The buildings sector (residential and commercial) is responsible for about 40% of all energy consumption in the EU. And, it is also the sector where progress has been slowest towards sustainability. The EU project “Houseful” concludes that the housing sector uses 50% of extracted materials, 40% of energy, 30% of water and causes 30% of total waste and 35% of greenhouse gas emissions.
An industry ripe for disruption?
The Architecture, Engineering and Construction (AEC) industry suffers from fragmentation, complex regulation, low productivity growth, poor procurement and supply-chain management, and contractural frameworks that hinder collaboration across the value chain, concludes a report from McKinsey. So is there hope? We believe, yes. There are at least three change drivers that may still create a perfect storm and revolutionize the industry.
Circularity needs industrialization and new materials
The United Nation International Resource Panel (UNIRP) estimates that embracing circular economy principles will allow us to reduce the lifecycle carbon emissions of the building sector of G7 countries by 35% through material efficiency strategies. For China and India the reduction could be up to 60%. This would involve embracing new low-carbon materials including wood, which also serves as a carbon-sink while growing, the reduction of virgin materials (non recycled), and building a supply chain that can work with reused materials and entire building modules.
It also implies rethinking construction materials and components related to embodied carbon, the use of virgin raw materials and the end-of-life scenario of buildings. Today, the deconstruction of buildings is still producing too much toxic waste and too little reusable material. In Germany, 32% of all toxic waste is produced by the construction sector, reports the European Commission.
Fresh money for new business models
Investors demonstrate their belief that radical change in the building sector is possible. For example, SoftBank’s investment with its Vision Fund into Katerra has been an important wake-up call for the industry. Katerra was founded only in 2015 with the promise to move much of the construction off-site, leverage on automation and new materials and deliver productivity gains through effective industrialization. That in 2020 SoftBank needed to bail out Katerra with 200M USD of fresh capital to save it from bankruptcy, however also shows that revolutionising the industry will not be without setbacks.
The circularity imperative to decouple resource consumption from economic growth is a big challenge for the industry. Most traditional construction companies have not yet explored business opportunities in the after-sales and end-of-life phases of buildings. Indeed most companies entirely lose track of their products and thus of valuable business opportunities. Such business opportunities might grow rapidly in value through the EU’s Environmental and Social Governance Standards (ESG). The EU’s sustainable finance framework is a stepwise approach, which will start to have direct implications for the industry from 2021 onwards (see figure below). The ESG taxonomy has the capacity to fundamentally redirect investment into new more sustainable business models.
For example, platforms for secondary material markets such as environmate.co.uk may create new value with the deconstruction of buildings and assets. The EU’s New Green Deal also requires the disclosure of building performance information which will allow for a fully digital ecosystem to emerge and digital twins of buildings provide the needed openness and transparency that new business models need to flourish. For instance the Dutch platform Madaster is at the forefront of online material platforms to enable buildings as material banks. The companies that are rapidly capable to make their products digital and smart will be able to benefit from entirely new and potentially disruptive business models.
Another area where the Green Deal might overcome barriers is energy efficiency renovation. In the EU only 1% of the building stock is being renovated each year. However, Thomas Boermans from E.ON, an energy utility, believes that clustering projects to capitalise on similarities of nearby buildings, can achieve larger project size and open options to include infrastructure solutions such as district heating. In addition, digitalisation, pre-fabricated systems and off-site and industrialised assembly can significantly bring down costs and make it much more attractive for owners, municipalities and businesses.
Embracing seamless digital and industrial processes
Productivity gains will only be achievable in the buildings sector if digital tools and processes are embraced across the value chain. This will require new collaboration frameworks that build trust and enable collaborative innovations across the value chain including new digital players. If the buildings sector is to fulfil its role as an agent that drives the CO2 neutrality goal of the European Green Deal, it needs to embrace digital manufacturing and industrialisation. The first will enable the needed efficiency gains and the two combined will make the sector more attractive for highly skilled labour, which today still prefers to apply their talent in other industries. Attracting talent from outside the building industry will be key to transfer best practices from other industries, secure digital skills for the industry and enable the emergence of new job profiles to drive productivity and sustainability.
EDHEC Business School with its Research Chair for Foresight, Innovation and Transformation and ARUP, a global global planning and consulting firm, will orchestrate an industry foresight project in 2021 that will bring together partners from across the industry to develop scenarios for the future building industry in 2040.
The article was co-authored with Martin Pauli, Associate Director, Europe Foresight Leader, Arup