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Aug 06, 2023

Accelerating green growth in built environment

The world is coming together to reduce the amount of carbon in the atmosphere,

The world is coming together to reduce the amount of carbon in the atmosphere, and all industries and sectors will need to contribute. The built environment is no exception. In fact, this setting—which refers to the full life cycle (design, materials manufacturing, construction, usage, and demolition) of all residential and commercial buildings and infrastructure—is directly or indirectly responsible for approximately 40 percent of global CO₂ emissions from fuel combustion and 25 percent of overall greenhouse-gas (GHG) emissions.1Tony Hansen, Focko Imhorst, Anna Moore, and Sebastian Reiter, "Glasgow COP26 2021: Decarbonizing the built environment," McKinsey, November 11, 2021. As a result, it is among the highest-emitting industries, emitting more than electricity production, shipping, and aviation.

This article is a collaborative effort by Fabian Apel, Brodie Boland, Helene de la Motte, Anna Moore, Sebastian Reiter, and Erik Sjödin, representing views from McKinsey's Basic Materials Practice.

The built environment's emissions contributions involve other industries and sectors as well. In fact, a sizable portion of total emissions across industries stem from physical structures. For instance, telecommunications players need to factor in emissions from their facilities in addition to the energy used to operate equipment.

Our analysis shows that over the life cycle of a typical building, 76 percent of emissions come from operations and the remaining 24 percent from the processing of raw materials used for and construction of new builds. Given that 80 percent of the predicted building stock for 2050 exists today,2"Call for action: Seizing the decarbonization opportunity in construction," McKinsey, July 14, 2021. it stands to reason that the built environment will need to decarbonize not only embodied emissions but also, more importantly, the operational emissions from the existing building stock.

Today, the physical implications of climate change are clearly visible in the form of floods, wildfires, rising sea levels, and other natural disasters. There is also significant pressure from all market dimensions, including regulatory requirements, shareholder expectations, employee needs, and green premiums paid by customers. To address these issues, industry leaders can work toward improving transparency and awareness, developing partnerships along the value chain, and establishing consistent and reliable metrics. By launching the Net Zero Built Environment Council, we aim to stimulate these changes and help shift the built environment into a cleaner, greener future.

To meet net-zero emissions targets by 2050, various industries will need to triple the pace at which they decarbonize compared with the past 30 years.3Greenhouse Gas Inventory Data – Detailed Data by Party, UN Climate Change, accessed October 5, 2022; Tony Hansen, Focko Imhorst, Anna Moore, and Sebastian Reiter, "Decarbonizing the built environment: Takeaways from COP26" January 12, 2022. There are several possible decarbonization pathways across materials, design, and technology that collectively could help mitigate a significant portion of overall emissions. Some of these pathways, such as switching to renewable sources of energy for heating systems, have significant potential for reducing emissions, while others, such as reducing waste and improving circularity, are likely to mitigate a smaller proportion of emissions.

Given that a significant portion of emissions in the built environment stem from operations of existing building stock, lowering these emissions is a key priority. The primary sources driving these operational emissions are heating and cooling. Indirect emissions (from power generation for electricity and commercial heat) constitute 50 percent of the global built environment's emissions.4"2020 global status report for building and construction: Executive summary," Global Alliance for Building and Construction and UN Environment Programme, December 16, 2020. There are two important factors to consider when decreasing emissions from the operations of existing buildings: the energy source used for heating and the energy efficiency of the building. Key pathways to address these two factors could be upgrading energy and improving insulation. This includes switching to renewable sources for heat pumps and leveraging new technologies such as combined heat and power, infrared heating boards, and hydrogen boilers.

In the European Union, for example, energy upgrades could mitigate up to 30 percent of emissions. The other key pathway is looking at design and insulation levers, which can improve energy performance by mitigating another 30 percent of emissions.5"Call for action," July 14, 2021. This would subsequently reduce the requirement to rely heavily on heating, ventilation, and air conditioning (HVAC) systems.

To make the transition to net-zero emissions, upstream aspects of low-carbon-intensive construction materials could also be maximized for tackling embodied emissions during the construction process.

The cement industry is responsible for about a quarter of all industry CO2 emissions, and it also generates the most CO2 emissions per dollar of revenue.6Thomas Czigler, Sebastian Reiter, Patrick Schulze, and Ken Somers, "Laying the foundation for zero-carbon cement," McKinsey, May 14, 2020. Addressing cement emissions is therefore critical in propelling the transition. For example, replacing the clinker used in cement with substitutes—such as ground-granulated blast-furnace slag (GGBS), silica fume, or natural pozzolanic materials—and fillers such as limestone could mitigate up to 90 percent of cement's carbon footprint. Wood construction materials emit anywhere from 20 to 60 percent less carbon than steel and concrete in a typical building.7Thomas Hundertmark, Sebastian Reiter, and Patrick Schulze, "Green growth avenues in the cement ecosystem," McKinsey, December 16, 2021. Another alternative is carbon-cured or carbon-neutral concrete, which uses materials based on mineralized or pyrolyzed CO2 to make long-term carbon storage possible. Today's methods could sequester up to 5 percent of the CO2 produced during production, but newer technologies could sequester as much as 25 to 30 percent. Overall, addressing only the emissions from cement using these methods could collectively abate the built environment's emissions by up to 15 percent.

