In the push to abandon fossil fuels and steer the world towards a net zero carbon economy, a wave of regulation and new requirements has begun to focus on the built environment, posing the biggest challenge in decades to property owners, investors and construction firms.

The potential benefits are huge: the built environment is estimated to account for nearly 40 per cent of all greenhouse gas emissions, making both residential and commercial buildings an essential piece of the net zero puzzle.

According to the US Green Building Council, buildings with a Leadership in Energy and Environmental Design (LEED) certification consumed 25 per cent less energy, and emitted 34 per cent less CO2, than conventional buildings. A 2016 European Commission report stated: “Heating and cooling consume half of the EU’s energy, and much of it is wasted.”

Yet while all buildings must be carbon neutral by 2050 to meet the goals of the Paris Agreement, fewer than 1 per cent meet those standards today. Moreover, total CO2 emissions from commercial buildings between 1990 to 2015 increased 20 per cent in the US – and direct emissions are projected to rise by 20.4 per cent between 2016 and 2050, driven by the increased use of natural gas.

As regulations become stricter, owners will need to substantially increase investment levels over the coming decades, as well as keep on top of a rapidly expanding set of local and national laws.

The European Commission has committed to proposing mandatory minimum energy performance standards in the coming years. In the UK, legislation for minimum energy efficiency standards (MEES) now requires all new contracts for privately rented commercial and residential properties to have an E-rated energy performance certificate (EPC) or higher.

This legislation, which became active in 2018, will extend to existing commercial contracts in 2023, so the clock is ticking for owners and investors to conform to the new standards.

According to the Principles for Responsible Investment (PRI), real-estate investors need to incorporate environmental, social and governance (ESG) issues at every stage of the investment process, from ensuring proper due diligence at the deal-sourcing stage to considering ESG factors during the management of real-estate assets.

As investing along environmental, social and governance (ESG) lines moves ever closer towards the mainstream, companies have an increasing obligation to show their ESG credentials to clients, investors and shareholders. One way to do that is to showcase a commitment to ESG principles through headquarters, regional offices and production facilities that are run in a sustainable way.

Assessing alternative building materials can help reduce reliance on traditional energy-intensive materials such as concrete. Cement, a key ingredient of concrete, involves an energy-hungry process that accounts for 8 per cent of CO2 emissions globally every year.

Ensuring optimal insulation increases energy savings and reduces fuel consumption and greenhouse gas emissions. Improving insulation in existing buildings, for example, can reduce heating needs by up to a factor of 4.

Meanwhile, on-site electricity generation through solar and wind power lowers buildings’ energy costs, and can even provide additional energy to the market. The global commercial and industrial sector is expected to account for 19 per cent of net additions to solar capacity next year alone.

Institutional investors in the real-estate sector need sustainable assets in their portfolios to underscore their contribution towards a low-carbon future. And, as the Principles for Responsible Investment (PRI) point out, maximising a building’s energy efficiency not only improves the carbon footprint of a property portfolio but also poses a clear business benefit.

For one thing, installing more energy-efficient equipment – from better insulation to upgrading heating and air-conditioning systems – reduces operating costs over the long term.

Investing in sustainable buildings also improves the chances of increased revenue. Tenants prefer buildings with stronger ESG credentials, and would be willing to pay more for that than for higher carbon-emitting buildings – partly because of the growing concern over global warming but also because companies are increasingly worried about their own carbon footprint.

In turn, and because of tenant preference for buildings with higher ESG credentials, making buildings more energy-efficient reduces the need for landlords to offer incentives. It also reduces the likelihood of voids, since tenants are more likely to renew leases than seek alternative premises.

According to UK real-estate group Savills, over 90 per cent of the top 10 rents paid in the city of Manchester over the past two years involved buildings that had very high environmental standards.

Savills also notes that there is a clear so-called brown discount for buildings lower down the scale. Covid-19 and the rise of remote working has led to a significant drop in demand for office space, and the resulting hit on the market is expected to disproportionately affect older and lower-quality office space for years to come.

As Savills states,

For millions of employees, the pandemic spelt the suspension of office life – making working from home the norm, ending commutes and providing a safe, if sometimes lonely, work environment.

But when the threat of coronavirus eventually starts to dwindle in economies, the challenge for owners of and investors in commercial property is to tempt those workers back by creating healthy environments that promote physical and mental wellbeing.

One clear lesson from the pandemic is that air quality is paramount. About 75 per cent of the air in offices is filtered and recycled indoor air, according to a report by CB Insights last year. Buildings must mitigate indoor air pollution by using sustainable materials, building fabrics and proper ventilation.

Smart heating, ventilation and air conditioning (HVAC) systems with state-of-the-art air filters capable of capturing smaller particulate matter will be an essential upgrade for office and other commercial space. This is particularly important in the light of the pandemic and efforts to reduce the likelihood of future outbreaks.

Entrances and lobbies will have to transform, with the possibility of contactless health checks to clear workers upon arrival. Cleaning will become a bigger priority, with robotic solutions in bathrooms and kitchens likely to become more prevalent.

Lifts and other potentially cramped communal spaces pose a particular challenge. But technology – everything from holographic no-touch buttons in lifts to ultraviolet radiation to kill pathogens in vacated areas – can help to resolve many problems.

Beyond technology, commercial buildings will need to increase the amount of fresh air for their occupants, which means ensuring better access to outside spaces, as well as bringing nature closer to architecture.

In the Indian city of Pune, the design for a new school contemplates twin towers completely covered in green thanks to stepped planted balconies wrapping around every level. In addition to converting carbon dioxide into oxygen, certain plants can help remove pollutants from the air via phytoremediation, a process by which they absorb or stabilise toxic substances through their leaves or roots.

According to a 2019 study, poor employee health costs US employers $575bn a year in illness-related lost productivity. Better-designed buildings, with improved air quality and access to outdoor space, is not only an appropriate response to the pandemic – it may also contribute to better employee health and higher productivity.