Reducing carbon emissions has become a top priority for governments, businesses and investors as the world tries to limit global warming yet fails to get on the right track.

The lowest-hanging fruit is reducing emissions of existing assets. A large number of investors and asset managers are seeking to do just that, having adopted net-zero commitments, either at the portfolio level, the firm level or both.

But there is an earlier stage worth considering, too: the construction phase. The United Nations Environment Programme (UNEP) found in its 2022 Global Status Report for Buildings and Construction that the production of concrete, steel and aluminium accounted for 4 percent of global energy use and 6 percent of global emissions in 2021, with the production of glass and bricks responsible for another 2-4 percent of global emissions.

That’s in addition to the roughly 30 percent of global energy the buildings sector consumed during that same year and around 27 percent of operational-related CO2 emissions it accounted for.

Combined, this makes buildings and infrastructure directly responsible for almost 40 percent of global energy and process-related emissions – with asset types like road surfaces and airport runways contributing further, not to mention the question of Scope 3 emissions.

Therefore, an increased focus on greener construction practices can have the double whammy of reducing emissions at the construction stage while setting an asset up to emit less during its operational life.

Get to the source

While a wind or solar farm, say, may appear to have relatively low operational emissions, the construction process – from panels and turbines down to the fencing around the facility – is extremely carbon-intensive. It all comes down to the materials used.

“I think a lot of it is in the hands of the construction companies and the design companies, who I think have done a very good job of taking all that into account,” says Sadek Wahba, founder and managing partner of I Squared Capital.

At least, that is, for greenfield projects, though not all are created equal. InEight, a construction management software provider, sees a wide variation in the types of projects that prioritise sustainability in design and construction. “Publicly funded infrastructure such as roads and bridges lag behind privately funded, alternative energy projects such as solar and wind farms, for which ‘green’ is a key part of securing public acceptance of the project,” explains Brad Barth, the company’s chief product officer.

Ryan Harter, a principal in the development group at CIM Group, says his firm takes a “project-specific approach” when it comes to sustainability in its construction practices. “What makes sense in Atlanta, where we’re developing a massive 50-acre project, doesn’t make sense in, say, Manhattan,” he comments.

Brownfield projects have an understandably tougher time. “Certainly, greenfield projects are easier to achieve sustainability goals,” says Barth. “Retrofitting existing assets not only brings engineering challenges – as the asset may be too old or incompatible with new technologies to achieve sustainability targets – but also invariably leads to difficult funding decisions.”

Those decisions require answers to the following questions: do asset managers invest millions of dollars in capital to ‘green’ an existing building, or do they deploy said capital towards new assets? Is that money better spent building the infrastructure of tomorrow? Should environmentally unfriendly brownfield assets be considered a sunk cost?

Wahba seems to think so – for certain assets, at least. “Unfortunately, the sunk cost is already there and there’s not much you can do about it,” he says. “If you look at a power plant, a power plant is a power plant. If it’s a gas-fired power plant, you can improve its efficiency here and there, its use of water, its own use of electricity, but the fundamental business is what it is.”

His outlook on existing roads and bridges is a bit sunnier. He notes that lighting can be improved by making it solar based, and maintenance and upgrades can be done with more sustainable materials. Similarly, buildings can be ‘greened’ by handling their electricity consumption.

“The main source of emissions in buildings is from operations, largely from electricity and energy use,” Harter says. “And there are often readily available wins to improve the sustainability and performance of buildings.”

Gains can be made through, for example, AI-adapted heating and cooling systems and carbon capture systems, as long as the incentives are there for companies to invest in them.

Materials as infrastructure?

Investors are pursuing a variety of methods to push these technologies forward. The option that is probably being pursued least, for now, is direct investment in technology businesses from a GP’s balance sheet.

“That’s not something we are actively thinking about,” says Foresight Group partner Dan Wells – a response common among most GPs we spoke to for this story.

