Reducing Embodied Carbon in Real Estate: Why We Finally Have to Pay Attention

The built environment is responsible for ~40% of global carbon emissions.

These emissions can be broadly divided into two categories: operational carbon (~28%) and embodied carbon (~11%). Operational carbon refers to emissions produced from running buildings (e.g. heating, cooling, light, power, and ventilation.) Embodied carbon refers to the emissions produced from the construction and demolition of buildings, and broadly includes material production (10–20%), material transportation (~5%), and construction and installation (5–20%).

Operational carbon is arguably a more straightforward emissions category to tackle. First, operational carbon can largely be derived from electricity consumption, so it’s easier to estimate. And second, post building construction, building owners and operators can gradually reduce operational carbon emissions (e.g. by adding solar panels or switching to more sustainable energy sources). Put differently — while operational carbon isn’t solved, it also isn’t “fixed”.

Embodied carbon emissions, by contrast, are largely irreversible. While buildings can be upgraded or retrofitted, their core components — steel, glass, cement, etc. and the building construction mechanisms employed — are effectively permanent. Calculating the impact of extracting, processing, transporting, and assembling these materials is also complex and convoluted, and frankly hasn’t been a focus for builders, owners, or operators, until recently. (As shown below, if we don’t amend how we build, and the materials we build with, embodied carbon emissions only grow over time).

Are We Finally At An Inflection Point for Tracking and Reducing Embodied Carbon?

It’s challenging to give a definitive “yes” to this question. But, there are several, significant tailwinds — both public and private — that are suggestive of an upcoming macro shift.

First, governmental and policy pressure. In March 2022, the SEC proposed a new regulation that would require public companies to disclose carbon emission metrics. The regulation specifically calls for companies to disclose direct and indirect emissions (Scope 1 and 2) as well as those associated with upstream or downstream activities (Scope 3) if “material”, or if a company has a public GHG reduction goal that’s inclusive of these activities. Embodied carbon is categorized as Scope 3.

This regulation has yet to be implemented, but if approved, would impact hundreds of public corporations. Over 1/3rd of the world’s largest publicly traded companies have net zero targets, up from 1/5th in 2020. The majority of which don’t have proper tracking or reporting methods, instead loosely sharing carbon reduction goals in their annual or quarterly reports. Importantly, 60% of reporting corporations don’t include goals regarding Scope 3 emissions (where embodied carbon is captured).

Potential requirements around Scope 3 reporting emissions are somewhat unknown, and ultimately dependent on the SEC’s definition of “material”. However, it seems inevitable that companies will be required to measure and report Scope 3 emissions in the coming years — either by force or to fulfill a corporate climate pledge — and there currently exists no standardized method for doing so.

In addition to the SEC’s proposal, individual states have implemented policies to lower embodied carbon emissions. In 2022, for example, New York passed a law requiring low-carbon cement usage in public real estate development projects. New York also recently implemented “Local Law 97” which imposes strict carbon emission limits for 50,000+ commercial and residential properties. Fines associated with exceeded limits go into effect May 2025. (Interestingly, the US often outpaces Europe when it comes to tech development and adoption. But, when it comes to climate, and using policy to drive innovation, they’ve got us beat. Dozens of European countries have had ESG policies and emission restrictions in place for years).

Second, real estate investors and operators are proactively investing in net zero carbon assets. According to a JLL survey, 3/4th of leading real estate developers plan to “own, build, or invest in” in net zero carbon assets over the next 3. Net zero assets beat out investments in renewable energy, offsets, considering ESG during underwriting processes, and a number of other ESG related actions.

Third, in addition to real estate investors and operators, other players along the built world “value chain” have independently made commitments to help lower carbon emissions (in part, by reducing demand for high emissions materials and production processes.) CarbonZero, for example, is an organization of 17 real estate production related entities that have pledged to use exclusively net zero carbon cement by 2050.

Fourth, the Inflation Reduction Act, passed in Summer 2022, earmarks $5B+ for incentivizing the use of low carbon materials in public infrastructure projects. In conjunction with this act passing, other federal organizations, such as the Environmental Protection Agency, are actively seeking public input for ways to reduce carbon emissions associated with construction materials over the coming months.

Investment Opportunities:

There are “hardware” and software opportunities for lowering embodied carbon in real estate.

On the “hardware” side:

First, making existing materials more “sustainable”. Steel and concrete are two of the main culprits here, accounting for 6% and 7% of total GHG emissions, respectively. Broadly speaking, GHG emissions can be reduced during material production by altering production mechanisms, materials, energy sources, and introducing carbon capture mechanisms. CarbonBuilt, Brimstone Energy, Terra CO2 and Sublime Systems are a few leading startups tackling this space.

Second, investing in new material development. Mass timber is the leading, sustainable material substitute. But other non-conventional “natural” materials are also being utilized to make steel and concrete alternatives. Plantd, for example, creates building panels from perennial grass.

Third, investing in “greener” construction mechanisms — e.g. offsite vs onsite construction. Offsite construction requires 67% less energy than onsite construction, and generates far less material waste. $1.6B was invested in modular construction in 2022, up 2x from the year prior.

On the software side, in conjunction with these “hardware” improvements, the real estate development industry will require technology to measure, track, procure, report, etc. on embodied carbon. Like much “horizontal” ESG analysis and reporting software, the tools available today for the real estate industry are challenging to utilize and inaccurate, at best. Companies committed to reducing their embodied carbon footprints hire external consultants to conduct full supply chain and production assessments, or build dedicated teams internally to do so. Deco Ventures, a Flybridge community fund, is the proud investor of a stealth company building a platform to help democratize embodied carbon assessments, reporting mechanisms, and reduction plans.

If you’re building or investing in this space, I’d love to connect! Shoot me a note to julia@flybridge.com.