INSIGHTS &PERSPECTIVES
from MacKay Shields Fundamental Equity TeamJANUARY 2023

Reshaping Buildings: Opportunity in Plain Sight
Authored by Carlos GarciaTunon, CFA, Head ofFundamental Equity teamand Ian Murdoch, Managing
Director, Fundamental
Equity team.

As with many of the secular growth trends ourteam has invested behind, the source of a problem
often represents an opportunity. Nearly 40% of
global carbon emissions are related to theconstruction and operations of buildings. We
believe investing to improve the energy efficiencyof buildings is a cost-effective solution to reducing
carbon emissions.
We are finding opportunities across multiple
sectors in companies with the technology andsolutions to benefit from the secular trend ofdecarbonizing buildings.

Contributing Factors to Building Related Emissions
The energy intensity of the existing stock is a major challenge
in reducing building related emissions. It is estimated that
68% of Europe’s buildings were constructed before energy
efficiency regulations were introduced in the 1980s and 76%of buildings in the United States were constructed before
similar regulations were introduced in 1989. Despite decadesof energy efficiency improvements in new construction,building operations continue to account for 28% of global
carbon emissions.1
UN D E R S T A N D I N G C A R B O N

Embodied and operational carbon are bothtypes of carbon dioxide released into the air.
The main difference is when it is released.

“We Shape our Buildings, and Afterwards Our Buildings
Shape US”—Winston Churchill
While Churchill was referring to rebuilding the Commons
Chambers after being bombed in WWII, his adage stands
today. In addition to shaping how we live and work, buildings
are also reshaping our environment as a major contributor toclimate change. A paper sponsored by the United Nations
estimates that in 2021 the operation and construction ofbuildings accounted for 34% of global energy consumption and
37% of global CO2 emissions.1

Source: Used with permission. https://www.usa.skanska.com/who-weare/media/constructive-thinking/carbon-reduction-in-construction/

In addition to the existing stock, construction is also a major
contributor to building related emissions. Skanska, a global
project management company, estimates that embedded
carbon, the carbon produced during the construction process,will account for 50% of the total carbon generated by a newbuilding over a 30-year lifecycle2. The reliance on energy
intensive materials, particularly concrete and steel, combinedwith highly inefficient workflows result in building materials

1. United Nations Environment Programme (2020). 2020 Global Status Report for Buildings and Construction: Towards a Zero-emission, Efficient and Resilient
Buildings and Construction Sector. Nairobi
2. https://www.usa.skanska.com/who-we-are/media/constructive-thinking/carbon-reduction-in-construction/

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INSIGHTS &PERSPECTIVES
from MacKay Shields Fundamental Equity Teamand construction accounting for an additional 10% of global
carbon emissions.1

renovation specifically identified as an area for increased
investment.3 In the US, cities and states continue to pass more

FIGURE 1: GLOBAL CO2 EMISSIONS BY SECTOR

FIGURE 2: ESTIMATED PUBLIC AND PRIVATE INVESTMENTS FROMSTIMULUS ANNOUNCEMENTS TO DATE FOR CLEAN ENERGY BYEFFICIENCY MEASURE COMPARED WITH THE IEA SUSTAINABLERECOVERY SCENARIO TO END OF OCTOBER 2020 | $USBN$81$51

Urban Infrastructure
New Efficient Vehicles

$186

$5

New Electric Vehicles$54

Long-distance Transport$36

Material Efficiency$33$22$273$273$159

Appliances
Industry Energy Efficiency
Source: United Nations Environment Programme (2020). 2020 Global Status
Report for Buildings and Construction: Towards a Zero-emission, Efficientand Resilient Buildings and Construction Sector. Nairobi

$86

$207

Building Efficiency
Sustainable Recovery Plan

$305

$444

Current Announcements

As of November 30, 2020.
Source: IEA (The International Energy Agency). All Rights Reserved.

Buildings Are Critical to Achieving Climate Goals
Many experts agree that achieving the targets in the Paris
Agreement is not feasible without a major reduction in building
related emissions.
While renewable energy and theelectrification of the transport sector are likely to continue
attracting the public’s attention, a more concerted effort tochannel investment into decarbonizing buildings will berequired for most developed countries to meet their climate
commitments. The IEA (The International Energy Agency)
estimates that a 50% reduction in direct CO2 emissions frombuildings will be required by 2030 in order to be on track forachieving a net-zero carbon building stock by 2050.2

stringent building emissions legislation, including New York
City’s Local Law 97 which targets a 40% reduction in building
based emissions by 2030.4 Federal funding and incentives
targeting building related emissions were included in both theInfrastructure Investment and Jobs Act, signed into law in
2021, and the Inflation Reduction Act of 2022.

