Key Insights:
- Among the 110 building products companies covered in the Morningstar Sustainalytics research universe, nearly 90% derive some portion of revenue from sustainable products and services.
- Currently, 68% of companies in the building products industry offer sustainable solutions, but do not report how much revenue they generate from them.
- Compared to other regions, Europe appears to be setting the pace in terms of sustainability solutions driving revenue growth. It hosts the largest number of companies that derive over half of their revenues from sustainable solutions.
- Considering companies from the building products industry in an investment portfolio can demonstrate a forward-looking strategy, not only from the standpoint of financial returns, but also supporting the transition towards a more sustainable built environment.
The building products industry is comprised of companies involved in the manufacture, sale and installation of materials, devices and components that together form new, completed buildings. The world’s growing population is driving demand for new buildings, making current construction and development decisions critical in shaping the long-term trajectory of energy consumption and emissions. With the operation of buildings accounting for more than 30% of global energy consumption, it is vital for the building products industry to adopt sustainable practices that meet net zero targets outlined in the Paris Agreement.1 The transition to green buildings also aligns with evolving market expectations and growing requirements to mitigate climate risks and increase resilience against extreme weather events.2
All of these things considered, manufacturers of building products play a crucial role in providing solutions to boost buildings’ energy efficiency, helping to shrink their carbon footprint amid rising energy costs. According to Morningstar Sustainalytics research, we found that among the 110 building products companies that we cover, nearly 90% derive some portion of revenue from sustainable products and services — a management indicator that is part of our ESG Risk Rating. Read on to learn more about the role of building products companies in the global green building transition and why investors should consider them as part of their sustainable portfolios.
Green Buildings Affect Planet, People and Profits
According to the LEED rating system, the most widely used green building rating system, a green building uses less energy and water, utilizes renewable energy and fewer resources, creates less waste, and preserves land and habitat. Moreover, LEED buildings have a higher resale value and lower operational costs than non-LEED buildings. They focus on occupant well-being, offering a healthier and more satisfying indoor space while addressing community and public health.3 Simply put, green buildings generate significantly lower greenhouse gas emissions than non-green buildings.
According to the World Green Building Council, green buildings use 25% less energy than non-green buildings in the US.4 A similar comparison holds in India, there they consume 40%-50% less energy.5 These are the world’s second and third largest greenhouse gas emitters after China.6 Green buildings also address the so-called triple bottom line of planet, people and profits,7 as reported by the US Green Building Council,8 each of which are explained, in turn, below.
Green buildings benefit the planet by reducing the environmental footprint of the built environment through energy efficient methods and the use of renewable sources. In addition to using less energy for heating and cooling, green buildings minimize water and resource usage, integrate waste reduction measures and, when located near public transportation, decrease private vehicle use. Additionally, vertical gardens and green roofs improve air quality and lower indoor temperatures.9
Green buildings offer numerous benefits to people. Innovative building designs featuring indoor greenery, optimal use of natural light, and air flow can reduce people’s blood pressure and anxiety. Clean air improves productivity and mood, while natural materials such as wood and stone can help alleviate mental health conditions, including depression.10
Contrary to popular belief, green buildings can also support profits. Green buildings are increasingly cost-effective due to maturing supply chains and technologies. Their cost premium relative to non-green construction has narrowed, given stricter building codes for all structures. The lower operating expense due to reduced energy and water consumption, together with minimal long-term maintenance costs, also enhances green buildings’ marketability and potential to command higher rents and sale prices in some markets.11 According to the World Green Building Council, green buildings’ energy savings alone routinely exceed any cost premiums linked to their design and construction in a reasonable payback period.12
Enabling a Green Building Transition: Rules by Region
Green building standards, regulations and codes are maturing globally. In the European Union, where buildings account for 40% of energy consumption, intensifying regulatory pressure is expected to boost building renovation rates over the next few years.13 The EU Renovation Wave, as mentioned in the European Green Deal, aims to double buildings’ annual energy renovation rates by 2030.14 These initiatives are backed by the Energy Performance of Buildings Directive, updated in April 2024, which mandates that all new buildings must be net zero by 2030.15 Amidst these regulations incentivizing green buildings and renovations, some EU member states are pushing back, due to the sheer size of their building inventory that would need to comply by 2030. In practice, the net outcome may be less positive than the regulation may otherwise suggest.
