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
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.
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.
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.
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.
Ante Banovac shares his thoughts about future risks facing the insurance industry and the state of the insurance market in Serbia, Slovenia and Croatia
How bad was drought this year in your region and how much insurance would help to protect against losses?
Such a big drought leads to many negative consequences in many industries, especially in agriculture, energy, logistics, and forestry.
Group Practice Leader Construction & Real Estate
T +43 5 04 04 119