Decarbonizing Buildings: A Secular Trend
As with many of the secular growth trends our team hasinvested behind, the source of a problem often represents anopportunity. Refurbishing existing building stock to improveenergy efficiency, adopting green standards for new buildings,
and reducing inefficiencies in the construction sector all havethe potential to significantly reduce carbon emissions. Withthe technology and solutions required to decarbonize buildings
already available, this appears to be an opportunity hidden inplain sight.

As the challenge of meeting climate goals becomes moreacute, governments are starting to focus more attention onbuildings. The initial framework for the European Green Deal,
released in December 2019, advocates for improving energy
efficiency in existing buildings by doubling the rate ofrenovation. In May of 2020, the EU reinforced its commitment
to the environment by dedicating 25% of its €750bn COVID-19
stimulus package to combating climate change with building

2. Building sector emission hit record high, but low-carbon pandemic recovery can help transform sector – UN report
3. Europe Charts a Course for Sustainable Recovery from COVID-19 – World Resources Institute4. https://www1.nyc.gov/site/sustainablebuildings/ll97/local-law-97.page

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INSIGHTS &PERSPECTIVES
from MacKay Shields Fundamental Equity TeamWe believe increasingly stringent environmental regulations
combined with direct government funding will support asustained period of investment targeting a reduction inbuilding related emissions. A recent McKinsey study estimates
the EU’s ambition to achieve a net zero building stock will
require €1.5tr of investment in clean technologies over thenext 30 years.5 Pressure from stakeholders and theanticipation of new regulations is already driving increased
investment to decarbonize buildings in the private sector, often
as part of a broader ESG strategy.

In our portfolios, we have exposure to the growth inconstruction software spend through a French based leader insimulation software and a Swedish based company with aleading position in measurement technology. Simulation
software allows for the creation of digital twins which can beused to design more energy efficient structures, reduce
inefficiencies through better project management, andimprove building operations.
Measurement technology
solutions, which combine hardware and software tools,
improve efficiency and reduce waste by digitally connecting theconstruction site with the planning office to allow for real-timemonitoring during the construction process. We have invested
in a German based company which is a leading player in thearchitectural, engineering, and construction (AEC) software
market. Its suite of software tools reduce embedded andoperational emissions by digitalizing every aspect of thebuilding lifecycle from planning through operations
management.

Finding Sustainable Growth Opportunities
While solutions and technologies from a wide range ofindustries will be required to decarbonize buildings, only
companies that meet all of our investment selection criteria
are considered for investment. Within our investment
universe, we have identified companies across multiple
sectors that we believe are well-positioned to deliver
sustainable earnings growth, underpinned by the desire to
reduce building related emissions, over our five year
investment horizon. In addition to benefitting from this clear
secular growth trend, in our view these companies also haveestablished durable competitive advantages, attractive ESG
profiles and are led by strong management teams. As we seek
to avoid companies with high earnings volatility, they also offer
a degree of economic resiliency while not being exposed toconcentration risks or having excessive financial leverage.

Opportunities in Materials and Industrials
Outside of technology, we have also identified opportunities in
the industrial and materials sectors. We have invested in a
Swiss based engineering company which designs field devices
used to optimize HVAC systems by allowing for precise control
of temperature, humidity, and air pressure. With heating andcooling accounting for as much as 50% of a building’s energy
consumption7, optimizing HVAC systems results in significant
energy efficiency gains.
Demand from increasingly
sophisticated HVAC systems in new construction combinedwith a massive opportunity from increased renovation activity
should support attractive growth rates for this industry leader.

Technology Solutions for Reducing Building Emissions
Given the energy and resource intensity of construction,technology driven efficiency gains can significantly reduce theamount of embedded carbon in new buildings. Despite
available software offering efficiency gains as high as 20%,
technology spend by the construction sector lags behind every
other major industry at less than 2% of sales. 6 In an effort toimprove efficiency and reduce emissions in the construction
process, government regulations are increasingly mandating
the use of building information modeling (BIM) tools in public
works projects. With BIM regulations helping to driveincreased adoption rates, construction technology spend isexpected to sustain high rates of growth into the foreseeable
future.

In the materials sector we are monitoring a Swiss based
construction chemicals company with a portfolio of solutions
which address both embedded and operational carbon
emissions. As the global leader in admixtures used to improve
the structural qualities of concrete, this company’s products
reduce embedded carbon in buildings by reducing the energy
intensity of concrete production while allowing for less material
to be used in a project. It also has a range of adhesive andsealing products which reduce operational emissions byimproving the energy efficiency of existing buildings. Low
emerging market penetration rates represent an additional
driver to this company’s long-term growth potential.

5. How the European Union could achieve net-zero emissions at net-zero cost – McKinsey Sustainability, December 3, 2020
6. Morgan Stanley Research, Premium business at a premium price. Initiate at Underweight, February 19, 2020
7. Morgan Stanley Research, Small Devices, Big Impact, March 12, 2021

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INSIGHTS &PERSPECTIVES
from MacKay Shields Fundamental Equity TeamIMPORTANT DISCLOSURE
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