Julia Nussholz, Patrick Moloney
November 8, 2022
Circular disruption in the buildings value chain
The ripple effect of aggressive regulation coupled with investor and customer expectations will drive a circular economy disruption in the buildings sector. In this article, our circular economy experts explain the consequences for the main actors in the buildings value chain.
In recent months, the buildings value chain has experienced increased emphasis on the transition to a circular economy. The transition has always been impeded by inconsistent definition - and thus understanding, the lack of a tangible business case and inadequate regulatory drivers. The definition, however, is now becoming clearer. This has been made possible by new regulation such as the EU taxonomy and the EU’s Sustainable Products Initiative, which includes both a revision of the construction products regulation and the new Eco-design for Sustainable Products Regulation.
An increased pressure on the investment community is also being witnessed via the application of the Sustainable Finance Disclosure Regulation (SFDR), which is forcing investors to clearly label investments with respect to their sustainable impact. The transition to a circular economy is part of the EU taxonomy and thus “labeled” as having a sustainable impact with respect to influencing and guiding investment decisions.
When the above is coupled with the recognition that it is virtually impossible to meet the requirements of the Paris Agreement without transitioning to a circular economy, significant disruption across the buildings value chain is now expected that will make integration of circular economy principles into the different actors of the buildings value chain shift from a ‘nice-to-do’ to a ‘must-do’.
The ripple effect of aggressive regulation coupled with investor and customer expectations means that no actor within the buildings value chain will be unaffected by the anticipated circular disruption with all actors being pressured to deliver upon the value chains necessity to transition to a circular economy.
The figure below illustrates the key actors within the value chain and the interconnectivity. In the following paragraphs some key issues that each actor will face are further elaborated upon.
First off, let’s consider the investors. With clarity, comes trust and with trust comes investment. The greatest impediment to circular investments to date has been lack of clarity around what is a circular investment and how to measure tangible impact.
The introduction of an EU Taxonomy (although far from perfect) does put some structure to what is a sustainable investment and what is not. The EU circular economy taxonomy that is currently in draft enables investors to label investment and fund types regarding their alignment with circular economy principles. This will promote investment flows in taxonomy aligned circular technology and infrastructure, which is expected to increase exponentially in the coming years.
But the enhanced opportunity to invest comes with a new wave of complex regulatory requirements. The labelling of investment funds, based upon rigorous disclosure requirements, as article 8 (light green) and article 9 (dark green), does provide investor clarity with respect to circular and sustainable impact, but they also require in-depth technical expertise on assessment requirements, interpretation of technical criteria, and screening processes.
Going beyond a one-time screening towards integrating taxonomy criteria into investment strategy and planning, requires extensive capability-building throughout different steps of the investment cycle. Devising plans for optimising investment return with circular economy criteria in mind, requires revision of KPI’s and targets. This will obviously influence requirements for future portfolios and funds and thereby all other actors across the value chain.
Public Authorities & Agencies
How should effective frontrunner and demonstration projects be designed to stimulate the strongly needed new circular products and processes in the immature circular markets? How can the learnings from these projects be translated into effective policy instruments, such as ambitious public procurement requirements or feasible minimum circularity requirements that can instantly be rolled out?
A fine balance needs to be maintained between driving the transition at the required speed without compromising on other political agendas (e.g., affordable and sustainable housing) or existing frameworks and processes (e.g., already mandatory sustainability certification schemes such as DGNB).
Asset owner’s main vehicle for change is procurement. Developing a circular procurement strategy and criteria to ensure that future assets are consistent with circular principles such as long-life, reusable, recyclable or compostable products and materials is key.
Examples of such criteria are procurement of products that are reused, modular, durable or have recycled content or services that enable repair, take-back or resource efficiency and low environmental impacts. Scaling such circular practices requires a range of organizational changes, such as new guidelines, platforms, information and storage systems, cross-departmental collaboration and partnerships with suppliers and off-takers.
Projects with high potential need to be identified based on expected impacts and ease of implementation, accompanied by new KPIs to support monitoring and reporting.
Also, developers are faced with numerous challenges in the circular transition. For developers, attracting investment and illustrating return on investment is crucial. But will the integration of circular principles into developments enhance value when weighed against cost? For residential, commercial, sale or rental developments alike? Regulation removes some ambiguity with respect to what is or what is not a circular development, but uncertainty remains for developers with respect to value creation.
