ESG in construction wants to aim high

The issues of sustainability and responsibility are not new to the construction and real estate industry. But the determination to act seems to be greater than ever before due to ESG.

On the one hand, storms and floods, on the other, drought and forest fires – scattered across the globe and almost simultaneously. This clearly shows us that “environmental” is not an issue that can be confined or pushed aside locally. Only globally coordinated efforts will keep our planet livable in the long term. Social and governance issues are also increasingly dominating the headlines. Larry Fink, the head of the world’s largest asset manager BlackRock, has put these issues on a high public profile. Since then, more and more funds and insurance companies have declared that they will pay even more attention to environmental, social and corporate governance criteria when investing.

The topic has gained momentum and entire industries are adapting their reporting. They are examining strategies and business models, and they are looking at taxonomies to see which provider of scores, KPIs and indexes is viable.

Construction and real estate sector directly affected

According to an analysis by the European Public Real Estate Association (EPRA) and the European Association for Investors in Non-Listed Real Estate Vehicles (INREV), the construction and real estate sector is already responsible for about 40% of energy consumption and 29% of all greenhouse gas emissions in Europe. At the same time, a strong change is also taking place here globally. China, for example, has consumed more cement in 3 years than the USA in the entire 20th century. In addition, productivity in the construction sector still has considerable potential. While productivity per worker in the manufacturing sector has risen by around USD 30,000 since 1994, it has actually fallen slightly in the construction sector (source: Digital Building Technologies, ETH Zurich – Additive Manufacturing in Construction, 2021).

In a survey conducted by Globaldata in Q2/2021, the increasing relevance of ESG in the construction sector became clear once again, with increased construction costs and the associated reduced profitability proving to be the biggest obstacles. Nevertheless, ESG is being strongly pushed by the regulatory environment. 61 % of the respondents have noted an increasing demand for sustainable construction methods, only 6 % say that the demand for sustainable construction methods has decreased.

Insurance in demand

This development also has an impact on insurance companies: In real estate transactions, ESG due diligence and the associated questions regarding transaction insurance such as warranty and indemnity insurance are increasingly arising.

There are also new insurance solutions such as Energy Efficiency Insurance. This solution insures the value of remediation concepts and covers financial losses resulting from a faulty remediation concept or insufficient or missing results. This additional security is an important tool in financing discussions with banks or investors.

Last but not least, parametric insurance is on the rise. Similar to a financial option, it insures a loss that occurs when a measurable value is exceeded or not reached. Examples of this are, for example, too few hours of sunshine for renewable energy (lack of sun) or too much or too little wind for electricity generation (lack of wind). Parametric insurance can smooth out volatility and establish more comprehensive protection.

Sustainability trends in construction

Certifications:
The number of certified buildings will continue to increase in order to meet demand from the financing side. The best-known certifications include klima:aktiv, ÖGNB/TQB, ÖGNI, Leed, Breeam, GRIHA, CRREM, GSAS, EDGE and WELL. In individual cases, so-called Environmental Product Declarations (EPD) are also used, with the help of which the environmental compatibility of buildings can be assessed.

Modular construction:
Further development of modularly combinable prefabricated elements enables more sustainable and efficient manufacturing, whereby the controlled manufacturing environment can bring additional benefits. Modularly manufactured structures can also be partially disassembled and relocated or repaired, reducing the need for raw materials and energy for new construction. On-site construction times are usually significantly reduced.

Sustainable materials:
Wood as a carbon store is increasingly being used as a substitute for other materials such as concrete, steel and aluminium, although here too the sustainable management and origin of the raw material must be considered. But there are countless lesser-known, innovative developments such as AshCrete (made from 97% recycled material from fly ash, among other sources) or Grasscrete, which provides open spaces for green growth while counteracting heat islands in cities. Other products include Holcim’s EvopactZERO or Ferrock from Ironkast in the field of concrete, Cross Laminated Timber or Wienerberger’s climate-neutral bricks, and solar panels integrated into the roof.

Low and no energy:
There is an increased awareness of energy consumption among investors and end users. The focus is on renewable energy and on replacing artificial light with efficient design, insulation and efficient windows or glass fronts or heat recovery. A net zero energy building, or “zero energy house” as a continuation of the idea of a passive house, is therefore a building in which the energy consumed by the building does not exceed the renewable energy produced on site.

Renovations/retrofits:
In order to improve energy efficiency and enhance quality of life (supported by the EU Green Deal or the regulatory environment), there is a strong focus on the adaptation and modernisation of existing buildings. In 2020, the European Commission published “A Renovation Wave for Europe – Greening Our Buildings, Creating Jobs, Improving Lifes” with the aim of doubling the annual renovation and refurbishment rate in the following 10 years. By 2030, more than 35 million buildings are to be renovated and made more energy efficient.

