Southeast Asia’s (SEA) economic development is at odds with the necessary climate trajectory. With rapid urbanisation, over 100 million people are projected to migrate to cities by 2030. While these urban dwellers will be an important catalyst for economic expansion, they will also be contributors to an unprecedented surge in energy demand — projected at a staggering 42 per cent increase anticipated over the next decade. 

The twin challenges of the built environment sector in SEA

The built environment is one of the planet’s most pollutive sectors. It currently accounts for approximately 39 per cent of global CO2 emissions. Despite the urgency to address climate change, obstacles persist. Escalating energy price volatility and rising interest rates hinder investments in building decarbonisation efforts.

As a consequence, the sector is veering off course from its decarbonisation pathway and is unlikely to reach net zero by 2050 without immediate and decisive action, The gap between actual climate performance and the necessary trajectory for decarbonisation continues to widen.

SEA is also particularly vulnerable to climate change, facing rising temperatures and sea levels. While decarbonising buildings toward net-zero emissions remains a significant challenge, the accelerating impact of climate change on our cities and homes is deeply concerning, including rising mean and variance of temperature, increased precipitation, humidity, wind patterns, and solar radiation.

Globally, April 2024 sets a new record as the hottest month ever recorded, marking the 11th consecutive month of unprecedented global warmth. The region’s extensive coastlines and low-lying areas make us susceptible to extreme weather events such as typhoons, floods, and heatwaves. These events pose threats to environmental degradation, exacerbate greenhouse gas emissions, impact economic productivity, and endanger human health and safety. The escalating temperatures drive excessive air-conditioning use, further contributing to global warming.

In Jakarta,  excessive groundwater extraction is causing the city to sink, prompting the government to relocate its capital. In Singapore, the government has established a US$5 billion fund to mitigate coastal erosion and flooding risks. The Philippines government’s Department of Environment and Natural Resources has also completed resilience roadmaps for 16 vulnerable areas to guide disaster risk management and climate resilience efforts.

Regulations and certifications in built environment space

Given the significant challenges related to decarbonisation and climate resilience faced by the built environment sector, SEA lacks mandatory building regulations, contributing to slow progress in decarbonising the built environment. However, the situation is gradually changing.

Green building certifications, such as the Green Building Index, Green Real Estate, Leadership in Energy and Environmental Design (LEED), and BREEAM are gaining traction. These certifications evaluate the sustainability attributes of buildings and provide recognition for environmentally responsible practices.

Also Read: Balancing act: Carbon Balance’s quest to tackle climate crises with tech-driven sustainability

They assess various criteria, including energy consumption, greenhouse gas emissions, water usage, waste management, and occupant health and well-being. Although these certifications are primarily voluntary, the demand for them is increasing for several reasons:

• Sustainability policy of tenants: Companies and individuals are increasingly aware of the environmental impact of their actions, leading to a rising demand for sustainable practices, including green buildings. This trend is particularly driven by global Fortune 500 companies, where institutional shareholders demand greater sustainability practices that trickle down to procurement functions when in search of real estate offices. Moreover, leading regional enterprises are also adopting these practices to attract institutional investors and retain their best employees.
• Availability of green loans: Building construction is a competitive and capital-intensive industry where access to affordable labour, materials, and financing is essential for profitability and success. The availability of green loans with lower interest rates encourages developers to construct new green buildings. The Malaysian government actively promotes green building investment through policies and schemes, such as the Green Technology Financing Scheme, which incentivises sustainable practices.
• Lower operating expenses: Potential savings from efficient operations serve as an attractive incentive for tenants. Heating, ventilation and air-conditioning (HVAC) and lighting make up 60-70 per cent of energy costs. Hence, energy-efficient designs, renewable energy sources and smart technologies in these areas can reduce utility bills for occupants in the long term. In an economic environment marked by high cost of capital and cost cutting, lower operating expenditures could better retain tenants.

Green buildings, certified by third parties, represent valuable assets and attractive business opportunities. They have the potential to generate higher revenue by attracting and retaining high-quality multinational clients.

Additionally, their lower operating costs, thanks to more efficient use of energy, and reduced cost of financing, drive further demand and innovation for building decarbonisation and climate resilience.

Therefore, it is no secret that such coveted certifications are highly sought after by real estate owners like Capitaland, Ayala Land and IJM Land. A portfolio of green buildings is now considered a compelling and fast-growing business segment. 

To be clear, they are not perfect either. According to a report “Seeing is Believing, Unlocking the Low-Carbon Real Estate Market” by Systemiq released in June 2024, it identifies two major issues with 3rd-party certifications and ratings:

• Inconsistency with decarbonisation pathways: Analysis showed that there is no clear correlation between certified assets and better energy performance, indicating potential gaps in these independent assessments. Many of these tools do not have a target that is consistent with 1.5 degrees Celsius pathways. 
• Lack of transparency on carbon and energy performance: Major certification bodies offer limited insights into how their building portfolio performs against energy use and carbon emissions. 

