or hot climates.

Exhibit provided by Impax. Source: IEA, 2023: Global floor area and buildings energy intensity in the Net Zero Scenario, 2010-2030

Solutions include ‘Smart building’ software and AI

‘Smart’ building’ software solutions can help optimise these systems by using timely data on energy consumption and trends that enable building owners to monitor and reduce usage. In some cases, sensors track usage more accurately across multiple systems and artificial intelligence-enabled software can help identify patterns and areas of waste, allowing property managers to identify opportunities for saving energy.

LED lights, each of which are uniquely trackable, provide one example of how buildings can be made ‘smarter’. When connected to the cloud, LED lights – which are themselves more efficient than alternatives – can be managed to minimise energy consumption. With half of lighting in the US still using old technology, it is estimated that switching it to LED systems could generate annual savings of USD 28 billion.

For landlords and tenants, smart systems could deliver significant financial savings and help insulate them from volatile energy prices. Indeed, the renovation revolution is well underway: in 2022, property owners and managers spent roughly USD 73 billion on smart building software and services worldwide, and that market is projected to grow by nearly 16% a year to more than USD 303 billion by 2032.   

The scale of opportunity is therefore clear for companies that can help unlock the potential for vast efficiency gains, and better align the buildings sector with global net-zero targets.

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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