“We’re not looking to own upstream construction materials assets, but I could see the logic of investing if you want to control that upstream resource one day”

Dan Wells
Foresight Group

A more realistic approach now is for GPs to invest in these types of businesses through the traditional infrastructure funds they manage – as long as they fit the definition of infrastructure, which usually means they must be larger-scale production assets, usually with offtake agreements in place or some other sort of competitive advantage.

“As Foresight Energy Infrastructure Partners grows, for example, and we raise more capital in that series of funds, we would take a broader look at what the definition of energy infrastructure is, because it is increasingly becoming intertwined with other sectors,” Wells says. “We’re not looking to own upstream construction materials assets, but I could see the logic of investing if you want to control that upstream resource one day. The closest analogue now for us would be if we ended up investing in a green steel plant.”

One example of this approach in action is Blue Phoenix Group, a business that recycles incinerator ash to extract metals and produce aggregates for use in the construction sector. BPG is 70 percent owned by funds managed by InfraVia Capital Partners and 30 percent by Daiwa International Capital Partners.

“It’s an established infrastructure business,” says Vincent Menager, investment director at InfraVia, citing the knowledge and expertise required to efficiently manage the processing recycling of incinerator ash, as well as its offtake networks, as differentiating factors.

Daiwa chief executive Gregor Jackson says that BPG “ticked all the boxes” as a market leader with strong thematic tailwinds and a good management team. “It makes a real impact in terms of carbon negativity and maximising the efficient use of finite resources, particularly metals which are required for energy transition,” he says. “You have to be very disciplined here. There are a lot of very exciting technologies on the horizon, but unless it has been proven at scale to be technically and commercially viable then it’s not infrastructure in our view.”

“There are a lot of very exciting technologies on the horizon, but unless it has been proven at scale to be technically and commercially viable then it’s not infrastructure in
our view”

Gregor Jackson

BPG is an example, then, of where the traditional infrastructure investment thesis can dovetail neatly with the question of how to decarbonise construction.

But for the riskier, emerging technologies – those that are less developed, have a smaller initial customer base, or require significant investment before achieving economies of scale – a different approach is needed.

Venturing out

I Squared Capital has decided to take matters into its own hands, launching a standalone Global InfraTech Fund that is “looking very hard” at new materials and construction techniques, explains Wahba. The fund explicitly targets growth-stage companies that are using technology to transform sectors such as transport, energy and digital infrastructure.

“Venture capital is doing this already, but it is looking at it from a purely VC perspective without necessarily having a focus on infrastructure,” Wahba says. “The advantage of someone with an infrastructure focus doing this is that they can test right away whether these [technologies] are applicable or not [to our sector].”

The fund targets traditional venture-style returns, meaning that it is a different beast entirely from a traditional infrastructure vehicle. It is led by Peter Corsell, who joined I Squared in 2019 after it acquired his business, Twenty First Century Utilities, a private investment firm focused on sustainable technology in the power sector.

Sustainability-focused asset manager and consultant Pollination is taking a similar approach, with managing director and head of global investments Diana Callebaut describing it as an “enormous opportunity” for investors. The firm is set to soon launch a climate-focused venture capital fund focused on Australia that will have building materials as a key investment thematic.

“There are still two constraints: one is the effectiveness [of these technologies], making sure they are sufficiently proven for building companies to adopt them, and the other is the unit costs of some of these solutions,” Callebaut says. “There’s still quite a bit of work to be done on that front until the floodgates open.

“We see the investment opportunity as being in that venture space, or the growth equity space.”

Sydney-based Taronga Ventures provides a different take on this model. Seemingly a typical venture capital firm, Taronga Ventures specialises in businesses and technology related to the built environment – what it calls RealTech, short for real assets technology.

Unusually, too, the LPs in its RealTech Ventures Fund series are drawn from the asset manager universe. It counts the likes of Dexus (the soon-to-be-owner of AMP Capital’s Australian infrastructure business), Patrizia, PGIM, CBRE and Grosvenor among its investors.