Circular metrics, criteria and overall value proposition need to be explained to both investors and leasers/buyers. Regulation aids in articulating the overall proposition but does leave the developer with a steep learning curve as the developer’s role is central with respect to attracting circular investment but also driving that investment throughout the value chain.
The developer is expected to translate circular ambition and regulation into reality. Currently, developers may lack the experience to absorb and apply emerging circular metrics and criteria. Not only may interpretation of these new standards and targets be a challenge, but also the identification of how these targets can be met in real building projects. Tenders and plans will need to be rethought with respect to how circular criteria and emerging standards are integrated into the developments, taking the full life cycle into consideration, whilst juggling with the financial implications of the decisions that need to be taken - in many instances, requiring a radical rethink.
Service providers such as architects and engineers are now required to find the technical and design solutions for new circular building requirements and ambitious standards passed on by investors and building developers. The service provider needs to consider circular requirements through the building life cycle i.e., planning, design, construction, operations, and disassembly. All stages of the building cycle force the service provider to rethink their approach.
For example, the design stage will require consideration of design for longevity, modularity, adaptability, and disassembly to optimize and increase value over time at different building layer (e.g., structures, envelopes, interiors, building systems). The designer also needs to consider the integration of increased percentages of recycled and reused materials to meet ambitious regulatory and investor targets.
Material and Product Manufacturers
Manufacturers will find themselves exposed to sharp competition regarding the environmental and circular performance of their products and their compliance with circular criteria that the value chain is already beginning to demand e.g., percentage recycled content and recyclability. New market entrants that offer, not just products, but also business models complying with the new demands will substantially increase competition and disrupt the value chain status quo.
To embrace the disruption and stay competitive, manufacturers will need to update designs and manufacturing processes but also specific material content. During this quest, supply risks regarding, for example, scarce secondary and bio-based materials from the underdeveloped and volatile sourcing markets need to be addressed.
Manufactures now also need to have a broader perspective with respect to tackling life cycle impacts beyond production (e.g., during use or end-of-life of products). This can be services that enable customers to use materials and products in the most productive and resource-efficient way (e.g., prefab, made-to-order, quantity optimization) or infrastructure to ensure large-volume collection pathways to circulate end-of-use products and materials back into the value chain.
The demands of the circular economy transition will perhaps be most acutely felt by the contractor and construction industry with access to the required volumes of circular materials being the biggest challenge. With regulation moving towards specific percentages of recycled, reused, and renewable materials, the contractor will be faced with a significant supply challenge. Those that can secure access to larger volumes of materials will have a distinct competitive advantage. Thus, controlling the supply chain of reused, recycled, and renewable buildings material will become a strategic objective, especially for the larger contractors e.g., establishing specific subsidiaries. Price of materials will also be an issue with increases anticipated.
Furthermore, there is an obligation upon the construction industry to evolve with respect to construction techniques to enable reuse and recycling at disassembly stage but also to adapt to using new and, perhaps, unfamiliar materials.
Embracing the Disruption
The transition to a circular economy is inevitable even if difficult. The language in the form of concepts, metrics and criteria is new to the buildings value chain. The complexity and interconnectivity will force real cooperation across the value chain unlike anything before.
"With the disruption comes some pain, but also many opportunities for growth for those players that embrace and prioritize the objectives of the circular transition, learn to play, and win in the new markets that are unfolding."
Rethink and ecosystems thinking are over-used cliches, but in this instance, we think that both are vital to all actors of the buildings value chain. Without rethinking how materials are manufactured, how buildings are designed, constructed, and operated, the transition will be difficult.
It is near impossible for any actor of the value chain to believe that it can successfully transition to a circular economy in isolation without cooperating, innovating, and working with those both above and below them in the value chain.
As the buildings value chain is challenged by circular disruption, a powerful avenue for growth is expected to unfold – both for the more established enterprises within the value chain, but also for new entrants, which are added via the circular transition. Those elements of the value chain that embrace and prioritize the objectives of the circular transition and learn to operate beyond the status quo will turn disruption into opportunity. They will play an important role in the circular transition, capitalizing upon new markets, and customers.
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Market Director, Strategic Sustainability Consulting
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