Global Capital Green Finance Report: Housing and Buildings

Global Capital, IMF editions, October 2015

Just south of the city of Växjö in southern Sweden is a new residential neighbourhood called Solallén. It’s a cluster of 21 black and yellow townhouses that, aesthetically pleasing as they are with their high ceilings and bike parking and gardens, would be unremarkable were it not for the fact that they constitute the first net zero energy residential neighbourhood in Sweden.

This is the holy grail of environmental house building: Deep Green, according to the colour palette Skanska, the developer, uses to assess just how environmentally friendly a building really is. But what does Deep Green, or even zero net energy, really mean?

To Skanska, Deep Green certification requires meeting three of six objectives: net zero primary energy, zero waste, zero unsustainable materials, zero hazardous materials, near zero embodied carbon and net zero water.  Solallén hits three of them (primary energy, unsustainable materials and hazardous materials) while also exceeding the demand Svanen Nordic ecolabel voluntary requirements for moisture safety, carbon emissions and material choices. They’re designed to use 45% less water than typical newly built Swedish homes – and your average Swedish home, let’s be clear, is already on the more environmentally benevolent end of the spectrum – and was achieved with the diversion of 98% of its construction waste from landfill. It realized embodied carbon savings of 37% (embodied carbon being the CO2 produced during the manufacture of materials, their transport and assembly on site, their maintenance and replacement, and eventually their decomposition).

If all that sounds jargony, let’s put it simply: it means they generate more energy than they use. The photovoltaic panels on the roof produce 31 kWh per square metre of electricity, but only use 30. Logically it means, at least in terms of energy, that it is better for the environment that the house is built than if it isn’t. “We have been on a journey since the mid-1990s,” says Johan Gerklev, sustainability manager at Skanska Sverige. “And that journey has a clear absolute goal that we call deep green, which means a zero environmental impact, or even a positive environmental impact, on the area and on the globe.”

Skanska uses a colour palette, sort of a green map, categorising projects as vanilla, green one, two, three or deep green, and looks at each project from four perspectives: energy, climate, material including waste, and water. If a project has energy performance 50% better than the environmental code in that country, it’s classified as green 2; to be green 3, it needs to be 75% better, and to be deep green it needs to have zero net energy. “We will not in the near future have a net positive impact in all four areas,” says Gerklev. “But we have put on the market buildings that produce more energy than they consume, and projects that have generated no waste to landfill.”

Getting something to be positive from a climate perspective is more challenging, but even there, some of the projects Skanska has put on the Norwegian market have generated so much surplus energy that it arguably outweighs whatever carbon emissions were generated during their construction and subsequent operation.

These policies apply more broadly than just housing. One of Skanska’s flagships is the Väla Gård office building in Helsingborg, which also achieved net zero energy, zero hazardous materials and zero waste sent to landfill. Offices are often ranked for environmental standing by the agency LEED, and this one logged LEED Platinum, making it one of the highest scoring projects under that methodology in Europe. Nor is it exclusively the preserve of Sweden. Another LEED Platinum certified building is Stone34, a mixed use commercial building in Seattle that is designed according to the City of Seattle’s Deep Green Pilot program (which is somewhat different to Skanska’s own methodology), and another is the Bentley Works in Doncaster, a net zero primary energy site Deep Green site. “Sweden is in the forefront, but there are areas where we can learn from our colleagues,” says Gerklev. “We took the work you have been doing in the UK on carbon calculations and environmental certification and took it into the Swedish market.”

The Climate Bond Initiative calculates a $19.6 billion total value of climate-related bonds financing buildings and industry, 45% of it labelled green. On the labelled side, European real estate corporates and US State universities are the main issuers; among those that are unlabelled but which CBI considers green anyway, the biggest is LG Electronics, whose 251 bonds as of June 2015 were worth $4.6 billion, about a quarter of the whole sector. Almost all of its product range is certified with the Energy Star label, which is why it qualifies.

It’s not just about low-carbon buildings: energy efficiency, energy efficient appliances and lighting, and energy service companies all fit within the theme. Low carbon buildings carry certification from LEED, BREEAM or an equivalent. Climate Bonds Initiative has its own standard for low carbon buildings; the first green bond to be issued under the property standard was a US$500 million issue from ANZ in May 2015.

“If you look on a global perspective, I would say the building and construction sector is a major player” in terms of environmental impact, says Gerklev. “Our business is downstream. Instead of having to put a lot of extra energy into the grid, we can have an impact as an end user by reducing the energy that we require,” particularly since in some countries buildings and the construction sector consume 30 to 40% of all energy. “You can have an impact both from an economic and an environmental point of view. So it makes a lot of sense to focus on the building sector.”

One of the attractions of bringing environmental principles to housing is that it has a number of immediate knock-on benefits. Flensborg recalls a study of an upgrading of a New York office, make it more efficiency with better use of light and cleaner air, sick leave dropped by 17%, with a consequent boost to productivity. “These things are important economic factors with a strong social benefit,” he says. It’s also a good example of how resource efficiency – in terms of using less resources, and therefore being more environmentally friendly – is simultaneously an economic boost to a company and broader society.

Skanska issued its first green bond in April 2014, a SEK850 million issue earmarked for green commercial property development (one which caught the eye in the financial markets since Skanska isn’t rated, though Handelsbanken at the time gave it an indicative rating of BBB). The company has a green bond framework, with eligible projects that are either LEED gold or above, BREEAM International “very good” or above, and use at least 25% less energy than is required by applicable codes and regulations. Still, Gerklev says that green bonds “have so far not been the major driving force when it comes to green in the construction sector, but for sure could do so. The finance business could have a huge impact on this sector, and if investors have more specific green demands it will push the sector forward.

“Also, I think it will not be enough to be green in the near future. You will have to be a lot greener and a lot more sustainable in all the different aspects of sustainability.” This might, in future, for example mean more than climate mitigation, but climate adaptation: “Adapting to a changed climate. That might mean developing eco-systems in and around buildings in a better way, with more green areas. It could mean an emphasis on the well-being not only of the building but those who are in the buildings. It could be to work more with a social sustainability agenda, to make the local community work in a better way.”