ESG IMPERATIVES FOR THE HVAC INDUSTRY

The recent COP 28 sumit in Dubai was significant in that the global community agreed to move away from fossil fuels and transition to a clean energy future. The 2023 Emissions Gap Report highlights that emissions will need to be reduced by 42% by 2030, if the world is to achieve the target of containing global temperature rise to below 1.5 Degrees C. COP 28 also saw the launch of ‘Buildings Breakthrough’, which is a global initiative to reduce emissions from the building sector that accounts for over 21% of global emissions – and make climate resilient buildings the preferred choice by 2030. Another initiative taken by a number of countries was the ‘Global Cooling Pledge’ wherein 66 countries agreed to reduce cooling related emissions across multiple sectors by 68% from the 2022 levels.

The Indian government has also taken a lead in the energy transition movement and pledged to become net zero by 2070 as announced in COP 26. There is thus a greater awareness amongst all sectors of the economy as well as industry on the need to move towards a green future. The Environment, Social & Governance (ESG) movement that started in the more mature markets of the western world nearly two decades back is now mainstream – and dovetails into the efforts of organisations to minimize their emissions and align themselves to the global climate change goals. This article gives a brief overview of ESG and then discuses the linkages of the HVAC industry to ESG programs in the built environment.

What is ESG?

At a broad level, ESG is a framework that organisations use to assess how their operations align to globally accepted sustainability and ethical practices. The ESG goals and actions that an organisation develops are also used as an input by investors for assessing organisations and assets. The key constituents of the ESG framework are given hereafter.

• Environment: This is the most visible aspect of ESG and covers aspects of an organisation’s operations such as minizine carbon footprint, waste management, moving to green energy etc. The actions that an organisation takes around the Environment pillar showcases its commitment to sustainability and climate change.
• Social: An organisation does not operate undependably of the surroundings and hence, the social framework relates to how a firm integrates its operations within the society and its stakeholders. This covers aspects of Diversity, Inclusion, Employee welfare, Corporate citizenship etc.
• Governance: Ethical conduct of business in a transparent way is crucial for an organisation’s growth and the Governance aspect of ESG addresses these crucial areas of business operations.

To help organisations, stakeholders and investors assess the integration of ESG in a business, various frameworks have been developed by different agencies and advocacy groups. These frameworks are usually self-reporting models where organisations transparently share the initiatives they have taken around ESG. Some of the more popular ESG reporting standards are GRI developed by the Global Reporting Initiative, CDP or Carbon Disclosure Project, TCFD (Task Force on Climate Related Financial Disclosures), which targets the financial risk companies have related to climate change and many other systems. There are also a number of tools that are used by organisations to rate their ESG score such as GRESB which is popular in the in building sector and gaining increasing traction in the Indian market as well.

While these standards and declarations are mostly voluntary, there is a move in many markets, including India to make sustainability and climate related aspects reporting mandatory. The BRSR (Business Responsibility and Sustainability Reporting)  introduced by SEBI in 2021 mandate the top 1000 listed companies in India to report on a range of aspects that also include ESG.

ESG and the building HVAC systems

As stakeholders in the building & construction sector know, the sector is one of the largest consumers of energy. Over 34% of the global energy demand and 37% of CO₂ came from this sector in 2021. Therefore, reducing the energy consumption in the building sector will play a crucial part in the global fight against climate change. Within the building sector, HVAC (Heating Ventilation and Air Conditioning) is a major energy consumer with a nearly 50% share of the total energy used in a building. HVAC thus plays an important role in any organisation’s ESG strategy since the efforts directed to reduce HVAC energy consumption will have a large bearing on the carbon emissions of the organisations. In addition there are aspects of Social and Governance as well that tie in with the HVAC systems of an organisation. Some of the areas that HVAC has direct impact on a building’s ESG reporting are:

