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Wholesale Banking

Does construction have a circular future?

What building blocks are needed to create a more sustainable built environment? And who will provide them?

Construction and real estate account for a huge proportion of greenhouse gases. What’s more, buildings usually have a lifespan of decades if not centuries; their energy efficiency (or lack of it) has lasting repercussions. In other words, they represent one of the best opportunities to improve sustainability. Given the costs involved in construction, and the environmental impact associated with building products – from concrete to mining – a circular economy model seems a perfect fit.

The Ellen MacArthur Foundation and the McKinsey Center for Business and Environment calculate that society and the environment would be €270 billion better off by 2030 in a circular-built environment than under the current model. More tangibly, companies could save a further €54 billion on primary resources – the materials that go into construction – as a result of the 3% increase in resource productivity offered by circular business models.

Mountains to climb

Despite the opportunities, the challenges associated with implementing a circular model are formidable. “Circular construction requires not only changes to business models but also a different approach to design, materials (whether they are renewed or sustainable, for example), data management, and perhaps most importantly cooperation within the supply chain,” explains Mayke Geradts, sustainable finance at ING. “It’s impossible for a single company to do it alone.”

As a report by Circle Economy, Building Value: A Pathway to a Circular Future, notes circularity brings into question the construction process itself. “In designing a circular building, one first reviews what is already there. Reusing elements, products and materials, from the same site or a different location, is prioritised over procuring new ones. Buildings can be seen as a collection of layers: each layer has a different function, subset of elements, products and materials, and lifespan.”

At the same time, it is important to take a nuanced approach. “Deconstructing a building and then using refurbished or remanufactured components to rebuild in another location might be the most appropriate option,” says Stephanie Palmer, sustainability manager at building supplies firm Weinerberger. “However, in doing this the industry risks creating a solution for a problem that is not the most important one we need to solve.”

This is because the circular economy is best applied to products with a short lifespan and high turnover rate (such as small electronics), Palmer notes. “If we design buildings to last 30 years with the intention to replace them several times thereafter we could end up using more resources than if we had designed an adaptable building that will be in continuous service for 100 years or more.” In other words, a circular built environment needs to prioritise longevity, quality and adaptability.

Paving the way

The Platform for Accelerating the Circular Economy is a public-private coalition of more than 50 leaders, including ING, co-chaired by the heads of Philips, the Global Environment Facility and UN Environment. Its report on the Circular Supply Chain Accelerator – a project that ING helped to establish – concludes that governments can greatly stimulate the transition to a circular economy by re-writing rules and regulations.

“In some instances, existing regulations hinder companies from moving to circularity and reworking rules could create new opportunities,” says Geradts. “In addition, the government can act as a launching customer for circular solutions by demanding them in public tenders.”

To date, no government has done more in this regard than the Netherlands, which aims to have a 50% circular economy by 2030 and full circularity by 2050. "An economy without waste and therefore smart use of raw materials is the missing link in the Paris climate agreement. We will not achieve the targets agreed upon in 2015 without this link", says the country’s State Secretary Stientje van Veldhoven.

While targets are important, the government is also putting its money where its mouth is; it recently committed an additional €80 million for promoting a circular economy. Perhaps most crucially, the Ministry of Public Works aims to include circular criteria in all infrastructure tenders by 2023. Of course, the government cannot create a circular economy itself: circularity needs to be economically viable and solutions have to be available. But the Netherlands is going a long way towards putting the foundations in place for businesses to build on.

Finding real value

Initially, costs associated with circular construction are usually higher than conventional construction. But reusing elements, lifetime extension and increased scale will lead to cost savings. Another crucial challenge in the move to circularity in the construction sector is therefore to recognise these benefits in the way circular projects are financed, says Jan van der Doelen, senior sector banker at ING.

“The principal difference between a conventional and circular model for construction – from a financing perspective – is the value placed on various building materials at the end of the project’s life,” he explains. With conventional finance, that value is effectively zero. Theoretically, in a circular model the building materials – provided they have been carefully selected when the project is built – should have value and should therefore impact the cost and terms of finance available to the project.

“Crucially however, financing on this basis requires us to be able to model that value and have some certainty about it,” says van der Doelen. “That is currently not the case because there is a limited secondary market for building materials. It is also difficult to easily assess which building materials are used in new projects.”

One solution to this is Madaster, which is a database that acts as a digital twin of a building to show the various materials involved in construction so that they can be traced and their value can be realised at a later date. “Ultimately, it would be valuable if such a database were to be compulsory for all new builds, both in the Netherlands and across the EU,” van der Doelen adds. Another company, digital marketplace Excess Materials Exchange, could offer a model for valuing used building materials in the secondary market.

Slow progress

If there was as much circular construction as there is talk about it, the circular economy would already be a major force in the sector. In recent years, numerous groups have been formed by different parts of the sector – such as building materials, contractors and financiers – to advance circular principles. Yet, even in the Netherlands, widely seen as one of the most advanced countries for circularity, circular construction is still in its infancy.

Indeed, there are still problems to be overcome in defining circular construction, says Geradts. “Do we want to go 100% circular or should we view it as a transition?” she asks. “And to what extent should reusability be a driver versus sustainable materials?”

Geradts notes that the first circular viaduct built in the Netherlands typifies this dichotomy. The viaduct is modular in nature, so that it can be taken apart when no longer needed and reused elsewhere. “That avoids waste and is clearly circular in nature,” says Geradts. “Nevertheless, it is constructed from concrete, which is an unsustainable and environmentally-damaging material. When it comes to circularity, the environment is important but the concept must be broader.”

For a construction sector still grappling with the idea of greater sustainability – and only making slow progress towards it – circularity may simply be too much, too soon. Moreover, as van der Doelen notes, the sector’s attention – even in the Netherlands – is on other matters. “The building and construction sector in the Netherlands is currently extremely busy and consequently capacity is focused on conventional building rather than exploring circular economy models,” he says.

Nevertheless, progress is being made. Innovative construction companies are emerging – such as New Horizon, which dismantles buildings while maintaining the value of their raw materials. And the exploration of the circular economy by traditional construction and infrastructure companies is likely to lead to engagement in circular projects in the future, even if only as pilots to develop new approaches, agree common standards, and identify ways to scale circularity successfully.

As Gregory Hodkinson, global chairman of engineering, design, planning and project management firm Arup notes, “Moving towards a truly circular economy will not be achieved in one step. Even if it takes a generational shift to get there, the direction of travel represents a far better future for our shared society.”