Old buildings that fail to keep in heat aren’t just expensive for their residents. They’re also costly for the climate. Head of Equities Sanjiv Tumkur examines some of the innovations seeking to address this challenge.

17 January 2023

As temperatures finally start to dip after a warmer-than-usual autumn, most of us will try hard to curb our gas and electricity usage this winter to save on our energy bills. But for the vast majority of us, our best efforts will be frustrated by the age and draughtiness of the buildings in which we live and work. And there are investment implications too.

Buildings are the world’s biggest single source of carbon emissions, through the energy used to build and power them. Newer, more energy efficient and sustainable homes and offices could make a huge difference in combatting climate change by cutting both energy consumption and carbon emissions. But existing building stock will still represent the majority of floor space in much of the developed world in 2050.

If net zero targets for reducing carbon emissions by 2050 are to be met, existing building stock will need to be retrofitted to higher energy efficiency standards.

The scale of this task is daunting. The UK has some of the oldest and leakiest housing stock in Europe, ensuring that heat quickly escapes through walls, windows and doors. Just under 30% of UK homes currently meet the Energy Performance Certificate (EPC) band-C standard (A is the most energy efficient standard and G the least). The government wants to retrofit all homes to band-C standard by 2035. But this will be expensive. In fact, doing the required renovations using traditional approaches can often cost as much as demolishing the old building and putting up a new one. To make renovations a more attractive solution, retrofitting needs to be tackled on an industrialised scale, rather than through current piecemeal approaches.

A giant leap for retrofitting?

In the Netherlands, the “Energiesprong” (energy leap) movement is responding to this challenge by insulating homes with offsite-manufactured wall and roof panels alongside pre-assembled ‘energy pod’ packages that include heat pump-based heating, cooling and ventilation equipment. Around 5,000 Dutch homes have already been retrofitted using this low cost, fast turnaround approach.

The model makes mass renovation financially viable. Early results show it could allow for retrofitting that’s potentially nearly 50% cheaper than conventional alternatives. The model is now being launched in the UK through work with the social housing sector, with the aim of extending it to the private sector.

We believe both conventional and industrialised retrofitting have good potential for growth in the decades ahead, along with the ancillary products and services that support both approaches. We see three areas in particular that are in the early stages of a long-term growth trend: environmental building audit services; window coverings for energy conservation; and building fabric insulation. Each currently makes up only a small part of the total operations of the publicly listed companies providing retrofitting goods and services.

The quest for all homes and offices to be more energy efficient is bound to be a long-term process that involves retrofitting existing stock and higher costs than most people can currently afford. Nevertheless, there are clearly some interesting developments on the horizon, giving hope for a world of more energy efficient zero-carbon buildings.

A key question will be: who pays, and how, for all of the change and transformation that will be needed? For investors, the crucial thing to consider is that without a dramatic contribution to emissions reductions from the buildings and construction industries, it is clear that net–zero targets won’t be met. The risks to the companies in these sectors over the coming decades are significant. But so are the opportunities for good investment returns for those that embrace the right solutions.

You can read more about some of the opportunities that could be generated by greener construction and building practices in our latest investment report Building a more sustainable future.