The national building code may soon be altered to reflect the risk climate change poses to buildings.
Buildings are meant to last 50 years or more so it’s important that the structures built today can withstand the onslaught of extreme weather events triggered by climate change.
That’s why the Australian Building Codes Board has teamed up with its United States, Canada and New Zealand counterparts to consider building code tweaks that support adaptation to the risk of increasing intensity, duration, frequency and location of extreme weather events.
“Building codes have made significant contributions to protecting society from both natural and manmade hazards,” according to a statement issued by the US-based International Code Council, which is running the climate risk program.
“However, as societal expectations change, scientific knowledge grows and risks intensify, building codes must continue to evolve to address these needs.”
The ABCB recently asked the industry for feedback on its initial ideas.
Team Catalyst director PC Thomas, who has been actively involved in the development of the National Building Code and other sustainability standards over the years, says that the industry has become increasingly cognisant of how extreme weather effects will impact their buildings.
Three very hot nights in a row, for instance, can put extreme pressure on cooling systems to keep occupants comfortable, and vice versa for three consecutive cold nights.
At the moment, the building code doesn’t properly recognise these extreme events and define minimum standards that will allow buildings to adapt to these events.
Thomas says the first step will likely be ensuring there’s consistent definitions for these extreme weather events, which will also need to be climate specific.
WT Consultancy’s Steve Hennessy says that climate resilience has become a mainstream concept for property owners.
Since 2018, there’s been a resilience module added to GRESB to provides investors and participating companies and funds with information about climate risk and resilience. Green Star has also added a resilience category and credits.
Hennessey says climate resilience is “something people are thinking a lot about”, but that more information is needed to better understand the implications of these events so that the industry can respond appropriately.
One must be careful they don’t consider the minority at the peril of the majority! Tyre companies once used a hard compound rubber for harsh Australian conditions and whilst worked wonders in extreme heat had no grip for the majority of the year and as such were dangerous and caused more problems.
Be mindful you don’t create much bigger problems when designing resilience for occasional events
It’s good to see progress with the ABCB engaging with other jurisdictions. But are they looking at the right issues when evaluating the impact of the resilience measures? Some personal thoughts:
In Australia at present, our National Construction Code (Code) provides “the minimum necessary requirements for safety and health; amenity and accessibility, and sustainability in the design, construction, performance and liveability of new buildings”. Changes to the Code must be shown to have net benefits through the COAG RIS process. The COAG best practice regulation guidelines, under the intergovernmental agreement stipulates that amendments to the Code must meet COAG best practice regulatory principles. These include that potential amendments generate ‘the greatest net benefit for the community’ and be ‘proportional to the issue being addressed’ The guidelines state that a cost–benefit analysis should ‘assess the costs and benefits of all the options supported by an acceptable level of evidence’. The Intergovernmental Agreement imposes the additional requirement that an amendment must be the ‘minimum necessary’ to achieve … [the Code’s] objectives efficiently.
Further, the ABCB and Board are bound by the Intergovernmental Agreement which in effect means, they do not do anything that is not part of the strategic direction by the “Building” Ministers. In the case of Royal Commissions and or Coronial inquiries, etc it is up to the Minister to determine first if they are going to accept the recommendation (which may be fully accept or partially or not at all) and then confirm what they are going to do implement. Therefore, it is not a straightforward in the adoption of making changes to the Code.
Recommendation 19.4 (2) from the Royal Commission into Natural Disaster Arrangements specifically identified the need to “conduct an evaluation as to whether the National Construction Code (Code) should be amended to specifically include, as an objective of the Code, making buildings more resilient to natural hazards”. Are we currently utilising methods to appropriately evaluate investments in resilience and adaptation measures to protect physical assets from climate change impacts?
The starting point, in my view, should be around ensuring adequately defining the fundamental basis of evaluating the impact of making buildings more resilient to natural hazards. The Regulatory Impact Statement process uses a 7% discounted cash flow (DCF) that does not consider triple bottom line and future legacy impacts. In my opinion, in order to adequately value resilient assets in an evaluation process, the approach needs a rethink. Inclusion of, resilience from natural hazards as an objective, is a welcome move but it needs to include addressing the basis of impact assessment.
Past ABCB studies have concluded that “there appears to be support for the current 7% discount rate for cost/benefit analysis when assessing draft Code proposals dealing with resilience to extreme weather events. There is also support for sensitivity analysis, which the ABCB currently uses in regulation impact assessment (i.e. includes 3%, 5%, and 11% discount rates)”.
