rethink sustainability
Shear surprise: unexpected profit pools as our economy goes electric
Around the world there are more than 1.2 billion sheep, together carrying enough wool to make a new sweater for nearly every person on the planet1. Most of these sheep come from lineages bred for their thick coats – the need for shearing is man-made. Yet, wool is falling out of favour. In many regions, prices are so low they are leaving farmers out of pocket, with the cost of shearing higher than the income from the sale of wool. Now, though, sheep farmers may be on the cusp of discovering an unexpected new profit pool – in buildings.
The world’s buildings are responsible for around one third of all greenhouse gas (GHG) emissions2. 6% of this comes from construction, and the manufacture of the cement, steel, aluminium and other materials the industry needs. The rest come from day-to-day operations – the electricity consumed to power appliances and buildings systems, and the fossil fuels burned for heating. Yet, much of this energy is wasted, as heat leaks out of draughty buildings or, in hot climates, penetrates from the outside. In the US, it is estimated that 35% of all energy consumed in the residential and commercial sectors goes to waste3.
Now the rise of renewable electricity generation, and the push for energy efficiency across the building sector, is giving property owners the chance to increase property value4 while reducing both their bills and carbon footprints. Electric heat pumps, mechanical ventilation systems and smart temperature control software all offer energy efficiency improvements. For these technologies to work at optimum efficiency, however, buildings must be well insulated – which is where the sheep come in. Sheep’s wool is an excellent insulator, 100% renewable, and beats mineral wool on several industry metrics. Across the world, millions of buildings have been lined up for energy efficiency upgrades – for many of these, insulation will be a key component.
Building green
By 2030, as demand for homes and commercial space rises, the total floor area of the world’s buildings is expected to grow by 20%5, an increase equivalent to more than all the buildings in North America. Over the same period, the International Energy Agency (IEA) estimates, if we are to meet the Paris temperature target, cumulative carbon emissions from building operations must halve. To stay on track with net zero, even as the number of buildings rises, the sector’s emissions must fall.
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With sustainability built-in by design, new buildings can be constructed to be zero-carbon or zero-carbon-ready, meaning that, for their day-to-day operations, they rely only on energy sources that can easily be decarbonised. In practice this means that electrification will increasingly be at the heart of new-build design – in the UK, for example, the government’s planned Future Homes Standard envisages the majority of new homes being heated with electric heat pumps rather than gas boilers6.
Digital solutions will also be embedded into new builds, to optimise energy usage and smooth demand peaks. Roof-top solar panels will become the norm, cutting buildings’ reliance on the central grid. Innovations in electricity-powered heating and cooling, such as mechanical ventilation with heat recovery (MVHR), will ensure a constant circulation of fresh air without loss of heat. And insulation – back to the sheep – will move from afterthought to essential design component.
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Regulations and emerging market challenges
In the construction industry, much of this work is already underway, driven by regulations and clear signals from policymakers. As part of the EU’s “Fit for 55” plan, the Energy Performance for Buildings Directive will be revised to require that from 2030 all new buildings across the entire bloc must run with zero-emissions7. In the US, an Executive Order from President Biden aims to achieve the same for all federal new builds, with electrification central to the plan8. Similarly, Germany’s government recently approved a bill that intends to ban oil and gas heating systems9.
While some nations are moving swiftly towards sustainable buildings, in other parts of the world, challenges remain. Only 80 countries currently have energy standards in place for new builds – 40% of the vast new floor space projected to be built by 2030 will not be covered by energy efficiency codes10. Further, the large majority of new construction will take place in emerging economies, where access to the materials, energy-efficient devices and expertise needed to build for zero-emissions may be more restricted.
In emerging economies, another problem is expense – while zero-emissions buildings bring huge day-to-day savings for owners, they are more costly to build. Nor does building green solve the problem of what to do with the many hundreds of millions of buildings currently in use. For these, retrofitting will be essential.
Renovate and retrofit
In 1931, the Empire State Building in New York served as a beacon to the world – amid the devastation of the Great Depression, it was a promise of better times ahead. Now the iconic art deco building is a symbol of a different kind, a demonstration that old, energy-inefficient buildings can play their part in The Sustainability Revolution. More than a decade after a deep retrofit, the building has cut its carbon emissions in half, and aims to achieve carbon neutrality by 2030.11 With 80% of today’s buildings likely to still be with us in 205012, the Empire State’s example is vital proof that retrofitting works.
The key for most energy efficiency upgrades is ‘sealing the envelope’, reducing the permeability of the lived-in area of homes and buildings, so cutting heat loss through leaky windows, doors, walls and roofs. Here, insulation is often the first port of call.
