ESG and Smart Buildings: The storm and its silver lining

Key takeaways:

• Difficult macro-economic conditions, energy price surge, ESG legislation and the drive for net-zero have combined to drive investment activity in smart building, buildings management systems and IoT businesses
• Many businesses have developed technology to help clients achieve their ESG objectives. These vary from modern IoT businesses to more traditional ‘BMS’ businesses, who have for a long time, been helping their customers become more energy efficient
• Key to all these businesses is how they manage their data, integration and how they achieve scalability

Over the past five years, we’ve seen an increase in investment activity in smart buildings, Building Management Systems (BMSs) and Internet of Things (IoT) businesses. There’s a ‘storm’ of macro-economic forces that make the sector attractive to private equity investors: not least the drive for ESG assets, high inflation and an energy crisis.

So what are investors buying into? Smart buildings represent the 21st-century vision of the ‘intelligent space’, with systems such as lighting, heating, security and even entertainment connected to the same network.

Building Management Systems refer to the software and hardware that control and even automate events like changing the temperature to suit when an office is busy, or detecting intruders and informing the relevant people.

Most BMSs use the Internet of Things: physical objects embedded with sensors, processing power, and an internet connection.

Explaining the growth behind Smart Buildings and BMS

We see two main reasons for the growth in smart buildings and BMSs. The first is rising demand for organisations to be sustainable, as seen in the rise of Environmental, Social and Governance (collectively ESG) goals and metrics. ESG has been a high point on the agenda for investors for a long time. This is set to continue: PwC estimates an 84% increase in investments labelled ESG by 2026. But why is ESG so in demand?

People’s environmental concerns have steadily grown since the 1990s, and the public is becoming savvier in seeing through greenwashing. Investors are feeling pressure from important stakeholders, with many banks reporting ESG as the most important point for their clients.

It’s time to separate E from ESG, Callum Stewart & Anniken Engelsen, GP Bullhound 2022

Scientific consensus agrees that we must reach net zero globally by 2050 to avoid the worst effects of climate change, so sustainability is moving to the front of people’s thinking. ESG is about more than environmentally-minded corporate management, but asset managers and investors are under strong pressure from consumers to invest in efficient, green businesses.

Another driver of investor demand in the smart building space are the macroeconomic factors behind the cost-of-living crisis in the UK and other Western economies (particularly those that rely on gas as a main source of energy).

This is the result of high inflation, a looming recession, and (perhaps most of all) record-high energy prices. Many people worry how expensive heating their house over the winter is going to be, and energy-intense industries such as manufacturing are urgently looking for ways to cut usage and costs.

Together, these issues emphasise the need for efficiency among building managers and enterprise. This storm of macroeconomic issues brings strong headwinds for inefficient businesses.

However, that same storm comes with a silver lining for private equity firms: opportunities for value creation and capital growth in businesses that focus on smart buildings, building management and IoT.

1. Businesses are adopting technology in order to help achieve ESG objectives and are searching for ways to increase efficiency, reduce demand and eliminate waste.
2. A wide range of technology businesses have solutions that can help these businesses.
3. Investors are attracted to these businesses as they are seeing growth and demand for their services.

We see technology as a key way to reach and measure ESG progress and create value in the sector. Here, the Intechnica team discuss some of the things we think investors should look out for when assessing businesses across Smart Building, BMSs, IoT and ESG enablement.

Things to consider from a technological perspective:

IoT and BMS is a complex ecosystem that includes traditional tech hardware, sensors, networking (WAN and edge), connectivity and analytics where no technology vendor dominates. The key component and common denominator is data, real-time (or near-time analysis) and automation.

Technology Integrations

Building Management Systems (BMSs) come in a range of technologies. Multi-site organisations will likely have systems from multiple BMS vendors across their estate, increasing the overheads and complexities in managing these estates and preventing their ability to quickly and efficiently reduce emissions.

As ESG objectives increase in importance, we see more businesses seeking expert engineering and development expertise to achieve them.