The implication is that such factors might be muting demand signals for low-carbon buildings, resulting in a lack of confidence to invest in truly sustainable buildings. However, this is changing and major certification bodies like LEED and BREEAM are updating their schemes to be more transparent and ambitious. While the progress is highly encouraging, there is still more to be done to be on track for the 1.5 degrees Celsius pathway. 

Decarbonising our building infrastructure

One critical area for achieving green building status involves reducing GHG emissions. These emissions from buildings can be categorised into two main aspects. 

Embodied carbon emissions

These are emissions resulting from the raw material extraction, production, supply chain and installation of building materials such as cement, glass and steel structures. New building projects are estimated to generate approximately half of their emissions from embodied sources. Strategies for decarbonising embodied carbon emissions include offering substitutes for raw materials and adopting green building products such as green cement and steel.

Notably, this opportunity is massive at some US$20-30 billion in Southeast Asia, requiring significant capital expenditure and working capital. Therefore, venture capital investments alone will not suffice; debt and infrastructure funds will be necessary.

Some startups innovating in this space include:

• Neocrete, a New Zealand startup, uses a proprietary additive to enhance concrete properties while reducing carbon footprint.
• CarbonCure injects recycled CO2 into concrete during the mixing process and repurposes buildings as carbon storage.
• H2 Green Steel is a Swedish startup that produces steel using hydrogen made from renewable energy instead of coal.

Despite their potential, these innovations currently come at a higher cost compared to conventional materials, necessitating further engineering and economies of scale to reduce costs for mass adoption.

Operating carbon emissions

These are emissions from building operations like energy consumption such as HVAC and lighting which collectively contribute to c.70 per cent of operating emissions. These operations contribute to the other half of emissions from the built environment. Decarbonising building operations presents a combination of asset-intensive and asset-light opportunities and represents a US$10-20 billion addressable market.

Also Read: On the sustainability of AI: Why measuring digital carbon emissions is key to a greener future

New HVAC systems such as district cooling require a significant upfront investment but there are also automation and optimisation software which can enhance the efficiency of traditional HVAC systems. Artificial intelligence and automation play enabling roles in enhancing real-time human comfort, optimisation and energy consumption efficiency.

Additionally, there is potential for creating carbon-negative operations such as the installation of solar panels on building surfaces using innovative photovoltaic technology to generate excess energy beyond immediate needs.

Notable homegrown startups in the region include:

• uHoo specialises in indoor air quality and temperature monitoring to measure various air quality parameters ensuring a healthy and comfortable environment.
• SensorFlow measures the energy consumption of boilers and chillers and correlates the measured consumption with heating and cooling demand.
• Solano Energy deploys new energy assets forming a distributed energy resource management system enabling every building owner to produce and store renewable energy.

Despite these innovative solutions, challenges related to incentives and financing remain during implementation.

Building for a new climate norm

As temperatures rise and extreme weather events become more frequent, we must rethink and enable the design of our built environment. Unlike decarbonisation, strategies to defend against climate catastrophes require a comprehensive approach involving a broader range of stakeholders and public-private partnerships.

• Policymakers: City officials, particularly in areas prone to climate disasters, must prioritise upgrading early warning and communication systems using digital infrastructure. Additionally, urban vegetation and improved water management strategies can help manage heat waves while enhancing coastal defences against rising sea levels. These measures not only protect communities but also improve urban liveability.
• Building Managers: Given prolonged heat waves in Southeast Asia, building managers will face increased cooling demands and peak loads. The implementation of energy-efficient cooling systems and the adoption of smart building technologies will be crucial in reducing energy consumption and maintaining occupant comfort.
• Construction companies and real estate developers: Architects and civil engineers should scrutinise new building designs and review existing material selection to withstand harsher environmental conditions. Project managers must also account for delays caused by extreme weather events, adjusting timelines and budgets accordingly.
• Insurers and Financiers: They need to prepare for more frequent natural catastrophes by incorporating new longitudinal climate data into their underwriting frameworks. National grants may also be made available for disaster management and relief support for affected communities

These are a new set of challenges that come with climate change. Fortunately, there are already startup founders with long-term vision who have been already working on these problem statements to tackle such opportunities.

• Komunidad harnesses the power of data and analytics to help enterprises and governments tackle the risks of climate change.
• Nafas provides businesses with a flexible & data-driven way to provide healthy air quality to their employees and customers against low air quality.
• IBISA’s parametric insurance offers end-to-end resilience to protect businesses and communities against climate change-induced natural catastrophes.

It is essential to recognise that not all climate adaptation opportunities in the built environment are suitable for venture capital investments. Nature-based projects, such as urban vegetation and mangroves, play a crucial role in defending against extreme heat and coastal erosion. Infrastructure developments, like coastal walls and drainage systems, are equally important.

Professional services, such as innovative building designs and material selections by architects and civil engineers, contribute to the total solution universe but may not align with climate venture capital investments.

