Morgan Stanley
  • Research
  • Jun 20, 2017

Green Buildings Power Savings & Returns

The energy-efficiency movement has evolved into a tech-savvy, industrial-strength global business offering substantial savings—and investment opportunities.

Turn off the lights when you leave the room. Seal all windows for winter. Close the blinds to keep out summer heat. Sound familiar?

These quaint refrains from the 1970s’ energy-efficiency movement have given way to a high-tech, industrial-strength sector focused today on delivering state-of-the-art building materials, equipment and energy management. Much of its growth is fueled by rising global demand for “green buildings” that can yield significant savings at every scale of construction, operations and maintenance. But technological advances in material science, low-cost connected sensors and chips, and advanced software for managing “smart buildings” make up the other side of this story.

Technology is creating new opportunities, particularly with intelligent building systems estimated to cut energy consumption in half.

“With residential, commercial and public buildings accounting for more than an estimated 30% of the world's energy consumption, this is an area of growing interest for consumers, building owners, tenants and regulators,” says Europe-based Sustainability Analyst Faty Dembele. The results not only accrue to corporate bottom lines: At the macroeconomic level, boosting buildings’ energy efficiency “can increase energy security and lower public budgets, while stimulating productivity and job creation,” she says.

Intelligent Building Systems

According to a recent Morgan Stanley Research report, “Building Energy Efficiency,” the return on investment in energy-efficient features is substantial—by some estimates, it can lower the cost of ownership by 50% for commercial buildings. Meanwhile, highly energy-efficient buildings can attract more tenants, thus driving down vacancy rates, and ultimately boosting property values.

Investors are taking notice. The companies best positioned to capture the growing emphasis on efficiency focus on areas that offer the biggest return on investment. This includes systems that can facilitate the expansion of smart grids and demand/response solutions, as well as energy-management systems. “Technology is creating new opportunities, particularly with intelligent building systems estimated to cut energy consumption in half,” says Dembele.

Indeed, moving beyond solar panels and green roofs, some of the most significant savings, both for residential and commercial construction, come from products and systems working behind the scenes to mitigate the costs of heating and cooling through proper insulation, climate-appropriate windows, as well as LED lighting and systems that control and optimize energy use.

Running Hot and Cold

Take heating and cooling systems, for example, which can account for up to 60% of a building's overall use. Incorporating the latest energy-efficient materials, construction methods and technology increasingly have become higher priorities for owners. Companies that stand to benefit from these trends include leading providers of heating, ventilation and air-conditioning systems, as well as energy management and automation systems that can detect usage patterns and manage on-off controls, and maintenance schedules.

Windows can also play a big role in how much energy is required to heat and cool buildings. “Windows are responsible for the highest heat loss in winter and higher heat gain in the summer per unit area in the majority of buildings,” says Dembele. Most of the world's installed windows can be significantly improved; in cold climates, low-emissivity-coated glass can reflect heat back into the building and reduce heat loss through the window, while in hot climates, the use of advanced solar-control-coated glass can mitigate reliance on air conditioning, Dembele says, citing Glass for Europe, the trade association of the EU glass sector.

Finally, lighting, which accounts for 15% of global electricity demand, offers significant potential for savings through better use of natural lighting and more efficient lamp technology. LED lights, for example, use up to 75% less energy and have an expected life that is 25 times that of traditional lights. One lighting company estimates that by 2020, 80% of professional lighting systems sold will be LED, while 25% will be part of a connected lighting system. These and other improvements could dim energy use from lighting by 40% by 2050, says Dembele.

Global Impact

Green building can also translate into societal benefits that go beyond reducing environmental footprints. Economists have dubbed energy efficiency as a “hidden fuel” that can reduce dependence on fossil-fuel imports, help governments cut operational costs for public buildings, and alleviate “fuel poverty” in low-income households. The growth of this sector can also fuel jobs and create opportunities at the local level.

“Given the expected growth in occupied space, particularly in developing nations, and increasing service demand, energy consumption could double by 2050 if nothing is done,” says Dembele.

All told, building energy performance will need to improve at least 2.5% a year over the next decade to keep global warming to the 2° Celsius above preindustrial levels set by the 2015 Paris Agreement. Although regulations are tightening, much of the world's building energy use still isn’t subject to minimum performance standards for heating and cooling, hot water and lighting.

For more Morgan Stanley Research on energy efficiency and sustainable and responsible investing, ask your Morgan Stanley representative or Financial Advisor for the full report, “Building Energy Efficiency” (May 2, 2017). Plus, more Ideas.