Related Insights

Richard Krammer

Group Practice Leader Construction & Real Estate

T +43 5 04 04 119

Architectural jewels made of wood, made in Austria

“With a pioneering spirit in engineering, we inspire our partners and customers for a sustainable future” is WIEHAG’s mission statement. The specialist for sophisticated architectural buildings made of wood is now continuing its successful path in the USA. Always on board: professional risk management.

The customer and event center Paneum of the Backaldrin company, the imposing dome-roofed green roof of the Scottish whisky distillery Macallan, and the fabulously beautiful Hans Christian Andersen Experience Museum in Odense, Denmark. What do they all have in common?

They are all pioneer timber buildings from the Innviertel-based timber construction specialist WIEHAG. The passion for wood has driven Erich Wiesner, the owner of the WIEHAG Group, and his family business for five generations. Together with internationally renowned architects, WIEHAG skillfully harmonizes form and function, and constantly redefines the limits of what is possible.

As the next milestone in the company’s history, the timber construction specialist is now venturing across the pond and playing a major role in the construction of an 88-meter-high timber hybrid skyscraper in the US city of Milwaukee.

US record-breaking building with Austrian participation

At nearly 90 meters tall, the “Ascent Milwaukee” apartment tower designed by Korb + Associates Architects will be the tallest wood-hybrid structure in the world. Jason Korb, managing director of Korb + Associates enthuses, “We are creating something extraordinary with the city of Milwaukee ─ a world-class residential project.”

The details of the project are as follows: The lower garage floors and the elevator shafts will be made of concrete. The main part of the building, however, is supported by the wooden structure. The entire supporting structure of the apartments, i.e. the vertical supports and the horizontal beams, will be made of glulam. WIEHAG supplies this wooden skeleton including all connecting elements.

The main challenges are the wood strength, which has to be two classes higher than in usual engineered wood structures, as well as ensuring a sufficient number of high-strength lamellas. Projects like these “rely” on professional project management. For the construction of the tower, ─ in addition to a sufficiently long lead time and excellent cooperation with the sawmill ─ the supply chain is also of great importance.

Quality from the Innviertel

More than 6.000 m³ of sawn timber, and only the very best boards, are used in Milwaukee for the required volume of 2.300 m³ of finished glulam. 1.150 columns and 1.320 beams will be shipped to Milwaukee in 65 sea containers.

The first components from WIEHAG will arrive on the site in April 2021, where one floor each will then be raised in weekly cycles. Ascent is expected to rise a total of 25 floors after its planned completion in 2022. This means that the residential tower in Milwaukee could replace Mjøstårnet, an 18-story hotel in Brumunddal, Norway, as the tallest wooden building in the world.

Where there is planning, risk management also plays a major role

Milwaukee is currently not the only international construction project of WIEHAG. At the same time, the largest timber construction in Asia is being built for the Technical University in Singapore, as well as a sports complex for the renowned Eton College in England, a huge shopping center for Abu Dhabi and a retail project on Tenerife. “Even as a technology leader with flexible capacity, this makes us sweat a bit” says Johannes Rebhahn, responsible for international business at WIEHAG.

So, it’s no surprise that for Johannes Rebhahn and Thomas Biringer, the responsible managing directors, project-related risk management plays a major role. The complexity of such projects requires a systematic approach to the entire process, from the bidding phase through the execution steps to project completion. An essential aspect of this is the risk transfer of project risks that can significantly jeopardize success.

WIEHAG has long since established itself as a leading timber construction specialist, and the order books are well filled even in these challenging times. Thus, the timber specialists from Altheim expect further high-rise orders in sustainable timber construction in the coming years.

“In 2021, we will invest in the expansion of our production buildings and facilities in order to meet the new market with larger capacities,” announces Brigitte Riedner, CFO of WIEHAG Holding. On board: GrECo as a trustworthy and powerful partner in risk and insurance management.

Dipl. Ing. Johannes Rebhahn
Sales Manager Engineered Timber Construction International WIEHAG GmbH
T +43 7723 465 375
j.rebhahn@WIEHAG.com

Johannes Rebhahn was born into a traditional sawmill family in Austria. He studied civil engineering at the TU Graz and in Lisbon before starting at WIEHAG in 2002. After several years in timber construction engineering, he started to develop the international market for WIEHAG and is currently Sales Manager for international timber engineering and responsible for all projects outside Austria and Germany.

Brigitte Riedner
Finance management
T +43 7723 465 1261
b.riedner@WIEHAG.com

After completing her training, Brigitte Riedner worked quite a long time for a medium-sized industrial company in Salzburg, with responsibility for finance and accounting, controlling, insurance, human resources, IT and internal organization. Since 2019, she has been Head of Finance and Accounting for the WIEHAG Group. Currently, the focus is on digitalization in accounting and investment financing. She has been working closely with GrECo’s Account Managers for two decades now.