In the Asia-Pacific region, where 60% of the world’s population lives, green building councils have merged to form the Asia Pacific Net Zero Readiness Framework. The organization will support countries in the region to decarbonize their built environment and promote investment instruments that support net zero transition plans.16
Other regions, such as the United States and its Green Building Council, have excelled in promoting globally recognized green building standards, such as the LEED certification.17 This effort is vital for a coordinated transition to sustainable building practices.
Evaluating Building Products Manufacturers Alignment With the Green Building Transition
As noted above, nearly 90% of building products companies derive revenue from sustainable solutions. This indicates a steady, positive trend: the rate was 85% in 2022, climbing from 75% in 2020.
Currently, 68% of companies in the industry offer sustainable solutions, but do not report how much revenue they generate from them (see Figure 1 below). This result illustrates the lack of comparable, consistent data in company disclosures and the absence of standardized reporting on ESG factors in the industry as a whole.
Figure 1. Percentage of Building Products Companies Revenue Derived from Sustainable Products and Services
Source: Morningstar Sustainalytics. For informational purposes only.
Note: The data for this analysis was retrieved in October 2024 from Sustainalytics’ Ratings+ Universe.
Looking at companies that are ahead of the ESG reporting curve, French construction manufacturer Saint-Gobain uses an in-house methodology to assess the performance of sustainable products and solutions, which accounted for 73% of its sales in 2023.18 Saint-Gobain’s methodology assesses two criteria:
- Sustainability, comprised of green share (i.e., energy and carbon efficiency) and well-being share (i.e., safety, security and comfort, such as indoor air quality); and
- Performance, which addresses these products’ economic value and the final user’s experience.
Saint-Gobain’s green building solutions are identified as those that allow direct or indirect energy savings during usage. These include ceramics, which increase furnace durability and reduce repair needs, and low-carbon glass, which reduces operational (e.g., cooling, lighting and heating) and embodied carbon in building façades.19
Denmark-based Rockwool transforms stones into stone wool, a material used for thermal insulation. Its stone wool insulation products are made to align with green building requirements for energy efficiency and resilience.20 They are recognized for their combination of thermal properties, which are temperature-preserving to reduce heating and ventilation costs; water properties, as they absorb or repel water, which is effective for flood protection; and circularity, as they use waste from other industries as an alternative raw material. Indeed, in 2023, Rockwool’s insulation products amounted to 77% of its total sales and will save 818 TWh energy over their lifetime-in-use — the equivalent to the annual electricity consumption of more than 68 million homes.21
Another example is Japan-based Toto, the largest toilet manufacturer in the world. In 2022, Toto derived more than 70% of its sales from green products.22 Toto’s sustainable cleansing solution, a WC called Washlet, substitutes the use of toilet paper with water and, according to the company, consumes far less electricity, water and raw materials compared to traditional paper cleansing methods.23
Lastly, Trane Technologies, which manufactures and services commercial and residential HVAC systems and transportation refrigeration solutions, disclosed that its energy-efficient and low-emission solutions accounted for 41% of its 2023 net revenue. This revenue is reported as “clean” with respect to its alignment with UN Sustainable Development Goals (SDGs) 11 and 13. SDG 11 aims to make cities and human settlements inclusive, safe, resilient and sustainable, while SDG 13 aims to strengthen resilience and adaptive capacity to climate-related hazards and natural disasters.24 These solutions are part of the company’s EcoWise portfolio of products. They include chiller systems designed with low global warming potential refrigerants and high efficiency operation; smart thermostats and building management automation systems; electric heat pumps that replace natural gas heat systems; and electrified transport refrigeration units that replace diesel-powered units.
Regional Variations in Companies’ Revenue from Sustainable Solutions
As noted above, due to the rules by region, Europe appears to be setting the pace in terms of sustainability solutions driving revenue growth. It hosts the largest number of companies that derive over half of their revenues from sustainable solutions.
The US and Canada, and the Asia-Pacific region show similar performance. No companies headquartered in Africa and the Middle East report revenues derived from these solutions (see Figure 2).
Figure 2. Percentage of Building Products Companies’ Revenue Derived from Sustainable Products and Services by Region
Source: Morningstar Sustainalytics. For informational purposes only.
Note: The data for this analysis was retrieved in October 2024 from Sustainalytics’ Ratings+ Universe.
Reflections on Future Developments
Buildings already account for over 30% of global energy consumption, with even higher rates in some regions, like Europe. With the global population forecast to grow significantly in the coming decades, the sustainable development of the built environment is critical to reducing the sector’s long-term energy consumption and emissions. This underscores the urgent need to adopt sustainable practices to meet net zero targets, where building products are a necessary tool to implement these practices.
