The built environment—that is, the cement and construction value chain—accounts for approximately 25 percent of global CO2 emissions. Reaching net zero by 20501 will require the buildings and construction industry to decarbonize three times faster over the next 30 years versus the previous 30. Companies from across the ecosystem have committed to decarbonization, but no one player can achieve this goal alone. At the COP26 Climate Change Conference, in Glasgow, Scotland, McKinsey hosted an interactive session that brought together global property owners, contractors, materials suppliers, investors, equipment manufacturers, and disruptors to define the path forward, with a focus on the following questions:
- What actions can the industry take now?
- How can stakeholders across the value chain collaborate to succeed?
Four key themes emerged from this roundtable.
- The challenge is huge, but concentrated. Materials processing and building operations together account for some 97 percent of building and infrastructure emissions.2 New buildings incorporating alternative materials, decarbonized cement and steel, and reduced embodied carbon are needed to meet net-zero targets. Existing stock will require renewable-energy sources, efficient building operations, and measuring performance, supported by more convenient end-to-end retrofit solutions.
- Businesses that move quickly and work together will solve the challenge—and create value. COP26 made clear that achieving net-zero emissions has become not only an organizing principle for business but a point of competitive differentiation (see McKinsey’s summary of five key priorities coming out of Glasgow). The construction industry has been stymied by a first-mover problem between policy, funding, and projects. CEOs can break the stalemate by joining (or forming) coalitions and moving at pace on investment and innovation.
- How do we get there?
- Shift from volume to value. Decarbonization is a license to grow, but grow responsibly. The industry historically has relied on GDP and population growth to create value—this will no longer suffice in a retrofit, redesigned world. Players must differentiate through decarbonization and by meeting new green demand. For example, developers that construct green buildings will have access to cheaper funding and green-only planning districts. Conversely, those that do not decarbonize will face an existential threat.
- Scale by sharing. Fragmentation distorts the risk equation for new green investment. The industry can boost innovation by developing common standards, shared R&D resources, and a forum to navigate and align decarbonization levers and new technologies.
- Get serious about green investment and new technologies. As the commitment of $130 trillion of private capital to the Glasgow Financial Alliance for Net Zero (GFANZ) made clear, there is no shortage of patient, green financing. Investors, however, face a shortage of large-scale green projects. Corporates can channel capital by making bigger bets on sustainability—decarbonizing existing assets at scale and partnering with the wide range of green start-ups serving the built environment.
- Start with the customer. Unlocking demand will require high-quality, convenient solutions, with a clear payback. In the retrofit market, for example, consumers are often deterred by complexity, unattractive offerings, and unclear financial benefits. Companies can break through by investing in new products and integrated solutions, taking a design-thinking approach to customer problems.
- Create a culture of innovation. The buildings and construction industry is notoriously slow to change. COP26 participants addressed the need to create a culture of innovation. Practical steps include setting targets for net new growth, promoting “test and learn” with minimum viable products, deploying venture capital–style metered funding, increasing R&D budgets, using certifications to drive a sustainability premium, and fostering precompetitive collaboration.
- Develop the skills now to deliver at scale. COP26 demonstrated that the industry has reached an inflection point. Policy and capital are moving and will make skills the bottleneck down the line: for example, the retrofitting workforce of tomorrow is not in place today. Industry leaders across the public and private sectors need to start developing the skills and capacity to deliver on the anticipated demand.
- The public sector can support by aligning ‘decarbonomics’ incentives. A mixture of carbon pricing, higher building performance standards, and building code changes can help move consumers and industry toward a more just and orderly net-zero transition. Clear signals are also needed on investment horizons, especially for transitional solutions (for example, biomass).