WIEHAG
WIEHAG Holding GmbH is a traditional company of the Wiesner family in the 5th generation. Headquartered in Altheim, Upper Austria, WIEHAG has over 160 years of experience in timber construction and is a leading supplier of long-span load-bearing systems and complete roofs. Other business areas include roof, ceiling and wall elements, standard glulam and connector systems for beam girders. With a state-of-the-art CNC production plant, over 70.000 m³ of glulam and 80.000 m² of roof elements are produced annually. WIEHAG stands for wide-ranging competence in engineered timber construction.

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Karin Gaisbauer-Roth

Account Manager

T+ 43 5 0404 416

The New Timber Construction Era

Why risk managers are taking up the cudgels for sustainable timber construction, and how the insurance market can be brought on board.

Although wood has been used as a building material for a very long time, the great construction success has only occurred internationally in recent decades. This has also put the insurance market on the map. But insurers have been slow to embrace the new developments.

In the absence of empirical values or broadly based studies, reservations were voiced at the beginning against the new timber construction era. On one hand, because of a supposedly increased fire risk or insufficient experience with the behavior of the building material in case of fire. On the other hand, because of the possibility of serial damage in the serial production of components, which could have massive consequences in the construction and assembly insurance, as well as in the liability insurance. Finally, design activity was also a concern for insurers.

In the meantime, empirical values are available. It has been shown that a differentiated approach to risk assessment is required in industrial timber construction. Glulam, for example, as used in the Milwaukee tower, achieves a fire resistance of 120 minutes and more. In addition, this wood has a higher stability in case of fire than steel. The outer layers do not burn but char, forming a protective layer so that the load-bearing wood core remains intact.

With regard to the residential tower in Milwaukee, specific tests were carried out by the U.S. Department of Agriculture’s Forest Products Laboratory. The results were positive, so that the authorities and public fire protection officers, who have the welfare and safety of the residents and fire departments in mind, also confirmed the feasibility.

Hard market for the construction industry

The occurrence of fire damage on construction sites is a significant risk. This damage is mainly caused by improper hot work but occurs to a much lesser extent during the construction of a wooden building. The construction industry is countering with appropriate processes to take precautions in organizational fire protection. Likewise, various interest groups have published guidelines that continue to sharpen conscious handling. In fact, there are no indications or statistics to prove that, despite the growing share of timber construction in the total insured construction risks, there has been a disproportionate increase in losses.

However, the construction industry is not spared from the hardening of the insurance market. The extent of the rising premium costs and the shortage of capacities sometimes lead to a massive impact on the profitability of individual project contracts or even entire companies. Even more so than for construction and erection insurance, this applies to the area of planning liability. Poor technical results of insurers, especially due to major claims, are negative for risk appetite. The consequences: a high need for information in the risk assessment phase, rising premium costs or deductibles, and coverage restrictions in insurance protection (for example, for fire damage in facade construction). A prominent example: the major fire at London’s Grenfell Tower in June 2017, where the facade construction, which, however, was built of conventional materials without wood, created a chimney effect and cost the lives of more than 70 people.

Magic word „risk transparency“

As the investigation results at the Ascent Tower project show, it is important to differentiate. Individual cases that are not related to wood as a building material must not lead to erroneous conclusions.

Also, in negotiations with the coverage market, it is essential to make the characteristics of the building materials transparent and to work out the sensitive points for the risk assessment. GrECo supports clients in placing corporate and project insurance policies on the national and international insurance market. A major focus is on the joint development of risk transparency; an aspect that is also served by the general education provided by organizations such as the “Structural Timber Association” or the “UK Timber Frame Association”. These educational activities are relevant for the London insurance hub and can positively influence risk appetite or lead to more open discussions with insurers.

Related Insights

Richard Krammer

Group Practice Leader Construction & Real Estate

T +43 5 04 04 119

When Cyber infects the construction site

Cyber risk management and insurance in Construction

The construction industry becomes more connected through electronic solutions and remotely accessible systems. Until now, labour productivity in the construction sector has not seen the same increase like in general manufacturing but it is expected that this will change in the foreseeable future. Despite an improved procurement and supply-chain management it is particularly digital technology, new materials and advanced automation that promise the largest gains.

A specific trait of companies in the construction sector is the fact that each building is, to a varying extent, different to any other. As a consequence, builders and joint venture partners, vendors, subcontractors, suppliers and financial institutions are mixed together in changing constellations every time. They co-operate on a contractual framework specifically drafted for this definite project and tasked with creating something which has not been done in this exact configuration before. At the same time trying to perform as efficiently as possible to produce works fit for the purpose and free of defect, while securing the sometime slim operating margin the industry offers. This is contrary to any stationary industry, where locations and stakeholders are a lot easier to oversee processes more standardized and accessible for optimization and immunization to threats.