Until recently, these engineering and development partners would have relied on manual processes and on-site visits to make a change. Today, they leverage technology to save time and increase accuracy.

This use of technology makes reporting ESG metrics and progress towards ESG objectives much easier for their clients, but it also gives way to streamlined processes and increased margin/revenue. Less waste and greater efficiency is great for the environment, but good for balance sheets too.

Less waste and greater efficiency is great for the environment, but good for balance sheets too.

This results in an outsized impact on businesses: they’re more favourable with investors for their ESG credentials, but by working towards ESG goals their bottom line also stands to benefit.

There are several ways in which a company can reduce time and effort spent managing buildings:

1. Install the same system on all buildings; however, given the size and nature of commercial buildings, these systems can be expensive to install and replace.
   
2. Integrate systems through hardware that sits onsite and speaks to a central dashboard.
   
3. Integrate systems via APIs that communicate between the various system portals and dashboards.

For any of these choices, businesses must use standard technology (including common APIs) as much as possible. Otherwise, they risk being responsible for a software estate as complex as their client’s real estate.

With robust, simple, appropriately managed integrations in place, a company can more easily report on ESG metrics. They can manage building services more effectively (even remotely) and reduce employees’ and contractors’ time spent hopping between systems and locations to manage building services.

Data

Businesses might want to report on metrics such as the emissions they’ve reduced but face several obstacles in doing so. What should they report on? How can they ensure they are reporting accurately? How can they use data to gain insights and recommendations that will contribute towards their ESG objectives (e.g., becoming net zero)?

Dedicated technology businesses (such as smart building vendors) can help with this challenge. However, these businesses must manage data that comes from several sources that each “speak” differently (such as BMSs, IoT devices, financial & HR & trading data and systems).

If partners and vendors fail to get these systems talking to each other, they’re not adding additional value and risk costing their clients more than they contribute.

Companies that do solve the challenge of getting different systems to communicate effectively typically have strong data capability and expertise. That expertise makes things like reporting actualities and automating processes (like automatically ensuring all lights are switched off when the last person leaves the building), suggesting changes and highlighting ineffective strategies much more efficient and accurate.

Data is only half the battle.

In summary, data is only half the battle. First, you must have useful sources of data and meaningful ways of connecting that data across systems and platforms. Secondly, you must have strong data expertise to make sense of the output from those systems and use it for the ESG metrics your business requires.

Scalability

Companies should be building with the future in mind. It’s not enough that systems work today if they present bigger problems tomorrow.

It’s not enough that systems work today if they present bigger problems tomorrow.

When thinking about scalability, the three areas to consider are technology, operations and risk.

Technology: This includes use of quality gates and robust infrastructure to ensure technology remains performant with more traffic/use. A common way of ensuring scalability cost-effectively is through the use of the cloud, which also enables companies to manage buildings and other areas of their estate remotely.

Operations: It’s important to reduce on-site time for support and maintenance staff, particularly for well-paid specialists such as BMS experts. Using standard systems and tooling helps to reduce this, and frees expert staff to focus on innovation and R&D. For example, remotely configured BMS units could be preferable because electricians can install the hardware instead of specialist engineers.

Risk: Security is always a consideration; the larger an organisation, the larger its attack surface. The use of IoT and remote BMSs present unique opportunities for attackers – and it’s important organisations are aware of this and taking steps to reduce the likelihood and impact of an attack. Another thing to consider is this use of open-source software – particularly when distributing hardware.

Conclusion

Smart buildings, BMSs and IoT present many opportunities in managing building services, reducing costs and minimising environmental impact. In addition to positively impacting ESG goals, they also make the measurement of ESG metrics much more straightforward if implemented correctly and carefully.

However, these opportunities also come with risks. Anticipating those risks is essential in mitigating them, so it’s important to be mindful of issues such as scalability, data governance and ease-of-integration in mind.

Thanks to Technical Consultant David Bamber and Consultant Rachel Ng for their contributions to this post.