Effective regulatory frameworks can stimulate the development and adoption of sustainable solutions by addressing root causes and encouraging long-term investment. Inadequate regulations on the other hand result in misallocation of capital, perpetuate poor practices and hinder disruptive innovations. There is no shortage of entrepreneurial talent, technological advancements and or investment capital which effective regulatory frameworks can mobilize to drive change.

The rallying cry for “more regulation” echoes frequently, yet its effectiveness in driving the necessary pace, scale, and depth of change remains debatable. History reveals instances where regulatory measures have caught industries unprepared, leading to compliance headaches, inflated costs, or even a regression in ambitions. Similarly, despite the availability of well-documented strategies to drastically reduce emissions in the building sector — such as enhancing energy efficiency — implementation efforts often fall short. Consider, for example, the alarming number of Europeans unable to economically heat their homes.

We’ve done it before

Consider the automotive industry, with electric vehicles experiencing an increased market intake and drastic price reductions. This traction has been triggered by private sector demand and incentive schemes, accelerated by regulation, creating jobs and supporting the transition to a net-zero economy. Since 2020, the EU has mandated CO2 emission limits for cars, starting at 95g/km, with further reductions of 55% by 2030 and 100% by 2035.

By setting a target without being prescriptive about how to achieve it, automotive manufacturers and their suppliers are free to choose the technological path to net zero. Predictably, companies increased their investment in electric vehicle (EV) technology but also explored other technologies such as hydrogen. As a result, EV sales accounted for 14% of all new car registrations in 2022, compared to 2019 when they accounted for barely 4% of the market.

Progress in the built environment

Similar approaches to target-based regulation are being introduced in the built environment. Since 1 January 2023, new buildings in Denmark must document their environmental impact over a lifespan of 50 years through a lifecycle assessment (LCA) calculation. Buildings above 1,000 square meters must comply with a limit of 12 kg CO2 per square meter per year — and some initiatives like the Reduction Roadmap call for a further tightening of these requirements in line with remaining carbon budgets. Like the EU CO2 emissions target for cars, the regulation is not prescriptive about the path developers and construction companies take to achieve the mandated goal.

This approach allows room for creativity and ingenuity, spurring the development of innovative materials and construction methods, whilst being held accountable for the impacts of the new development. Key to the successful implementation of this approach, is the increasing availability of tools and software to aid decision making: the impacts of design choices, the trade-offs required, and the alternative viable low carbon options available.

However, obstacles remain. Building codes often lack the flexibility to accommodate technological advancements. Discrepancies in regulations across regions can impede progress and create market inefficiencies. In the UK, for example, recent legislation restricts the use of structural timber for affordable housing in London. While in New York, the city council has approved the use of mass timber for the construction of buildings up to 85 feet (25.9 metres) tall. Harmonizing regulations and promoting evidence-based policymaking are essential steps towards achieving sector decarbonization goals.

The Supply and Demand Paradox

Consider heavy industries: roadmaps for the decarbonization of cement and steel, each responsible for a whopping 7% of global emissions, already exist. But the required investment is enormous. Therefore a strong and committed pipeline of demand is required to activate the flow of finance ahead of regulation, and for supply chains to adapt accordingly, in anticipation of inevitable mainstream demand.

Voluntary sector initiatives like ConcreteZero, SteelZero, Science Based Targets, and corporate initiatives such as Lendlease’s Absolute Zero, utilize the collective purchasing power and influence of major corporate buyers and specifiers to send strong demand signals for responsible production and sourcing practices. Public procurement approaches like the US Buy Clean Initiative embrace the enormous purchasing potential — as much as 50% of demand in some markets — of governments. And the recent Inflation Reduction Act includes much needed investment through loans, grants, rebates and incentives to stimulate market demand for lower embodied carbon products.

Against a growing need for cost-effective, sustainable solutions from buyers, innovative start-ups struggle to secure the level of demand necessary to scale their operations that could only be activated with effective regulation.

Regulation as an Accelerator, Capital as an Initiator

To break this deadlock, it’s time for a shift. We suggest a multifaceted approach that combines regulatory intervention with capital investment. Venture capital firms like KOMPAS VC can play a crucial role in connecting innovative startups with corporations committed to sustainability, fostering an ecosystem conducive to the development and adoption of sustainable solutions.

Recognizing the challenges and opportunities posed by new regulations, collaborative efforts involving all stakeholders — startups, corporations, regulatory bodies, and the private sector — are essential for developing practical solutions. For instance, VELUX’s collaboration with Arcelor Mittal to incorporate low-carbon steel into their production processes exemplifies how major industry players can explore innovations and solutions, ultimately enabling widespread adoption of low-carbon products.

A breakthrough moment

Following the recent Buildings and Climate Global Forum in Paris, France, 70 governments signed the Declaration de Chaillot. This statement commits to implementing policy frameworks, building codes, financial incentives, public procurement and capacity building initiatives to dramatically increase affordable near zero emission and climate resilient buildings and to phase out the financing of emissive and non-resilient ones.

A week later, revisions to the European Performance of Buildings Directive were adopted, setting out progressive targets to improve energy efficiency in new and existing buildings, and ensure that new buildings are zero emission from 2030.

This marks potentially the strongest signal of political effort and multi stakeholder collaboration to future-proof the built environment against climate change.

To net zero and beyond

The transition to a sustainable built environment requires a joint effort from regulators, investors, and all stakeholders. Waiting for regulation to require more ambitious action is no longer an option. By aligning interests, forging partnerships and addressing implementation challenges, we can navigate the complexities of the supply-demand dilemma and deliver cost-effective, market-ready solutions that shape a more sustainable and resilient built world.

At KOMPAS VC we hope these market signals will catalyze more demand for technology innovation and solutions aligned with these goals. Perhaps more than in any other industry, policymakers and investors hold the key to leading the way in decarbonizing the built environment and mitigating the industry’s environmental impact. It’s imperative that we act decisively and collaboratively to seize this opportunity and build a future that is both environmentally sustainable and economically viable.

Do you know of a solution to these challenges? Do you know more examples of incentives that have stimulated meaningful change?

— by Victoria Burrows,
Portfolio Development and Industry Partnerships Manager.