Green buildings – the foundations to building our future?
19 May 2011
In order to meeting national emission targets, green standards, both voluntary and compulsory, are being increasingly introduced into the building sector. Building performance, primarily in terms of energy and water use, is becoming as important as traditional qualities of providing shelter. Improving performance requires a greater sophistication of building technologies. This brings with it two risks: that building systems fail to meet performance standards; and that different technologies cannot interface within a larger system or smart grid. Both of these are risks – but also potential opportunities - for insurers.
Mankind is continually striving to increasing comfort, mobility and consumption of natural and manmade resources. These efforts have hitherto come at a cost; higher greenhouse gas emissions (GHG) and resulting climate change. By one estimate, climate change has increase damage caused by natural catastrophes by 37% over recent decades.
The increasing public awareness of potentially damaging effects of global warming has driven the concept of sustainability into the foreground. Key among these drivers is the search for sustainable energy technologies with a minimal emission footprint; and the efficient use of scarce water resources.
Figure 1: Shares of Global Final Energy Consumption by Sector (Total consumption in 2005 is equal to 285EJ) 
In this attempt to develop a new sustainable society, the worldwide building sector will have to play an important role. The sector uses 30% to 40% of primary energy, produces a third of global GHG emissions, consumes eight to 16% of overall freshwater and a considerable amount of raw materials. To improve its level of sustainability, the building sector must react by including both new and more efficient technologies than those currently in place in order to reduce energy and water requirements without decreasing either comfort level or living standard.
Building for the future?
In 2008, only 10% of United States non-residential construction was built using green standards. This number is far too low to reach agreed GHG targets, especially when keeping in mind that most of the existing buildings are still at very low levels of sustainability and the replacement rate of existing domestic stock is only between 1% and 2% a year. The benefits of creating new green buildings can be neglected if we do not simultaneously focus on retrofitting existing buildings using green building technology and practices.
Exacerbating this development, the service life of both new and renovated buildings usually exceeds 30 - 50 years. Hence, already constructed buildings considerably influence envisioned energy and water needs for coming decades. For example, at the current rate of turnover of the stock, 80% of the dwellings that exist today will still exist in 2050. Consequently, decisions made today have a great impact on our future build environment and therefore on our ecological footprint as a society.
Thus, buildings must be planned, constructed and run according to the principles of energy efficiency, resource efficiency and water conservation. Buildings that show these attributes of sustainability together with a healthy and comfortable environment for their users are so called ‘green buildings.’ They combine a high comfort level with optimum user quality, minimal energy, resource and water expenditure, and use means of energy generation that are as sustainable as possible on both climate and resources (Figure 2).
Figure 2: Overview of the different technologies that are applied in green buildings
Even though sustainability is of increasing importance within our society, most of the new construction is conducted in a conventional manner. This is largely due to the public perception that green buildings involve a significant cost premium. Studies have shown that, depending on the level of technologies involved in the building, the upfront cost premium is relatively small, reaching only 3-5% of total costs. However, when considering the whole life-cycle of a building the efficiency improvements and the gain in indoor quality easily have the potential to compensate those costs. While cost savings due to less energy and water consumption can be predicted with reasonable certainty and monitored over the lifetime of the building, increases in indoor quality, in contrast, which may affect health and productivity, are much less understood and hard to forecast.
Yet, considering that in average 82% of total commercial costs are directly associated to salaries and benefits of employees, the business case of building green has to be completely rewritten if studies can prove (as has long been claimed) that green buildings have a positive effect on occupants health and productivity. Moreover, green properties can achieve higher valuation and rents as the green building certification allows stakeholders to better judge the quality of the real estate.
In order to encourage the steps towards greening our built environment, regulators have introduced stricter building codes that demand future constructions to be built according to modern energy efficient standards and sustainable principles. Governments of the G20 countries allocated roughly USD890 billion in various green fiscal packages in 2010 accounting to 1.9% of their collective GDP. Much of this will be invested in energy efficiency measures of buildings and stimulating renewable energy sources.
Figure 3: Future development of the building codes and voluntary green building standards
As building codes only provide the lower limits for the building process, stakeholders have become interested in implementing advanced sustainable concepts and defining them according to new voluntary standards (Figure 3). Beginning in the early 1990s, the development of voluntary green building rating systems were initiated in order to create standards above the building code. These “green building rating systems are defined as tools that examine the performance or expected performance of a ‘whole building’ by a certain set of criteria and translate that examination with the use of points and weightings into an overall assessment that allows for comparison against other buildings”. The standards (such as BREAM, CASBEE, LEED, Minergie, among others) have been accepted by both private and public property developers supporting the construction of green buildings in the institutional, commercial and residential sectors. Today, almost every industrialised country has its own green building rating system, based on local climate conditions and building traditions (Figure 4). However, direct comparisons are very difficult; achieving a high rank within one framework does not guarantee the same in another (Figure 5). This is a particular problem for multinational companies that commit to providing green office spaces and therefore need a direct comparison of building performance in different countries. Within the new generation of green building standards this problem is addressed and international codes such as BREEAM, LEED and DGNB are developed.
Figure 4: Overview of worldwide green building standards and there geographical distribution
Figure 5: Comparison of the major voluntary green building standards
In addition, new certification schemes are also under development that allow the assessment of green building retrofits which are becoming increasingly important. In order to meet GHG emission targets, considerable investment in refurbishments and retrofits will be required.
