Net zero investment, policy, training, and bravery

Decisions to fund net zero in the built environment are already being influenced by market pressure, but need policy sticks and carrots, better and more coordinated ‘selling’ of construction careers to younger people, and coordinated bravery – “a moonshot” – to reach our 2050 targets.

These were the conclusions from the Chartered Institute of Building’s (CIOB) latest client roundtable of senior construction clients, real estate investors, developers, and construction professionals at the recent UKREIIF conference.

Convened to discuss the challenges of achieving net zero in construction, the roundtable was part of CIOB’s ongoing Client Strategy to support construction clients.

To encourage a frank and open exchange, the session was conducted under Chatham House rules and so thoughts and ideas in this write-up are not attributed. CIOB President and Client Champion Sandi Rhys-Jones OBE was in the chair.

The investment landscape

The Chair kicked off with a question probing the current state of play in real estate investment, particularly in relation to funding buildings that target net zero.

Delegates reported that the overall investment picture continues to be difficult because of persistent high interest rates, which they reckon will last for at least another year. As one delegate put it, “Every central Western bank is quantitative tightening, so it’s just the laws of physics: there’s going to be less money in the system.” The problem is that the cost of funding makes it hard for appraisals to stack up – every margin is squeezed.

That said, there was some optimism that the lull in lending would free up funders’ attention long enough to allow them to reappraise their attitude to achieving sustainable goals through real estate.

According to one delegate, before the current economic slowdown, investors reacted badly to any attempt to reduce carbon emissions if it dented the bottom line. The delegate hoped that, when interest rates drop again, lenders will have had time to appreciate the benefits of giving more weight to green targets.

User demand and viability trade-offs

The group reported that these benefits are real. Occupiers actively seek out and will sometimes pay extra for greener accommodation to support their ESG commitments. As one developer contractor delegate put it, “Demands of occupiers’ own sustainability criteria have gone through the roof. BREEAM Excellent is no longer good enough and neither is Outstanding.”

All the developers in the room accepted that the push for net zero had by now gone mainstream. However, while the idea of net zero is accepted, its application is still patchy, not least because, until the UK Net Zero Carbon Buildings Standard is finalised, the definition of a net zero building is still uncertain.

The chief difficulty, of course, is how to account for carbon emissions over an asset’s whole life from conception to obsolescence. It was unsurprising, therefore, that the roundtable delegates did not limit the discussion just to net zero but extended the scope to include sustainable measures more generally. After all, building projects and existing built assets aren’t either net zero or not but more likely some distance along, as one delegate put it, “a net zero pathway.”

Experiences of attracting funding for going farther down this pathway were mixed. One local authority delegate found that it definitely is possible in the new build residential sector – if done at scale.

It is much harder to interest investors who divest on completion, though. The problem is that the viability of some green measures remains a significant obstacle for shorter-term funders. A delegate cited the example of trying to deploy decentralized energy systems across a housing development: the necessary plant would consume useable space, damaging potential yields.

Another of the challenges for investors is that net zero retrofit or refurbishment as an asset class is still poorly defined, which attracts uncertainty and, therefore, tends to disincentivise the release of funding.

Carrots and sticks: the role of net zero policy in changing behaviour

End-users’ changing attitudes are not just in response to escalating average global temperatures and other environmental indicators (as enshrined in ESG commitments), of course. It is also driven by a tightening regulatory environment. For example, the UK government’s plan to increase the minimum energy efficiency standards for non-domestic rental properties in steps is having the desired effect: tenants are demanding higher EPCs and landlords are responding with upgrades – even if the policy is not and never has been enforced, according to one delegate.

However, the policy was criticised for being inadequate for the size of the ultimate net-zero-by-2050 challenge facing the nation. Several delegates criticized EPCs and, indeed, other measures including BREEAM and Well as being poor measures of whole life carbon and inadequate when it came to net zero.

They had more respect for NABERS certification, which measures operational energy use over time and must be renewed every year. Even so, a delegate questioned the nation’s ability to measure the entire building stock’s carbon emissions with any accuracy. And if we can’t measure carbon accurately, we won’t be able to map a path to net zero, he felt.

