Read this article to understand:
- The importance of mobilising the whole value chain
- The five key barriers to decarbonising the built environment
- The cross-industry solutions that can unlock climate mitigation and adaptation in the sector
The built environment is responsible for 39 per cent of the world’s carbon emissions, and the total global floor area of buildings is expected to double by 2060.1 Decarbonising this sector is critical to achieving global climate targets.
It also presents a significant investment opportunity. For example, up to £28 billion of cumulative investment could be required by 2028 to scale the UK heat pump supply chain and support the government’s ambition to install 600,000 heat pumps annually by 2028.2
However, the building sector operates as a complex, interconnected network of developers, suppliers, regulators and investors. Some barriers to decarbonisation are unique to certain actors, while others are shared, but all are deeply interlinked.
Overcoming these challenges requires the coordinated mobilisation of the entire value chain. As part of our holistic approach to stewardship, we brought together stakeholders from across the sector to address challenges at all levels, from individual companies to the system they operate in (see Building bridges to net zero: Mobilising value chains for decarbonisation).3,4
In June 2024, we hosted a 13-strong panel of industry leaders, including materials manufacturers, real estate developers, utilities and engineering consultancies (see Figure 1). Attendees discussed barriers to investment in decarbonisation solutions and identified potential strategies to address them. Although focused on the UK, many insights have global relevance.
Figure 1: Value-chain roundtable – represented sectors
Source: Aviva Investors, as of December 18, 2024.
The discussion was conducted under Chatham House rules, allowing information to be shared without attribution. In this article, we summarise five key takeaways, highlighting barriers and solutions for each, while also tracking the UK government’s progress in addressing these challenges.
Financial barriers
Most households cannot afford the necessary investments in energy efficiency and low-carbon technologies. In January 2024, the average UK savings balance was £17,364, while 34 per cent of adults had no savings.5 Although the UK Climate Change Committee (CCC) estimates under £10,000 per home is needed for upgrades, deep retrofits can cost up to £69,000.6
The housing stock is unprepared for extreme weather events
The housing stock is also unprepared for extreme weather events, such as flooding and heatwaves, highlighting the need for a “just transition”, as most homeowners cannot afford climate-proofing upgrades.
Suppliers face similar financial challenges in scaling low-carbon materials and technologies. Fragmented permitting standards and slow regulatory updates add complexity, and participants noted difficulties in obtaining funding for early-stage commercialisation of low-carbon businesses.
Proposed solutions
- Deliver at pace targeted public funding schemes, such as the UK government’s £13.5 billion Warm Homes Plan, to help overcome financial barriers to the uptake of energy efficiency and low-carbon heat measures in the built environment.7
- Develop innovative financial products, such as those enabled by the National Wealth Fund (formerly the UK Infrastructure Bank), which provided guarantees in 2024 to support £1 billion in commitments for social housing retrofit funding.8
- Introduce new business models such as "Heat as a Service" (HaaS), where households pay for warmth rather than energy units, shifting upfront costs to third-party companies.
- Mandate climate adaptation measures and integrate top-down economic incentives to create a stronger business case for change. Help to better inform the public on climate resilience.
- Integrate circular economy principles into building materials, such as reusing steel or recycled concrete, to reduce embodied carbon emissions* while promoting sustainable resource use. Greater support for the circular economy would be complemented by a broader suite of mandatory product standards to drive down embodied and lifecycle emissions in finished products (like buildings) and intermediate industrial goods (like steel and cement).9
*Note: The UK Green Building Council defines embodied carbon as “the emissions associated with materials and construction processes throughout the whole lifecycle of a building or infrastructure. This is typically associated with any processes, materials or products used to construct, maintain, repair, refurbish and repurpose a building.”10
Consumer sentiment
Consumer hesitancy is a significant barrier, driven by limited understanding and negative perceptions of energy efficiency. Only ten per cent of UK adults feel well-versed about improving energy efficiency, and 64 per cent are unaware of their home's Energy Performance Certificate (EPC) rating.11
Consumers also often prioritise visible design upgrades over sustainable structural elements like recycled concrete. A 2021 study by the UK Department for Business, Energy & Industrial Strategy found that 42 per cent of homeowner survey participants rejected solar panel installation due to aesthetic concerns (see Figure 2).12
This highlights the need to make green options more desirable and to support consumers in understanding the long-term benefits of energy-efficient measures.