How VCs are catalysing innovation

The increasing prevalence of green buildings and challenges of climate change are opening up vast opportunities for sustainable innovation within the built environment sector across all areas like, 

• Embodied carbon emission
• Operating carbon emission
• Re-thinking building in a new climate norm

Also Read: Meet the 4 SEA startups of PepsiCo’s climate tech accelerator programme

Consequently, this sector is drawing substantial venture capital investments to capitalise on this trend. For example:

• Proptech and real estate VC fund Fifth Wall had closed US$500m for its 1st climate fund in 2022, underscoring the sector’s potential impact on climate solutions.
• Australia’s proptech manager, Taronga Ventures, had closed US$170m to focus on the ESG space, far exceeding its original target of US$50m. Their commitment highlights the growing interest in sustainable real estate solutions. 

There is also no lack of successful startup stories:

• Brimstone was selected by US DOE for an up to US$189m award to build a commercial-scale facility that will demonstrate the start-up’s novel technology at scale for the very first time.
• Closer to home, Accacia, an India-based decarbonisation platform for real estate and infrastructure, has closed a US$6.5m Pre-Series A round from Illuminate Finance, Accel and B Capital.

These opportunities coupled with strong macro and ESG tailwinds in Southeast Asia meant that the built environment will be one of the focus areas for our fund. Some of the key themes that are explored (non-exhaustive) may include:

• Digitalisation: Deploying next-generation software to supplant outdated systems like building management systems.
• AI-led optimisation and analytics: Empowering building managers to leverage AI for heightened energy efficiency, minimised waste, and optimised resource utilisation.
• Material innovation: Introducing novel sustainable materials, including cooling-effect paints, transparent solar panels as glass substitutes, and carbon-negative cement.
• Resource management: Covering critical areas such as energy storage, waste stream processing, indoor air quality and water conservation.
• Hardtech: Investing in hardware advancements, including sophisticated sensors, IoT devices and solar panels to revolutionise the built environment. 

Challenges in adopting innovative solutions

While clear problem statements, compelling business cases, and available solutions are essential, they do not always guarantee swift adoption in the built environment sector. This industry is notorious for its slow-moving momentum, which can be frustrating for startups and investors.

Some of the challenges include:

• Legacy challenges: Many existing buildings and infrastructure operate on legacy systems. Integrating these systems seamlessly with new technology can be challenging. Retrofitting old buildings often proves to be more expensive than constructing new ones, especially in high-cost markets like Singapore—even after accounting for carbon emissions.
• Lack of/inconsistent regulation: Inconsistent and unclear policies across the region hinder the creation of a robust incentive or penalty framework. Such a framework is crucial for accelerating the adoption of new technologies. Without regulatory alignment, stakeholders may hesitate to invest in innovative solutions.
• Lengthy adoption cycles: Building materials like concrete and steel are critical for structural integrity. Replacing these conventional materials requires extensive testing to ensure strength, workability, and durability. Consequently, implementation cycles can become lengthy, delaying the adoption of alternative materials.
• Economic challenges: Many new solutions haven’t achieved the economies of scale necessary to compete with conventional materials in terms of cost. HVAC upgrades, for instance, are typically planned well in advance, leaving little room in the budget for exploring alternatives beyond fixed-asset schedules.
• Lack of awareness: Stakeholders, ranging from building owners to occupants, may not fully grasp the benefits of green solutions or be aware of the available options. Some sustainable solutions are perceived as risky or unproven. Demonstrating their reliability and effectiveness is crucial for overcoming this perception.

In navigating these challenges, collaboration among industry players, policymakers, and investors is essential. By addressing these roadblocks collectively, we have a better chance to accelerate the adoption of innovative solutions and create a more sustainable built environment.

Partnership for win-win with Keppel

Given the aforementioned challenges and the nascency of the sector, The Radical Fund has partnered with Keppel Real Estate Group to tackle decarbonising the built environment sector. A division of Keppel Corporation, Keppel Real Estate is a global asset manager and operator with expertise in sustainability-related solutions across infrastructure, real estate, and connectivity.

It has been recognised for delivering innovative urban space solutions that leverage technology to create sustainable and customer-centric developments. Their commitment to building responsibly and sustainably is evident in their approach to creating real estate solutions that mitigate climate change and enhance lifestyles and businesses.

The firm recently closed a US$1.7 billion sustainability fund to upgrade existing assets and invest in value-add platforms that create greener cities and work to reduce the negative impact of climate change. 

Keppel Real Estate’s strong capabilities and deep experience in the area of real estate, its sharp focus on sustainability and its captive portfolio of commercial and industrial real estate assets offer a compelling green lane to test bed and pilot the solutions of our startups.

Together, we aim to accelerate the adoption of cutting-edge technologies that address climate-related challenges while establishing a foundational proof-of-concept to scale promising solutions relevant to the real estate development and built environment sectors. We are also actively partnering with co-investors and debt providers to catalyse climate innovation in SEA. 

The Radical Fund is seeking business models that are capital-light while delivering a twin strategy of scaled commercial and climate impact. Please reach out to us for feedback or comments regarding the built environment industry in Southeast Asia or share your startup here.

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