The environmental bill for our built infrastructure Joseph Friedland, Investment Analyst
Urbanisation has long been one of the most significant global trends, economically and socially. With that shift set to continue, there is now more recognition than ever that construction in major conurbations around the world comes with an environmental cost as well as a financial one. Technological advances in materials and systems as well as changes in planning regulations have helped to reduce environmental cost associated with construction. As regulations and standards continue to tighten, those advances must continue. The day-to-day environmental cost of our already-built cities must also be addressed. Here too, regulations and societal pressures will demand mitigating actions, with building owners turning to new technologies in refurbishment and monitoring.
- Building construction and the operation of building systems accounts for more than 35% of global energy demand1.
- Population growth and the modernisation of the developing world’s building stock are expected to cause building-related energy consumption to grow by nearly 50% by 20502.
- The anticipated increase in renewable energy’s share of global generating capacity will not be sufficient to offset this growth in absolute demand. Increasing the energy efficiency of buildings is critical to achieving net zero by 2050.
The environmental impact of any building starts with construction, but certainly doesn’t end at that stage. Addressing the ongoing environmental impact of our built world is vital in the fight against climate change. The largest contributors to lifetime energy demand in both residential and commercial buildings are heating, cooling, ventilation, lighting, and embodied energy (that used in the production and transportation of building materials).
Global Energy Consumption by Sector
The good news is that a myriad of technologies that address these sources of demand exist today, and new technologies come to market each year. These will not only help in the fight against climate change, but may also provide investors with new opportunities.
In an effort to tackle heating, ventilation and air conditioning (HVAC) and embodied energy demand, there has been significant investment in ‘green’ building materials. Since 2016, demand for high-efficiency insulation and paneling has grown by 25%3, and the market for advanced windows has grown by over 50%4.
To date, the high cost of these materials has kept adoption low. In the US, for example, less than 10% of residential buildings5 and 50% of commercial buildings6 utilise high-efficiency materials. However, a market for low-embodied-energy building materials is beginning to take shape. Materials and chemical companies have developed several alternatives to high-carbon construction materials, such as cement, steel, and plastic cladding. It is a small market today as most products are only suitable for limited applications but it is growing rapidly.
Building Delivered Energy Consumption by Region
Technological advancements and falling prices will allow for wider use of green building materials. Evident demand and the increasing applications for these materials should bring noteworthy growth opportunities for building material manufacturers like Kingspan, and speciality chemical companies such as Sika, both of which have already established themselves in this burgeoning market.
Kingspan is the global leader in high-performance insulation panels and boards for buildings. The company has developed a proprietary portfolio of products, which helps customers reduce their buildings’ energy costs. Insulation enables owners to keep buildings warmer in the winter and cooler in the summer by controlling heat flow, thus reducing the energy costs and carbon emissions generated by a building’s operations.
Sika Group is a speciality chemicals company with leading positions in the development and production of systems and products for bonding, sealing, damping, reinforcing and protection used in construction. The company’s growth strategy rests not only on urbanisation but also the need for more energy-efficient, and sustainable, materials and systems. In addition to its targets for the reduction of scope 1 and 2 emissions, to meet net zero by 2050, in addressing scope 3 emissions, Sika now targets 70% of its products having a positive sustainable benefit.
The collective benefit of ‘micro’ gains
Where there is significant scope for improvement in ‘macro’ building materials like cement as well as in building infrastructure, such as air conditioning, there are also exciting developments in the ‘micro’ aspects of a functioning building. The success of LED lights, as just one example, provides a blueprint for how a niche green technology can grow into a market leader. When introduced in the early 2000s, LED bulbs were a sub-scale technology. Over time, however, a combination of government subsidies, technology improvements and regulations drove adoption. This allowed manufacturing at scale, and prices fell to a level where demand could grow organically.
Annual LED sales have reached $55bn7. The technology accounts for over 50% of the global lighting market, and is expected to grow at a 13% compound annual growth rate over the next decade8. If the pace of LED adoption continues, energy demand for lighting could be reduced by 30-40% by 20509. When considering the potential for investment in this space, however, the best opportunities are likely behind us. Early entrants in the LED market enjoyed over a decade of strong fundamental and share price performance. In more recent years, commoditisation and increased competition have dampened financial returns.
In contrast, untapped opportunities within air conditioning remain compelling. Electricity demand from air conditioning is expected to triple by 2050 as a result of increased adoption in developing economies in particular10. In order to prevent an associated increase in emissions, governments are banning widely used refrigerants and implementing new efficiency standards. These market developments present a long-term opportunity for global air-conditioning manufacturers like Daikin. Thanks to the company’s existing footprint, Daikin is well-positioned to take advantage of emerging-market growth, while its depth of knowledge and proven R&D capability should support the development of next-generation products, outcompeting local players.
Daikin Industries is a world leader in air conditioning systems both commercial and residential. A key driver in Daikin’s success has been the development of highly energy-efficient and environmentally friendly systems.
