In the runup to this year’s COP26 climate conference in Glasgow, there’s a renewed call to sharply pare greenhouse gas emissions from buildings — a long-neglected issue that urgently needs to be tackled, and one that Europe especially is trying to address.

Existing buildings and new construction are the source of nearly 40% of global energy-related carbon emissions and use up half of all extracted materials, according to the World Green Building Council, a U.S. nonprofit group. Any attempt to limit global warming to 2 degrees C above preindustrial levels, a threshold that would stave off some of the worst climate change scenarios, would require a 56% reduction in CO2 emissions by 2050, according to modeling from the Future Energy Outlooks team at Platts, a unit of S&P Global. But emissions are projected to fall only 7% under the current trajectory. That’s a big gap — and creates room for new investments.

This year’s United Nations COP conference has dedicated an entire day to “Cities, Regions and Built Environment” — the first time it has done so.  Attendees can visit a “virtual pavilion” and learn about building best practices. There’s a separate “Built Environment and Net Zero” conference coinciding with COP26 on Nov. 11. And to capitalize on the occasion, a group of business and government networks, known as the #BuildingToCOP26 Coalition, have joined forces to address the role of buildings in the green transition.

More property owners, real estate investors, and corporations are pushing on the building decarbonization issue not only to help cool a warming world but also because their prosperity depends on it. A recent Sustainable1 analysis using S&P Global Trucost data showed that after utilities and materials, the real estate sector is one of the most exposed to physical risk triggered by climate change.

Cities will continue to grow throughout the climate crisis, making efforts to green the buildings sector all the more urgent. By 2050, the building stock is expected to double, with 1.6 billion urban dwellers regularly exposed to very high temperatures. More than 800 million people will live in in 570 cities vulnerable to sea level rise and coastal flooding, according the World Green Building Council.

In recent months, cities from Sydney to Cape Town to Vancouver to Los Angeles have voiced support for net zero buildings. But progress is uneven. After flattening between 2013 and 2016, energy-related CO2 emissions from buildings have risen in recent years, according to the International Energy Agency. In fact, in 2019, direct and indirect emissions from electricity and commercial heat used in buildings rose to 10 gigatons of CO2, the highest level ever recorded.

In that context, Europe has launched a particularly aggressive plan called the “Renovation Wave” to taper emissions and energy use from buildings, requiring 35 million structures to be renovated over the next decade. It’s part of Europe’s broader goal of becoming the world’s first net zero continent.

Buildings are responsible for about 40% of the EU's energy consumption and 36% of greenhouse gas emissions from energy use, according to the European Commission. About 220 million buildings — or 85% of Europe's entire building stock — were built before 2001. Many of these structures use old technology, are fitted with wasteful appliances and rely on fossil fuels for heating.

Fuel consumption and emissions data from S&P Global Platts Analytics’ Global Integrated Energy Model shows that reducing housing sector emissions will be key to achieving 2030 emissions targets in Europe and the U.K. But the challenges vary by country. 

In Germany, the remaining share of coal in power generation means that electrification of aging oil heating systems doesn’t have an immediate impact on emissions reductions without adequate buildout of renewable power sources, according to Adrian Dorsch, lead analyst for European gas at S&P Global Platts. The U.K. and the Netherlands, meanwhile, will struggle to wean themselves off longstanding natural gas heating infrastructure amid slow turnover of housing stock.

There is, however, low-hanging fruit in Europe. In Poland, 35% of the energy used by residential and commercial buildings is still provided by coal-fired district heating. Poland’s government wants to replace coal with natural gas (and hydrogen), but methane emissions associated with natural gas production could lower the emissions impact of such a switch, Dorsch added. 

The EU says its renovation project will help cut building emissions by 60%, reduce final energy consumption by 14% and lower energy consumption for heating and cooling by 18%, when compared to 2015 levels.

A wide swath of players will have to adjust. Construction companies need to switch to materials made by less carbon-intensive methods. Corporations must revamp older buildings to comply with the new rules. Asset managers with significant real estate holdings will increasingly have to assess the transition risk. Homeowners will be prodded to spend more money to make homes energy efficient.

"Heating homes emits more carbon than all the coal power plants in Europe," said Jan Rosenow, European program director at the nonprofit Regulatory Assistance Project, during a Feb. 23 online press event about the European Green Deal. Rosenow noted that attaining the EU goal would require cutting CO2 emissions from buildings by 60% compared to 2015 levels, squeezing at least 10 times the energy savings from buildings than the current rate, and getting 4.6% of homes each year to switch to low-carbon heating. "It's going to be all about smart buildings — less gas, more electricity," Rosenow added.

The cost is eye-watering. It will require public funding to the tune of €90 billion per year in Europe to sufficiently boost the rate of "deep renovations," or renovations that improve the energy performance of a building by at least 60%, according to a May 2020 report published by the Buildings Performance Institute Europe, a Brussels think tank. The analysis also estimated that the "total investment opportunity" for renovating Europe's buildings was about €243 billion per year.

COVID-19 has complicated things. Lockdowns aimed at stemming the spread of the virus have brought the residential sector into sharper focus like no other event, as millions of Europeans have made homes their principal hub for teleworking, schooling, online shopping and entertainment. At the same time, pandemic-related job losses mean that many homeowners have less money to pour into eco-friendly home improvement.

"Some of the effects of the pandemic may continue in the longer term creating new demands on our buildings and their energy and resource profile, further adding to the need to renovate them deeply and on a massive scale," the EU acknowledged when announcing the Renovation Wave strategy.

To date, progress on decarbonizing the building sector has been slow. The task is complex, but COP26 could provide a forum to meaningfully advance discussions around one of the sectors that hold the keys to achieving a net zero world.

As Mark Reynolds, CEO of U.K. construction company Mace Group, put it in an interview with S&P Global Sustainable1: “It’s one of the sectors that probably could, as a sleeping giant, make the biggest impact in the shortest amount of time.”