“It’s a win-win – our investors get access to our investments, which can help them to reduce cost, increase safety and improve the sustainability of their assets. And for our portfolio companies, we can make connections between them and the customers that would be most interested in their products,” says Avi Naidu, co-founder and managing partner of Taronga Ventures.

Here, the asset managers are investing from their own balance sheets, but they don’t have to go direct – they are using a specialist VC manager, which subsequently allows them early access to innovative technology.

It also depends on the type of technology that a GP wants to invest in, says Joanna Parent, investment director at Mirova’s Private Equity Impact Fund: “In terms of materials, as the process is much longer to develop the product, then gain certification and regulatory approvals, it may be too long for a private equity investor and the risk may be too high. So we think that is [better suited] to public funding or deep tech funds.

“But for innovation on the process or digitalisation side, we think there is space for private equity funds to accelerate [change], because construction today is a market with several major companies who take the same historical approaches [to building], as it is complicated for them to change culture and their way of doing business. It is more for PE to help these businesses grow to a significant size where they might then be acquired by the major construction companies, to help them change the way they work.”

The policy play

The role of the public sector is also important beyond providing funding. Governments have a huge influence on the direction of travel with the policies they enact and the regulations they enforce.

In the US, the passage of the Inflation Reduction Act and the Bipartisan Infrastructure Law each made a splash. The latter, enacted at the end of 2021, set national standards for carbon emissions in concrete production. Those standards include a 20 percent reduction in greenhouse gas emissions compared with previous standards and require third-party licensing in the form of an “environmental product declaration”. Enforced through the General Services Administration, any project that seeks BIL funds will be required to comply. The IRA, however, works not through mandate, but through incentive.

“Outside of the voluntary market – which does exist – the IRA has made many green construction projects economically viable when they previously weren’t. Those types of projects get direct subsidies through tax breaks,” explains Dan Sinaiko, a partner in the global projects, energy, natural resources and infrastructure practice at law firm Allen & Overy.

CIM Group’s Harter agrees. “The Inflation Reduction Act is phenomenal for [CIM] because it provides a massive amount of financial incentive both on the industry and production side, but also on the technology deployment side. It just gets people excited about using technologies that until now might have been challenging because of their higher cost basis,” he says.

“The IRA has made many green construction projects economically viable when they previously weren’t… through
tax breaks”

Dan Sinaiko
Allen & Overy

Said technology incentives include investment tax credits for heat pumps, the extension of the 179D deduction for energy efficiency upgrades in commercial buildings, and clean manufacturing tax credits for decomposition retrofits at cement and steel production facilities.

What more can be done?

While there are many things to celebrate in US construction policy right now, Wahba – currently a member of President Biden’s national infrastructure advisory council – leaves room for criticism. “What we need is research and development from universities, from federal grants that focus on finding these things. Most companies that I talk to are getting support from the Israeli government. Why is the US government not providing that kind of encouragement?” he asks.

On the international level, there are associations and organisations that encourage new sustainable construction technologies, such as the UNEP’s sustainable buildings and climate initiative, but they’re relatively small.

“Not enough is currently being done through government bodies to promote [sustainable construction’s] use in a sensible and increasing manner,” remarks Paul Knight, chief executive of Blue Phoenix Group. “That is not to say nothing happens today. However, we do not see enough incentivisation to ensure that the end users or construction companies see the enhanced benefit.

“This should be done through a more focused project scoring for recycled use as well as higher taxations on the use of virgin materials. We still see countries and regions that have approved the use of energy-from-waste operations but inhibit the use of recycled material for their construction projects and redevelopments. This needs to change.”

There is a sense among many that the tide is turning, with operators and owners of infrastructure assets taking an increasing interest in how their assets are built and maintained, and in the materials used to do so.

“Investors are definitely more engaged now and their expectations are higher,” Callebaut says. “There is a much bigger desire to have tangible facts that can evidence action.