The Chair agreed with another delegate that, while EPCs might have some value for cavity wall construction, it was inappropriate for traditional solid wall construction – a considerable problem, given the age of many buildings.

Another critical voice thought that the UK government’s EPC policy failed to take account of landlords’ intrinsic motivations to minimise and delay capital outlay. The policy’s approach of setting periodic deadlines for achieving a higher EPC rating created “inflation points” where landlords were tapping all the service providers and suppliers at the same time, ramping up costs. Also, the small gains in energy efficiency through EPCs, he felt, missed an opportunity to upgrade the nation’s buildings’ energy efficiency faster by incentivising landlords to do more sooner. His solution was to find a way to reward renters for leasing greener properties.

The plea for less stick and more carrot was echoed by another delegate, who felt that the planning system should favour net zero applications with faster decisions.

Another delegate could vouch for the stick approach, citing New York City’s Local Law 97. By the end of 2024, all existing buildings in NYC must be fully electric. If developers don’t meet the target, they are fined. This policy is also stepped, with more stringent thresholds on the path to net zero in 2030 and again in 2034.

Despite a loud outcry from developers, Local Law 97 has proved very successful, with 90% compliance at the start of 2024. If you face a substantial financial penalty for non-compliance, suddenly the gap between investing and not investing starts to narrow. As the delegate put it: “The fines have actually lowered the green premium.”

Labour and skills shortages: culture change and training

The Chair asked the panel whether the UK had the skills and labour force to effect the transition to net zero.

Again, the scope opened up: the group was very vocal about the labour and skills shortage not just in net zero competence but in construction as a whole. There was near-universal agreement that the shortages were about the industry’s culture as much as the failure to attract young people. A lack of diversity and a disgracefully high suicide rate were picked out as targets for action.

The group highlighted a number of small-scale initiatives underway to change the narrative.

The Open City charity’s ‘Accelerate’ programme in London that introduces young people from disadvantaged backgrounds to construction jobs is, reportedly, very successful.

Crown Estates encourages ethnic minority people around Westminster into construction and real estate roles by listening to their needs and inviting them into their offices as well as opening their eyes to the many careers available.

Several of the delegates highlighted their disparate efforts to attract new entrants by going into schools or investing in training centres.

There was some disagreement about how excited young people are about the prospect of working in construction. While one reported a lack of engagement, another reported how young people in the area covered by Ipswich Borough Council were clamouring to get into local colleges to train in construction trades, including to learn net zero skills. The only thing holding them back, reportedly, is a dearth of willing lecturers and restrictions on how funding from the Apprenticeship Levy is used.

The group agreed that the rich variety of careers in construction, which has expanded beyond all recognition in recent years – especially in the wake of the Building Safety Act – into, for example, data engineering and building physics, has not been sold well enough.

While teachers and parents tend not to help, the main culprits, the group acknowledged, is with the industry itself. Suggested cures included retirees and mid-career professionals volunteering in colleges and training centres, and focusing not on the tough nuts and bolts of construction but its extraordinarily inspiring purpose.

The piecemeal initiatives described in the session, while encouraging, were too little and too disjointed. Instead, one delegate maintained, a centralised, coordinated system was needed. And if research carried out by The Crown Estate and Historic England (with Peabody Estates, Grosvenor, and National Trust Estates) is anything to go by, expanding and upskilling the construction workforce would generate billions in added value for the country.

Launching a moonshot

Overall, delegates felt that the UK’s approach to net zero involved too much red tape – as distinct from regulation. Setting a detailed rulebook and then expecting everyone to follow it was perceived as unrealistic and unpragmatic.

Equally, investment in the UK’s built environment sector was criticised for being too risk-averse, as exemplified by the recent rash of insolvencies in MMC, which on paper still looks like it will help the UK down the net zero pathway. Investors should embrace failure – especially when, in the case of MMC, there are plenty of examples of successful projects - and learn from it as part of the journey to finding better solutions. As one delegate put it, what the UK’s real estate and construction sectors need is the bravery to collaborate on “a moonshot.” Otherwise, he said, the UK will miss its 2050 net zero target.