Green buildings and insurance
The development of green buildings will be of double significance to the insurance industry. One aspect is that insurers are exposed indirectly to all aspects of climate change, being it an increase in extreme weather conditions; changes in sea-levels; or crop failure as a result of more extreme weather. As a result of climate change, the risk landscape of various products is changing and an understanding of the inherent processes of this change can give a substantial competitive advantage. The other area of insurer interest is their direct activities in the construction sector, providing insurance or reinsurance solutions for most parts of building life cycles. Green technologies have their own risk profiles, often distinct from conventional solutions.
Underperformance and technical malfunction of the building itself or specific components are the major source of such risks. Many of these risks are the result of new forms of contracts and a lack of experience during the design and construction process. However, some risks are entirely new because they are caused by an increase in system complexity. These risks are summarised as performance risks and represent one of the major challenges when building green. Performance risks are very diverse, encompassing the failure the building or particular components to meet the promised energy savings or renewable energy generation; or they can result from the failure of building components such as HVAC systems (heating, ventilation and air conditioning). They are triggered by faulty design, construction and installation or caused by wrong user behaviour. Determining ultimate responsibilities in the complex frameworks of design and construction processes is very difficult. Many parties are involved in the building process, contracts are sometimes yet to be adapted to green building practices and overall there is a lack of experience within the field of sustainable construction.
Judging whether green building practice is increasing construction risks is currently difficult. On one hand it is claimed that the certification process is reducing the risks because third parties are involved in the assessment of the sustainable design and construction. On the other hand the complexity of building and construction systems is increasing. New materials are being tested and new equipment is being installed in order to achieve higher levels of sustainability (Figure 6). In addition, new companies, especially in the sector of renewable energy generation and building automation are entering the market with little experience in terms of durability and reliability of their products and services.
Figure 6: Uncertainty of the loss-frequency curve of future green buildings
Overall, we must accept that buildings are turning into machines that go beyond the classical functions of a building, such as providing safety and comfort. Modern green buildings also have to generate energy with the help of renewable energy sources; use energy efficient HVAC systems that control the indoor temperature and air quality; and feature building automation technology which interconnects all electrical appliances and building technologies to adapt to specific user behaviour. Furthermore, future buildings will have to provide the ability to supply surplus energy to local grids and help to manage peak loads as a part of the smart grid.
While each system may be well understood in its own right, there are increasing concerns that the interconnection of these various systems will increase the uncertainty when it comes to the overall reliability and durability within the green building. In the US the first insurance claims have been made against the underperformance of LEED certified buildings. This was followed by the announcement that buildings could also be decertified when real life performance fails to match design promises. This exerts an enormous pressure on building owners and design companies as green building certification is already mandatory in some countries.
As a consequence insurers are carefully monitoring the future developments of regulation and voluntary building standards together with the introduction of new technologies and systems. In the long term, as the first problems are solved and the interaction of the different technologies is better understood, new insurance and reinsurance opportunities could arise.
 "Climate Change to Boost Insured Losses, Allianz Says”, Blomberg, Mac-Donald-Smith, A. 2007 These figure include the share of buildings energy in power generation and commercial/industry use. "Energy and Climate: Pathways to 2050", WBCSD 2007 and "Worldwide trends in Energy Use and Efficiency", IEA, Energy Indicators, 2008 "Buildings and Climate Change Summary for Decision Makers", UNEP/SBCI, Paris 2009 "Draft Briefing on the Sustainable Building Index", UNEP/SBCI, Paris 2010 "Green Building Facts", U.S. Green Building Council 2009 "Research Networking for Energy Efficient Building”, J. R. Goulding and J. O. Lewis, Energy Research Group, School of Architecture, University College Dublin, 2003 "The 40% House”, Environmental Change Institute, University of Oxford, 2005 "Buildings and climate change: Status, challenges and opportunities”, United Nations Environment Program, 2007 Rocky Mountain Institute, updated by EBN There are many attempts to quantify the gains of good quality living spaces, as highlighted in Cook et al, Risk Dialogue Magazine, May 2011 "Towards a global green recovery: Recommendations for immediate G20 action”, O. Edenhofer and N. Stern, April 2009 Based on "Greening the codes", USGBC white paper, June 2010 "Sustainable Building Rating Systems Summary”, K.M. Fowler and E.M. RauchPacific Northwest National Laboratory, 2006  Based on "Comparison of worldwide certification systems for sustainable buildings", Longlife, Baltic Sea Region Program, 2007 - 2013"Critics Say LEED Program Doesn't Fulfill Promises", F. Cater, npr, September 2010
- Green buildings have to perform according to a much broader range of factors compared to previous ones. One key performance factor is energy consumption.
- There are a wide variety of green building standards in the world. What is considered “green” in one part of the world may not qualify in another country.
- Not performing as expected can trigger damage claims, since tax breaks and other financial incentives are tied to a building.
- The green buildings involve many new technologies and create new interfaces. It is unclear how this will affect loss experience in different lines of insurance business in the future.
- Not only are the buildings changing – the environment in which they have to perform is also changing. Intelligent green buildings will have to work with smart grids and other smart infrastructure.
- The speed of change may also be key in the future loss developments. Some technologies are still prototype while others are well tested. The widespread application of prototype technologies will be a risk-increasing factor.
- In the near future building green will not be an option but a prerequisite, fulfilling the demand of regulators and investors. This is shown by several strict policy programmes that were launched in recent years.
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