Figure 2: Motivators and barriers for people rejecting solar panels (per cent)
Source: Aviva Investors, Department for Business, Energy & Industrial Strategy, July 2021.13
Proposed solutions
- Establish a central, independent energy advice service, akin to the Energy Savings Trust’s Home Energy Scotland Programme, to guide households through energy upgrades.14
- Improve the reliability of EPC assessments, incorporating technology and data (e.g., building performance tracking, digital twins, and AI for energy optimisation) and advanced metrics like energy cost and fabric performance, as proposed in the UK government’s 2024 EPC reform consultation.15
- Expand the “Able to Pay” framework, providing consumer protection and compliance standards for domestic energy retrofits.
- Conduct public education campaigns to improve understanding of energy efficiency and make low-carbon measures more desirable, with behavioural incentives, such as discounts, green rewards, or interactive tools.
- Encourage decentralised energy solutions, such as community heat networks and solar co-ops, to reduce costs and simplify adoption.
Complexities of home ownership
Tenants, whether domestic or corporate, and leaseholders face structural barriers to implementing energy upgrades, often due to lease terms. Freeholders may resist sharing costs for building improvements, while leaseholders lack authority to make changes within their flat.
This “split incentive” problem – where freeholders manage building maintenance but leaseholders bear energy costs – affects approximately five million leasehold homes in England.16 These complexities hinder large-scale adoption of green upgrades.
Proposed solutions
- Update legislation to empower leaseholders to collectively implement energy-efficiency measures. Suggestions include an independent right for leaseholders to undertake energy improvements collectively for a block of flats.
- Tighten energy-efficiency standards for landlords in both commercial and residential properties, including minimum EPC ratings for rented properties, as proposed in the Warm Homes Plan.17
Regulatory challenges
Despite progress in green regulation, participants highlighted that existing policies and a lack of tailored, stable incentives fail to provide sufficient ambition to decarbonise the building sector.
Embodied emissions, which account for 30 to 70 per cent of a building’s whole-life carbon emissions, remain unregulated.18
The reintroduction of mandatory EPC ratings signals progress in driving decarbonisation
Frequent policy changes also create uncertainty, limiting the ability of local authorities and industry to plan and invest on a larger scale.19 However, reintroduction of mandatory EPC ratings of E or higher by 2028 for rental properties (subject to consultation) under the new government signals progress in driving decarbonisation.20
Similarly, the situation on heat pump regulations and incentives is now much improved. Evidence suggests heat pumps and electrification are the most appropriate option for residential heating (see Figure 3).21 In November, the new government confirmed the Clean Heat Market Mechanism is set to launch on April 1, 2025, supporting the supply of heat pumps in the market. It will be introduced alongside a growing budget for the Boiler Upgrade Scheme, which gives consumers grants of up to £7,500 to buy a heat pump.22
Figure 3: Heat-pump efficiency compared to traditional heating systems (unit of heat produced per unit of energy consumed, in per cent)
Source: Aviva Investors, Energy Saving Trust, December 4, 2024.23
Proposed solutions
- Introduce more stable, long-term regulations, paired with fiscal incentives for energy efficiency.
- For owner-occupied homes, this could take the shape of minimum regulatory energy efficiency standards combined with fiscal incentives.
- For new homes and buildings, this could come as clear standards on energy efficiency, low-carbon heat, renewable electricity, operational emissions and climate adaptation standards.