The most widely-used solutions – mineral wool and glass fibre insulation – bring a number of environmental problems. The spinning process used in their production is highly energy-intensive, requiring temperatures of up to 1,500 degrees Celsius; both are made with a large proportion of non-renewable, mined materials; and neither is biodegradable at the end of life.
Natural fibres offer a solution that can outperform conventional insulation while cutting the environmental impact. Both hemp and sheep’s wool insulation have a higher heat capacity than mineral wool13, making them better at blocking out external heat. Wool is also better able to balance and absorb moisture without loss of insulation performance, making it an attractive option in areas of high humidity. Crucially, both hemp and sheep’s wool are 100% renewable and biodegradable at the end of life.
Neither will be a single solution, however. With animal agriculture a leading cause of deforestation and greenhouse gas emissions, the use of sheep’s wool for insulation must be a by-product of sheep farming – rearing more sheep for the purpose would be counter-productive. Further, the wool industry is not without controversy. In recent years, activists have highlighted examples of maltreatment, due in part to shearers being paid by volume, a practice that incentivises speed over animal welfare. Hemp farming can create its own negative impacts, with agricultural chemicals contributing to soil degradation and the pollution of waterways.
Despite these problems, adopting a mix of natural fibre solutions, and using sustainable materials, will enable widespread insulation in ways that work with nature, rather than relying on continued unsustainable extraction.
With an estimated 225 billion square metres of buildings floor space in need of renovation14, retrofitting will be essential for governments aiming to achieve net-zero national emissions. Many have adopted subsidies to encourage the uptake of energy-efficiency solutions. Increasingly, governments are also turning to mandates – in the EU, for instance, new laws aim to trigger retrofits by introducing minimum energy standards for all existing buildings, with standards growing stricter over time15.
A multi-trillion opportunity
The widespread electrification of our economy is bringing new opportunities for the buildings sector to decarbonise. For property owners, the falling cost of renewable electricity and advances in digital solutions and electric heating and cooling systems are creating tangible savings. For example, following its retrofit, the Empire State building is now saving USD 4 million per year in energy costs.
Across all shapes and sizes of buildings – from bedsits to skyscrapers – there is no one size fits all approach. New-builds must be designed for sustainability from the ground up, and existing buildings must be retrofitted to incorporate a range of heating, cooling and energy saving solutions, with renewably-generated electricity driving design decisions.
It will be a vast effort. In the EU alone, there are 35 million buildings in need of renovation16. But with that effort comes outsized opportunity – across Europe this work is expected to create 160,000 jobs, while around the world we estimate the renovation sector will more than triple in value to reach USD 3.3 trillion by 2030.
For investors, the opportunities that electrification is bringing will be varied, and extend far beyond the world’s buildings. Vast amounts of new cabling will be needed as power grids are upgraded, a flourishing recycling industry will serve our fast-growing need for batteries, and entire new profit pools will arise from the digital solutions that optimise our energy usage. As the transition progresses, however, in amongst all the electric vehicles and the heat pumps and the rapid rise of at-home solar – don’t forget the sheep. Known for following the crowd, they may soon join the growing shift to a clean energy future.
1 https://iwto.org/sheep/
2 https://www.iea.org/reports/buildings
3 https://www.weforum.org/agenda/2018/05/visualizing-u-s-energy-consumption-in-one-chart
4 International Journal of Sustainable Built Environment | ScienceDirect.com by Elsevier; How the conversation around green real estate is changing | World Economic Forum (weforum.org)
5 https://www.iea.org/reports/buildings
6 https://www.cih.org/blogs-and-articles/zero-carbon-ready-from-2025-a-look-at-the-future-homes-standard-and-future-building-standard
7 https://www.consilium.europa.eu/en/press/press-releases/2022/10/25/fit-for-55-council-agrees-on-stricter-rules-for-energy-performance-of-buildings/
8 https://www.sustainability.gov/federalsustainabilityplan/buildings.html
9 German cabinet approves bill to phase out oil and gas heating systems | Reuters
10 https://www.iea.org/reports/buildings
11 https://www.cbc.ca/news/world/empire-state-building-carbon-emissions-1.6427893
12 https://www.weforum.org/agenda/2022/11/net-zero-cities-retrofit-older-buildings-cop27/
13 Eshrar review.pdf (cardiff.ac.uk)
14 Lombard Odier data
15 https://www.consilium.europa.eu/en/press/press-releases/2022/10/25/fit-for-55-council-agrees-on-stricter-rules-for-energy-performance-of-buildings/
16 https://climate-pact.europa.eu/about/priority-topics/green-buildings_en
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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