An important supplement to reducing embodied emissions is developing a closed-loop economy by minimizing waste sent to landfills. This can be improved in several ways, starting with making accurate estimates of required construction materials via tools such as building information modeling (BIM), ensuring the recycling of demolition waste, or, in the case of modular construction, using potential end-of-life building components or products.

Many levers to decarbonize the built environment are known and proven.

Decarbonizing the built environment can create as much as $800.0 billion to $1.9 trillion in new green value pools across sectors (Exhibit 1). This promising market offers significant potential for players in the ecosystem. Specifically, there are primary value pools in resilient materials and systems, totaling more than $320.0 billion, and in retrofitting existing assets, totaling more than $240.0 billion.

Climate-resilient infrastructure aids in protection from extreme weather events, including droughts, extreme temperatures, flooding, hurricanes, and wildfires. Using double-glazed glass in windows and doors, building green facades, and insulating walls with gypsum wallboards are just a few ways to mitigate extreme temperatures. For instance, green roofs have multiple direct benefits and cobenefits, including lowering indoor temperatures by as much as 5°C, resulting in energy savings; absorbing rainwater and delaying runoff, reducing flood risk due to intense rain events; reducing the temperature in densely built-up areas; providing habitats for urban wildlife and stepping stones for migratory species; and creating a more aesthetically pleasing urban landscape.8"Green roofs in Basel, Switzerland: Combining mitigation and adaptation measures," Climate-ADAPT, September 10, 2022.

In addition, the value pool for retrofitting existing buildings is expected to have an accelerated trajectory from current forecasts of 4 percent CAGR beyond 2035, driven by mounting regulatory pressure and financial incentives, cost savings for building owners and occupiers from actions such as improving insulation, and growing end-user demand for more efficient, less carbon-intensive buildings (Exhibit 2). The uplift in the potential annualized value pool over time is expected to decrease over the next two decades as the number of new technologies and houses stagnates. Realized value will still grow, but the built environment faces several headwinds, such as fragmentation, risk aversion, and slow digitalization.9For more on these headwinds as well as the construction value chain, see "The next normal in construction: How disruption is reshaping the world's largest ecosystem," McKinsey, June 4, 2020.

Local market structures and ease of entry have resulted in a fragmented landscape of mostly small companies with limited economies of scale. Moreover, the project-based construction process involves many steps, with scattered accountability and a multitude of active entities in every project—from several specialist-engineering and planning companies to multiple subcontractors and subsubcontractors and a multitude of material suppliers. Since the level of collaboration across the value chain is low, the result is a siloed ecosystem in which companies tend to manage their own risk and frictions at the interfaces are high. Varying governing bodies, local building codes, and standards further aggravate the challenge and lead to decreased productivity, slowing the turnaround time of projects.

Overall, no single player in the ecosystem can tackle the emissions issue alone—and there is an urgent need for players to collaborate and increase transparency. The built environment is complex and fragmented with different players, business models, and value chain steps10Including construction material manufacturers; engineering, procurement, and construction (EPC) contractors; designers and engineers; and real estate owners and developers.; it is also highly local with varying standards, building codes, and decision makers, often with partially conflicting objectives. Arrangements are often project-based with temporary, nonrepetitive agreements, while companies operate on small margins with limited abilities to invest and take risks.

Achieving the necessary scale of decarbonization and value creation to accelerate the green transition requires fundamental shifts in how industry players design, build, operate, and decommission assets. Although some regulations and policies currently favor the sector's net-zero transition, the sector needs to be better positioned to leverage these tailwinds and orchestrate the best way forward. One way of doing this is to join or form coalitions while moving at pace on investment and innovation.

Three ingredients could potentially accelerate the green transition in the built environment: transparency and awareness, partnerships along the value chain, and consistent and reliable metrics.

Acting on these three ingredients can provide unique opportunities to meet emissions targets and create future leaders in the built environment. In all major technology disruptions in the past, first movers have captured a disproportionate share of the market.

To help facilitate the critical elements for change, we are launching the Net Zero Built Environment Council, which brings together many of the leading incumbents and new scale-ups across the built-environment ecosystem. Along the lines of the three ingredients covered in this article, the council's ambitions can help with the following actions:

All contributors along the value chain must come together to overcome systematic challenges and increase transparency on cost-effective pathways to reach decarbonization goals and spread awareness to the entire sector. In this sense, the Net Zero Built Environment Council represents an important step forward in uniting industries and sectors—not only to achieve their climate ambitions but also to create green growth in the built environment.

Fabian Apel is an associate partner in McKinsey's London office; Brodie Boland is a partner in the Washington, DC, office; Helene de la Motte is a consultant in the Stockholm office, where Erik Sjödin is a partner; Anna Moore is a partner in the London office; and Sebastian Reiter is a partner in the Munich office.

The authors wish to thank Eddie Elizondo, Riyaz Gilani, Alastair Green, Focko Imhorst, Sharada Sucharitha Kannan, Shailesh Lekhwani, Aleem Anil Mawji, Paolo Spranzi, and Mai Ly Sorri for their contributions to this article.