If so many assets are having to be rebuilt (or abandoned) due to not being resilient, how has the Code’s liveability and sustainability aims and current DCF basis supported this outcome to date? Deloitte Access Economics 2017 report for the Australian Business Roundtable for Disaster Resilience and Safer Communities found that the total economic cost of natural disasters is growing and will reach $39 billion per year by 2050. These costs include significant, and often long-term, social impacts, including death and injury and impacts on employment, education, community networks, health and wellbeing. Given this projection, providing decision makers and the investment community with transparent methods to value investments in resilience and adaptation measures to protect physical assets from climate change impacts and mitigate future total economic losses to society, is becoming increasingly critical.
There is a growing awareness that traditional valuation methods that comingle risk with the time value of money to discount future cashflows cannot properly account for climate-related risks when assessing long-term investments, which are typical for infrastructure projects (Espinoza 2020) ‘The role of traditional discounted cash flows in the tragedy of the horizon: another inconvenient truth’(Espinoza et al, 2020) paper, introduces and utilises the decoupled net present value (DNPV) valuation methodology. “DNPV is a robust method that can incorporate climate change risk into investment analyses”.
According to the Espinoza paper, “widespread use of traditional valuation methods such as net present value combined with risk-adjusted discount rates introduces a pernicious time-bias effect that magnifies stakeholders’ misaligned interests and investment horizons, leading investors, both public and private, to significantly underinvest in resilience and adaptation. Furthermore, because traditional valuation methods cannot correlate physical risks (e.g., climate change) with discount rates, investments to reduce climate change risks are largely considered as expenses that make the investment less attractive. The DNPV method addresses this issue and offers a viable alternative that can consistently and transparently quantify all risks (market and non-market) in terms of cash flows”.
Why all the fuss about discounted cash rates? The issue of discounting is not trivial as the selected discount rate will favour certain investments over others with higher discount rates, generally deterring long-term investments and/or downplaying liabilities that are relatively far into the future. For example, the time horizon associated with recouping investments in resilience and adaptation is generally longer even than that for traditional infrastructure projects. Nordhaus (2008) contends that the real discount rate should match that of markets (i.e., about 5%), making investments more socially efficient, whereas Stern (2007) recommends 1.4% based on classical utilitarianism and ethical principles. Several developed economies (e.g., UK, France, Norway, Denmark) have adopted protocols that use prescriptive Declining Discount Rate (DDR)’s to evaluate the effect on society of public policies and to perform long-term Cost Benefit Analysis (CBA)’s for major public projects, particularly those implemented to mitigate climate change (Cropper et al., 2014).
The other big question for me is, what can be gleamed from NZ that have had the defined term ‘Durability’ in their Code since 1993? NZ Clause B2 Durability requires structural elements – supports for walls, floors, roofs – to continue conforming to the performance requirements of the Building Code for at least 50 years with normal maintenance. Elements that are moderately difficult to access and replace, for example, plumbing in subfloors or cladding, have a minimum durability requirement of 15 years with normal maintenance. Easily accessible elements, such as surface coatings, linings and services, have a minimum durability requirement of 5 years with normal maintenance. This means that NZ building product manufacturers or importers of materials must provide evidence that their products will meet or exceed these durability requirements in service, or specifiers and consenting authorities will be reluctant to specify or approve them for use.
Just imagine how insurance premiums in Australia would change if buildings and product supply chains were required by Code to address durability! The Insurance Council of Australia has long called on durability to be addressed in the Code and there are some signs that the link between premiums and levels of asset resilience is being acknowledged through various initiatives like Brisbane City Council’s flood resilience program.
The ABCB, in a Senate Inquiry some time ago, suggested that a durability requirement would add ‘significant upfront costs to construction’. “Private builders and property owners are able to construct buildings to standards in excess of building regulation requirements if they deem durability to be an issue”. Well it hasn’t happened; we have had market failure on a significant scale and who is bearing the cost? As insurance premiums continue to rise in the face of insured losses and future risk exposure, we are building to a minimum standard that doesn’t adequately recognise the value of long-term ownership and resilience. It has always been about upfront lowest cost, not the consequences of losing the use of the asset and the whole of life economic impact of same.
In my view, the valuing of resilient assets should be undertaking using an appropriate method that acknowledges future loss consequences. Maybe decoupled net present value (DVNP) is the right answer over discounted cash flow (DFC)? Given the hurdles that ABCB must operate under, through Intergovernmental Agreement and Building Minister’s agendas, the pathway forward to affect change could be very challenging, The key entity that loses out with not addressing durability and not valuing the long-term resilience benefits adequately, is the vulnerable asset owner. There is much at stake for those in the unenviable position of having the least ability to effect change.
So what your saying is we should consider the potential financial cost/loss created by this concept?