The main attack vectors in the construction industry in cyber are:

  • Social engineering: psychological manipulation of people into performing actions or divulging confidential information. People and companies change from project to project and also within projects fluctuation of personnel happens.
  • Access points: construction trailers, site offices and decentralized IT are often more vulnerable and easier to access physically than on-site premises or offices in buildings
  • Increasing digitisation of the value creation change, from project management software over electronic flow of designs and BIM to Internet of things (IOT) and automatized machinery
  • Ransomware: a piece of malicious software that blocks access to a system, encrypts it or threatens to publish the victim’s data unless a ransom is paid (extortion)
  • Dependency on subcontractors and suppliers: if a subcontractor or supplier is affected by a cyber attack it may negatively influence the timely completion of a project
  • Hacktivists identifying companies as targets because of their involvement in certain areas/projects (fossil fuels, nuclear power plants, some sort of industrial plant)
  • Human error / malicious (ex-)employees

Some of these assets are at risk by a cyber-incident:

  • Intellectual property, proprietary assets, information protected by non-disclosure agreements including contractual fines if information gets disclosed
  • Architectural drawings / specifications, building schematics and blueprints
  • Compromised core systems (finance and accounting, logistics, communications) and as a consequence theft of funds, loss of contracts and contractual penalties
  • Business interruption events, literally paralyzing a company partly or in whole
  • Loss or theft of confidential information
  • Third party liability arising from any of the above
  • Loss, theft or extortion of funds
  • Reputational risk

To illustrate cyber claims examples in the construction industry, we consider the following units of a construction company and claims we have observed:

Recent media coverage of incidents only support our illustration. In October 2018 for instance, Ingérop was victim of a cyber attack where perpetrators were able to get documents relating to nuclear plants, jails/correctional facilities and railway lines. The breach comprised 65 Gigabytes, including the exact locations of video surveillance intended for use in a French high-security prison as well as plans to an ultimate disposal site for nuclear waste and sensitive details on more than 1.200 employees of Ingérop.

Two of the largest construction companies in Austria were affected recently as well. In one instance in 2020, the company’s communication system was affected internationally, including encryption of files on network drives, ultimately rendering the company unable to act for several days, while the actual impairment of operations (and correspondingly, increased IT costs) went on for several months thereafter. The second well known incident in Austria was a Phishing email disguised in an email titled “Information on the Corona Virus”. In this case, the actors gained access to the data of the project owner, a municipality, and consequently tried to extort them.

Also in 2020, a ransomware attack on Bouygues led to internal applications, intranet and the email-system had to be taken offline, with even phone services failed intermittently. The hacker group Maze consequently demanded 10 million EUR in ransom based on the attack, which presumably originally affected only part of the system in Toronto and Montréal, and consequently affected systems worldwide.

Do you need insurance?

It is and entrepreneurial decision which risks to take and which ones to transfer. The cyber arena provides exposures which simply did not exist 5-10 years ago. And just like the business environment changes, so does the response of the companies adapt to those changes.

As of today, insurance premiums are still low and wide coverages available. In the wake of the numerous cyber incidents registered in recent times the premiums are however bound to go up and covers to get more restrictive. Costs following a cyber-breach can easily reach millions of Euros, composed of – depending on the loss scenario:

  • First party losses such as business interruption and immediate costs of crisis management and first response, including technical experts and forensic experts
  • Third party losses stemming from legal liabilities such as the GDPR, including financial loss due to contractual penalties, and crisis communication requirements

As even the most advanced IT security cannot guarantee full safety (think of the recent Solarwinds hack which even affected the source code of widely used Microsoft products, though the full extent is yet to be assessed), it seems prudent to install a safety net which will step in should security measures fail and covers the worst case scenario of company closure.

The mere question of when a cyber-insurance policy is triggered is simple:

  • Data breach (violation of data protection laws (e.g. GDPR)
  • Network security breach: targeted or non-targeted cyber-attack (e.g. computer virus)
  • Operator Error: error or omission that results in a damage of data (e.g. programming error)
  • Technical failure: computer system malfunction (e.g. overheating)

The way ahead and how we can help

The evolvement of technology will continue to coin and form the value creation in construction. A conscious analysis will help to contribute to the resilience of the organisation and minimize negative effects cyber incidents may have. GrECo Risk Engineering offers specialized services supporting in the assessment of cyber exposures and choosing adequate insurance levels. With CyberSolid, GrECo exclusively offers an insurance solution with extensive cover and easy and simple application.

Related Insights

Richard Krammer

Group Practice Leader Construction & Real Estate

T +43 5 04 04 119

Stephan Eberlein

Group Practice Leader Financial Lines

T +43 664 962 40 60