- Set minimum lifecycle carbon standards for embodied emissions in new buildings.
- Increase ambition for Minimum Energy Efficiency Standard (MEES) for privately rented accommodation, requiring EPC level C compliance by 2025 and introducing performance metrics. The government is addressing this to a degree through the Warm Homes Plan.24
- Bring forward the planned decision on the use of hydrogen in heating and make a decision in the near future on the introduction of a Clean Heat Mechanism. As noted earlier, the government has now decided to introduce the Clean Heat Market Mechanism on April 1, 2025, with some important modifications to support manufacturers.
- Finalise a regulatory framework for heat networks and zoning by the end of 2025 to attract large-scale investment in low-carbon heating.
Workforce development
The UK workforce lacks the skills to support the transition to net zero. An ageing workforce and limited recruitment of younger workers have created a skills gap that is particularly evident in the construction and heating sectors.
At least 27,000 more trained heat-pump engineers will be needed by 2030
Currently, only 3,000 trained heat-pump engineers are available, but at least 27,000 more will be needed by 2030 (see Figure 4).25 The Construction Industry Training Board also estimated in 2021 that an additional 350,000 full-time equivalent workers will be required by 2028 to decarbonise the existing building stock.26
This skills shortage extends to local authorities, where insufficient expertise in planning, permitting, and enforcement delays low-carbon developments. Participants also noted a lack of understanding of embodied carbon among building professionals.
Figure 4: Total heat pump engineers needed in the UK
Source: Nesta, July 2022.27
Proposed solutions
- Publish a comprehensive action plan to address skills gaps across sectors. This is the aim of the Skills England body created by the government in July 2024.28
- Reform apprenticeship structures to prioritise the required skills for people of all ages and backgrounds, including allowing reskilling of existing employees under the apprenticeship levy. Recent government reforms aim to redirect apprenticeship funding towards young workers while building capacity across other demographics.29
- Expand incentives for reskilling, with government leadership to signal long-term demand.
- Upskill local authorities to enhance planning, permitting, and enforcement capacity.
Investment opportunities
As highlighted during the roundtable, despite some progress, there is still insufficient focus on tightening regulatory minimum standards for buildings, and local authorities will need more resources to enforce existing standards rigorously. However, our investment view is that this is not just the right thing to do from a moral and regulatory standpoint; improving buildings’ sustainability profiles can mitigate risks and deliver returns. Evidence of a “green premium” is growing, with sustainable buildings commanding higher rents and sales prices (see Figure 5).30
Green buildings are increasingly sought after by occupiers and buyers, providing long-term value
Buildings with poor energy performance face risks of faster depreciation and of becoming unlettable as regulations tighten. Conversely, green buildings are increasingly sought after by occupiers and buyers, providing long-term value.
As investors, we can play our part through our holistic stewardship approach, bringing value-chain participants together and engaging with governments to address these issues and the others set out in this article. We can also encourage commercial landlords to improve the energy efficiency and performance of their assets.
For example, we embed sustainability targets into some of our loan agreements, incentivising borrowers to improve their assets’ energy efficiency performance. For assets we own, we allocate specific budgets for sustainability-related upgrades and collaborate closely with delivery partners to ensure best practices in development and refurbishment.
Figure 5: Evidence of sales price premia in green buildings (per cent)
Source: N. Miller, et. al., 2008; F. Fuerst, et. al., 2009; W. Benefield, et. al., 2010; A. Chegut, et. al., 2013; T.B. Oyedokun, 2017; M. Papinaeu, 2017; M. del Giudice, et. al., 2020; JLL, 2023; Knight Frank, 2021; MSCI 2022.
Thanks to the insights gained through our stewardship and investment strategies, we believe decarbonising the building sector is not just achievable but essential. By mobilising the value chain and capitalising on green investment opportunities, we can unlock meaningful climate action while delivering long-term value for our clients.