The EU's ambitious goals of doubling annual energy renovation rates by 2030 and ensuring all new buildings are net zero by the same year, as well as the long-term net zero by 2050 goal, highlight the increasing regulatory pressure and evolving market expectations driving this shift. Green buildings offer a pathway and open new opportunities to achieving these sustainability goals. Considering companies from the building products industry in an investment portfolio can demonstrate a forward-looking strategy, not only from the standpoint of financial returns, but also supporting the transition towards a more sustainable built environment.
References
- International Energy Agency. “Buildings - Energy System.” August 13, 2024. https://www.iea.org/energy-system/buildings.
- World Economic Forum. “2024: A Tipping Point for Investing in Sustainable Buildings.“ January 22, 2024. https://www.weforum.org/agenda/2024/01/sustainable-office-buildings/.
- WGBC. “Changing perspectives on green buildings.” August 16, 2024 https://worldgbc.org/article/changing-perspectives-on-green-buildings/.
- Statista. “Carbon Dioxide Emissions of the Most Polluting Countries Worldwide in 2010 and 2022.” August 13, 2024. https://www.statista.com/statistics/270499/co2-emissions-in-selected-countries/.
- EgyptGBC. “Why Green Building?.” August 16, 2024. https://www.egyptgbc.org/why-green-building.
- HBS. “The Triple Bottom Line: What It Is & Why It’s Important.” Business Insights Blog, December 8, 2020. https://online.hbs.edu/blog/post/what-is-the-triple-bottom-line.
- USGBC. “Benefits of Green Building.” Press: Benefits of green building | U.S. Green Building Council. August 13, 2024. https://www.usgbc.org/press/benefits-of-green-building.
- WGBC. “The Business Case for Green Building: A Review of the Costs and Benefits for Developers, Investors and Occupants.” August 13, 2024. https://worldgbc.org/article/the-business-case-for-green-building-a-review-of-the-costs-and-benefits-for-developers-investors-and-occupants/.
- Ibid.
- Ibid.
- Ibid.
- European Union. “Energy efficiency of buildings: MEPs adopt plans to decarbonise the sector.” March 12, 2024. https://www.europarl.europa.eu/news/en/press-room/20240308IPR19003/energy-efficiency-of-buildings-meps-adopt-plans-to-decarbonise-the-sector#:~:text=According%20to%20the%20European%20Commission,36%25%20of%20greenhouse%20gas%20emissions.
- European Commission. “Renovation Wave.” August 13, 2024. https://energy.ec.europa.eu/topics/energy-efficiency/energy-efficient-buildings/renovation-wave_en.
- European Commission. “Energy Performance of Buildings Directive.” August 13, 2024. https://energy.ec.europa.eu/topics/energy-efficiency/energy-efficient-buildings/energy-performance-buildings-directive_en.
- WGBC. “Asia Pacific Net Zero Readiness Framework.” August 13, 2024. https://worldgbc.org/asia-pacific-net-zero-readiness-framework/.
- USGBC. “LEED rating system.” August 13, 2024. https://www.usgbc.org/leed.
- Compagnie de Saint Gobain. “Universal Registration Document 2023.” URD, March 12, 2024. https://www.saint-gobain.com/sites/saint-gobain.com/files/media/document/Saint-Gobain_2023_DEU_VA.pdf.
- Leca. “Green Roofs.” August 13, 2024. https://www.leca.co.uk/sites/leca.co.uk/files/pdf/Green%20Roof%20Guide.pdf.
- Rockwool. “The 7 Strengths of Stone.“ August 13, 2024. https://www.rockwool.com/uk/advice-and-inspiration/why-stone-wool/.
- Toto. Integrated Report 2023. August 13, 2024. https://jp.toto.com/assets/files/report2023.en.pdf.
- Toto Global Site. “Washlet.“ August 13, 2024 https://eu.toto.com/en/washlet/sustainability.
- United Nations. “Sustainable Development Goals.” August 13, 2024 https://sdgs.un.org/goals.
- Trane Technologies. “Sustainability Annual Report 2023.” August 13, 2024. https://www.tranetechnologies.com/content/dam/cs-corporate/pdf/sustainability/annual/2023-ESG-Report.pdf
- United Nations. “Sustainable Development Goals.” August 13, 2024 https://sdgs.un.org/goals
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