At a Glance
Switching to greener technologies in construction and operation of buildings and materials, combined with more climate-friendly capital markets, could reduce the construction value chain’s carbon footprint 23 percent by 2035, while creating investment opportunities in emerging markets, according to a major report from the International Finance Corporation.
Construction value chains, which comprise the construction and operation of buildings and the production of materials such as cement and steel, are a major contributor to global warming, accounting for about 40 percent of global energy and industrial-related CO2 emissions, more than two-thirds of which is from emerging markets.
Current trajectories put emissions from construction on a path to rise by 13 percent globally by 2035 without additional mitigation and adaptation efforts, the research shows. Energy-saving design, construction, and operations practices and access to climate-friendly capital markets that channel more investment to the construction value chain could curb emissions by 12.8 percent by 2035 from 2022 levels. This would mark a significant breakthrough in the fight against climate change, reducing the likelihood of extreme weather events that exact an ever-higher economic and human cost on the world’s poorest populations. Companies that reap cost-saving or new business opportunities would also find benefits to their bottom line.
Path to Green Buildings
How can this be achieved? Heating, cooling, and powering buildings represents around half of the construction sector’s 40 percent share of global emissions, IFC estimates. This can be abated through energy-efficient designs for new structures, orienting them toward the sun, incorporating more external shading, and installing smaller windows. Existing buildings can also be improved by lightly retrofitting them with more efficient cooling and heating systems, smart meters, and by applying reflective paint to external surfaces and rooftops, among other sustainable practices and technologies. In addition to addressing climate change, this would generate savings for building owners. For example, a reflective roof could save more than $20,000 a year in electricity bills compared with conventional building design in a one-floor warehouse in Bogota, Colombia.
The other major contributor to emissions from the construction sector—about half its CO2 output—is the production of building materials, principally cement and steel. Cement production is the most carbon-intensive activity in the world. Using alternative fuel sources such as biomass, waste, and industrial residues, combined with wind and solar renewable energies rather than coal, can reduce emissions from cement production by 20 percent. Taking energy and resource efficiency measures can save up to 30 percent in electricity plant needs. In the steelmaking industry, injecting pure oxygen into blast furnaces uses less coal and can lower emissions by 15 to 20 percent.
In the longer term, green hydrogen technology, which generates energy by splitting water into hydrogen and oxygen using renewable electricity, offers a promising solution for decarbonization in the cement industry. Meanwhile, carbon capture — taking the CO2 from emissions and either storing or recycling it for further industrial use — could potentially almost halve carbon emissions by 2050 and beyond, the research finds.
Financial and Regulatory Tools
All this needs to be funded, presenting a further challenge because sustainable finance markets are less developed in emerging markets than in advanced economies. Of the $230 billion of green private debt finance that was made available in 2021 for construction value chains, just 10 percent went to emerging markets, with most of that going to China. To date, most of this green private debt financing has been directed toward the construction and operation of buildings. Just 9 percent of financing has gone into greening the manufacturing of construction materials, the activity responsible for almost half the value chain’s carbon footprint.
The research indicates that the total cost of greening construction value chains would amount to just 0.03 percentage points of global GDP per year on average between 2022 and 2035 if the recommended energy efficiency measures are taken, with global investment needs estimated at $3.5 trillion, of which $1.5 trillion is for emerging markets.
Many financing tools have been developed in recent years that can be harnessed to increase emerging markets’ share of global financing for green buildings. One of these is blended finance, a field pioneered by IFC that combines public and private funding. Other instruments include sustainability-linked debt, green mortgages, and venture capital funds.
Development finance institutions like IFC are well placed to unleash more green building finance. They can, for example, serve as an anchor investor, providing concessional and blended financing, and operationalizing various supranational climate funds. Governments can make a crucial contribution, for example, by strengthening energy-efficiency codes and regulations and carbon pricing policies that incentivize more sustainable construction and lower emissions, by introducing tax breaks (where fiscal space permits) for technologies that reduce emissions, and by enacting more disclosure requirements on the environmental, social, and governance performances of companies, among other policies.