Perhaps not always at the granular level of digging into what material is used, but at the more holistic, total-project level, that line of inquiry is stronger than it has ever been.”

Taronga’s Naidu echoes this, saying: “We see this every single day now. Capital is the biggest driver of this, and many asset managers have begun to realise that doors of capital are beginning to close if you are not thinking about this.”

To achieve the International Energy Agency’s Net Zero Emissions by 2050 Scenario, emissions from the buildings and construction sector need to fall by more than 98 percent from 2020 levels. But the sector is set to fall well short of this target on current trends, with the IEA describing it as “not on track” in 2022.

Financing energy efficiency and decarbonisation of both operational assets and the construction process for greenfield assets is a vital piece of the puzzle, with investors increasingly aware of the scale of the opportunities on offer to them should they find a model that makes it work.

What to measure?

The conversation around sustainable construction becomes more complicated once numbers are involved. For example, how much of a reduction in carbon emissions will one new technology or new method produce? Which assets are the highest emitters, and which should be prioritised for “greening”?

Most GPs interviewed were gung-ho on data. They said that it can aid in educating the public on sustainability, as well as help track energy usage, supply chain emissions and more.

I Squared’s Sadek Wahba was a bit more reserved: “Before we talk about monitoring, we have to ask ourselves the question of monitoring what and for what purpose,” he says. “So monitoring CO2 emissions and greenhouse gas emissions, there isn’t a consensus on how to measure that. How do you measure greenhouse gas emissions for one industry versus another? Do you measure it in absolute numbers? Do you measure it in terms of intensity?”

Brad Barth of InEight, who lives and breathes sustainability data, agrees. “Different infrastructure owners have different requirements, or sometimes no requirements, leading to data collection processes that are haphazard, reactive and ill-defined,” he says. “The first step toward improvement is what is already happening in much of Europe, where sustainability criteria are explicitly specified as part of project awards.”

Indeed, while the EU has yet to implement a cohesive policy, the European Committee for Standardisation – a nonbinding technocratic body – issued a sustainability of construction works standard (EN 15804+A2) that quantifies project sustainability levels based on a lifecycle assessment of given construction projects.

The EU is alone in its ability as an international body to set sustainable construction standards. Despite serving as a delegate at COP27, Wahba has yet to see a standard he thinks should be universally applied, nor has he been able to pinpoint a governing body suitable to set that standard. As a result, the question of measuring persists.

Innovation at a premium

There are many areas of focus for technological innovation in the construction materials space, but with concrete, steel and asphalt the most significant materials used in infrastructure projects, it is natural that infrastructure GPs take an interest in that space. Currently, many of these solutions do cost more than traditional alternatives.

On steel, the focus is mostly on greening the energy supply used to create it, with proponents of hydrogen hoping it will lead to truly ‘green steel’ production in future.

Most think that concrete will be much more challenging to decarbonise.

Taronga Ventures, a venture capital firm headquartered in Sydney that counts several prominent asset managers among its LPs, focuses on investments in nascent technologies that service the built environment – either during the operational phase of buildings and infrastructure assets, or during their construction.

Among its more high-profile investments is CarbonCure Technologies, a business that works with concrete producers to permanently store carbon dioxide within concrete by injecting it into the cement mix where it mineralises, meaning it both sequesters carbon and reduces the amount of cement content used in the process.

Its other investors include Amazon, Microsoft and Mitsubishi.

Meanwhile, Aggregate Industries’ biogenic asphalt is an example of innovation in the roads sector. The material includes a product made by living organisms that lock CO2 within the asphalt itself.

Aggregate’s director of sustainability, Kirstin McCarthy, says that this product costs around 5-10 percent more than traditional asphalt. “There is a price premium but it is just because that is how much more it costs us to produce,” she says. “This is the biggest challenge – there ultimately has to be a business case, and the market needs to accept that there is a higher cost to some of these products.”