Environment

• Energy usage: Since HVAC accounts for a significant portion of the energy that a building uses, building owners track the efficiencies of the chiller plants and other associated equipment and systems more diligently. This is because HVAC offers both an opportunity to lower energy costs which in turn help lower operating costs as well as improve ESG scores.
• Water usage: Minimising the water usage in cooling towers and the cooling systems directly improves the sustainability of the HVAC operations.
• Waste: The disposal of hazardous waste emanating from HVAC systems such as compressor oil, used filters, refrigerant, cooling water blow off are part of a buildings ESG strategy with an aim to reduce the waste as much as possible.
• Supply chains: How does a buildings supply chain measure up to ESG is an important part of the ESG framework since the aim is to measure overall environmental impact, not just what occurs in the building. Thus, the carbon emission of suppliers of HVAC systems and products is also measured as part of a buildings ESG rating.

Social

• With relation to HVAC systems in a building, the social aspects cover how building owners engage with their and their supplier’s employees who work on HVAC systems. This could include the level of diversity and inclusivity of the work force, employment of People With Disabilities (PWDs), welfare measures provided to the work force etc.

ESG and its impact on the building sector HVAC industry

Many progressive developers in the Indian market have started taking out annual ESG and sustainability reports and publishing them. The reports cover activities taken by the developers that align their assets to their overall ESG strategy and goals. Since HVAC systems are critical aspects of any building, initiatives taken by asset owners to reduce their carbon footprint will include the HVAC operations. Some of the challenges and opportunities for the HVAC sector that the ESG movement throws are:

Challenges

• Developers seeking better efficiencies from existing systems. There will be pressure on HVAC service providers as well as O&M teams to bring down energy costs, lower the iKW but without effecting end user comfort and without additional investments.
• Greater scrutiny on how waste is managed in the HVAC ecosystem. There will be requirements of traceability of waste disposal, a push for more recycling and also expectations from building owners and investors to reduce the waste.

Opportunities

• Retrofits: To reduce the buildings energy footprint, and the aging of buildings, there will opportunities for HVAC manufactures to propose innovative retrofits to either parts of the HVAC system or a complete change in case of older assets. With increasing energy costs, the payback period may come down, however the driver for retrofits would also be the need for the organisation to show lower energy spends to align with their ESG and net zero goals.
• Automation: the current level of automation in most buildings is rudimentary, even in many new buildings constructed in the last few years. With an increasing focus on lowering building energy costs, developers are looking at investing in chiller plant automation and integration with other building systems – so that the operations can be monitored in real time and changes made on the fly to optimise HVAC operations. With the rapid penetration of IoT devices, at reasonable price points, building owners are able to deploy building management systems faster and by integrating data analytics and fault detection systems, the system reliability can be improved as well enabling lower energy use.
• Better Products: The ESG movement will drive innovation in the HVAC eco system as manufactures will compete to deliver products that have lower carbon footprint than their competitors. There is an opportunity to re-introduce technologies fixes that had not found favour earlier due to the complexity or other reasons such as heat pumps and natural refrigerant systems. These technologies have a lower energy demand and are more sustainable in the long run. Asset owners are willing to pay more to get such systems if it helps them meet their ESG targets.

Conclusion

The effect of climate change is very much visible across the globe, resulting in environmental degradation as well as a negative impact on human and animal populations. The ESG framework is a way for organisations to realign their business operations – such that their impact on the environment as well is minimal and they are an enabling member of the community that they operate in.

The HVAC systems in the building sector are a major contributor to the greenhouse gas emissions as well as energy usage. ESG integrations into an organisations business stagey will have an impact on how HVAC systems are sourced as well as operated. The ESG framework provides an opportunity for the sector to bring in innovative technologies and approaches as building owners are willing to invest in such offerings with an aim to meet their ESG goals.

Aneesh Kadyan is the Executive Director – Operations, for a leading real estate services firm. He heads the operations of a large team of professionals in the building and facility management arena. He is a post graduate in Mechanical Engineering – and has over 28 years’ experience in management of services in technology intensive environments. His areas of interest include: Maintenance management, Corporate  governance, Strategic planning and Technology interventions in Industry. He is a Professional Engineer (PE), Active member of ISHRAE, a certified Energy Auditor and an IGBC Accredited Professional (AP).