According to Fitch Ratings, cement production is the segment of the building materials and construction sector most vulnerable to long-term climate risks due to large, direct, hard-to-abate carbon emissions that require expensive decarbonisation technologies.
Other heavy building materials production (such as aggregates and concrete) will be less severely affected, as they have high environmental footprints but significantly less direct greenhouse gas (GHG) emissions than cement production. Building materials distribution and engineering & construction are least exposed in the sector due to low direct emissions, low-to-moderate policy risks and solid fundamental demand drivers.
Cement production accounts for about 8% of global carbon emissions, the majority of which arises from the manufacturing process. Production methods will therefore require major changes in the coming decades to meet climate targets. Decarbonisation in cement production requires significant operational advances and technological innovation that will increase costs and investments, disrupting business models. The main areas of innovation currently include carbon-cured concrete, next-generation cements and carbon capture and storage (CCS) technology, which offers the greatest potential for emissions reduction, according to the UN PRI Forecast Policy Scenario 2021.
Other heavy building materials include construction materials that are usually linked to cement production in the value chain, from lime and aggregates to downstream materials such as concrete and asphalt products. Producers of such materials have high environmental footprints and are often vertically integrated with cement production, although they generate significantly less direct (Scope 1) GHG emissions on a standalone basis. This segment typically requires energy-intensive steps in the production process, including the crushing and moving of raw materials, usually leading to significant GHG emissions, as well as waste and water management challenges.
Decarbonisation of other heavy building materials production is also costly and will involve increasing use of raw-material substitutes, better plant utilisation, increasing equipment effectiveness and increased use of alternative fuels. However, due to this segment’s links to cement, CCS technology offers the greatest potential for multi-decade emissions reduction, despite its expected protracted roll-out.
Building products manufacturing covers a wide range of products, including plasterboards, insulation boards and panels or glazing systems, and generates significant direct carbon emissions, although these are lower compared to cement and other heavy building materials. Emissions are primarily related to energy use (Scope 2) and high indirect supply-chain (Scope 3) emissions from raw-material sourcing and transport. For many companies in this segment the energy transition will require significant adjustments to business models. Their climate vulnerability is highest in relation to the transition towards energy-efficiency solutions rather than the reduction of direct carbon footprints.
Climate vulnerability in the building materials distribution segment is mainly related to responsible sourcing, circularity and carbon emissions from energy use, transport and increasingly supply-chain emissions (Scope 3). Decarbonisation will therefore primarily focus on more effective purchasing of goods and services, especially those with higher environmental footprints such as concrete products, bricks and plasterboards.
Due to exposure to indirect emissions, engineering & construction needs to adopt an effective climate strategy throughout the project lifecycle and to increasingly focus on the supply-chain climate footprint. Companies will reconsider the way in which they design and construct buildings and infrastructure, including their choice of materials, resource efficiency and circularity challenges. This will also require integrating climate risk into their supply chain and purchasing decisions. We expect the increasing use of renewable energy, reduced fuel consumption, and electrification of transportation fleets in this segment.