Applying connected technologies
Smart controls for HVAC and lighting systems are also gaining popularity amongst commercial property owners. These controls utilise internet of things sensors, and data analytics to optimise energy efficiency through detailed performance monitoring and automated controls. That said, despite the price of smart controls falling steadily since the early 2000s, adoption today remains low. The highly customisable nature of these systems, the complex implementation process, differentiation in sensor technology, and analytical capabilities reduces the scope for commoditisation and thereby material cost declines. But with the need now recognised, and efficiency improvements increasingly required by regulation, the market for smart controls is expected to more than double by 202611. Leading players like Belimo are very well-positioned for the years ahead. The integration of IT and building systems is also likely to provide a new avenue of growth for some ‘tech’ companies, while also adding an ESG element to their investment case, something the market is likely to view positively.
Belimo is the global leader in the development, assembly and marketing of actuators, control valves and sensors for the HVAC and fire and safety markets. The company’s products enable managers of commercial buildings to monitor and control air and water flows. As the leading developer and assembler of innovative, customised HVAC systems, Belimo enables owners of commercial buildings to reduce operating costs through improving the efficiency of energy consumption. Belimo’s reputation for continuous innovation has resulted in companies such as Apple, Disney and Google stipulating that Belimo products are installed in corporate buildings including data centres and company headquarters. Belimo products are also installed within the White House, the Empire State Building and the world’s tallest building, the Burj Khalifa.
The perspective of the building owner
When thinking about energy efficiency and the opportunities for companies providing materials, technologies or services, it is through the lens of a building owner that perhaps makes the most compelling case. At the most basic level, reduced energy consumption lowers expenses, allowing investments in efficiency to generate a positive return on investment (ROI). Payback periods, and lifetime returns, vary depending on building design, use, location and age amongst other factors. But, virtually all building owners could implement solutions and achieve a positive return.
However, investment in energy efficiency is not just about cost savings. Commercial and residential buildings with energy efficiency certifications, such as LEED and Energy Star, have higher average occupancy rates, demand higher lease fees and sale prices. These factors must also be considered when judging efficiency investments against ROI hurdles.
Determining which solutions will provide the best financial and environmental returns can be challenging, but building information modelling (BIM) software provided by the likes of Ansys, Autodesk and Nemetschek simplify the process for engineers and building owners. BIM software is used to create a 3D-model, or “digital twin”, of a building. Engineers can then enter variables, such as insulation type, electricity price, and climate, run simulations, and analyse data outputs to determine which combination of efficiency measures provide the building owner’s desired energy savings and financial returns.
Ansys is the world leader in engineering simulation software and services. Its software tests how a product will perform in the real world under various physical conditions, playing a mission-critical role in verification and validation of product designs. The company is actively involved in additive manufacturing and the development of the digital twin which allows maintenance to be more efficiently predicative rather than reactive.
Autodesk software allows higher-quality products to be created at a faster pace, cheaper price, using less material and with reduced human input. Autodesk does this through an extensive, high-end offering of products at a low cost of entry to the consumer.
Founded in 1963 by Professor Georg Nemetschek, Nemetschek is a leading BIM software provider. This software serves customers across the architecture, engineering and construction markets. Greater regulation and expected increases in company sustainability targets should both support future growth.
Who will benefit?
The trends outlined are both significant and undisputed but, of course, that does not mean financial success will be evenly distributed. As stock pickers, our task is to identify the companies best positioned to deliver these environmental gains and, in turn, achieve sustainable, long-term growth. As always, we must look further than the obvious construction ‘play’. We look at the systems and materials that create the most value and that are based on differentiated and leading-edge research and development. Those are the types of attributes that we look for in trying to assess which companies might financially prosper over the coming decades as well as contribute in a meaningful way to environmental gains and, in turn, aid social prosperity.
- World Green Building Council, Bringing Embodied Carbon Upfront
- U.S. Energy Information Administration, Global energy consumption driven by more electricity in residential, commercial buildings
- MarketsandMarkets, Building Thermal Insulation Market by Material (Glass Wool, Stone Wool, Polystyrene), Application (Flat Roof, Pitched Roof, External Wall, Internal Wall, Cavity Wall, Floor), Building Type (Residential, Non-residential) - Global Forecast to 2022
- MarketsandMarkets, Energy-efficient Windows Market by Glazing Type (Double, Double Low-e, Triple, and Triple Low-e), Component (Glass, Frame, and Hardware), Application (Replacement & Renovation and New Construction), End-use Sector, and Region - Global Forecast to 2026
- Cision, Ninety Percent of U.S. Homes Are Under Insulated
- U.S. Department of Energy Office of Scientific and Technical Information, The case for retrofitting building envelopes
- Grand View Research, LED Lighting Market Size, Share & Trends Analysis Report By End Use (Residential, Commercial, Industrial, Others), By Product (Lamps, Luminaires), By Application (Indoor, Outdoor), And Segment Forecasts, 2020 - 2027
- MATEC Web of Conferences, LED Lightbulbs as a Source of Electricity Saving in Buildings
- International Energy Agency, Air conditioning use emerges as one of the key drivers of global electricity-demand growth
- Cision, Smart Building Market to Reach USD 109.48 Billion by 2026; Rising Environmental Concerns to Contribute Healthy Growth, States Fortune Business Insights™
This article is provided for general information purposes only. The information provided in this article relating to stock examples should not be considered a recommendation to buy or sell any particular security. Any examples discussed are given in the context of the theme being explored. The opinions expressed in this article accurately reflect the views of Walter Scott at this date, and whilst opinions stated are honestly held, no reliance should be placed on them when making investment decisions.